TORONTO, Aug. 11 /CNW/ - For the three months ended June 30, 2009, total Leon's sales were $209,931,000 including $44,693,000 of franchise sales ($224,688,000 including $47,962,000 of franchise sales in 2008), a decrease of 6.6%. Net income was $8,620,000, 12 cents per common share ($11,618,000, 16 cents per common share in 2008), a decrease of 25% per common share.
For the six months ended June 30, 2009, total Leon's sales were $405,131,000 including $89,826,000 of franchise sales ($421,129,000 including $89,826,000 of franchise sales in 2008), a decrease of 3.8% and net income was $17,191,000, 24 cents per common share ($22,686,000, 32 cents per common share in 2008), a decrease of 25% per common share. Results for 2008 include an after tax gain on sale of land of $1,135,000 or 2 cents per common share.
Similar to the first quarter 2009, we experienced lower sales and profits in the second quarter 2009 when compared to the prior year. We continue celebrating our 100th Anniversary with an active marketing campaign along with providing good consumer value. At the same time we continue to put measures in place to keep expenses in check. As a result, we believe we are well positioned to take advantage of any improvements in general economic conditions. In the second quarter 2009 we completed a major renovation to our Laval showroom and warehouse followed by a successful grand re-opening. In addition, July 2009 saw us open a new showroom store in downtown Toronto, Ontario known as the "Roundhouse" and are pleased with its performance to date.
The Directors have declared a quarterly dividend of 7 cents per common share payable on the 9th day of October 2009 to shareholders of record at the close of business on the 9th day of September 2009. 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.
The Directors have also approved, subject to obtaining regulatory approvals, the continuation of the Company's ongoing Normal Course Issuer Bid, which expires on September 9, 2009. Pursuant to the continued bid, the Company intends, in the twelve months commencing September 10, 2009, to purchase up to the lesser of 4.99% of its Common Shares outstanding on August 28, 2009, and the amount equal to 4.99% of its Common Shares outstanding on the date the Toronto Stock Exchange accepts the notice of intention to make a normal course issuer bid.
Since September 10, 2008, the date on which Leon's current issuer bid commenced, the Company has purchased 146,168 Common Shares at an average price of $9.25 per share. The Company's Board of Directors believes that the purchase of its common shares is an appropriate use of its corporate funds, given its very strong liquidity position.
EARNINGS PER SHARE FOR EACH QUARTER
-----------------------------------
YEAR
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL
-------- ------- -------- ------- -----
2009 - Basic 12 cents 12 cents $0.24
- Fully Diluted 12 cents 12 cents $0.24
2008 - Basic 16 cents 16 cents 25 cents 33 cents $0.90
- Fully Diluted 15 cents 16 cents 24 cents 32 cents $0.87
2007 - Basic 15 cents 14 cents 23 cents 31 cents $0.83
- Fully Diluted 15 cents 13 cents 22 cents 30 cents $0.80
LEON'S FURNITURE LIMITED - MEUBLES LEON LTEE
Mark J. Leon
Chairman of the Board
MANAGEMENT'S DISCUSSION AND ANALYSIS
August 11, 2009
Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited consolidated interim financial statements of the Company for the six months ended June 30, 2009, MD&A for the year ended December 31, 2008, the audited consolidated financial statements for the year ended December 31, 2008 and the Company's Annual Information Form dated March 14, 2009.
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 will vary.
The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the MD&A and the financial statements, and recommended the Board of Directors approve them. Following review by the full Board of Directors, the financial statements and MD&A were approved.
Introduction
Leon's Furniture Limited has been in the furniture retail business for 100 years. The company's 36 corporate and 28 franchise stores can be found in every province except British Columbia. Main product lines sold at retail include furniture, appliances and electronics.
Revenues and Expenses
For the three months ended June 30, 2009, total Leon's sales were $209,931,000 including $44,693,000 of franchise sales ($224,688,000 including $47,962,000 of franchise sales in 2008), a decrease of 6.6%.
Leon's corporate sales of $165,238,000 in the second quarter of 2009, decreased by $11,488,000 or 6.5%, compared to the second quarter of 2008. The decrease in sales in the second quarter compared to the prior year was the result of a general economic slowdown that began in 2008 and has picked up speed in 2009. In order to help offset declining consumer confidence, we continued running a very active marketing campaign to coincide with the Company's 100th Anniversary. Although same store corporate sales were down 6.5% compared to the prior year, based upon a competitive analysis of the marketplace, we feel confident that we did increase market share.
Leon's franchise sales of $44,693,000 in the second quarter of 2009 decreased by $3,269,000, or 6.8% compared to the second quarter of 2008. The franchise sales decline is similar to the corporate sales decrease. The economic slowdown has impacted all regions of the country.
Our gross margin for the second quarter of 2009 of 38.06% has decreased 1.35% from the second quarter 2008. The decrease in the gross margin is mainly attributed to the increased costs of imported furniture that were not entirely passed onto consumers. In addition, we increased the levels of promotional pricing in order to entice consumers to come into our stores in what has been a weak retail economy.
Net operating expenses of $50,264,000 were down $2,047,000 or 3.9% for the second quarter of 2009 compared to the second quarter of 2008. Payroll and commission costs were down 8.3% in the quarter compared to the prior year. This decrease was mainly the result of a planned effort to reduce payroll costs in response to our expectation of a slowdown in sales for 2009. As previously stated, the Company created an enhanced marketing campaign to celebrate the Company's 100th Anniversary. As a result, advertising expenses increased by $1,039,000 or 13.0% for the second quarter compared to the prior year. For the most part, all other operating costs as a percentage of sales were down compared to the prior year second quarter as we continue to look at ways of reducing operating expenses given the economic slowdown.
As a result of the above, net income for the second quarter of 2009 was $8,620,000, 12 cents per common share ($11,618,000, 16 cents per common share in 2008), a decrease of 25% per common share.
For the six months ended June 30, 2009, total Leon's sales were $405,131,000 including $87,368,000 of franchise sales ($421,129,000 including $89,826,000 of franchise sales in 2008), a decrease of 3.8% and net income was $17,191,000, 24 cents per common share ($22,686,000, 32 cents per common share in 2008), a decrease of 25% per common share. The first quarter 2008 includes an after tax gain on sale of land of $1,135,000 or 2 cents per common share.
Annual Financial Information
($ in thousands, except earnings
per share and dividends) 2008 2007 2006
Net corporate sales 740,376 637,456 591,286
Leon franchise sales 209,848 195,925 177,167
Total Leon sales 950,224 833,381 768,453
Net income 63,390 58,494 53,602
Earnings per share
Basic $0.90 $0.83 $0.76
Diluted $0.87 $0.80 $0.73
Total Assets 513,408 475,226 439,639
Common Share Dividends Declared $0.38 $0.2725 $0.375
Convertible, Non-Voting Shares
Dividends Declared $0.14 $0.14 $0.125
Liquidity and Financial Resources
($ in thousands, except dividends
per share)
Balances as at: June 30/09 Dec. 31/08 June 30/08
---------- ---------- ----------
Cash, cash equivalents and
marketable securities (including
restricted marketable securities) 130,172 139,275 125,550
Accounts receivable 16,933 30,291 22,736
Inventory 96,473 92,904 81,313
Total assets 502,517 513,408 475,886
Working capital 142,889 135,192 113,816
Current Prior Prior
Quarter Quarter Quarter
For the 3 months ended June 30/09 Mar. 31/09 Dec. 31/08
---------- ---------- ----------
Cash flow from operations 13,961 (3,166) 16,359
Purchase of capital assets 5,180 1,903 7,161
Repurchase of capital stock 384 707 -
Dividends paid 4,953 4,952 4,943
Dividends paid per share $0.07 $0.07 $0.07
Cash and marketable securities (including restricted marketable securities) increased by $4,033,000 in the quarter mainly as the result of the reduced investment in working capital balances.
Marketable securities consist primarily of bonds with maturities not exceeding 8 years with an interest rate range of 0.249% to 7.6% and 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. The assets are in the form of a trust with a financial institution amounting to $16,989,000.
Inventory increased by $8,735,000 from the first quarter of 2009. The increase is the result of lower sales and inventory being staged for our new downtown Toronto store which opened in July 2009.
Renovations are ongoing at our Barrie and Whitby, Ontario stores and are scheduled to be completed by this Fall. A major renovation was completed at our Laval, Quebec showroom and warehouse store with a successful grand re-opening in the second quarter 2009. We have completed work on a new downtown Toronto, Ontario showroom store known as the "Roundhouse" and the store had a grand opening in July 2009. We are pleased with initial results from this most recent store addition. All funding for new store projects and renovations is scheduled to come from our existing cash resources.
Common Shares
At June 30, 2009, there were 70,692,758 common shares issued and outstanding. During the second quarter of 2009, no (2008 - 23,450) convertible, non-voting series 1998 shares and 39,316 (2008 - 97,930) convertible, non-voting series 2002 shares were converted to common shares. The Company repurchased 39,468 (2008 - 22,800) of its common shares on the open market at an average cost of $9.70, pursuant to the terms and conditions of Normal Course Issuer Bids. All shares repurchased by the Company have been cancelled.
For the six month period ending June 30, 2009, the Company repurchased 123,168 common shares at an average price of $8.82, no (2008 - 38,799) convertible, non-voting series 1998 shares and 70,787 (2008 - 208,403) convertible, non-voting series 2002 shares were converted to common shares.
Commitments
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($ 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) 25,948 1,254 6,301 6,036 12,357
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Purchase obligations(2) 392 392 - - -
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Total contractual
obligations 26,340 1,646 6,301 6,036 12,357
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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 two
locations in Canada.
In addition, the Company has commitments related to redeemable shares as
follows:
As at As at
($ in thousands) June 30, 2009 December 31, 2008
Authorized
2,284,000 convertible, non-voting,
series 2002 shares
806,000 convertible, non-voting,
series 2005 shares
1,222,000 convertible, non-voting,
series 2009 shares
Issued
1,097,358 series 2002 shares
(2008 - 1,168,145) $7,887 $8,396
689,513 series 2005 shares
(2008 - 689,513) 6,511 6,511
1,207,000 series 2009 shares
(2008 - 0) 10,683 -
Less employees share purchase loans (24,698) (14,622)
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Redeemable share liability 383 285
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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 and 2005 shares of approximately $261,000 (2008 - $329,000) have been used to reduce the respective shareholder loans.
During the second quarter 2009, no convertible, non-voting, series 1998 shares were converted into common shares with a stated value of nil (2008 - 23,450 for a stated value of $103,000). For the six month period, no convertible, non-voting, series 1998 shares were converted into common shares with a stated value of nil (2008 - 38,799 for a stated value of $170,000).
During the second quarter 2009, 39,316 convertible, non-voting series 2002 shares were converted into common shares with a stated value of $283,000 (2008 - 97,930 for a stated value of $704,000). For the six month period, 70,787 convertible non-voting series 2002 shares were converted into common shares with a stated value of $509,000 (2008 - 208,403 for a stated value of $1,498,000). During the quarter ended June 30, 2009, the Company did not cancel any series shares (2008 - 38,454 in the amount of $363,000 for series 2005 shares).
During the second quarter 2009, the Company issued 1,207,000 series 2009 shares for proceeds of $10,683,000. In addition, the Company advanced non-interest bearing loans in the amount of $10,683,000 to certain of its employees to acquire these shares.
Quarterly Results (2009, 2008, 2007)
Quarterly Income Statement ($ in thousands, except earnings per share)
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Quarter Ended Quarter Ended
June 30 March 31
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2009 2008 2009 2008
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Leon corporate sales 165,238 176,726 152,525 154,577
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Leon franchise sales 44,693 47,962 42,675 41,864
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Total Leon sales 209,931 224,688 195,200 196,441
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Net income per share $0.12 $0.16 $0.12 $0.16
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Fully diluted per share $0.12 $0.16 $0.12 $0.15
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Quarter Ended Quarter Ended
December 31 September 30
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2008 2007 2008 2007
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Leon corporate sales 206,088 185,922 202,985 165,791
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Leon franchise sales 63,803 60,931 56,219 50,434
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Total Leon sales 269,891 246,853 259,204 216,225
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Net income per share $0.33 $0.31 $0.25 $0.23
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Fully diluted per share $0.32 $0.30 $0.24 $0.22
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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, 2008. 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 year to date for 2009 have increased when compared to the same period for 2008. The cost increase is a result of the extended promotional terms in 2009 to coincide with the Company's 100th Anniversary.
Inventories
During the first quarter of 2008, the Company 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. 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 for the three and six month periods ended June 30, 2009 was $100,009,000 and $190,160,000 (2008 - $106,663,000 and $196,601,000) is presented within cost of sales on the consolidated statements of income. There were inventory write-downs of $216,000 (2008 - $96,000) recognized as an expense during the period ended June 30, 2009. As at June 30, 2009, the inventory markdown provision totalled $3,419,000 (2008 - $3,841,000). There were no reversals of any write-down for the period ended June 30, 2009. 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 year to date for 2009 are $8,008,000 compared to $7,017,000 in 2008. Warranty expenses deducted through costs of goods sold year to date for 2009 are $2,870,000 compared to $2,530,000 in 2008. The cost of warranty repairs in particular for electronics continues to increase but we anticipate it will level off in the very near future.
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 5.5% year to date for 2009 compared to 2008 which is in line with the decrease in franchise sales for the six month period ended June 30, 2009.
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.
Changes in Accounting Policy Accounting Standards Implemented in 2009 Section 3064 - Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted the new CICA accounting standard entitled, Section 3064 "Goodwill and Intangible Assets". Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The adoption of CICA 3064 had no impact on the Company's consolidated financial statements.
Credit Risk and Fair Value of Financial Assets and Financial Liabilities
In January 2009, the CICA issued Emerging Issues Committee Abstract 173, "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities" ("EIC-173"), effective for interim and annual financial statements ending on or after January 2009. EIC-173 provides further information on the determination of the fair value of financial assets and financial liabilities under Handbook Section 3855, "Financial Instruments - Recognition and Measurement." It states that an entity's own credit and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments. The adoption of this standard did not have any impact on the Company's results of operations or financial position.
Pending Changes to Accounting Policy
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 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.
To meet these requirements, the Company has launched an internal initiative to govern the conversion process and is currently evaluating the potential impact of the conversion to IFRS on its financial statements. At this time, the impact on the Company's future financial position and results of operations is not reasonably determinable or estimable. The Company expects the transition to IFRS to impact accounting, financial reporting, internal control over financial reporting, information systems and business processes.
The Company is developing a formal project governance structure which will include a steering committee to guide our IFRS conversion project forward. During the quarter, the Company has also completed a diagnostic impact assessment which involved a high level review of the major differences between current Canadian GAAP and IFRS, as well as establishing an implementation guideline. In accordance with this guideline the Company has divided its convergence plan into the following two phases:
Phase 1: Detailed Impact Analysis & Development Phase (currently in progress) Phase 2: Implementation Phase
The effects of any Canadian GAAP to IFRS divergences noted during the Company's diagnostic impact assessment have not been quantified. The Company will continue to assess the impact of the transition to IFRS and to review all of the proposed and ongoing projects of the International Accounting Standards Board to determine their impact on the Company. Additionally, the Company will continue to invest in training and resources throughout the transition period to facilitate a timely conversion.
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.
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 June 30, 2009.
There have been no changes in the Company's internal control over financial reporting during the period ended on June 30, 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Outlook
Similar to a trend that began in the latter part of 2008, we saw a decrease in same store sales from the prior year's quarter. At this point we do not see any clear signs as to when we will see an economic turnaround. However, we just opened a new store in the third quarter 2009 known as the "Roundhouse" which should help reinforce sales for the balance of this year. This will also be aided by a continuation of a robust marketing campaign to coincide with celebrating the Company's 100th Anniversary. However, even with these measures in place, growing sales and profits for the balance of this year will be very challenging. Despite these concerns, our strong financial position coupled with past experience in dealing with economic slowdowns should allow us to look to the future with cautious optimism.
Financial Statements Governance Practice
Leon's Furniture Limited's financial statements have been prepared in accordance with Canadian generally accepted accounting principles.
The Audit Committee of the Board of Directors of Leon's Furniture Limited reviewed the Management's Discussion and Analysis and the financial statements, and recommended the Board of Directors approve them. Following review by the full Board of Directors, the financial statements and MD&A were approved.
Forward-Looking Statements
This MD&A, in particular the section under the 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 further slowdown 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 11th day of August, 2009.
Leon's Furniture Limited-Meubles Leon Ltee
Incorporated under the laws of Ontario
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
As at As at
June 30 December 31
($ in thousands) 2009 2008
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ASSETS
Current
Cash and cash equivalents 31,600 39,483
Marketable securities 81,583 83,194
Restricted marketable securities 16,989 16,598
Accounts receivable 16,933 30,291
Income taxes recoverable 10,450 2,037
Inventory 96,473 92,904
Future tax assets 430 270
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Total current assets 254,458 264,777
Prepaid expenses 1,580 1,490
Goodwill 11,282 11,282
Intangibles 4,563 4,875
Other receivables 334 419
Future tax assets 11,003 10,752
Property, plant & equipment net 219,297 219,813
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502,517 513,408
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 73,236 95,247
Customers' deposits 17,750 14,119
Dividends payable 4,949 4,952
Deferred warranty plan revenue 15,634 15,267
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Total current liabilities 111,569 129,585
Deferred warranty plan revenue 21,253 21,712
Redeemable share liability 383 285
Future tax liabilities 9,195 8,468
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Total liabilities 142,400 160,050
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Shareholders' equity
Common shares 16,944 16,493
Retained earnings 345,216 338,960
Accumulated other comprehensive income (2,043) (2,095)
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Total shareholders' equity 360,117 353,358
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502,517 513,408
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF INCOME AND
RETAINED EARNINGS
(UNAUDITED)
Period ended June 30th
($ in thousands) 3 months ended 6 months ended
2009 2008 2009 2008
Sales 165,238 176,726 317,763 331,303
Cost of sales 102,343 107,077 194,785 199,609
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Gross profit 62,895 69,649 122,978 131,694
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Operating expenses (income)
Salaries and commissions 26,070 28,438 50,314 53,608
Advertising 9,047 8,008 18,200 16,349
Rent and property taxes 2,757 2,778 5,601 5,755
Amortization 4,169 3,801 8,115 7,563
Employee profit-sharing plan 1,030 1,150 1,867 1,973
Other operating expenses 10,208 11,946 20,532 22,416
Interest income (766) (886) (1,618) (2,165)
Other income (2,251) (2,924) (5,234) (6,471)
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50,264 52,311 97,777 99,028
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Income before gain on sale of
capital property and income
taxes 12,631 17,338 25,201 32,666
Gain on sale of capital property - - - 1,385
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Income before income taxes 12,631 17,338 25,201 34,051
Provision for income taxes 4,011 5,720 8,010 11,365
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Net income for the period 8,620 11,618 17,191 22,686
Retained earnings, beginning
of the period 341,910 311,207 338,960 307,068
Dividends declared (4,949) (12,021) (9,902) (16,978)
Excess of cost of share
repurchase over carrying value
of related shares (365) (270) (1,033) (2,242)
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Retained earnings, end of period 345,216 310,534 345,216 310,534
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Weighted average number of common
shares outstanding ('000's)
Basic 70,696 70,678 70,725 70,637
Diluted 71,831 72,081 71,739 72,099
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Earnings per share
Basic $0.12 $0.16 $0.24 $0.32
Diluted $0.12 $0.16 $0.24 $0.31
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Dividends declared per share
Common $0.07 $0.17 $0.14 $0.24
Convertible, non-voting - - - -
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Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three month period ended June 30th
($ in thousands)
Net of tax
Tax
2009 effect 2009
Net income for the period 8,620 - 8,620
Other comprehensive income, net of tax
Unrealized gains on available-for-sale
financial assets arising during
the period 1,145 199 946
Reclassification adjustment for net gains
and (losses) included in net income 84 14 70
Change in unrealized gains on
available-for-sale financial assets
arising during the period 1,229 213 1,016
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Comprehensive income for the period 9,849 213 9,636
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Net of tax
Tax
2008 effect 2008
Net income for the period 11,618 - 11,618
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during
the period (1,506) (255) (1,251)
Reclassification adjustment for net gains
and (losses) included in net income (336) (57) (279)
Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,842) (312) (1,530)
-----------------------------
Comprehensive income for the period 9,776 (312) 10,088
-----------------------------
-----------------------------
Six month period ended June 30th
($ in thousands)
Net of tax
Tax
2009 effect 2009
Net income for the period 17,191 17,191
Other comprehensive income, net of tax
Unrealized gains on available-for-sale
financial assets arising during
the period 15 8 7
Reclassification adjustment for net gains
and (losses) included in net income 53 8 45
Change in unrealized gains on
available-for-sale financial assets
arising during the period 68 16 52
-----------------------------
Comprehensive income for the period 17,259 16 17,243
-----------------------------
-----------------------------
Net of tax
Tax
2008 effect 2008
Net income for the period 22,686 - 22,686
Other comprehensive income, net of tax
Unrealized losses on available-for-sale
financial assets arising during
the period (731) (123) (608)
Reclassification adjustment for net gains
and (losses) included in net income (961) (163) (798)
Change in unrealized losses on
available-for-sale financial assets
arising during the period (1,692) (286) (1,406)
-----------------------------
Comprehensive income for the period 20,994 (286) 21,280
-----------------------------
-----------------------------
Leon's Furniture Limited-Meubles Leon Ltee
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Period ended June 30th
($ in thousands) 3 months ended 6 months ended
2009 2008 2009 2008
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income for the period 8,620 11,618 17,191 22,686
Add (deduct) items not involving
a current cash payment
Amortization of property,
plant & equipment 4,013 3,801 7,803 7,563
Amortization of intangible
assets 156 - 312 -
Amortization of deferred
warranty revenue (4,030) (3,528) (8,008) (7,017)
Loss (gain) on sale of
marketable securities 100 (144) 134 (712)
Future tax expense 2 65 300 66
Gain on sale of property,
plant & equipment (16) (11) (17) (1,398)
Cash received on warranty sales 3,880 4,110 7,916 7,802
-------------------------------------------------------------------------
12,725 15,911 25,631 28,990
Net change in non-cash working
capital balances related to
operations 1,236 7,045 (14,836) (5,566)
-------------------------------------------------------------------------
Cash provided by operating
activities 13,961 22,956 10,795 23,424
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant
& equipment (5,180) (4,796) (7,083) (6,402)
Proceeds on sale of property,
plant & equipment 20 38 22 2,463
Purchase of marketable securities (68,538) (71,967) (118,838) (110,766)
Proceeds on sale of marketable
securities 64,840 67,284 119,992 114,432
Decrease in employee share
purchase loans 283 807 607 1,447
Purchase of Appliance Canada Ltd. (842) (908) (2,382) (17,114)
-------------------------------------------------------------------------
Cash used in investing activities (9,417) (9,542) (7,682) (15,940)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid (4,953) (12,023) (9,905) (17,302)
Repurchase of common shares (384) (273) (1,091) (2,265)
-------------------------------------------------------------------------
Cash used in financing activities (5,337) (12,296) (10,996) (19,567)
-------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents during
the period (793) 1,118 (7,883) (12,083)
Cash and cash equivalents,
beginning of period 32,393 12,498 39,483 25,699
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 31,600 13,616 31,600 13,616
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
Except for the adoption of the accounting standards discussed in note
2 below, 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, 2008.
2. CHANGES IN ACCOUNTING POLICIES
Accounting Standards Implemented in 2009
Section 3064 - Goodwill and Intangible Assets
Effective January 1, 2009, the Company adopted the new CICA accounting
standard entitled, Section 3064 "Goodwill and Intangible Assets". Section
3064 establishes standards for the recognition, measurement, presentation
and disclosure of goodwill and intangible assets. The adoption of CICA
3064 had no impact on the Company's consolidated financial statements.
Credit Risk and Fair Value of Financial Assets and Financial Liabilities
In January 2009, the CICA issued Emerging Issues Committee Abstract 173,
"Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities" ("EIC-173"), effective for interim and annual financial
statements ending on or after January 2009. EIC-173 provides further
information on the determination of the fair value of financial assets
and financial liabilities under Handbook Section 3855, "Financial
Instruments - Recognition and Measurement." It states that an entity's
own credit and the credit risk of the counterparty should be taken into
account in determining the fair value of financial assets and financial
liabilities, including derivative instruments. The adoption of this
standard did not have any impact on the Company's results of operations
or financial position.
Pending Changes to Accounting Policy
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 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.
To meet these requirements, the Company has launched an internal
initiative to govern the conversion process and is currently evaluating
the potential impact of the conversion to IFRS on its financial
statements. At this time, the impact on the Company's future financial
position and results of operations is not reasonably determinable or
estimable. The Company expects the transition to IFRS to impact
accounting, financial reporting, internal control over financial
reporting, information systems and business processes.
The Company is developing a formal project governance structure which
will include a steering committee to guide our IFRS conversion project
forward. During the quarter, the Company has also completed a diagnostic
impact assessment which involved a high level review of the major
differences between current Canadian GAAP and IFRS, as well as
establishing an implementation guideline. In accordance with this
guideline the Company has divided its convergence plan into the following
two phases:
Phase 1: Detailed Impact Analysis & Development Phase (currently in
progress)
Phase 2: Implementation Phase
The effects of any Canadian GAAP to IFRS divergences noted during the
Company's diagnostic impact assessment have not been quantified. The
Company will continue to assess the impact of the transition to IFRS and
to review all of the proposed and ongoing projects of the International
Accounting Standards Board to determine their impact on the Company.
Additionally the Company will continue to invest in training and
resources throughout the transition period to facilitate a timely
conversion.
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 June 30, 2009 accumulated other comprehensive income was comprised
of the unrealized losses on marketable securities of $2,462,000
($2,043,000 net of tax)
2009 2008
Balance, beginning of period $ (2,095) $ 917
Changes in unrealized gains (losses)
on available-for-sale financial
assets arising during the period 52 (1,406)
Balance, end of period $ (2,043) $ (489)
4. INCOME TAXES
The Company's total cash payments for income taxes paid in the three
month period ending June 30, 2009 were $8,064,000 (2008 - $8,172,000) and
for the six month period were $16,684,000 (2008 - $18,752,000).
5. SHARE CAPITAL
During the quarter, 39,468 common shares were repurchased (2008 - 22,800)
on the open market pursuant to the terms and conditions of Normal Course
Issuer Bids at a net cost of approximately $384,000 (2008 - $273,000).
For the six month period, the Company repurchased 123,168 (2008 -
194,000) common shares at a net cost of approximately $1,091,000 (2008 -
$2,265,000). 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
$58,000 (2008 - $23,000). The excess net cost over the carrying value of
the shares of approximately $1,033,000 (2008 - $2,242,200) has been
recorded as a reduction in retained earnings.
During the quarter ended June 30, 2009, no convertible, non-voting,
series 1998 shares (2008 - 23,450) and 39,316 series 2002 shares (2008 -
97,930) were converted to common shares with a stated value of
approximately $nil and $282,000 (2008 - $103,000 and $704,000)
respectively. For the six month period, no convertible, non-voting,
series 1998 shares (2008 - 38,799) and 70,787 series 2002 shares (2008 -
208,403) were converted to common shares with a stated value of
approximately $nil and $509,000 (2008 - $170,000 and $1,498,000)
respectively.
During the second quarter 2009, the Company issued 1,207,000 series 2009
shares for proceeds of $10,683,000. In addition, the Company advanced
non-interest bearing loans in the amount of $10,683,000 to certain of its
employees to acquire these shares.
6. CLASSIFICATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS
As June 30, 2009, the classification of the Company's financial
instruments is as follows:
June 30, 2009
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 31,600 - - - 31,600 31,600
Accounts
receivable - - 16,933 - 16,933 16,933
Marketable
securities 81,583 - - - 81,583 81,583
Restricted
marketable
securities 16,989 - - - 16,989 16,989
Income taxes
recoverable - - 10,450 - 10,450 10,450
Other receivables - - 334 - 334 334
Financial
Liabilities
Accounts payable
and accrued
liabilities - - - 73,236 73,236 73,236
Redeemable share
liability - - - 383 383 383
December 31, 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 39,483 - - - 39,483 39,483
Accounts
receivable - - 30,291 - 30,291 30,291
Marketable
securities - 83,194 - - 83,194 83,194
Restricted
marketable
securities - 16,598 - - 16,598 16,598
Income taxes
recoverable - - 2,037 - 2,037 2,037
Other receivables - - 419 - 419 419
Financial
Liabilities
Accounts payable
and accrued
liabilities - - - 95,247 95,247 95,247
Redeemable share
liability - - - 285 285 285
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. 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 U.S. financial companies affected 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) 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;
- 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.