Leon's Furniture Limited - 2010 First Quarter
TORONTO, May 12 /CNW/ - For the three months ended March 31, 2010, total Leon's sales were $201,119,000 including $42,328,000 of franchise sales ($195,200,000 including $42,675,000 of franchise sales in 2009), an increase of 3.0%. Net income for the first quarter 2010 was $11,970,000, 17 cents per common share ($8,571,000, 12 cents per common share in 2009), an increase of 41.7% per common share.
For the first quarter of 2010, we are very pleased to report higher sales and a significant improvement in profits when compared to the first quarter of 2009. Higher sales were aided by a general improvement in the economy along with a strong marketing and merchandising effort. The profit improvement was mainly the result of three key factors: higher sales compared to the prior year quarter; an improvement in our gross margin which was aided by the strengthening of the Canadian dollar and a more favorable product mix; and the continuation of improved productivity and expense controls that were initiated in the prior year.
Although we are very satisfied with the results of our first quarter, we believe that we must remain vigilant during 2010 in order to continue to improve the performance of our Company. We are announcing today that we plan to increase the pace of our expansion over the next five years with the goal of opening approximately 5 stores per year. This year, we have already begun construction on a new 73,000 sq. ft. facility in Thunder Bay, Ontario. We will soon begin construction on a new 84,000 sq. ft. building in Regina, Saskatchewan and just recently we signed a lease for a 76,000 sq. ft. premises in Guelph, Ontario to be completely renovated for opening in the summer next year. We plan to accomplish this increased expansion by building, leasing or acquiring stores. We also plan to continue renovation of our existing buildings with major renovations and additions to our Sault St. Marie and Sudbury stores this year.
As previously announced, we paid a quarterly 7 cents dividend on April 5, 2010. Today we are happy to announce that the Directors have declared a quarterly dividend of 7 cents per common share payable on the 5th day of July 2010 to shareholders of record at the close of business on the 4th day of June 2010. As of 2007, dividends paid by Leon's Furniture Limited are "eligible dividends" pursuant to the changes to the Income Tax Act under Bill C-28, Canada.
EARNINGS PER SHARE FOR EACH QUARTER
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
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TOTAL
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2010 - Basic 17 cents $0.17
- Fully Diluted 16 cents $0.16
2009 - Basic 12 cents 12 cents 22 cents 34 cents $0.80
- Fully Diluted 12 cents 12 cents 21 cents 33 cents $0.78
2008 - Basic 16 cents 16 cents 25 cents 33 cents $0.90
- Fully Diluted 15 cents 16 cents 24 cents 32 cents $0.87
LEON'S FURNITURE LIMITED
Mark J. Leon
Chairman of the Board
MANAGEMENT'S DISCUSSION AND ANALYSIS
May 12, 2010
Management's Discussion and Analysis should be read in conjunction with the unaudited consolidated interim financial statements of the Company for the three months ended March 31, 2010, Management's Discussion and Analysis for the year ended December 31, 2009, the audited consolidated financial statements for the year ended December 31, 2009 and the Company's Annual Information Form dated March 24, 2010.
Financial Statements Governance Practice
Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and the amounts expressed are in Canadian dollars.
This MD&A is intended to provide readers with the information that management believes is required to gain an understanding of Leon's Furniture Limited's current results and to assess the Company's future prospects. Accordingly, sections of this report contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are effected by risks and uncertainties that could have a material impact on future prospects. Readers are cautioned that actual events and results may vary.
The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the Management's Discussion and Analysis ("MD&A") and the financial statements, and recommended that the Board of Directors approve them. Following review by the full Board, the financial statements and MD&A were approved.
Introduction
Leon's Furniture Limited has been in the furniture retail business for over 100 years. The Company's 38 corporate and 28 franchise stores can be found in every province across Canada except British Columbia. Main product lines sold at retail include furniture, appliances and electronics.
Revenues and Expenses
For the three months ended March 31, 2010, total Leon's sales were $201,119,000 including $42,328,000 of franchise sales ($195,200,000 including $42,675,000 of franchise sales in 2009), an increase of 3.0%.
Leon's corporate sales of $158,791,000 in the first quarter of 2010, increased by $6,266,000, or 4.1%, compared to the first quarter of 2009. The increase in sales in the first quarter compared to the prior year reflected increased consumer confidence, as a result of the general improvement in the economy. Same store corporate sales increased by 3.2% compared to the prior year.
Leon's franchise sales of $42,328,000 in the first quarter of 2010, decreased by $347,000 or 0.8%, compared to the first quarter of 2009. The franchise division experienced a slight sales decrease in Eastern Canada, flat sales in Ontario and a small decrease in Western Canada.
Our gross margin for the first quarter 2010 of 41.1% has increased 1.7% from the first quarter 2009. We saw our product margin on imported products increase in the quarter mainly due to the appreciation of the Canadian dollar versus the US dollar, resulting in lower product costs. In addition, we experienced higher margins as a result of a more favorable product mix and a reduction in our sales finance expenses compared to the prior year first quarter.
Net operating expenses of $47,683,000 were up $170,000 or less than 1% for the first quarter 2010 compared to the first quarter 2009. Payroll and commission costs were up by 2.0% in the quarter compared to the prior year. The increase was mainly the result of higher commissions from increased sales in the quarter. Advertising expenses decreased by $1,563,000 or 17.1% for the first quarter compared to the prior year. During 2009, the Company celebrated its 100th Anniversary and as such supported this celebration with an enhanced marketing campaign to capitalize on this once-in-a-lifetime opportunity. All other operating costs in the quarter were comparable with the prior year first quarter.
As a result of the above, net income from operations for the first quarter 2010 was $11,970,000, 17 cents per common share ($8,571,000, 12 cents per common share in 2009), an increase of 41.7% per common share.
Annual Financial Information
($ in thousands, except earnings per
share and dividends) 2009 2008 2007
Net Corporate Sales 703,180 740,376 637,456
Leon Franchise Sales 194,290 209,848 195,925
Total Leon sales 897,470 950,224 833,381
Net Income 56,864 63,390 58,494
Earnings per Share
Basic $0.80 $0.90 $0.83
Diluted $0.78 $0.87 $0.80
Total Assets 529,156 513,408 475,226
Common Share Dividends Declared $0.48 $0.38 $0.2725
Convertible, Non-Voting Shares
Dividends Declared $0.14 $0.14 $0.14
Liquidity and Financial Resources
($ in thousands, except dividends
per share) Mar. 31/10 Dec. 31/09 Mar. 31/09
Cash, cash equivalents, marketable
securities and restricted
marketable securities 168,258 170,726 126,139
Accounts receivable 21,065 31,501 17,967
Inventory 85,622 83,957 87,738
Total assets 515,653 529,156 485,867
Working capital 175,270 164,759 139,047
Current Prior Prior
Quarter Quarter Quarter
For the 3 months ended Mar. 31/10 Dec. 31/09 Mar. 31/09
Cash flow provided by (used in)
operations 2,871 48,444 (3,166)
Purchase of property, plant &
equipment 398 1,480 1,903
Repurchase of capital stock - 3,023 707
Dividends paid 4,938 19,111 4,952
Dividends paid per share $0.07 $0.27* $0.07
* includes a special dividend of 20 cents per share paid Dec. 16, 2009.
Cash and cash equivalents decreased by $2,468,000 in the quarter mainly as a result of the reduction in trade payables from year end.
Marketable securities consist primarily of fixed income investments with maturities not exceeding ten years with an interest rate range of 0.25% to 7.75% and are stated at market value.
As part of the warranty reinsurance agreement entered into by a subsidiary, the Company has pledged assets and provided a letter of credit, which are part of the investment portfolio. The pledged assets and the letter of credit are for the benefit of the primary insurance company for the purposes of insuring customer product warranty sales. The assets are in the form of a trust with a financial institution amounting to $16,989,000 (December 31, 2009 - $18,088,000).
Inventory levels increased by $1,665,000 from the last quarter 2009 due to an anticipated increase in sales.
This year, we have already begun construction on a new 73,000 sq. ft. facility in Thunder Bay, Ontario. We will soon begin construction on a new 84,000 sq. ft. building in Regina, Saskatchewan and just recently we signed a lease for a 76,000 sq. ft. premises in Guelph, Ontario to be completely renovated for opening in the summer next year. We also plan to continue renovation of our existing buildings with major renovations and additions to our Sault St. Marie and Sudbury stores this year. At the present time, all funding for new store projects and renovations are scheduled to come from our existing cash resources.
Common Shares
At March 31, 2010 there were 70,535,194 common shares issued and outstanding. During the first quarter of 2010, 57,583 convertible, non-voting series 2002 shares were converted to common shares, and no common shares were repurchased by the Company, through a normal course issuer bid.
Commitments
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Payments Due by Period (in thousands)
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Less than 2-3 4-5 After
Contractual Obligations Total 1 year Years years 5 years
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Operating Leases(1) 27,383 3,466 6,986 5,664 11,267
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Purchase Obligations(2) 9,186 9,186 - - -
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Total Contractual
Obligations 36,569 12,652 6,986 5,664 11,267
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(1) The Company is obligated under operating leases to future minimum
annual rental payments for various land and building sites across
Canada.
(2) The estimated cost to complete construction in progress at one
location in Canada.
In addition, the Company has commitments related to redeemable shares as follows:
As at As at
March 31, December 31,
($ in thousands) 2010 2009
Authorized
2,284,000 convertible, non-voting, series 2002
shares
806,000 convertible, non-voting, series 2005
shares
1,224,000 convertible, non-voting, series 2009
shares
Issued
911,450 series 2002 shares (2009 - 969,033) 6,552 6,965
689,513 series 2005 shares (2009 - 689,513) 6,511 6,511
1,207,000 series 2009 shares (2009 - 1,207,000) 10,683 10,683
Less employees share purchase loans (23,505) (23,776)
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Redeemable share liability $ 241 $ 383
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Under the terms of its Management Share Purchase Plan, the Company advanced non-interest bearing loans to certain of its employees in 2002, 2005 and 2009 to allow them to acquire convertible, non-voting, series 2002 shares, series 2005 shares and series 2009 shares, respectively, of the Company. These loans are repayable through the application against the loans of any dividends on the shares, with any remaining balance repayable on the date the shares are converted to common shares. Each issued and fully paid for series 2002, 2005 and 2009 share may be converted into one common share at any time after the fifth anniversary date of the issue of these shares and prior to the tenth anniversary of such issue. The series 2002 shares may also be redeemed at the option of the holder or by the Company at any time after the fifth anniversary date of the issue of these shares and must be redeemed prior to the tenth anniversary of such issue. The series 2005 and 2009 shares are redeemable at the option of the holder for a period of one business day following the date of issue of such shares.
The Company has the option to redeem the series 2005 and 2009 shares at any time after the fifth anniversary date of the issue of these shares and must redeem prior to the tenth anniversary of such issue. The redemption price is equal to the original issue price of the shares adjusted for subsequent subdivisions of shares plus accrued and unpaid dividends. The purchase prices of the shares are $7.19 per series 2002 share, $9.44 per series 2005 share and $8.85 per series 2009 share. Dividends paid to holders of series 2002, 2005 and 2009 shares of approximately $401,000 (2009 - $261,000) have been used to reduce the respective shareholder loans.
During the first quarter 2010, 57,583 convertible, non-voting, series 2002 shares were converted to common shares with a stated value of $414,000 (2009 - 31,471 series 2002 for a stated value of $226,000).
Quarterly Results (2010, 2009, 2008)
Quarterly Income Statement ($000) - except per share data
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Quarter Ended Quarter Ended
March 31 December 31
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2010 2009 2009 2008
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Leon's Corporate Sales 158,791 152,525 197,986 206,088
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Leon's Franchise sale 42,328 42,675 57,679 63,803
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Total Leon's sales 201,119 195,200 255,665 269,891
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Net Income Per Share $0.17 $0.12 $0.34 $0.33
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Fully Diluted Per Share $0.16 $0.12 $0.33 $0.32
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Quarter Ended Quarter Ended
September 30 June 30
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2009 2008 2009 2008
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Leon's Corporate Sales 187,431 202,985 165,238 176,726
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Leon's Franchise sale 49,243 56,219 44,693 47,962
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Total Leon's sales 236,674 259,204 209,931 224,688
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Net Income Per Share $0.22 $0.25 $0.12 $0.16
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Fully Diluted Per Share $0.21 $0.24 $0.12 $0.16
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Critical Accounting Policies and Estimates
Our significant accounting policies are contained in Note 1 to the consolidated financial statements for the year ended December 31, 2009. Certain of these policies involve critical accounting estimates because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.
Revenue Recognition
Sales are recognized as revenue for accounting purposes upon the customer either picking up the merchandise or when merchandise is delivered to the customers' home.
The Company offers customers the option to finance purchases through various third party financing companies. In situations where a customer elects to take advantage of delayed payment terms, the costs of financing these sales are deducted from sales. Finance costs deducted from sales for the first quarter 2010 decreased when compared to the same period for 2009. Last year as part of our 100th Anniversary, we extended even more favourable financing offers to our customers.
Inventories
The Company measures inventories at the lower of cost, determined on a first-in, first-out basis, and net realizable value. The Company estimates the net realizable value as the amount at which inventories are expected to be sold by taking into account fluctuations of retail prices due to prevailing market conditions. If required, inventories are written down to net realizable value when the cost of inventories is estimated to not be recoverable due to obsolescence, damage or declining selling prices.
Reserves for slow moving and damaged inventory are deducted in our evaluation of inventories. The reserve for slow moving inventory is based on many years of historic retail experience. The reserve is calculated by analyzing all inventory on hand older than one year. Damaged inventory is coded as such and placed in specific locations. The amount of damaged reserve is determined by specific product categories.
The Company's inventory amount encompasses one category which is goods purchased and held for resale in the ordinary course of business. The amount of inventory recognized as an expense of $91,134,000 (2009 - $90,151,000) is presented within cost of sales on the consolidated statements of income. There were no inventory write-downs (2009 - $220,000) recognized as an expense during the period ended March 31, 2010. For the period ended March 31, 2010, the inventory markdown provision totalled $3,668,000 (2009 - $3,593,000). There were $171,000 (2009 - nil) of reversals of any write-down for the period ended March 31, 2010. Furthermore none of the Company's inventory has been pledged as security for any liabilities of the Company.
Warranty Revenue
Warranty revenues are deferred and taken into income on a straight-line basis over the life of the warranty period. Warranty revenues included in sales for the quarter 2010 are $4,105,000 compared to $3,978,000 in 2009. Warranty expenses deducted through costs of goods sold year to date 2010 are $1,376,000 compared to $1,399,000 in 2009. The warranty expenses over the prior period have remained relatively unchanged.
Franchise Royalties
Leon's franchisees operate as independent owners. The Company charges the franchisee a royalty fee based primarily on a percentage of the franchisees gross sales. This royalty income is recorded by the Company on an accrual basis under the heading, "other income" and is down 1.2% for the first quarter 2010 compared to 2009 which is in line with the decrease in franchise sales for the quarter.
Volume Rebates
The Company receives vendor rebates on certain products based on the volume of purchases made during specified periods. The rebates are deducted from the inventory value of goods received and are recognized as a reduction of cost of goods sold as sales occur.
Pending Changes to Accounting Policies
International Financial Reporting Standards ("IFRS")
In March 2009, the Accounting Standards Board ("AcSB") issued its exposure draft "Adopting IFRS in Canada, II" which reconfirmed that publicly accountable enterprises are required to adopt International Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. Accordingly, the Company will be required to adopt IFRS on January 1, 2011, including interim periods in fiscal 2011. Comparative interim and annual information will be required for the year ending December 31, 2010.
The Company's project and governance structure for its transition to IFRS, as detailed in prior MD&A disclosures, will remain in place throughout fiscal year 2010.
The Company is nearing completion of the detailed impact analysis and development phase of its conversion project for all standards that affect the transition. The Company will focus its effort throughout 2010 on the solution development and implementation phase of IFRS that will have an impact on the Company's financial statements. To date, the project is progressing according to plan.
At this time, the Company cannot quantify the impact of IFRS on its financial statements. The Company is still finalizing and will report throughout 2010 on its conclusions and accounting policy choices on the standards noted above. The Company has set an internal project milestone of preparing the first draft of the IFRS shell financial statements and note disclosures, in the summer of 2010. The Company expects to be in a position to disclose additional qualitative analysis on the impacts of the transition to IFRS along with the required quantitative information disclosure. While the Company believes it is doing a suitable level of analysis in selecting its IFRS accounting policies, actual quantitative results may reveal further impacts to the Company. Ongoing IASB projects, discussed below, may also present changes or adjustments to the opening balance sheet and quarterly financial statements.
The Company will be testing its ability to track IFRS adjustments throughout 2010 as well as implementing any modifications that are required to existing reports and possibly creating new reports to facilitate preparation of the increased note disclosure required by IFRS. At this time, the transition is expected to have minimal impact on the Company's information systems.
The IASB has several projects slated for completion in 2010 and 2011 that may impact the transition to IFRS and the financial statements of the Company. The Company continues to monitor the progress on these projects and their impact on the Company's transition to IFRS.
The transition to IFRS for the Company mainly affects the presentation and disclosure of its financial statements. It is expected that the Company's transaction-level controls will not be affected by the transition to IFRS in any material way. However, the transition to IFRS may lead to presentation and process changes to report more detailed information in the notes of the financial statements, but it is not currently expected to lead to many measurement or fundamental differences in the accounting processes used by the Company.
In general, IFRS requires more judgment with respect to various accounting treatments. As in the past under Canadian GAAP, entity and process level controls will be in place to ensure the Company is making the appropriate judgments and following the IFRS accounting policies selected. Furthermore, the Company's finance group continues to receive ongoing training to ensure they have the required understanding of IFRS.
Section 1582 - Business Combinations
In January 2009, the CICA issued Section 1582, Business Combinations, replacing Section 1581, Business Combinations. This section establishes the standards for the accounting of business combinations, and states that all assets and liabilities of an acquired business will be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. This new Section will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011.
Section 1601 - Consolidated Financial Statements
In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, which replaces the existing standards. This section establishes the standards for preparing consolidated financial statements and is effective for fiscal years beginning on or after January 1, 2011. The Company is currently assessing the future impact of this new standard on its financial statements.
Disclosure Controls and Internal Control Over Financial Reporting
Based on the evaluation of disclosure controls and procedures, the CEO and the CFO have concluded that the Company's disclosure controls and procedures were effective as at March 31, 2010.
There have been no changes in the Company's internal control over financial reporting during the period ended on March 31, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Outlook
In the first quarter of 2010 we saw an improvement in same store sales from the prior year quarter which was aided by the general improvement in consumer confidence. As well, we have seen positive signs in relation to the Canadian economy. Looking forward, we do not know what the impact will be on consumer confidence and the economy as a result of the new HST measures that go into place July 1st in Ontario and the possibility of higher interest rates in the future. However, we plan to continue the year with a well planned robust marketing and merchandising campaign along with the continuation of strong controls over expenditures. Even with these measures in place, growing sales and profits for the balance of this year will be challenging. Our strong financial position coupled with our experience in adjusting to changing market conditions, allow us to look to the future with cautious optimism.
Forward-Looking Statements
This MD&A, in particular the section under heading "Outlook", includes forward-looking statements, which are not historic facts based on certain assumptions and reflect Leon's Furniture Limited's current expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from current expectations. Some of the factors that can cause actual results to differ materially from current expectations are: a continuing slowdown in the Canadian economy; a further drop in consumer confidence and dependency on product from third party suppliers. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Leon's Furniture Limited
P.O. Box 1100, Stn. "B"
Weston, ON
M9L 2R8
Phone: (416) 243-4073 Fax: (416) 243-7890
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited interim financial statements of the company have been prepared by and are the responsibility of the company's management.
No auditor has performed a review of these financial statements.
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Terrence T. Leon Dominic Scarangella
President & Chief Executive Vice President & Chief Financial
Officer Officer
Dated as of the 7th day of May, 2010.
Leon's Furniture Limited-Meubles Leon Ltee
Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As at As at
March 31 December 31
($ in thousands) 2010 2009
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ASSETS
Current
Cash and cash equivalents 39,635 58,301
Marketable securities 111,634 94,337
Restricted marketable securities 16,989 18,088
Accounts receivable 21,065 31,501
Income taxes recoverable 1,209 -
Inventory 85,622 83,957
Future tax assets 903 1,133
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Total current assets 277,057 287,317
Prepaid expenses 1,603 1,560
Goodwill 11,282 11,282
Intangibles 5,404 5,334
Future tax assets 11,521 11,465
Property, plant & equipment net 208,786 212,198
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515,653 529,156
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 66,024 83,880
Income taxes payable - 1,958
Customers' deposits 14,705 15,632
Dividends payable 4,937 4,938
Deferred warranty plan revenue 16,121 16,150
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Total current liabilities 101,787 122,558
Deferred warranty plan revenue 22,096 22,248
Redeemable share liability 241 383
Future tax liabilities 9,073 8,829
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Total liabilities 133,197 154,018
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Shareholders' equity
Common shares 18,117 17,704
Retained earnings 364,609 357,576
Accumulated other comprehensive income (270) (142)
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Total shareholders' equity 382,456 375,138
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515,653 529,156
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(UNAUDITED)
Period ended March 31st 3 months
($ in thousands) ended
2010 2009
Sales 158,791 152,525
Cost of sales 93,498 92,442
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Gross profit 65,293 60,083
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Operating expenses (income)
Salaries and commissions 24,723 24,244
Advertising 7,590 9,153
Rent and property taxes 3,488 2,844
Amortization 3,968 3,946
Employee profit-sharing plan 1,162 837
Other operating expenses 10,323 10,324
Interest income (691) (852)
Other income (2,880) (2,983)
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47,683 47,513
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Income before income taxes 17,610 12,570
Provision for income taxes 5,640 3,999
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Net income for the period 11,970 8,571
Retained earnings, beginning of the period 357,576 338,960
Dividends declared (4,937) (4,953)
Excess of cost of share repurchase over carrying
value of related shares - (668)
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Retained earnings, end of period 364,609 341,910
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Weighted average number of common shares
outstanding ('000's)
Basic 70,514 70,729
Diluted 73,343 71,871
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Earnings per share
Basic $0.17 $0.12
Diluted $0.16 $0.12
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Dividends declared per share
Common $0.07 $0.07
Convertible, non-voting - -
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three month period ended March 31st
($ in thousands)
Net of tax
2010 Tax effect 2010
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Net income for the period 11,970 - 11,970
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Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during the
period (285) (37) (248)
Reclassification adjustment for net
gains and (losses) included in net
income 141 21 120
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Change in unrealized losses on
available-for-sale financial assets
arising during the period (144) (16) (128)
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Comprehensive income for the period 11,826 (16) 11,842
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Net of tax
2009 Tax effect 2009
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Net income for the period 8,571 - 8,571
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Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during the
period (1,130) (191) (939)
Reclassification adjustment for net
gains and (losses) included in net
income (31) (6) (25)
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Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,161) (197) (964)
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Comprehensive income for the period 7,410 (197) 7,607
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period ended March 31st 3 months
($ in thousands) ended
2010 2009
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OPERATING ACTIVITIES
Net income for the period 11,970 8,571
Add (deduct) items not involving a current cash
payment
Amortization of property, plant & equipment 3,779 3,790
Amortization of intangible assets 189 156
Amortization of deferred warranty revenue (4,105) (3,978)
Loss (gain) on sale of marketable securities (121) 34
Future tax expense 434 298
Gain on sale of property, plant & equipment (4) (1)
Cash received on warranty sales 3,924 4,036
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16,066 12,906
Net change in non-cash working capital balances
related to operations (13,195) (16,072)
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Cash provided by (used in) operating activities 2,871 (3,166)
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INVESTING ACTIVITIES
Purchase of property, plant & equipment (398) (1,903)
Purchase of intangibles (259) -
Proceeds on sale of property, plant & equipment 8 2
Purchase of marketable securities (72,735) (30,300)
Proceeds on sale of marketable securities 56,514 35,152
Decrease(increase) in employee share purchase
loans 271 324
Purchase of Appliance Canada Ltd. - (1,540)
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Cash (used in) provided by investing activities (16,599) 1,735
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FINANCING ACTIVITIES
Dividends paid (4,938) (4,952)
Repurchase of common shares - (707)
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Cash used in financing activities (4,938) (5,659)
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Net decrease in cash and cash equivalents during
the period (18,666) (7,090)
Cash and cash equivalents, beginning of period 58,301 39,483
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Cash and cash equivalents, end of period 39,635 32,393
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PREPARATION
These unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial statements. They do not include all of the disclosures required by Canadian generally accepted accounting principles for annual financial statements and accordingly, the interim financial information should be read in conjunction with the Company's annual consolidated financial statements. The interim financial information has been prepared using the same accounting policies as set out in note 1 to the consolidated financial statements for the year ended December 31, 2009.
2. PENDING CHANGES IN ACCOUNTING POLICIES
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
In March 2009, the Accounting Standards Board ("AcSB") issued its exposure draft "Adopting IFRS in Canada, II" which reconfirmed that publicly accountable enterprises are required to adopt International Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. Accordingly, the Company will be required to adopt IFRS on January 1, 2011, including interim periods in fiscal 2011. Comparative interim and annual information will be required for the year ending December 31, 2010. As part of its transition to IFRS, the Company has developed an implementation plan which includes an extensive analysis of accounting differences between Canadian GAAP and IFRS and the assessment of the expected impact of the accounting differences on its consolidated financial statements. The Company continues to assess the IFRS component evaluation for those areas of the consolidated financial statements that have identified accounting differences between Canadian GAAP and IFRS. As part of its IFRS implementation plan, the Company will continue to review the impact on its business activities, its disclosure and internal controls over financial reporting and its financial reporting systems.
SECTION 1582 - BUSINESS COMBINATIONS
In January 2009, the CICA issued Section 1582, Business Combinations, replacing Section 1581, Business Combinations. This section establishes the standards for the accounting of business combinations, and states that all assets and liabilities of an acquired business will be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. This new Section will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011. The Company is currently assessing the future impact of this new standard on its financial statements.
SECTION 1601 - CONSOLIDATED FINANCIAL STATEMENTS
In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, which replaces the existing standards. This section establishes the standards for preparing consolidated financial statements and is effective for fiscal years beginning on or after January 1, 2011. The Company is currently assessing the future impact of this new standard on its financial statements.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
As at March 31, 2010 accumulated other comprehensive income was comprised of the unrealized losses on marketable securities of $328,000 ($270,000 net of tax)
2010 2009
Balance, beginning of period $ (142) $ (2,095)
Changes in unrealized (losses) gains on
available-for-sale financial assets arising
during the period (128) (964)
---------- ----------
Balance, end of period $ (270) $ (3,059)
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4. INCOME TAXES
The Company's total cash payments for income taxes paid in the three month period ending March 31, 2010 were $8,871,000 (2009 - $8,619,000).
5. SHARE CAPITAL
During the quarter, no common shares were repurchased (2009 - 83,700) on the open market pursuant to the terms and conditions of Normal Course Issuer Bids (2009 - net cost of approximately $707,000). All shares repurchased by the Company pursuant to its Normal Course Issuer Bids have been cancelled. The repurchase of common shares resulted in a reduction of share capital in the amount of approximately $39,000 in 2009. The excess net cost over the carrying value of the shares of approximately nil (2009 - $668,000) has been recorded as a reduction in retained earnings.
During the quarter ended March 31, 2010, 57,583 convertible non-voting series 2002 shares (2009 - 31,471) were converted into common shares with a stated value of approximately $414,000 (2009 - $226,000).
6. CLASSIFICATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS
As at March 31, 2010, the classification of the Company's financial instruments is as follows:
March 31, 2010
Other
Loans Finan-
and cial
Avail- Receiv- Liabil-
Held for able ables ities
Trading for Sale (amort- (amort- Total
Financial (fair (fair ized ized Carrying Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 39,635 - - - 39,635 39,635
Accounts
receivable - - 21,065 - 21,065 21,065
Marketable
securities - 111,634 - - 111,634 111,634
Restricted
marketable
securities - 16,989 - - 16,989 16,989
Income taxes
recoverable - - 1,209 - 1,209 1,209
Financial
Liabilities
Accounts
payable and
accrued
liabilities - - - 66,024 66,024 66,024
Redeemable
share
liability - - - 241 241 241
December 31, 2009
Other
Loans Finan-
and cial
Avail- Receiv- Liabil-
Held for able ables ities
Trading for Sale (amort- (amort- Total
Financial (fair (fair ized ized Carrying Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 58,301 - - - 58,301 58,301
Accounts
receivable - - 31,501 - 31,501 31,501
Marketable
securities - 94,337 - - 94,337 94,337
Restricted
marketable
securities - 18,088 - - 18,088 18,088
Financial
Liabilities
Accounts
payable and
accrued
liabilities - - - 83,880 83,880 83,880
Income taxes
payable - - - 1,958 1,958 1,958
Redeemable
share
liability - - - 383 383 383
The Company's fair value measurements of financial instruments within the fair value hierarchy, as at March 31, 2010 and December 31, 2009 consists primarily of investments valued using Level 1 inputs.
RISK MANAGEMENT
The Company is exposed to various risks associated with its financial instruments. These risks are summarized as credit risk, liquidity risk and market risk. The significant risks for the Company's financial instruments are:
i) Credit risk
The Company believes at this point in time, it has some credit risk
associated to its accounts receivable as it relates to the Appliance
Canada division that is partly mitigated by the Company's credit
management practices. The majority of the Company's sales are paid
through cash, credit card or third party finance. The Company relies
on two third party credit suppliers to supply financing alternatives
to our customers.
ii) Liquidity risk
The Company has no outstanding debt and does not rely upon available
credit facilities to finance operations or to finance committed
capital expenditures. The portfolio of marketable securities
consists primarily of Canadian and International bonds. There is no
immediate need for cash from our investment portfolio.
iii) Foreign currency risk
The Company is exposed to foreign currency exchange rate risk. Some
merchandise is paid for in U.S. dollars. The foreign currency cost
is included in the inventory cost. The Company does not believe it
has significant foreign currency risk with respect to its accounts
payable in U.S. dollars.
iv) Market price risk
The Company is exposed to fluctuations in the market prices of its
marketable securities that are classified as available-for-sale.
Changes in the fair value of marketable securities are recorded, net
of income taxes, in accumulated other comprehensive income (note 3).
The risk is managed by ensuring a relatively conservative asset
allocation of bonds and equities.
7. CAPITAL MANAGEMENT
The Company defines capital as shareholders' equity. The Company's objectives when managing capital are to:
- ensure sufficient liquidity to support its financial obligations and
execute its operating and strategic plans; and
- utilize working capital to negotiate favourable supplier agreements
both in respect of early payment discounts and overall payment terms.
For further information: Dominic Scarangella, Tel: (416) 243-4073
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