annual REPORT 2018 a sTROng and gROwing cORPORaTiOn TaBlE OF cOnTEnTs 2 Profile 5 Financial Highlights 6 Network 7 Message to Shareholders 11 Directors and Officers 12 Values 13 Products and Service 23 Social and Environmental Responsibility 24 Management’s Report 37 Financial Statements and Related Notes The annual general meeting of shareholders will be held on Thursday, April 4, 2019 at 10:30 a.m., at Novotel, 2599 Alfred-Nobel Blvd., Ville Saint-Laurent, Quebec in a highly innOvaTivE indusTRy By iNTEgRATiNg cOnTinuOus imPROvEmEnT iN Each asPEcT OF OuR ORgANizATiON, RESPEcTiNg OuR cORE valuEs, AND STRiViNg FOR cuSTOMER sERvicE ExcEllEncE, wE cONTiNuE TO gROw ThROugh innOvaTiOn, sTRaTEgic acquisiTiOns iN NORTH AMERicA, AND OPERaTiOnal EFFiciEncy. RichEliEu REmains FiRmly cusTOmER- and innOvaTiOn- dRivEn. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 1 NORTH AMERICAN LEADER IN THE IMPORT, DISTRIBUTION, AND MANUFACTURING OF SPECIALTY HARDWARE AND COMPLEMENTARY PRODUCTS OVER 80,000 ACTIVE CUSTOMERS IN NORTH AMERICA MANUFACTURERS of kitchen and bathroom cabinets, storage solutions and closets, and home and office furniture — Residential and commercial woodworkers, as well as hardware RETAILERS including renovation superstores. OVER 2,100 EMpLOyEES 50% are dedicated to sales and marketing. Over 50% are shareholders of the Corporation. A pERSONALIZED SERVICE provided by a qualified and skilled team working in close collaboration with architects and designers — an outstanding expertise provided to customers. With its proactive approach, Richelieu is expert at bringing innovative products to market. 2 R I C H E L I E U | A N N U A L R E P O R T 2 0 1 8 72 DISTRIBUTION CENTERS A robust network including showrooms. The diversified range of products — the one-stop shop service approach — efficient logistics — the multiple advantages of the transactional website richelieu.com — and a full support to customers including sales tools that are unique in the market, result in an optimal customer response rate. 2 MANUFACTURINg pLANTS Les Industries Cedan Inc. and Menuiserie des Pins Ltée manufacture products lines offering distinctive features, including a variety of veneer sheets and edgebanding products, a wide selection of decorative mouldings, and components for the window and door industry. dRivER OF changE in ThE nORTh amERican maRKET aT ThE lEading EdgE OF maRKET OvER 110,000 PROducTs (SKus) in a wide variety of categories, including decorative and functional hardware for furniture and buildings — lighting systems — finishing and decorating products — ergonomic workstations — kitchen and closet storage solutions — sliding door systems — decorative and functional panels — high-pressure laminates. Private brands products and/or exclusive products coupled with product lines from the world’s leading suppliers. Several products are manufactured according to Richelieu’s specifications and those of its customers. a glOBal nETwORK OF PaRTnER suPPliERs world-leading partners renowned for their technological skills and creativity, with whom Richelieu has built lasting relationships of trust. richelieu.com Available in three languages, Richelieu.com is the leading tool of its kind in the industry. it was designed to facilitate customers’ projects and transactions and provide users with information on Richelieu’s entire offering — the most comprehensive and innovative in North America. 62 succEssFul acquisiTiOns 37 iN cANADA, 25 iN THE uNiTED STATES AN AcQuiSiTiON STRATEgy TAiLORED TO THE cORPORATiON, iTS ViSiON AND iTS MARKET. salEs CAGR: 11.6% $60 M 1993 $1 billion maRKET caPiTaliZaTiOn $1.5 billion $39 M 2018 1993 2018 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 3 susTainEd gROwTh FiNANciAL SOuNDNESS AND STABiLiTy salEs (in millions $) 2018 2017 2016 2015 2014 EquiTy aTTRiBuTaBlE TO shaREhOldERs/dEBT (in millions $) 1,004.4 942,5 844,6 942.5 742,9 844.5 622,7 749.7 511,3 646.9 2018 2017 2016 2015 2014 2.0 4.3 4.9 3.6 5.4 nET EaRnings PER shaRE aTTRiBuT aBlE TO shaREhOldERs (diluTEd) (in $) cash FlOws FROm OPERaTing acTiviTiEs (1) (in millions $) 2018 2017 2016 2015 2014 1.17 1.15 1.07 0.99 0.88 2018 2017 2016 2015 2014 470.3 434.1 394.3 362.9 309.2 84.5 80.0 73.3 68.1 60.3 (1) cash flows from operating activities is a non-iFRS measure, as indicated on page 26 of this report. Appreciation in share price (RCH) since initial stock listing: 3,479% Total return on share/ 10 years*: 436% Average annual return on share/10 years*: 18.3% *including dividend reinvestment 4 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 Financial highlighTs yEaRs EndEd nOvEmBER 30 (in thousands of $, except per share amounts, number of shares and data expressed as a %) Sales EBiTDA (1) EBiTDA margin (%) Net earnings Net earnings attributable to the shareholders of the corporation • basic per share ($) (3) • diluted per share ($) (3) Net margin attribuable to the shareholders of the corporation (%) cash flows from operating activities (2) • diluted per share ($) (3) Dividends paid to shareholders of the corporation • per share ($) (3) weighted average number of shares outstanding (diluted) (in thousands) (3) As at November 30 Total assets working capital current ratio Equity attributable to shareholders of the corporation Return on average equity (%) Book value per share ($) Total debt cash and cash equivalents 2 018 1,004,400 105,991 10.6 67,964 67,777 1.18 1.17 6.7 84,456 1.45 13,824 0.240 2 017 942,545 102,974 10.9 67,932 67,704 1.17 1.15 7.2 79 ,951 1.36 13,157 0.227 2 016 2 015 2 014 844,473 749,646 646,909 94,422 11.2 87,681 11.7 63,013 58,878 62,814 1.08 1.07 7.4 73,296 1.25 12,374 0.213 58,739 1.00 0.99 7.8 68,052 1.15 11,717 0.200 77,417 12.0 52,573 52,393 0.89 0.88 8.1 60,253 1.01 11,023 0.187 58,064 58,659 58,781 59,343 59,754 569,119 329,343 542,667 300,116 486,046 280,747 449,792 260,579 390,721 214,866 4.6 4.0 4.4 4.4 4.0 470,278 434,092 394,268 362,885 309,149 15.0 8.23 2,023 7,408 16.3 7.51 4,294 29,162 16.6 6.81 4,864 42,969 17.5 6.19 3,580 29,454 17.5 5.27 5,354 33,721 (1) EBiTDA is a non-iFRS measure, as indicated on page 26 of this report. (2) cash flows from operating activities and cash flows from operating activities per share are non-iFRS measures, as indicated on page 26 of this report. (3) All share data in this report have been restated to reflect the impact of the three-for-one split of all common shares effective February 29, 2016. 2014-2018: 14 aquisiTiOns 2018 • cabinet & Top Supply inc. (Fort Myers, Florida) • chair city Supply, inc. (North carolina, Tennessee) 2017 • Tamarack Distributors inc. (cincinnati, Ohio) • weston Premium woods inc. (Brampton, Ontario) 2016 • cabinetmakers Supply, inc. (Houston, Texas) • JFH corporation (Memphis, Tennessee) • Eveready Hardware Manufacturing co, inc. (Long island city, New york) • Neils Sorenson Hardware, inc. (Portland, Maine) 2015 • BD Enterprises, inc. (Single Source cabinet Supplies) (Dallas, Texas) 2014 • Procraft industrial Ltd. (Maritimes Provinces, canada) • Pleasantside Distribution Ltd. (western canada) • cabinetware, inc. (Florida) • XM Export-import canada inc. (Quebec) • Thruway Hardwood and Plywood corp. (New york State) R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 5 34 2 36 disTRiBuTiOn cEnTERs manuFacTuRing cEnTERs disTRiBuTiOn cEnTERs BaRRiE | BRamPTOn | calgaRy (2) | daRTmOuTh | EdmOnTOn (2) | KElOwna | KiTchEnER | laval (2) | lOnguEuil (2) mOncTOn | mOnTREal | OTTawa | quEBEc (3) | REgina | sasKaTOOn | sT. JOhn’s | sudBuRy | ThundER Bay TOROnTO (2) | vancOuvER (5) | vicTORia (2 ) | winniPEg manuFacTuRing cEnTERs: lOnguEuil | nOTRE-damE-dEs-Pins aTlanTa | BOsTOn | BuFFalO | BuRlingTOn | chaRlOTTE | chicagO | cincinnaTi | dallas | dania | dETROiT FORT myERs | gREEnsBORO | gREEnvillE | haRTFORd | hialEah | hicKORy | hOusTOn | indianaPOlis | JacKsOnvillE lincOln PaRK | lOuisvillE | mEmPhis | mORRisTOwn | nashvillE | nEw yORK (2) | ORlandO | POmPanO PORTland | RiviERa BEach | saRasOTa | savannah | sEaTTlE | syRacusE | TamPa Bay | ThOmasvillE mEssagE TO shaREhOldERs RicHARD LORD President and chief Executive Officer ThE yEaR 2018 was highlighTEd BOTh By RichEliEu’s 50Th annivERsaRy and REcORd salEs OF OvER $1 BilliOn. This gREaT milEsTOnE is a sOuRcE OF sTimulaTiOn FOR OuR whOlE TEam in canada and ThE uniTEd sTaTEs. iT is ThE REsulT OF OuR cOmmiTmEnT TO PROviding ThE BEsT cusTOmER sERvicE By POOling OuR cREaTivE TalEnTs, dEdicaTiOn, and PassiOn FOR whaT wE dO. in line with previous years, 2018 was marked by good growth, an excellent financial situation, two new acquisitions that strengthened our presence in Florida, North carolina, and Tennessee, as well as investments aimed at optimizing operational efficiency and the customer experience. Richelieu continues to stand out in its market for its innovation strategy and its comprehensive service concept across its network and on line. we are pursuing our strategy of internal and acquisition- based growth as we build on our solid financial position, our culture of innovation, the expertise of our team, and our commitment to excellence. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 7 ThROugh OuR innOvaTiOn, maRKET dEvElOPmEnT, and acquisiTiOn sTRaTEgiEs, wE cOnTinuEd TO sTREngThEn OuR PREsEncE in ThE canadian and u.s. maRKETs, Each OF which madE a sOlid cOnTRiBuTiOn TO gROwTh in 2018. Our market development efforts, the sales syner- gies created with our acquisitions, and the contri- bution of the acquisitions completed in 2018 resulted in a 6.6% increase in total sales, driven in equal parts by internal growth and acquisitions. This increase reflects the strong performances in our manufacturer and retailer markets, where sales increased by 6.4% and 7.7% respectively. Our canadian markets contributed to growth with a 6.9% increase in sales, as did our u.S. markets. u.S. sales also benefited from the strong contri- bution of our acquisitions. we are stepping up our development efforts in our main market segments in both canada and the united States and have recently made new inroads in the market for retailers. Our gross margin and EBiTDA margin remain satisfactory despite a small decline due mainly to the lower gross margins of certain acquisitions whose product mixes differ from that of Richelieu. we continue to focus our efforts on profitability when integrating acquisitions. in 2018, our investments totalled $21.4 million, including $9.0 million in acquisitions and $12.4 million in technology implementation and network improvements, par t of which went toward the reorganization of distribution centers to achieve operational synergies. we acquired $26.5 million in shares in the normal course of business and paid dividends of $13.8 million to shareholders, up 5.1%. As at November 30, 2018, our working capital stood at $329.3 million. Year after year, we are proud to report a very strong balance sheet, which enables us to enjoy excellent financial stability, pursue our growth strategy at a good pace, and remain an innova- tive and successful company. ThE acquisiTiOns clOsEd EvERy yEaR aRE BasEd On cOmPaTiBiliTy, cOmPlEmEnTaRiTy, and valuE cREaTiOn cRiTERia. ThEy PROvidE a KEy cOnTRiBuTiOn TO RichEliEu’s gROwTh. The highly fragmented market in which we oper- ate provides us with diversified acquisition oppor- tunities in our field. we take a patient and cautious approach that involves a rigorous research of suitable acquisition targets, which are consistent with our criteria of value creation and belief in our corporate culture. The acquisition strategy we have followed for over three decades is a major growth driver for Richelieu. it allows us to establish strong anchor points in new territories and strengthen our operations in markets where we already operate — while at the same time integrating expert local resources and new customers. with the February 2018 acquisition of cabinet & Top Supply, a distributor with a distribution center in Florida, we continued to expand our operations in this important market, where we now operate nine distribution centers. Then, on September 4, we closed the acquisition of chair city Supply, a distributor of specialty products serving a broad customer base of furniture manufacturers from three distribution centers in North carolina and one in Tennessee. we are very satisfied with these acquisitions, which strengthen our local teams and expand our customer base in these markets. 8 R I C H E L I E U | R A P P O R T A N N u E L 2 0 1 8 As always with our previous acquisitions, we are integrating these businesses by combining our respective strengths in order to improve systems and processes, and by creating sales and oper- ational synergies in our network. Over the past five years, we have completed four- teen acquisitions — ten in the united States and four in canada — representing additional annual sales of approximately $130 million, including $23 million from the two acquisitions closed in 2018. in KEEPing wiTh iTs cusTOmER- and innOvaTiOn- dRivEn aPPROach, RichEliEu cOnTinuEd TO maKE a diFFEREncE FOR iTs nORTh amERican cusTOmERs in 2018 — By sTanding as ThEiR PaRTnER in innOvaTiOn. we are operating in a highly creative industry in which, over the years, we have developed a global network of partners who are leading manufactur- ers of innovative products. we remain constantly aware of the emerging trends, listening closely to our customers and interacting with them and our suppliers. This is how we can bring the best decorative and functional hardware products and systems in the world to our canadian and u.S. markets. Our product strategy is built around design- forward technological innovations and decorative functional hardware products that meet the highly diverse needs of our manufacturer and retailer customers. w e are motivated by a constant concern for quality regardless the product range level, since quality is one of our core values. We provide precise, high-performance products that, because of their quality manufacturing and finish, help optimize production efficiency for our customers, saving them time, especially in the context of a skilled-labor shortage. in 2018, we continued to expand and diversify our product lines in step with global trends, including those aimed at improving the quality of life. Major innovations have been made in the area of func- tional furniture, for instance. These innovations are reflected in our incomparable selection of stylish, ergonomic storage systems for kitchens, offices, and closets and in our unique offering of functional and comfortable organization solutions for small living spaces. Very innovative solutions are also found in our wide range of sliding door systems, our vast selection of decorative panels, and our diverse categories of eco-friendly prod- ucts and architectural hardware. we are forging ahead on the path of innovation in order to anticipate our customers’ needs, provide them with ever more trendy and effective solutions for their residential and commercial projects, and contribute to the further evolution of the market. RichEliEu adaPTs and imPROvEs iTs mulTi-accEss sERvicE cOnsTanTly in ORdER TO suPPORT iTs manuFacTuRER and RETailER cusTOmERs in ThEiR cOmPETiTivEnEss sTRaTEgy, and PROvidE ThEm wiTh a FiRsT-RaTE cusTOmER ExPERiEncE. Our comprehensive service concept is based on the efficiency of our supply chain and our infor- mation management system. it relies equaly on our ability to further innovate, to provide our customers with market-leading sales support tools, as well as to keep welcoming and informa- tive showrooms, and an outstanding transactional website. The efficiency of our customer service reflects our team’s expertise and quality execution, and especially the skills and competencies of our sales and service staff — whether it’s by phone, at our sales counters, in our showrooms, directly at customer locations, or on richelieu.com. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 9 Therefore, we always ensure that our ongoing trai- ning programs maximize skills and remain well adapted to rapidly changing needs. we continue to invest in our sales and service workforce, who represents over 50% of our team. in 2018, we implemented our modular AutoStore® storage and order picking system. This robotic system has proven its effectiveness in the order picking process and storage space management, as the number of products increases to accom- modate growth. Our adaptability, product availability, and supply chain management, which is well suited to our customers’ needs, enable us to operate in “just-in-time” mode for our 80,000 manufac- turer and retailer customers in North America. We deliver the right product to the right place at the right time. We are our customers’ warehouse. Hence, we offer them the opportunity to minimize their inventory and streamline their stock management. in 2018, we further improved our information management system in order to optimize our operational efficiency and our customer service. Our i T system also includes tools for track- ing customer purchasing habits and assessing their satisfaction, which expands our individual and overall knowledge of customers for a more proactive and personalized approach. in 2018, our customers were able to access the new mobile version of richelieu.com , which includes all the site’s available functions, thus making it the most complete and efficient trans- actional mobile version in our market. Richelieu continues to differentiate itself in North America with its highly effective, trilingual transactional website for manufacturers and retailers, which is also an outstanding showcase of its complete range of products for the public. The many func- tions and benefits of richelieu.com optimize the customer experience. it is the ultimate tool for product selection and configuration and complete order administration, as evidenced by the steady increase in our online sales. in the future, innovation will remain at the core of our business model and continue to be our primary growth leverage. with our acquisition strategy, our ability to anticipate change, and ongoing operational improvements, we will seize and create opportunities that generate value for our customers, employees, suppliers, and shareholders. we are focusing our priorities on market share gains, profitability, and new acquisitions, as we continue to build on our leadership and the distinctive strengths that make Richelieu a sound, forward-looking company. we would like to thank our team, customers, suppliers, directors, and shareholders as well as all our business partners. 10 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 DIRECTORs Jocelyn Proteau Chairman of the Board Richelieu Hardware Ltd. Corporate Director Richard lord President and Chief Executive Officer Richelieu Hardware Ltd. denyse chicoyne (2) Corporate Director Robert courteau (2) President CM Management Inc. OFFICERs Richard lord President and Chief Executive Officer antoine auclair Vice-President and Chief Financial Officer guy grenier Vice-President, Sales and Marketing — Industrial geneviève quevillon Vice-President — Logistics and Supply Chain Pierre Pomerleau (1) President and Chief Executive Officer Pomerleau Group marjolaine Plante Vice-President — Human Resources mathieu gauvin (1) Senior Vice-President Investments- Private Equity Quebec Caisse de dépôt et placement du Québec marc Poulin (1) Corporate Director sylvie vachon (2) President and Chief Executive Officer Montreal Port Authority (1) Member of the Audit Committee (2) Member of the Human Resources and Corporate Governance Committee Jeff crews Vice-President, Business Development — Retailers Market, Canada craig Ratchford Vice-President, General Manager — United States Éric daignault General Manager of Divisions marion Kloibhofer General Manager — Central Canada John statton General Manager — Western Canada and Western United States yannick godeau Legal Affairs and Corporate Secretary R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 11 OuR valuEs customer focus understand the challenges, objectives, and needs of our manufacturer and retailer customers — Put ourselves in their place — Make their lives easier and exceed their expectations. innovation Be always on the lookout for the most suitable emerging trends for our customers — constantly provide customers with new ideas and solutions that help them differentiate and be competitive — Be their innovation partner. quality of service accessibility Proximity Performance Responsibility intrapreneurship Attitude, accessibility, proximity, and expertise: the watchwords of our professional sales and customer service team. Personalized local service for our 80,000 customers. Every customer is unique. No compromise on service quality. Entrepreneurial spirit, interest, passion, consistent focus on performance. Maintain a work environment conducive to creating value for the corporation’s four pillars: our customers, employees, suppliers, and shareholders. Ethical behavior Respect integrity Mutual assistance, respect, fairness, and integrity: the values that guide us within the company and in our professional practices and that earn the trust of our partners. They make us proud to work for Richelieu. 12 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 lEadERshiP in dEcORaTivE and FuncTiOnal haRdwaRE PROducTs. ThE mOsT divERsiFiEd and widEsT sElEcTiOn OF maTERials, FinishEs, TREndy and TimElEss dEsign, innOvaTivE sysTEms and mEcanisms. Collection Flowing lines Elegance Beauty Produced by world- renowned designers and manufacturers according to strict quality guidelines, our collections include innovative and unique solutions for any renovation and construction project of every size and scale. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 13 aRchiTEcTs and dEsignERs wE shaRE ThE samE gOals: mEET and ExcEEd cusTOmER ExPEcTaTiOns wiTh ThE mOsT aPPROPRiaTE and innOvaTivE sOluTiOns. 14 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 By working with architects and designers, we foster a fertile exchange of new ideas and expertise. Functionality, visual appeal, ergo- nomics, and respect for the environment are key to the success of residential, commercial, and institutional renovation and construction projects. These designers of structures and spaces are among our partners in expertise and innovation. They are regularly informed of our innovations. richelieu.com highly PERFORmanT TRilingual usER-FRiEndly — inTERacTivE all OuR OFFERings and mORE aT yOuR FingERTiPs For our customers: Selection, product configuration, and complete order processing For the public: A one-stop source of inspiration richelieu.com is constantly evolving to provide access to new features that are even more convenient and user-friendly for customers. A brand new module offers customers the opportunity to configure products according to their own specifications. nEw mOBilE vERsiOn The new mobile version includes all the functions of richelieu.com, making it the most comprehensive mobile app in our market. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 15 a cOmPlETE RangE OF caBinET dOORs and cusTOm cOmPOnEnTs A wide choice of materials and colors for great- looking residential and commercial projects in any style. customers will find an outstanding selection of panels at Richelieu, including antibacterial and scratch-, uV-, and fade-resistant models. Made of high quality materials, they are easy to match and maintain. Our exclusive collections of high-tech LED light- ing enhance and brighten up functional layouts while illuminating work surfaces, shelving, and drawers. 16 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 Full ExTEnsiOn sliding sysTEms — EFFORTlEss, Fluid, and silEnT mOvEmEnT Sliding system with high storage capacity that adapts to kitchen cabinets and provides complete visibility and access to content. intelligent system in an elegant design ideally suited for large wall units, with a compactly folding cabinet door with a multifunctional stop secured in each position when lifted. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 17 whEThER in a REsTauRanT OR aT hOmE, ThE winE cEllaR REquiREs an EFFiciEnT, saFE, and visually aPPEaling layOuT. A wide range of storage solutions for traditional and contemporary wine cellars. Frames and systems in various materials such as aluminium and chemical- free torrefied wood. Bottle holder in aluminium Most innovative products and systems which facilitate the implementation of every commercial and institutional project. 18 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 FOR CLOsET sTORAgE sOLUTIONs: THE MOsT COMPREHENsIvE RANgE OF HARdWARE PROdUCTs ANd sYsTEMs ON THE MARkET. Energy-efficient lighting in elegant, modern designs to illuminate and enhance closets, various storage spaces, and bathrooms. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 19 A wide selection of decorative panels provides customers with inspiration for their renovation projects. Manufactured to the highest quality standards, these panels help dress up and soundproof living and working spaces. smart living A complete and versatile lineup of products and mechanisms for multifunctional beds, sliding doors, and retractable tables, benches, and accessories—ideal for optimizing space in small apartments and offices. 20 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 Sound-deadening panels, adjustable mechanisms, innovative casters, and accessories for the ergonomic office. State-of-the-art materials and integrated lighting for stylish and sustainable commercial decors. New line of casters by Philippe Stark New line of handles by Jean-claude Poitras R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 21 Store displays provided by Richelieu wE aRE a lEading PaRTnER FOR ThOusands OF small and mid-siZEd haRdwaRE sTOREs, cEnTERs and REnOvaTiOn suPERsTOREs. we provide our customers with high quality sales tools, which are regularly updated to reflect our evolving offer, as well as we give the closest attention to the quality of welcoming and service in our showrooms adjacent to our distribution centers. 22 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 sOcial and EnviROnmEnTal REsPOnsiBiliTy More than ever, we are concerned with environmental issues. We strive to minimize the environmental impact of our activities by ensuring the responsible management of waste, energy consumption, and greenhouse gas emissions. • We work closely with our suppliers and distribution centers to reduce waste as much as possible by paying special attention to product packaging and optimizing product transportation. • To facilitate the management of recyclable materials, we analyze each of our sites according to waste material type and recovery and use appropriate collection equipment. • We promote energy conservation through a variety of measures applied across all our departments and centers. • To minimize environmental impact, waste, and printing costs, we are working on elim- inating paper reports as much as possible, and optimizing our printer fleet. • We have established partnerships with carri- ers to minimize our carbon footprint. We are committed to supporting causes that contribute to the well-being of the communi- ties we have connections with. Our social role focuses in large part on education, culture and sports for young people, and on physical and mental health and heritage conservation. Each year, we renew and diversify our commitment to community and charitable organizations that support these vital causes. Our ecolabeled product offerings continue to expand to meet the needs of green construc- tion and renovation projects. Thousands of certified products and innovative, high-quality solutions are available at our centers and at richelieu.com, including laminates made from all-natural materials, panels made of recycled oak wood, product lines made with recycled fiber, and handles, knobs, LED lighting, and finishing products that meet the highest stan- dards and specifications. R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 23 managEmEnT’s REPORT MANAgEMENT’S DiScuSSiON AND ANALySiS OF OPERATiNg RESuLTS AND FiNANciAL POSiTiON cOnTEnTs 25 2018 Highlights 26 Forward-Looking Statements 26 Non-iFRS Measures 27 general Business Overview as at November 30, 2018 27 Mission and Strategy 28 Financial Highlights 28 Analysis of Operating Results 29 Summary of Quarterly Results 30 Fourth Quarter 31 Financial Position 32 contractual commitments 32 Financial instruments 32 internal control over Financial Reporting 33 Significant Accounting Policies and Estimates 33 New Accounting Methods 34 Risk Factors 35 Share information 35 Outlook 35 Supplementary information ____________________________________________________ 36 Management’s Report and independent Auditors’ Report 37 consolidated Financial Statements 41 Related Notes 24 R I C H E L I E U | A N N u A L R E P O R T 2 0 1 8 HigHligHts of tHe Year ended november 30, 2018 Richelieu continued to grow at a steady pace in 2018 while making acquisitions and investing in market de- velopment, facility improvements and implementing new technologies. Its innovation, acquisition, de- velopment and web strategies, which have proven themselves over the years, resulted in solid internal and acquisition-based growth, enabling the Corporation to surpass the $1 billion mark in sales in 2018, the year of its 50th anniversary. With the acquisition of Cabinet & Top Supply, Inc., Richelieu further enhanced its pos- ition in Florida, where it now operates nine distribution centers, while the acquisition of Chair City Supply, Inc. strengthened its presence, product offering and client base in the important furniture manufacturer market. As at November 30, 2018, as in previous years, the Cor- poration’s financial position was impeccable, with al- most no debt and an excellent liquidity ratio. Richelieu is pursuing its growth strategy on a solid footing by focusing on operational profitability, sales synergies with its recent acquisitions, and strategic investments aimed at increasing its long-term value. • Consolidated sales totalled $1,004.4 million, up 6.6%, 3.2% of which from internal growth and 3.4% from acqui- sitions. • Earnings before income taxes, interest and amortiza- tion (EBITDA) (1) grew by 2.9% to $106 million. EBITDA margin stood at 10.6%. • Net earnings attributable to shareholders amounted to $67.8 million or $1.18 per share (basic) and $1.17 (diluted), up by 0.9% and 1.7% respectively. • Cash flows from operating activities (1) (before net change in non-cash working capital balances) grew by 5.6% to $84.5 million. • Working capital increased by 9.7% to $329.3 million, with a current ratio of 4.6:1. • Cash and cash equivalents totalled $7.4 million. • Total debt was $2.0 million. • Repurchase of 966,143 common shares for $26.5 million and payment of $13.8 million in dividends to sharehold- ers (representing 20.4% of net earnings attributable to shareholders for fiscal year 2018). Richelieu thus distrib- uted $40.3 million to shareholders in 2018 while retaining the financial resources necessary for growth in 2019. Two (2) acquisitions during the year: • February 26, 2018 — Principal net assets of Cabinet & Top Supply, Inc., a specialty products distributor located in Fort Myers, Florida; • September 4, 2018 — Principal net assets of Chair City Supply, Inc., a distributor of specialty products operating four distribution centers, three in North Carolina and one in Tennessee. (1) EBITDA and cash flows from operating activities are non-IFRS measures, as indicated on page 26 of this report. R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 25 This Management’s Discussion and Analysis (“MD&A”) re- lates to Richelieu Hardware ltd.’s consolidated operating re- sults and cash flows for the year ended November 30, 2018, in comparison with the year ended November 30, 2017, as well as the Corporation’s financial position as at those dates. This report should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended November 30, 2018, appearing in the Cor- poration’s Annual Report. In this MD&A, “Richelieu” or the “Corporation” designates, as the case may be, Richelieu Hardware ltd. and its subsidiaries and divisions, or one of its subsidiaries or divisions. Supplementary information, such as the Annual Information Form, interim MD&As, Manage- ment Proxy Circular, certificates signed by the Corporation’s President and Chief Executive Officer and Vice-President and Chief Financial Officer, as well as press releases issued during the year ended November 30, 2018, is available on the website of the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. The information contained in this MD&A accounts for any major event occurring prior to January 24, 2019, on which date the audited consolidated financial statements and an- nual MD&A were approved by the Corporation’s Board of Directors. unless otherwise indicated, the financial infor- mation presented below, including tabular amounts, is ex- pressed in Canadian dollars and prepared in accordance with International Financial Reporting Standards (“IFRS”). FORWARD-LOOKING STATEMENTS Certain statements set forth in this MD&A, including state- ments relating to the expected sufficiency of cash flows to cover contractual commitments, maintain growth and pro- vide for financing and investing activities, the growth outlook, Richelieu’s competitive position in its industry, Richelieu’s ability to weather the current economic context and access other external financing, the closing of new acquisitions, and other statements not pertaining to past events, con- stitute forward-looking statements. In some cases, these statements are identified by the use of terms such as “may,” “could,” “might,” “intend,” “should,” “expect,” “project,” “plan,” “believe, “estimate” or the negative form of these ex- pressions or other comparable variants. These statements are based on the information available at the time they were prepared and management’s good-faith assumptions and expectations regarding future events. Assumptions are that economic conditions and exchange rates will not significant- ly deteriorate, the Corporation’s deliveries will be sufficient to fulfil Richelieu’s needs, the availability of credit will re- main stable during the year and no extraordinary events will require supplementary capital expenditures. Although management believes these assumptions and ex- pectations to be reasonable based on the information avail- able at the time they were prepared, they could prove inaccu- rate. Forward-looking statements are also subject, by their very nature, to known and unknown risks and uncertainties such as those related to the industry, acquisitions, labour relations, credit, key officers, supply and product liability, as well as other factors set forth in the Corporation’s 2018 An- nual Report (see the “Risk Factors” section on page 34 of the 2018 Annual Report available on SEDAR at www.sedar.com). Richelieu’s actual results could differ materially from those indicated or underlying these forward-looking statements. The reader is therefore recommended not to place undue reliance on these forward-looking statements. Forward- looking statements do not reflect the potential impact of special items, any business combination or any other trans- action that may be announced or occur subsequent to the date hereof. Richelieu undertakes no obligation to update or revise the forward-looking statements to account for new events or new circumstances, except where provided for by applicable legislation. NON-IFRS MEASURES Richelieu uses earnings before interest, income taxes and amortization (“EBITDA”) as we believe this measure enables management to assess the Corporation’s operational per- formance. This measure is a widely accepted financial in- dicator of a Corporation’s ability to service and incur debt. However, EBITDA should not be considered by an investor as an alternative to operating income or the net earnings attrib- utable to shareholders of the Corporation, as an indicator of financial performance or cash flows, or as a measure of liquidity. Since EBITDA is not a standardized measurement prescribed by IFRS, it may not be comparable to EBITDA of other companies. Richelieu also uses cash flows from operating activities and cash flows from operating activities per share. Cash flows from operating activities are based on net earnings plus amortization of property, plant and equipment and intan- gible assets, deferred tax expense (or recovery) and share- based compensation expense. These additional measures do not account for net change in non-cash working capital items to exclude seasonality effects and are used by man- agement in its assessments of cash flows from long-term operations. Therefore, cash flows from operating activities may not be comparable to cash flows from operating activi- ties of other companies. 26 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 GENERAL BUSINESS OVERVIEW as at November 30, 2018 MISSION AND STRATEGY Richelieu’s mission is to create shareholder value and con- tribute to its customers’ growth and success, while favour- ing a business culture focused on service quality and re- sults, partnership and entrepreneurship. To sustain its growth and remain a leader in its specialty market, the Corporation continues to implement a proven, highly beneficial strategy focused on: • Continuously strengthening product selection by intro- ducing diversified new products each year to meet mar- ket segment needs and develop its niche as a functional and decorative hardware specialist for manufacturers and retailers. • Further developing current markets in Canada and the united States with the support of a specialized sales and marketing force to provide customers with personalized service. • Continuing to expand in North America by opening new distribution centres and making attractively priced, ef- ficiently integrated and profitable acquisitions that offer high growth potential and a good fit for its product mix and expertise. Richelieu’s solid and efficient organization, highly diversified product selection and long-term relationships with lead- ing suppliers worldwide allows it to compete effectively in a fragmented market consisting mainly of a large number of regional distributors offering a limited range of products. Richelieu is a leading North American importer, distribu- tor and manufacturer of specialty hardware and related products. Its products target an extensive customer base of kitchen and bathroom cabinet, storage and closet, home furnish- ing and office furniture manufacturers, residential and commercial woodworkers, as well as hardware retailers including renovation superstores. The residential and com- mercial renovation industry is the Corporation’s principal growth driver. Richelieu offers customers a broad mix of products sourced from manufacturers worldwide. The solid relationships Richelieu has built with the world’s leading suppliers enable it to provide customers with the latest innovative products tailored to their business needs. The Corporation’s product selection consists of over 110,000 different items targeting a base of more than 80,000 customers served by 72 cen- ters across North America with 34 distribution centers in Canada, 36 distribution centers in the united States and two manufacturing plants in Canada. Main product categories include furniture, glass and build- ing decorative and functional hardware, lighting systems, finishing and decorating products, ergonomic workstation components, kitchen and closet storage solutions, slid- ing door systems, decorative and functional panels, high- pressure laminates and floor protection products. This of- fering is completed by the Corporation’s two manufacturing subsidiaries, les Industries Cedan inc. and Menuiserie des Pins ltée, which manufacture a variety of veneer sheets and edgebanding products as well as a broad selection of deco- rative mouldings and components for the window and door industry. In addition, many of the Corporation’s products are manufactured according to its specifications and those of its customers. The Corporation employs over 2,100 people at its head office and throughout the network, nearly to half of whom work in marketing, sales and customer service. More than 50% of its employees are Richelieu's shareholders. R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 27 FINANCIAL HIGHLIGHTS (in thousands of $, except per-share amounts, number of shares and data expressed as a %) Years ended November 30 Sales EBITDA(1) EBITDA margin (%) Net earnings Net earnings attributable to shareholders of the Corporation • per share - basic ($) (3) • per share - diluted ($) (3) Net margin attributable to the shareholders of the Corporation (%) 2018 $ 2017 $ 2016 $ 2015 $ 2014 $ 1,004,400 942,545 844,473 749,646 646,909 105,991 102,974 94,422 87,681 77,417 10.6 10.9 11.2 11.7 12.0 67,964 67,777 67,932 67,704 63,013 62,814 58,878 58,739 52,573 52,393 1.18 1.17 6.7 1.17 1.15 7.2 1.08 1.07 7.4 1.00 0.99 7.8 0.89 0.88 8.1 Cash flows from operating activities (2) 84,456 79,951 73,296 68,052 60,253 • per share - diluted ($) (3) 1.45 1.36 1.25 1.15 1.01 Dividends paid to Shareholders of the Corporation 13,824 13,157 12,374 11,717 11,023 • per share ($) (3) 0.240 0.227 0.213 0.200 0.187 Weighted average number of shares outstanding (diluted) (in thousands) (3) 58,064 58,659 58,781 59,343 59,754 As at November 30 Total assets Working capital Current ratio 569,119 542,667 486,046 449,792 390,721 329,343 300,116 280,747 260,579 214,866 4.6 4.0 4.4 4.4 4.0 Equity attributable to shareholders of the Corporation 470,278 434,092 394,268 362,885 309,149 Return on average equity (%) Book value per share ($) Total debt Cash and cash equivalents 15.0 8.23 2,023 7,408 16.3 7.51 16.6 6.81 17.5 6.19 17.5 5.27 4,294 4,864 3,580 5,354 29,162 42,969 29,454 33,721 (1) EBITDA is a non-IFRS measure, as indicated on page 26 of this report. (2) Cash flows from operating activities and cash flows from operating activities per share are non-IFRS measures, as indicated on page 26 of this report. (3) All share data in this report have been restated to reflect the impact of the three-for-one split of all common shares effective February 29, 2016. ANALYSIS OF OPERATING RESULTS FOR THE YEAR ENDED NOVEMBER 30, 2018, COMPARED WITH THE YEAR ENDED NOVEMBER 30, 2017 Consolidated sales (in thousands of $, except exchange rates) Years ended November 30 Canada united States (CA$) (uS$) 2018 $ 2017 $ ∆ (%) 678,314 634,676 326,086 307,869 252,738 236,504 +6,9 +5.9 +6.9 Average exchange rates 1.2902 1.3017 Consolidated sales 1,004,400 942,545 +6.6 Consolidated sales reached $1,004.4 million, an increase of $61.9 million or 6.6% over 2017, of which 3.2% from internal growth and 3.4% from acquisitions. At comparable exchange rates to 2017, consolidated sales growth would have been 6.9% for the year ended November 30, 2018. Sales to manufacturers grew to $850.9 million, compared with $800.0 million for 2017, an increase of $50.9 million or 6.4%, 2.4% of which from internal growth and 4.0% from ac- quisitions. Sales to hardware retailers and renovation super- stores grew by 7.7% or $11.0 million to total $153.5 million. 28 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 In Canada, Richelieu achieved sales of $678.3 million, compared with $634.6 million for 2017, up by $43.7 million or 6.9%, of which 4.1% from internal growth and 2.8% from acquisitions. Sales to manufacturers rose to $549.1 million, up by $42.1 million or 8.3%, of which 4.8% from internal growth and 3.5% from acquisitions. Sales to hardware retailers and renovation superstores reached $129.2 million, compared with $127.6 million, up by $1.6 million or 1.3% over 2017. In the United States, the Corporation recorded sales of uS$252.7 million, compared with uS$236.5 million for 2017, an increase of uS$16.2 million or 6.9%, of which 2.2% from inter- nal growth and 4.7% from acquisitions. Sales to manufactur- ers totalled uS$233.9 million, compared with uS$225.0 mil- lion, an increase of uS$8.9 million or 4.0% over 2017, of which 4.8% from acquisitions and, due to the termination of a sup- ply agreement with a major customer, an internal decrease of 0.8%. With comparable sales, internal growth in the manufac- turers market would have been 6.3%. Sales to hardware re- tailers and renovation superstores were up by 63.5% from the previous year resulting primarily from our market development efforts, the addition of new customers and significant cyclical sales. Considering exchange rates, u.S. sales expressed in Canadian dollars amounted to $326.1 million, compared with $307.9 million for 2017, an increase of 5.9%. They accounted for 32.5% of consolidated sales in 2018, whereas they represented 32.6% of the year’s consolidated sales in 2017. Consolidated EBITDA and EBITDA margin (in thousands of $, unless otherwise indicated) Years ended November 30 Sales EBITDA 2018 $ 1,004,400 105,991 2017 $ 942,545 102,974 Consolidated net earnings attributable to shareholders (in thousands of $, unless otherwise indicated) Years ended November 30 EBITDA Amortization of property, plant and equipment and intangible assets Financial costs, net Income taxes Net earnings Net earnings attributable to shareholders of the Corporation Net margin attributable to the shareholders of the Corporation(%) Non-controlling interests Net earnings 2018 2017 $ $ 105,991 102,974 13,200 11,454 65 (193) 24,762 23,781 67,964 67,932 67,777 67,704 6.7 187 7.2 228 67,964 67,932 Net earnings remained stable. Considering non-controlling interests, net earnings attributable to shareholders of the Corporation totalled $67.8 million, an increase of 0.1% over 2017. Net earnings per share amounted to $1.18 basic and $1.17 diluted, compared with $1.17 basic and $1.15 diluted for 2017, an increase of 0.9% and 1.7% respectively. Comprehensive income totalled $71.7 million, considering a positive adjustment of $3.7 million on translation of the financial statements of the subsidiary in the united States, compared with $63.5 million for 2017, considering a nega- tive adjustment of $4.4 million on translation of the financial statements of the subsidiary in the united States. SUMMARY OF QUARTERLY RESULTS (unaudited) (in thousands of $, except per-share amounts) EBITDA margin (%) 10.6 10.9 Quarters 1 2 3 4 Earnings before income taxes, interest and amortization (EBITDA) totalled $106.0 million, up by $3.0 million or 2.9% over 2017. The gross margin was slightly down from 2017 in- fluenced by the lower gross margins of some recent acquisi- tions due to their different product mix. Considering the con- tinued investments in market development, the reorganization of some distribution centers and the cost of implementing new technologies, the EBITDA margin stood at 10.6%, compared with 10.9% for 2017. Amortization expenses amounted to $13.2 million compared with $11.5 million for the corresponding quarter of 2017, an in- crease of $1.7 million resulting mainly from investments made in property, plant and equipment. Income taxes amounted to $24.8 million, an increase of $1.0 million over 2017. 2018 • Sales • EBITDA • Net earnings attribut able to shareholders of the Corporation basic per share diluted per share 2017 • Sales • EBITDA • Net earnings attribut able to shareholders of the Corporation basic per share diluted per share 2016 • Sales • EBITDA • Net earnings attribut able to shareholders of the Corporation basic per share diluted per share 221,980 263,365 260,565 258,490 19,803 28,080 28,926 29,182 12,704 18,174 18,389 18,510 0.32 0.32 0.32 0.32 0.22 0.22 0.31 0.31 195,909 243,269 253,190 250,177 30,061 26,648 27,924 18,341 11,998 0.21 0.20 17,587 0.30 0.30 18,135 0.31 0.31 19,984 0.34 0.34 188,909 217,413 220,155 217,996 28,696 23,074 16,170 25,942 10,861 0.19 0.18 15,408 0.27 0.26 17,331 0.30 0.30 19,214 0.33 0.33 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 29 Quarterly variations in earnings — The first quarter closed at the end of February is generally the year’s weakest for Richelieu in light of the smaller number of business days due to the end-of-year holiday period and a wintertime slowdown in renovation and construction work. The third quarter ending August 31 also includes a smaller number of business days due to the summer holidays, which can be reflected in the period’s financial results. The second and fourth quarters re- spectively ending May 31 and November 30 generally repre- sent the year’s most active periods. Note: For further information about the Corporation’s performance in the first, second and third quarters of 2018, the reader is referred to the interim management’s reports available on SEDAR’s website at www.sedar.com. FOURTH QUARTER ENDED NOVEMBER 30, 2018 Fourth-quarter consolidated sales amounted to $258.5 mil- lion, compared with $250.2 million for the corresponding quarter of 2017, an increase of $8.3 million or 3.3%, of which 1.0% from internal growth and 2.3% from acquisitions. At comparable exchange rates to the fourth quarter of 2017, the consolidated sales growth would have been 2.0% for the quar- ter ended November 30, 2018. Richelieu achieved sales of $224.2 million in the manufac- turers market, compared with $213.7 million for the fourth quarter of 2017, an increase of $10.5 million or 4.9%, of which 2.2% from internal growth and 2.7% from acquisitions. Sales to hardware retailers and renovation superstores stood at $34.3 million, down by $2.2 million or 6.0% over the fourth quarter of 2017. In Canada, Richelieu recorded sales of $174.6 million, an in- crease of $0.1 million over the fourth quarter of 2017. Sales to manufacturers amounted to $144.2 million, an increase of 2.3% from internal growth. Sales to hardware retailers and renovation superstores reached $30.4 million, down by $3.2 million or 9.5%, caused by higher cyclical sales in the same period of 2017 and a decrease in the level of purchases from some major customers in the fourth quarter of 2018. In the United States, sales totalled uS$64.1 million, compared with uS$60.3 million for the fourth quarter of 2017, an in- crease of uS$3.8 million or 6.3%, of which 7.2% from acquisi- tions and an internal decrease of 0.9% (up 8.6% at comparable sales). Sales to manufacturers amounted to uS$61.1 million, an increase of uS$3.1 million or 5.3% over the fourth quar- ter of 2017, of which 7.5% from acquisitions, while the internal decrease was 2.2% due to the termination of a supply agree- ment with a major customer (up 7.7% at comparable sales). Sales to hardware retailers and renovation superstores were up by 30.4% from the corresponding quarter of 2017. Consid- ering exchange rates, total u.S. sales expressed in Canadian dollars stood at $83.9 million, an increase of 10.8%. They ac- counted for 32.5% of consolidated sales for the fourth quarter of 2018, whereas they had represented 30.3% of the period’s consolidated sales for the fourth quarter of 2017. Earnings before income taxes, interest and amortization (EBITDA) amounted to $29.2 million compared with $30.1 mil- lion in the fourth quarter of 2017. The gross margin and the EBITDA margin were influenced by lower gross margins of certain recent acquisitions due to their different product mix as well as to lower sales in the Canadian retailers market and uS market development costs. The EBITDA margin stood at 11.3%, compared with 12.0% for the fourth quarter of 2017. Amortization expenses amounted to $3.5 million compared with $2.9 million for the corresponding quarter of 2017, an in- crease of $0.6 million resulting mainly from investments made in property, plant and equipment. Income taxes amounted to $7.2 million, stable compared with 2017. Net earnings was down by 7.3% year over year. Considering non-controlling interests, net earnings attributable to shareholders of the Corporation amounted to $18.5 million, down by 7.4% over the fourth quarter of 2017. Net earnings per share reduced to $0.32 basic and diluted, compared with $0.34 basic and diluted for the fourth quarter of 2017, a de- crease of 5.9%. Comprehensive income amounted to $20.7 million, consid- ering a positive adjustment of $2.2 million on translation of the financial statements of the subsidiary in the united States, compared with $22.8 million for the fourth quarter of 2017, considering a positive adjustment of $2.8 million on transla- tion of the financial statements of the subsidiary in the united States. Cash flows from operating activities (before net change in non-cash working capital balances) amounted to $23.4 mil- lion or $0.40 per share, compared with $22.2 million or $0.38 per share for the fourth quarter of 2017, an increase of 5.4% resulting primarily from deferred taxes. Net change in non- cash working capital balances represented a cash inflow of $2.2 million, reflecting the change in inventory ($5.4 mil- lion), whereas the change in accounts receivable and pay- able and other items represented a cash inflow of $7.6 mil- lion. Consequently, operating activities provided cash flows of $25.5 million, compared with $19.8 million for the fourth quarter of 2017. Financing activities used cash flows of $14.8 million, com- pared with $13.7 million for the fourth quarter of 2017. This change was primarily driven by common shares buyback of $12.4 million in the fourth quarter of 2018 compared with $10.6 million for the same quarter in 2017. Investing activities represented a cash outflow of $11.2 mil- lion in the fourth quarter, of which $7.0 million for the acquisi- tion of Chair City Supply, Inc. and $4.2 million for equipment to improve operational efficiency, improvements to some build- ings and IT equipment. 30 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 FINANCIAL POSITION Investing activities Analysis of principal cash flows for the year ended November 30, 2018 Change in cash and cash equivalents and capital resources (in thousands of $, unless otherwise indicated) Years ended November 30 Cash flows provided by (used for): Operating activities Financing activities Investing activities 2018 $ 2017 $ 42,272 55,956 (42,284) (26,547) (21,373) (43,324) Effect of exchange rate fluctuations (369) 108 Net change in cash and cash equivalents (21,754) (13,807) Cash and cash equivalents, beginning of year 29,162 42,969 Cash and cash equivalents end of year As at November 30 Working capital Renewable line of credit (CA$) Renewable line of credit (uS$) Operating activities 7,408 29,162 2018 2017 329,343 300,116 50,000 6,000 50,000 6,000 Cash flows from operating activities (before net change in non-cash working capital balances) reached $84.5 million or $1.45 diluted per share, compared with $80.0 million or $1.36 diluted per share for 2017, an increase of 5.6% stem- ming primarily from depreciation and deferred taxes. Net change in non-cash working capital balances used cash flows of $42.2 million, mainly due to investment in inventory as a result of adding new products in order to increase sales in the future. Consequently, operating activities provided cash flows of $42.3 million compared with $56.0 million for 2017. Financing activities Financing activities used cash flows of $42.3 million, com- pared with $26.5 million for 2017. During the year, Richelieu repurchased common shares for cancellation for $26.5 mil- lion, compared with $14.8 million in 2017. The Corpora- tion paid dividends to shareholders of $13.8 million, up by 5.1% over 2017 and made a debt repayment in the amount of $3.9 million compared with $1.2 million for fiscal 2017. Investing activities represented a total cash outflow of $21.4 million, of which $9.0 million for business acquisitions and $12.4 million for equipment to improve operational effi- ciency. Sources of financing As at November 30, 2018, cash and cash equivalents amount- ed to $7.4 million, compared with $29.2 million as at Nov- ember 30, 2017. The Corporation posted a working capital of $329.3 million for a current ratio of 4.6:1, compared with $300.1 million (4.0:1 ratio) as at November 30, 2017. Richelieu believes it has the capital resources to fulfill its ongoing commitments and obligations and to assume the funding requirements needed for its growth and the financing and investing activities between now and the end of 2019. The Corporation continues to benefit from an authorized line of credit of $50 million as well as a line of credit of uS$6 million renewable annually and bearing interest at prime and base rates respectively. In addition, Richelieu considers it could obtain access to other outside financing if necessary. The expectation set forth above consists of forward-looking infor- mation based on the assumption that economic conditions and ex- change rates will not deteriorate significantly, operating expenses will not increase considerably, deliveries will be sufficient to ful- fill Richelieu’s requirements, the availability of credit will remain stable in 2019, and no unusual events will entail additional capital expenditures. This expectation also remains subject to the risks identified under the “Risk Factors” section. Analysis of financial position as at November 30, 2018 Summary of financial position (in thousands of $, except exchange rates) As at November 30 Current assets Non-current assets Total Current liabilities Current liabilities Equity attributable to shareholders of the Corporation Non-controlling interests Total 2018 $ 2017 $ 419,844 399,187 149,275 143,480 569,119 542,667 90,501 99,071 5,132 5,392 470,278 434,092 3,208 4,112 569,119 542,667 Exchange rates on translation of a subsidiary in the united States 1.330 1.289 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 31 Assets CONTRACTUAL COMMITMENTS Total assets amounted to $569.1 million as at Novem- ber 30, 2018, compared with $542.7 million as at Novem- ber 30, 2017. Current assets increased by 5.2% or $20.7 mil- lion from November 30, 2017. Owing mainly to inventory growth in fiscal 2018. Summary of contractual financial commitments as at November 30, 2018 (in thousands of $)) Less than 1 year Between 1 and 5 years More than 5 years Total Cash position (in thousands of $) As at November 30 long-term debt 2,023 — — 2,023 2018 $ 2017 $ Operating leases 12,678 30,980 14,184 57,842 Total 14,701 30,980 14,184 59,865 Current portion of long-term debt 2,023 4,294 long-term debt Total debt Cash and cash equivalents — — 2,023 4,294 7,408 29,162 As at November 30, 2018, the Corporation continues to bene- fit from a healthy and solid financial position. Total debt was $2.0 million representing balances payable on acquisitions. Equity attributable to shareholders of the Corporation to- talled $470.3 million as at November 30, 2018, compared with $434.1 million as at November 30, 2017, an increase of $36.2 million. That increase is mainly due to a rise of $28.5 million in retained earnings, which amounted to $405.4 million, and $3.9 million of share capital and con- tributed surplus, while accumulated other comprehensive income increased by $3.7 million. As at November 30, 2018, the book value per share was $8.23, up by 9.6% over Novem- ber 30, 2017, and the return on average shareholders’ equity was 15.0%. As at November 30, 2018, the Corporation’s share capital consisted of 57,114,234 common shares (57,795,603 shares as at November 30, 2017). In 2018, upon the exercise of stock options under the stock option plan, Richelieu issued 284,774 common shares at an average price of $8.11 (333,225 in 2017 at an average price of $8.34). In addition, 966,143 common shares were repurchased for cancellation under the nor- mal course issuer bid for a cash consideration of $26.5 mil- lion (458,088 common shares for a cash consideration of $14.8 million in 2017). The Corporation granted 357,000 stock options during the year (329,500 in 2017). Consequently, as at November 30, 2018, 1,669,475 stock options were outstanding (1,637,361 as at No- vember 30, 2017). For 2019 and the foreseeable future, the Corporation expects cash flows from operating activities and other sources of fi- nancing to meet its ongoing contractual commitments. The expectation set forth above consists of forward-looking infor- mation based on the assumption that economic conditions and ex- change rates will not deteriorate significantly, operating expenses will not increase considerably, deliveries will be sufficient to ful- fill Richelieu’s requirements, the availability of credit will remain stable in 2019, and no unusual events will entail additional capital expenditures. This expectation also remains subject to the risks identified under the “Risk Factors” section. FINANCIAL INSTRUMENTS Richelieu periodically enters into foreign exchange forward contracts to fully or partially hedge the effects of foreign currency fluctuations related to foreign-currency denominated payables or to hedge forecasted purchase transactions. The Corporation has a policy of not entering into derivatives for speculative or negotiation purposes and to enter into these contracts only with major financial institutions. Richelieu also uses equity swaps to reduce the effect of fluctuations in its share price on net earnings in connection with its deferred share unit plan. In notes (1) and (12) of the audited consolidated financial statements for the year ended November 30, 2018, the Corporation presents the information on the classification and fair value of its financial instruments, as well as on their value and management of the risks arising from their use. INTERNAL CONTROL OVER FINANCIAL REPORTING Management has designed and evaluated internal controls over financial reporting (ICFR) and disclosure controls and procedures (DC&P) to provide reasonable assurance that the Corporation’s financial reporting is reliable and that its pub- licly disclosed financial statements are prepared in accord- ance with IFRS. The President and Chief Executive Officer and the Vice-President and Chief Financial Officer have assessed, within the meaning of National Instrument 52-109 - Certifica- tion of Disclosure in Issuers’ Annual and Interim Filings, the design and the effectiveness of internal controls over finan- cial reporting as at November 30, 2018. In light of this assess- ment, they concluded that the design and the effectiveness of internal controls over financial reporting (ICFR and DC&P) were effective. During the year ended November 30, 2018, 32 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 management ensured that there were no material changes in the Corporation’s procedures that were reasonably likely to have a material impact on its internal control over financial reporting. No such changes were identified. Due to their intrinsic limits, internal controls over financial re- porting only provide reasonable assurance and may not pre- vent or detect misstatements. In addition, projections of an assessment of effectiveness in future periods carry the risk that controls will become inappropriate as a result of changes in conditions or if the degree of conformity with standards and methods should deteriorate. SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES The Corporation’s audited consolidated financial statements for the year ended November 30, 2018, have been prepared by management in accordance with International Financial Reporting Standards (IFRS). The preparation of the consoli- dated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on management’s best knowledge of current events and actions that the Corporation may undertake in the future and other factors deemed rel- evant and reasonable. The judgments made by management in applying the ac- counting policies that have the most significant effect on the amounts recognized in the consolidated financial statements and the assumptions about the future and other major sources of estimation uncertainty as at the end of the reporting period that could potentially result in material adjustments to the carrying amount of assets and liabilities during the following period are summarized as follows: Valuation of inventory impairment, including loss and obso- lescence. The use of judgment and assumptions that may affect the amounts reported in the consolidated financial statements. The underlying estimates and assumptions are reviewed regularly. Revised accounting estimates, if any, are recognized in the period in which the estimates are revised, as well as in the future periods affected by the revisions. Actual results could differ from those estimates. NEW ACCOUNTING METHODS Recently issued IFRS 9, Financial Instruments IFRS 9, Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement, and includes a single approach to determine whether a financial asset is measured at amortized cost or fair value, a new hedge accounting model to enable financial statement users to better understand an entity’s risk exposure and its risk management activities, and a new impairment model for financial assets based on expected credit losses. IFRS 9 is effective for the Corporation’s fiscal year beginning on December 1, 2018. The Corporation has completed its assessment of IFRS 9 and concluded that it will not have a significant impact on the consolidated financial statements. IFRS 15, Revenue from Contracts with Customers IFRS 15, Revenue from Contracts with Customers, replaces IAS 18, Revenue, IAS11, Construction Contracts and related interpretations. under IFRS15 standard, revenue is recog- nized at the point in time when control of the goods or servi- ces transfers to the customer rather than when the significant risks and rewards are transferred. The new standard also re- quires additional disclosures through notes to financial state- ments. IFRS 15 is effective for the Corporation’s fiscal year be- ginning on December 1, 2018. The Corporation has completed its assessment of IFRS 15 and concluded that it will not have a significant impact on the consolidated financial statements. IFRS 16, Leases IFRS 16, leases replaces IAS 17, leases and related interpretations. The new standard brings most leases on- balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17 leases and related interpretations and is effective for periods beginning on or after January 1, 2019, thus for the Corporation’s fiscal year beginning on December 1, 2019. Earlier adoption is permitted if IFRS 15, Revenue from Contracts with Customers, has also been applied. The Corporation being committed under operating leases for warehouse and office premises, it expects that the adoption of IFRS 16 will result in the recognition, in the consolidated statement of financial position, of a related asset and a liability and, in the consolidated statement of earnings, of a reduction in rent expense and an increase in financial costs and amortization of property, plant and equipment. The Company is currently evaluating the impact of the new standard on its consolidated financial statements R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 33 RISK FACTORS Supply and inventory management Richelieu is exposed to different risks that can have a mate- rial adverse effect on its profitability. To offset such risks, the Corporation has adopted various strategies adapted to the major risk factors below: Economic conditions The Corporation’s business and financial results partly depend on general economic conditions and the economic factors specific to the renovation and construction industry. Any economic downturn could lead to a decline in sales and have an adverse impact on the Corporation’s financial performance. Richelieu must anticipate and meet its customers’ supply needs. To that end, Richelieu must maintain solid relation- ships with suppliers respecting its supply criteria. The inabil- ity to maintain such relationships or to efficiently manage the supply chain and inventories could affect the Corporation’s financial position. Similarly, Richelieu must track trends and its customers’ preferences and maintain inventories meeting their needs, failing which its financial performance could be adversely affected. To mitigate its supply-related risks, Richelieu has built solid long-term relationships with numerous suppliers on several continents, most of whom are world leaders. Market and competition Acquisitions The specialty hardware and renovation products segment is highly competitive. Richelieu has developed a business stra- tegy rooted in a diversified product offering in various targeted niche markets in North America and sourced from suppliers around the world, in creative marketing and in unparalleled expertise and quality of service. up to now, this strategy has enabled it to benefit from a solid competitive edge. However, if Richelieu were unable to implement its business strategy with the same success in the future, it could lose market sha- res and its financial performance could be adversely affected. Acquisitions in North America remain an important strategic focus for Richelieu. The Corporation will maintain its strict acquisition criteria and pay particular attention to the integra- tion of its acquisitions. Nevertheless, there is no guarantee that a business matching Richelieu’s acquisition criteria will be available and there can be no assurance that the Corpora- tion will be able to make acquisitions at the same pace as in the past. However, the fact that the u.S. market remains high- ly fragmented and that acquisitions are generally of limited size reduces the inherent financial and operational risks. Foreign currency Credit Richelieu is exposed to the risks related to currency fluctua- tions, primarily in regard to foreign-currency denominated purchases and sales made abroad. The Corporation’s products are regularly sourced from abroad. Thus, any increase in foreign currencies (primarily the u.S. dollar and euro) compared with the Canadian dollar tends to raise its supply cost and thereby affect its consoli- dated financial results. These currency fluctuations related risks are mitigated by the Corporation’s ability to adjust its selling prices within a relatively short timeframe so as to pro- tect its profit margins although significant volatility in foreign currencies may have an adverse impact on its sales. Sales made abroad are mainly recorded in the united States and account for approximately 32% of Richelieu’s total sales. Any volatility in the Canadian dollar therefore tends to affect consolidated results. This risk is partially offset by the fact that major purchases are denominated in u.S. dollars. To manage its currency risk, the Corporation uses derivative financial instruments, more specifically forward exchange contracts in u.S. dollars and euros. There can be no assu- rance that the Corporation will not sustain losses arising from these financial instruments or fluctuations in foreign currency. The Corporation is exposed to the credit risk related to its ac- counts receivable. Richelieu has adopted a policy defining the credit conditions for its customers to safeguard against credit losses arising from doing business with them. For each cus- tomer, the Corporation sets a specific limit that is regularly reviewed. The diversification of its products, customers and suppliers reasonably safeguards the Corporation against a concentration of its credit risk. No customer of the Corpora- tion accounts for more than 10% of its revenues. Labour relations and qualified employees To achieve its objectives, Richelieu must attract, train and retain qualified employees while controlling its payroll. The inability to attract, train and retain qualified employees and to control its payroll could have an impact on the Corporation’s financial performance. Close to 18% of Richelieu’s workforce is unionized. The Corporation’s policy is to negotiate collective agreements at conditions enabling it to maintain its competi- tive edge and a positive and satisfactory working environment for its entire team. Richelieu has not experienced any major labour conflicts over the past five years. Any interruption in operations as a result of a labour conflict could have an ad- verse impact on the Corporation’s financial results. 34 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 Stability of key officers Richelieu offers a stimulating working environment and a competitive compensation plan, which help it retain a stable management team. Failure to retain the services of a highly qualified management team could compromise the success of Richelieu’s strategic execution and expansion, which could have an adverse impact on its financial results. To adequately manage its future growth, the Corporation adjusts its or- ganizational structure as needed and strengthens the teams at the various levels of its business. It should be noted that more than 50% of its employees, including senior officers, are Richelieu shareholders. Product liability In the normal course of business, Richelieu is exposed to vari- ous product liability claims that could result in major costs and affect the Corporation’s financial position. Richelieu has agreements containing the usual limits with insurance com- panies to cover the risks of claims associated with its oper- ations. Crisis management, IT contingency plan and data security The IT structure implemented by Richelieu enables it to sup- port its operations and contributes to ensure their efficiency. As the occurrence of a disaster, including a major interruption of its computer systems, could affect its operations and finan- cial performance, the Corporation has implemented a crisis management and IT contingency plan to reduce the extent of such a risk. This plan provides among others for an alternate physical location in the event of a disaster, generators in the event of power outages and a relief computer as powerful as the central computer. A breach of the Corporation’s IT security, loss of customer data or system disruption could adversely affect its business and reputation. Richelieu’s business is dependent on its payroll, transaction, financial, accounting and other data processing systems. The Corporation relies on these systems to process, on a daily basis, a large number of transactions. Any security breach in its business processes and/or systems has the potential to impact its customer information, which could result in the po- tential loss of business. If any of these systems fail to operate properly or become disabled, the Corporation could poten- tially lose control of customer data and suffer financial loss, a disruption of our businesses, liability to customers, regula- tory intervention or damage to its reputation. In addition, any issue of data privacy as it relates to unauthor- ized access to, or loss of, customers and/or employee infor- mation could result in the potential loss of business, damage to Richelieu’s market reputation, litigation and regulatory in- vestigation and penalties. To reduce its risk, the Corporation continuously invests in the security of its IT systems, business processes improvements and enhancements to its culture of information security. SHARE INFORMATION AS AT JANUARY 24, 2019 Issued and outstanding common shares: Outstanding stock options: 57,148,234 1,857,725 OUTLOOK In 2019, as in the past, Richelieu will be customer-oriented, focusing on quality of service and innovation. Its two major sources of growth will remain innovation and business acqui- sition strategies in its sector. The Corporation will pursue its current market development in North America and its efforts to penetrate new territories, especially in the united States. It remains on the lookout for strategic acquisitions to further strengthen its positioning and create additional sales and operational synergies, while giving priority to operational ef- ficiency and sound financial management. SUPPLEMENTARY INFORMATION Further information about Richelieu, including its latest Annual Information Form, is available on the System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com. (Signed) Richard Lord (Signed) Antoine Auclair President and Chief Executive Officer Vice-President and Chief Financial Officer January 24, 2019 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 35 management’s reP ort Related to the consolidated financial statements The consolidated financial statements of Richelieu Hardware ltd. (the “Corporation”) and other financial information included in this Annual Report are the responsibility of the Corporation’s management. These consolidated financial statements have been prepared by management in accordance with IFRS and approved by the Board of Directors. The Corporation maintains accounting and internal control systems which, in management’s opinion, reasonably ensure the accuracy of the financial information and maintain proper standards of conduct in the Corporation’s activities. The Board of Directors fulfills its responsibility regarding the consolidated financial statements included in the Annual Report, primarily through its Audit Committee. This committee which meets periodically with the Corporation’s managers and external auditors, has reviewed the consolidated financial statements of the Corporation and has recommended that they be approved by the Board of Directors. The consolidated financial statements have been audited by the Corporation’s external auditors, Ernst & Young llP, Chartered Professional Accountants. Montreal, Canada, January 24, 2019 (Signed) Richard Lord (Signed) Antoine Auclair President and Chief Executive Officer Vice-President and Chief Financial Officer indePendent auditors’ rePort To the shareholders of Richelieu Hardware Ltd. We have audited the accompanying consolidated financial statements of Richelieu Hardware ltd., which comprise the consolidated statements of financial position as at November 30, 2018 and 2017, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Richelieu Hardware ltd. as at November 30, 2018 and 2017 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. (Signed) Ernst & Young llP Montreal, Canada, January 24, 2019 1 CPA auditor, CA, public accountancy permit no. A118111 36 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 Consolidated statements of finanCial Position Notes 2018 $ 2017 $ As at November 30 [In thousands of dollars] ASSETS Current assets Cash and cash equivalents Accounts receivable Inventories Prepaid expenses Non-current assets Property, plant and equipment Intangible assets Goodwill Deferred taxes LIABILITIES AND EQUITY Current liabilities Accounts payable and accrued liabilities Income taxes payable Current portion of long-term debt Non-current liabilities Deferred taxes Other liabilities Equity Share capital Contributed surplus Retained earnings Accumulated other comprehensive income 11 Equity attributable to shareholders of the Corporation Non-controlling interests Commitments and contingencies [note 10] See accompanying notes to the consolidated financial statements On behalf of the Board of Directors: 4 5 5 9 8 7 9 8 8 7,408 138,767 270,275 3,394 419,844 41,725 29,340 71,984 6,226 29,162 134,187 233,585 2,253 399,187 38,558 29,282 68,931 6,709 569,119 542,667 88,359 119 2,023 90,501 3,289 1,843 95,633 41,398 4,122 405,445 19,313 470,278 3,208 473,486 569,119 91,858 2,919 4,294 99,071 3,511 1,881 104,463 39,230 2,358 376,922 15,582 434,092 4,112 438,204 542,667 (Signed) Richard Lord (Signed) Mathieu Gauvin Director Director R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 37 Consolidated statements of earnings Years ended November 30 [In thousands of dollars, except earnings per share] Sales Operating expenses excluding amortization Earnings before amortization, financial costs and income taxes Amortization of property, plant and equipment Amortization of intangible assets Financial costs, net Earnings before income taxes Income taxes Net earnings Net earnings attributable to: Shareholders of the Corporation Non-controlling interests Notes 8, 12 9 Net earnings per share attributable to shareholders of the Corporation 8 Basic Diluted See accompanying notes to the consolidated financial statements. 2018 $ 1,004,400 898,409 105,991 9,203 3,997 65 13,265 92,726 24,762 67,964 67,777 187 67,964 2017 $ 942,545 839,571 102,974 7,634 3,820 (193) 11,261 91,713 23,781 67,932 67,704 228 67,932 1.18 1.17 1.17 1.15 Consolidated statements of ComPreHensive inCome Years ended November 30 [In thousands of dollars] Net earnings Other comprehensive income that will be reclassified to net earnings Exchange differences on translation of foreign operations Notes 11 Comprehensive income Comprehensive income attributable to: Shareholders of the Corporation Non-controlling interests See accompanying notes to the consolidated financial statements. 38 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 2018 $ 67,964 3,731 71,695 71,508 187 71,695 2017 $ 67,932 (4,384) 63,548 63,320 228 63,548 Consolidated statements of CHanges in eQuitY Years ended November 30 [In thousands of dollars] Attributable to shareholders of the Corporation Share capital Contributed surplus Retained earnings Accumulated other comprehensive income $ 8 $ 8 $ $ 11 Total Non- controlling interests Total equity $ $ $ Notes Balance as at November 30, 2016 36,050 1,417 336,835 19,966 394,268 4,043 398,311 Net earnings Other comprehensive income Comprehensive income Shares repurchased Stock options exercised Share-based compensation expense Dividends [note 16] Other liabilities — — — (303) 3,483 — — — — — — — (703) 1,644 — — 67,704 — 67,704 (14,460) — — (13,157) — 3,180 941 (27,617) — 67,704 228 67,932 (4,384) (4,384) — (4,384) (4,384) 63,320 228 63,548 — (14,763) — (14,763) — — 2,780 1,644 — (13,157) — — — (23,496) — — 2,780 1,644 (190) (13,347) 31 31 (159) (23,655) Balance as at November 30, 2017 39,230 2,358 376,922 15,582 434,092 4,112 438,204 Net earnings Other comprehensive income Comprehensive income Shares repurchased Stock options exercised Share-based compensation expense Dividends [note 16] Other liabilities Acquisition of non-controlling interests [note 3] — — — (675) 2,843 — — — — — — — — (534) 2,298 — — — 67,777 — 67,777 (25,856) — — — 67,777 187 67,964 3,731 3,731 — 3,731 3,731 71,508 187 71,695 — (26,531) — 2,309 (26,531) — 2,309 — 2,298 — 2,298 (13,824) — (13,824) (311) (14,135) — 426 — — — 426 38 38 (818) (392) Balance as at November 30, 2018 41,398 4,122 405,445 19,313 470,278 3,208 473,486 2,168 1,764 (39,254) — (35,322) (1,091) (36,413) See accompanying notes to the consolidated financial statements. R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 39 Consolidated statements of CasH floWs Years ended November 30 [In thousands of dollars] OPERATING ACTIVITIES Net earnings Items not affecting cash and cash equivalent Amortization of property, plant and equipment Amortization of intangible assets Deferred taxes Share-based compensation expense Net change in non-cash working capital balances FINANCING ACTIVITIES Repayment of long-term debt Dividends paid to Shareholders of the Corporation Other dividends paid Common shares issued Common shares repurchased for cancellation INVESTING ACTIVITIES Business acquisitions Additions to property, plant and equipment and intangible assets Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplementary information Income taxes paid Interest paid (received), net See accompanying notes to the consolidated financial statements. Notes 2018 $ 2017 $ 67,964 67,932 4 5 9 8 16 8 8 3 4, 5 9,203 3,997 321 2,971 84,456 (42,184) 42,272 (3,927) (13,824) (311) 2,309 (26,531) (42,284) (9,004) (12,369) (21,373) (369) 7,634 3,820 (1,700) 2,265 79,951 (23,995) 55,956 (1,217) (13,157) (190) 2,780 (14,763) (26,547) (30,203) (13,121) (43,324) 108 (21,754) (13,807) 29,162 7,408 27,139 65 42,969 29,162 24,507 (193) 40 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 notes to Consolidated finanCial statements NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) NATURE OF BUSINESS Inventories Richelieu Hardware ltd. [the “Corporation”] is incorporated under the laws of Quebec, Canada. The Corporation is a distributor, im- porter, and manufacturer of specialty hardware and complement- ary products. Its products target an extensive customer base of kitchen and bathroom cabinet, storage and closet, home furnish- ing and office furniture manufacturers, residential and commer- cial woodworkers and hardware retailers including renovation superstores. The Corporation’s head office is located at 7900 Henri-Bourassa Blvd. West, Montreal, Quebec, Canada, H4S 1V4. 1. SIGNIFICANT ACCOUNTING POLICIES The Corporation’s consolidated financial statements, presented in Canadian dollars, have been prepared by management in accord- ance with International Financial Reporting Standards [“IFRS”]. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and ac- companying notes. These estimates are based on management’s best knowledge of current events and actions that the Corporation may undertake in the future and other factors deemed relevant and reasonable. The judgments made by management in applying the account- ing policies that have the most significant effect on the amounts recognized in the consolidated financial statements and the as- sumptions about the future and other major sources of estima- tion uncertainty as at the end of the reporting period that could potentially result in material adjustments to the carrying amount of assets and liabilities during the following period are the valua- tion of inventory impairment, including loss and obsolescence and require the use of judgment and assumptions that may affect the amounts reported in the consolidated financial statements. The underlying estimates and assumptions are reviewed regularly. Revised accounting estimates, if any, are recognized in the period in which the estimates are revised, as well as in future periods affected by the revisions. Actual results could differ from those estimates. The Corporation’s consolidated financial statements have been properly prepared within the reasonable limits of materiality, in accordance with the accounting policies summarized below: Consolidation The consolidated financial statements include the accounts of Richelieu Hardware ltd. and its subsidiaries described in note 13. All significant intercompany balances and transactions have been eliminated upon consolidation. Cash and cash equivalents Cash and cash equivalents consist of cash on hand and highly li- quid investments with a term of three months or less. Cash and cash equivalents were classified in “financial assets at fair value through net earnings” and measured at fair value. Gains (losses) arising from remeasurement at each period-end are recorded in the consolidated statement of earnings. Accounts receivable Accounts receivable are classified in “loans and receivables” and carried at cost, which is equivalent to fair market value on initial recognition. Subsequent measurements are recorded at amor- tized cost using the effective interest method. For the Corpora- tion, this measurement is usually equivalent to cost due to their short-term maturities. Inventories, which consist primarily of finished goods, are valued at the lower of average cost and net realizable value. Net real- izable value is the expected selling price in the normal course of business, less estimated costs to sell. The Corporation uses judgment when estimating the effect of certain factors on the net realizable value of inventory, such as inventory obsolescence and losses. The quantity, age and condition of inventory are measured and assessed regularly during the year. Property, plant and equipment Property, plant and equipment are recorded at cost and amor- tized on a straight-line basis over their estimated useful lives. The main components have different useful lives and are amortized separately. The amortization method and useful life estimates are reviewed annually. Buildings leasehold improvements Machinery and equipment Rolling stock Furniture and fixtures Computer equipment Intangible assets 20 years lease terms, maximum 5 years 5-10 years 5 years 3-5 years 3-5 years Intangible assets are acquired assets that lack physical sub- stance and meet the specified criteria for recognition apart from property, plant and equipment. Intangible assets consist mainly of purchased or internally developed software, non-competition agreements, customer relationships, and trademarks. Software and customer relationships are amortized on a straight-line basis over their useful lives of 3 and 8-20 years, respectively, while non-competition agreements are amortized over the terms of the agreements. Trademarks have an indefinite useful life and are therefore not amortized. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired and corresponds to the development potential of the acquired businesses, combined with the Corpora- tion’s operations and from the expected synergies and expanding of the product offering and network. Goodwill is not amortized. Impairment of non-current assets At the end of each reporting period, the Corporation determines whether indicators of impairment exist for its non-current assets, excluding goodwill and intangible assets with indefinite useful lives. If such indicators exist, the non-current assets are tested for impairment. When the impairment test indicates that the carrying amount of the tangible or intangible asset exceeds its recoverable amount, an impairment loss is recognized in net earnings in an amount equal to the excess. The Corporation is required to test goodwill and intangible assets with indefinite useful lives for impairment at least once a year, whether or not indicators of impairment exist. Impairment tests are carried out on the asset itself, the cash-generating unit [“CGu”] or group of CGus as at November 30. A CGu is the small- est identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill and the supporting assets that cannot be wholly allocated to a single CGu are tested for impairment at the group of CGus level. Impairment tests consist in a comparison between the carrying and recoverable amounts of an asset, CGu or group of CGus. The recoverable amount is the higher of value in use and fair value less costs to sell. Where the carrying amount exceeds the recoverable amount, an impairment loss equal to the excess is recognized in net earnings, however, the carrying amount of the assets is not reduced below the higher of their fair value less costs to sell and their value in use. Other than for goodwill, if a reversal of an impairment loss occurs, it must be recognized immediately in net earnings. R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 41 notes to C onsolidated finanCial statement s NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) 1. SIGNIFICANT ACCOUNTING POLICIES (cont’d) Foreign currency translation On reversal of an impairment loss, the increased recoverable amount of an asset must not exceed the carrying amount that would have been determined, net of amortization, if no impairment loss had been recognized in respect of the asset in prior years. In im- pairment testing of goodwill and intangible assets with indefinite useful lives, value in use is estimated using a discounted future cash flow model. The application of this method is based on differ- ent assumptions such as estimated future cash flows as described in note 5. Other financial liabilities Accounts payable, accrued liabilities and long-term debt are clas- sified in “other financial liabilities” and are initially recorded at fair value. They are subsequently measured at amortized cost using the effective interest method. For the Corporation, this measurement is usually equivalent to cost. Options to purchase non-controlling interests that correspond to the definition of a financial liability are measured at fair value and presented under other liabilities. Revenue recognition Revenues are recognized when products are shipped to customers. They are measured at the fair value of the consideration received or receivable, net of returns and discounts granted. Income taxes The Corporation follows the liability method of accounting for in- come taxes. under this method, deferred tax assets and liabilities are accounted for based on estimated taxes recoverable or payable that would result from the recovery or settlement of the carrying amount of assets and liabilities. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the years in which the temporary differences are expected to reverse. Chan- ges in these balances are recognized in net earnings in the year in which they arise. Deferred tax assets are recognized to the extent that it is probable that the Corporation will have future taxable income against which these tax assets may be offset. In determining these deferred tax assets, assumptions are considered, such as the period for tax loss carrying forwards to be completely used up and the level of future taxable income in accordance with tax planning strategies. Leases leases are classified as finance leases if substantially all risks and rewards incidental to ownership are transferred to the lessee. At the moment of initial recognition, the lessee records the leased item as an asset at the lower of the fair value of the asset and the present value of the minimum lease payments. A corresponding liability to the lessor is recorded in the consolidated statement of financial position as a finance lease obligation. In subsequent per- iods, the asset is depreciated on the shorter of straight-line basis over the term of the lease or the estimated useful life of the asset, and interest on the obligation is expensed through net earnings. leases are classified as operating leases if substantially all risks and rewards incidental to ownership are not transferred to the lessee. The lease payments are recognized as an expense on a straight-line basis over the lease term. Monetary assets and liabilities of the Corporation are translated at the exchange rate in effect at the end of the reporting period and the other items in the statements of financial position and earnings are translated at the exchange rates in effect at the date of transaction. Foreign exchange gains and losses are recognized in net earnings in the year in which they arise. The assets and liabilities of the u.S. subsidiary are translated into Canadian dollars at the exchange rate in effect at the end of the re- porting period. Revenues and expenses are translated at the rate in effect at the date of transaction. Foreign exchange gains and losses are recognized in the consolidated statements of comprehensive income. Derivative financial instruments The Corporation periodically enters into foreign exchange forward contracts with financial institutions to partially hedge the effects of fluctuations in foreign exchange rates related to foreign currency liabilities, as well as to hedge anticipated purchase transactions. The Corporation enters into equity swaps to reduce its exposure on net earnings related to the fluctuations in the Corporation’s share price relating to its deferred share unit plan. The Corporation does not use derivatives for speculative purposes. The Corporation uses hedge accounting only when IFRS documen- tation criteria are met. Derivative financial instruments designated as cash flow hedges are measured at fair value, which is the in- struments’ approximate settlement value at market rates. Gains and losses on remeasurement at each year-end are recorded in comprehensive income. If the instrument is not designated and documented as a hedge, changes in fair value are recognized in the statement of consolidated earnings for the year. Assets or liabilities related to financial instruments are included in Accounts receiv- able or Accounts payable and accrued liabilities in the consolidated statements of financial position. Fair value measurements hierarchy Fair value measurements of assets and liabilities recognized at fair value in the consolidated statements of financial position or whose fair value is presented in the notes to the consolidated financial state- ments are categorized in accordance with the following hierarchy: level 1: level 2: quoted prices (unadjusted) in active markets for identi- cal assets or liabilities; inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Share-based payment The Corporation offers a stock option plan to its directors, officers and key employees. The subscription price of each share issuable under the plan is equal to the weighted average market price of the shares five (5) business days prior to the day the option was granted and must be paid in full at the time the option is exercised. Options vest at a rate of 25% per year starting one year after grant date and expire on the tenth anniversary of the grant date. The Corporation recognizes stock-based compensation and other share-based pay- ments in net earnings using the fair value method for stock options granted with a corresponding increase recorded in contributed surplus. The Black & Scholes model is used to determine the grant date fair value of stock options. The application of this method is based on different assumptions such as risk-free interest rate, ex- pected life, volatility and dividend yield as described in note 8. 42 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 notes to C onsolidated finanCial statement s NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) 1. SIGNIFICANT ACCOUNTING POLICIES (cont’d) Deferred share unit plan The Corporation offers a deferred share unit [“DSu”] plan to its directors who can elect to receive part or all of their compensa- tion in DSus. The value of DSus is redeemable for cash only when a director ceases to be a member of the Board. The number of DSus granted to a director equals the compensation amount to be converted in DSus divided by the average closing price of the shares on the Toronto Stock Exchange for the five (5) business days immediately preceding the date of the payment. The DSu lia- bility is measured at fair value at each closing date on the basis of the number of outstanding share units and the market price of the Company’s common shares is included in Accounts payable and accrued liabilities. The Corporation has entered into equity swaps to reduce its exposure on net earnings related to the fluctuations of the Corporation’s share price. The net effect of the equity swaps mostly offsets the impact of the change in the Corporation’s share price and is included in the Operating expenses excluding amor- tization. Net earnings per share Net earnings per share are calculated based on the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated using the treasury stock method and take into account all the elements that have a dilutive effect. 2. CHANGES IN ACCOUNTING METHODS Recently issued IFRS 9, Financial Instruments IFRS 9, Financial Instruments replaces IAS 39 Financial Instru- ments: Recognition and Measurement, and includes a single approach to determine whether a financial asset is measured at amortized cost or fair value, a new hedge accounting model to enable financial statement users to better understand an en- tity’s risk exposure and its risk management activities, and a new impairment model for financial assets based on expected credit losses. IFRS 9 is effective for the Corporation’s fiscal year begin- ning on December 1, 2018. The Corporation has completed its as- sessment of IFRS 9 and concluded that it will not have a significant impact on the consolidated financial statements IFRS 15, Revenue from Contracts with Customers IFRS 15, Revenue from Contracts with Customers, replaces IAS 18, Revenue, IAS11, Construction Contracts and related inter- pretations. under IFRS15 standard, revenue is recognized at the point in time when control of the goods or services transfers to the customer rather than when the significant risks and rewards are transferred. The new standard also requires additional disclo- sures through notes to financial statements. IFRS 15 is effective for the Corporation’s fiscal year beginning on December 1, 2018. The Corporation has completed its assessment of IFRS 15 and concluded that it will not have a significant impact on the consoli- dated financial statements. IFRS 16, Leases IFRS 16, leases replaces IAS 17, leases and related interpreta- tions. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. lessor accounting, however, re- mains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17 leases and related interpretations and is effective for periods beginning on or after January 1, 2019, thus for the Corporation’s fiscal year beginning on December 1, 2019. Earlier adoption is permitted if IFRS 15, Revenue from Contracts with Customers, has also been applied. The Corporation being committed under operating leases for warehouse and office premises, it expects that the adoption of IFRS 16 will result in the recognition, in the consolidated state- ment of financial position, of a related asset and a liability and, in the consolidated statement of earnings, of a reduction in rent expense and an increase in financial costs and amortization of property, plant and equipment. The Company is currently evaluat- ing the impact of the new standard on its consolidated financial statements. 3. BUSINESS ACQUISITIONS 2018 On September 4, 2018, the Corporation purchased the principal net assets of Chair City Supply, Inc. a distributor operating four (4) distribution centers, three (3) in North Carolina and one (1) in Tennessee. Chair City Supply distributes a diverse range of spe- cialty products targeted to an extensive customer base of furni- ture manufacturers. On February 26, 2018, the Corporation purchased the principal net assets of Cabinet & Top Supply Inc., a distributor of specialty prod- ucts located in Fort Myers, Florida. Those acquisitions generated sales of $8.0 million since their ac- quisition. If those acquisitions had been acquired on December 1, 2017, management believes that the sales included in the con- solidated statement of earnings would have been approximately $23 million. 2017 On August 1, 2017, the Corporation purchased the principal net assets of Tamarack Distributors Inc., a specialty product distribu- tor located in Cincinnati, Ohio. On April 18, 2017, the Corporation purchased the principal net assets of Weston Premium Woods Inc., a distributor of materials, decorative products and hardwoods located in Brampton, Ontario. Summary of acquisitions The final purchase price allocations, at the transaction dates are summarized as follows: Current assets assumed Non-current assets assumed Current liabilities assumed Non-current liabilities assumed Net assets acquired Considerations Cash, net of cash acquired Considerations payable [note 7] 2018 2017 $ $ 5,759 6,077 11,836 (1,612) 10,224 15,810 20,491 36,301 (2,297) 34,004 8,612 1,612 30,203 3,801 10,224 34,004 Goodwill deductible for tax purposes with regard to those acquisitions amounted to $2,646 [$9,525 in 2017]. On November 1, 2018, the Corporation acquired an additional 5% interest in the voting shares of Menuiserie des Pins ltée, increasing its ownership interest to 80%, for a cash consideration of $392. R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 43 notes to C onsolidated finanCial statement s NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) 4. PROPERTY, PLANT AND EQUIPMENT Cost Accumulated amortization Land Buildings $ $ 3,652 27,591 — (16,888) Net carrying amount as at November 30, 2016 3,652 10,703 Acquisitions Acquisitions through business acquisitions [note 3] Amortization Effect of changes in foreign exchange rates Net carrying amount as at November 30, 2017 Cost — — — — 3,652 3,652 510 — (1,392) — 9,821 28,101 Leasehold improvements Machinery and equipment Rolling stock Furniture and fixtures Computer equipment $ 6,515 (4,937) 1,578 524 — (494) (20) 1,588 6,945 Total $ $ $ $ $ 32,752 10,838 17,641 12,695 111,684 (23,831) (7,306) (15,244) (10,220) (78,426) 8,921 3,532 6,017 2,409 72 250 2,397 1,799 10 2,475 33,258 1,423 12,682 25 357 (1,825) (1,602) (1,256) (1,065) (7,634) (26) (30) (21) (8) (105) 13,159 4,559 2,929 2,850 38,558 38,574 13,246 19,266 14,094 123,878 Accumulated amortization — (18,280) (5,357) (25,415) (8,687) (16,337) (11,244) (85,320) Net carrying amount as at November 30, 2017 3,652 Acquisitions Acquisitions through business acquisitions [note 3] Amortization Effect of changes in foreign exchange rates Net carrying amount as at November 30, 2018 Cost — — — — 3,652 3,652 9,821 1,484 — (1,377) — 9,928 29,584 1,588 1,006 — (578) 19 2,035 8,012 13,159 4,559 3,555 2,455 143 708 2,929 1,528 19 2,850 38,558 1,286 11,314 — 870 (2,533) (1,935) (1,563) (1,217) (9 203) 47 90 22 8 186 14,371 5,877 2,935 2,927 41,725 42,380 16,022 20,971 15,380 136,001 Accumulated amortization — (19,656) (5,977) (28,009) (10,145) (18,036) (12,453) (94,276) Net carrying amount as at November 30, 2018 3,652 9,928 2,035 14,371 5,877 2,935 2,927 41,725 5. INTANGIBLE ASSETS AND GOODWILL Cost Accumulated amortization Net carrying amount as at November 30, 2016 Acquisitions Acquisitions through business acquisitions [note 3] Write-off Amortization Effect of changes in foreign exchange rates Net carrying amount as at November 30, 2017 Cost Software Non-competition agreements Customer relationships Trademarks Total Goodwill $ 6,686 (6,066) 620 439 — — (486) (1) 572 7,124 $ 3,353 (2,627) 726 — 1,125 — (788) (15) 1,048 4,394 $ $ $ $ 35,274 (18,977) 16,297 — 8,314 — (2,546) (450) 21,615 42,600 5,238 50,551 62,256 — (27,670) — 5,238 22,881 62,256 — 439 — 1,170 10,609 9,525 (243) (243) (2,334) — (3,820) (118) (584) — (516) 6,047 29,282 68,931 6,047 60,165 68,931 Accumulated amortization (6,552) (3,346) (20,985) — (30,883) — Net carrying amount as at November 30, 2017 Acquisitions Acquisitions through business acquisitions [note 3] Amortization Effect of changes in foreign exchange rates Net carrying amount as at November 30, 2018 Cost Accumulated amortization Net carrying amount as at November 30, 2018 44 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 572 1,055 — (443) 3 1,187 8,119 (6,932) 1,187 1,048 21,615 6,047 29,282 68,931 — 351 (579) 10 830 4,680 (3,850) 830 — 2,209 (2,975) 345 21,194 45,637 — — 1,055 2,560 — (3,997) 82 440 — 2,646 — 407 6,129 29,340 71,984 6,129 64,565 71,984 (24,443) — (35,225) — 21,194 6,129 29,340 71,984 notes to C onsolidated finanCial statement s NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) 5) IMMOBILISATIONS INCORPORELLES ET GOODWILL (cont’d) For impairment test purposes, the carrying amouts of goodwill and intangible assets have been allocated to CGus or groups of CGus. The carrying amounts of goodwill for the three groups of CGus that are significant in comparison with the total carry- ing amount of goodwill are $56 million and $13.9 million, while $2.1 million is allocated across CGus with carrying amounts of goodwill that are not significant in comparison with the total carrying amount of goodwill. The carrying amounts of intan- gible assets with indefinite useful lives are allocated across multiple CGus or groups of CGus and the amount allocated is not individually significant in comparison with the total carry- ing amount. The recoverable value of the CGus or groups of CGus was determined on the basis of their value in use, which was calculated using forecasted cash flows before taxes over a period of five years, discount rates before taxes of 12.6% and a terminal value calculated at a rate of 2%. Main assumptions are based on historical data. No reasonably possible change to the main assumptions used for the impairment tests would re- sult in a carrying amount higher than the recoverable amount. 6. BANK INDEBTEDNESS The Corporation has lines of credit with a Canadian banking in- stitution with respective authorized amount of $50 million in Canadian dollars and $6 million in uS dollars, bearing inter- est at the bank’s prime and base rates, which were respect- ively 3.95% and 5.75% as at November 30, 2018 [3.20% and 5% in 2017]. Those lines of credit are renewable annually. As at November 30, 2018 and 2017, both were undrawn. During 2018, the Corporation issued 284,774 common shares [333,225 in 2017] at a weighted average exercise price of $8.11 per share [$8.34 in 2017] pursuant to the exercise of stock options under the stock option plan. The weighted average share price on the market at the date of exercise was $28,02 [$29,72 in 2017]. In addition, during 2018, the Corporation, through a normal course issuer bid, repurchased 966,143 common shares for cancellation in consideration for $26,531 [458,088 common shares in consider- ation for $14,763 in 2017], which resulted in a premium on the re- demption in the amount for $25,856 recorded in retained earnings [premium of $14,460 in 2017]. Stock option plan Changes in stock options are summarized as follows: (in thousands) Outstanding, November 30, 2016 Granted Exercised Cancelled Outstanding, November 30, 2017 Granted Exercised Cancelled Number of options Weighted average share price 1,650 330 (333) (9) 1,638 357 (285) (40) 1,670 $ 13.58 25.71 8.34 22.93 17.04 32.77 8.11 27.00 21.69 7. LONG-TERM DEBT Outstanding, November 30, 2018 Not-interest bearing business acquisition considerations payable, including uS$ 1,281 [uS $309 in 2017] Non-interest bearing financing contract, repayable in equal installments Current portion of long-term debt long-term debt 8. SHARE CAPITAL Authorized unlimited number of: 2018 2017 $ $ 2,023 3,810 — 2,023 2,023 — 484 4,294 4,294 — The table below summarizes information regarding the stock op- tions outstanding as at November 30, 2018: Options outstanding Exercisable options Range in exercise price Number of options Weighted average remaining period Weighted average exercise price Weighted average exercise price Number of options (in dollars) (in thousands) (years) (in dollars) (in thousands) (in dollars) 5.56 - 8.56 8.57 - 13.57 13.58 - 20.58 20.59 - 32.77 40 286 376 968 1,670 0.27 3.69 5.73 8.24 6.71 5.94 11.45 17.22 27.10 21.69 40 286 323 236 885 5.94 11.45 16.96 23.42 16.40 Common shares, participating, entitling the holder to one vote per share. Non-voting first and second ranking preferred shares issuable in series, the characteristics of which are to be determined by the Board of Directors Changes in common shares are summarized as follows: (in thousands) Number of shares $ Outstanding, November 30, 2016 57,921 36,050 During 2018, the Corporation granted 357,000 options [329,500 in 2017] with an average exercise price of $32.77 per share [$25.71 in 2017] and an average fair value of $7.39 per option [$5.93 in 2017] as determined using the Black & Scholes option pricing model using an expected dividend yield of 0.8% [0.9% in 2017], a volatility of 20% [20% in 2017], a risk-free interest rate of 2.25% [1.86% in 2017] and an expected life of 7 years [7 years in 2017] and 40,112 options were cancelled [9,000 en 2017]. The compensation expense related to stock options amounted to $2,298 [$1,644 in 2017] and is recognized under Operating expenses excluding amortization. Issued Repurchased 333 3,483 (458) (303) Outstanding, November 30, 2017 57,796 39,230 Issued Repurchased 285 2,843 (966) (675) Outstanding, November 30, 2018 57,115 41,398 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 45 notes to C onsolidated finanCial statement s NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) 8. SHARE CAPITAL (cont’d) Deferred share unit plan The effective income tax rate differs from the combined statutory rates for the following reasons: The financial liability resulting from the DSu plan of $6,426 [$7,914 in 2017] is presented under the Accounts payable and accrued liabilities. As at November 30, 2018, the fair value of the equity swaps amounted to a liability of $524 [an asset of $157 as at November 30, 2017] and is presented under Accounts payable. The Corporation categorized the fair value measurement in level 2, as it is derived from observable market data. The compensation expense for the DSus in 2018, amounted to $673 [$621 in 2017] and is recognized under Operating expenses excluding amortization. Number of DSUs Outstanding, beginning of year Granted Outstanding, end of year Share purchase plan 2018 2017 233,823 216,944 18,203 16,879 252,026 233,823 Compensation expense related to the share purchase plan amounted to $764 for 2018 [$697 in 2017] and is recognized under Operating expenses excluding amortization. Net earnings per share Basic net earnings per share and diluted net earnings per share were calculated based on the following number of shares: Combined statutory rates 2018 2017 $ $ 26.68% 26.68% Income taxes at combined statutory rates 24,740 24,469 Increase (decrease) resulting from: Impact of statutory rates changes for the subsidiary outside Canada Share-based compensation Non-deductible expenses (23) 612 116 402 352 143 Deferred tax assets not previously recognized (2,234) (1,553) Changes related to tax laws and tax rates Other 1,833 (282) — (32) 24,762 23,781 Deferred taxes reflect the net tax impact of temporary differences between the value of assets and liabilities for accounting and tax purposes. The major components of deferred tax assets and liabil- ities of the Corporation were as follows: 2018 2017 $ $ 2018 2017 Deferred taxes Weighted average number of shares outstanding - Basic 57,597 57,956 Dilutive effect under stock option plan 467 703 Translation of foreign exchange currencies, reserve recognized for tax purposes only upon disbursement and other tax attributes 6,763 6,301 Weighted average number of shares outstanding - Diluted 58,064 58,659 Excess of the tax value of Property, plant and equipment over their net carrying value 924 1,296 The computation of diluted net earnings per share includes all out- standing stock options as at November 30, 2018. Excess of the net carrying value of intangible assets and goodwill over their tax value 9. INCOME TAXES Net amount (4,750) (4 399) 2,937 3,198 The main components of the income tax expense were as follows: The net deferred taxes included the following as at November 30 : Current Deferred: 2018 2017 $ $ 24,441 25,481 Deferred tax assets Deferred tax liabilities Related to temporary differences 722 (147) 2018 2017 $ $ 6,226 6,709 (3,289) (3,511) 2,937 3,198 Deferred tax expense related to changes in tax rates Deferred tax assets not previously recognized 1,833 — Changes in deferred taxes for the years ended November 30 are detailed as follows: (2,234) (1,553) 24,762 23,781 Balance at the beginning of the year, net In net earnings Other Balance at the end of the year, net 2018 2017 $ 3,198 (321) $ 1,609 1,700 60 (111) 2,937 3,198 46 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 notes to C onsolidated finanCial statement s NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) 10. COMMITMENTS AND CONTINGENCIES [a] Leases The Corporation performs ongoing credit evaluation of custom- ers and generally does not require collateral. The allowance for doubtful accounts for the years ended November 30 is as follows: The Corporation has commitments under operating leases for warehouse and office premises expiring on various dates up to 2028. The future minimum payments, excluding incidental costs for which the Corporation is responsible, are as follows: less than a year Between 1 and 5 years More than 5 years $ 12,678 30,980 14,184 57,842 [b] Foreign exchange forward contracts As at November 30, 2018, the Corporation held the following for- eign exchange forward contracts having maturity dates in Decem- ber 2018 and January 2019. Balance, beginning of year Allowance for doubtful accounts Write-offs 2018 2017 $ 6,486 1,726 $ 6,323 1,352 (1,498) (1,254) Exchange rate variations and others 88 65 Balance, end of year 6,802 6,486 The balance of accounts receivable of the Corporation that are overdue for more than 60 days, but which were not provided for, totalled $1,894 [$1,331 in 2017]. As at November 30, 2018 and 2017, no customer accounted for more than 10% of the total accounts receivable. Type Purchase [c] Claims Currency Average exchange rate Market risk €4,700 1.51 In the normal course of business, various proceedings and claims are instituted against the Corporation. Management believes that any forthcoming settlement in respect of these claims will not have a material effect on the Corporation’s financial position or consolidated net earnings. 11. ACCUMULATED OTHER COMPREHENSIVE INCOME The accumulated other comprehensive income, including the fol- lowing items and their variances, were as follows: 2018 2017 $ $ Balance at the beginning of the period 15,582 19,966 Exchange differences on translation of foreign operations Balance at the end of the period 3,731 (4,384) 19,313 15,582 12. FINANCIAL INSTRUMENTS AND OTHER INFORMATION Fair value The carrying value of long-term debt approximates their fair value because of the short maturity on balances of sale payable. The Corporation categorized the fair value measurement in level 2, as it is derived from observable market data. As at November 30, 2018, the fair value of the foreign exchange forward contracts amounted to a liability of $1 [an asset of $83 as at November 30, 2017] representing the amount the Corporation would collect on settlement of these contracts at spot rates. The Corporation categorized the fair value measurement in level 2, as it is derived from observable market data. Credit risk The Corporation sells its products to numerous customers in Canada, and in a lesser proportion in the united States. The credit risk refers to the possibility that customers will be unable to assume their liabilities towards the Corporation. The average days outstanding of accounts receivable, as at November 30, 2018 and 2017 are deemed acceptable given the industry in which the Corporation operates. The Corporation’s foreign currency exposure arises from pur- chases and sales transacted mainly in uS dollars and Euros. Oper- ating expenses included, for the year ended November 30, 2018, an exchange gain of $2,478 [gain of $888 in 2017]. The Corporation’s policy is to maintain the purchase prices and selling prices of its commercial activities by mitigating its expos- ure through use of derivative financial instruments. To protect its operations from exposure to exchange rate fluctuations, foreign exchange contracts are used. Major exchange risks are covered by a centralized cash flow management. Exchange rate risks are managed in accordance with the Corporation’s policy on exchange risk management. The goal of this policy is to protect the Corpora- tion’s profits by reducing the exposure to exchange rate fluctua- tions. The Corporation’s policy does not allow speculative trades. As at November 30, 2018, a decrease of 5% of the Canadian dol- lar against the uS dollar and the euro on translation of monetary assets and liabilities, all other variables remaining the same,would have increased consolidated net earnings by $763 [would have had no significant impact on consolidated net earnings as at November 30, 2017] and would have increased the consolidated comprehensive income by $6,597 [$5,968 as at November 30, 2017]. The exchange rate sensitivity is calculated by aggregation of the net foreign exchange rate exposure of the Corporation’s fi- nancial instruments as at November 30, 2018. Liquidity risk The Corporation manages its risk of not being able to settle its financial liabilities when required by taking into account its oper- ational needs and by using different financing tools, if required. During the previous years, the Corporation has financed its growth, its acquisitions, and its payout to shareholders by using mainly the cash generated by the operating activities. R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 47 notes to C onsolidated finanCial statement s NOVEMBER 30, 2018 AND 2017 (amounts are in thousands of dollars, except per-share amounts or otherwise indicated) 12. FINANCIAL INSTRUMENTS AND OTHER INFORMATION (cont’d) 15. CAPITAL MANAGEMENT Operating expenses excluding amortization The Corporation’s objectives are: Inventories from the distribution, imports and manufacturing activities recognized as an expense Salaries and related charges Other charges 2018 2017 $ $ 732,490 682,189 134,998 128,113 30,921 29,269 898,409 839,571 An expense of $2,994 [$2,000 in 2017] for inventory obsolescence was included in Inventories from the distribution, imports and manufacturing activities. • Maintain a low debt ratio to preserve its capacity to pursue its growth both internally and through acquisitions; and • Provide an adequate shareholders return. The Corporation manages and makes adjustments to its capital structure in light of changes in economic conditions and the risk characteristics of underlying assets. To maintain or adjust its cap- ital structure, the Corporation may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. For the year ended November 30, 2018 the Corporation achieved the following results regarding its capital management objectives: • Debt/equity ratio: 0.4% [1.0% in 2017] [long-term debt/Equity] • Return on average shareholder’s equity of 15.0% over the last 12 months [16.3% as at November 30, 2017] 13. RELATED PARTY INFORMATION Scope of consolidation Names Country of incorporation Richelieu America ltd. united States Richelieu Finances ltée (1) les industries Cedan Inc. Distributions 20/20 Inc. Canada Canada Canada Provincial Woodproducts ltd. Canada Menuiserie des Pins ltée [note 3] Canada Equity interest Voting rights The Corporation’s capital management objectives remained un- changed from the previous fiscal year. 16. DIVIDENDS PAID TO SHAREHOLDERS OF THE CORPORATION % 100 100 100 100 85 80 % 100 100 100 100 85 80 For the year ended November 30, 2018, the Corporation paid a quarterly dividend of $0.06 per share to common shareholders [quarterly dividend of $0.0567 per share in 2017] for a total amount of $13,824 [$13,157 in 2017]. On January 24, 2019, the Board of Directors approved the payment of a quarterly dividend of $0.0633 per common share for the first quarter of 2019. 17. APPROVAL OF FINANCIAL STATEMENTS The consolidated financial statements for the year ended Novem- ber 30, 2018 (including the comparative figures) were approved for issue by the Board of Directors on January 24, 2019. (1) Richelieu Finances ltée is the owner of 100% of Richelieu Hardware Canada ltd. 18. COMPARATIVE FIGURES Some figures disclosed for the year ended November 30, 2017, have been reclassified to conform to the presentation adopted in the year ended ended November 30, 2018. Executive officers’ compensation Short-term employee benefits Other long-term benefits Share-based compensations 2018 2017 $ $ 3,319 3,521 717 593 622 590 4,629 4,733 Accounts payable and accrued liabilities included a retirement allowance amounting to $2,740 [$2,520 as at November 30, 2017] payable to an executive officer. 14. GEOGRAPHIC INFORMATION During the year ended November 30, 2018, nearly 68% of sales had been made in Canada [67% in 2017]. The Corporation’s sales to foreign countries, almost entirely directed to the united States, amounted to $326,086 [$307,869 in 2017] in Canadian dollars and to $252,738 [$236,504 in 2017] in uS dollars. As at November 30, 2018, out of the total amount in property, plant and equipment, $7,031 [$3,830 in 2017] is located in the united States. In addition, intangible assets located in the united States amounted to $14,713 [$13,302 in 2017] and goodwill to $13,870 [$10,818 in 2017] in Canadian dollars and to $11,062 [$10,321 in 2017] and goodwill to $10,428 [$8,394 in 2017] in uS dollars. 48 R I C H E L I E U | A N N u A l R E P O R T 2 0 1 8 Transfer Agent and Registrar computershare Trust company of canada Auditors Ernst & young LLP 900 De Maisonneuve Blvd. west, Suite 2300 Montreal, Quebec H3A 0A8 Head Office Richelieu Hardware Ltd. 7900 Henri-Bourassa Blvd. west Montreal, Quebec, H4S 1V4 Telephone: 514 336-4144 Fax: 514 832-4002 Printed in canada www.RichEliEu.cOm