Financial Highlights
All currency figures in this report are in Canadian dollars, unless otherwise noted
($ in thousands, except per share information)
RESULTS FOR THE YEAR
Sales
Same store sales % increase (1)
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (2)
Earnings from operations (EBIT)
Net earnings
Net earnings attributable to The North West Company Inc.
Cash flow from operating activities (3)
FINANCIAL POSITION
Total assets
Total debt
Total equity
FINANCIAL RATIOS
Debt-to-equity
Return on net assets (RONA) (2)
Return on average equity (ROE) (2)
Sales blend: Food
General Merchandise
Other
PER SHARE ($) - DILUTED
EBITDA (2)
Net earnings
Cash flow from operating activities
Market price: January 31
high
low
Year Ended
January 31, 2018
Year Ended
January 31, 2017
Year Ended
January 31, 2016
$
$
$
$
1,953,743
1.2%
169,624
113,971
69,691
67,154
141,419
$
$
1,844,093
1.3%
166,498
118,131
77,076
77,076
126,024
$
930,948
$
805,821
$
313,549
382,156
229,266
367,785
1,796,035
3.8%
151,347
107,321
69,779
69,779
132,987
793,795
225,489
357,612
.82:1
16.7%
18.3%
79.2%
16.6%
4.2%
3.44
1.36
2.87
29.14
33.75
28.45
$
.62:1
20.1%
21.8%
79.6%
17.5%
2.9%
3.40
1.57
2.57
29.28
33.15
24.08
$
.63:1
19.5%
20.6%
79.3%
17.6%
3.1%
3.10
1.43
2.73
30.53
30.53
23.41
$
(1) All references to same store sales exclude the foreign exchange impact.
(2) See Non-GAAP Financial Measures section.
(3) See Consolidated Liquidity and Capital Resources.
THE NORTH WEST COMPANY INC. 2017
Annual Report
TABLE OF CONTENTS
Management's Discussion & Analysis
Forward-Looking Statements
President & CEO Message
Chairman's Message
Our Business Today
Vision, Principles and Strategies
Key Performance Drivers and Capabilities to Deliver Results
Business Acquisitions
Consolidated Results Financial Performance
Canadian Operations Financial Performance
International Operations Financial Performance
Consolidated Liquidity and Capital Resources
Quarterly Financial Information
Disclosure Controls
Internal Controls over Financial Reporting
Outlook
Risk Management
Critical Accounting Estimates
Accounting Standards Implemented in 2017
Future Accounting Standards
Non-GAAP Financial Measures
Glossary of Terms
Eleven-Year Financial Summary
Consolidated Financial Statements
Management’s Responsibility for Financial Statements
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Shareholder Information
Corporate Governance
2
3
4
5
6
7
8
8
11
12
14
18
19
19
20
20
24
26
26
27
29
30
32
32
33
34
35
36
37
38
65
66
MANAGEMENT'S DISCUSSION & ANALYSIS
FORWARD-LOOKING STATEMENTS
Unless otherwise stated, this Management's Discussion & Analysis
(“MD&A”) for The North West Company Inc. (“NWC”) or its predecessor
North West Company Fund (“NWF” or “Fund”) and its subsidiaries
(collectively, “North West Company”, the “Company”, “North West”, or
“NWC”) is based on, and should be read in conjunction with the 2017
annual audited consolidated financial statements and accompanying
financial
notes. The Company's annual audited consolidated
statements and accompanying notes
the year ended
January 31, 2018 are in Canadian dollars, except where otherwise
indicated, and are prepared in accordance with International Financial
Reporting Standards (“IFRS”).
for
The Board of Directors, on the recommendation of its Audit
Committee, approved the contents of this MD&A on April 11, 2018 and
the information contained in this MD&A is current to April 11, 2018,
unless otherwise stated.
This MD&A contains forward-looking statements about North West
including its business operations, strategy and expected financial
performance and condition. Forward-looking statements include
statements that are predictive in nature, depend upon or refer to future
events or conditions, or include words such as “expects”, “anticipates”,
“plans”, “believes”, “estimates”, “intends”, “targets”, “projects”, “forecasts” or
negative versions thereof and other similar expressions, or future or
conditional future financial performance (including sales, earnings,
growth rates, capital expenditures, dividends, debt levels, financial
capacity, access to capital, and liquidity), ongoing business strategies
or prospects, and possible future action by the Company.
Forward-looking statements are based on current expectations
and projections about future events and are inherently subject to,
among other things, risks, uncertainties and assumptions about the
Company, economic factors and the retail industry in general. They are
not guarantees of future performance, and actual events and results
could differ materially from those expressed or implied by forward-
looking statements made by the Company due to, but not limited to,
important factors such as general economic, political and market
factors in North America and internationally, interest and foreign
exchange rates, changes in accounting policies and methods used to
report financial condition, including uncertainties associated with
critical accounting assumptions and estimates, the effect of applying
future accounting changes, business competition, technological
change, changes in government regulations and legislation, changes
in tax laws, unexpected judicial or regulatory proceedings, catastrophic
events, the Company's ability to complete capital projects, strategic
transactions and integrate acquisitions, the Company's ability to realize
benefits from investments in information technology ("IT") and
systems , including IT system implementations or unanticipated results
from these initiatives and the Company's success in anticipating and
managing the foregoing risks.
The reader is cautioned that the foregoing list of important factors
is not exhaustive. Other risks are outlined in the Risk Management
section of this MD&A, in the Risk Factors sections of the Annual
Information Form and in our most recent consolidated financial
statements, management
information circular, material change
reports and news releases. The reader is also cautioned to consider
these and other factors carefully and not place undue reliance on
forward-looking statements. Other than as specifically required by
applicable law, the Company does not intend to update any forward-
looking statements whether as a result of new information, future
events or otherwise.
Additional information on the Company, including our Annual
Information Form, can be found on SEDAR at www.sedar.com or on the
Company's website at www.northwest.ca.
2THE NORTH WEST COMPANY INC.
Our Giant Tiger stores performed poorly within a highly competitive
food pricing environment. We are addressing this through an intense focus
on lowering product costs and shifting key selling space to higher margin
hard and soft lines.
Through 2018 I expect our carry-forward priorities and capital
allocations to significantly benefit from 2017 learnings. With few exceptions,
we are in position to solidify and move faster on higher return core and
complimentary businesses and to minimize the impact of less attractive ones.
"Pure Retail" will be a new focus that puts our store roles first, recognizing
how vital they are to our success. The early efforts on Pure Retail have been
energizing, with a priority on streamlining, stopping or removing low value
work from stores so that we free more precious time to develop store
associates and get sales. Other new work in 2018 will be the rebuild of our
Caribbean stores destroyed or damaged by last year's hurricanes and tests of
profitable e-commerce platforms geared to our different banner and
customer types.
2017 was a year of significant planned investments which will help
shape our growth for years to come. The year also stood out for other reasons,
notably the extensive wildfires in northern Manitoba and two hurricanes
which hit the Caribbean. In these situations our store teams showed
remarkable resiliency, courage and dedication as they recovered their stores
and served their customers and communities amidst extremely trying
personal times. Their task was far beyond the high standards that we expect
and appreciate from each other every day at North West. Through their
actions they inspired and reinforced the values that are at the heart of our
sustainability and growth.
Thank you to our investors, customers, communities, suppliers and
other stakeholders for your genuine interest and support. Together we are
North West.
.
Edward S. Kennedy
President & CEO
April 17, 2018
President & CEO Message
At North West we're dedicated to making lives better for our customers.
This extends to community well-being and our commitment to deliver a
leading net social benefit. In 2017, these principles were seen in countless
interactions and through some major climate events, discussed further
below, which demonstrated how deeply we value what we do on behalf of
the customers and communities we serve.
2017 began with significant investments that reflected the range of
growth and performance opportunities we've developed over several years.
Early in the first quarter we completed three Top Market investments, bringing
the total number of investments to 19 under this program. These stores, like
all Top Markets, provide us with attractive upside for products, services and
share expansion within our most important locations. The results confirm
this is a compelling initiative, provided that the maintenance capital
component is well managed.
We also completed an important acquisition in the first quarter, and
announced a second one that closed in June. The first was Roadtown
Wholesale Trading Ltd. ("RTW"), the leading retailer and wholesale distributer
in the British Virgin Islands ("BVI"). Our access to the BVI market was the
product of ten years experience in the Caribbean region building our
consumer and social benefit offer. Post-acquisition, it was reinforced by
passing cost synergy savings through to RTW customers consistent with our
pre-acquisition community commitments, and by the exceptional support
role our stores played in the devastating aftermath of hurricanes Irma and
Maria.
The second acquisition was our move into northern air transportation
through the purchase of North Star Air ("NSA"), a smaller, high performing
regional cargo and passenger airline based in Thunder Bay, Ontario. This
decision fit strongly within our long-term logistics planning. NSA enables
North West to innovate and deliver a higher level of air service to our stores
and communities than could be achieved within the incumbent, third-party
carrier structure. More specifically, NSA gives us the ability to bring more
reliability, speed and frequency to our supply chain at equal or lower cost.
We recognized that NSA was a profitable, well-run airline and that it is
now a quickly growing one, requiring capital and other resources as capacity
and routes are added. Most of NSA's new volumes will be NWC freight,
mitigating the risk of this expansion.
Our major systems initiative, Project Enterprise, was in full build mode
last year. This is a $34 million project to replace old buying and store IT
platforms with new, better functionality. We're on budget and slightly behind
schedule with the main financial benefits targeted for 2019. As we ramp up
implementation in 2018, process change risks will be closely managed. Our
edge is the tremendous interest of our people to fully leverage the best
technology tools made available to them through Project Enterprise.
Top Categories is a multi-year initiative that prioritizes attractive selling
opportunities. Many come under the umbrella of highly convenient, local
shopping products and services, ranging from transactional financial services
to pharmacy and prepared food. We are shifting more selling space and skill
into convenience and we are generating superior returns that are less volatile
than even our core food-at-home categories. We will keep refining our
models but we know enough of what works best to accelerate new
convenience space investment in 2018, including lower-cost modular stores.
Innovation in our community support work stood out in 2018 with the
launch of "Health Happy", an expanded focus on bringing more relevant
healthy food education and product options into our stores. Indigenous
language promotion was another key development area, as we added
translations to products and QR label codes to enable oral pronunciation.
These will be refined further in 2018 as part of an overall commitment to
acting on significant community and broader social priorities that matter to
our customers.
Our 2017 financial performance reflected success in our key strategies,
offset by external challenges we faced. Led by our northern businesses in
Alaska and Canada and the contribution from RTW, consolidated EBITDA was
up 1.9% to a record $170 million. On the negative side we temporarily lost
approximately US$92 million in annualized sales and US$6.6 million in EBITDA
due to store damage caused by hurricanes Irma and Maria.
3ANNUAL REPORT
You will note that we have asked shareholders to approve an increase
in the maximum number of Directors from 12 to 13. This is part of an
organized plan to refresh our Board in advance of the anticipated retirement
of several Directors over the next three years. This year, we were very pleased
to welcome Brock Bulbuck, Chief Executive Officer of Boyd Group Income
Fund and Deepak Chopra, former President and Chief Executive Officer of
Canada Post, to our Board. These individuals bring a diversity of skills and
perspectives to our deliberations and they will be fully engaged in the affairs
of the Company by the time some of our longer tenured Directors retire.
One of the reasons we have two new Directors this year is that Gary
Merasty, who has been a Director of The North West Company since 2011,
stepped down as Director in April in order to assume a senior executive
position with the Company. While losing Gary as a Director is significant,
we believe it is far outweighed by the contributions that he can make as a
member of our senior management team.
On behalf of the Board, I would like to welcome Brock and Deepak to
our Board and to thank Gary for his service and to wish him the very best
in his new role with the Company.
I want to close by restating the Board's admiration and appreciation
for the efforts of our management team, and of all NorWester's, in what was
one of the most demanding and momentous years in our history.
H. Sanford Riley
Chairman, Board of Directors
April 17, 2018
Chairman's Message
On behalf of the Board of The North West Company, I am pleased to
report on the Board's work over the past year and our perspective on a
number of the more strategic issues and opportunities looking forward.
2017 was, unquestionably, a year that had "Dickensian" qualities - it
was the best of times and the worst of times. On one hand, we completed
two significant acquisitions which will have a profound and positive impact
on the Company for years to come. On the other hand, we faced the
challenges of serious forest fires in northern Manitoba which put many of
our most important communities at grave risk and two Category 5
hurricanes which decimated St. Maarten, the British Virgin Islands, and St.
Thomas in the U.S. Virgin Islands and impaired our store assets in these
markets.
From the Board's perspective, the acquisition of RTW in the British
Virgin Islands provides North West with more scale in the region and more
opportunity to demonstrate our unique and positive fit as a valued retailer
within smaller Caribbean islands. It was also immediately and significantly
accretive to earnings. The purchase of North Star Air enables us to vertically
integrate a key component of our "delivered to the customer" business
proposition in the North, in turn providing much better service and higher
financial returns. It also positions North West to play a unique end-to-end
e-commerce role in remote markets.
These acquisitions, combined with a number of IT and new store-
related investments in our existing businesses, resulted in the most
aggressive capital program in our history. Throughout, the Board has
applied the same proven criterion, evaluating expenditures on their
strategic importance and their risk-adjusted rate of expected return, aligned
with maintaining a lower level of business volatility and superior cash flow
generation. This discipline, as we have said on a number of occasions, has
been essential to providing stable total returns to shareholders, including
maintenance of a strong and growing dividend. While time will determine
the ultimate success of our 2017 capital spending, we are confident that
the quality of these investments measures up to our standards.
As commented on by our CEO Edward Kennedy and elsewhere, the
dangers that natural disasters presented last year were met with
extraordinary efforts by our associates who worked tirelessly, alongside the
citizens of the affected communities, to provide continuing service during,
and immediately after, these most perilous of situations. The Board cannot
express in adequate words how much we appreciate their everyday work
and, especially in times of upheaval or stress, how proud we are of all of
them.
The way in which North West listens to, anticipates and responds to
community and customer conditions says a lot about the culture of the
Company and the social benefit we have consistently provided for so many
years. Our retailing is at a distinctly human scale. We treat each market
according to its unique requirements and tailor our efforts accordingly. At
the same time, we are able to marshal the resources, scale benefits and
management practices that allow us to succeed, both for our customers
and our shareholders.
We have spoken in previous reports about our concerns for the
indigenous communities in which we operate and the unique challenges
they face. Your Board recognizes that, as the largest private sector employer
of indigenous people in Canada and of native people in Alaska, and as a
major commercial presence throughout most of the other territories and
countries that we serve, we need to play a bigger advocacy role in
encouraging governments and others to address the many problems that
we see every day in the communities we serve - which we intend to do in
the years ahead. Our priority is to determine where our own practices need
to change and then where we can most effectively play a public role,
recognizing that any support we give must be seen as credible and
constructive. Initially, this will lead us to areas that we know best - food
pricing and availability, income inequality, health and housing - but we
know that the issue is more deeply rooted in society and that we must
encourage the identification and eradication of discriminatory attitudes
which underlie many of the problems which we see.
4THE NORTH WEST COMPANY INC. Management's
Discussion &
Analysis
OUR BUSINESS TODAY
The North West Company is a leading retailer to rural and remote
communities and urban neighbourhoods in the following regions:
northern Canada, western Canada, rural Alaska, the South Pacific and
the Caribbean. Our stores offer a broad range of products and services
with an emphasis on food. Our value offer is to be the best local
shopping choice for everyday household and lifestyle needs.
North West's core strengths include: our ability to adapt to varied
community preferences and priorities; our on-the-ground presence
with hard-to-replicate operating skills, customer insights and facilities;
our logistics capability in moving product to, remote or difficult-to-
reach markets; and our ability to apply these strengths within
complementary businesses.
North West has a rich enterprising legacy as one of the longest
continuing retail enterprises in the world. The Company traces its roots
back to 1668 and many of our stores in northern Canada have been in
operation for over 200 years. In 2017, the Alaskan retail subsidiary,
Alaska Commercial Company, celebrated its 150th anniversary.
Today these northern stores serve communities with populations
ranging from 300 to 9,000. A typical store is 6,500 square feet in size
and offers food, family apparel, housewares, appliances, outdoor
products and services such as fuel, post offices, pharmacies, income
tax return preparation, quick-service prepared food, commercial
business sales, prepaid card products, ATMs, cheque cashing and
proprietary credit programs.
Growth at North West has come from market share expansion
within existing locations and from applying our expertise and
infrastructure to new product categories, markets and complementary
businesses. The latter includes vertical investments in shipping and air
cargo, wholesaling to independent stores, opening Giant Tiger junior
discount stores in rural communities and urban neighbourhoods in
western Canada, and retailing through mid-sized warehouse and
supermarket format stores serving the South Pacific islands and the
Caribbean.
A key strength and ongoing strategy of North West is our ability
to capture unique community-by-community selling opportunities
better than our competition. Flexible store development models, store
management selection and education, store-level merchandise
ordering, community relations and enterprising incentive plans are all
ingredients of the model we have built to sustain this leading market
position. We believe that our enterprising culture, continued, efficient
enhancement of our execution skills in general, and our logistics and
selling skills specifically, are essential components to meeting
customer needs within each market we serve.
North West delivers its products and services through the
following retail, wholesale and complimentary businesses:
Canadian Operations(1)
•
•
•
•
•
•
•
•
•
•
•
•
119 Northern stores, offering a combination of food, financial
services and general merchandise to remote northern Canadian
communities;
6 NorthMart stores, targeted at larger northern markets with an
emphasis on an expanded selection of fresh foods, apparel and
health products and services;
16 Quickstop convenience stores, offering extended hours,
ready-to-eat foods, fuel and related services in northern Canadian
markets;
41 Giant Tiger ("GT") junior discount stores, offering family
fashion, household products and food to urban neighbourhoods
and larger rural centers in western Canada;
1 Valu Lots discount center and direct-to-customer food
distribution outlet for remote communities in Canada;
1 Solo Market store, targeted at less remote, rural markets;
1 Tim Hortons stand-alone franchise restaurant located in a
northern market;
1 Wally's Drug Store, a stand-alone northern pharmacy and
convenience store;
2 North West Company Fur Marketing outlets, trading in furs
and offering Indigenous handicrafts and authentic Canadian
heritage products;
Crescent Multi Foods ("CMF"), a distributor of produce and fresh
meats to independent grocery stores in Saskatchewan, Manitoba
and northwestern Ontario;
North West Telepharmacy Solutions, the leading provider of
contract tele-pharmacist services to rural hospitals and health
centres across Canada; and
Transport Nanuk Inc. and North Star Air Ltd. ("NSA"), water
and air-based transportation businesses, respectively, serving
northern Canada.
International Operations(1)
•
•
•
•
•
•
27 Alaska Commercial Company ("AC") stores, similar to
Northern and NorthMart, offering a combination of food and
general merchandise to communities across remote and rural
regions of Alaska;
5 Quickstop convenience stores within rural Alaska;
Pacific Alaska Wholesale ("PAW"), a leading distributor to
independent grocery stores, commercial accounts and individual
households in rural Alaska;
12 Cost-U-Less ("CUL") mid-sized warehouse stores, offering
discount food and general merchandise products to island
communities in the South Pacific and the Caribbean;
1 Island Fresh IGA Supermarket neighborhood food store in
Guam, offering convenience with an emphasis on fresh and
prepared foods; and
5 Riteway Food Markets, 1 Cash and Carry store and a
significant wholesale operation (collectively "RTW") in the
British Virgin Islands.
(1) Store count at January 31, 2018 and does not include convenience "Store
within a Store" services such as post offices, pharmacies or branded food
services.
5ANNUAL REPORT
VISION
At North West our mission is to be a trusted provider of goods and
services within hard-to-access and less developed markets. Our vision
is to help people live better in these communities by doing our job
well, with their interests as our first priority. This starts with our
customers' ability and desire to shop locally with us for the widest
possible range of products and services that meet their everyday
needs. We respond by being more innovative, reliable, convenient,
locally adaptable, welcoming and by having the lowest local price,
enabled by lean, innovative processes. For our associates, we want to
be a preferred, fulfilling place to work. For our investors, we want to
deliver risk-adjusted, top-quartile total returns over the long term.
PRINCIPLES
The way we work at North West is shaped by six core principles:
Customer Driven, Enterprising, Passion, Accountability, Trust, and
Personal Balance.
Customer Driven refers to looking through the eyes of our customers
while recognizing our local presence as a supportive community
citizen.
Enterprising is our spirit of innovation, improvement and growth,
reflected in our unrelenting focus on new and better products, services
and processes.
Passion refers to how we value our work, our privileged local market
presence and the opportunity to find solutions that make a difference
in our customers' lives.
Accountability is our management approach to getting work done
through effective roles, tasks and resources.
Trust at North West means doing what you say you will do, with
fairness, integrity and respect.
Personal Balance is our commitment to sustaining ourselves and our
organization, so that we work effectively and sustainably in our roles
and for our customers and communities.
STRATEGIES
The strategies at North West are aligned with a total return approach
to investment performance. We aim to deliver top-quartile returns
through an equal emphasis on growth and dividend yield with
opportunities considered in terms of their growth potential and ability
to sustain an attractive cash return within a lower business risk profile.
The Company's Long-Range Plans (“LRP”) are developed in multi-
year cycles and are reviewed and adjusted as required at the senior
management and board levels. The current LRP focus is on the
following areas:
•
•
•
•
•
further gains
in operating standards and
achieving
efficiency;
investing in our physical store network,
capability and community relations;
expanding into new retail markets primarily in the Caribbean
and Giant Tiger store openings in western Canada;
building a stronger logistics capability; and
investing in new information technology for our stores and
support offices.
local selling
Our key priorities are detailed further below together with the
results for 2017:
Initiative #1
Pure Retail
"Pure Retail" refers to top store teams, lean processes, and customer-
driven, store centric support throughout our organization. The goal is
to optimize store sales and net performance by creating more ability
and freeing more time to get sales at store level.
Result
This initiative was launched late in the fourth quarter of 2017 and will
be reported on throughout 2018. Key performance indicators will be
hours and dollars of time freed up, people capability gains and
profitable sales increases.
Initiative #2
Investing in Top Markets and Top Categories
This initiative prioritizes our largest and highest potential categories
and store locations.
Result
Top convenience categories represented the biggest Top Category
opportunity in 2017. Convenience sales were up over 12.0% on a
comparable stores basis, led by food service growth. Big-ticket sales
were a second priority and delivered mixed results with motorized sales
increasing 5.1% but furniture sales were down 2.9%. Improved
inventory flow and consumer financing enabled the motorized gains
while the loss of a large contract sale affected furniture performance.
Excluding the low margin contract sale, furniture sales were up 4.9%.
The third Top Category focus was produce and meat which combined
were up 0.7%. Sales in these categories were negatively impacted by
supply issues for certain case-ready meat products and the full year
deflationary impact of the Nutrition North Subsidy implemented in 18
stores in October 2016.
Top Markets featured three major store remodels for a total of 19
completed under this program. Overall, Top Markets have met financial
projections and have delivered above average sales growth. Top
Market investments are expected to roll-out at a pace of 3-5 stores per
from prior
year over 2018-2020, with continuous
investments.
learnings
Initiative #3
Investing in New Markets and Businesses
This initiative is focused on growing our retail business in new locations
as well as pursuing greenfield and acquisition opportunities in
complimentary businesses which uniquely leverage our capabilities
and market presence.
Result
We completed the integration of RTW, the leading retail and wholesale
distribution business in the British Virgin Islands, which was acquired
early in the first quarter. RTW exceeded performance expectations
helped by the reinvestment of cost synergy savings into lower prices
and exceptional resiliency following the devastating effects of
hurricanes Irma and Maria.
Stores were acquired in Nain, Newfoundland and Kiana, Alaska
and converted to the Company's Quickstop and AC banners
respectively. Four Giant Tiger stores were opened during the year,
increasing the number of GT stores to 41. New GT store performance
did not meet expectations, due in part to more intensive discount food
store maturation.
competition
longer
time
and
to
6THE NORTH WEST COMPANY INC.
Initiative #4
Next Generation Merchandise and Store Systems ("Project
Enterprise")
Project Enterprise is focused on implementing new, higher capability
point-of-sale ("POS"), merchandise management ("MMS"), which
includes pricing, promotions, category management and vendor
revenue management, and workforce management ("WFM") systems.
This initiative is expected to deliver improvements in pricing and
margin management,
inventory management and store staff
productivity, all aligned with the Company's "Top" strategies.
Result
In 2017, the first phase of WFM was implemented in all stores and POS
was implemented in Cost-U-Less stores. The development of custom
financial services functionality for northern Canada and Alaska stores
delayed the POS pilot in these stores to the second quarter of 2018,
with planned completion in 2019. The pricing component of MMS was
implemented in Canadian Operations in February 2018 with the
remaining components expected to be fully implemented in Canadian
and International Operations in the second half of 2018. Total project
investment is forecasted at $34 million over 2016 to 2019, with 80% of
the annualized benefits beginning in early 2019.
Initiative #5
Building a superior logistics capability
Recognizing the unique importance of logistics to our business, we
continue to invest in building a superior capability in this area, with a
focus on providing faster, more reliable and lower cost transportation
service to our stores and customers in remote markets.
Result
In June 2017, the Company completed the acquisition of North Star
Air Ltd. ("NSA"), a regional airline providing cargo and passenger
services within northwestern Ontario. The acquisition provides the
Company with greater control over a key component of our logistics
network and has enabled faster and more consistent delivery of
merchandise to our stores. Through the back half of 2017, NSA
expanded its fleet capacity to handle NWC freight in other regions of
Canada. In 2018, we will continue to expand NSA's service to
communities we serve in northern Canada.
KEY PERFORMANCE DRIVERS AND
CAPABILITIES REQUIRED TO DELIVER RESULTS
The ability to protect and enhance the performance of our "Top"
Markets and Categories: Our Top Markets and Categories offer the
highest potential for market share growth, improved productivity and
customer satisfaction. We believe that the effective execution of our
Top strategy will deliver higher and more consistent returns and will
lead to new growth ideas that can be applied across all stores.
The financial capability to sustain the competitiveness of our core
strengths and to pursue growth: Our investment priorities center
on next level technology, superior logistics, Top Categories and Top
Markets while applying higher payback learnings in areas such as
energy-efficiency and
to all stores. Non-capital
expenditures are centered on Pure Retail improvements to our in-store
capabilities
structures, processes,
through
compensation, recruiting and training.
technology
improved
store
The ability to be a leading community store in every market we
serve: This depends on connecting with the customers and
communities we serve in a highly valued way. It starts with being able
to locally tailor our store formats, product/service mix, community
support and store associate employment offer, while still realizing the
scale efficiencies of our size or the size of our alliance partners. Investing
in relationships, a broad range of products, services and store sizes,
flexible technology platforms and “best practice” work processes, are
all required to achieve this goal.
Our ability to build and maintain supportive community
relations: Our ongoing community presence depends on being a
trusted, open, respectful, adaptable and a socially helpful organization.
Obtaining or renewing store leases and business licenses is often
subject to community approval and depends on our track record of
solid store operations, our positive community relations and the
perceived community and customer value of our retail store compared
to other options.
Our ability to develop highly capable store level employees and
work practices: Enhancing store execution and capability as part of
our Pure Retail strategies recognizes the important role of executable
work processes that drive sales and enable our managers and other
key store-level personnel to actively manage the other key facets of
their store. This enables a store's full potential to realize local selling
opportunities, meet our customer service commitments and build and
maintain positive community relationships. It also recognizes that our
store roles must be great jobs that offset remoteness, employment
competition from other local sectors and other market conditions that
create challenges in attracting and retaining the best people. Related
to this is our on-going ability to hire locally and assist local associates
to reach their full potential.
Our ability to reduce costs across all of our store banners, improve
competitiveness and create more time and skill at store level to
sell merchandise: A key goal of our Pure Retail initiative is to shift
more staff time and skill towards selling merchandise tailored to the
unique markets we serve, while reducing costs in the non-selling facets
of store work. Pure Retail is expected to "free" significant hours of lower
value store time through process change in 2018 and through
technology tools like our new WFM and POS systems.
7ANNUAL REPORT
BUSINESS ACQUISITIONS
FINANCIAL PERFORMANCE
Roadtown Wholesale Trading Ltd. ("RTW")
On February 9, 2017, the Company acquired 76% of the outstanding
common shares of Roadtown Wholesale Trading Ltd. operating
primarily as Riteway Food Markets in the British Virgin Islands ("BVI").
RTW is the leading retailer in BVI with eight retail outlets, one Cash and
Carry store and a significant wholesale operation. This acquisition was
completed to gain access to a new market, consistent with the
Company's overall Caribbean growth plans.
Based on the Company's closing share price on that date, the
purchase price was $35.6 million (US$27.0 million) comprised of cash
consideration of $31.6 million (US$24.0 million) financed through
existing loan facilities and the issuance of 133,944 common shares, in
accordance with the form of consideration elected to be received by
RTW shareholders. The Company incurred one-time acquisition related
costs of $5.8 million (US$4.3 million) largely due to stamp duties paid
to the Government of the BVI. The financial results for RTW are included
in International Operations.
North Star Air Ltd. ("NSA")
On June 15, 2017, the Company acquired 100% of the outstanding
common shares of North Star Air Ltd. NSA is a Thunder Bay based
airline, providing cargo and passenger services within northwestern
Ontario, Canada. This acquisition was completed to gain efficiencies in
our logistics network and enable the Company to provide faster, more
consistent delivery of merchandise to our stores in northern Canada.
The purchase price was $30.8 million and was financed through
existing loan facilities. The financial results for NSA are included in
Canadian Operations.
Further information on the acquisition of RTW and NSA is provided in
Note 24 to the 2017 consolidated financial statements.
Consolidated Results
2017 Highlights
•
•
•
•
•
•
•
Sales increased to $1.954 billion, our 18th consecutive year of top
line growth.
Same store sales increased 1.2% driven by food sales.
EBITDA(2) increased 1.9%.
Total returns to shareholders were 3.7% for the year and were 9.5%
on a compound annual basis over the past five years.
On February 9, 2017, the Company acquired 76% of the shares of
Roadtown Wholesale Trading Ltd.
On June 15, 2017, the Company acquired 100% of the shares of
North Star Air Ltd.
One Quickstop convenience store and four Giant Tiger stores were
opened in Canadian Operations and one AC store was opened in
International Operations.
Some of the key performance indicators used by management to
assess results are summarized in the following table:
Key Performance Indicators and Selected Annual Information
($ in thousands,
except per share)
Sales
2017
2016
2015
$ 1,953,743
$ 1,844,093
$ 1,796,035
Same store sales % increase(1)
1.2%
1.3%
3.8%
EBITDA(2)
EBIT
Net earnings
$ 169,624
$ 113,971
$
69,691
Net earnings attributable to
shareholders of the Company $
67,154
Net earnings per share -
diluted
Cash flow from operating
activities(3)
Cash dividends per share
Total assets
$
1.36
$ 141,419
$
1.28
$ 930,948
Total long-term liabilities
$ 377,580
$
$
$
$
$
$
$
$
$
166,498
118,131
77,076
77,076
1.57
126,024
1.24
805,821
285,792
$
$
$
$
$
$
$
$
$
151,347
107,321
69,779
69,779
1.43
132,987
1.20
793,795
280,682
Return on net assets(2)
Return on average equity(2)
16.7%
18.3%
20.1%
21.8%
19.5%
20.6%
(1) All references to same store sales exclude the foreign exchange impact.
(2) See Non-GAAP Financial Measures section.
(3) See Consolidated Liquidity and Capital Resources.
Consolidated Sales Sales for the year ended January 31, 2018 (“2017”)
increased 5.9% to $1.954 billion compared to $1.844 billion for the year
ended January 31, 2017 (“2016”), and were up 8.8% compared to$1.796
billion for the year ended January 31, 2016 (“2015”). The increase in
sales in 2017 was driven by the acquisition of RTW and NSA, same store
food sales growth and the impact of new stores in Canadian
Operations. These factors were partially offset by hurricane-related
store closures in International Operations and the negative impact of
foreign exchange on the translation of International Operations sales.
Further information on the impact of the hurricane-related store
closures is included in International Operations on page 13. Excluding
the foreign exchange impact, sales increased 6.3% from 2016 and were
up 8.7% from 2015. On a same store basis, sales increased 1.2%
compared to increases of 1.3% in 2016 and 3.8% in 2015.
Food sales increased 5.3% from 2016, and were up 5.4% excluding
the foreign exchange impact with both Canadian and International
Operations contributing to the sales gains. Same store food sales
increased 1.3% over last year with quarterly same store increases of
2.1%, 1.9% and 0.8% in the first three quarters but sales were flat to last
year in the fourth quarter. Canadian food sales increased 1.0% and
International food sales increased 13.2% excluding the foreign
exchange impact.
General merchandise sales increased 0.7% compared to 2016 and
were up 1.6% excluding the foreign exchange impact led by sales
growth in our Canadian Operations. Same store general merchandise
sales increased 0.7% for the year with increases of 1.9% and 0.8% in the
first and second quarters respectively, a decrease of 1.2% in the third
quarter, followed by an increase of 1.3% in the fourth quarter. Canadian
general merchandise sales increased 3.5% led by same store sales
growth in northern markets and the impact of new stores in rural and
urban markets. International general merchandise sales decreased
5.7% excluding the foreign exchange impact as lower sales in Cost-U-
Less markets, mainly due to the hurricane-related store closures, more
than offset an increase in sales in Alaskan markets.
8THE NORTH WEST COMPANY INC.
Earnings from Operations (EBIT) Earnings from operations or
earnings before interest and income taxes ("EBIT”) decreased 3.5% to
$114.0 million compared to $118.1 million last year as the positive
impact of the RTW and NSA acquisitions and earnings improvements
in northern Canada were more than offset by the $6.3 million in one-
time acquisition costs and the impact of the hurricane-related store
closures. Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") increased 1.9% to $169.6 million compared to
last year. Excluding the impact of the one-time acquisition related costs
and share-based compensation option expense, adjusted EBITDA2 was
up $9.8 million or 5.8% compared to last year and as a percentage to
sales was flat at 9.2% compared to last year.
Interest Expense Interest expense increased 40.5% to $10.1 million
compared to $7.2 million last year. The increase in interest expense is
due to higher average debt levels and higher average cost of borrowing
compared to last year. Average debt levels increased 28.6% compared
to last year largely due to the RTW and NSA acquisitions. The average
cost of borrowing was 3.1% compared to 2.7% last year. Further
information on interest expense is provided in Note 18 to the
consolidated financial statements.
Income Tax Expense The provision for income taxes increased 0.9%
to $34.1 million compared to $33.8 million last year and the effective
tax rate for the year was 32.9% compared to 30.5% last year. The increase
in income tax expense is due to the impact of a one-time income tax
expense related to U.S. tax reform partially offset by lower pre-tax
earnings and changes in earnings of the Company's subsidiaries across
various tax jurisdictions. The most significant impact of the change in
U.S. tax legislation was a reduction in the federal corporate income tax
rate from 35.0% to 21.0% effective January 1, 2018 and the
implementation of a one-time transition tax on undistributed earnings
in foreign subsidiaries. These changes resulted in an estimated income
tax expense of $5.8 million comprised of $1.8 million for the re-
measurement of deferred tax assets and liabilities and $4.0 million for
the transition tax on undistributed earnings in certain of the Company's
foreign subsidiaries. The $4.0 million transition tax is payable over eight
years in accordance with the legislation. The estimated impact of the
change in U.S. tax legislation may require further adjustment as
additional information and interpretations from the U.S. Department
of the Treasury becomes available. Further information on income tax
expense, the effective tax rate and deferred tax assets and liabilities is
provided in Note 9 to the consolidated financial statements.
Other sales, which includes airline revenue, fuel sales, fur sales,
tele-pharmacy revenue and
financial service charge revenue,
increased 54.5% compared to 2016 substantially due to the acquisition
of NSA.
Sales Blend The table below shows the consolidated sales blend over
the past three years:
Food
General merchandise
Other
2017
79.2%
16.6%
4.2%
2016
79.6%
17.5%
2.9%
2015
79.3%
17.6%
3.1%
Canadian Operations accounted for 60.0% of total sales (61.0% in 2016
and 60.7% in 2015) while International Operations contributed 40.0%
(39.0% in 2016 and 39.3% in 2015).
Gross Profit Gross profit increased 8.2% to $586.1 million compared
to $541.5 million last year due to sales growth and a 64 basis points
increase in the gross profit rate. The gross profit rate increased to 30.0%
from 29.4% last year largely due to sales blend changes across the
various jurisdictions, sales growth in higher margin food service and
perishable categories, and lower general merchandise inventory shrink
and markdowns in northern Canada stores.
(“Expenses”)
Selling, Operating and Administrative Expenses Selling, operating
and administrative expenses
increased 11.5% to
$472.1 million and were up 120 basis points as a percentage of sales
compared to last year. This increase in Expenses is primarily due to the
acquisition of RTW and NSA, one-time acquisition related costs of $6.3
million largely related to stamp duties paid to the Government of the
British Virgin Islands, and new stores in Canadian Operations. Higher
incentive plan expenses and an increase in amortization expense
mainly related to capital investments in Top Markets and aircraft were
also factors. These factors were partially offset by the impact of
hurricane-related store closures and a gain on the settlement of a fire
insurance claim in Canadian Operations.
(1) Net earnings attributable to shareholders of the Company
9ANNUAL REPORT to the acquisitions. Higher accrued incentive plan and share-based
compensation costs were also a factor. These factors were partially
offset by the impact of foreign exchange on the translation of
International Operations working capital.
Return on net assets employed decreased to 16.7% compared to
20.1% in 2016 due to a 3.5% decrease in EBIT and an increase in net
assets employed. Additional information on net assets employed for
the Canadian Operations and International Operations is on page 12
and page 13 respectively.
Return on average equity decreased to 18.3% compared to 21.8%
in 2016 due to a 9.6% decrease in net earnings and higher average
equity compared to last year. Further information on shareholders'
equity is provided in the consolidated statements of changes in
shareholders' equity in the consolidated financial statements.
Total Long-Term Liabilities Consolidated total long-term liabilities
for the past three years is summarized in the following table:
($ in thousands)
2017
2016
2015
Total long-term liabilities
$ 377,580
$
285,792
$
280,682
Consolidated long-term liabilities increased $91.8 million or 32.1%
to $377.6 million compared to 2016 and were up $96.9 million or 34.5%
from 2015. The increase in long-term liabilities compared to 2016 and
2015 is primarily due to an increase in long-term debt largely related
to the RTW and NSA acquisitions and investments in property and
equipment as noted under the total assets section. These increases
were partially offset by the impact of foreign exchange rates on the
translation of U.S. denominated debt. Further information on long-
term debt is included in the Sources of Liquidity and Capital Structure
sections on page 16 and page 17 respectively and in Note 11 to the
consolidated financial statements.
Net Earnings Consolidated net earnings decreased 9.6% to
$69.7 million compared to $77.1 million last year. Net earnings
attributable to shareholders of the Company was $67.2 million and
diluted earnings per share was $1.36 per share compared to $1.57 per
share last year due to the factors previously noted. Excluding the impact
of acquisition expenses, share-based compensation option expense
and the one-time U.S. tax reform expense, adjusted net earnings2
increased $5.0 million or 6.3%. Additional information on the financial
performance of Canadian Operations and International Operations is
included on page 11 and page 12 respectively. In 2017, the average
exchange rate used to translate International Operations sales and
expenses was 1.2930 compared to 1.3169 last year and 1.2971 in 2015.
The Canadian dollar's appreciation versus the U.S. dollar compared to
2016 had the following net impact on the 2017 results:
Sales.........................................................................decrease of $14.5 million or 1.8%
Earnings from operations...............................................decrease of $0.8 million
Net earnings............................................................................decrease of $0.5 million
Diluted earnings per share.......................................decrease of $0.01 per share
Total Assets Consolidated total assets for the past three years is
summarized in the following table:
($ in thousands)
Total assets
2017
2016
2015
$ 930,948
$ 805,821
$ 793,795
Consolidated assets increased $125.1 million or 15.5% compared
to 2016 and were up $137.2 million or 17.3% compared to 2015. The
increase in consolidated assets compared to last year and 2015 is
predominately due to the acquisition of RTW and NSA which, on a
combined basis, resulted in an increase of $104.6 million in total assets.
Further information on the assets acquired is provided in Note 24 to
the consolidated financial statements. In addition to the acquisitions,
higher capital expenditures on property and equipment related to
additional aircraft and investments in hangar and distribution facilities
to support NSA in providing cargo service to more of the Company's
stores in northern Canada, new stores, major store renovations,
equipment replacements and staff housing renovations as part of our
Top Markets initiative were also factors. Intangible assets increased
compared to last year and 2015 largely due to the purchase of new
point-of-sale, merchandise management and workforce management
system software. These factors were partially offset by the impact of
foreign exchange as the year-end exchange rate used to translate
International Operations assets decreased to 1.2301 compared to
1.3030 last year and 1.4080 in 2015.
Consolidated working capital for the past three years
is
summarized in the following table:
($ in thousands)
Current assets
Current liabilities
Working capital
2017
2016
2015
$ 335,003
$ 327,938
$ 335,581
$ (171,212)
$ (152,244)
$ (155,501)
$ 163,791
$ 175,694
$ 180,080
Working capital decreased $11.9 million or 6.8% to $163.8 million
compared to 2016 and decreased $16.3 million or 9.0% compared to
2015. Current assets increased $7.1 million or 2.2% compared to last
year but were down $0.6 million compared to 2015 due to the
acquisitions and new stores in Canadian Operations partially offset by
a decrease in cash. The decrease in cash is largely due to dividends paid
by International Operations to Canadian Operations which were used
to reduce amounts drawn on the Company's revolving loan facilities.
Current liabilities increased $19.0 million or 12.5% compared to last
year and were up $15.7 million or 10.1% compared to 2015 mainly due
10THE NORTH WEST COMPANY INC. Canadian Operations
FINANCIAL PERFORMANCE
Same Store Sales Canadian Operations same store sales for the past
three years are shown in the following table. Food sales tend to be
impacted by changes in commodity costs, transportation costs and
promotional pricing.
Canadian Operations results for the year are summarized by the key
performance indicators used by management as follows:
Same Store Sales
(% change)
Food
General merchandise
Total sales
2017
0.8%
1.2%
0.9%
2016
2.0%
0.6%
1.7%
2015
4.0%
0.3%
3.1%
Gross Profit Gross profit dollars for Canadian Operations increased
by 3.8% as sales growth more than offset a decrease in the gross profit
rate. The lower gross profit rate was mainly due to higher third party
freight costs in northern markets and the impact of price discounting
in southern markets. These factors were partially offset by lower
inventory shrinkage and markdowns in general merchandise.
Selling, Operating and Administrative Expenses Selling, operating
and administrative expenses (“Expenses”) increased 5.4% from 2016
and were up 32 basis points as a percentage of sales. The increase in
Expenses is primarily due to the acquisition of NSA, the ramp-up costs
related to expanding this business, and one-time acquisition related
costs. The impact of new stores and higher incentive plan costs largely
related to share-based compensation costs were also factors. Further
information on share-based compensation costs is provided in Note
13 to the consolidated financial statements. These factors were partially
offset by a gain related to the settlement of a fire insurance claim.
Earnings from Operations (EBIT) Earnings from operations
decreased $1.8 million or 2.5% to $72.6 million compared to
$74.4 million in 2016 as the positive impact of higher sales and gross
profit were more than offset by higher Expenses as previously noted.
Earnings from operations as a percentage of sales was 6.2% compared
to 6.6% last year. EBITDA from Canadian Operations increased $2.7
million or 2.4% to $112.4 million and was 9.6% as a percentage of sales
compared to 9.8% in 2016.
Key Performance Indicators
($ in thousands)
Sales
2017
2016
2015
$ 1,171,621
$ 1,125,330
$ 1,089,898
Same store sales % increase
0.9%
1.7%
3.1%
EBITDA (1)
EBIT
$
$
112,393
$ 109,736
72,597
$
74,445
$
$
98,276
66,495
Return on net assets (1)
17.2%
20.7%
20.4%
(1) See Non-GAAP Financial Measures section.
Sales Canadian Operations sales increased $46.3 million or 4.1% to
$1.172 billion compared to $1.125 billion in 2016 and were up $81.7
million or 7.5% compared to 2015 due to the acquisition of NSA, the
impact of new stores and same store sales growth. Same store sales
increased 0.9% compared to increases of 1.7% in 2016 and 3.1% in 2015.
Food sales accounted for 72.3% (74.6% in 2016) of total Canadian
Operations sales. The balance was made up of general merchandise
sales at 21.1% (21.2% in 2016) and other sales, which consists primarily
of airline revenue, fuel sales, fur sales, tele-pharmacy revenue and
service charge revenue at 6.6% (4.2% in 2016).
Food sales increased by 1.0% from 2016 and were up 4.7%
compared to 2015 as sales gains in northern markets more than offset
the impact of lower sales in southern markets due in part to more
intensive price discounting. Same store food sales increased 0.8%
compared to 2.0% in 2016. On a quarterly basis, same store food sales
had increases of 1.5%, 1.4% and 0.7% in the first three quarters but
decreased 0.8% in the fourth quarter. Food deflation was a factor as
price discounting in southern markets more than offset the impact of
freight related inflation in northern markets.
General merchandise sales increased 3.5% from 2016 and 6.5%
compared to 2015 led by same store sales growth in all of our banners
and the impact of new stores. Same store sales increased 1.2%
compared to a 0.6% increase in 2016. On a quarterly basis, same store
general merchandise sales increased 3.3% and 0.9% in the first and
second quarters respectively, decreased 1.7% in the third quarter,
followed by an increase of 2.3% in the fourth quarter.
Other sales increased 63.0% from 2016 and were up 57.4% over
2015 primarily due to the acquisition of NSA.
Sales Blend The table below shows the sales blend for the Canadian
Operations over the past three years:
Food
General merchandise
Other
2017
72.3%
21.1%
6.6%
2016
74.6%
21.2%
4.2%
2015
74.2%
21.3%
4.5%
11ANNUAL REPORT
Net Assets Employed Net assets employed at January 31, 2018
increased 21.8% to $454.2 million compared to $372.9 million at
January 31, 2017, and was up 31.0% compared to $346.8 million at
January 31, 2016 as summarized in the following table:
Return on Net Assets The return on net assets employed for
Canadian Operations decreased to 17.2% from 20.7% in 2016 due to a
2.5% decrease in EBIT and a $62.2 million or 17.3% increase in average
net assets compared to last year.
Net Assets Employed
($ in millions at the end of the fiscal
year)
2017
2016
2015
Property and equipment
$ 332.3
$
247.1
$
225.5
Inventories
Accounts receivable
Other assets
Liabilities
138.4
66.8
96.8
130.3
65.9
82.8
125.7
65.2
84.8
(180.1)
(153.2)
(154.4)
Net assets employed
$ 454.2
$
372.9
$
346.8
Capital expenditures for the year included the $30.8 million
acquisition of NSA and additional investments in aircraft, hangar and
distribution facilities to support NSA in providing cargo service to more
of the Company's stores
in northern Canada. Other capital
expenditures included the opening of five new stores, Top Markets
investments related to major store renovation projects, new
equipment, staff housing improvements, energy-efficient lighting and
refrigeration upgrades and "New Store Experience" renovations in two
Giant Tiger stores.
Inventory increased $8.1 million compared to 2016 and was up
$12.7 million compared to 2015 mainly due to new stores and a higher
investment in inventory in stores serviced by sealift and winter road to
take advantage of lower transportation costs. Average inventory levels
in 2017 increased $2.9 million or 2.2% compared to 2016 and were up
$9.3 million or 7.3% compared to 2015. Inventory turnover was flat to
last year at 6.0 times and was down slightly compared to 6.1 times in
2015.
Accounts receivable were up $0.9 million to last year and up $1.6
million or 2.5% compared to 2015 as new NSA accounts receivable
were partially offset by a decrease in fire insurance claim-related
accounts receivable. Average accounts receivable were $2.7 million or
4.3% higher than 2016 and up $5.0 million or 8.3% compared to 2015.
The increase in average accounts receivable is due in part to NSA and
higher motorized merchandise sales.
Other assets increased $14.0 million or 16.9% compared to last
year and were up $12.0 million or 14.2% compared to 2015. This
increase is largely due to higher intangible assets related to new point-
of-sale, merchandise management and workforce management
system software as part of Project Enterprise and an increase in
goodwill related to the NSA acquisition. An increase in net deferred tax
assets primarily related to property and equipment and decrease in
deferred limited partnership earnings was also a factor.
Liabilities increased $26.9 million or 17.6% from 2016 and were
up $25.7 million or 16.6% compared to 2015. This increase is largely
due to the NSA acquisition, higher trade accounts payable related to
the timing of payment cycles and accrued share-based compensation
costs.
Further information on the assets and liabilities of NSA is provided
in Note 24 to the consolidated financial statements.
International Operations
(Stated in U.S. dollars)
FINANCIAL PERFORMANCE
International Operations results for the year are summarized by the key
performance indicators used by management as follows:
Key Performance Indicators
($ in thousands)
Sales
2017
2016
2015
$
604,889
$ 545,799
$ 544,397
Same store sales % increase
1.8%
0.4%
5.2%
EBITDA(1)
EBIT
$
$
44,262
31,999
$
$
43,049
33,173
$ 40,991
$ 31,475
Return on net assets (1)
15.8%
19.2%
18.1%
(1) See Non-GAAP Financial Measures section.
Sales International sales increased 10.8% to $604.9 million compared
to $545.8 million in 2016, and were up $60.5 million or 11.1% compared
to 2015 led by the acquisition of RTW and same store sales growth in
AC stores. These sales gains were partially offset by the impact of store
closures in the Caribbean due to the hurricanes that occurred in the
third quarter. Further information about the impact of the hurricanes
is provided below. Same store sales increased 1.8% compared to 0.4%
in 2016 and 5.2% in 2015. Food sales accounted for 89.5% (87.6% in
2016) of total sales with the balance comprised of general merchandise
at 9.9% (11.6% in 2016) and other sales, which consists primarily of fuel
sales and service charge revenue at 0.6% (0.8% in 2016).
Food sales increased 13.2% from 2016 and were up 14.1%
compared to 2015. Same store food sales were up 2.3% compared to
a 1.0% increase in 2016 with both AC and CUL contributing to the sales
increase. Quarterly same store food sales increases were 3.0%, 2.8%,
1.2% and 2.0% in the fourth quarter.
12THE NORTH WEST COMPANY INC.
General merchandise sales decreased 5.7% from 2016 and were
down 8.7% from 2015. On a same store basis, general merchandise
sales were down 1.4% compared to a decrease of 3.9% in 2016.
Quarterly same store general merchandise sales decreased 3.8% in the
first quarter with increases of 0.3% and 0.5% in the second and third
quarters respectively and a decrease of 2.8% in the fourth quarter as
same store sales growth in AC stores was more than offset by lower
sales in CUL stores.
Sales in the Caribbean were negatively impacted by the
hurricanes that occurred in the third quarter and continuing logistics
disruptions related to shipping port capacity and reduced cargo
container availability that impacted store in-stock rates. Sales in AC
stores rebounded after a challenging 2016 which was impacted by
deteriorated economic conditions and a 50.7% decrease in the
Permanent Fund Dividend (“PFD”). The PFD was $1,100 this year
compared to $1,022 in 2016 and $2,072 in 2015.
Other sales, which consists of fuel sales and service charge
revenue, were down 11.3% from 2016 and 16.0% from 2015 due to a
decrease in fuel sales from the closure of a small Quickstop
Convenience store in Kodiak, Alaska.
Sales Blend The table below reflects the importance of food sales to
the total sales of International Operations:
Food
General merchandise
Other
2017
89.5%
9.9%
0.6%
2016
87.6%
11.6%
0.8%
2015
87.1%
12.0%
0.9%
Same Store Sales International Operations same store sales for the
past three years are shown in the following table. General merchandise
same store sales are impacted by consumer spending on big-ticket
durable goods that are largely influenced by special payments, such
as the PFD and regional native corporation dividends, which can result
in greater sales volatility.
Same Store Sales
(% change)
Food
General merchandise
Total sales
2017
2.3 %
(1.4)%
1.8 %
2016
1.0 %
(3.9)%
0.4 %
2015
5.4%
3.9%
5.2%
Gross Profit Gross profit dollars increased 18.6% driven by sales
growth and an increase in the gross profit rate. The increase in the gross
profit rate is due to the blend of sales across the various jurisdictions
partially offset by price investments in certain AC stores.
Selling, Operating and Administrative Expenses Selling, operating
and administrative expenses (“Expenses”) increased 25.3% compared
to last year and were up 266 basis points as a percentage of sales largely
due to RTW stores and one-time acquisition costs of $4.3 million
predominately related to stamp duties paid to the Government of the
British Virgin Islands. These factors were partially offset by the hurricane-
related store closures.
Earnings from Operations (EBIT)
Earnings from operations
decreased $1.2 million or 3.5% to $32.0 million compared to 2016 as
the positive impact of the RTW acquisition was more than offset by the
one-time acquisition costs and the impact of the hurricane-related
store closures. EBITDA increased $1.2 million or 2.8% to $44.3 million
and was 7.3% as a percentage of sales compared to 7.9% in 2016.
Net Assets Employed International Operations net assets employed
increased $24.0 million or 14.0% to last year and were up $27.9 million
or 16.6% to 2015 as summarized in the following table:
Net Assets Employed
($ in millions at the end of the fiscal
year)
2017
Property and equipment
$ 111.9
$
Inventories
Accounts receivable
Other assets
Liabilities
2016
85.2
63.6
10.0
53.1
$
2015
85.5
61.1
10.0
51.1
68.0
11.3
49.8
(45.3)
(40.2)
(39.9)
Net assets employed
$ 195.7
$ 171.7
$ 167.8
Substantially all of the increase in net assets employed compared to
last year and 2015 is due to the acquisition of RTW. Further information
on the assets and liabilities of RTW is provided in Note 24 to the
consolidated financial statements. The increase in property and
equipment related to the RTW acquisition was partially offset by the
$5.4 million write-off of store assets destroyed in the hurricanes.
Inventories increased $4.4 million compared to last year and were
up $6.9 million or 11.3% from 2015 as the addition of RTW inventories
was partially offset by a reduction in inventory due to the hurricane-
related store closures. Average inventory levels in 2017 were up 9.1%
compared to 2016 and were up 8.9% compared to 2015 and inventory
turnover was down slightly to 6.1 times compared to 6.2 times last year
and in 2015.
Other assets decreased $3.3 million or 6.2% compared to last year
and were down $1.3 million compared to 2015 primarily due to lower
cash balances and deferred tax assets partially offset by an increase in
goodwill and intangible assets related to RTW.
Other liabilities increased $5.1 million or 12.7% compared to 2016
and were up $5.4 million or 13.5% compared to 2015 mainly due to an
increase in trade accounts payable related to the RTW acquisition and
the impact of accrued transition income tax expense related to U.S. tax
reform.
Hurricanes Irma and Maria Impact In September 2017, the
Company's CUL stores in St. Maarten and St. Thomas, and the RTW
operations in the British Virgin Islands ("BVI") were impacted by
hurricanes Irma and Maria. These category five hurricanes had a
devastating impact on the people and infrastructure on these and
other islands in the Caribbean. Infrastructure repairs are ongoing and
the timelines for completing this work and the impact on the economy
is currently indeterminable.
A CUL store in St. Maarten partially re-opened in November 2017
and is expected to be fully operational in the second half of 2018. A
13ANNUAL REPORT CUL store in St. Thomas, USVI, and three RTW stores in the BVI require
complete reconstruction. Two of the RTW stores are expected to open
in the second half of 2018 while the CUL store in St. Thomas and the
remaining RTW store are expected to re-open in 2019. The timelines
for completing the repair and reconstruction of these stores will
depend on many factors including the state of public infrastructure
and the availability of building materials and qualified trades people.
The hurricane related store closures negatively impacted sales
and EBITDA by approximately $35.1 million and $4.1 million
respectively. On an annualized basis, these stores represent
approximately $92.0 million in sales and $6.6 million in EBITDA. In
addition, the Company may incur certain ongoing expenses that are
expected to be recovered through business interruption insurance.
The Company expects that its insurance proceeds will be
sufficient to cover repair and reconstruction costs. The Company also
has business interruption insurance that will help mitigate the earnings
impact of the store closures however, the settlement of the business
interruption claim is expected to take approximately 12 to 15 months
to complete. The settlement of these claims and the receipt of
payments are expected to result in insurance-related gains in the
consolidated statements of earnings in subsequent periods.
Return on Net Assets The return on net assets employed for
International Operations decreased to 15.8% compared to 19.2% in
2016 due to a 3.5% decrease in EBIT and a $29.0 million increase in
average net assets employed.
Cash from Operating Activities Cash flow from operating activities
increased $15.4 million or 12.2% to $141.4 million compared to 2016
and was up $8.4 million or 6.3% compared to 2015. The increase in cash
flow from operating activities is mainly due to the change in non-cash
working capital which positively impacted cash flow from operating
activities by $2.3 million this year compared to a decrease in cash flow
of $10.8 million in 2016 and an increase in cash flow of $5.9 million in
2015. The change in non-cash working capital is primarily due to the
change in inventories, accounts receivable and accounts payable and
accrued expenses compared to the prior year. Further information on
working capital is provided in the Canadian and International net assets
employed section on pages 12 and 13 respectively.
The $12.8 million increase in cash flow from operating activities
before working capital and other items in 2017 compared to 2015 is
due in part to higher amortization and interest expense partially offset
by an increase in taxes paid due to the timing of income tax
installments.
Cash flow from operating activities and unutilized credit available
on existing loan facilities are expected to be sufficient to fund operating
requirements, pension plan contributions, sustaining and planned
growth-related capital expenditures as well as anticipated dividends
during 2018.
Since converting back to a share corporation on January 1, 2011,
the compound annual growth rate ("CAGR") for cash flow from
operating activities is 3.4% as shown in the following graph:
Consolidated Liquidity
and Capital Resources
The following table summarizes the major components of cash flow:
($ in thousands)
2017
2016
2015
Cash provided by (used in):
Operating activities before
change in non-cash working
capital and other
Change in non-cash working
capital
Change in other non-cash items
Operating activities
Investing activities
Financing activities
Effect of foreign exchange
$134,222
$ 132,351
$ 121,424
2,271
4,926
141,419
(165,861)
19,928
(569)
(10,799)
4,472
126,024
(77,682)
(54,398)
(944)
5,904
5,659
132,987
(75,813)
(50,174)
1,114
8,114
Net change in cash
$ (5,083)
$
(7,000)
$
(1) North West Company Fund converted from an income trust to a share corporation
effective January 1, 2011. See Conversion to a Share Corporation in glossary of terms
for further information.
The decrease in cash flow from operating activities in 2013 is largely
due to the payment of Canadian income taxes related to the conversion
to a share corporation.
Cash Used in Investing Activities Net cash used in investing
activities was $165.9 million compared to $77.7 million in 2016 and
$75.8 million in 2015. The increase is mainly due to the acquisition of
RTW and NSA partially offset by $7.0 million in insurance proceeds
received on the write-off of store assets destroyed in the hurricanes.
Net investing in Canadian Operations was $121.4 million compared to
$63.3 million in 2016 and $68.1 million in 2015. A summary of the
Canadian Operations investing activities is included in net assets
employed on page 12. Net investing in International Operations was
$44.5 million compared to $14.4 million in 2016 and $7.7 million in
2015. A summary of the International Operations investing activities is
included in net assets employed on page 13.
14THE NORTH WEST COMPANY INC.
The following table summarizes the number of stores and selling
square footage under NWC's various retail banners at the end of the
fiscal year:
Number of Stores
Selling square footage
Northern
NorthMart
Quickstop
Giant Tiger
Alaska Commercial
Cost-U-Less
Riteway Food Market
Other Formats
2017
119
2016
120
6
21
41
27
12
6
7
6
21
37
27
13
—
8
2017
688,583
134,210
35,003
672,794
269,893
318,191
54,712
46,366
2016
701,112
134,387
36,552
611,324
278,742
369,281
—
62,254
Total at year-end
239
232
2,219,752
2,193,652
In Canadian Operations, one Quickstop convenience store and four
Giant Tiger stores were opened, one Northern store in Fort Nelson, BC
was closed, and the Price Chopper store under Other Formats was
converted to a Giant Tiger store. Total selling square footage in Canada
increased to 1,551,916 from 1,517,840 in 2016 as a result of the new
stores.
In International Operations, an AC store was opened in Kiana,
Alaska and a Quickstop convenience store in Kodiak, Alaska and an AC
store in St. Paul, Alaska were closed. Total selling square footage
decreased to 667,836 compared to 675,812 last year as the impact of
the two AC store closures and the CUL hurricane-related store closures
more than offset the square footage added from the acquisition of
RTW.
Cash From/(Used in) Financing Activities Cash provided by
financing activities was $19.9 million compared to cash used in
financing activities of $54.4 million in 2016 and $50.2 million in 2015.
The change compared to last year is due to the issuance of $100.0
million in senior notes which was used to reduce amounts drawn on
the Company's revolving loan facilities. This change in long-term debt
was partially offset by an increase in dividends and interest. Further
information on dividends, interest and the loan facilities is provided in
the following sections.
Shareholder Dividends The Company paid dividends of
$62.3 million or $1.28 per share, an increase of 3.6% compared to $60.2
million or $1.24 per share paid in 2016. Further information on
dividends is included in Note 19 to the consolidated financial
statements.
The following table shows the quarterly cash dividends per share
paid for the past three years:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
2017
$ 0.32
0.32
0.32
0.32
2016
$ 0.31
0.31
0.31
0.31
$ 1.28
$ 1.24
2015
0.29
0.29
0.31
0.31
1.20
$
$
The payment of dividends on the Company's common shares is subject
to the approval of the Board of Directors and is based on, among other
factors, the financial performance of the Company, its current and
anticipated future business needs and the satisfaction of solvency tests
imposed by the Canada Business Corporations Act (“CBCA”) for the
declaration of dividends. The dividends were designated as eligible
dividends in accordance with the provisions of the Canadian Income
Tax Act.
The following table shows dividends paid in comparison to cash
flow from operating activities for the past three years:
2017
2016
2015
Dividends
$ 62,315
$ 60,169
$ 58,210
Cash flow from operating
activities
Dividends as a % of cash flow
from operating activities
$ 141,419
$ 126,024
$132,987
44.1%
47.7 %
43.8%
Dividends as a percentage of cash flow from operating activities has
averaged 45.2% over the past three years.
Since converting back to a share corporation on January 1, 2011,
the Company has increased its dividend each year with a compound
annual growth rate ("CAGR") of 4.9% over the past six years as shown
in the following graph:
(1) North West Company Fund converted to a share corporation effective January 1, 2011.
In addition to the $0.96 per share dividend paid in 2011, the Company also paid a $0.09
per unit final distribution from the Fund as part of the conversion to a share corporation.
Subsequent Event - Dividends On March 15, 2018, the Board of
Directors approved a quarterly dividend of $0.32 per share to
shareholders of record on March 29, 2018, to be paid on April 16, 2018.
Post-Employment Benefits The Company sponsors defined benefit
and defined contribution pension plans covering the majority of
Canadian employees. The Company recorded net actuarial gains on
defined benefit pension plans of $1.2 million net of deferred income
taxes in other comprehensive income. This compares to net actuarial
gains on defined benefit pension plans of $2.4 million net of deferred
income taxes in other comprehensive income in 2016 and net actuarial
gains of $4.6 million net of deferred income taxes in 2015. These gains
in other comprehensive income were immediately recognized in
retained earnings. Actuarial gains and losses occur primarily due to
changes in the discount rate used to calculate pension liabilities and
returns on pension plan assets.
15ANNUAL REPORT
In 2018, the Company will be
required to contribute
approximately $1.7 million to the defined benefit pension plans. In
addition to the cash funding, a portion of the pension plan obligation
may be settled by the issuance of a letter of credit in accordance with
pension legislation. In 2017, the Company's cash contributions to the
pension plan were $3.5 million compared to $1.5 million in 2016 and
$1.6 million in 2015. The actual amount of the contribution may be
different from the estimate based on actuarial valuations, plan
investment performance, volatility in discount rates, regulatory
requirements and other factors. The Company also expects to
contribute approximately $4.2 million to the defined contribution
pension plan and U.S. employees savings plan in 2018 compared to
$3.1 million in 2017 and $3.5 million in 2016. Additional information
regarding post-employment benefits is provided in Note 12 to the
consolidated financial statements.
Sources of Liquidity In September 2017, the Company issued $100.0
million senior notes, the proceeds of which were used to reduce
amounts outstanding on the $300.0 million revolving loan facilities.
These senior notes mature September 26, 2029 and have a fixed interest
rate of 3.74%. The notes are secured by certain assets of the Company
and rank pari passu with the Company's other senior debt comprised
of the $300.0 million Canadian Operations loan facilities, the US$70.0
million senior notes and the US$52.0 million loan facilities.
At January 31, 2018, the Canadian Operations have outstanding
US$70.0 million senior notes (January 31, 2017 - US$70.0 million). The
senior notes, which mature June 16, 2021, have a fixed interest rate of
3.27% on US$55.0 million and a floating interest rate on US$15.0 million
based on U.S. LIBOR plus a spread payable semi-annually. The senior
notes are secured by certain assets of the Company and rank pari passu
with the Company's other senior debt. The Company has designated
certain U.S. denominated debt as a hedge against the U.S. dollar
investment in the International Operations. For more information on
the senior notes and financial instruments, see Note 11 and Note 14 to
the consolidated financial statements.
The Canadian Operations also have committed, revolving loan
facilities of $300.0 million that bear a floating rate of interest based on
Bankers Acceptances rates plus a stamping fee. In September 2017,
the maturity date was extended from April 29, 2021 to September 26,
2022. These facilities are secured by certain assets of the Company and
rank pari passu with the Company's other senior debt. At January 31,
2018, the Company had drawn $91.1 million on these facilities
(January 31, 2017 - $126.3 million).
The Company has committed, revolving loan facilities of US$52.0
million that bear interest at U.S. LIBOR plus a spread. In September
2017, the maturity date was extended from April 29, 2021 to September
26, 2022. These facilities are secured by certain assets of the Company
and rank pari passu with the Company's other senior debt. At
January 31, 2018, the Company had drawn US$27.9 million on these
facilities (January 31, 2017 - US$NIL).
The International Operations have a US$40.0 million loan facility
which matures October 31, 2020 and bears a floating rate of interest
based on U.S. LIBOR plus a spread. This facility is secured by certain
accounts receivable and inventories of the International Operations.
At January 31, 2018, the International Operations had drawn US$1.4
million on this facility (January 31, 2017 - US$9.1 million).
The loan facilities and senior notes contain covenants and
restrictions including the requirement to meet certain financial ratios
and financial condition tests. The financial covenants include a fixed
charge coverage ratio, minimum current ratio, a leverage test and a
minimum net worth test. At January 31, 2018, the Company is in
compliance with the financial covenants under these facilities. Current
and forecasted debt levels are regularly monitored for compliance with
debt covenants.
Interest Costs and Coverage
Coverage ratio
EBIT ($ in millions)
Interest ($ in millions)
2017
11.3
$ 114.0
$ 10.1
2016
16.4
$ 118.1
$
7.2
2015
17.3
$ 107.3
$
6.2
The coverage ratio of earnings from operations ("EBIT") to interest
expense has decreased to 11.3 times compared to 16.4 times in 2016
largely due to a $2.9 million increase in interest expense and a decrease
in consolidated EBIT as previously noted. Additional information on
interest expense is provided in Note 18 to the consolidated financial
statements.
Contractual Obligations and Other Commitments
Contractual obligations of the Company are listed in the chart below:
($ in thousands)
Total
0-1 Year 2-3 Years
4-5 Years
6 Years+
Long-term debt
(including capital
lease obligations) $313,549
$ — $ 1,776
$ 211,773
$100,000
Operating leases
174,708
31,279
43,681
27,310
72,438
Other liabilities (1)
28,352
14,164
14,188
—
—
Total
$516,609
$ 45,443
$ 59,645
$ 239,083
$172,438
(1) At year-end, the Company had additional long-term liabilities of $46.0 million
which included other liabilities, defined benefit plan obligations and
deferred income tax liabilities. These have not been included as the timing
and amount of the future payments are uncertain.
Director and Officer Indemnification Agreements The Company
has agreements with its current and former directors, trustees, and
officers to indemnify them against charges, costs, expenses, amounts
paid in settlement and damages incurred from any lawsuit or any
judicial, administrative or investigative proceeding in which they are
sued as a result of their service. Due to the nature of these agreements,
the Company cannot make a reasonable estimate of the maximum
amount it could be required to pay to counterparties. The Company
has also purchased directors', trustees' and officers' liability insurance.
No amount has been recorded in the financial statements regarding
these indemnification agreements.
Other Indemnification Agreements The Company provides
indemnification agreements to counterparties for events such as
intellectual property right infringement, loss or damage to property,
claims that may arise while providing services, violation of laws or
regulations, or as a result of litigation that might be suffered by the
counterparties. The terms and nature of these agreements are based
on the specific contract. The Company cannot make a reasonable
estimate of the maximum amount it could be required to pay to
counterparties. No amount has been recorded in the financial
statements regarding these agreements.
Giant Tiger Master Franchise Agreement The Company has a Master
Franchise Agreement (MFA) with Giant Tiger Stores Limited, based in
Ottawa, Ontario, which grants the Company the exclusive right to open
Giant Tiger stores in western Canada, subject to meeting a minimum
store opening commitment. Under the agreement, Giant Tiger Stores
Limited provides product sourcing, merchandising, systems and
administration support to the Company's Giant Tiger stores in return
for a royalty based on sales. The Company is responsible for opening,
16THE NORTH WEST COMPANY INC.
owning, operating and providing food buying and distribution services
to the stores. At January 31, 2018, the Company owns 41 Giant Tiger
stores and is in compliance with the minimum store opening
commitment. The agreement expires July 31, 2040. Additional
information on commitments, contingencies and guarantees is
provided in Note 22 to the consolidated financial statements.
Related Parties The Company has a 50% ownership interest in a
Inc. and
Canadian Arctic shipping company, Transport Nanuk
purchases freight handling and shipping services from Transport
Nanuk Inc. and its subsidiaries. The purchases are based on market rates
for these types of services in an arm's length transaction. Additional
information on the Company's transactions with Transport Nanuk Inc.
is included in Note 23 to the consolidated financial statements.
Letters of Credit In the normal course of business, the Company
issues standby letters of credit in connection with defined benefit
pension plans, purchase orders and performance guarantees. The
aggregate potential liability related to letters of credit is approximately
$22 million (January 31, 2017 - $16 million).
Capital Structure The Company's capital management objectives
are to deploy capital to provide an appropriate total return to
shareholders while maintaining a capital structure that provides the
flexibility to take advantage of growth opportunities, maintain existing
assets, meet obligations and financial covenants and enhance
shareholder value. The capital structure of the Company consists of
bank advances,
long-term debt and shareholders' equity. The
Company manages capital to optimize efficiency through an
appropriate balance of debt and equity. In order to maintain or adjust
its capital structure, the Company may purchase shares for cancellation
pursuant to normal course issuer bids, issue additional shares, borrow
additional funds, adjust the amount of dividends paid or refinance debt
at different terms and conditions.
On a consolidated basis, the Company had $313.5 million in debt
and $382.2 million in equity at the end of the year and a debt-to-equity
ratio of 0.82:1 compared to 0.62:1 last year.
The Company's capital structure is summarized in the preceding graph.
Over the past four years, the Company's debt-to-equity ratio has
ranged from .57:1 to .82:1. Equity has increased $59.7 million or 18.5%
to $382.2 million over the past four years and interest-bearing debt has
increased $130.7 million or 71.5% to $313.5 million compared to $182.9
million in 2013. From 2013 to 2017, the Company has made capital
expenditures, including acquisitions, of $422.5 million and has paid
dividends of $291.1 million. This reflects the Company's balanced
approach of investing to sustain and grow the business while providing
shareholders with an annual cash return.
Consolidated debt at the end of the year increased $84.3 million
or 36.8% to $313.5 million compared to $229.3 million in 2016, and was
up $88.1 million or 39.1% from $225.5 million in 2015. The increase in
debt is due to the issuance of $100.0 million senior notes and higher
amounts drawn on the revolving loan facilities largely resulting from
the acquisition of RTW and NSA. This increase was partially offset by
the impact of foreign exchange on the translation of U.S. denominated
debt. The Company has US$99.4 million in debt at January 31, 2018
(January 31, 2017 - US$79.1 million, January 31, 2016 - US$75.6 million)
that is exposed to changes in foreign exchange rates when translated
into Canadian dollars. The exchange rate used to translate U.S.
denominated debt into Canadian dollars at January 31, 2018 was
1.2301 compared to 1.3030 at January 31, 2017 and 1.4080 at
January 31, 2016. The change in the foreign exchange rate resulted in
a $7.2 million decrease in debt compared to 2016 and a $17.7 million
decrease compared to 2015. Average debt outstanding during the
year excluding the foreign exchange impact increased $68.1 million or
32.3% from 2016 and was up $93.1 million or 50.1% compared to 2015.
The debt outstanding at the end of the fiscal year is summarized as
follows:
($ in thousands at the end of
the fiscal year)
CAD$ senior notes
US$ senior notes
Canadian revolving loan
facilities
U.S. revolving loan facilities
2017
2016
$ 100,000
$
—
$
85,760
91,035
91,648
36,141
126,344
11,887
2015
—
98,350
119,193
7,946
Total
$ 313,549
$ 229,266
$ 225,489
Shareholders' Equity The Company has an unlimited number of
authorized shares and had
issued and outstanding shares at
January 31, 2018 of 48,690,212 (January 31, 2017 - 48,542,514). The
Company has a Share Option Plan that provides for the granting of
options to certain officers and senior management. Each option is
exercisable into one common share of the Company at a price specified
in the option agreement. At January 31, 2018, there were 2,919,117
options outstanding representing approximately 6.0% of the issued
and outstanding shares. Further information on share options is
provided in Note 13 to the consolidated financial statements.
On June 14, 2017, the Company’s Common Shares were replaced
by Variable Voting Shares and Common Voting Shares. The two classes
of shares have equivalent rights except for voting rights. Holders of
Variable Voting Shares are entitled to one vote per share except where
(i) the number of outstanding Variable Voting Shares exceeds 25% of
the total number of all issued and outstanding Variable Voting Shares
and Common Voting Shares, or (ii) the total number of votes cast by or
on behalf of the holders of Variable Voting Shares at any meeting on
any matter on which a vote is to be taken exceeds 25% of the total
number of votes cast at such meeting. Variable Voting Shares may only
be held, beneficially owned or controlled, directly or indirectly, by
persons who are not Canadians (within the meaning of the Canada
Transportation Act). At January 31, 2018 there were 12,557,051 Variable
Voting Shares, representing 25.8% of the total shares issued and
outstanding. Further information on the Company's share capital is
provided in Note 15 to the consolidated financial statements.
Book value per share, on a diluted basis, at the end of the year
decreased to $7.50 per share compared to $7.51 per share in 2016. Total
shareholders' equity increased $14.4 million or 3.9% compared to 2016
as shares issued in connection with the acquisition of RTW and the
related impact of non-controlling interests more than offset the impact
of lower net earnings and an increase in dividends. Further information
is provided in the consolidated statements of changes in shareholders'
equity in the consolidated financial statements.
17ANNUAL REPORT
QUARTERLY FINANCIAL INFORMATION
Historically, the Company's first quarter sales are the lowest and fourth
quarter sales are the highest, reflecting consumer buying patterns. Due
to the remote location of many of the Company's stores, weather
conditions are often more extreme compared to other retailers and
can affect sales in any quarter. Net earnings generally follow higher
sales, but can be dependent on changes in merchandise sales blend,
promotional activity in key sales periods, variability in share-based
compensation costs related to changes in the Company's share price
and other factors which can affect net earnings.
The following is a summary of selected quarterly financial information:
($ thousands)
Q1
Q2
Q3
Q4 (1)
Total
Sales
2017
2016
EBITDA
2017
2016
$ 476,822
$507,873
$479,292
$489,756
$1,953,743
$ 438,974
$460,567
$463,959
$480,593
$1,844,093
$ 30,115
$ 47,304
$ 45,612
$ 46,593
$ 169,624
$ 37,640
$ 38,857
$ 51,140
$ 38,861
$ 166,498
Earnings from operations (EBIT)
2017
2016
Net earnings
$ 16,740
$ 33,192
$ 31,824
$ 32,215
$ 113,971
$ 25,613
$ 26,954
$ 39,082
$ 26,482
$ 118,131
2017
2016
$
9,071
$ 23,261
$ 21,034
$ 16,325
$ 17,794
$ 16,423
$ 27,865
$ 14,994
Net earnings attributable to shareholders of the Company
2017
2016
$
8,386
$ 22,720
$ 20,648
$ 15,400
$ 17,794
$ 16,423
$ 27,865
$ 14,994
Earnings per share-basic
2017
2016
$
$
0.17
0.37
$
$
Earnings per share-diluted
2017
2016
$
$
0.17
0.36
$
$
0.47
0.34
0.46
0.34
$
$
$
$
0.42
0.57
0.42
0.57
$
$
$
$
0.32
0.31
0.31
0.30
$
$
$
$
$
$
$
$
69,691
77,076
67,154
77,076
1.38
1.59
1.36
1.57
(1) Fourth Quarter Subsequent Event The Company reported its
fourth quarter unaudited interim period condensed consolidated
financial statements on March 15, 2018. On April 2, 2018, the U.S.
Department of the Treasury and the Internal Revenue Service issued
notice 2018-26 providing additional guidance on H.R. 1, the Tax Cuts
and Jobs Act ("U.S. Tax Reform") including the calculation of the
Deemed Repatriation Transition Tax (“transition tax”). As a result of this
additional guidance, the Company recorded an additional estimated
transition tax of $1.9 million on accumulated undistributed earnings
in foreign subsidiaries in its annual audited consolidated financial
statements for the year ended January 31, 2018. This adjustment
increased income tax expense and decreased net earnings by $1.9
million (US$1.5 million) from the amounts previously reported in the
fourth quarter unaudited interim consolidated financial statements for
both the fourth quarter and the year ended January 31, 2018. The
impact of the $1.9 million increase in income tax expense has been
included in the quarterly financial information table above and
reflected in the fourth quarter highlights that follow.
Fourth Quarter Highlights Fourth quarter consolidated sales
increased 1.9% to $489.8 million due to the acquisition of RTW in
International Operations and NSA in Canadian Operations. Same store
sales gains in International Operations were also a factor. These gains
were partially offset by store closures related to hurricanes in the
Caribbean and the impact of foreign exchange on the translation of
International Operations sales. Excluding the foreign exchange impact,
consolidated sales increased 4.2% and were up 0.3%2 on a same store
basis. Food sales2 increased 1.2% but were flat to last year on a same
store basis. General merchandise sales2 increased 1.8% and were up
1.3% on a same store basis.
Gross profit dollars were up 3.8% driven by the acquisition related
sales growth and a 56 basis point increase in gross profit rate compared
to last year. The increase in gross profit rate is mainly due to sales blend
changes across the various jurisdictions.
Selling, operating and administrative expenses ("Expenses")
decreased 0.2% and were down 51 basis points as a percentage to sales
as expenses related to the RTW and NSA acquisitions and new stores
in Canadian Operations were more than offset by the impact of lower
share-based compensation costs and hurricane-related store closures.
The decrease in share-based compensation costs of $9.2 million
was largely due to an option expense recovery of $2.8 million this year
compared to an option expense of $4.6 million last year. A substantial
portion of the options granted are accounted for as a liability and are
re-measured based on the share price at each quarterly reporting date.
The lower option expense this quarter was due to a decrease in the
share price in the quarter this year compared to an increase in the share
price in the fourth quarter last year.
Earnings from operations ("EBIT") increased $5.7 million or 21.6%
to $32.2 million compared to $26.5 million last year due to the impact
of the RTW and NSA acquisitions and lower share-based compensation
previously noted. These gains were partially offset by the impact of the
hurricane-related store closures.
interest,
income taxes, depreciation and
amortization (EBITDA3) increased $7.7 million or 19.9% to $46.6 million.
Excluding the impact of the share option expense, adjusted EBITDA3
was up 0.7% compared to last year and as a percentage to sales was
8.9% compared to 9.0% last year.
Earnings before
Interest expense increased $1.3 million to $3.1 million due to an
increase in long-term debt largely related to the financing of the RTW
and NSA acquisitions and higher interest rates.
Income tax expense increased $3.1 million to $12.8 million and
the consolidated effective tax rate was 44.0% compared to 39.3% last
year. The increase in the effective tax rate is due to the impact of one-
time income tax expense related to U.S. tax reform. These changes
resulted in an income tax expense of $5.8 million for the re-
measurement of deferred tax assets and liabilities and the transition
tax on undistributed earnings in certain of the Company's foreign
subsidiaries. These factors more than offset the impact of changes in
earnings of the Company's subsidiaries across various tax jurisdictions
and the change in non-taxable share-based compensation costs in
Canadian Operations compared to last year.
Net earnings increased 8.9% to $16.3 million. Net earnings
attributable to shareholders of the Company were $15.4 million and
diluted earnings per share were $0.31 per share compared to $0.30 per
share last year due to the factors noted above. Excluding the impact
of share-based compensation option expense and the one-time tax
expense related to U.S. tax reform, adjusted net earnings3 decreased
1.3%.
(2) Excluding the foreign exchange impact.
(3) See Non-GAAP Financial Measures Section in the 2017 fourth quarter report
to shareholders.
18THE NORTH WEST COMPANY INC. Working capital decreased $11.9 million compared to the fourth
quarter last year as the impact of the net working capital in RTW and
NSA was more than offset by higher trade accounts payable and
accrued expenses in Canadian Operations largely related to timing of
payments and an increase in accrued incentive plan costs. Changes
in the foreign exchange rate used to translate International Operations
balance sheets was also a factor. The exchange rate used to convert
U.S. denominated International Operations balance sheets into
Canadian dollars at January 31, 2018 was 1.2301 compared to 1.3030
last year.
Cash flow from operating activities in the quarter increased $4.0
million to $55.5 million compared to cash flow from operating activities
of $51.5 million last year. This increase is primarily due to higher net
earnings and a decrease in taxes paid due to timing of installments.
These positive impacts were partially offset by the change in non-cash
working capital largely due to the change in inventory and accounts
receivable compared to last year.
Cash used for investing activities in the quarter increased to $40.0
million compared to $23.8 million last year due to the purchase of
aircraft and equipment to expand the number of stores serviced by
NSA. Investments related to the implementation of a new point-of-
sale and merchandise management system were also factors.
Cash used in financing activities in the quarter was $42.9 million
compared to $44.5 million last year. The net change in long-term debt
in the quarter is due to a decrease in amounts drawn on the Company's
revolving loan facilities.
Further information on the quarterly financial performance of the
Company is provided in the interim MD&A available on the Company's
website at www.northwest.ca or on SEDAR at www.sedar.com.
DISCLOSURE CONTROLS
Management is responsible for establishing and maintaining a system
of disclosure controls and procedures to provide reasonable assurance
that material information relating to the Company is reported to senior
management, including the Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”) on a timely basis so that decisions can be made
regarding public disclosure. Based on an evaluation of the Company's
disclosure controls and procedures, as required by National Instrument
52-109 (Certification of Disclosure in Issuers' Annual and Interim
Filings), the Company's CEO and CFO have concluded that these
controls and procedures were designed and operated effectively as of
January 31, 2018.
INTERNAL CONTROLS OVER
FINANCIAL REPORTING
Management is responsible for establishing and maintaining internal
controls over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
International Financial Reporting Standards. All internal control
systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can only
provide reasonable assurance with respect to financial reporting and
may not prevent or detect misstatements. Projections of any
evaluations of effectiveness to future periods are subject to the risk that
controls may become ineffective because of changes in conditions or
the degree of compliance with policies and procedures may
deteriorate. Furthermore, management is required to use judgment in
evaluating controls and procedures. Based on an evaluation of the
Company's internal controls over financial reporting using the Internal
Control - Integrated Framework published by The Committee of
Sponsoring Organizations of the Treadway Commission (“COSO
Framework”), 2013, the Company's CEO and CFO have concluded that
the internal controls over financial reporting were designed and
operated effectively as at January 31, 2018.
Management has limited the scope of the design of internal
controls over financial reporting and disclosure controls and
procedures to exclude the controls, policies and procedures of
Roadtown Wholesale Trading Ltd. ("RTW") operating primarily as
Riteway Food Markets in the British Virgin Islands and North Star Air
Ltd. ("NSA"). RTW and NSA were acquired February 9, 2017 and June
15, 2017 respectively and their operating results have been included
in the 2017 annual consolidated financial statements for the period
ended January 31, 2018. The scope limitation is due to the time
required for the Company to assess disclosure controls & procedures
and internal controls over financial reporting at both RTW and NSA in
a manner consistent with its other operations. This limitation is in
Instrument 52-109,
accordance with Section 3.3 of National
Certification of Disclosure in Issuer's Annual and Interim Filings, which
allows an issuer to limit its design of internal controls over financial
reporting and disclosure controls and procedures of a company
acquired not more than 365 days before the end of the financial period
to which the certificate relates.
Other than as described above, there have been no changes in
the internal controls over financial reporting for the year ended
January 31, 2018 that have materially affected or are reasonably likely
to materially affect the internal controls over financial reporting. The
assessment of the design of internal controls over financial reporting
and disclosure controls and procedures for RTW and NSA are on track
for completion by the first and second quarters of 2018, respectively.
Since the date of the RTW and NSA acquisitions, the impact on
sales was an increase of $133.5 million and the impact on net earnings
was an increase of $6.4 million. The net earnings increase of $6.4 million
includes $6.2 million in acquisition costs, net of tax, substantially related
to stamp duty paid to the Government of the British Virgin Islands.
Further financial information on the acquisition of RTW and NSA is
included in Note 24 to the annual consolidated financial statements.
19ANNUAL REPORT
OUTLOOK
RISK MANAGEMENT
As noted under the Strategy section, the Company's principal focus
continues to be on its store network, people, products and facilities.
The successful execution of this enables the Company to capture
market share and sales at a higher rate, while focusing on lower-risk
products and services. Priority work in 2018 will include implementing
hurricane recovery plans in the Caribbean and post-acquisition plans
for RTW and NSA, with an emphasis on growing these regions and
businesses to their full potential.
The short-term consumer income outlook is stable to positive and
aligns with the Company's lower risk product and service focus,
augmented by opportunistic investments. Northern Canada is seeing
more mining development activity, public infrastructure investment
and spending on indigenous programming which is expected to
continue over the next two to five years. The western Canadian retail
environment is important for our Giant Tiger business and we expect
to face ongoing low food inflation and price competition within this
region combined with modest growth in competitive selling space.
Economic conditions in Alaska are expected to recover modestly
from depressed conditions over the past two years led by stronger
commercial fishing and more oil and gas activity. The impact of lower
corporate income tax rates as a result of U.S. tax reform will have a
positive impact on net earnings in International Operations starting in
2018.
CUL market prospects vary significantly from island to island and
overall, with the exception of the islands impacted by hurricanes Irma
and Maria, are expected to be comparable to 2017. As previously noted
in the International Operations section, it is uncertain how long it will
take for major infrastructure repairs to be completed on these islands
and what the economic impacts will be over the medium term as the
rebuilding efforts continue.
Net capital expenditures for 2018 are expected to be in the $108.0
million range (2017 - $165.9 million) reflecting investments in aircraft
and major store replacements, store renovations, fixtures, equipment,
staff housing and store-based warehouse expansions under the
Company's Top Markets and Top Categories initiatives; the opening of
three Giant Tiger stores and the completion of "New Store Experience"
upgrades in GT stores. The Company will also continue to invest in
implementing new information systems as described under the
strategy section. Finally, expenditures include approximately $21.0
million in hurricane-related construction costs which the Company
expects to recover through insurance proceeds. The receipt of
insurance proceeds on the reconstruction and the settlement of
business interruption insurance claims are expected to result in
insurance-related gains in the consolidated statements of earnings in
subsequent periods.
In 2019,
that sustaining capital
expenditures, including sustaining investments in aircraft, will be in the
range of $60.0 million plus approximately $12.0 million in hurricane-
related capital expenditures which are expected to be recovered
through insurance. Store-based capital expenditures can be impacted
by the completion of landlord negotiations, shipment of construction
materials to remote markets, and weather-related delays and therefore
their actual amount and timing can fluctuate.
the Company expects
The North West Company maintains an Enterprise Risk Management
("ERM") program which assists in identifying, evaluating and managing
risks that may reasonably have an impact on the Company. An annual
ERM assessment is completed to evaluate risks and the potential
impact that the risks may have on the Company's ability to execute its
strategies and achieve its objectives. The results of this annual
assessment and regular updates are presented to the Board of Directors
who are accountable for providing oversight of the ERM program.
The North West Company is exposed to a number of risks in its
business. The descriptions of the risks below are not the only ones
facing the Company. Additional risks and uncertainties not presently
known to the Company, 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 the Key
Performance Drivers and Capabilities Required to Deliver Results and
Outlook sections of this MD&A, as well as North West's Annual
Information Form, which provides further information on the risk
factors facing the Company. While the Company employs strategies to
minimize these risks, these strategies do not guarantee that events or
circumstances will not occur that could negatively impact the
Company's financial condition and performance.
Careful consideration should be given to the risk factors which include,
but are not limited to, the following:
Employee Development and Retention Attracting, retaining and
developing high caliber employees is essential to effectively managing
our business, executing our strategies and meeting our objectives. Due
to the vast geography and remoteness of the Company's markets, there
is significant competition for talent and a limited number of qualified
personnel, particularly at the store management level. The degree to
which the Company is not successful in retaining and developing
employees and establishing appropriate succession plans could lead
to a lack of knowledge, skills and experience required to effectively run
our operations and execute our strategies and could negatively affect
financial performance. The Company's overall priority on building and
sustaining store competency reflects the importance of mitigating
against this risk.
In addition to compensation programs and
investments in staff housing that are designed to attract and retain
qualified personnel, the Company also continues to implement and
refine initiatives such as comprehensive store-based manager-in-
training programs as part of the Pure Retail initiative.
Transport Canada has proposed new regulations with respect to
pilot fatigue and flight duty times. The proposed regulations are
currently under review and are expected to be finalized in 2018 with
implementation over the following 1-5 years. Depending on the
content of the finalized regulations, there may be an increase in the
number of pilots required by NSA. An existing global shortage of pilots
may result in an inability to attract and retain a sufficient number of
qualified pilots to meet its operational requirements. In addition to
pilots, the inability to attract and retain personnel with the required
aviation industry expertise at a reasonable cost could have a negative
impact on the Company's financial performance and reputation.
Business Model The Company serves geographically diverse markets
and sells a very wide range of products and services. Operational scale
can be difficult to achieve and the complexity of the Company's
business model is higher compared to more narrowly-focused or larger
retailers. Management continuously assesses the strength of its
customer value offer to ensure that specific markets, products and
services are financially attractive. The Company's Pure Retail initiative
20THE NORTH WEST COMPANY INC.
is focused on streamlining processes to simplify work across the
Company. To the extent the Company is not successful in developing
and executing its strategies, it could have an adverse effect on the
financial condition and performance of the Company.
Competition The Company has a leading market position in a large
percentage of the markets it serves. Sustaining and growing this
position depends on our ability to continually improve customer
satisfaction while identifying and pursuing new sales opportunities.
We actively monitor competitive activity and we are proactive in
enhancing our value offer elements, ranging from in-stock position to
service and pricing. To the extent that the Company is not effective in
responding to consumer trends or enhancing its value offer, it could
have a negative impact on financial performance. Furthermore, the
entrance of new competitors, an increase in competition, both local
and outside the community, or the introduction of new products and
services in the Company's markets could also negatively affect the
Company's financial performance.
Community Relations A portion of the Company's sales are derived
from communities and regions that restrict commercial
land
ownership and usage by non-indigenous or non-local owned
businesses or which have enacted policies and regulations to support
locally-owned businesses. We successfully operate within these
environments through initiatives that promote positive community
and customer relations. These include store lease arrangements with
community-based development organizations and initiatives to
recruit local residents into management positions and to incorporate
community stakeholder advice into our business at all levels. To the
extent the Company is not successful in maintaining these relations or
is unable to renew
lease agreements with community-based
organizations, or is subject to punitive fees or operating restrictions, it
could have an adverse effect on the Company's reputation and
financial performance.
Information Technology and Cyber Security The Company relies
on information technology (“IT”) to support the current and future
requirements of the business. A significant or prolonged disruption in
the Company's current IT systems could negatively impact day-to-day
operations of the business which could adversely affect the Company's
financial performance and reputation.
In 2016, the Company began the implementation of a new point-
of-sale, workforce management and merchandise management
systems which are described further in the strategy section under
Initiative #4, Project Enterprise. The failure to successfully upgrade
legacy systems, or to migrate from legacy systems to the new IT
systems, could have an adverse effect on the Company's operations,
reputation and financial performance. There is also a risk that the
anticipated benefits, cost savings or operating efficiencies related to
upgrading or implementing new IT systems may not be realized which
could adversely affect the Company's financial performance or
reputation. To help mitigate these risks, the Company uses a
combination of specialized internal and external IT resources as well
as a strong governance structure and disciplined project management.
The Company also relies on the integrity and continuous
availability of its IT systems. These IT systems are exposed to the risks
of “cyber-attack”, including viruses that can paralyze IT systems or result
in unauthorized access to private customer information or confidential
Company information.
The Company has implemented security software and measures,
including monitoring, testing and employee training, to prevent
unauthorized access to its IT systems and confidential information, and
to reduce the likelihood of disruptions. Cyber-attacks are constantly
evolving and are becoming more frequent and sophisticated in nature
and there is a risk that the Company's security measures may be
breached or unauthorized access may not be detected on a timely
basis. Any prolonged failure relating to IT system availability, breaches
of IT system security, or a significant loss of data, an impairment of data
integrity or unauthorized access to private and confidential
information, could adversely affect the financial performance and
reputation of the Company and may result in regulatory enforcement
actions or litigation.
Logistics and Supply Chain The Company relies on a complex and
elongated outbound supply chain due to the remoteness of the
Company's stores. The delivery of merchandise to a substantial portion
of the Company's stores involves multiple carriers and multiple modes
of transportation including trucks, trains, aircraft, ships and barges
through various ports and transportation hubs. The Company's
reputation and financial performance can be negatively impacted by
supply chain events or disruptions outside of the Company's control,
including changes in foreign and domestic regulations which increase
the cost of transportation; the quality of transportation infrastructure
such as roads, ports and airports; labour disruptions at transportation
companies; or the consolidation, financial difficulties or bankruptcy of
transportation companies. To help mitigate these risks, the Company
acquired North Star Air Ltd. in 2017 and has an investment in Transport
Nanuk Inc., an arctic shipping company, which provides the Company
with greater control over key components of our logistics network and
service to our stores in northern Canada.
Climate and Natural Disasters The Company's operations are
exposed to extreme weather conditions ranging from blizzards to
hurricanes, typhoons and cyclones which can cause loss of life, damage
to or destruction of key stores and facilities, or temporary business
disruptions. The stores located in the South Pacific, Caribbean and
coastal areas of Alaska are also at risk of earthquakes and tsunamis
which can result in loss of life and destruction of assets. The destruction
of assets and the impact on the local economy resulting from these
types of extreme weather conditions, particularly where more than one
location is impacted, could have a material adverse effect on the
operations and financial performance of the Company.
The impact of warmer ocean water temperatures has increased
the risk of frequency, severity and duration of hurricanes and typhoons.
In 2017, islands in the Caribbean were devastated by two category five
hurricanes which resulted in the destruction of four of the Company's
stores and significantly damaged a CUL store in St. Maarten. Rebuilding
will significantly increase resiliency to future hurricanes, however
certain markets remain exposed to this risk. Further information on
the impact of these hurricanes is provided in the International
Operations financial performance section.
Global warming conditions would also have a more pronounced
effect, both positive and negative, on the Company's most northern
latitude stores.
21ANNUAL REPORT Economic Environment External factors which affect customer
demand and personal disposable income, and over which the
Company exercises no influence, include government fiscal health,
general economic growth, changes in commodity prices, inflation,
unemployment rates, personal debt
levels of personal
disposable income, interest rates and foreign exchange rates. Changes
in the inflation rate and foreign exchange rate are unpredictable and
may impact the cost of merchandise and the prices charged to
consumers which in turn could negatively impact sales and net
earnings.
levels,
Our largest customer segments derive most of their income
directly or indirectly from government infrastructure spending or direct
payment to individuals in the form of social assistance, child care
benefits and old age security. While these tend to be stable sources of
income, independent of economic cycles, a decrease in government
income transfer payments to individuals, a recession, or a significant
and prolonged decline in consumer spending could have an adverse
effect on the Company's operations and financial performance.
Furthermore, customers in many of the Company's markets
benefit from product cost subsidies through programs such as
Nutrition North Canada ("NNC"), the U.S. Supplemental Nutrition
Assistance Program ("SNAP") and the by-pass mail system in Alaska
which contribute to lower living costs for eligible customers. A change
in government policy could result in a reduction in financial support
for these programs which would have a significant impact on the price
of merchandise and consumer demand and could have an adverse
effect on the Company's operations and financial condition.
A major source of employment income in the remote markets
where the Company operates is generated from local government and
spending on public infrastructure. This includes housing, schools,
health care facilities, military facilities, roads and sewers. Local
employment levels will fluctuate from year-to-year depending on the
degree of infrastructure activity and a community's overall fiscal health.
A similar fluctuating source of income is employment related to
tourism and natural resource development. A significant or prolonged
reduction
infrastructure
projects, natural resource development and tourism spending would
have a negative impact on consumer income which in turn could result
in a decrease in sales and gross profit, particularly for more discretionary
general merchandise items.
in government transfers, spending on
Management regularly monitors economic conditions and
considers factors which can affect customer demand in making
operating decisions and the development of strategic initiatives and
long-range plans.
Fuel and Utility Costs Compared to other retailers, the Company is
more exposed to fluctuations in the price of energy, particularly oil.
Due to the vast geography and remoteness of the store network,
expenses related to aviation fuel, diesel-generated electricity, and
heating fuel costs are a more significant component of the Company's
and its customers' expenses. To the extent that escalating fuel and
utility costs cannot be offset by alternative energy sources, energy
conservation practices or offsetting productivity gains, this may result
in higher retail prices or lower operating margins which may affect the
Company's financial performance. In this scenario, consumer retail
spending could also be negatively affected by higher household
energy-related expenses which could have an adverse effect on the
Company's financial performance.
Environmental The Company owns a large number of facilities and
real estate, particularly
in remote locations, and is subject to
environmental risks associated with the contamination of such facilities
and properties. The Company operates retail fuel outlets in a number
of locations and uses fuel to heat stores and housing. The Company
also has aviation fuel storage containers and operates aviation fuel
dispensing equipment. Contamination resulting from gasoline,
heating and aviation fuel is possible. The Company employs operating,
training, monitoring and testing procedures to minimize the risk of
contamination. The Company also operates refrigeration equipment
in its stores and distribution centres which, if the equipment fails, could
release gases that may be harmful to the environment. The Company
has monitoring and preventative maintenance procedures to reduce
the risk of this contamination occurring. Even with these risk mitigation
policies and procedures, the Company could incur increased or
unexpected costs related to environmental incidents and remediation
activities, including litigation and regulatory compliance costs, all of
which could have an adverse effect on the reputation and financial
performance of the Company.
Laws, Regulations and Standards The Company is subject to various
laws, regulations and standards administered by federal, provincial and
foreign regulatory authorities, including but not limited to income,
laws, duties, currency
commodity and other taxes, securities
repatriation, health and safety, employment standards, Payment Card
Industry ("PCI") standards, anti-money laundering ("AML") regulations,
licensing requirements, product packaging and labeling regulations
and zoning laws. The airline industry is also subject to extensive legal,
regulatory and administrative controls and oversight, including airline
safety standards. New accounting standards and pronouncements or
changes in accounting standards may also impact the Company's
financial results.
These laws, regulations and standards and their interpretation by
various courts and agencies are subject to change. In the course of
complying with such changes, the Company may incur significant
costs. Failure by the Company to fully comply with applicable laws,
regulations and standards could result
financial penalties,
assessments, sanctions, loss of operating licenses or legal action that
could have an adverse effect on the reputation and the financial
performance of the Company.
in
The Company is also subject to various privacy laws and
regulations regarding the protection of personal information of its
customers and employees. Any failure in the protection of this
information or non-compliance with laws or regulations could
negatively affect the Company's reputation and financial performance.
Income Taxes In the ordinary course of business, the Company is
subject to audits by tax authorities. The Company regularly reviews its
compliance with tax legislation, filing positions, the adequacy of its tax
provisions and the potential for adverse outcomes. While the Company
believes that its tax filing positions are appropriate and supportable,
the possibility exists that certain matters may be reviewed and
challenged by the tax authorities. If the final outcome differs materially
from the tax provisions, the Company's income tax expense and its
earnings could be affected positively or negatively in the period in
which the outcome is determined.
Food and Product Safety The Company is exposed to risks associated
with food safety, product handling and general merchandise product
defects. The Company also operates pharmacies and provides tele-
pharmacy services and is subject to risks associated with errors made
through medication dispensing or patient consultation. Food sales
represent approximately 80% of total Company sales. A significant
outbreak of a food-borne illness or increased public concerns with
certain food products could have an adverse effect on the reputation
and financial performance of the Company and could lead to
unforeseen liabilities from legal claims. The Company has food
preparation, handling, dispensing and storage procedures which help
mitigate these risks.
22THE NORTH WEST COMPANY INC.
The Company also has product recall procedures in place in the
event of a food-borne illness outbreak or product defect. The existence
of these procedures does not eliminate the underlying risks and the
ability of these procedures to mitigate risk in the event of a food-borne
illness or product recall is dependent on their successful execution.
Vendor and Third Party Service Partner Management The
Company relies on a broad base of manufacturers, suppliers and
operators of distribution facilities to provide goods and services. Events
or disruptions affecting these suppliers outside of the Company's
control could in turn result in delays in the delivery of merchandise to
the stores and therefore negatively impact the Company's reputation
and financial performance. A portion of the merchandise the Company
sells is purchased offshore. Offshore sourcing could provide products
that contain harmful or banned substances or do not meet the required
standards. The Company uses offshore consolidators and sourcing
agents to monitor product quality and reduce the risk of sub-standard
products however, there is no certainty that these risks can be
completely mitigated in all circumstances.
NSA also relies upon suppliers and third party service partners for
specialized aviation parts and aircraft maintenance services. A
prolonged disruption affecting the supply of parts or provision of
maintenance services could negatively impact the availability of
aircraft to service the Company's customers, or result in higher than
anticipated costs, which could have an adverse affect on the
Company's financial performance and reputation.
Management of Inventory Success in the retail industry depends
on being able to select the right merchandise, in the correct quantities
in proportion to the demand for such merchandise. A miscalculation
of consumer demand for merchandise could result in having excess
inventory for some products and missed sales opportunities for others
which could have an adverse effect on operations and financial
performance. Excess inventory may also result in higher markdowns
or inventory shrinkage all of which could have an adverse effect on the
financial performance of the Company.
Litigation and Casualty Losses In the normal course of business, the
Company is subject to a number of claims and legal actions that may
be made by its customers, suppliers and others. The Company records
a provision for litigation claims if management believes the Company
has liability for such claim or legal action. If management's assessment
of liability or the amount of any such claim is incorrect, or the Company
is unsuccessful in defending its position, any difference between the
final judgment amount and the provision would become an expense
or a recovery in the period such claim was resolved.
Consistent with risks inherent in the aviation industry, NSA could
be subject to large liability claims arising out of major accidents or
disasters involving aircraft which can result in serious injury, death or
destruction of property. Accidents and disasters may occur from factors
outside of the Company’s control such as severe weather, lightning
strikes, wind shear and bird strikes. Any such accident or disaster could
have a material adverse effect on the Company’s reputation, results
from operations and financial condition.
Post-Employment Benefits The Company engages professional
investment advisors to manage the assets in the defined benefit
pension plans. The performance of the Company's pension plans and
the plan funding requirements are impacted by the returns on plan
in the discount rate and regulatory funding
assets, changes
requirements. If capital market returns are below the level estimated
by management, or if the discount rate used to value the liabilities of
the plans decreases, the Company may be required to make
contributions to its defined benefit pension plans in excess of those
currently contemplated, which may have an adverse effect on the
Company's financial performance.
The Company regularly monitors and assesses the performance
of the pension plan assets and the impact of changes in capital markets,
changes in plan member demographics, and other economic factors
that may impact funding requirements, benefit plan expenses and
actuarial assumptions. The Company makes cash contributions to the
pension plan as required and also uses letters of credit to satisfy a
portion of its funding obligations. Effective January 1, 2011, the
Company entered into an amended and restated staff pension plan
and added a defined contribution plan. Under the amended pension
plan, all members who did not meet a qualifying threshold based on
number of years in the pension plan and age were transitioned to the
defined contribution pension plan effective January 1, 2011 and no
longer accumulate years of service under the defined benefit pension
plan. Further information on post-employment benefits is provided on
page 15 and in Note 12 to the consolidated financial statements.
Insurance The Company manages its exposure to certain risks
through an integrated insurance program which combines an
appropriate level of self-insurance and the purchase of various
insurance policies. The Company's insurance program is based on
various lines and limits of coverage and is arranged with financially
stable insurance companies as rated by professional rating agencies.
There can be no assurance that the Company's insurance program will
be sufficient to cover one or more large claims, or that any given risk
will be mitigated in all circumstances. There can also be no assurance
that the Company will be able to continue to purchase insurance
coverage at reasonable rates. To the extent that the Company's
insurance policies do not provide sufficient coverage for a loss, it could
have an adverse impact on the Company's operating results and
financial condition.
Dependence on Key Facilities There are five major distribution
centres which are located in Winnipeg, Manitoba; Anchorage, Alaska;
San Leandro, California; Port of Tacoma, Washington; and a third party
managed facility in Miami, Florida. In addition, the Company's Canadian
Operations support office is located in Winnipeg, Manitoba, NSA's
support office is located in Thunder Bay, Ontario and the International
Operations has support offices in Anchorage, Alaska and Bellevue,
Washington. A significant or prolonged disruption at any of these
facilities due to fire, inclement weather or otherwise could have a
material adverse effect on the financial performance of the Company.
Geopolitical Changes in the domestic or international political
environment may impact the Company's ability to source and provide
products and services. Acts of terrorism, riots, and political instability,
especially in less developed markets, could have an adverse effect on
the financial performance of the Company.
Ethical Business Conduct The Company has a Code of Business
Conduct and Ethics policy which governs both employees and
Directors. The Business Ethics Committee monitors compliance with
the Code of Business Conduct and Ethics. The Company also has a
Whistleblower Policy that provides direct access to members of the
Board of Directors. Unethical business conduct could negatively
impact the Company's reputation and relationship with its customers,
investors and employees, which in turn could have an adverse effect
on the financial performance of the Company.
Financial Risks In the normal course of business, the Company is
exposed to financial risks that have the potential to negatively impact
its financial performance. The Company manages financial risk with
oversight provided by the Board of Directors, who also approve specific
financial
financial transactions. The Company uses derivative
instruments only to hedge exposures arising in respect of underlying
23ANNUAL REPORT business requirements and not for speculative purposes. These risks
and the actions taken to minimize the risks are described below. Further
information on the Company's financial instruments and associated
risks are provided in Note 14 to the consolidated financial statements.
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 is exposed to credit risk primarily
in relation to individual and commercial accounts receivable. The
Company manages credit risk by performing
regular credit
assessments of its customers and provides allowances for potentially
uncollectible accounts receivable. The Company does not have any
individual customer accounts greater than 10% of total accounts
receivable.
Liquidity Risk Liquidity risk is the risk that the Company will not be
able to meet its financial obligations as they come due or can do so
only at excessive cost. The Company manages liquidity risk by
maintaining adequate credit facilities to fund operating requirements,
pension plan contributions and planned sustaining and growth-
related capital expenditures, and regularly monitoring actual and
forecasted cash flow and debt levels. At January 31, 2018, the Company
had undrawn committed revolving loan facilities available of $266.6
million (January 31, 2017 - $264.7 million).
Currency Risk Currency risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes in
foreign exchange rates. The Company is exposed to currency risk,
primarily the U.S. dollar, through its net investment in International
Operations and its U.S. dollar denominated borrowings. The Company
manages its exposure to currency risk by hedging the net investment
in foreign operations with a portion of U.S. dollar denominated
borrowings as described in the Sources of Liquidity section on page
16. At January 31, 2018, the Company had US$99.4 million in U.S.
denominated debt compared to US$79.1 million at January 31, 2017
and US$75.6 million at January 31, 2016. Further information on the
impact of foreign exchange rates on the translation of U.S.
denominated debt is provided in the Capital Structure section on page
17.
The Company is also exposed to currency risk relating to the
translation of International Operations earnings to Canadian dollars. In
2017, the average exchange rate used to translate U.S. denominated
earnings from the International Operations was 1.2930 compared to
1.3169 last year. The Canadian dollar's appreciation in 2017 compared
to the U.S. dollar in 2016 negatively impacted consolidated net
earnings by $0.5 million. In 2016, the average exchange rate was 1.3169
compared to 1.2971 in 2015 which resulted in an increase in 2016
consolidated net earnings of $0.4 million compared to 2015.
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 interest
rate risk primarily through its long-term borrowings. The Company
manages exposure to interest rate risk by using a combination of fixed
and floating interest rate debt and may use interest rate swaps. In 2017,
the Company issued $100.0 million in senior notes which mature
September 26, 2029 and have a fixed interest rate of 3.74%. The
proceeds of the senior notes were used to reduce amounts
outstanding on the $300.0 million revolving loan facilities which have
a floating rate of interest. Further information on long-term debt is
provided in Note 11 to the consolidated financial statements. As at
January 31, 2018, the Company had no outstanding interest rate swaps.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with IFRS
requires management to make estimates, assumptions and judgments
that affect the application of accounting policies and the reported
amounts and disclosures made
in the consolidated financial
statements and accompanying notes. Judgment has been used in the
application of accounting policy and to determine if a transaction
should be recognized or disclosed in the financial statements while
estimates and assumptions have been used to measure balances
recognized or disclosed. These estimates, assumptions and judgments
are based on management's historical experience, knowledge of
current events, expectations of future outcomes and other factors that
management considers reasonable under the circumstances. Certain
of these estimates and assumptions require subjective or complex
judgments by management about matters that are uncertain and
changes in these estimates could materially impact the consolidated
financial statements and disclosures. Management regularly evaluates
the estimates and assumptions it uses and revisions are recognized in
the period in which the estimates are reviewed and in any future
periods affected. The areas that management believes involve a higher
degree of judgment or complexity, or areas where the estimates and
assumptions may have the most significant impact on the amounts
recognized in the consolidated financial statements include the
following:
Valuation of Accounts Receivable The Company records an
allowance for doubtful accounts related to accounts receivable that
may potentially be impaired. The allowance is based on the aging of
the accounts receivable, our knowledge of our customers' financial
condition, the current business environment and historical experience.
A significant change in one or more of these factors could impact the
estimated allowances for doubtful accounts recorded
in the
consolidated balance sheets and the provisions for debt loss recorded
in the consolidated statement of earnings. Additional information on
the valuation of accounts receivable is provided in Note 5 and the
Credit Risk section in Note 14 to the consolidated financial statements.
Valuation of Inventories Inventories are stated at the lower of cost
and net realizable value. Significant estimation is required in: (1) the
determination of discount factors used to convert inventory to cost
after a physical count at retail has been completed; (2) recognizing
merchandise for which the customer's perception of value has
declined and appropriately marking the retail value of the merchandise
down to the perceived value; (3) estimating inventory losses, or
shrinkage, occurring between the last physical count and the balance
sheet date; and (4) the impact of vendor rebates on cost.
General Merchandise inventories counted at retail are converted
to cost by applying average cost factors by merchandise category.
These cost factors represent the average cost-to-retail ratio for each
merchandise category based on beginning inventory and purchases
made throughout the year.
Inventory shrinkage is estimated as a percentage of sales for the
period from the date of the last physical inventory count to the balance
sheet date. The estimate is based on historical experience and the most
recent physical inventory results. To the extent that actual losses
experienced vary from those estimated, both inventories and cost of
sales may be impacted.
Changes or differences in these estimates may result in changes
to inventories on the consolidated balance sheets and a charge or
credit to cost of sales in the consolidated statements of earnings.
Additional information regarding inventories is provided in Note 6 to
the consolidated financial statements.
24THE NORTH WEST COMPANY INC.
Post-Employment Benefits The defined benefit plan obligations are
accrued based on actuarial valuations which are dependent on
assumptions determined by management. These assumptions include
the discount rate used to calculate benefit plan obligations, the rate of
compensation increase, retirement ages and mortality rates. These
assumptions are reviewed by management and the Company's
actuaries.
The discount rate used to calculate benefit plan obligations and
increase are the most significant
the rate of compensation
assumptions. The discount rate used to calculate benefit plan
obligations and plan asset returns is based on market interest rates, as
at the Company's measurement date of January 31, 2018 on a portfolio
of Corporate AA bonds with terms to maturity that, on average,
matches the terms of the defined benefit plan obligations. The
discount rate used to measure the benefit plan obligations for fiscal
2017 was 3.5% compared to 4.0% in 2016 and 2015. Management
assumed a rate of compensation increase of 4.0% for fiscal 2017 - 2015.
These assumptions may change in the future and may result in
material changes in the defined benefit plan obligation on the
Company's consolidated balance sheets, the defined benefit plan
expense on the consolidated statements of earnings and the net
actuarial gains or losses recognized in comprehensive income and
retained earnings. Changes in financial market returns and interest
rates could also result in changes to the funding requirements of the
Company's defined benefit pension plans. Additional information
regarding the Company's post-employment benefits, including the
sensitivity of a 100 basis point change in the discount rate, is provided
in Note 12 to the consolidated financial statements.
Amortization of Long-lived Assets The Company makes estimates
about the expected useful lives of long-lived assets, including aircraft,
the expected residual values of the assets and the most appropriate
method to reflect the realization of the assets future economic benefit.
This includes using judgment to determine which asset components
constitute a significant cost in relation to the total cost of an asset.
Changes to these estimates, which can be significant, could be caused
by a variety of factors, including changes in expected useful lives or
residual values, changes to maintenance programs and changes in
utilization of the aircraft. Estimates and assumptions are evaluated at
least annually and any adjustments are accounted for as a change in
estimate, on a prospective basis, through amortization expense in the
Company's consolidated statement of earnings.
Business Combinations The Company's accounts for business
combinations using the acquisition method of accounting which
requires the acquired assets and assumed liabilities to be recorded at
their estimated fair values. Judgment is required to determine the fair
value of the assets and liabilities with the most significant judgment
and assumptions required to determine the estimated fair values of
intangible assets, particularly trade names.
The Company uses the royalty relief method to determine the fair
value of the trade name intangible assets. This technique values the
intangible assets based on the present value of the expected after-tax
royalty cash flow stream using a hypothetical licensing arrangement.
Significant assumptions include, among others, the determination of
projected revenues, royalty rate, discount rates and anticipated
average income tax rates.
Impairment of Long-lived Assets The Company assesses the
recoverability of values assigned to long-lived assets after considering
potential impairment indicated by such factors as business and market
trends, future prospects, current market value and other economic
factors. Judgment is used to determine if a triggering event has
occurred requiring an impairment test to be completed. If there is an
indication of impairment, the recoverable amount of the asset, which
is the higher of its fair value less costs of disposal and its value in use,
is estimated in order to determine the extent of the impairment loss.
Where the asset does not generate cash flows that are independent
from other assets, the Company estimates the recoverable amount of
the cash-generating unit ("CGU") to which the asset belongs. For
tangible and intangible assets excluding goodwill, judgment is
required to determine the CGU based on the smallest group of assets
that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets. To
the extent that the carrying value exceeds the estimated recoverable
amount, an impairment charge is recognized in the consolidated
statements of earnings in the period in which it occurs.
Various assumptions and estimates are used to determine the
recoverable amount of a CGU. The Company determines fair value less
costs of disposal using estimates such as market rental rates for
comparable properties, property appraisals and capitalization rates.
The Company determines value in use based on estimates and
assumptions regarding future financial performance. The underlying
estimates for cash flows include estimates for future sales, gross margin
rates and store expenses, and are based upon the stores' past and
expected future performance. Changes which may impact future cash
flows include, but are not limited to, competition, general economic
conditions and increases in operating costs that can not be offset by
other productivity improvements. To the extent that management's
estimates are not realized, future assessments could result in
impairment charges that may have a significant impact on the
Company's consolidated balance sheets and consolidated statements
of earnings.
Goodwill Goodwill is not amortized but is subject to an impairment
test annually or whenever indicators of impairment are detected.
Judgment is required to determine the appropriate grouping of CGUs
for the purpose of testing for impairment. Judgment is also required
in evaluating indicators of impairment which would require an
impairment test to be completed. Goodwill is allocated to CGUs that
are expected to benefit from the synergies of the related business
combination and represents the lowest level within the Company at
which goodwill is monitored for internal management purposes,
which is the Company's International Operations segment before
aggregation.
The value of the goodwill was tested by means of comparing the
recoverable amount of the operating segment to its carrying value.
The recoverable amount is the greater of its value in use or its fair value
less costs of disposal. The operating segment's recoverable amount
was based on fair value less costs of disposal. A range of fair values was
estimated by inferring enterprise values from the product of financial
performance and comparable trading multiples. Values assigned to the
key assumptions represent management's best estimates and have
been based on data from both external and internal sources. Key
assumptions used in the estimation of enterprise value include:
budgeted financial performance, selection of market trading multiples
and costs to sell. To the extent that management's estimates are not
realized, future assessments could result in impairment charges that
may have a significant impact on the Company's consolidated balance
sheets and consolidated statements of earnings.
25ANNUAL REPORT
The Company performed the annual goodwill impairment test in
2017 and determined that the recoverable amount exceeded its
carrying value. No goodwill
identified and
management considers any reasonably foreseeable changes in key
assumptions unlikely to produce a goodwill impairment.
impairment was
Income and Other Taxes Deferred tax assets and liabilities are
recognized for the future income tax consequences attributable to
temporary differences between the financial statement carrying values
of assets and liabilities and their respective income tax bases. Deferred
income tax assets or liabilities are measured using enacted or
substantively enacted income tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The calculation of current and deferred
income taxes requires management to use judgment regarding the
interpretation and application of tax legislation in the various
jurisdictions in which the Company operates. The calculation of
deferred income tax assets and liabilities is also impacted by estimates
of future financial results, expectations regarding the timing of reversal
of temporary differences, and assessing the possible outcome of audits
of tax filings by the regulatory agencies.
Changes or differences in these estimates or assumptions may
result in changes to the current or deferred income tax balances on
the consolidated balance sheet, a charge or credit to income tax
expense in the consolidated statements of earnings and may result in
cash payments or receipts. Additional information on income taxes is
provided in Note 9 to the consolidated financial statements.
ACCOUNTING STANDARDS IMPLEMENTED IN
2017
New Standards Implemented The Company adopted amendments
to IAS 7, Statement of Cash Flows and IAS 12, Recognition of Deferred Tax
Assets for Unrealized Losses effective February 1, 2017 as required by the
IASB.
The IAS 7 amendments provide guidance on the disclosure of liabilities
that form part of an entity's financing activities. The amendments had
no material impact on the consolidated financial statements.
The IAS 12 amendments clarify that the existence of a deductible
temporary difference depends solely on a comparison of the carrying
amount of an asset and its tax base at the end of the reporting period,
and is not affected by possible future changes in the carrying amount
or expected manner of recovery of the asset. The amendments also
clarify the methodology to determine the future taxable profits used
for assessing the utilization of deductible temporary differences. These
amendments had no impact on the consolidated financial statements.
FUTURE ACCOUNTING STANDARDS
A number of new standards, and amendments to standards and
interpretations, are not yet effective for the year ended January 31,
2018, and have not been applied in preparing these consolidated
financial statements.
Financial Instruments The amended IFRS 9, Financial Instruments is
a multi-phase project with the goal of improving and simplifying
financial instrument reporting. The Company will adopt IFRS 9 on
February 1, 2018. The standard establishes new principles for:
•
•
•
•
fair value
New requirements for the classification and measurement of
financial assets and liabilities. IFRS 9 uses a single approach to
determine measurement of a financial asset by both cash flow
characteristics and how an entity manages financial impairment,
replacing the multiple classification options in IAS 39 with three
through other
categories: amortized cost,
comprehensive income and fair value through profit or loss.
A single forward-looking "expected credit loss" impairment
model.
New general hedge accounting standard which aligns hedge
accounting more closely with risk management. This new
standard does not fundamentally change the types of hedging
relationships or the requirement to measure and recognize
effectiveness, however it will provide more strategies that may be
used for risk management to qualify for hedge accounting and
introduces more judgment to assess the effectiveness of a
hedging relationship.
Required disclosures about an entity's risk management strategy
and the impact of hedge accounting on the consolidated
financial statements.
The Company does not believe that either the new classification
requirements or the new hedge accounting requirement will have a
material impact on its accounting for financial instruments. Under IFRS
9, the Company's financial assets and financial liabilities will be
classified and measured at amortized cost. The Company's net
investment hedging
the new hedging
relationship meets
requirements.
The Company will apply a new forward-looking lifetime expected
credit loss ("ECL") impairment model to its accounts receivable based
on historical trends, timing of recoveries and management's judgment.
The change in ECL's will be recognized in earnings and reflected as an
allowance against accounts receivable. In accordance with the
transitional provisions of
IFRS 9 which requires retrospective
application without restatement (modified retrospective approach),
the initial measurement difference is an adjustment to retained
earnings. This adjustment is not expected to be significant.
Revenue Recognition In May 2014, the IASB issued IFRS 15, Revenue
from Contracts with Customers. The IFRS 15 standard contains a
comprehensive model which specifies the criteria and timing for
recognizing revenue, and also requires additional disclosures in the
notes to the financial statements. The core principle of the standard is
that revenue is recognized at an amount that reflects the consideration
to which the Company is entitled. A contract-based five step analysis
is used to determine whether, how much and when revenue is
recognized. New estimates and judgmental thresholds have also been
introduced. The Company will adopt this standard effective February
1, 2018. The impact of adopting this standard on reported earnings is
not expected to be significant.
26THE NORTH WEST COMPANY INC.
Share based payment In June 2016, the IASB issued amendments to
IFRS 2, Share-based Payments in relation to the classification and
measurement of share-based payment transactions; specifically,
accounting for cash-settled share-based transactions, share-based
payment transactions with a net settlement feature and modifications
of share-based payment transactions that change classification from
cash-settled to equity settled. The Company will adopt IFRS 2 on
February 1, 2018. As a practical simplification, the amendments can
be applied prospectively. The Company does not expect a material
impact on its consolidated financial statements as a result of these
changes.
Leases IFRS 16, Leases replaces the current guidance in IAS 17 for
operating and finance lease accounting. This standard requires lessees
to recognize a lease liability representing the obligation for future lease
payments and a right-of-use asset in the consolidated balance sheets
for substantially all lease contracts, initially measured at the present
value of unavoidable lease payments. The Company continues to
evaluate the effect this standard will have on its consolidated financial
statements, and expects the impact to be material. Under the new
standard the Company will recognize new right of use assets and lease
liabilities for its operating leases of land, buildings and equipment. In
addition, the nature and timing of leasing expenses will change as
straight line operating lease expenses are replaced by a depreciation
charge for right-of-use assets and interest expense on lease liabilities.
On transition the Company can either apply the standard using a
retrospective approach or a modified retrospective approach with
optional practical expedients. The Company plans to apply IFRS 16
initially on February 1, 2019 and has not yet determined which
transition approach to apply. As a result, the Company has not yet
quantified the impact on its reported assets and liabilities since it will
depend on the transition method chosen. The Company is continuing
to analyze the impact of this change on its leases, including the impacts
on our accounting system, processes and internal controls.
In December 2017, the
issued
Annual Improvements
amendments to IFRS 3, Business Combinations; IAS 12, Income Taxes and
IAS 23, Borrowing Costs. These amendments are effective for the
Company February 1, 2019. The Company is currently assessing the
potential impacts of these amendments.
IASB
There are no other IFRS or IFRIC interpretations that are not yet effective
that would be expected to have a material impact on the Company.
NON-GAAP FINANCIAL MEASURES
(1) Earnings Before Interest, Income Taxes, Depreciation and
Amortization (EBITDA), Adjusted EBITDA and Adjusted Net
Earnings are not recognized measures under IFRS. Management uses
these non-GAAP financial measures to exclude the impact of certain
income and expenses that must be recognized under IFRS. The
excluded amounts are either subject to volatility in the Company's
share price or may not necessarily be reflective of the Company's
underlying operating performance.
factors can make
comparisons of the Company's financial performance between
periods more difficult. The Company may exclude additional items if
it believes that doing so will result in a more effective analysis and
explanation of the underlying financial performance. The exclusion of
these items does not imply that they are non-recurring.
These
These measures do not have a standardized meaning prescribed by
GAAP and therefore they may not be comparable to similarly titled
measures presented by other publicly traded companies and should
not be construed as an alternative to the other financial measures
determined in accordance with IFRS.
Reconciliation of consolidated net earnings to EBITDA and
adjusted EBITDA
($ in thousands)
Net earnings
Add:
Amortization
Interest expense
Income taxes
EBITDA
Add:
2017
2016
2015
$ 69,691
$
77,076
$
69,779
55,653
10,145
34,135
48,367
7,220
33,835
44,026
6,210
31,332
$ 169,624
$ 166,498
$ 151,347
Acquisition costs
6,344
—
—
Share-based compensation
option expense
2,886
2,510
5,408
Adjusted EBITDA
$ 178,854
$ 169,008
$ 156,755
For EBITDA information by business segment, see Note 4 to the
consolidated financial statements.
Reconciliation of consolidated net earnings to adjusted net
earnings:
($ in thousands)
Net earnings
Add:
2017
2016
2015
$ 69,691
$
77,076
$
69,779
Acquisition costs, net of tax
6,188
—
—
Share-based compensation
option expense
U.S. Tax reform transition and
deferred tax expense
2,886
2,510
5,408
5,835
—
—
Adjusted Net Earnings
$ 84,600
$
79,586
$
75,187
Acquisition costs were incurred to complete the North Star Air Ltd. and
Roadtown Wholesale Trading Ltd. transactions. They comprise stamp
duty, external legal fees and other costs all of which are included in
selling, operating and administrative expenses.
27ANNUAL REPORT
is presented as a
The Company is exposed to market price fluctuations in its share price
through share-based compensation costs. Accrued share-based
compensation
liability on the Company's
consolidated balance sheets. This liability is recorded at fair value at
each reporting date based on the market price on the Company's
shares at the end of each reporting period with the changes in fair
value recorded in selling, operating and administrative expenses.
U.S. tax reform transition and deferred tax expense were incurred due
to new corporate tax legislation enacted in December 2017. They
comprise a one-time transition tax on undistributed accumulated
earnings in foreign owned subsidiaries and also the re-measurement
of deferred tax assets and liabilities.
(2) Return on Net Assets (RONA) is not a recognized measure under
IFRS. Management believes that RONA is a useful measure to evaluate
the financial return on the net assets used in the business. RONA is
calculated as earnings from operations (EBIT) for the year divided by
average monthly net assets. The following table reconciles net assets
used in the RONA calculation to IFRS measures reported in the
consolidated financial statements as at January 31 for the following
fiscal years:
($ in millions)
Total assets
2017
2016
2015
$
930.9
$
805.8
$
793.8
Less: Total liabilities
Add: Total long-term debt
(548.8)
313.5
Net Assets Employed
$
695.6
$
(438.0)
229.3
597.1
(436.2)
225.5
583.1
$
(3) Return on Average Equity (ROE) is not a recognized measure
under IFRS. Management believes that ROE is a useful measure to
evaluate the financial return on the amount invested by shareholders.
ROE is calculated by dividing net earnings for the year by average
monthly total shareholders' equity. There is no directly comparable
IFRS measure for return on equity.
28THE NORTH WEST COMPANY INC. GLOSSARY OF TERMS
AC Alaska Commercial Company store banner.
Basic earnings per share Net earnings attributable to shareholders of The
North West Company Inc. divided by the weighted-average number of
shares outstanding during the period.
Fair value The amount of consideration that would be agreed upon in an
arm's length transaction between knowledgeable, willing parties who are
under no compulsion to act.
Gross profit Sales less cost of goods sold and inventory shrinkage.
Gross profit rate Gross profit divided by sales.
Basis point A unit of measure that is equal to 1/100th of one percent.
GT Giant Tiger store banner.
Book value per share Equity attributable to shareholders of The North
West Company Inc. divided by the number of shares, basic or diluted,
outstanding at the end of the year.
CGAAP (Canadian generally accepted accounting principles) The
consolidated financial statements for the fiscal years 2009 and prior were
prepared in accordance with Canadian generally accepted accounting
principles as issued by the Canadian Institute of Chartered Accountants.
Compound Annual Growth Rate ("CAGR") The compound annual
growth rate is the year-over-year percentage growth rate over a given period
of time.
Conversion to a Share Corporation On January 1, 2011, the North West
Company Fund (the “Fund”) completed a conversion to a corporation
named The North West Company Inc. (the “Company”) by way of a plan of
arrangement under section 192 of the Canada Business Corporations Act.
The details of the conversion and the Arrangement are contained in the
management information circular dated April 29, 2010 which is available on
the Company's website at www.northwest.ca or on SEDAR at
www.sedar.com.
The MD&A contains references to “shareholders”, “shares” and
“dividends” which were previously referred to as “unitholders”, “units” and
“distributions” under the Fund.
CUL Cost-U-Less store banner.
Debt covenants Restrictions written into banking facilities, senior notes
and loan agreements that prohibit the Company from taking actions that
may negatively impact the interests of the lenders.
Debt loss An expense resulting from the estimated loss on potentially
uncollectible accounts receivable.
Debt-to-equity ratio Provides information on the proportion of debt and
equity the Company is using to finance its operations and is calculated as
total debt divided by shareholders' equity.
Diluted earnings per share The amount of net earnings for the period
attributable to shareholders of The North West Company Inc. divided by the
weighted-average number of shares outstanding during the period
including the impact of all potential dilutive outstanding shares at the end
of the period.
EBIT (Earnings From Operations) Net earnings before interest and income
taxes provides an indication of the Company's performance prior to interest
expense and income taxes.
EBIT margin EBIT divided by sales.
EBITDA Net earnings before interest, income taxes, depreciation and
amortization provides an
indication of the Company's operational
performance before allocating the cost of interest, income taxes and capital
investments. See Non-GAAP Financial Measures section.
EBITDA margin EBITDA divided by sales.
Hedge A risk management technique used to manage interest rate, foreign
currency exchange or other exposures arising from business transactions.
Interest coverage Net earnings before interest and income taxes divided
by interest expense.
IFRS (International Financial Reporting Standards) Effective for the 2011
fiscal year, the consolidated financial statements were prepared in
accordance with International Financial Reporting Standards as issued by
the International Accounting Standards Board. Comparative financial
information for the year ended January 31, 2011 (“2010”) previously reported
in the consolidated financial statements prepared in accordance with
CGAAP has been restated in accordance with the accounting policies and
financial statement presentation adopted under IFRS. Further information
on the transition to IFRS and the impact on the Company's consolidated
financial statements is provided in the 2011 Annual Financial Report
available on SEDAR at www.sedar.com or on the Company's website at
www.northwest.ca.
NSA North Star Air Ltd. A regional airline providing cargo and passenger
services.
Return on Average Equity ("ROE") Net earnings divided by average
shareholders' equity. See Non-GAAP Financial Measures section.
Return on Net Assets ("RONA") Net earnings before interest and income
taxes divided by average net assets employed (total assets less accounts
payable and accrued liabilities, income taxes payable, defined benefit plan
obligations, deferred tax liabilities, and other long-term liabilities). See Non-
GAAP Financial Measures section.
RTW Roadtown Wholesale Trading Ltd. collectively consisting of the
Riteway Food Markets banner, a Cash and Carry store and a significant
wholesale operation.
Same store sales Retail food and general merchandise sales from stores
that have been open more than 52 weeks in the periods being compared,
excluding the impact of foreign exchange.
Working capital Total current assets less total current liabilities.
Year The fiscal year ends on January 31. Each fiscal year has 365 days of
operations with the exception of a "leap year" which has 366 days of
operations as a result of February 29. The following table summarizes the
fiscal year:
Fiscal
Year
2017
2016
2015
2014
2013
2012
Year-ended
January 31, 2018
January 31, 2017
January 31, 2016
January 31, 2015
January 31, 2014
January 31, 2013
Fiscal
Year
2011
2010
2009
2008
2007
2006
Year-ended
January 31, 2012
January 31, 2011
January 31, 2010
January 31, 2009
January 31, 2008
January 31, 2007
29ANNUAL REPORT
Eleven-Year Financial Summary
Fiscal Year(1)
($ in thousands )
Consolidated Statements of Earnings
Sales - Canadian Operations
Sales - International Operations
Sales - Total
EBITDA(3) - Canadian Operations
EBITDA(3) - International Operations
EBITDA(3) - Total Operations
Amortization - Canadian Operations
Amortization - International Operations
Amortization - Total
Interest
Income taxes
Net earnings attributable to shareholders of the Company
Cash flow from operating activities
Dividends/distributions paid during the year
Capital and intangible asset expenditures
Net change in cash
Consolidated Balance Sheets
Current assets
Property and equipment
Other assets, intangible assets and goodwill
Deferred tax assets
Current liabilities
Long-term debt and other liabilities
Total Equity
Consolidated Dollar Per Share/Unit ($)(5)
Net earnings - basic
Net earnings - diluted
EBITDA(3),(4)
Cash flow from operating activities(4)
Dividends/distributions paid during the year(4)
Equity (basic shares/units outstanding end of year)
Market price at January 31
Statistics at Year End
Number of stores - Canadian
Number of stores - International
Selling square feet (000's) end of year - Canadian Stores
Selling square feet (000's) end of year - International Stores
Sales per average selling square foot - Canadian
Sales per average selling square foot - International
Number of employees - Canadian Operations
Number of employees - International Operations
Average shares/units outstanding (000's)
Shares/Units outstanding at end of fiscal year (000's)
Shares/Units traded during the year (000's)
Financial Ratios
EBITDA(3) (%)
Earnings from operations (EBIT) (%)
Total return on net assets(3) (%)
Return on average equity(3) (%)
Debt-to-equity
Dividends/distributions as % of cash flow from operating activities
Inventory turnover (times per year)
(1) The fiscal year changed from the last Saturday in January to January 31
effective January 31, 2007.
2017
2016
2015
2014
2013
1,171,621
782,122
1,953,743
112,393
57,231
169,624
39,796
15,857
55,653
10,145
34,135
67,154
141,419
62,315
122,035
(5,083)
$ 1,125,330
718,763
1,844,093
109,736
56,762
166,498
35,291
13,076
48,367
7,220
33,835
77,076
126,024
60,169
77,745
(7,000)
$ 335,003
469,993
91,502
34,450
171,212
377,580
382,156
$
$
$
1.38
1.36
3.48
2.91
1.28
7.60
29.14
188
51
1,552
668
763
1,164
5,915
2,119
48,680
48,690
38,836
8.7
5.8
16.7
18.3
.82:1
44.1
6.0
$
$
$
$
327,938
358,121
86,909
32,853
152,244
285,792
367,785
1.59
1.57
3.43
2.60
1.24
7.57
29.28
185
47
1,518
676
755
1,063
5,715
1,882
48,524
48,542
49,189
9.0
6.4
20.1
21.8
.62:1
47.7
6.1
$1,089,898
706,137
1,796,035
98,276
53,071
151,347
31,781
12,245
44,026
6,210
31,332
69,779
132,987
58,210
75,983
8,114
$ 335,581
345,881
83,293
29,040
155,501
280,682
357,612
$1,042,168
582,232
1,624,400
100,896
36,942
137,838
30,302
10,070
40,372
6,673
27,910
62,883
115,086
56,180
52,329
6,776
$ 315,840
311,692
68,693
28,074
146,275
248,741
329,283
$1,022,985
520,140
1,543,125
111,225
27,111
138,336
29,258
9,018
38,276
7,784
28,013
64,263
79,473
54,229
43,207
(16,322)
$ 299,071
286,875
64,969
19,597
209,738
138,334
322,440
$
$
$
1.44
1.43
3.12
2.74
1.20
7.37
30.53
181
47
1,463
676
756
1,045
5,482
1,896
48,509
48,523
35,631
8.4
6.0
19.5
20.6
.63:1
43.8
6.2
$
$
$
1.30
1.29
2.85
2.38
1.16
6.80
26.56
178
47
1,422
676
742
849
4,921
1,726
48,432
48,497
24,080
8.5
6.0
18.4
19.3
.61:1
48.8
5.7
$
$
$
1.33
1.32
2.86
1.64
1.12
6.66
25.42
178
48
1,386
696
741
767
4,839
1,853
48,413
48,426
17,623
9.0
6.5
20.0
21.0
.57:1
68.2
5.6
(2) The financial results for 2009 to 2007 are reported in accordance with
CGAAP and have not been restated to IFRS.
30THE NORTH WEST COMPANY INC. 2012
2011
2010
CGAAP(2)
2009
CGAAP(2)
2008
CGAAP(2)
2007
$1,043,050 $1,028,396
466,740
1,495,136
97,998
27,883
125,881
28,745
7,827
36,572
6,026
25,322
57,961
115,469
50,797
46,376
(4,247)
470,596
1,513,646
106,510
27,207
133,717
29,155
7,994
37,149
6,979
25,701
63,888
128,992
50,320
51,133
11,691
$ 303,896 $ 295,836
270,370
53,289
7,422
128,002
215,206
283,709
274,027
60,567
12,904
190,184
164,960
296,250
$ 978,662
469,442
1,448,104
98,781
26,983
125,764
27,511
7,981
35,492
6,077
14,539
69,656
114,564
68,700
37,814
3,953
$ 284,789
259,583
55,199
17,017
185,377
144,736
286,475
$
$
$
1.32 $
1.32
2.76
2.67
1.04
6.12
23.14
177
46
1,375
660
734 $
716 $
4,768
1,568
48,384
48,389
17,831
1.20
1.19
2.60
2.39
1.05
5.86
19.40
183
46
1,466
655
702
713
5,233
1,668
48,378
48,378
22,418
$
$
$
1.45
1.44
2.61
2.38
1.42
5.92
21.09
184
46
1,445
654
682
718
5,301
1,601
48,180
48,378
24,814
$ 921,621
522,745
1,444,366
96,599
33,675
130,274
26,727
8,423
35,150
5,470
7,841
81,813
107,973
67,245
45,294
1,548
$ 285,843
258,928
73,177
5,852
171,946
161,928
289,926
$
$
$
1.71
1.69
2.73
2.26
1.39
6.04
17.94
180
46
1,423
653
654
752
5,358
1,545
47,799
48,017
20,080
8.8
6.4
20.6
22.1
.55:1
39.0
5.8
8.4
6.0
18.5
20.1
.62:1
44.0
5.7
(3) See Non-GAAP financial measures on page 27.
8.7
6.2
17.9
24.1
.67:1
60.0
5.6
9.0
6.6
18.7
29.3
.72:1
62.3
5.6
(4) Based on average basic shares/units outstanding.
$ 899,263
493,371
1,392,634
90,606
31,651
122,257
24,501
7,553
32,054
8,307
6,518
75,378
90,178
67,730
46,118
3,998
$ 285,088
248,856
68,632
6,597
172,216
162,547
274,410
$ 852,773
211,717
1,064,490
87,410
19,147
106,557
22,634
4,316
26,950
7,465
9,151
62,991
93,591
54,667
44,409
(368)
$ 254,061
223,397
50,492
1,720
134,899
138,470
256,301
$
$
1.58
1.56
2.56
1.89
1.40
5.75
16.14
1.32
1.31
2.24
1.96
1.13
5.37
18.42
Fiscal Year(1)
($ in thousands )
Consolidated Statements of Earnings
Sales - Canadian Operations
Sales - International Operations
Sales - Total
EBITDA(3) - Canadian Operations
EBITDA(3) - International Operations
EBITDA(3) - Total Operations
Amortization - Canadian Operations
Amortization - International Operations
Amortization - Total
Interest
Income taxes
Net earnings attributable to shareholders of the Company
Cash flow from operating activities
Dividends/distributions paid during the year
Capital and intangible asset expenditures
Net change in cash
Consolidated Balance Sheets
Current assets
Property and equipment
Other assets, intangible assets and goodwill
Deferred tax assets
Current liabilities
Long-term debt and other liabilities
Total equity
Consolidated Dollar Per Share/Unit ($)(5)
Net earnings - basic
Net earnings - diluted
EBITDA(3),(4)
Cash flow from operating activities(4)
Dividends/distributions paid during the year(4)
Equity (basic shares/units outstanding at end of year)
Market price at January 31
Statistics at Year End
$
$
$
$
176
44
1,368
639
657
410
5,359
1,502
47,649
47,701
17,330
178
43
1,396
617
651
723
5,408
1,339
47,718
47,722
16,402
Number of stores - Canadian
Number of stores - International
Selling square feet (000's) end of year - Canadian Stores
Selling square feet (000's) end of year - International Stores
Sales per average selling square foot - Canadian
Sales per average selling square foot - International
Number of employees - Canadian Operations
Number of employees - International Operations
Average shares/units outstanding (000's)
Shares/Units outstanding at end of fiscal year (000's)
Shares/Units traded during the year (000's)
Financial Ratios
EBITDA(3) (%)
10.0
Earnings from operations (EBIT) (%)
7.5
Total return on net assets(3) (%)
21.0
Return on average equity(3) (%)
24.9
.62:1
Debt-to-equity
58.4 Dividends/distributions as % of cash flow from operating activities
Inventory turnover (times per year)
5.3
(5) Effective January 1, 2011, North West Company Fund converted to a share corporation called The North
West Company Inc. The comparative information refers to units of the Fund. On September 20, 2006 the
units were split on a three-for-one basis. All per unit information has been restated to reflect the three-for-
one split except trading volume.
8.8
6.5
19.8
28.6
.78:1
75.1
5.8
31ANNUAL REPORT Management’s Responsibility for Financial Statements
Independent Auditor’s Report
The management of The North West Company Inc. is responsible
for the preparation, presentation and integrity of the accompanying
consolidated financial statements and all other information in the
annual report. The consolidated financial statements have been
prepared by management in accordance with International Financial
Reporting Standards as issued by the International Accounting
Standards Board and include certain amounts that are based on the
best estimates and judgment by management.
In order to meet its responsibility and ensure integrity of financial
information, management has established a code of business ethics,
and maintains appropriate internal controls and accounting systems.
An internal audit function is maintained that is designed to provide
reasonable assurance that assets are safeguarded, transactions are
authorized and recorded and that the financial records are reliable.
Ultimate responsibility for financial reporting to shareholders rests
with the Board of Directors. The Audit Committee of the Board of
Directors, consisting of independent Directors, meets periodically with
management and with the internal and external auditors to review the
audit results, internal controls and the selection and consistent
application of appropriate accounting policies. Internal and external
auditors have unlimited access to the Audit Committee. The Audit
Committee meets separately with management and the external
auditors to review the financial statements and other contents of the
annual report and recommend approval by the Board of Directors. The
Audit Committee also recommends the independent auditor for
appointment by the shareholders.
PricewaterhouseCoopers LLP, an independent firm of auditors
appointed by the shareholders, have completed their audit and
submitted their report as follows.
Edward S. Kennedy
PRESIDENT & CEO
THE NORTH WEST COMPANY INC.
John D. King, CPA, CA, CMA
EXECUTIVE VICE-PRESIDENT &
CHIEF FINANCIAL OFFICER
THE NORTH WEST COMPANY INC.
April 11, 2018
To the Shareholders of The North West Company Inc;
We have audited the accompanying consolidated financial
statements of The North West Company Inc. and its subsidiaries, which
comprise the consolidated balance sheets as at January 31, 2018 and
January 31, 2017 and the consolidated statements of earnings,
comprehensive income, changes in shareholders’ equity and cash
flows for the years then ended, and the related notes, which comprise
a summary of significant accounting policies and other explanatory
information.
Management’s responsibility for the consolidated financial
statements
Management
is responsible for the preparation and fair
presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s
including the assessment of the risks of material
judgment,
misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to
design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits
is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of The North West
Company Inc. and its subsidiaries as at January 31, 2018 and January
31, 2017 and their financial performance and their cash flows for the
years then ended in accordance with International Financial Reporting
Standards.
CHARTERED PROFESSIONAL ACCOUNTANTS
WINNIPEG, CANADA
April 11, 2018
32THE NORTH WEST COMPANY INC.
Consolidated Balance Sheets
($ in thousands)
CURRENT ASSETS
Cash
Accounts receivable (Note 5)
Inventories (Note 6)
Prepaid expenses
NON-CURRENT ASSETS
Property and equipment (Note 7)
Goodwill (Note 8)
Intangible assets (Note 8)
Deferred tax assets (Note 9)
Other assets (Note 10)
TOTAL ASSETS
CURRENT LIABILITIES
Accounts payable and accrued liabilities
Income tax payable (Note 9)
NON-CURRENT LIABILITIES
Long-term debt (Note 11)
Defined benefit plan obligation (Note 12)
Deferred tax liabilities (Note 9)
Other long-term liabilities
TOTAL LIABILITIES
SHAREHOLDERS’ EQUITY
Share capital (Note 15)
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Equity attributable to The North West Company Inc.
Non-controlling interests
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board of Directors
“Eric L. Stefanson, FCPA, FCA”
DIRECTOR
“H. Sanford Riley”
DIRECTOR
January 31, 2018
January 31, 2017
$
25,160
80,765
222,072
7,006
335,003
469,993
41,231
37,628
34,450
12,643
595,945
$
30,243
78,931
213,217
5,547
327,938
358,121
37,752
35,394
32,853
13,763
477,883
$
930,948
$ 805,821
$
170,166
$ 146,639
1,046
171,212
313,549
34,095
6,468
23,468
377,580
548,792
172,619
2,570
181,844
12,918
369,951
12,205
382,156
5,605
152,244
229,266
34,078
2,661
19,787
285,792
438,036
168,283
2,647
176,003
20,852
367,785
—
367,785
$
930,948
$ 805,821
33CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Earnings
($ in thousands, except per share amounts)
SALES
Cost of sales
Gross profit
Selling, operating and administrative expenses (Notes 16, 17)
Earnings from operations
Interest expense (Note 18)
Earnings before income taxes
Income taxes (Note 9)
NET EARNINGS FOR THE YEAR
NET EARNINGS ATTRIBUTABLE TO
The North West Company Inc.
Non-controlling interests
TOTAL NET EARNINGS
NET EARNINGS PER SHARE (Note 20)
Basic
Diluted
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING (000's)
Basic
Diluted
See accompanying notes to consolidated financial statements.
Year Ended
Year Ended
January 31, 2018
January 31, 2017
$ 1,953,743
$ 1,844,093
(1,367,657)
(1,302,596)
586,086
(472,115)
113,971
(10,145)
103,826
(34,135)
541,497
(423,366)
118,131
(7,220)
110,911
(33,835)
$
69,691
$
77,076
67,154
2,537
69,691
77,076
—
77,076
$
$
1.38
1.36
$
$
1.59
1.57
48,680
49,275
48,524
48,964
34THE NORTH WEST COMPANY INC.
Consolidated Statements of Comprehensive Income
($ in thousands)
NET EARNINGS FOR THE YEAR
Other comprehensive income/(loss), net of tax:
Items that may be reclassified to net earnings:
Exchange differences on translation of foreign controlled subsidiaries
Items that will not be subsequently reclassified to net earnings:
Remeasurements of defined benefit plans (Note 12)
Remeasurements of defined benefit plan of equity investee
Total other comprehensive loss, net of tax
COMPREHENSIVE INCOME FOR THE YEAR
OTHER COMPREHENSIVE LOSS ATTRIBUTABLE TO
The North West Company Inc.
Non-controlling interests
TOTAL OTHER COMPREHENSIVE LOSS
COMPREHENSIVE INCOME ATTRIBUTABLE TO
The North West Company Inc.
Non-controlling interests
TOTAL OTHER COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
Year Ended
Year Ended
January 31, 2018
January 31, 2017
$
69,691
$
77,076
(7,934)
1,175
(173)
(6,932)
(9,566)
2,413
19
(7,134)
$
62,759
$
69,942
$
$
$
$
(6,932)
—
(6,932)
$
$
(7,134)
—
(7,134)
60,222
2,537
62,759
$
69,942
—
$
69,942
35CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands)
Share
Capital
Contributed
Surplus
Retained
Earnings
AOCI (1)
Total
Non-
Controlling
Interests
Total
Equity
Balance at January 31, 2017
$ 168,283
$
2,647
$ 176,003
$ 20,852
$ 367,785 $
— $ 367,785
Net earnings for the year
Other comprehensive income/(loss)
Other comprehensive income of
equity investee
Comprehensive income
Acquisition of subsidiary with non-
controlling interests (Note 24)
Equity settled share-based
payments
Dividends (Note 19)
Issuance of common shares
(Note 15)
—
—
—
—
—
—
—
4,336
4,336
—
—
—
—
—
259
—
(336)
(77)
67,154
1,175
—
(7,934)
67,154
(6,759)
(173)
—
(173)
2,537
—
—
69,691
(6,759)
(173)
68,156
(7,934)
60,222
2,537
62,759
—
—
(62,315)
—
(62,315)
—
—
—
—
—
—
12,150
12,150
259
—
259
(62,315)
(2,482)
(64,797)
4,000
(58,056)
—
4,000
9,668
(48,388)
Balance at January 31, 2018
$172,619
$
2,570
$ 181,844
$12,918 $369,951 $ 12,205 $ 382,156
Balance at January 31, 2016
$ 167,910
$
2,620
$ 156,664
$ 30,418
$ 357,612 $
— $ 357,612
Net earnings for the year
Other comprehensive income
Other comprehensive loss of equity
investee
Comprehensive income
Equity settled share-based
payments
Dividends (Note 19)
Issuance of common shares
(Note 15)
—
—
—
—
—
—
373
373
—
—
—
—
168
—
(141)
27
77,076
2,413
—
(9,566)
77,076
(7,153)
19
—
19
79,508
(9,566)
69,942
—
(60,169)
—
(60,169)
—
—
—
—
168
(60,169)
232
(59,769)
—
—
—
—
—
77,076
(7,153)
19
69,942
168
— (60,169)
—
232
— (59,769)
Balance at January 31, 2017
$ 168,283
$
2,647
$ 176,003
$ 20,852
$ 367,785 $
— $ 367,785
(1) Accumulated Other Comprehensive Income
See accompanying notes to consolidated financial statements.
36THE NORTH WEST COMPANY INC.
Consolidated Statements of Cash Flows
($ in thousands)
CASH PROVIDED BY (USED IN)
Operating activities
Net earnings for the year
Adjustments for:
Amortization (Note 7, 8)
Provision for income taxes (Note 9)
Interest expense (Note 18)
Equity settled share option expense (Note 13)
Taxes paid
Loss on disposal of property and equipment
Change in non-cash working capital
Change in other non-cash items
Cash from operating activities
Investing activities
Purchase of property and equipment (Note 7)
Business acquisitions (Note 24)
Intangible asset additions (Note 8)
Proceeds from disposal of property and equipment
Proceeds from interim insurance settlement on
property and equipment (Note 7)
Cash used in investing activities
Financing activities
Debt issuance (Note 11)
Net (decrease)/increase in long-term debt (Note 11)
Dividends (Note 19)
Dividends to non-controlling interests (Note 19)
Interest paid
Issuance of common shares (Note 15)
Cash from/(used) in financing activities
Effect of changes in foreign exchange rates on cash
NET CHANGE IN CASH
Cash, beginning of year
CASH, END OF YEAR
See accompanying notes to consolidated financial statements.
Year Ended
Year Ended
January 31, 2018
January 31, 2017
$
69,691
$
77,076
55,653
34,135
10,145
259
(36,213)
552
134,222
2,271
4,926
141,419
(114,948)
(51,204)
(7,087)
370
7,008
48,367
33,835
7,220
168
(35,430)
1,115
132,351
(10,799)
4,472
126,024
(66,180)
—
(11,565)
63
—
(165,861)
(77,682)
100,000
(9,092)
(62,315)
(2,482)
(6,183)
—
19,928
(569)
(5,083)
30,243
—
11,567
(60,169)
—
(6,028)
232
(54,398)
(944)
(7,000)
37,243
$
25,160
$
30,243
37CONSOLIDATED FINANCIAL STATEMENTS
Notes to
Consolidated
Financial
Statements
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 31, 2018 AND 2017
1. ORGANIZATION
The North West Company Inc. (NWC or the Company) is a
corporation amalgamated under the Canada Business Corporations
Act (CBCA) and governed by the laws of Canada. The Company,
through its subsidiaries, is a leading retailer to rural and remote
communities and urban neighbourhoods in the following regions:
northern Canada, western Canada, rural Alaska, the South Pacific and
the Caribbean. These regions comprise two reportable operating
segments: Canadian Operations and International Operations.
In 2017, the Company acquired 76% of the outstanding shares of
Roadtown Wholesale Trading Ltd. (RTW), operating primarily as
Riteway Food Markets in the British Virgin Islands. The Company also
acquired 100% of the outstanding common shares of North Star Air
Ltd., a Thunder Bay based airline providing cargo and passenger
services within northwestern Ontario, Canada. See Note 24 for a
discussion of these acquisitions.
The address of its registered office is 77 Main Street, Winnipeg,
Manitoba. These consolidated financial statements have been
approved for issue by the Board of Directors of the Company on
April 11, 2018.
2. BASIS OF PREPARATION
(A) Statement of Compliance
These consolidated financial
statements have been prepared in accordance with International
Financial Reporting Standards (IFRS), as issued by the International
Accounting Standards Board (IASB).
(B) Basis of Measurement The consolidated financial statements
have been prepared on a going concern basis, under the historical
cost convention, except for the following which are measured at
fair value, as applicable:
•
•
•
Liabilities for share-based payment plans (Note 13)
Defined benefit pension plan (Note 12)
Assets and liabilities acquired in a business
combination (Note 24)
The methods used to measure fair values are discussed further in
the notes to these financial statements.
(C) Functional and Presentation Currency The presentation
currency of the consolidated financial statements is Canadian
dollars, which is the Company’s functional currency. All financial
information is presented in Canadian dollars, unless otherwise
stated, and has been rounded to the nearest thousand.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied to all years
presented in these consolidated financial statements, and have been
applied consistently by both the Company and its subsidiaries using
uniform accounting policies for like transactions and other events in
similar circumstances.
(A) Basis of Consolidation Subsidiaries are entities controlled, either
directly or indirectly, by the Company. Control is established when
the Company has rights to an entity's variable returns, and has the
ability to affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date on which control
is transferred to the Company until the date that control ceases.
The Company assesses control on an ongoing basis.
Net Earnings or loss and each component of other
comprehensive income are attributed to the shareholders of the
Company and
Total
the non-controlling
comprehensive income is attributed to the shareholders of the
Company and to the non-controlling interests even if this results
in the non-controlling interests having a deficit balance on
consolidation.
interests.
to
A joint arrangement can take the form of a joint operation
or a joint venture. Joint ventures are those entities over which the
Company has joint control of the rights to the net assets of the
arrangement, rather than rights to its assets and obligations for
its liabilities. The Company’s 50% interest in Transport Nanuk Inc.
has been classified as a joint venture. Its results are included in
the consolidated statements of earnings using the equity method
of accounting. The consolidated financial statements include the
Company's share of both earnings and other comprehensive
income from the date that significant influence or joint control
commences until the date that it ceases. Joint ventures are carried
in the consolidated balance sheets at cost plus post-acquisition
changes in the Company’s share of net assets of the entity, less
any impairment in value.
All significant inter-company amounts and transactions have
been eliminated.
(B) Business Combinations Business combinations are accounted
for using the acquisition method of accounting.
The
consideration transferred is measured at the fair value of the assets
given, equity instruments issued and liabilities assumed at the
date of exchange. Acquisition costs incurred are expensed and
included in selling, operating and administrative expenses. Any
contingent consideration to be transferred by the acquirer will be
recognized at fair value at the acquisition date. Subsequent
changes to the fair value of the contingent consideration which
is deemed to be an asset or liability will be recognized in
accordance with International Accounting Standard (IAS) 39
either in net earnings or as a change to other comprehensive
income (OCI). If the contingent consideration is classified as
equity, it will not be remeasured and settlement is accounted for
within equity.
38THE NORTH WEST COMPANY INC.
Identifiable assets acquired, and liabilities and contingent
liabilities assumed in a business combination, are measured
initially at their fair values at the acquisition date irrespective of
the extent of any non-controlling interest. The excess of the cost
of the acquisition over the fair value of the Company’s share of
the identifiable net assets acquired is recorded as goodwill. If the
cost of acquisition is less than the fair value of the net assets of
the subsidiary acquired, the difference is recognized directly in
the consolidated statement of earnings.
Non-controlling interests are measured either at fair value or
their proportionate share of the acquiree's identifiable net assets
at the date of acquisition.
(C) Revenue Recognition Revenue on the sale of goods is recorded
at the time the sale is made to the customer, being when the
significant risks and rewards of ownership have transferred to the
customer, recovery of the consideration is probable, and the
amount of revenue can be measured reliably. Sales are presented
net of tax, returns and discounts and are measured at the fair value
of the consideration received or receivable from the customer for
the products sold or services supplied. Service charges on
customer account receivables are accrued each month on
balances outstanding at each account’s billing date.
(D) Inventories Inventories are valued at the lower of cost and net
realizable value. The cost of warehouse inventories is determined
using the weighted-average cost method. The cost of retail
inventories is determined primarily using the retail method of
accounting for general merchandise inventories and the cost
method of accounting for food inventories on a first-in, first-out
basis. Cost includes the cost to purchase goods net of vendor
allowances plus other costs incurred in bringing inventories to
their present location and condition. Net realizable value is
estimated based on the amount at which inventories are
expected to be sold, taking into consideration fluctuations in retail
prices due to obsolescence, damage or seasonality.
Inventories are written down to net realizable value if net
realizable value declines below carrying amount.
When
circumstances that previously caused inventories to be written
down below cost no longer exist or when there is clear evidence
of an increase in selling price, the amount of the write-down
previously recorded is reversed.
(E) Vendor Rebates Consideration received from vendors related
to the purchase of merchandise is recorded on an accrual basis
as a reduction in the cost of the vendor’s products and reflected
as a reduction of cost of sales and related inventory when it is
probable they will be received and the amount can be reliably
estimated.
(F) Property and Equipment Property and equipment are stated
at cost less accumulated amortization and any impairment losses.
Cost includes any directly attributable costs, borrowing costs on
qualifying construction projects, and the costs of dismantling and
removing the items and restoring the site on which they are
located. When major components of an item of property and
equipment have different useful lives, they are accounted for as
separate items. Amortization methods, useful lives and residual
values are reviewed at each reporting date and adjusted if
appropriate. Assets under construction and land are not
amortized. Amortization is calculated from the dates assets are
available for use using the straight-line method to allocate the
cost of assets less their residual values over their estimated useful
lives.
Estimated useful lives of Property and Equipment are as follows:
Buildings 3% – 8%
Leasehold improvements 3% – 20%
Aircraft 3.3% – 20%
Fixtures and equipment 8% – 20%
Computer equipment 12% – 33%
Major aircraft maintenance overhaul expenditures, including
labour, are capitalized and depreciated over the expected life of
the maintenance cycle. Any remaining carrying value, if any, is
derecognized when the major maintenance overhaul occurs. All
other costs associated with maintenance of aircraft fleet assets are
charged to the statement of earnings as incurred.
(G) Impairment
Impairment of non-financial assets Tangible assets and definite life
intangible assets are reviewed at each balance sheet date to
determine whether events or conditions indicate that their
carrying amount may not be recoverable. If any such indication
exists, the recoverable amount of the asset, which is the higher of
its fair value less costs of disposal and its value in use, is estimated
in order to determine the extent of the impairment loss. Where
the asset does not generate cash flows that are independent from
other assets, the Company estimates the recoverable amount of
the cash-generating unit (CGU) to which the asset belongs. For
tangible and intangible assets excluding goodwill, the CGU is the
smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows
of other assets or groups of assets. CGU's may comprise individual
stores or groups of stores.
Goodwill and indefinite life intangible assets are not
amortized but are subject to an impairment test annually and
whenever indicators of impairment are detected. Goodwill is
allocated to CGUs that are expected to benefit from the synergies
of the related business combination and represents the lowest
level within the Company at which goodwill is monitored for
internal management purposes. The goodwill asset balance
largely relates to the Company's acquired subsidiary, Cost-U-Less,
and is allocated to the International Operations operating
segment.
Any impairment charge is recognized in the consolidated
statement of earnings in the period in which it occurs, to the
extent that the carrying value exceeds its recoverable amount.
Where an impairment loss other than an impairment loss on
goodwill subsequently reverses due to a change in the original
estimate, the carrying amount of the asset is increased to the
revised estimate of its recoverable amount. Impairment charges
on goodwill are not reversed.
Impairment of financial assets Financial assets are assessed at each
reporting date to determine whether there is any objective
evidence that they are impaired. A financial asset is considered
to be impaired if objective evidence indicates that one or more
events have had a negative effect on the estimated future cash
flows of that asset. An impairment loss is calculated as the
difference between its carrying amount, and the present value of
the estimated future cash flows discounted at their original
effective interest rate.
All impairment losses are recognized in the consolidated
statement of earnings. An impairment loss, except an impairment
loss related to goodwill, is reversed if the reversal can be related
objectively to an event occurring after the impairment loss was
recognized.
39NOTES TO CONSOLDATED FINANCIAL STATEMENTS
(H) Leases Leases in which a significant portion of the risks and
rewards of ownership are retained by the lessor are accounted for
as operating leases. Assets leased under operating leases are not
recorded on the consolidated balance sheets. Rental payments
are recorded in selling, operating and administrative expenses in
the consolidated statements of earnings. Lease incentives
received are recognized as part of the total lease expense, over
the term of the lease.
Leases in which the Company has substantially all of the risks
and rewards of ownership are accounted for as finance leases. At
commencement, finance leases are capitalized at the lower of the
fair value of the leased property and the present value of minimum
lease payments, and are recorded in property and equipment on
the consolidated balance sheets. Finance lease liabilities are
recorded in long-term debt and are reduced by the amount of
the lease payment net of imputed interest (finance charges).
(I) Borrowing Costs Borrowing costs directly attributable to the
acquisition or construction of qualifying assets are capitalized as
part of the cost of the respective asset until it is ready for its
intended use. Qualifying assets are those assets that necessarily
take a substantial period of time to prepare for their intended use.
Borrowing costs are capitalized based on the Company’s
weighted-average cost of borrowing. All other borrowing costs
are expensed as incurred.
(J) Goodwill Goodwill represents the excess of the consideration
transferred over the fair value of the identifiable assets, including
intangible assets, and liabilities of the acquiree at the date of
acquisition. Goodwill is not amortized but is subject to an
impairment test annually and whenever indicators of impairment
are detected. Goodwill is carried at cost less accumulated
impairment losses.
(K)
Intangible Assets Intangible assets with finite lives are carried
at cost less accumulated amortization and any impairment loss.
Amortization is recorded on a straight-line basis over the term of
the estimated useful life of the asset as follows:
Software
Non-compete agreements
3 – 7 years
3 – 5 years
Intangible assets with indefinite lives comprise the Cost-U-Less
and RTW banners. These assets are not amortized but instead
tested for impairment annually or more frequently if indicators of
impairment are identified.
(L) Share-based Payment Transactions
Equity settled plans Certain stock options settled in common
shares are equity settled share-based payment plans. The fair
value of these plans is determined using an option pricing model.
The grant date fair values of this benefit is recognized as an
employee expense over the vesting period, with corresponding
increases in equity.
Cash settled plans Certain stock options, Performance Share
Units, Executive Deferred Share Unit Plan and the Director
Deferred Share Unit Plan are cash settled share-based payments.
These plans are measured at fair value at each balance sheet date
and a charge or recovery recognized through the consolidated
statement of earnings over the vesting period. A corresponding
adjustment is reflected in accounts payable and accrued liabilities
or other long-term liabilities.
The value of the charges under both cash settled and equity
settled plans are adjusted in the consolidated statement of
earnings to reflect expected and actual levels of benefits vesting.
(M) Foreign Currency Translation The accounts of
foreign
operations have been translated into the presentation currency,
Canadian dollars. Assets and liabilities are translated at the period-
end exchange rate, and revenues and expenses at the average
rate for the period. Foreign exchange gains or losses arising from
the translation of the net investment in foreign operations and
the portion of the U.S. denominated borrowings designated as a
hedge against this investment are recorded in equity as other
comprehensive income. Foreign exchange gains or losses
recorded in accumulated other comprehensive income (AOCI) are
recognized in net earnings when there is a reduction in the net
investment in foreign operations.
Items included in the financial statements of the Company
and its subsidiaries are measured using the currency of the
primary economic environment in which the entity operates
(functional currency). Transactions in foreign currencies are
translated to the respective functional currencies at exchange
rates approximating the rates in effect at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies
at the reporting date are retranslated to the functional currency
at the exchange rate ruling at that date.
(N) Income Taxes Income tax expense includes taxes payable on
current earnings and changes in deferred tax balances. Current
income tax expense is the expected tax payable on taxable
income for the period, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable
in respect of previous periods.
The Company accounts for deferred income taxes using the
liability method of tax allocation. Under the liability method,
deferred income tax assets and liabilities are determined based
on the temporary differences between the financial statement
carrying values and tax bases of assets and liabilities, and are
measured using substantively enacted tax rates and laws that are
expected to be in effect in the periods in which the deferred
income tax assets or liabilities are expected to be realized or
settled. The measurement of deferred tax reflects the tax
consequences that would follow the manner in which the
Company expects to settle the carrying amount of its assets and
liabilities. A deferred tax asset is recognized to the extent that it
is probable that future taxable earnings will be available against
which the temporary difference can be utilized. Deferred tax
assets are reviewed at each reporting date and are reduced to the
extent that it is no longer probable that the related tax benefit will
be realized. Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation authority and
there is a legally enforceable right to offset the amounts.
Income tax expense is recognized in the consolidated
statement of earnings, except to the extent that it relates to items
recognized directly in other comprehensive income or in equity,
in which case the related income tax expense is also recognized
in other comprehensive income or in equity respectively.
40THE NORTH WEST COMPANY INC.
(O) Employee Benefits The Company maintains either a defined
benefit or defined contribution pension plan for the majority of
its Canadian employees, and an employee savings plan for its U.S.
employees. Other benefits include employee bonuses, employee
share purchase plans and termination benefits.
(P) Provisions A provision is recognized if, as a result of a past event,
the Company has a present legal or constructive obligation that
can be estimated reliably, and it is probable that an outflow of
economic benefits will be required to settle the obligation.
Defined Benefit Pension Plan The actuarial determination of the
defined benefit obligations for pension benefits uses the
projected unit credit method prorated on services which
incorporates management’s best estimate of the discount rate,
salary escalation, retirement rates, termination rates and
retirement ages of employees. The discount rate used to value
the defined benefit obligation is derived from a portfolio of high
quality Corporate AA bonds denominated in the same currency
in which the benefits are expected to be paid and with terms to
maturity that, on average, match the terms of the defined benefit
plan obligations. Bonds included in the curve are denominated
in the currency in which the benefits will be paid that have terms
to maturity approximating the terms of the related pension
liability.
The amount recognized in the consolidated balance sheet
at each reporting date represents the present value of the defined
benefit obligation, and is reduced by the fair value of plan assets.
Any recognized asset or surplus is limited to the present value of
economic benefits available in the form of any future refunds from
the plan or reductions in future contributions. To the extent that
there is uncertainty regarding entitlement to the surplus, no asset
is recorded. The Company’s funding policy is in compliance with
statutory regulations and amounts funded are deductible for
income tax purposes.
The actuarially determined expense for current service is
recognized annually in the consolidated statement of earnings.
The actuarially determined net interest costs on the net defined
benefit plan obligation are recognized in interest expense.
All actuarial remeasurements arising from defined benefit
plans are recognized in full in the period in which they arise in the
consolidated statement of comprehensive income, and are
immediately recognized in retained earnings. The effect of the
asset ceiling is also recognized in other comprehensive income.
Defined Contribution Pension Plans The Company sponsors
defined contribution pension plans for eligible employees where
fixed contributions are paid into a registered plan. There is no
obligation for the Company to pay any additional amount into
these plans. Contributions to the defined contribution pension
plans are expensed as incurred.
Short-term Benefits An undiscounted liability is recognized for the
amount expected to be paid under short-term incentive plans or
employee share purchase plans if the Company has a present legal
or constructive obligation to pay this amount as a result of past
service provided by the employee and the obligation can be
estimated reliably.
Termination Benefits Termination benefits are expensed at the
earlier of when the Company can no longer withdraw the offer of
those benefits and when the Company recognizes costs for a
restructuring. If the effect is significant, benefits are discounted
to present value.
(Q) Financial Instruments Financial assets and
liabilities are
recognized when the Company becomes a party to the
contractual provisions of the financial instrument. Financial assets
are derecognized when the contractual rights to receive cash
flows and benefits related from the financial asset expire, or the
Company transfers the control or substantially all the risks and
rewards of ownership of the financial asset to another party.
Financial liabilities are derecognized when obligations under the
contract expire, are discharged or cancelled.
initial
recognition, all financial instruments are classified into one of the
following categories: financial assets or liabilities at fair value
through profit or loss (FVTPL), loans and receivables, held-to-
investments, available-for-sale financial assets, or
maturity
financial liabilities at amortized cost.
On
Financial instruments have been classified as follows:
•
•
•
Cash is designated as loans and receivables
Accounts receivable and financial assets included in other
assets are classified as loans and receivables
Long-term debt, accounts payable and accrued liabilities,
and certain other liabilities are classified as financial liabilities
at amortized cost
Financial instruments are initially recognized at fair value (plus
transaction costs for financial instruments at amortized cost);
subsequent measurement and recognition of changes in value
depends on their initial classification. Financial instruments
classified as FVTPL are subsequently measured at fair value, with
changes in fair value recorded in net earnings. Loans and
receivables are subsequently carried at amortized cost less
impairment losses. Interest revenue, consisting primarily of
service charge income on customer accounts receivable, is
included in sales in the consolidated statement of earnings.
Financial liabilities at amortized cost are subsequently held at
amortized cost. Interest expense relating to long-term debt is
recorded using the effective interest rate method and included
in the consolidated statement of earnings as interest expense.
The Company is exposed to financial risks associated with
movements in foreign exchange rates. The Company uses a net
investment hedge to counterbalance gains and losses arising on
the retranslation of foreign operations with gains and losses on a
financial liability.
To qualify for hedge accounting, the Company documents
its risk management strategy, the relationship between the
hedging instrument and the hedged item or transaction and the
nature of the risks being hedged. The Company also documents
the assessment of the effectiveness of the hedging relationship,
to show that the hedge has been and will likely be highly effective
on an ongoing basis.
41NOTES TO CONSOLDATED FINANCIAL STATEMENTS
To the extent that a fair value hedging relationship is
effective, a gain or loss arising from the hedged item adjusts its
carrying value and is reflected in earnings, offset by a change in
fair value of the underlying derivative. Any changes in fair value
of derivatives that do not qualify for hedge accounting are
reported in earnings.
The Company has designated certain U.S. denominated debt
as a hedge of its net investment in U.S. operations. To the extent
that the hedging relationship is effective, the foreign exchange
gains and losses arising from translation of this debt are included
in other comprehensive income. These gains and losses are
subsequently recognized in earnings when the hedged item
affects earnings.
loss on the hedging
Hedge accounting is discontinued when the hedging
instrument expires or is sold, terminated, exercised, or no longer
qualifies for hedge accounting. At that time, any cumulative gain
or
in other
comprehensive income is retained in equity until the forecasted
transaction occurs. If a hedged transaction is no longer expected
to occur, the net cumulative gain or loss recognized in other
comprehensive income is transferred to the consolidated
statements of earnings for the period.
instrument recognized
Embedded derivatives are components of hybrid
instruments that include non-derivative host contracts. These are
separated from their host contracts and recorded on the
consolidated balance sheets at fair value when certain conditions
are met. Changes in the fair value of embedded derivatives are
recognized in earnings.
(R) Cash Cash comprises cash on hand and balances with banks.
(S) Net Earnings Per Share Basic net earnings per share are
calculated by dividing the net earnings by the weighted-average
number of common shares outstanding during the period.
Diluted net earnings per share is determined by adjusting net
earnings and the weighted-average number of common shares
outstanding for the effects of all potentially dilutive shares, which
comprise shares issued under the Share Option Plan and Director
Deferred Share Unit Plan.
(T) Dividends Dividends declared and payable to the Company's
shareholders are recognized as a liability in the consolidated
balance sheets in the period in which distributions are declared.
in conformity with
financial statements
(U) Use of Estimates, Assumptions & Judgment The preparation
IFRS requires
of
management to make estimates, assumptions and judgments
that affect the application of accounting policies, the reported
amounts of revenues and expenses during the reporting period
in the
and disclosure of contingent assets and
consolidated financial statements and notes. Judgment has been
used in the application of accounting policy and to determine if
a transaction should be recognized or disclosed in these financial
statements while estimates and assumptions have been used to
measure balances recognized or disclosed.
liabilities
Estimates, assumptions and judgments are based on
management’s historical experience, best knowledge of current
events, conditions and actions that the Company may undertake
in the future and other factors that management believes are
reasonable under the circumstances. Estimates and underlying
assumptions are reviewed on an ongoing basis. Certain of these
estimates
judgments by
management about matters that are uncertain and changes in
impact the consolidated
these estimates could materially
financial statements and notes. Revisions to accounting estimates
require subjective or complex
are recognized in the period in which the estimates are reviewed
and in any future periods affected.
The areas that management believes involve a higher degree
of judgment or complexity, or areas where the estimates and
assumptions may have the most significant impact on the
amounts recognized in the consolidated financial statements
include the following:
•
•
•
•
•
•
•
•
Allowance for doubtful accounts is estimated based on
expected customer payment experience, and influenced by
specific customer behavior and regional economic factors
(Notes 5, 14)
Inventories are remeasured based on the lower of cost and
net realizable value (Note 6)
Amortization methods
for property and equipment,
including aircraft, are based on management's estimate of
the most appropriate method to reflect the pattern of an
asset's future economic benefit. This includes judgment of
what asset components constitute a significant cost in
relation to the total cost of an asset (Note 7)
Impairment of long-lived assets is influenced by judgment
in determining indicators of impairment and estimates used
to measure impairment losses, if any (Note 7)
Recognition of identifiable assets and liabilities acquired in
a business combination requires judgment as to their fair
value (Note 24)
Goodwill and indefinite life intangible asset impairment is
dependent on judgment used to identify indicators of
impairment and estimates used to measure impairment
losses, if any (Notes 8, 24)
Income taxes have judgment applied to determine when tax
losses, credits and provisions are recognized based on tax
rules in various jurisdictions (Note 9)
Defined benefit pension plan obligation and expense
depends on assumptions used in the actuarial valuation
(Note 12)
(V) Share capital
Common shares are classified as equity.
Incremental costs directly attributable to the issue of ordinary
shares are recognized as a deduction from equity, net of any tax
effects.
(W) New Standards
Implemented The Company adopted
amendments to IAS 7, Statement of Cash Flows and IAS 12,
Recognition of Deferred Tax Assets for Unrealized Losses effective
February 1, 2017 as required by the IASB.
The IAS 7 amendments provide guidance on the disclosure of
liabilities that form part of an entity's financing activities. The
amendments had no material impact on the consolidated
financial statements.
The IAS 12 amendments clarify that the existence of a deductible
temporary difference depends solely on a comparison of the
carrying amount of an asset and its tax base at the end of the
reporting period, and is not affected by possible future changes
in the carrying amount or expected manner of recovery of the
asset. The amendments also clarify the methodology to
determine the future taxable profits used for assessing the
These
utilization of deductible
amendments had no impact on the consolidated financial
statements.
temporary differences.
42THE NORTH WEST COMPANY INC. Share based payment In June 2016, the IASB issued amendments
to IFRS 2, Share-based Payments in relation to the classification and
measurement of share-based payment transactions; specifically,
accounting for cash-settled share-based transactions, share-
based payment transactions with a net settlement feature and
modifications of share-based payment transactions that change
classification from cash-settled to equity settled. The Company
will adopt IFRS 2 February 1, 2018. As a practical simplification,
the amendments can be applied prospectively. The Company
does not expect a material impact on its consolidated financial
statements as a result of these changes.
Leases IFRS 16, Leases replaces the current guidance in IAS 17 for
operating and finance lease accounting. This standard requires
lessees to recognize a lease liability representing the obligation
for future lease payments and a right-of-use asset in the
consolidated balance sheets for substantially all lease contracts,
initially measured at the present value of unavoidable lease
payments. The Company continues to evaluate the effect this
standard will have on its consolidated financial statements, and
expects the impact to be material. Under the new standard the
Company will recognize new right of use assets and lease liabilities
for its operating leases of land, buildings and equipment. In
addition, the nature and timing of leasing expenses will change
as straight line operating lease expenses are replaced by a
depreciation charge for right-of-use assets and interest expense
on lease liabilities.
On transition the Company can either apply the standard using a
retrospective approach or a modified retrospective approach with
optional practical expedients. The Company plans to apply IFRS
16 initially on February 1, 2019 and has not yet determined which
transition approach to apply. As a result, the Company has not
yet quantified the impact on its reported assets and liabilities since
it will depend on the transition method chosen. The Company is
continuing to analyze the impact of this change on its leases,
including the impacts on our accounting system, processes and
internal controls.
Annual Improvements In December 2017, the IASB issued
amendments to IFRS 3, Business Combinations; IAS 12, Income Taxes
and IAS 23, Borrowing Costs. These amendments are effective for
the Company February 1, 2019. The Company is currently
assessing the potential impacts of these amendments.
There are no other IFRS or IFRIC interpretations that are not yet
effective that would be expected to have a material impact on
the Company.
(X) Future Standards and Amendments A number of new
standards, and amendments to standards and interpretations, are
not yet effective for the year ended January 31, 2018, and have
not been applied in preparing these consolidated financial
statements.
Financial Instruments The amended IFRS 9, Financial Instruments
is a multi-phase project with the goal of improving and simplifying
financial instrument reporting. The Company will adopt IFRS 9
February 1, 2018. The standard establishes new principles for:
financial assets by both cash
• The classification and measurement of financial assets and
liabilities. IFRS 9 uses a single approach to determine
flow
measurement of
characteristics and how an entity manages
financial
impairment, replacing multiple classification options in IAS 39
with three categories: amortized cost, fair value through other
comprehensive income and fair value through profit or loss
• A single forward-looking "expected credit loss" impairment
model
• New general hedge accounting standard which aligns hedge
accounting more closely with risk management. This new
standard does not fundamentally change the types of hedging
relationships or the requirement to measure and recognize
effectiveness, however it will provide more strategies that may
be used for risk management to qualify for hedge accounting
and introduces more judgment to assess the effectiveness of a
hedging relationship
• Required disclosures about an entity's risk management
impact of hedge accounting on the
strategy and the
consolidated financial statements
The Company does not believe that either the new classification
requirements or the new hedge accounting requirement will have
a material impact on its accounting for financial instruments.
Under IFRS 9 the Company's financial assets and financial liabilities
will be classified and measured at amortized cost. The Company's
net investment hedging relationship meets the new hedging
requirements.
trends,
timing of
The Company will apply a new forward-looking lifetime expected
credit loss ("ECL") impairment model to its accounts receivable
based on historical
recoveries and
management's judgment. The change in ECL's will be recognized
in earnings and reflected as an allowance against accounts
receivable. In accordance with the transitional provisions of IFRS
9 which requires retrospective application without restatement
(modified retrospective approach), the initial measurement
difference is an adjustment to retained earnings. This adjustment
is not expected to be significant.
Revenue Recognition In May 2014, the IASB issued IFRS 15, Revenue
from Contracts with Customers. The IFRS 15 standard contains a
comprehensive model which specifies the criteria and timing for
recognizing revenue, and also requires additional disclosures in
the notes to the financial statements. The core principle of the
standard is that revenue is recognized at an amount that reflects
the consideration to which the Company is entitled. A contract-
based five step analysis is used to determine whether, how much
and when revenue is recognized. New estimates and judgmental
thresholds have also been introduced. The Company will adopt
this standard effective February 1, 2018. The impact of adopting
this standard on reported earnings is not expected to be
significant.
43NOTES TO CONSOLDATED FINANCIAL STATEMENTS 4. SEGMENTED INFORMATION
5. ACCOUNTS RECEIVABLE
The Company is a retailer of food and everyday products and services
in two geographical segments, Canada and International. The
Canadian segment consists of subsidiaries operating retail stores and
complimentary businesses to serve northern and western Canada.
The International segment consists of subsidiaries operating in the
continental United States, Caribbean and South Pacific. Financial
information for these business segments is regularly reviewed by the
Company’s President and Chief Executive Officer to assess
performance and make decisions about the allocation of resources.
The following key information is presented by geographic segment:
Consolidated Statements of Earnings
Year Ended
Sales
Canada
International
January 31, 2018
January 31, 2017
$ 1,171,621
$ 1,125,330
782,122
718,763
Consolidated
$ 1,953,743
$ 1,844,093
Earnings before amortization, interest and income taxes
Canada
International
$ 112,393
$
109,736
57,231
56,762
Consolidated
$ 169,624
$
166,498
Earnings from operations
Canada
International
$
72,597
$
41,374
74,445
43,686
Consolidated
$ 113,971
$
118,131
Assets
Canada
International
January 31, 2018
January 31, 2017
$ 634,399
$
529,807
296,549
276,014
Consolidated
$ 930,948
$
805,821
Canadian total assets includes goodwill of $6,730 (January 31, 2017
– $3,271). International total assets includes goodwill of $34,501
(January 31, 2017 – $34,481).
Supplemental information
Year Ended
January 31, 2018
January 31, 2017
Canada
Int'l
Canada
Int'l
Purchase of property and
equipment
$ 92,313 $ 22,635 $ 53,701 $ 12,479
Amortization
$ 39,796 $ 15,857 $ 35,291 $ 13,076
January 31, 2018
January 31, 2017
Trade accounts receivable
$ 80,374
$ 76,122
Corporate and other
accounts receivable
Less: allowance for doubtful
accounts
16,322
17,193
(15,931)
(14,384)
$ 80,765
$ 78,931
The carrying values of accounts receivable are a reasonable
approximation of their fair values. The maximum exposure to credit
risk at the reporting date is the carrying value of each class of receivable
mentioned above. Credit risk for trade accounts receivable is discussed
in Note 14. Corporate and other accounts receivable have a lower risk
profile relative to trade accounts receivable because they are largely
due from government or corporate entities.
Movements in the allowance for doubtful accounts for customer and
commercial accounts receivables are as follows:
January 31, 2018
January 31, 2017
Balance, beginning of year
$
(14,384)
$
(12,383)
Net charge
Written off
(9,972)
8,425
(9,425)
7,424
Balance, end of year
$
(15,931)
$
(14,384)
6.
INVENTORIES
Retail inventories are valued at the lower of cost and net realizable value.
Valuing retail inventories requires the Company to use estimates
related to: adjusting to cost inventories valued at retail; future retail
sales prices and reductions; and inventory losses during periods
between the last physical count and the balance sheet date. Included
in cost of sales for the year ended January 31, 2018, the Company
recorded $1,335 (January 31, 2017 – $1,129) for the write-down of
inventories as a result of net realizable value being lower than cost.
There was no reversal of inventories written down previously that are
no longer estimated to sell below cost during the year ended
January 31, 2018 or 2017.
44THE NORTH WEST COMPANY INC.
7. PROPERTY & EQUIPMENT
January 31, 2018
Cost
Land
Buildings
Leasehold
improvements
Fixtures &
equipment
Aircraft
Computer
equipment
Construction
in process
Total
Balance, beginning of year
$ 16,367
$ 442,041
$
69,735
$ 309,155
$
— $
74,298
$
11,607
$ 923,203
Additions through business acquisitions
(Note 24)
Additions
Disposals
Effect of movements in foreign exchange
975
308
—
(549)
27,760
15,937
(8,531)
(8,256)
32
7,253
(2,056)
(1,190)
6,249
22,439
(9,623)
(6,067)
26,332
55,198
—
—
1,773
2,317
(240)
(896)
—
63,121
11,496
114,948
—
(511)
(20,450)
(17,469)
Total January 31, 2018
$ 17,101
$ 468,951
$
73,774
$ 322,153
$
81,530
$
77,252
$
22,592
$1,063,353
Accumulated amortization
Balance, beginning of year
$
— $ 246,054
$
37,952
$ 216,196
$
— $
64,880
$
— $ 565,082
Amortization expense
Disposals
Effect of movements in foreign exchange
—
—
—
20,997
(4,813)
(3,428)
5,184
18,299
2,541
(931)
(748)
(6,552)
(5,135)
—
—
3,640
(224)
(552)
Total January 31, 2018
$
— $ 258,810
Net book value January 31, 2018
$ 17,101
$ 210,141
$
$
41,457
$ 222,808
32,317
$
99,345
$
$
2,541
78,989
$
$
67,744
9,508
$
$
—
—
—
50,661
(12,520)
(9,863)
— $ 593,360
22,592
$ 469,993
January 31, 2017
Cost
Land
Buildings
Leasehold
improvements
Fixtures &
equipment
Aircraft
Computer
equipment
Construction
in process
Total
Balance, beginning of year
$ 16,935
$ 417,182
$
64,055
$ 294,922
$
— $
77,142
$
17,075
$ 887,311
Additions
Disposals
Effect of movements in foreign exchange
120
—
(688)
35,478
(1,407)
(9,212)
7,803
(500)
(1,623)
23,949
(2,533)
(7,183)
—
—
—
4,186
(6,025)
(1,005)
(5,356)
66,180
—
(112)
(10,465)
(19,823)
Total January 31, 2017
$ 16,367
$ 442,041
$
69,735
$ 309,155
$
— $
74,298
$
11,607
$ 923,203
Accumulated amortization
Balance, beginning of year
$
— $ 232,202
$
34,811
$ 207,004
$
— $
67,413
$
— $ 541,430
Amortization expense
Disposals
Effect of movements in foreign exchange
—
—
—
18,944
(920)
(4,172)
4,584
15,846
(472)
(971)
(1,968)
(4,686)
—
—
—
4,277
(5,927)
(883)
Total January 31, 2017
$
— $ 246,054
Net book value January 31, 2017
$ 16,367
$ 195,987
$
$
37,952
$ 216,196
31,783
$
92,959
$
$
— $
64,880
— $
9,418
$
$
—
—
—
43,651
(9,287)
(10,712)
— $ 565,082
11,607
$ 358,121
The Company reviews its property and equipment for indicators of impairment. During the year the Company wrote-off assets with a net book
value of $7,008 due to the impact of hurricanes in the Caribbean which were reimbursed by insurance proceeds. No assets were identified as
impaired at January 31, 2018 and 2017.
Interest capitalized
Interest attributable to the construction of qualifying assets was capitalized using an average rate of 3.4% and 3.1% for the years ended January 31,
2018 and 2017 respectively. Interest capitalized in additions amounted to $502 (January 31, 2017 – $338). Accumulated interest capitalized in
the cost total above amounted to $2,278 (January 31, 2017 – $1,776).
45NOTES TO CONSOLDATED FINANCIAL STATEMENTS
8. GOODWILL & INTANGIBLE ASSETS
Goodwill
January 31, 2018
January 31, 2017
Balance, beginning of year
$
37,752
$
37,260
Additions
Effect of movements in foreign
exchange
5,544
(2,065)
3,271
(2,779)
Balance, end of year
$
41,231
$
37,752
Goodwill Impairment Testing
A goodwill asset balance of $34,501 (January 31, 2017 – $34,481)
relates to acquisition of subsidiaries by the Company's International
Operations and was tested by means of comparing the recoverable
amount of the operating segment to its carrying value. The recoverable
amount is the greater of its value in use or its fair value less costs of
disposal. The recoverable amount was estimated from the product of
financial performance and trading multiples observed for comparable
public companies. Values assigned to the key assumptions represent
management's best estimates and have been based on data from both
external and internal sources. This fair value measurement was
categorized as a Level 3 fair value measurement based on the inputs
in the valuation technique used. Key assumptions used in the
estimation of enterprise value are as follows:
•
•
•
Financial performance was measured with actual and
budgeted earnings based on sales and expense growth
specific to each store and the Company's administrative
offices. Financial budgets and forecasts are approved by
senior management and consider historical sales volume
and price growth;
The ratio of enterprise value to financial performance was
determined using a range of market trading multiples from
comparable companies;
Costs to sell have been estimated as a fixed percentage of
enterprise value. This is consistent with the approach of an
independent market participant.
A goodwill asset balance of $6,730 (January 31, 2017 – $3,271) relates
The
to acquisitions by the Company's Canadian Operations.
recoverable amount of the operating segment has also been
determined on the basis of fair value less costs to sell.
No impairment has been identified on goodwill, and management
considers reasonably foreseeable changes in key assumptions are
unlikely to produce a goodwill impairment.
Intangible assets
January 31, 2018
Cost
Balance, beginning of year
Additions
Effect of movements in foreign exchange
Total January 31, 2018
Accumulated Amortization
Balance, beginning of year
Amortization expense
Effect of movements in foreign exchange
Total January 31, 2018
Net book value January 31, 2018
Software
Store banners
Other
Total
$
47,605
$
9,121
$
9,981
$
66,707
7,057
—
$
54,662
$
24,837
4,434
—
$
29,271
$ 25,391
909
(569)
9,461
—
—
—
—
9,461
$
$
$
$
30
(194)
9,817
6,476
558
7
7,041
2,776
$
$
$
$
7,996
(763)
$
73,940
$
31,313
4,992
7
$
36,312
$ 37,628
46THE NORTH WEST COMPANY INC. Intangible assets
January 31, 2017
Cost
Balance, beginning of year
Additions
Effect of movements in foreign exchange
Total January 31, 2017
Accumulated Amortization
Balance, beginning of year
Amortization expense
Effect of movements in foreign exchange
Total January 31, 2017
Net book value January 31, 2017
Software
Store banners
Other
Total
$
41,030
$
9,856
6,575
—
$
47,605
$
20,590
4,247
—
$
24,837
$ 22,768
—
(735)
9,121
—
—
—
—
9,121
$
$
$
$
$
$
$
$
$
8,364
1,719
(102)
9,981
6,050
469
(43)
6,476
3,505
$
59,250
8,294
(837)
$
66,707
$
26,640
4,716
(43)
$
31,313
$ 35,394
Work in process
As at January 31, 2018, the Company had incurred $11,762 (January 31,
2017 – $10,402) for intangible assets that were not yet available for use,
and therefore not subject to amortization.
Intangible Asset Impairment Testing
The Company determines the fair value of the store banners using the
Relief from Royalty approach. This method requires management to
make long-term assumptions about future sales, terminal growth rates,
royalty rates and discount rates. Sales forecasts for the following
financial year together with medium and terminal growth rates ranging
from 2% to 5% are used to estimate future sales, to which a royalty rate
of 0.5% is applied. The present value of this royalty stream is compared
to the carrying value of the asset. No impairment has been identified
reasonably
on
foreseeable changes in key assumptions are unlikely to produce an
intangible asset impairment.
intangible assets and management considers
47NOTES TO CONSOLDATED FINANCIAL STATEMENTS 9.
INCOME TAXES
The following are the major components of income tax expense:
Year Ended
January 31, 2018
January 31, 2017
Current tax expense:
Current tax on earnings for
the year
Withholding taxes
Over provision in prior years
Deferred tax expense:
Origination and reversal of
temporary differences
Impact of change in tax rates
Under provision in prior years
$ 35,985
991
(354)
$ 37,903
1,401
(87)
$ 36,622
$ 39,217
$ (4,723)
$ (5,546)
1,791
445
(23)
187
In December 2017 new corporate tax legislation was enacted in the
United States which reduced the federal corporate tax rate from 35%
to 21% effective January 1, 2018. There was also a one-time transition
tax introduced on undistributed accumulated earnings in foreign
owned subsidiaries. These changes resulted in an estimated income
tax expense of $5,835, comprised of $1,827 for the re-measurement of
deferred tax assets and liabilities and $4,008 for transition tax related
to certain of the Company's subsidiaries. The estimated impact of the
change in U.S. tax legislation may require further adjustment as
additional information and interpretations from the U.S. Department
of the Treasury becomes available.
Deferred tax assets of $4,200 arising from certain foreign income tax
losses were not recognized on the consolidated balance sheets. The
income tax losses expire from 2022 – 2036.
Deferred income tax charged (credited) to other comprehensive
income during the year is as follows:
(2,487)
(5,382)
Year Ended
January 31, 2018
January 31, 2017
Defined benefit plan
actuarial gain / (loss):
Origination and reversal of
temporary difference
Impact of change in tax rates
Investments:
Origination and reversal of
temporary difference
$
430
(12)
$
418
$
$
$
(27)
(27)
391
$
$
$
$
$
875
(12)
863
—
—
863
Income taxes
$ 34,135
$ 33,835
Income tax expense varies from the amounts that would be computed
by applying the statutory income tax rate to earnings before taxes for
the following reasons:
Year Ended
January 31, 2018
January 31, 2017
Net earnings before income
taxes
Combined statutory income
tax rate
Expected income tax
expense
$103,826
$110,911
26.5%
28.9%
$ 27,561
$ 32,007
Increase (decrease) in income taxes resulting from:
Non-deductible expenses/
non-taxable income
Unrecognized income tax
losses
Withholding taxes
Impact of change in tax rates
Transition tax
Under provision in prior years
Other
$
(330)
$
(292)
76
991
1,791
4,008
91
(53)
215
1,401
(23)
—
100
427
Provision for income taxes
$ 34,135
$ 33,835
Income tax rate
32.9%
30.5%
Changes in the combined statutory income tax rate primarily reflect
changes in earnings of the Company's subsidiaries across various tax
jurisdictions.
48THE NORTH WEST COMPANY INC. Income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:
January 31, 2018
February 1, 2017
Taxes (charged)
credited to net
earnings
Taxes (charged)
credited to OCI
Acquired in
business
combinations
Other
adjustments
January 31, 2018
Deferred tax assets:
Goodwill & intangible assets
$
672
$
(672)
$
Property & equipment
Inventory
Share-based compensation and
long-term incentive plans
Defined benefit plan obligation
Accrued expenses not
deductible for tax
Other
15,971
2,477
3,746
9,182
4,464
(912)
$
35,600
Deferred tax liabilities:
Goodwill & intangible assets
$
(1,077)
Property & equipment
Net investment hedge
Investment in joint venture
Deferred limited partnership
earnings
Other
—
(97)
(1,370)
(2,597)
(267)
(5,408)
30,192
$
$
1,781
(401)
276
472
286
1,330
3,072
393
(1,817)
—
234
2,597
(1,992)
(585)
2,487
$
$
$
$
$
$
$
$
—
—
—
—
(418)
—
—
(418)
—
—
—
27
—
—
27
(391)
$
$
$
—
—
—
—
—
—
—
—
—
(4,272)
—
—
—
(1)
$
$
(4,273)
(4,273)
$
$
$
$
$
—
(92)
(83)
(19)
—
(147)
(6)
(347)
41
77
97
—
—
99
314
(33)
$
—
17,660
1,993
4,003
9,236
4,603
412
$
37,907
$
(643)
(6,012)
—
(1,109)
—
(2,161)
$
$
(9,925)
27,982
Recorded on the consolidated balance sheet as follows:
Year Ended
Deferred tax assets
Deferred tax liabilities
January 31, 2018
January 31, 2017
$
34,450
(6,468)
$
27,982
$
$
32,853
(2,661)
30,192
49NOTES TO CONSOLDATED FINANCIAL STATEMENTS January 31, 2017
February 1, 2016
Taxes (charged)
credited to net
earnings
Taxes (charged)
credited to OCI
Acquired in
business
combinations
Other
adjustments
January 31, 2017
Deferred tax assets:
Goodwill & intangible assets
$
721
$
(49)
$
Property & equipment
Inventory
Share-based compensation and
long-term incentive plans
Defined benefit plan obligation
Accrued expenses not
deductible for tax
Other
Deferred tax liabilities:
Goodwill & intangible assets
Net investment hedge
Investment in joint venture
Deferred limited partnership
earnings
Other
13,742
2,146
3,851
9,106
4,889
102
$
34,557
$
$
$
(973)
(53)
(1,391)
(5,647)
(83)
(8,147)
26,410
2,391
459
(58)
939
(160)
(1,038)
2,484
(178)
—
21
3,050
5
2,898
5,382
$
$
$
$
$
$
$
$
—
—
—
—
(863)
—
—
(863)
—
—
—
—
—
—
(863)
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
—
(162)
(128)
(47)
—
(265)
24
(578)
74
(44)
—
—
(189)
(159)
(737)
$
$
$
$
$
672
15,971
2,477
3,746
9,182
4,464
(912)
35,600
(1,077)
(97)
(1,370)
(2,597)
(267)
(5,408)
30,192
In assessing the recovery of deferred income tax assets, management considers whether it is probable that the deferred income tax assets will be
realized. The recognition and measurement of the current and deferred tax assets and liabilities involves dealing with uncertainties in the application
of complex tax regulations and in the assessment of the recoverability of deferred tax assets. The ultimate realization of deferred income tax assets
is dependent upon the generation of future taxable income during the periods in which the temporary differences are deductible.
Actual income taxes could vary from these estimates as a result of future events, including changes in income tax laws or the outcome of
tax reviews by tax authorities and related appeals. To the extent the final outcome is different from the amounts initially recorded, such differences,
which could be significant, will impact the tax provision in the period in which the outcome is determined.
No deferred tax has been recognized in respect of temporary differences between the carrying value and tax value of investments in
subsidiaries. The Company is in a position to control the timing and reversal of these differences and believes it is probable that they will not
reverse in the foreseeable future. The temporary differences associated with the Company’s foreign subsidiaries are approximately $103,736 at
January 31, 2018 (January 31, 2017 – $96,278).
10. OTHER ASSETS
Investment in joint venture (Note 23)
Other
January 31, 2018
January 31, 2017
$
9,294
3,349
$
9,930
3,833
$ 12,643
$
13,763
50THE NORTH WEST COMPANY INC. 11. LONG-TERM DEBT
January 31, 2018
January 31, 2017
Current:
Revolving loan facilities
Non-current
Revolving loan facilities (1)
Revolving loan facilities (2)
Revolving loan facilities (3)
Revolving loan facilities (4)
Revolving loan facilities (5)
Senior notes (6)
Senior notes (7)
—
—
$
—
—
$
$
1,776
$
11,887
34,365
91,108
—
540
85,760
100,000
—
126,344
—
—
91,035
—
$ 313,549
$ 229,266
Total
$ 313,549
$ 229,266
(1) The committed, revolving U.S.
loan facility provides the
International Operations with up to US$40,000 for working capital
requirements and general business purposes. This facility matures
October 31, 2020, bears a floating rate of interest based on U.S. LIBOR
plus a spread and is secured by certain accounts receivable and
inventories of the International Operations. At January 31, 2018, the
International Operations had drawn US$1,444 (January 31, 2017 – US
$9,122) on this facility.
(2) In September 2017, the Company extended the maturity date of
the US$52,000 loan facilities. These facilities mature September 22,
2022 and bear interest at U.S. LIBOR plus a spread. These loan facilities
are secured by certain assets of the Company and rank pari passu with
the US$70,000 senior notes, the $100,000 senior notes and the $300,000
Canadian Operations loan facilities. At January 31, 2018, the Company
had drawn US$27,936 (January 31, 2017 – US$NIL) on these facilities.
(3) These committed, revolving loan facilities provide the Company's
Canadian Operations with up to $300,000 for working capital and
general business purposes. In September 2017, the Company
extended the maturity date of these facilities to September 26, 2022.
These facilities are secured by certain assets of the Company and rank
pari passu with the US$70,000 senior notes, the $100,000 senior notes
and the US$52,000 loan facilities. These facilities bear a floating interest
rate based on Bankers Acceptances rates plus stamping fees or the
Canadian prime interest rate.
(4) The revolving U.S. loan facility provides the International Operations
with up to US$1,500 for Roadtown Wholesale Trading Ltd.'s (RTW)
working capital requirements and general business purposes. This
facility bears a floating rate of interest based on a U.S. dollar base rate
plus a spread and is secured by certain assets of RTW. At January 31,
2018, the Company had drawn US$NIL on this facility.
(5) The Canadian Operations also have a $2,375 revolving loan facility
to meet North Star Air Ltd's. (NSA) working capital requirements and
for general business purposes. This facility bears a floating rate of
interest and is secured by the assets of NSA.
(6) The US$70,000 senior notes mature on June 16, 2021, have a fixed
interest rate of 3.27% on US$55,000 and a floating interest rate on US
$15,000 based on U.S. LIBOR plus a spread. The senior notes are secured
by certain assets of the Company and rank pari passu with the $300,000
Canadian Operations loan facilities, the $100,000 senior notes and the
US$52,000 loan facilities.
(7) In September 2017, the Company issued $100,000 senior notes
maturing September 26, 2029. These senior notes have a fixed interest
rate of 3.74%, are secured by certain assets of the Company and rank
pari passu with the $300,000 Canadian Operations loan facilities, the
US$70,000 senior notes and the US$52,000 loan facilities.
12. POST-EMPLOYMENT BENEFITS
incorporated
The Company sponsors defined benefit and defined contribution
pension plans covering the majority of Canadian employees. Effective
January 1, 2011, the Company entered into an amended and restated
staff pension plan, which
legislated changes,
administrative practice, and added a defined contribution provision
(the “Amended Plan”). Under the Amended Plan, all members as of
December 31, 2011 who did not meet a qualifying threshold based on
number of years in the pension plan and age were transitioned to the
defined contribution pension plan effective January 1, 2011 and no
longer accumulate years of service under the defined benefit pension
plan. The defined benefit pension previously earned by members
transitioned to the defined contribution plan, will continue to accrue
in accordance with the terms of the plan based on the member’s
current pensionable earnings. Members who met the qualifying
threshold on January 1, 2011, elected between accruing a defined
contribution benefit and continuing to accrue a defined benefit
pension in accordance with the provisions of the Amended Plan.
The defined benefit pension plans are based on years of service
and final average salary. The Company uses actuarial reports prepared
by independent actuaries for accounting purposes as at January 31,
2018 and January 31, 2017. The accrued pension benefits and funding
requirements were last determined by actuarial valuation as at
December 31, 2016. The next actuarial valuation is required as at
December 31, 2017. The Company also sponsors an employee savings
plan covering all U.S. employees with at least six months of service.
Under the terms of the plan, the Company is obligated to make a 50%
matching contribution up to 6% of eligible compensation.
During the year ended January 31, 2018, the Company
contributed $3,487 to its defined benefit pension plans (January 31,
2017 – $1,501). During the year ended January 31, 2018, the Company
contributed $3,129 to
its defined contribution pension plans
(January 31, 2017 – $2,890). The current best estimate of the
Company's funding obligation for the defined benefit pension plans
for the year commencing February 1, 2018 is $1,700. In addition to the
cash funding, a portion of the pension plan obligation may be settled
by the issuance of a letter of credit in accordance with pension
legislation. The actual amount paid may vary from the estimate based
on actuarial valuations being completed, investment performance,
volatility in discount rates, regulatory requirements and other factors.
51NOTES TO CONSOLDATED FINANCIAL STATEMENTS Movement in plan assets and defined benefit obligation
Information on the Company’s defined benefit plans, in aggregate, is
as follows:
The average life expectancy in years of a member who reaches normal
retirement age of 65 is as follows:
January 31, 2018
January 31, 2017
January 31, 2018
January 31, 2017
Plan assets:
Fair value, beginning of year
$
78,280
$
76,429
Average life expectancies at age 65 for current pensioners:
Accrued interest on assets
Benefits paid
Plan administration costs
Employer contributions
Employee contributions
Return on assets greater than
discount rate
3,075
(4,612)
(388)
3,487
9
4,486
2,987
(5,040)
(405)
1,501
9
2,799
Fair value, end of year
$
84,337
$
78,280
Plan obligations:
Defined benefit obligation,
beginning of year
Current service costs
Employee contributions
Interest on plan liabilities
Benefits paid
Actuarial remeasurement due to:
Plan experience
Financial assumptions
Defined benefit obligation, end of
year
$ (112,358)
$ (110,282)
(3,387)
(9)
(4,397)
4,612
6,599
(9,492)
(3,273)
(9)
(4,311)
5,040
477
—
$ (118,432)
$ (112,358)
Plan deficit
$ (34,095)
$
(34,078)
The defined benefit obligation exceeds the fair value of plan assets as
noted in the table. While the plans are not considered fully funded for
financial reporting purposes, registered plans are funded in accordance
with the applicable statutory funding rules and regulations governing
the particular plans.
Defined benefit obligation
The following actuarial assumptions were employed to measure the
plan:
January 31, 2018
January 31, 2017
Discount rate on plan liabilities
Rate of compensation increase
Discount rate on plan expense
Inflation assumption
3.5%
4.0%
4.0%
2.0%
4.0%
4.0%
4.0%
2.0%
The assumptions used are the best estimates chosen from a range of
possible actuarial assumptions, which may not necessarily be borne
out in practice. The weighted-average duration of the defined benefit
obligation at the end of the reporting period is 17.1 years (January 31,
2017 – 17.8 years).
Male
Female
21.3
23.8
21.2
23.6
Average life expectancies at age 65 for current members aged 45:
Male
Female
22.5
24.9
22.3
24.6
Assumptions regarding future mortality experience are set based on
actuarial advice in accordance with published statistics and experience.
For the years ended January 31, 2018 and 2017, mortality assumptions
have been estimated at 106% of the base mortality rates in the
CPM2014PRIV table based on pension size and industry classification.
Sensitivity of key assumption
The following table outlines the sensitivity of a 1% change in the
discount rate used to measure the defined benefit plan obligation and
cost for the defined benefit pension plans. The table reflects the impact
on both the current service and interest cost expense components.
The sensitivity analysis provided in the key assumption table is
hypothetical and should be used with caution. The sensitivities have
been calculated independently of any changes in other assumptions.
Actual experience may result in changes in a number of key
assumptions simultaneously. Changes in one factor may result in
changes in another, which could amplify or reduce the impact of such
assumptions.
Defined benefit
plan obligation
Benefit plan cost
Discount rate:
Impact of:
1% increase
1% decrease
$ (17,686)
$
22,825
$
$
(965)
889
Plan assets
The major categories of plan assets as a percentage of total plan assets
are listed below. The pension plans have no direct investment in the
shares of the Company.
January 31, 2018
January 31, 2017
Plan assets:
Canadian equities (pooled)
Global equities (pooled)
Real estate equities (pooled)
Debt securities
17%
41%
9%
33%
23%
40%
—
37%
Total
100%
100%
52THE NORTH WEST COMPANY INC.
Governance and plan management
The Company's Pension Committees oversee the pension plans. These
committees are responsible for assisting the Board of Directors to fulfill
its governance responsibilities for the plans. The committees assist with
plan administration, regulatory compliance, pension investment and
monitoring responsibilities.
Plan assets are subject to the risk that changes in market prices,
such as interest rates, foreign exchange and equity prices will affect
their value. A Statement of Investment Policy and Procedures (SIPP)
guides the investing activity of the defined benefit pension plans to
mitigate market risk. Assets are expected to achieve, over moving three
to four-year periods, a return at least equal to a composite benchmark
made up of passive investments in appropriate market indices. These
indices are consistent with the policy allocation in the SIPP.
Periodically, an Asset-Liability Modeling study is done to update
the policy allocation between liability hedging assets and return
seeking assets. This is consistent with managing both the funded status
of the defined benefit pension plans and the Company's long-term
costs. It assists with adequately securing benefits and mitigating year-
to-year fluctuations in the Company's cash contributions and pension
expense. The defined benefit plans are subject to, and actively manage,
the following specific market risks:
Interest rate risk: is managed by allocating a portion of plan investments
to liability hedging assets, comprised of a passive universe bond fund.
Currency risk: is managed through asset allocation. A significant portion
of plan assets are denominated in the same currency as plan
obligations.
The following amounts have been included in other comprehensive
income:
January 31, 2018
January 31, 2017
Current Year:
Return on assets greater than
discount rate
Actuarial remeasurement due to:
Plan experience
Financial assumptions
Taxes on actuarial remeasurement
in OCI
Net actuarial remeasurement
recognized in OCI
$
4,486
$
2,799
6,599
(9,492)
(418)
477
—
(863)
$
1,175
$
2,413
Cumulative gains/losses recognized in OCI:
Cumulative gross actuarial
remeasurement in OCI
Taxes on cumulative actuarial
remeasurement in OCI
Total actuarial remeasurement
recognized in OCI, net
$ (15,834)
$ (17,427)
2,194
2,612
$ (13,640)
$ (14,815)
The actual return on the plans assets is summarized as follows:
January 31, 2018
January 31, 2017
Equity price risk: The defined benefit pension plans are directly exposed
to equity price risk on return seeking assets. Fair value or future cash
flows will fluctuate due to changes in market prices because they may
not be offset by changes in obligations. Investment management of
plan assets is outsourced to independent managers.
Accrued interest on assets
$
3,075
$
2,987
Return on assets greater than
discount rate
4,486
2,799
Actual return on plan assets
$
7,561
$
5,786
Statement of earnings and comprehensive income
The following pension expenses have been charged to the
consolidated statement of earnings:
January 31, 2018
January 31, 2017
Employee costs (Note 17)
Defined benefit pension plan,
current service costs included
in post-employment benefits
Plan administration costs
Defined contribution pension
plan
Savings plan for U.S. employees
Interest expense (Note 18)
Accrued interest on assets
Interest on plan liabilities
$
3,387
$
3,273
388
3,129
1,168
405
2,890
592
$
8,072
$
7,160
$ (3,075)
$ (2,987)
4,397
4,311
$
1,322
$
1,324
13. SHARE-BASED COMPENSATION
The Company offers the following share-based payment plans:
Performance Share Units (PSUs); Share Options; Director Deferred Share
Units (DDSUs); Executive Deferred Share Units (EDSUs) and an
Employee Share Purchase Plan. The purpose of these plans is to directly
align the interests of the participants and the shareholders of the
Company by providing compensation that is dependent on the
performance of the Company’s common shares.
The total expense relating to share–based payment plans for the
year ended January 31, 2018 was $8,820 (January 31, 2017 – $7,053).
The carrying amount of the Company’s share-based compensation
arrangements including PSU, share option, DDSU and EDSU plans are
recorded on the consolidated balance sheets as follows:
Accounts payable and accrued
liabilities
Other long-term liabilities
Contributed surplus
January 31, 2018
January 31, 2017
$ 14,164
14,188
1,001
$ 10,844
13,624
1,078
Total
$ 29,353
$ 25,546
53NOTES TO CONSOLDATED FINANCIAL STATEMENTS
Performance Share Units
The Company has granted Performance Share Units to officers and
senior management. Each PSU entitles the participant to receive a cash
payment equal to the market value of the number of notional units
granted at the end of the vesting period based on the achievement of
specific performance based criteria. The PSU account for each
participant includes the value of dividends from the Company as if
reinvested in additional PSUs. PSU awards vest with the employee on
the third fiscal year following the date of the grant to which the award
relates. Compensation expense is measured initially based on the fair
market value of the Company’s shares at the grant date and
subsequently adjusted for additional shares granted based on the
reinvestment of notional dividends and the market value of the shares
at the end of each reporting period. The associated compensation
expense is recognized over the vesting period based on the estimated
total compensation to be paid out at the end of the vesting period
factoring in the probability of the performance criteria being met
during that period. Compensation costs related to the PSUs for the
year ended January 31, 2018 are $4,048 (January 31, 2017 – $3,017).
Director Deferred Share Unit Plan
This Plan is available for independent Directors. Participants are
credited with deferred share units for the amount of the annual equity
retainer, and for the portion of the annual cash retainer and fees each
participant elects to allocate to the DDSU plan. Each deferred share
unit entitles the holder to receive a share of the Company. The DDSUs
are exercisable by the holder at any time but no later than December
31 of the first calendar year commencing after the holder ceases to be
a Director. A participant may elect at the time of exercise of any DDSUs ,
subject to the consent of the Company, to have the Company pay an
amount in cash equal to the aggregate current market value of the
shares, determined based on the closing price of the shares on the TSX
on the trading day preceding the exercise date. This cash payment is
in consideration for the surrender by the participant to the Company
the right to receive shares from exercising the DDSUs. Effective
December 2016, the Plan was amended for those DDSUs credited to
participants for the portion of the annual cash retainer and fees each
participant elects to allocate to the Plan. The holder of these DDSUs is
entitled to receive at the time of exercise, an amount in cash equal to
the aggregate current market value of the shares, determined based
on the closing price of the shares on the TSX on the trading day
preceding the exercise date.
Compensation expense is measured at the time of the grant.
Subsequent changes in the fair value of the DDSUs based on changes
in the market value of the Company's shares are recognized at each
reporting date. The DDSU plan compensation recorded for the year
ended January 31, 2018 is an expense of $1,047 (January 31, 2017 –
$712). The total number of deferred share units outstanding at
January 31, 2018 is 249,108 (January 31, 2017 – 212,166). There were
no DDSUs exercised during the years ended January 31, 2018 and
January 31, 2017.
Executive Deferred Share Unit Plan
The EDSU plan was implemented to assist executive management to
meet the Company's minimum share ownership guidelines. This plan
provides for the granting of deferred share units to those executives
who elect to receive a portion of their annual short-term incentive
payment in EDSUs, subject to plan limits. Effective April 2016,
participants will be credited with EDSUs based on the amount of their
annual short-term incentive payment allocated to the plan and the
fair market value of the Company's shares. The EDSUs are exercisable
at any time after the executive ceases to be an employee of the
Company, but no later than December 31 of the first calendar year
commencing after the holder ceased to be an employee. Each EDSU
entitles the holder to a cash payment equal to the market value of the
equivalent number of the Company's shares, determined based on
their closing price on the TSX on the trading day preceding the exercise
date.
Total compensation expense is measured at the time of the grant.
Subsequent changes in the fair value of the EDSUs based on changes
in the market value of the Company's shares are recognized at each
reporting date. The EDSU plan compensation recorded for the year
ended January 31, 2018 is an expense of $28 (January 31, 2017 – $35).
Share Option Plan
The Company has a Share Option Plan that provides for the granting
of options to certain officers and senior management. Options are
granted at fair market value based on the volume weighted-average
closing price of the Company’s shares for the five trading days
preceding the grant date. Effective June 14, 2011, the Share Option
Plan was amended and restated. The amendments afford the Board of
Directors the discretion to award options giving the holder the choice,
upon exercise, to either deduct a portion of all dividends declared after
the grant date from the options exercise price or to exercise the option
at the strike price specified at the grant date ("Declining Strike Price
Options"). Options issued prior to June 14, 2011 and certain options
issued subsequently are standard options ("Standard Options"). Each
option is exercisable into one share of the Company at the price
specified in the terms of the option. Declining Strike Price options allow
the employee to acquire shares or receive a cash payment based on
the excess of the fair market value of the Company’s shares over the
exercise price.
The fair value of the Declining Strike Price Options is remeasured
at the reporting date and recognized both in net earnings and as a
liability over the vesting period. The grant date fair value of the Standard
Options is recognized in net earnings and contributed surplus over the
vesting period.
The maximum number of shares available for issuance is a fixed
number set at 4,354,020, representing 8.9% of the Company’s issued
and outstanding shares at January 31, 2018. Fair value of the
Company's options is determined using an option pricing model. Share
options granted vest on a graduated basis over five years and are
exercisable over a period of seven to ten years. The share option
compensation cost recorded for the year ended January 31, 2018 is
$2,886 (January 31, 2017 – $2,510).
The fair values for options issued during the year were calculated based
on the following assumptions:
2017
2016
Fair value of options granted
$ 3.12 to 4.30
$ 2.80 to 3.88
Exercise price
Dividend yield
Annual risk-free interest rate
Expected share price volatility
$ 32.40
4.2%
1.2%
21.6%
$ 28.81
3.9%
0.5% to 0.7%
19.8%
The assumptions used to measure options at the balance sheet dates
are as follows:
Dividend yield
2017
4.4%
2016
4.2%
Annual risk-free interest rate
1.8% to 2.1%
0.8% to 1.1%
Expected share price volatility
16.6% to 20.5%
19.7% to 23.3%
54THE NORTH WEST COMPANY INC. The expected dividend yield is estimated based on the quarterly dividend rate and the closing share price on the date the options are granted.
The expected share price volatility is estimated based on the Company's historical volatility over a period consistent with the expected life of the
options. The risk-free interest rate is estimated based on the Government of Canada bond yield for a term to maturity equal to the expected life
of the options.
The following continuity schedules reconcile the movement in outstanding options during the year:
Number of options outstanding
Declining Strike Price Options
Standard Options
Outstanding options, beginning of year
Granted
Exercised
Forfeited or cancelled
Outstanding options, end of year
Exercisable at end of year
2017
2016
2017
2016
2,082,892
1,659,664
441,269
(28,527)
(30,694)
454,057
(30,829)
—
442,642
63,843
(16,855)
(35,453)
400,045
68,564
(25,967)
—
2,464,940
2,082,892
454,177
442,642
773,188
485,431
237,026
205,958
The weighted-average share price on the dates options were exercised during the year was $31.65 (January 31, 2017 – $29.88).
Weighted-average exercise price
Declining Strike Price Options
Standard Options
Outstanding options, beginning of year
$
24.81
$
23.67
$
23.21
$
21.86
2017
2016
2017
2016
Granted
Exercised
Forfeited or cancelled
Outstanding options, end of year
Exercisable at end of year
Summary of options outstanding by grant year
32.34
21.68
26.36
26.18
19.52
$
$
28.81
21.95
—
24.81
18.47
$
$
32.40
22.71
26.31
24.28
20.67
$
$
28.81
17.20
—
23.21
20.29
$
$
Outstanding
Exercisable
Range of
exercise price
Number
outstanding
Weighted-average
remaining
contractual years
Weighted-average
exercise price
Options
exercisable
Weighted-average
exercise price
$
$
$
$
$
$
$
$
19.11-19.11
17.19-21.24
18.04-22.53
19.87-24.00
21.98-25.21
23.86-27.22
26.55-30.60
29.45-32.40
106,700
252,469
306,865
342,421
358,661
546,365
500,524
505,112
2.2
0.5
1.2
2.2
3.2
4.2
5.2
6.4
$
$
$
$
$
$
$
$
19.11
17.77
19.34
21.21
23.18
24.73
28.52
32.35
106,700
252,469
306,865
224,631
119,549
NIL
NIL
NIL
$
$
$
$
$
19.11
17.77
19.34
21.21
23.18
N/A
N/A
N/A
Grant
year
2010
2011
2012
2013
2014
2015
2016
2017
Employee Share Purchase Plan
The Employee Share Purchase Plan provides participants with the opportunity to acquire an ownership interest in the Company. The Company
contributes an additional 33% of the amount invested, subject to a maximum annual contribution of 2% of the participants' base salary. The plan
is administered by a trustee who uses the funds received to purchase shares on the TSX on behalf of the participating employees. These shares
are registered in the name of the plan trustee on behalf of the participants.
The Company’s contribution to the plan is recorded as compensation expense. The employee share purchase plan compensation recorded
for the year ended January 31, 2018 is $811 (January 31, 2017 – $779).
55NOTES TO CONSOLDATED FINANCIAL STATEMENTS 14. FINANCIAL INSTRUMENTS
The Company's activities expose it to a variety of financial risks including liquidity risk, credit risk and market risk. The Company's overall risk
management program focuses on minimizing potential adverse effects on financial performance.
The Company manages funding and financial risk management with oversight provided by the Board of Directors, who also approve specific
financial transactions. The Company uses derivative financial instruments only to hedge exposures arising in respect of underlying business
requirements and not for speculative purposes.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due or can do so only at excessive cost. The
Company’s operational cash flow is reasonably stable and predictable. This reflects the business risk profile of the majority of markets in which the
Company operates and its product mix. Cash flow forecasts are produced regularly and reviewed against the Company’s debt portfolio capacity
and maturity profile to assist management in identifying future liquidity requirements. The Company’s funding strategy is to ensure a mix of funding
sources offering flexibility and cost effectiveness to match the business requirements.
The Company is financed by a combination of cash flow from operating activities, bank advances, senior notes and committed revolving loan
facilities. At January 31, 2018, the Company had undrawn committed revolving loan facilities available of $266,322 (January 31, 2017 – $264,657)
which mature in 2020 and 2022 (Note 11).
The following table analyzes the Company’s financial liabilities into relevant maturity groupings based on the remaining period from the balance
sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows or an estimation in
respect of floating interest rate liabilities, and as a result may not agree to the amounts disclosed on the balance sheet.
Accounts payable and accrued liabilities
Long-term debt (Note 11)
Operating leases (Note 21)
Total
2018
170,166
9,938
31,279
211,383
$
$
2019
—
9,938
25,132
35,070
2020
—
11,714
18,549
30,263
2021
—
94,415
15,076
109,491
2022
—
132,055
12,234
144,289
2023+
Total
— $ 170,166
125,514
383,574
72,438
174,708
197,952 $ 728,448
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’s exposures to credit risk arise primarily from
holdings of cash and its customer and commercial accounts receivable.
To mitigate credit risk, the Company maintains deposits with
financial institutions with minimum equivalent short-term credit ratings
of “A1.” The maximum exposure on cash is equal to the carrying amount
of these instruments.
It is the Company’s policy that customers who wish to trade on
credit terms are subject to credit verification procedures including
policies governing: credit approvals, limits, collections and fraud
prevention. The Company provides impairment allowances for
potentially uncollectible accounts receivable. Receivable balances are
comprised of approximately forty thousand customers spread across a
wide geography, substantially reducing the Company’s risk through the
diversity of its customer base. Further, receivables are centrally
monitored on an ongoing basis with the result that the Company’s
exposure to individual customers is generally not significant. The
maximum exposure net of impairment allowances is $80,765 (January
31, 2017 – $78,931). The Company does not have any individual
customers greater than 10% of total accounts receivable. At January 31,
2018, the Company’s gross maximum credit risk exposure is $96,696
(January 31, 2017 – $93,315). Of this amount, $16,427 (January 31, 2017
– $15,444) is more than 60 days past due. The Company has recorded
an allowance against its maximum exposure to credit risk of $15,931
(January 31, 2017 – $14,384) which is based on historical payment
records for similar financial assets.
As at January 31, 2018 and 2017, the Company has no significant
credit risk related to derivative financial instruments.
Market risk
(a) Currency risk
The Company operates internationally and is
exposed to foreign exchange risk arising from various currency
exposures, primarily with respect to the U.S. dollar. Foreign
exchange risk arises from U.S. dollar denominated borrowings and
net investments in foreign operations.
Management is responsible for managing foreign currency
risk. The Company’s U.S. dollar net investment is exposed to foreign
currency translation risk. A significant portion of this risk has been
hedged with U.S. dollar denominated borrowings.
In respect of recognized foreign currency assets and liabilities,
the Company has limited exposure. Procurement and related
borrowing activity are generally conducted in currencies matching
cash flows generated by underlying operations, providing an
economic hedge without sophisticated treasury management.
Short-term imbalances in foreign currency holdings are rectified
by buying or selling at spot rates when necessary.
Management considers a 10% variation in the Canadian dollar
relative to the U.S. dollar reasonably possible. Considering all major
exposures to the U.S. dollar as described above, a 10% appreciation
of the Canadian dollar against the U.S. dollar in the year-end rate
would cause net earnings to decrease by approximately $100. A
10% depreciation of the Canadian dollar against the U.S. dollar year-
end rate would cause net earnings to increase by approximately
$100.
(b)
Interest rate risk Interest rate risk is the risk that the fair value of
future cash flows of a financial instrument will fluctuate because
of changes in market interest rates. The Company is exposed to
interest rate risk primarily through its long-term borrowings.
56THE NORTH WEST COMPANY INC. The Company manages exposure to interest rate risk by
monitoring its blend of fixed and floating interest rates, and may
modify this blend using interest rate swaps. The goal of
management is to manage the trade-off between obtaining the
most beneficial effective rates of interest, while minimizing the
impact of interest rate volatility on earnings.
Management considers a 100 basis point change in interest
rates reasonably possible. Considering all major exposures to
interest rates as described above, a 100 basis point increase in the
risk-free rate would cause net earnings to decrease by
approximately $1,141. A 100 basis point decrease would cause net
earnings to increase by approximately $1,141.
(c) Accounting classifications and fair value estimation The following
table comprises the carrying amounts of the Company’s financial
instruments. Financial instruments are either carried at amortized
cost using the effective interest rate method or fair value.
The Company uses a three-level hierarchy to categorize financial
instruments carried at fair value as follows:
• Level 1 – Fair values measured using quoted prices (unadjusted) in
active markets for identical instruments
• Level 2 – Fair values measured using directly or indirectly
observable inputs, other than those included in Level 1
• Level 3 – Fair values measured using inputs that are not based on
observable market data
These amounts represent point-in-time estimates and may not reflect fair value in the future. These calculations are subjective in nature, involve
uncertainties and are a matter of significant judgment.
Assets (Liabilities) carried at
amortized cost
Maturity Carrying amount
Short-term
Short-term
Long-term
Short-term
Long-term
$
25,160
80,765
1,197
(170,166)
(313,549)
Fair value
$
25,160
80,765
1,197
(170,166)
(310,737)
Assets (Liabilities) carried at
amortized cost
Maturity Carrying amount
Fair value
Short-term
Short-term
Long-term
Short-term
Long-term
$
30,243
$
30,243
78,931
1,582
(146,639)
(229,266)
78,931
1,582
(146,639)
(230,067)
January 31, 2018
Cash
Accounts receivable
Other financial assets
Accounts payable and accrued liabilities
Long-term debt
January 31, 2017
Cash
Accounts receivable
Other financial assets
Accounts payable and accrued liabilities
Long-term debt
The methods and assumptions used in estimating the fair value of the
Company’s financial instruments are as follows:
•
•
The fair value of short-term financial instruments approximates
their carrying values due to their immediate or short-term period
to maturity. Any differences between fair value and book values
of short-term
instruments are considered to be
insignificant.
financial
The fair value of long-term debt with fixed interest rates is estimated
by discounting the expected future cash flows using the current
risk-free interest rate on an instrument with similar terms adjusted
for an appropriate risk premium. This is considered a level 2 fair
value estimate.
57NOTES TO CONSOLDATED FINANCIAL STATEMENTS Capital management
The Company’s objectives in managing capital are to deploy capital to
provide an appropriate total return to shareholders while maintaining
a capital structure that provides the flexibility to take advantage of the
growth opportunities of the business, maintain existing assets, meet
obligations and financial covenants and enhance shareholder value. The
capital structure of the Company consists of bank advances, long-term
debt and shareholders’ equity. The Company manages capital to
optimize efficiency through an appropriate balance of debt and equity.
In order to maintain or adjust its capital structure, the Company may
purchase shares for cancellation pursuant to normal course issuer bids,
issue additional shares, borrow additional funds, adjust the amount of
dividends paid or refinance debt at different terms and conditions.
The Company’s process and policies for managing capital are
monitored by management and are reflected in the following measures:
(a) Debt-to-equity ratio At January 31, 2018, the debt-to-equity ratio
was 0.82 compared to 0.62 last year. The debt-to-equity ratio is
within the Company’s objectives. The debt-to-equity ratio is
calculated as follows:
Current portion of
long-term debt
Long-term debt
Total debt
Total equity
Debt-to-equity ratio
January 31, 2018
January 31, 2017
$
$
$
—
313,549
313,549
382,156
0.82
$
$
$
—
229,266
229,266
367,785
0.62
(b) Financial covenants As a result of borrowing agreements entered
into by the Company, there are certain financial covenants that
must be maintained. Financial covenants include a fixed charge
coverage ratio, minimum current ratio, a leverage test and a
minimum net worth test. Compliance with financial covenants is
reported quarterly to the Board of Directors. During the years
ended January 31, 2018 and 2017, the Company is in compliance
with all financial covenants. Other than the requirements imposed
by these borrowing agreements and solvency tests imposed by
the CBCA, the Company is not subject to any externally imposed
capital requirements.
Capital management objectives are reviewed on an annual basis. The
capital management objectives were substantially unchanged for the
year ended January 31, 2018.
15. SHARE CAPITAL
Authorized – The Company has an unlimited number of Common
Voting Shares and Variable Voting Shares.
Shares
Consideration
Balance at January 31, 2017
48,542,514
$ 168,283
Issued for acquisition of RTW (Note 24)
133,944
Issued under option plans (Note 13)
13,754
4,000
336
Balance at January 31, 2018
48,690,212
$ 172,619
Balance at January 31, 2016
48,523,341
$
167,910
Issued under option plans (Note 13)
19,173
373
Balance at January 31, 2017
48,542,514
$
168,283
On June 14, 2017, the Company's Common Shares were replaced by
Variable Voting Shares and Common Voting Shares. The two classes of
shares have equivalent rights as shareholders except for voting rights.
Holders of Variable Voting Shares are entitled to one vote per share
except where (i) the number of outstanding Variable Voting Shares
exceeds 25% of the total number of all issued and outstanding Variable
Voting Shares and Common Voting Shares, or (ii) the total number of
votes cast by or on behalf of the holders of Variable Voting Shares at
any meeting on any matter on which a vote is to be taken exceeds 25%
of the total number of votes cast at such meeting.
If either of the above-noted thresholds is surpassed at any time, the
vote attached to each Variable Voting Share will decrease automatically
without further act or formality. Under the circumstances described
in paragraph (i) above, the Variable Voting Shares as a class cannot carry
more than 25% of the total voting rights attached to the aggregate
number of issued and outstanding Variable Voting Shares and
Common Voting Shares of the Company. Under the circumstances
described in paragraph (ii) above, the Variable Voting Shares as a class
cannot, for the given Shareholders' meeting, carry more than 25% of
the total number of votes cast at the meeting.
Variable Voting Shares may only be held, beneficially owned or
controlled, directly or indirectly, by persons who are not Canadians
(within the meaning of the Canada Transportation Act). An issued and
outstanding Variable Voting Share is converted into one Common
Voting Share automatically and without any further act of the Company
or the holder, if such Variable Voting Share becomes held, beneficially
owned and controlled, directly or indirectly, otherwise than by way of
security only, by a Canadian, as defined in the Canada Transportation
Act.
At January 31, 2018 shares outstanding of 48,690,212 included
12,557,051 Variable Voting Shares, representing 25.8% of the total
shares issued and outstanding.
58THE NORTH WEST COMPANY INC. 16. EXPENSES BY NATURE
19. DIVIDENDS
The following is a summary of the dividends recorded in shareholders'
equity and paid in cash:
Year Ended
January 31, 2018
January 31, 2017
Dividends recorded in equity
and paid in cash
Less: Dividends paid to non-
controlling interests
Shareholder dividends
Dividends per share
$ 64,797
$ 60,169
(2,482)
—
$ 62,315
$
1.28
$ 60,169
$
1.24
The payment of dividends on the Company’s common shares is subject
to the approval of the Board of Directors and is based upon, among
other factors, the financial performance of the Company, its current
and anticipated future business needs, and the satisfaction of solvency
tests imposed by the CBCA for the declaration of dividends. Dividends
are recognized as a liability in the consolidated financial statements in
the year in which the dividends are approved by the Board of Directors.
On March 15, 2018, the Board of Directors declared a dividend of
$0.32 per common share to be paid on April 16, 2018 to shareholders
of record as of the close of business on March 29, 2018.
Year Ended
January 31, 2018
January 31, 2017
Employee costs (Note 17)
$ 296,417
$
260,891
Amortization
Operating lease rentals
Other income
55,653
35,394
(31,604)
48,367
30,207
(30,168)
17. EMPLOYEE COSTS
Year Ended
January 31, 2018
January 31, 2017
Wages, salaries and benefits
including bonus
Post-employment benefits (Note 12)
Share-based compensation
(Note 13)
$ 279,525
$ 246,678
8,072
8,820
7,160
7,053
Included in the above are the following amounts in respect of key
management compensation:
Wages, salaries and benefits
including bonus
Post-employment benefit expense
Share-based compensation
$
4,603
1,160
5,314
$
3,957
1,145
3,913
Key management personnel are those individuals who have the
authority and responsibility for planning, directing and controlling the
activities of the Company. The Company’s key management personnel
are comprised of the Board of Directors, Chief Executive Officer and the
senior officers of the Company.
18. INTEREST EXPENSE
Year Ended
January 31, 2018
January 31, 2017
Interest on long-term debt
$ 9,363
$ 6,326
Net interest on defined benefit
plan obligation
Interest income
Less: interest capitalized
1,322
(38)
(502)
1,324
(92)
(338)
Interest expense
$ 10,145
$ 7,220
59NOTES TO CONSOLDATED FINANCIAL STATEMENTS
20. NET EARNINGS PER SHARE
Basic net earnings per share is calculated based on the weighted-average shares outstanding during the year. The diluted net earnings per share
takes into account the dilutive effect of all potential ordinary shares. The average market value of the Company’s shares for purposes of calculating
the dilutive effect of share options was based on quoted market prices for the period that the options were outstanding.
($ and shares in thousands, except earnings per share)
Year Ended
Diluted earnings per share calculation:
January 31, 2018
January 31, 2017
Net earnings for the year (numerator for diluted earnings per share)
$
67,154
$
77,076
Weighted-average shares outstanding (denominator for basic earnings per share)
Dilutive effect of share-based compensation
Denominator for diluted earnings per share
Basic earnings per share
Diluted earnings per share
21. OPERATING LEASE COMMITMENTS
48,680
595
49,275
48,524
440
48,964
$
$
1.38
1.36
$
$
1.59
1.57
The Company leases various retail stores, offices, warehouses and equipment under non-cancellable operating leases. The leases have varying
terms, escalation clauses and renewal rights. The future minimum lease payments are as follows:
Year Ended
January 31, 2018
January 31, 2017
Due within 1 year
Within 2 to 5 years inclusive
After 5 years
Land and buildings
Other leases
Land and buildings
Other leases
$ 29,620
$
1,659
$
29,030
$
69,692
72,438
1,299
—
73,889
69,339
861
978
—
60THE NORTH WEST COMPANY INC. 22. COMMITMENTS, CONTINGENCIES AND
GUARANTEES
Commitments
The Company has a Master Franchise Agreement (MFA) with Giant
Tiger Stores Limited, based in Ottawa, Ontario which grants the
Company the exclusive right to open Giant Tiger stores in western
Canada, subject to meeting a minimum store opening commitment.
Under the agreement, Giant Tiger Stores Limited provides product
sourcing, merchandising, systems and administration support to the
Company’s Giant Tiger stores in return for a royalty based on sales. The
Company is responsible for opening, owning, operating and providing
distribution services to the stores. As at January 31, 2018, the Company
owns 41 Giant Tiger stores and is in compliance with the minimum
store opening commitment. The agreement expires July 31, 2040.
Contingencies
In the ordinary course of business, the Company is subject to audits by
taxation authorities. While the Company believes that its filing
positions are appropriate and supportable, the possibility exists that
certain matters may be reviewed and challenged by the taxation
authorities. The Company regularly reviews the potential for adverse
outcomes and the adequacy of its tax provisions. The Company
believes that it has adequately provided for these matters. If the final
outcome differs materially from the provisions, the Company’s income
tax expense and its earnings could be affected positively or negatively
in the period in which the matters are resolved.
The Company is involved in various legal matters arising in the
normal course of business. The occurrence of the confirming future
events is not determinable or it is not possible to determine the
amounts that may ultimately be assessed against the Company. The
resolution of these matters is not expected to have a material adverse
effect on the Company’s financial position, results of operations or cash
flows.
Guarantees
The Company has provided the following guarantees to third parties:
The Company has entered into indemnification agreements with
its current and former directors and officers to indemnify them, to the
extent permitted by law, against any and all charges, costs, expenses,
amounts paid in settlement and damages incurred by the directors
and officers as a result of any lawsuit or any judicial, administrative or
investigative proceeding in which the directors and officers are sued
as a result of their service. These indemnification claims will be subject
to any statutory or other legal limitation period. The nature of the
indemnification agreements prevents the Company from making a
reasonable estimate of the maximum potential amount it could be
required to pay to counterparties. The Company has purchased
director and officer liability insurance. No amount has been recorded
in the consolidated financial statements with respect to these
indemnification agreements.
In the normal course of operations, the Company provides
indemnification agreements to counterparties for various events such
as intellectual property right infringement, loss or damages to property,
claims that may arise while providing services, violation of laws or
regulations, or as a result of litigation that might be suffered by the
counterparties. The terms and nature of these indemnification
agreements prevents the Company from making a reasonable estimate
of the maximum potential amount it could be required to pay to
counterparties. No amount has been recorded in the consolidated
financial statements with respect to these indemnification agreements.
61NOTES TO CONSOLDATED FINANCIAL STATEMENTS
23. SUBSIDIARIES AND JOINT VENTURES
The Company’s principal operating subsidiaries are set out below:
Activity Country of Organization
Company
Subsidiary
Proportion of voting rights held by:
NWC GP Inc.
North West Company Holdings Inc.
The North West Company LP
NWC (U.S.) Holdings Inc.
The North West Company (International) Inc.
General Partner
Holding Company
Retailing
Holding Company
Retailing
The North West Finance Company Cooperatie U.A.
Finance Company
Canada
Canada
Canada
United States
United States
Netherlands
Roadtown Wholesale Trading Ltd.
North Star Air Ltd.
Retailing
Airline
British Virgin Islands
Canada
100%
100%
100% (less one unit)
99%
100%
100%
1%
76%
100%
The investment in joint venture comprises a 50% interest in a Canadian Arctic shipping company, Transport Nanuk Inc. At January 31, 2018, the
Company’s share of the net assets of its joint venture amount to $9,294 (January 31, 2017 – $9,930) comprised assets of $10,925 (January 31, 2017
- $11,137) and liabilities of $1,631 (January 31, 2017 – $1,207). During the year ended January 31, 2018, the Company purchased freight handling
and shipping services from Transport Nanuk Inc. and its subsidiaries of $7,806 (January 31, 2017 – $8,217). The contract terms are based on market
rates for these types of services on similar arm’s length transactions.
62THE NORTH WEST COMPANY INC. 24. BUSINESS ACQUISITION
On February 9, 2017, the Company acquired 76% of the outstanding common shares of Roadtown Wholesale Trading Ltd. (RTW),
operating primarily as Riteway Food Markets in the British Virgin Islands (BVI). RTW is the leading retailer in BVI with eight retail
outlets, a Cash and Carry store and a significant wholesale operation. Based on the Company's closing share price on that date, the
purchase price was $35,593 (US$27,044). This was comprised of cash consideration of $31,593 (US$24,004) financed through existing
loan facilities and the issuance of 133,944 common shares, in accordance with the form of consideration elected to be received by
RTW shareholders. The purchase price allocation based on management's best estimate of the acquisition date fair values of assets
acquired and liabilities assumed is as follows:
CURRENT ASSETS
Cash
Accounts receivable
Inventories
Prepaid expenses
NON-CURRENT ASSETS
Property and equipment
Goodwill
Intangible assets
TOTAL ASSETS
CURRENT LIABILITIES
Accounts payable and accrued liabilities
NET IDENTIFIABLE ASSETS
Less: non-controlling interests
CONSIDERATION
Less: cash acquired
Less: share consideration
NET CASH FLOW FOR BUSINESS ACQUISITION
February 9, 2017
$
$
$
8,738
2,647
12,432
616
24,433
34,574
2,085
909
37,568
$
62,001
$
(14,258)
47,743
(12,150)
$
35,593
(8,738)
(4,000)
$
22,855
This acquisition was completed to gain access to a new market, consistent with the Company's overall Caribbean growth plans.
The acquisition was accounted for using the acquisition method. Since the date of acquisition the impact on sales was an increase
of $105,270 and the impact on net earnings was an increase of $5,417. The net earnings of $5,417 includes $5,765 in acquisition
costs substantially related to stamp duty paid to the Government of the British Virgin Islands. These acquisition costs are included
in selling, operating and administrative expenses in the consolidated statements of earnings. On February 9, 2017, accounts payable
and accrued liabilities includes a $7,470 (US$5,676) dividend payable to RTW shareholders declared prior to the acquisition. This
dividend was paid subsequent to the closing of the acquisition and was fully funded by the cash acquired.
63NOTES TO CONSOLDATED FINANCIAL STATEMENTS 24. BUSINESS ACQUISITION (continued)
On June 15, 2017, the Company acquired 100% of the outstanding common shares of North Star Air Ltd. (NSA). NSA is a Thunder
Bay based airline, providing cargo and passenger services within northwestern Ontario, Canada. The purchase price was $30,755,
subject to working capital adjustments, and was financed through existing loan facilities. The preliminary purchase price allocation
based on management's best estimate of the acquisition date fair values of assets acquired and liabilities assumed is as follows:
CURRENT ASSETS
Cash
Accounts receivable
Inventories
Prepaid expenses
NON-CURRENT ASSETS
Property and equipment
Goodwill
TOTAL ASSETS
CURRENT LIABILITIES
Accounts payable and accrued liabilities
Deferred tax liability
NET IDENTIFIABLE ASSETS & CONSIDERATION
Less: cash acquired
NET CASH FLOW FOR BUSINESS ACQUISITION
June 15, 2017
$
$
$
$
$
2,406
5,258
1,053
1,852
10,569
28,547
3,459
32,006
42,575
(7,547)
(4,273)
30,755
(2,406)
$
28,349
This acquisition was completed to allow the Company to deliver faster, more consistent service to our customers. The acquisition
was accounted for using the acquisition method. Since the date of acquisition the impact on sales was an increase of $28,194 and
the impact on net earnings was an increase of $943. The net earnings of $943 includes $423 in acquisition costs, net of tax. Acquisition
costs are included in selling, operating and administrative expenses in the consolidated statements of earnings.
In the fourth quarter of 2017, the Company revised its fair value estimates updated the NSA purchase price allocation based on the
final settlement of working capital adjustments. The result was to decrease the purchase price by $585 with a corresponding
decrease in assets acquired of $439 and an increase in current liabilities of $146.
The Company has one year from the date of acquisition to finalize the fair value of net tangible assets, goodwill and intangible assets
and therefore these amounts are subject to change.
64THE NORTH WEST COMPANY INC. Shareholder Information
Fiscal Year
Quarter Ended
2017
April 30, 2017
July 31, 2017
October 31, 2017
January 31, 2018
2016
April 30, 2016
July 31, 2016
October 31, 2016
January 31, 2017
2015
April 30, 2015
July 31, 2015
October 31, 2015
January 31, 2016
Share
Price High
Share
Price Low
Share
Price Close
Volume
$33.75
$28.45
$29.14
38,835,538
32.28
33.75
32.00
32.90
28.78
29.68
29.37
28.45
32.20
30.54
31.48
29.17
10,508,104
8,949,833
8,193,983
11,183,618
EPS1
$1.36
0.17
0.46
0.42
0.31
$33.15
$24.08
$29.28
49,189,285
$1.57
33.15
31.13
30.89
30.23
27.56
27.70
24.58
24.08
27.89
30.50
25.60
29.28
13,914,839
9,094,678
11,714,391
14,465,377
0.36
0.34
0.57
0.30
$30.53
$23.41
$30.53
35,630,567
$1.43
26.80
27.98
29.90
30.53
24.27
23.41
26.15
26.20
24.76
27.51
29.00
30.53
7,604,165
11,004,187
8,843,138
8,179,077
0.32
0.37
0.43
0.31
1 Net earnings per share are on a diluted basis.
Total Return Performance (% at January 31)
illustrates
the
This chart
West Company
Inc. over
the reinvestment of dividends.
relative performance of shares of The North
incorporates
the past
five years. The
index
The North West Company Inc.
Anticipated Dividend Dates*
Record Date: March 29, 2018
Payment Date: April 16, 2018
Record Date: June 29, 2018
Payment Date: July 16, 2018
Record Date: September 28, 2018
Payment Date: October 15, 2018
Record Date: December 31, 2018
Payment Date: January 15, 2019
*Dividends are subject to approval by the
Board of Directors
The 2018 Annual General and Special Meeting
of Shareholders of The North West Company
Inc. will be held on Wednesday, June 13, 2018 at
11:30 a.m. in the Muriel Richardson Auditorium,
Winnipeg Art Gallery, 300 Memorial Boulevard,
Winnipeg, Manitoba
Transfer Agent and Registrar
AST Trust Company (Canada)
2001 Robert-Bourassa Blvd.
Suite 1600
Montreal, QC
Toll-free: 1 800 387 0825
www.astfinancial.com/ca-en
Stock Exchange Listing
The Toronto Stock Exchange
Stock Symbol NWC
ISIN #: CA6632781093
CUSIP #: 663278109
Number of shares issued and outstanding at
January 31, 2018: 48,690,212
Auditors
PricewaterhouseCoopers LLP
Five Year Compound Annual Growth (%)
65ANNUAL REPORT Corporate Governance
Complete disclosure of The North West Company Inc's. corporate governance is provided in the Company’s Management Information Circular,
which is available on the Canadian Securities Administrators’ website at www.sedar.com or in the investor section of the Company’s website at
www.northwest.ca.
EXECUTIVES
EXECUTIVES
Edward S. Kennedy
President and Chief Executive Officer
Craig T. Gilpin
Executive Vice-President and
Chief Corporate Officer
John D. King CPA, CA, CMA
Executive Vice-President and
Chief Financial Officer
Daniel G. McConnell
President, International Retail
Brett D. Marchand
Vice-President, Logistics & Distribution,
Canada
Tom Meilleur
Vice-President, North Star Air Ltd.
Beth Millard-Hales*
Vice-President, Human Resources
Walter E. Pickett
Vice-President and General Manager,
Alaska Commercial Company
Michael T. Beaulieu
Vice-President, Canadian Sales & Operations
Northern Canada Retail, Central Division
Glenn R. Revet
Vice-President, Sales and Operations,
Giant Tiger
BOARD OF DIRECTORS
H. Sanford Riley, Chairman
Brock Bulbuck 2, 3
Deepak Chopra, FCPA, FCGA
Frank J. Coleman 1, 2
Wendy F. Evans 1, 3
Stewart Glendinning 2, 3
Edward S. Kennedy
Robert J. Kennedy 1, 3
Annalisa King 2, 3
Violet (Vi) A. M. Konkle 2, 3
Steven J. Boily
Vice-President, Information Services
Chris J. Santschi
Vice-President, Canadian Sales and Operations,
Northern Canada Retail, National Division
Eric L. Stefanson, FCPA, FCA 1, 2
Victor Tootoo, CPA, CGA 2, 3
J. Robert Cain
Vice-President, Logistics and Distribution
(International Operations)
Michael C. Scott
Vice-President, General Merchandise
Procurement & Marketing
David M. Chatyrbok
Vice-President, Canadian Sales & Operations,
Northern Canada Retail, NorthMart/Major
Markets Division
Jeff Stout
Vice-President, North Star Air Ltd.
Leanne G. Flewitt
Vice-President, Project Enterprise
Amanda E. Sutton
Vice-President, Legal and Corporate Secretary
Matt D. Johnson
Vice-President, International Food
Procurement and Marketing
James W. Walker
Vice-President and General Manager,
Wholesale Operations (International
Operations)
Laurie J. Kaminsky
Vice-President, NWC Health Products
and Services
Rex A. Wilhelm
Vice-Chairman, NWCI
(International Operations)
Frank Kelner
President, North Star Air Ltd.
* effective April 27, 2018
BOARD COMMITTEES
1 Governance & Nominating
2 Audit
3 Human Resources, Compensation, and
Pension
For additional copies of this report or for
general information about the Company,
contact the Corporate Secretary:
The North West Company Inc.
Gibraltar House, 77 Main Street
Winnipeg, Manitoba Canada R3C 2R1
T 204 934 1756 F 204 934 1317
board@northwest.ca
Company Website: www.northwest.ca
66THE NORTH WEST COMPANY INC. Nor'Westers are associated with the vision,
perseverance, and enterprising spirit of the original
North West Company and Canada's early fur trade.
We trace our roots to 1668, and the establishment of
one of North America's early trading posts at
Waskaganish on James Bay. Today, we continue to
embrace this pioneering culture as true "frontier
merchants."
The North West Company Inc.
Gibraltar House, 77 Main Street
Winnipeg, Manitoba Canada R3C 2R1
T 204 934 1756 F 204 934 1317
Toll -free 1 800 563 0002
investorrelations@northwest.ca
www.northwest.ca