TORONTO, Nov. 12 /CNW/ - For the three months ended September 30, 2008, total Leon's sales were $259,204,000 including $56,219,000 of franchise sales ($216,225,000 including $50,434,000 franchise sales in 2007), an increase of 19.9%. Net income was $17,499,000, 25 cents per common share ($16,174,000, 23 cents per common share in 2007), an increase of 8.7% per common share.
For the nine months ended September 30, 2008, total Leon's sales were $680,333,000 including $146,045,000 of franchise sales ($586,459,000 including $134,925,000 of franchise sales in 2007), an increase of 16.0% and net income was $40,185,000, 57 cents per common share ($36,884,000, 52 cents per common share in 2007), an increase of 9.6% per common share.
We are pleased that we were able to continue to improve both sales and profits in the third quarter of 2008 compared to the prior year. This was achieved through strong efforts put forth by both our merchandising and marketing departments. We believe that we are gaining market share and are well positioned to continue to do so during these difficult times. Renovations have just been completed at our Mississauga, Ontario store with a grand re-opening now taking place. A major renovation to our Laval, Quebec showroom and warehouse store is well on its way and is scheduled to be complete by the spring of 2009. Progress is continuing with a new downtown Toronto, Ontario store known as the "Roundhouse" and we anticipate a grand opening in 2009. We are also pleased with the year-to-date performance of Appliance Canada which was acquired effective January 1, 2008.
The Directors have declared a quarterly dividend of 7 cents per common share payable on the 12th day of January 2009 to shareholders of record at the close of business on the 12th day of December 2008. In addition, the annual dividend on the convertible non-voting series shares of 14 cents, will be payable on January 12th, 2009 to the shareholders of record at the close of business on December 12th, 2008. As stated in our press release dated February 20, 2007, as of 2006, dividends paid by Leon's Furniture Limited are "eligible dividends" and for further clarification, all future dividends are eligible dividends unless otherwise stated.
For further information, please consult the Company's Management Discussion & Analysis dated November 12, 2008.
EARNINGS PER SHARE FOR EACH QUARTER
-----------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 YEAR TOTAL
-------- ------- -------- ------- ----------
2008
- Basic 16cents 16cents 25cents $0.57
- Fully Diluted 15cents 16cents 24cents $0.55
2007
- Basic 15cents 14cents 23cents 31cents $0.83
- Fully Diluted 15cents 13cents 22cents 30cents $0.80
2006
- Basic 14cents 12cents 21cents 29cents $0.76
- Fully Diluted 14cents 11cents 20cents 28cents $0.73
LEON'S FURNITURE LIMITED - MEUBLES LEON LTEE
Mark J. Leon
Chairman of the Board
MANAGEMENT'S DISCUSSION AND ANALYSIS
November 12, 2008
Management's Discussion and Analysis ("MD&A) should be read in conjunction with the unaudited consolidated interim financial statements of the Company for the three and nine months ended September 30, 2008, MD&A for the year ended December 31, 2007, the audited consolidated financial statements for the year ended December 31, 2007 and the Company's Annual Information Form dated March 14, 2008.
Financial Statements Governance Practice
Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles 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 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 close to 100 years. The company's 35 corporate and 29 franchise stores can be found across Canada. Main product lines sold at retail include furniture, appliances and electronics.
Revenues and Expenses
For the three months ended September 30, 2008, total Leon's sales were $259,204,000 including $56,219,000 of franchise sales ($216,225,000 including $50,434,000 of franchise sales in 2007), an increase of 19.9%.
Leon's corporate sales of $202,985,000 in the third quarter of 2008, increased by $37,194,000 or 22.4%, compared to the third quarter of 2007. In this quarter, we continued to experience strong corporate sales growth across the country with same store corporate sales being up 7.9% compared to the prior year. The balance of the sales increase in the third quarter was the result of the acquisition of Appliance Canada, which took effect January 1, 2008.
Leon's franchise sales of $56,219,000 in the third quarter of 2008, increased by $5,785,000, or 11.5% store for store, compared to the third quarter of 2007. Similar to the previous quarters, we experienced strong franchise sales growth in Eastern and Central Canada with flat sales in Western Canada compared to the same quarter the prior year.
Our gross margin of 39.0% for the third quarter 2008 decreased 2.9% from the third quarter 2007. The drop in gross margin was mainly attributable to Appliance Canada sales whose margins are substantially lower than a typical Leon's store. Appliance Canada is involved in the wholesale of appliances to the building and apartment trades as well as some retail of high end appliances to the public.
Net operating expenses of $52,531,000 were up $8,028,000 or 18.0% for the third quarter 2008 compared to the third quarter 2007. Payroll and commission costs were up 20.5% in the third quarter compared to the prior year. The increase was the result of three key factors: the inclusion of Appliance Canada effective January 1, 2008; higher payroll costs associated with the increase in sales over the prior year; and the continuation of a trend started in 2007 where higher than normal wage cost increases continue in Western Canada where they have experienced a labour shortage. We saw advertising expenses increase by $187,000 or 2.8% for the third quarter compared to the prior year, which is well within budget.
As a result of the above, net income for the third quarter 2008 was $17,499,000, 25 cents per common share (as compared to $16,174,000, 23 cents per common share in 2007), an increase of 8.7% per common share.
For the nine months ended September 30, 2008, total Leon's sales were $680,333,000 including $146,045,000 of franchise sales ($586,459,000 including $134,925,000 of franchise sales in 2007), an increase of 16.0% and net income was $40,185,000, 57 cents per common share ($36,884,000, 52 cents per common share in 2007), an increase of 9.6% per common share.
Annual Financial Information
($ in thousands, except earnings
per share and dividends) 2007 2006 2005
Net corporate sales 637,456 591,286 547,744
Leon franchise sales 195,925 177,167 173,043
Total Leon sales 833,381 768,453 720,787
Net income 58,494 53,602 48,964
Earnings per share
Basic $0.83 $ 0.76 $ 0.68
Diluted $0.80 $ 0.73 $ 0.65
Total Assets 475,226 439,639 381,702
Common Share Dividends Declared $0.2725 $0.375 $0.20
Convertible, Non-Voting Shares
Dividends Declared $0.14 $0.125 $0.10
Liquidity and Financial Resources
($ in thousands, except dividends
per share)
Balances as at: Sept 30/08 Dec. 31/07 Sept 30/07
----------- ----------- -----------
Cash and marketable securities 136,805 142,279 124,645
Accounts receivable 23,815 33,684 15,366
Inventory 93,399 75,640 71,787
Total assets 506,445 475,226 437,364
Net working capital 115,650 124,766 106,358
Current Prior Prior
Quarter Quarter Quarter
For the 3 Months Ended Sept 30/08 June 30/08 March 31/08
----------- ----------- -----------
Cash flow from operations 29,941 22,956 468
Purchase of capital assets 9,105 4,796 1,606
Repurchase of capital stock 2,403 273 1,992
Dividends paid 4,625 12,023 5,279
Dividends paid per share $0.07 $0.17 $0.07
Cash and marketable securities (including restricted marketable securities) increased by $11,255,000 in the quarter mainly as a result of net income and the net change in non-cash working capital balances in the quarter.
Marketable securities consist of over 80% fixed income investments, the majority of which are denominated in Canadian currency. These fixed income investments consist primarily of Canadian and International bonds with maturities not exceeding nine years with an interest rate range of 4.0% to 7.75%. The Company has minimal exposure to U.S. financial companies effected by the credit crisis and corporate failures and the Company does not own any asset backed commercial paper in its portfolio. Marketable securities are stated at market value.
As part of the warranty reinsurance agreement with a subsidiary, the Company has pledged assets, which are part of the investment portfolio. The pledged assets 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 $17,168,000.
Inventory increased by $12,086,000 from the second quarter 2008. Inventory levels increased to support the promotional campaigns for the fourth quarter.
At the present time all funding for all new store projects, renovations, dividends and working capital needs are scheduled to come from our existing cash resources. In the third quarter of 2008, the Company generated $29,941,000 cash from operating activities, contributing to the Company's strong liquidity position.
Common Shares
At September 30, 2008 there were 70,593,177 common shares issued and outstanding. During the third quarter of 2008, 7,819 convertible, non-voting series 1998 shares (2007 - 20,844) and 20,424 convertible non-voting series 2002 shares (2007 - nil) were converted into common shares. The Company repurchased 201,800 (2007 - 342,800) of its common shares in the open market at an average price of $11.91. Pursuant to the terms and conditions of Normal Course Issuer Bids, all shares repurchased by the Company have been cancelled.
For the nine-month period ending September 30, 2008, the Company repurchased 395,800 (2007 - 565,600) common shares at an average price of $11.79 and 46,618 convertible, non-voting series 1998 shares (2007 - 384,340) and 228,827 convertible, non-voting series 2002 shares (2007 - nil) were converted to common shares. In addition, 49,992 convertible, non voting series 2005 shares were cancelled.
Commitments
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($ in thousands) Payments Due by Period
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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) 13,298 447 3,504 3,486 5,861
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Purchase Obligations(2) 5,237 5,237 - - -
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Total Contractual
Obligations 18,535 5,684 3,504 3,486 5,861
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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 three
locations in Canada.
In addition, the Company has commitments related to redeemable shares as
follows:
($ in thousands) As at As at
September 30, 2008 December 31, 2007
Authorized
1,400,000 convertible, non-voting,
series 1998 shares
2,284,000 convertible, non-voting,
series 2002 shares
806,000 convertible, non-voting,
series 2005 shares
Issued
151,362 series 1998 shares
(2007 - 197,980) $ 666 $ 871
1,168,745 series 2002 shares
(2007 - 1,397,572) 8,400 10,045
706,822 series 2005 shares
(2007 - 756,814) 6,674 7,146
Less employees share purchase loans (15,454) (17,882)
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Redeemable share liability $ 286 $ 180
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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 1998, 2002 and 2005 allowing them to acquire convertible, non-voting, series 1998 shares, series 2002 shares and series 2005 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 1998, 2002 and 2005 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. Each series 1998 and 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 prior to the tenth anniversary of such issue. The series 2005 shares were 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 1998, series 2002 and series 2005 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 $4.40 per series 1998 share, $7.19 per series 2002 share and $9.44 per series 2005 share. Dividends paid to holders of series 1998, 2002, 2005 shares of approximately $329,000 (2007 - $365,000) have been used to reduce the respective shareholder loans.
During the third quarter of 2008, 7,819 convertible, non-voting, series 1998 shares (2007 - 20,844) and 20,424 convertible, non-voting series 2002 shares were converted into common shares with a stated value of $34,000 (2007 - $92,000) and $147,000 (2007 - nil) respectively. For the nine month period, 46,618 convertible, non-voting, series 1998 shares (2007 - 384,340) and 228,827 convertible, non-voting series 2002 shares (2007 - nil) were converted into common shares with a stated value of $205,000 (2007 - $1,691,000) and $1,645,000 (2007 - nil) respectively.
During the three month period ended September 30, 2008, 11,538 convertible, non-voting series 2002 shares were cancelled (2007 - nil) in the amount of $109,000. For the nine month period, 49,992 convertible, non-voting series 2002 shares were cancelled (2007 - 3,905) in the amount of $472,000 (2007 - $37,000).
Quarterly Results (2008, 2007, 2006)
Quarterly Income Statement ($ in thousands, except earnings per share)
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Quarter Ended Quarter Ended
September 30 June 30
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2008 2007 2008 2007
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Leon Corporate Sales 202,985 165,791 176,726 147,000
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Leon Franchise Sales 56,219 50,434 47,962 43,437
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Total Leon sales 259,204 216,225 224,688 190,437
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Net Income Per Share $0.25 $0.23 $0.16 $0.14
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Fully Diluted Per Share $0.24 $0.22 $0.16 $0.14
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Quarter Ended Quarter Ended
March 31 December 31
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2008 2007 2007 2006
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Leon Corporate Sales $154,577 $138,743 185,922 $180,108
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Leon Franchise Sales 41,864 41,054 60,931 56,658
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Total Leon sales 196,441 179,797 246,853 236,766
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Net Income Per Share $0.16 $0.15 $0.31 $0.29
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Fully Diluted Per Share $0.15 $0.15 $0.30 $0.28
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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 third quarter 2008 were down slightly when compared to the same period for 2007. The cost decrease is a result of the decrease in the prime lending rate. The current credit crisis has not hindered the Company in providing third party financing to its customers during the third quarter. We expect our finance costs to drop slightly going forward as the prime lending rates have continued to fall.
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 year to date for 2008 are $10,827,000 compared to $9,957,000 in 2007. Warranty expenses deducted through costs of goods sold year to date 2008 are $3,864,000 compared to $3,317,000 in 2007.
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 up 8.5% year to date for 2008 compared to 2007 which is in line with the increase in franchise sales for the year.
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.
Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure and Presentation
In December 2006, the Canadian Institute of Chartered Accountants ("CICA") issued three new accounting standards: Section 1535, "Capital Disclosures" ("Section 1535"), Section 3862, "Financial Instruments - Disclosures" ("Section 3862") and Section 3863, "Financial Instruments - Presentation" (Section 3863").
Section 1535 establishes guidelines for the disclosure of information regarding a company's capital and how it is managed. The adoption of Section 1535 did not have an impact on the Company's results of operations or financial condition.
Section 3862 and Section 3863 replaced Section 3861, "Financial Instruments - Disclosure and Presentation". Section 3862 requires increased disclosures regarding the risks associated with financial instruments and how these risks are managed. Section 3863 carried forward standards for presentation of financial instruments and provides additional guidance for the classification of financial instruments, from the perspective of the issuer, between liabilities and equity. Comparative information about the nature and extent of risks arising from financial instruments is not required in the year Section 3862 is adopted. The adoption of Section 3862 and Section 3863 did not have an impact on the Company's results of operations or financial condition.
Inventories
During the first quarter of 2008, the Company also implemented Section 3031, "Inventories" ("Section 3031"), which replaced Section 3030 of the same title. Section 3031 establishes that inventories should be measured at the lower of cost and net realizable value, with guidance on the determination of cost. Leon's Furniture Limited 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 be not recoverable due to obsolescence, damage or declining selling prices.
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 $122,551,000 and $319,630,000 during the three and nine month periods ended September 30, 2008 is presented within cost of sales on the interim consolidated statements of income for the period ended September 30, 2008. There were inventory write-downs of $144,000 recognized as an expense during the period ended September 30, 2008. There were no reversals of any write-down that was recognized as a reduction in the amount of inventories recognized as an expense for the period ended September 30, 2008. Furthermore none of the Company's inventory has been pledged as security for any liabilities of the Company.
This new standard was adopted by the Company for its fiscal year starting on January 1, 2008 and had no impact on its financial position or results of operation.
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board will require all public companies to adopt IFRS for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Companies will be required to provide IFRS comparative information for the previous fiscal year. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter of 2011 when the Company will prepare both the current and comparative financial information using IFRS. The Company expects the transition to IFRS to impact financial reporting, business processes and information systems. The Company will assess the impact of the transition to IFRS and will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.
Accounting Estimates
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 reserve for damaged inventory is determined by specific product categories.
Disclosure Controls and Procedures
Leon's management evaluated the effectiveness of the design of its disclosure controls and procedures, as defined under Multilateral Instrument 52-109. The evaluation was performed under the supervision of Leon's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO").
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed with Canadian securities regulatory authorities are recorded, summarized and reported in a timely fashion. The disclosure controls and procedures are designed to ensure that information required to be disclosed by Leon's in such reports is then accumulated and communicated to the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based on the evaluation of disclosure controls and procedures, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as at September 30, 2008.
Internal Control Over Financial Reporting
Leon's management, under the supervision of the CEO and the CFO, has designed internal controls over financial reporting, as defined under Multilateral Instrument 52-109.
The purpose of internal controls over financial reporting is to provide reasonable assurance regarding the reliability of financial reporting, in accordance with GAAP, focusing in particular on controls over information contained in the annual and interim financial statements. The internal controls are not expected to prevent and detect all misstatements due to error or fraud.
There have been no changes in Leon's internal controls over financial reporting during the third quarter ended September 30, 2008, that have materially affected or are reasonably likely to materially affect Leon's internal control over financial reporting.
Outlook
During the first three quarters of 2008 very strong merchandising and marketing efforts enabled us to increase sales and profits over the comparable period for the prior year. As of late, we have seen signs of a slowdown in consumer spending and as such we expect the final quarter of 2008 to show a moderation in sales growth as compared to last year. Despite these concerns, our Company's previous experience in dealing with economic slowdowns, our strong financial position, and our constant effort to improve productivity have well positioned us to adapt to these changing market conditions.
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: sudden slow down in the Canadian economy; 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 12th day of November, 2008.
Leon's Furniture Limited - Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(UNAUDITED)
Period ended September 30th
($ in thousands) 3 months ended 9 months ended
2008 2007 2008 2007
Sales 202,985 165,791 534,288 451,534
Cost of sales 123,885 96,321 323,494 263,102
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Gross profit 79,100 69,470 210,794 188,432
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Operating expenses (income)
Salaries and commissions 29,780 24,709 83,388 72,436
Advertising 6,951 6,764 23,300 22,175
Rent and property taxes 2,649 2,581 8,404 7,931
Amortization 4,216 3,557 11,779 10,301
Employee profit-sharing plan 998 888 2,971 2,855
Other operating expenses 11,854 9,161 34,270 27,911
Interest income (1,369) (1,213) (3,534) (3,442)
Other income (2,548) (1,944) (10,404) (8,106)
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52,531 44,503 150,174 132,061
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Income before income taxes 26,569 24,967 60,620 56,371
Provision for income taxes 9,070 8,793 20,435 19,487
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Net income for the period 17,499 16,174 40,185 36,884
Retained earnings, beginning of
the period 310,534 284,026 307,068 276,037
Dividends declared (4,943) (4,950) (21,921) (14,879)
Excess of cost of share
repurchase over carrying value
of related shares (2,379) (4,413) (4,621) (7,205)
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Retained earnings, end of period 320,711 290,837 320,711 290,837
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Weighted average number of common
shares outstanding ('000's)
Basic 70,694 70,871 70,583 70,810
Diluted 72,693 73,366 72,735 73,305
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Earnings per share
Basic $0.25 $0.23 $0.57 $0.52
Diluted $0.24 $0.22 $0.55 $0.50
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Dividends declared per share
Common $0.07 $0.07 $0.31 $0.2025
Convertible, non-voting - - - -
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Leon's Furniture Limited - Meubles Leon Ltee
Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As at As at
September 30 December 31
($ in thousands) 2008 2007
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ASSETS
Current
Cash and cash equivalents 22,501 25,699
Marketable securities 97,136 102,013
Restricted marketable securities 17,168 14,567
Accounts receivable 23,815 33,684
Income taxes recoverable 3,240 -
Inventory 93,399 75,640
Income taxes recoverable - -
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Total current assets 257,259 251,603
Prepaid expenses 1,562 1,282
Goodwill 12,282 -
Intangibles 4,188 -
Other receivables 590 -
Future tax assets 12,397 10,722
Capital assets, net 218,167 211,619
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506,445 475,226
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 105,087 92,051
Income taxes payable - 2,137
Customers' deposits 17,091 13,533
Dividends payable 4,943 4,949
Deferred warranty plan revenue 13,709 13,812
Future tax liabilities 779 355
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Total current liabilities 141,609 126,837
Deferred warranty plan revenue 21,829 19,124
Redeemable share liability 286 180
Future tax liabilities 7,944 7,080
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Total liabilities 171,668 153,221
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Shareholders' equity
Common shares 15,823 14,020
Retained earnings 320,711 307,068
Accumulated other comprehensive income (1,757) 917
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Total shareholders' equity 334,777 322,005
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506,445 475,226
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Leon's Furniture Limited - Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three month period ended September 30th
($ in thousands) 3 months ended 9 months ended
2008 2007 2008 2007
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OPERATING ACTIVITIES
Net income for the period 17,499 16,174 40,185 36,884
Add (deduct) items not involving
a current cash payment
Amortization of capital assets 3,903 3,557 11,466 10,301
Amortization of intangible
assets 313 - 313 -
Amortization of deferred
warranty revenue (3,810) (3,597) (10,827) (9,957)
Loss (gain) on sale of
marketable securities 236 570 (476) (562)
Future tax expense 94 (290) 160 (1,188)
Loss (gain) on sale of capital
assets (267) 3 (1,665) 21
Cash received on warranty sales 4,877 4,075 12,679 10,952
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22,845 20,492 51,835 46,451
Net change in non-cash working
capital balances related
to operations 7,096 14,950 1,530 (4,892)
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Cash provided by operating
activities 29,941 35,442 53,365 41,559
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INVESTING ACTIVITIES
Purchase of capital assets (9,105) (7,025) (15,507) (19,183)
Proceeds on sale of capital assets 312 6 2,775 187
Purchase of marketable securities (52,410) (54,933) (163,176) (117,920)
Proceeds on sale of marketable
securities 48,274 41,636 162,706 108,538
Decrease in employee share
purchase loans 509 92 1,956 1,691
Purchase of Appliance Canada (1,608) - (18,722) -
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Cash used in investing activities (14,028) (20,224) (29,968) (26,687)
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FINANCING ACTIVITIES
Dividends paid (4,625) (4,679) (21,927) (14,069)
Repurchase of capital stock (2,403) (4,454) (4,668) (7,272)
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Cash used in financing activities (7,028) (9,133) (26,595) (21,341)
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Net increase (decrease) in cash
and cash equivalents during the
period 8,885 6,085 (3,198) (6,469)
Cash and cash equivalents,
beginning of period 13,616 15,618 25,699 28,172
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Cash and cash equivalents,end of
period 22,501 21,703 22,501 21,703
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three month period ended September 30th
($ in thousands)
Net
Tax of tax
2008 effect 2008
Net income for the period 17,499 - 17,499
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during the
period (1,516) (258) (1,258)
Reclassification adjustment for net gains
and (losses) included in net income (12) (2) (10)
Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,528) (260) (1,268)
------------------------------
Comprehensive income for the period 15,971 (260) 16,231
------------------------------
------------------------------
Net
Tax of tax
2007 effect 2007
Net income for the period 16,174 - 16,174
Other comprehensive income, net of tax
Unrealized gains on available-for-sale
financial assets arising during the
period 703 124 579
Reclassification adjustment for net gains
and (losses) included in net income (276) (47) (229)
Change in unrealized gains on
available-for-sale financial assets
arising during the period 427 77 350
------------------------------
Comprehensive income for the period 16,601 77 16,524
------------------------------
------------------------------
Nine month period ended September 30th
($ in thousands)
Net
Tax of tax
2008 effect 2008
Net income for the period 40,185 - 40,185
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during the
period (2,247) (381) (1,866)
Reclassification adjustment for net gains
and (losses) included in net income (973) (165) (808)
Change in unrealized losses on
available-for-sale financial assets
arising during the period (3,220) (546) (2,674)
------------------------------
Comprehensive income for the period 36,965 (546) 37,511
------------------------------
------------------------------
Net
Tax of tax
2007 effect 2007
Net income for the period 36,884 - 36,884
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during the
period (461) (73) (388)
Reclassification adjustment for net gains
and (losses) included in net income (1,482) (254) (1,228)
Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,943) (327) (1,616)
------------------------------
Comprehensive income for the period 34,941 (327) 35,268
------------------------------
------------------------------
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PREPARATION
The Company prepares its financial statements in accordance with
accounting principles generally accepted in Canada. The disclosures
contained in these unaudited interim consolidated financial statements do
not include all requirements of generally accepted accounting principles
for annual financial statements. The unaudited interim consolidated
financial statements should be read in conjunction with the annual
consolidated financial statements for the year ended December 31, 2007.
These interim consolidated financial statements were prepared following
the same policies and standards as in the most recent annual consolidated
financial statements.
2. Accounting Standards Implemented in 2008
Capital Disclosures and Financial Instruments - Disclosure and
Presentation
In December 2006, the Canadian Institute of Chartered Accountants
("CICA") issued three new accounting standards: Section 1535, "Capital
Disclosures" ("Section 1535"), Section 3862, "Financial Instruments -
Disclosures" ("Section 3862") and Section 3863, "Financial Instruments -
Presentation" (Section 3863").
Section 1535 establishes guidelines for the disclosure of information
regarding a company's capital and how it is managed. The adoption of
Section 1535 did not have an impact on the Company's results of
operations or financial condition.
Section 3862 and Section 3863 replaced Section 3861, "Financial
Instruments - Disclosure and Presentation". Section 3862 requires
increased disclosures regarding the risks associated with financial
instruments and how these risks are managed. Section 3863 carried forward
standards for presentation of financial instruments and provides
additional guidance for the classification of financial instruments, from
the perspective of the issuer, between liabilities and equity.
Comparative information about the nature and extent of risks arising from
financial instruments is not required in the year Section 3862 is
adopted. The adoption of Section 3862 and Section 3863 did not have an
impact on the Company's results of operations or financial condition.
Inventories
During the first quarter of 2008, the Company also implemented Section
3031, "Inventories" ("Section 3031"), which replaced Section 3030 of the
same title. Section 3031 establishes that inventories should be measured
at the lower of cost and net realizable value, with guidance on the
determination of cost. Leon's Furniture Limited 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 be not recoverable due to
obsolescence, damage or declining selling prices.
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 $122,551,000 and
$319,630,000 during the three and nine month periods ended September 30,
2008 is presented within cost of sales on the interim consolidated
statements of income for the period ended September 30, 2008. There were
inventory write-downs of $144,000 recognized as an expense during the
period ended September 30, 2008. There were no reversals of any
write-down that was recognized as a reduction in the amount of
inventories recognized as an expense for the period ended September 30,
2008. Furthermore none of the Company's inventory has been pledged as
security for any liabilities of the Company.
This new standard was adopted by the Company for its fiscal year starting
on January 1, 2008 and had no impact on its financial position or results
of operation.
3. ACCUMULATED OTHER COMPREHENSIVE INCOME
As at September 30, 2008 accumulated other comprehensive income was
comprised of the unrealized losses on marketable securities of $2,122,000
($1,757,000 net of tax)
2008 2007
Balance, beginning of period $ 917 $ -
Cumulative impact of implementing new accounting
standards (net of income taxes $491,000) - 2,392
Changes in unrealized losses on available-for-sale
financial assets arising during the period (2,674) (1,616)
Balance, end of period $ (1,757) $ 776
4. INCOME TAXES
The Company's total cash payments for income taxes paid in the three
month period ending September 30, 2008 were $7,596,000 (2007 -
$7,208,000) and for the nine month period were $26,348,000 (2007 -
$25,067,000).
5. COMMON SHARES
During the quarter, 201,800 common shares were repurchased (2007 -
342,800) on the open market pursuant to the terms and conditions of
Normal Course Issuer Bids at a net cost of approximately $2,403,000 (2007
- 4,454,000). For the nine month period, the Company repurchased 395,800
(2007 - 565,600) common shares at a net cost of approximately $4,668,000
(2007 - $7,272,000). 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 $24,000 (2007 - $41,000) and $47,000 (2007 - $67,000) for
the three and nine month period respectively. The excess net cost over
the carrying value of the shares of approximately $2,379,000 (2007 -
$4,413,000) has been recorded as a reduction in retained earnings. For
the nine month period, the excess net cost over the carrying value of the
shares of approximately $4,621,000 (2007 - $7,205,000) has been recorded
as a reduction in retained earnings.
During the quarter ended September 30, 2008, 7,819 series 1998 shares
(2007 - 20,844) and 20,424 series 2002 shares (2007 - nil) were converted
into common shares with a stated value of approximately $34,000 (2007 -
$92,000) and $147,000 (2007 - nil) respectively. For the nine month
period 46,618 (2007 - 384,340) series 1998 shares and 228,827 (2007 -
nil) series 2002 shares were converted in to common shares with a stated
value of approximately $205,000 (2007 - $1,691,000) and $1,645,000 (2007
- nil), respectively.
During the quarter ended September 30, 2008, the Company cancelled 11,538
series 2005 shares in the amount of $109,000. For the nine month period
49,992 series 2005 shares (2007 - 3,905) were cancelled in the amount of
$472,000 (2007 - $37,000).
6. Classification and Fair Value of Financial Instruments
As at September 30, 2008, the classification of the Company's financial
instruments is as follows:
September 30, 2008
Other
Loans Financ-
Avail- and ial
able Receiv- Liabil-
Held for for ables ities Total
Trading Sale (amort- (amort- Carry-
Financial (fair (fair ized ized ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 22,501 - - - 22,501 22,501
Accounts receivable - - 23,815 - 23,815 23,815
Marketable
securities - 97,136 - - 97,136 97,136
Restricted
marketable
securities - 17,168 - - 17,168 17,168
Other receivables - - 590 - 590 590
Financial
Liabilities
Accounts payable
and accrued
liabilities - - - 105,087 105,087 105,087
Redeemable share
liability - - - 286 286 286
December 31, 2007
Other
Loans Financ-
Avail- and ial
able Receiv- Liabil-
Held for for ables ities Total
Trading Sale (amort- (amort- Carry-
Financial (fair (fair ized ized ing Fair
Assets value) value) cost) cost) Amount Value
Cash and cash
equivalents 25,699 - - - 25,699 25,699
Accounts receivable - - 33,684 - 33,684 33,684
Marketable
securities - 102,013 - - 102,013 102,013
Restricted
marketable
securities - 14,567 - - 14,567 14,567
Income taxes
recoverable - - - - - -
Other receivables - - - - - -
Financial Liabilities
Accounts payable and
accrued liabilities - - - 92,051 92,051 92,051
Income taxes payable - - - 2,137 2,137 2,137
Redeemable share
liability - - - 180 180 180
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 no significant credit
risk associated to its accounts receivable. 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 for which there is minimum exposure
to US financial companies effected by the credit crisis and corporate
failures. There is no immediate need for cash from our investment
portfolio.
Working capital requirements are expected to increase. Terms with our
suppliers are being reviewed and when there is an opportunity to increase
the purchase discount, we are making the offer to secure the inventory
supply.
iii) Market risk
The Company is exposed to foreign currency exchange rate risk. Some
merchandise is paid for in United States 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 United States dollars.
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;
- maintain financial capacity and access to capital to support future
development of the business while taking into consideration current
and future industry, market and economic risks and conditions; and
- utilize short term funding sources to manage its working capital
requirements.