dependable.
K-Bro Linen Inc.
2013 Annual Report
Contents
President’s Message
Chairman’s Message
Financial Highlights
Management’s Discussion and Analysis
Management’s Responsibility for Financial Reporting
Consolidated Financial Statements
1
2
5
10
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We are
dependable.
Plant Locations
K-Bro is the largest healthcare & hospitality laundry and linen
processor in Canada.
Victoria
Calgary
Vancouver
(2 locations)
Edmonton
Regina
(Under Construction)
Québec City
Montréal
Toronto
President’s Message
2013 was a year of accomplishments and continued progress for K-Bro.
We remained focus on our core business of providing the best possible
laundry and linen services to our valued customers, and as a result we
were rewarded with the continuing loyalty of our existing customers and
the trust of many new ones.
Our company was founded in Edmonton in 1952, and it is with great
pride that we opened our newest facility there in 2013. Our 124,000
square foot facility—new, modern and highly-automated—enables us
to continue providing outstanding quality and service to our customers.
As expected, the start-up of our new Edmonton facility brought transition
costs and some margin impairment, but we are excited and focused on
the increased efficiencies that we are already realizing from our new
facility. Our Edmonton healthcare contract runs well into the next decade,
and were are looking forward to continuing many years of a successful
partnership with our healthcare and hospitality customers.
Another key 2013 milestone for K-Bro was our agreement with 3sHealth,
to provide services to the entire province of Saskatchewan for at least 10
years. While we have been providing service to much of the province on
a temporary basis from our Calgary plant, we are excited to begin building
our new Regina plant in 2014 and process Saskatchewan’s volume from
this new modern facility.
With all of our new customers and contract renewals from existing customers,
we enter 2014 with more than 98% of our healthcare business under long-term
contracts, typically 10-years. As a result, we have significant visibility and are
able to plan for our future with great confidence.
While our new Edmonton and Regina plants receive a lot of attention,
we continue to deliver outstanding results by working hard to earn the
confidence and trust of existing and new customers every day. Because
of their confidence and the tremendous commitment and capabilities of
our more than 1600 employees, 2013 was a year of success:
• Total shareholder return of 41.1%;
• Revenue in excess of $131 million compared with $126 million in 2012;
• EBITDA of $23.3 million compared with $24.5 million in 2012 (with
$1.1mm representing a temporary decline as the new Edmonton
plant begins operating);
• Market capitalization of $281 million at December 31, 2013, and a
very low debt to total capitalization ratio of 0.2x;
• Earnings per share of $1.47, compared with $1.60 in 2012; and,
• $8.1 million in dividends, representing 44% of our distributable
cash flows.
We will always ensure that our business adapts to new and changing
customer needs and we maintain our quality execution and differentiation
in everything we do. We will continue to make significant investments
in our people and our facilities to ensure that we build upon the many
strengths that have made us the leader in our market. For while we take
great pride in providing the best possible service to our more than 1,700
customers across Canada, we know we must continue to find ways to
improve every single day.
On behalf of our management team and our 1,600 dedicated employees,
thank you for your continued support of K-Bro.
Linda McCurdy
President and
Chief Executive Officer
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Chairman’s Message
The market’s confidence in us shows that we are well on our way
to achieving our vision of being a leading laundry and linen services
processor. To get there, we will continue to rely on the foundation of
our existing asset base, the industry’s most talented and dedicated
employees, and our financial strength and flexibility.
On behalf of K-Bro, I thank all of our shareholders and other
stakeholders for your continued confidence and commitment to
K-Bro. We will continue to work hard everyday to earn your trust.
Since inception, K-Bro has been a leader in good governance
practices and the composition of our Board has reflected the skills
and experience required to address the current issues and business
environment. Our Directors provide independent thinking and counsel
as it pertains to long-term strategy, succession and governance for
our company.
We are both excited and realistic about the future. We continue to
invest capital to improve our position in the marketplace as well as
to solidify our ability to face competition in our markets. Our growth
potential is significant and our investments are about to pay off. We
have the right equipment and proven capabilities, great employees and
are seeing a strong demand for our services throughout the country.
K-Bro has been safely delivering critical services across the
nation for 60 years and has a solid track record of sustainable
growth, reliable operations, and treating our hospitality customers,
healthcare partners and stakeholders with integrity and respect. This
consistent approach has served us well in the past and we believe
will continue to do in the future.
Ross Smith
Chairman
2
Board of Directors
(Left to right) - Linda McCurdy, Steve Matyas, Mike Percy, Ross Smith, Matt Hills
General Managers
(Left to right) - Ken Chu, Jerry Ostrzyzek, Jeff Gannon, Kevin Stephenson, Maxim Lortie, Sean Curtis, Sean Jackson, Ron Graham
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K-Bro is the largest healthcare and hospitality laundry and linen processor
in Canada. K-Bro operates eight facilities in seven cities, providing
management services and laundry processing of hospitality, healthcare
and speciality linens. Our core values are central to our reputation, our
quality is industry-leading, and our ability to deliver on commitments to
customers is second to none.
K-Bro provides the vital products and services that help people heal,
travel, live, and play. We’re helping hospitals and extended care centres
care for the young, old and vulnerable in environmentally responsible
ways. Our responsibility also extends to ensuring that we have a safe
culture at K-Bro. As our society grows, we integrate our commitment to
responsibility into our new businesses, employees and the communities
in which we live and work.
We are
dependable.
By expanding our capabilities into new markets,
we have opportunities to leverage our operating
strengths, grow our revenue, and further enhance
operating margins, ensuring consistent value
creation for stakeholders.
Linda McCurdy
President and Chief Executive Officer
K-Bro has a stable business model with strong
fundamentals that support our market valuation
and reliable shareholder dividends.
Christopher Burrows
Vice-President and Chief Financial Officer
Quality, innovation, and respect for our customers,
employees and communities is at the very center of
everything we have done for the past 50 years. We
have positioned K-Bro to be the preeminent partner
of choice by providing services across the country.
Sean Curtis
Senior Vice-President and General Manager
4
Financial Highlights
The following unaudited financial data has been derived from K-Bro’s consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP. The information set forth below should be read in conjunction with the Management’s Discussion & Analysis,
Consolidated Financial Statements and Notes sections of this Annual Report.
REVENUE
EBITDA
130
120
110
100
90
80
70
60
50
25
20
18
16
14
12
8
6
4
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
REVENUE (In millions of Canadian dollars) Years ended December 31
EBITDA (In millions of Canadian dollars) Years ended December 31
ToTAL ShAREhoLDER RETURN
(on a $100 investment in 2008)
$350
$300
$250
$200
$150
$100
$50
$0
DEC 08
$100
DEC 09
$82
DEC 10
$118
DEC 11
$172
DEC 12
$210
DEC 13
$261
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Single source for customers – K-Bro is able to deliver total linen
management services, including laundering, drying, folding, quota
cart development, sterilization, and more that focuses on efficiencies
and cost savings. We are one of the largest consumers of linens and
textiles in Canada. We leverage our market position to drive savings
for our customers. K-Bro works in partnership with our clients to
reduce their linen consumption.
One of our key strategies for growth is to pursue opportunities for
expansion through acquisition. We follow a strict set of criteria
when evaluating another organization’s potential, examining every
facet of a target company – does it open up a new or strategically
placed geographic market or market niche for us? Is there a
potential for growth in the market it serves? Will we be able to
build on relationships the company already has in place? Can we
build on an already-existing base of business? Does it enhance our
resources overall?
in place
Taking advantage of relationships already
includes
maintaining the existing labour and management of a company. The
ability and commitment demonstrated by staff members is a factor
in our decision-making process for acquisitions. The bottom line is
that we want profitable, dependable operations where we can bring
our expertise and resources to grow the existing base of business.
We continue to review and pursue accretive opportunities in new
markets and we believe that such opportunities may be available in
the future to further add to our growth.
In our industry, we’re dependent on our reputation, resources, and
track record as we develop relationships with potential and new
clients and compete for contracts. These factors are also critical
in maintaining stable, responsive, and loyal relationships with our
existing customers.
In order to be successful, a company must have a vision. We continue
to be committed to remaining as Canada’s premier linen processing
company. We focus on businesses that we know and understand –
laundry and linen processing – in regions where we have an existing
competitive advantage or can develop one. Long-term contracts
supported by an experienced workforce and large scale assets are
the priority – relationships coupled with assets that provide attractive
and sustainable returns.
Over the past decade, K-Bro has invested over $80 million in high
quality plants, investments that have allowed the company to move
forward in achieving its vision. Today, we play a significant role in the
provision of high quality healthcare and also in business and leisure
travel markets.
We are the largest healthcare and hospitality laundry & linen
processor in Canada.
We are dependable.
In aggregate, our eight plants provided services to more than
1,500 customers and employed almost 1,600 employees in 2013. At
December 31, 2013, total assets were $112 million, equity was $71
million and market capitalization was $281 million.
Diversified and integrated services – we provide critical services,
support and management of linen requirements that address each
and every one of our customers’ needs.
Strategically positioned – K-Bro has 8 plants located in 7 different
cities, which ensures our ability to provide uninterrupted service in
the wake of disasters, pandemics or other adversity.
Long-term stable contracts – by anticipating our customers’ needs,
delivering consistently dependable service and acting with integrity,
K-Bro has developed long-term relationships with its customers.
Committed workforce – our corporate culture enables us to attract
and retain quality laundry staff and our national presence provides
opportunities for career advancement. Five members of our senior
management team commenced their careers with K-Bro and have an
average tenure in excess of 20 years.
Sean Curtis
Senior Vice-President and General Manager
In 2013, K-Bro excelled at discovering and
winning new opportunities and clients,
building on the successes we’ve had in our
decades of experience as leaders in our sector.
6
At K-Bro, we innovate and develop new processes and systems, and further refine
business delivery and practices.
In 2013, K-Bro excelled at discovering and winning new opportunities
and clients, building on the successes we’ve had in our decades of
experience as leaders in our sector. We obtained significant new
business from our competitors in important locations. In British
Columbia, we added four major hospitality customers to our base,
three in Quebec, three in Ontario, and in Alberta we added two
additional hoteliers and extended agreements with several more.
Our new clients include some of the finest hotels in the country.
Each new customer was a victory for the entire K-Bro team and a
reflection of the company as a whole, rather than any individual. The
qualities that contribute to our success are the same ones that define
us as leaders in customer service – an impeccable and dependable
record, comprehensive service programs, financial stability,
competitive costs, experience in transitioning large accounts, and
having the resources to support growth, including the ability to
purchase linen and equipment in anticipation of higher volume.
Our policy at K-Bro has always been one of proactive response. In
order to meet our goal of being the absolute best laundry and linen
services provider in the country, we continually review our service
offerings, adding to our menu and providing more comprehensive
service capabilities than other linen companies. We watch our
industry and think ahead to strategically address the future needs of
the markets we serve. Our established relationships and experience
contribute to our thinking – our clients talk to us not only about their
present needs, but about the directions they see themselves going in.
They depend on the knowledge we’ve accumulated over our history.
During 2013 we commissioned a new Edmonton processing facility.
Our customer’s needs had outgrown our former facility. Furthermore,
there were significant process efficiencies to be realized from a
newly designed facility.
While the construction and commissioning came at a cost of almost
$28 million, and negatively impacted our profit margin during 2013,
the productivity gains and efficiency improvements will more than
offset the costs related to the new facility. We remain excited about
opportunities which are available due to the increased capacity in
the region.
K-Bro’s value-added services provide a ‘one-stop shop’ for linen
services, and currently include:
• Exchange cart preparation
• Delivery of carts to user wards and departments
• Reusable OR linen and pack rental (KOR services)
• Distribution and control of uniforms
• Personal clothing services
• Customer service programs
• Linen purchase and supply
• Linen inventory management reports and services
• Sterilization of operating room linen packs
At K-Bro, we will innovate and develop new processes and
systems, and further refine business delivery and practices. When
we launched our company on the public markets, we stated that
we were ready for whatever lay ahead of us. As the events of the
next nine years unfolded, our readiness contributed to our
success in dependability and growth. The hands-on nature of our
management team and established relationships with open lines
of communication with our customers is the very source of our
advantage. We are dependable.
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The following selected unaudited financial data has been derived from K-Bro’s consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP. The information set forth below should be read in conjunction with the Management’s Discussion & Analysis,
Consolidated Financial Statements and Notes sections of this Annual Report.
($ Thousands, except per share
data and percentages)
INCoME STATEMENT DATA
Revenue
EBITDA
EBITDA (%)
Net earnings
Net earnings per Share (Diluted)
BALANCE ShEET DATA
Working capital
Long-term debt
oThER FINANCIAL DATA
Distributable cash per share
Payout ratio (%)
Price to earnings multiple (12 month trailing)
Price to EBITDA multiple (12 month trailing)
Return on shareholders’ equity (ROE) (%)
Total shareholder return, YTD (%)
Total shareholder return, 5 yrs (%)
Market capitalization
Share price:
High
Low
Close
Years ended December 31(1)
2013
2012
2011
2010
2009
2008
131,202
23,317
17.8
10,336
1.47
126,290
24,517
19.4
11,149
1.59
116,859
19,946
17.1
7,928
1.14
104,051
16,877
16.2
6,953
0.99
87,533
15,547
17.8
7,802
1.11
85,113
12,395
14.6
4,722
0.70
9,434
19,640
8,064
5,818
7,245
6,095
8,664
10,763
7,896
4,043
3,533
4,061
2.61
44.2
27.0
12.0
14.5
41.2
235.2
2 280,976
40.50
28.38
39.60
2.72
41.8
18.1
8.2
16.5
34.9
253.8
203,613
30.18
21.20
28.86
2.40
45.9
19.6
7.8
12.6
27.5
121.1
155,821
22.98
17.28
22.24
2.15
51.4
18.5
7.6
11.4
43.9
146.7
126,866
19.29
13.02
18.30
1.99
55.1
12.1
6.1
12.0
50.0
87.5
93,451
13.84
9.70
13.48
1.63
68.4
13.9
5.2
6.1
-19.8
38.9
67,385
13.65
8.50
9.72
(1) K-Bro’s IFRS transition date was January 1, 2010; accordingly 2010 figures have been restated; earlier fiscal periods are presented under Canadian GAAP.
As events have unfolded since entering the public market, our readiness
has contributed to our success in dependability and growth.
8
Management’s
Discussion
and Analysis
MANAGEMENT’S RESPoNSIBILITY FoR FINANCIAL REPoRTING
The consolidated financial statements of K-Bro Linen Inc. and the
accompanying financial information presented are the responsibility
of management of the Corporation and have been approved by its
Board of Directors. In management’s opinion, the consolidated
financial statements have been prepared within reasonable limits
of materiality in accordance with International Financial Reporting
Standards. The preparation of financial statements necessarily
requires judgment and estimation when events affecting the current
year depend on determinations to be made in the future. Management
has exercised careful judgment where estimates were required,
and these consolidated financial statements reflect all information
available to March 12, 2014.
internal controls designed
To discharge its responsibility for financial reporting, management
to provide
maintains systems of
reasonable assurance that the Corporation’s assets are safeguarded,
that transactions are properly authorized and that reliable financial
information is relevant, accurate and available on a timely basis.
The internal control systems are monitored and evaluated by
management, which are regularly reported on to the Audit Committee
of the Board of Directors.
The consolidated financial statements have been examined by
PricewaterhouseCoopers LLP, the Corporation’s external auditors.
The external auditors are responsible for examining the consolidated
financial statements and expressing their opinion on the fairness
of the consolidated financial statements
in accordance with
International Financial Reporting Standards. The auditors’ report
outlines the scope of their audit examination and states their opinion.
The Board of Directors, through the Audit Committee, is responsible
for oversight of management’s fulfilment of its responsibilities for
financial reporting and internal controls. The Audit Committee, which
is comprised solely of independent directors, meets regularly with
management and the external auditors to satisfy itself that each
group is discharging its responsibilities with respect to internal
controls and financial reporting. The Audit Committee reviews the
consolidated financial statements and recommends their approval
to the Board of Directors. The external auditors have full and open
access to the Audit Committee, with and without the presence of
management. The Audit Committee also recommends to the Board
of Directors for nomination, the firm of external auditors, and such
nomination on approval of the Board of Directors shall be confirmed
annually by the shareholders of the Corporation.
On behalf of management,
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Vice-President and Chief Financial Officer
The Board of Directors, through the
Audit Committee, is responsible for
oversight of management’s fulfilment
of its responsibilities for financial
reporting and internal controls.
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MANAGEMENT’S DISCUSSIoN AND ANALYSIS oF FINANCIAL CoNDITIoN
AND RESULTS oF oPERATIoNS
The following Management’s Discussion and Analysis (“MD&A”) is supplemental to, and should be read in conjunction with, the audited
Consolidated Financial Statements of K-Bro Linen Inc. (“the Corporation”) for the years ended December 31, 2013 and 2012, as well as the
unaudited interim condensed Consolidated Financial Statements for the periods ended March 31, 2013, June 30, 2013 and September 30, 2013.
The Corporation and its wholly-owned subsidiaries, including K-Bro Linen Systems Inc., are collectively referred to as “K-Bro” in this MD&A.
Management is responsible for the information contained in this MD&A and its consistency with information presented to the Audit Committee
and Board of Directors. All information in this document has been reviewed and approved by the Audit Committee and Board of Directors. This
review was performed by management with information available as of March 12, 2014.
In the interest of providing current Shareholders of K-Bro Linen Inc. and potential investors with information regarding current results and
future prospects, our public communications often include written or verbal forward-looking statements. Forward-looking statements are
disclosures regarding possible events, conditions, or results of operations that are based on assumptions about future economic conditions
and courses of action, and include future-oriented financial information.
This MD&A contains forward-looking information that represents internal expectations, estimates or beliefs concerning, among other
things, future activities or future operating results and various components thereof. The use of any of the words “anticipate”, “continue”,
“expect”, “may”, “will”, “project”, “should”, “believe”, and similar expressions suggesting future outcomes or events are intended to identify
forward-looking information. Statements regarding such forward-looking information reflect management’s current beliefs and are based on
information currently available to management.
These statements are not guarantees of future performance and are based on management’s estimates and assumptions that are subject
to risks and uncertainties, which could cause K-Bro’s actual performance and financial results in future periods to differ materially from the
forward-looking information contained in this MD&A. These risks and uncertainties include, among other things: (i) risks associated with
acquisitions, including the possibility of undisclosed material liabilities; (ii) K-Bro’s competitive environment; (iii) utility and labour costs; (iv)
K-Bro’s dependence on long-term contracts with the associated renewal risk; (v) increased capital expenditure requirements; (vi) reliance on
key personnel; (vii) changing trends in government outsourcing; and (viii) the availability of future financing. Material factors or assumptions
that were applied in drawing a conclusion or making an estimate set out in the forward-looking information include: (i) volumes and pricing
assumptions; (ii) expected impact of labour cost initiatives; and (iii) the level of capital expenditures. Although the forward-looking information
contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results
will be consistent with these forward-looking statements. Certain statements regarding forward-looking information included in this MD&A
may be considered “financial outlook” for purposes of applicable securities laws, and such financial outlook may not be appropriate for
purposes other than this MD&A.
All forward-looking information in this MD&A is qualified by these cautionary statements. Forward-looking information in this MD&A is
presented only as of the date made. Except as required by law, K-Bro does not undertake any obligation to publicly revise these forward-
looking statements to reflect subsequent events or circumstances.
This MD&A also makes reference to certain measures in this document that do not have any standardized meaning as prescribed by IFRS
and, therefore, are considered additional GAAP measures. These measures may not be comparable to similar measures presented by other
issuers. Please see “Terminology” for further discussion.
In order to be successful, a company must have a vision. We continue to be
committed to remaining as Canada’s leading linen processing company.
12
MD&A Table of Contents
Introduction
Strategy
Fourth Quarter Overview
Selected Annual Financial Information
Summary of 2013 Results and Events
Key Performance Drivers
Outlook
Results of Operations
Liquidity and Capital Resources
Dividends
Distributable Cash Flow
Outstanding Shares
Related Party Transactions
Critical Accounting Estimates
Terminology
Off Balance Sheet Arrangements
Changes in Accounting Policies
Recent Accounting Pronouncements
Financial Instruments
Critical Risks and Uncertainties
Controls and Procedures
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INTRoDUCTIoN
Core Business
K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada. K-Bro provides a comprehensive range of general
linen and operating room linen processing, management and distribution services to healthcare institutions, hotels and other commercial
accounts. K-Bro currently has eight processing facilities in seven Canadian cities including Victoria, Vancouver, Calgary, Edmonton, Toronto,
Montréal and Québec City.
Industry and Market
K-Bro provides laundry and linen services to Canadian healthcare, hospitality and other commercial customers. Typical services offered by
K-Bro include the processing, management and distribution of general and operating room linens, including sheets, blankets, towels, surgical
gowns and drapes and other linen. Other types of processors in K-Bro’s industry in Canada include independent privately owned facilities
(i.e. typically small, single facility companies), public sector central laundries and public and private sector on-premise laundries (known as
“OPLs”). Participants in other sectors of the laundry and linen services industry, such as uniform rental companies (which own and launder
uniforms worn by their customers’ employees) and facilities management companies (which manage public sector central laundries and
OPLs), typically do not offer services that significantly overlap with those offered by K-Bro.
Our partnerships with healthcare institutions and hospitality clients across Canada demonstrate K-Bro’s commitment to build relationships
that foster continuous improvement, provide flexibility to adjust to changing circumstances as required and which incorporate incentives,
penalties and sharing of risks and rewards as circumstances warrant. As a result, clients across the country have entered into long-term
relationships with us, with most having renewed their contracts several times.
In this competitive industry, K-Bro is distinctive in Canada in its ability to deliver products and services that provide value to our customers. Management
believes that the healthcare and hospitality sectors of the laundry and linen services industry represent a stable base of annual recurring business with
opportunities for growth as additional healthcare beds and funds are made available to meet the needs of an aging demographic.
Industry Characteristics and Trends
Management believes that the industry in which K-Bro operates exhibits the following characteristics and trends:
Stable Industry with Moderate Cyclicality – As evidenced by the stability in the number of approved hospital beds in the healthcare
system and hotel rooms in the hospitality industry. The potential for step-changes in volumes and revenues that align with contractual
arrangements exists within this industry. Service relationships are generally formalized through contracts in the healthcare sector that are
typically long term (from seven to ten years), while contracts in the hospitality sector usually range from two to five years.
Outsourcing and Privatization – Healthcare institutions and regional authorities are facing funding pressures and must continually evaluate
the allocation of scarce resources. Consequently there are often advantages to healthcare institutions in outsourcing the processing of
healthcare linen to private sector laundry companies such as K-Bro because of the economies of scale and significant management
expertise that can be provided on a more comprehensive and cost-effective basis than customers can achieve in operating their own
laundry facilities.
Fragmentation – Most Canadian cities have at least one and sometimes several private sector competitors operating in the healthcare
and hospitality sectors of the laundry and linen services industry. Management believes that the presence of these operators provides
consolidation opportunities for larger industry participants with the financial means to complete acquisitions.
Customers and Product Mix
K-Bro’s customers include some of the largest healthcare institutions and hospitality providers in Canada. Healthcare customers include
acute care hospitals and long-term care facilities. Most of K-Bro’s hospitality customers (typically >250 rooms) generate between 500,000 and
3 million pounds of linen per year. Most healthcare customers generate between 500,000 pounds of linen per year for a hospital and up to 30
million pounds of linen per year for a healthcare region.
STRATEGY
K-Bro maintains the following three-part strategic focus:
Secure and Maintain Long-Term Contracts with Large Healthcare and Hospitality Customers – K-Bro’s core service is providing high
quality laundry and linen services at competitive prices to large healthcare and hospitality customers under long-term contracts. K-Bro’s
contracts in the healthcare sector typically range from seven to ten years in length. Contracts in the hospitality sector typically range from
two to five years.
14
STRATEGY (continued)
Extend Core Services To New Markets – Management has demonstrated its ability to successfully expand K-Bro’s business into new
markets from its established bases. Since 2005, K-Bro has entered four new geographic markets across Canada. These new markets have
contributed significantly to K-Bro’s growth. Management believes that new outsourcing opportunities will continue to arise in the near
to medium term and that K-Bro is well-positioned for continued growth, particularly as healthcare and hospitality institutions continue to
increase their focus on core services and confront pressures for capital and cost savings.
Management may in the future expand its core services to new markets either through acquisitions or by establishing new facilities. Its
choice of areas for expansion will depend on the availability of suitable acquisition candidates, the volume of healthcare and hospitality
linen to be processed and the policies of applicable governments.
Introduce Related Services – In addition to focusing on its core services, the Corporation also attempts to capitalize on attractive business
opportunities by introducing closely related services that enable it to provide more complete solutions to K-Bro’s healthcare and hospitality
customers. These related service offerings include K-Bro Operating Room (“KOR”) services and on-site services. For three major hospitals
in Toronto, K-Bro performs the sterilization of operating room linen packs.
FoURTh QUARTER oVERVIEW
In the fourth quarter of 2013, revenue was $32.3 million which was 2.2% higher than the $31.6 million generated in the comparative quarter of
2012. This year-over-year increase was due to organic growth from new volume and price increases at existing customers across the plants.
EBITDA decreased from $5.8 million in Q4, 2012 to $5.4 million in Q4, 2013, this decrease was predominantly a result of the transition costs and
reduced productivity during the transition period to transfer operations in Edmonton, partially offset by organic growth and price increases,
and a settlement pertaining to disputed development costs in the amount of $0.6 million.
SELECTED ANNUAL FINANCIAL INFoRMATIoN
($ Thousands, except share and per share amounts)
2013
2012
Revenue
Earnings before income taxes
Net earnings
Net earnings per share:
Basic
Diluted
Total assets
Long-term debt
Dividends declared to Shareholders
Dividends declared to Shareholders per share
Number of shares outstanding:
Basic
Diluted
131,202
14,509
10,336
1.47
1.47
112,330
19,640
8,142
1.15
126,290
15,324
11,149
1.60
1.59
94,800
5,818
7,977
1.13
2011
116,859
10,888
7,928
1.15
1.14
91,425
6,095
7,706
1.10
7,022,699
7,054,235
6,981,432
6,993,561
6,918,955
6,980,489
SUMMARY oF 2013 RESULTS AND KEY EVENTS
Financial Growth
K-Bro delivered strong financial results in 2013 driven by the operating results from all eight of its processing plants. Net earnings were $10.3
million or $1.47 per share (basic). Cash flow from operating activities was $19.2 million and distributable cash flow was $18.4 million. Revenue
increased in fiscal 2013 to $131.2 million or by 3.9% compared to 2012. This revenue growth in the year is due to increased volumes arising from
new clients including the Saskatchewan Health Region contract and organic volume and price growth in the remainder of the plants. EBITDA
(see Terminology) decreased in the year to $23.3 million from $24.5 million in 2012, which is a decrease of 4.5%. The EBITDA margin decreased
to 17.8% in 2013 compared 19.4% in 2012. Both the EBITDA and EBITDA margin decrease were predominantly a result of the negative impact
of the transition to the new Edmonton facility.
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3sHealth Contract
On December 12, 2013, K-Bro and 3sHealth completed negotiations and executed a 10-year agreement for the provision of laundry and linen
processing services for the Province of Saskatchewan. The agreement encompasses a comprehensive linen supply and service program
covering general, operating room and specialty linens. Services under the terms and conditions of this contract are expected to commence in
2015. The agreement is renewable for two additional three year periods at 3sHealth’s option. Planning and design activities have commenced
for the construction of a new processing facility in Regina, Saskatchewan. Expected costs of construction and commissioning of the facility
are expected to be approximately $22 million for a leased facility. The Corporation intends to finance the construction through its revolving
credit facilities.
Edmonton Facility Development
During Q4, K-Bro completed construction of the new leased Edmonton facility. Management estimates that the total costs to commission
the new facility to be approximately $27.8 million for new efficiency enhancing equipment, leaseholds and conversion costs, with immediate
returns anticipated from reduced labour, lower energy consumption and other work-flow improvements. Transition into and start-up of the
new facility commenced in Q3 and was completed in Q4. As anticipated, transition costs associated with moving into the new facility were
incurred during the quarter and negatively impacted the EBITDA margin.
Effects of Economic Uncertainty
K-Bro believes that it is positioned to withstand market volatility and uncertainty given that:
• Approximately 69.9% of its revenues in the quarter were from large publicly funded healthcare customers which are geographically
diversified across multiple provinces;
• At December 31, 2013, K-Bro had unutilized borrowing capacity of $19.7 million or 49.3% of the revolving credit line available; and,
• K-Bro’s prudent approach to managing capital has added cash flow and liquidity to the Corporation, thereby improving its ability to
withstand the turmoil in the national and global capital markets.
K-Bro is a participant in the temporary foreign worker (“TFW”) program in our facilities where genuine labour shortages exist, predominantly
within our Alberta plants. During the year, the federal government reviewed the TFW program and proposed various rule changes. These
proposed changes include stricter application requirements, the suspension of accelerated labour market opinions and an end to a provision
whereby employers could pay wages lower than the prevailing wage to temporary foreign workers. The proposed rule changes have limited
applicability to K-Bro and are not expected to have a material effect on the financial results or operations of the Corporation.
Sound governance is a principle that is both understood and embraced by our
management team.
16
KEY PERFoRMANCE DRIVERS
K-Bro’s key performance drivers focus on growth, profitability, stability and cost containment in order to maintain dividends and maximize
Shareholder value. The following outlines our results on a period-to-period comparative basis in each of these areas:
($ Thousands, except percentages)
Category
Growth
Profitability
Stability
Cost containment
Indicator
Q4, 2013
Q4, 2012
YTD 2013
YTD 2012
EBITDA(1) (%)
Revenue (%)
Distributable cash flow (%)
EBITDA(1)
EBITDA margin (%)
Adjusted EBITDA(2)
Adjusted EBITDA margin(2)(%)
Net earnings
Adjusted net earnings(3)
Debt to total capitalization(4)(%)
Unutilized line of credit
Payout ratio (%)
Dividends declared per share
Wages and benefits (%)
Utilities (%)
Expenses included in EBITDA (%)
-6.2
2.2
8.1
5,421
16.8
5,421
16.8
2,117
2,117
21.6
19,710
42.8
0.288
46.7
6.6
83.2
26.8
8.3
14.9
5,777
18.3
18.3
18.3
2,758
2,758
7.9
33,782
45.8
0.287
46.1
6.9
81.7
-4.9
3.9
-3.5
23,317
17.8
24,030
18.3
10,336
10,835
21.6
19,710
44.2
1.150
46.4
6.4
82.2
21.8
8.0
13.8
24,517
19.4
19.4
19.4
11,149
11,149
7.9
33,782
41.8
1.133
46.1
6.6
80.6
(1) EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, gain or loss on disposals, financial charges and
depreciation and amortization). See Terminology.
(2) Adjusted EBITDA is defined as EBITDA (defined above) plus or minus non-recurring, infrequent and/or unusual transactions which did not occur during the
preceding two years and are not expected to recur within the next two years. See Terminology for a complete description of the adjusted items.
(3) Adjusted net earnings is defined as net earnings plus or minus non-recurring, infrequent and/or unusual transactions net of corporate income taxes which
did not occur during the preceding two years and are not expected to recur within the next two years. See Terminology for a complete description of the
adjusted items.
(4) Debt to total capitalization is defined as total debt divided by total capital. See Terminology.
oUTLooK
K-Bro’s focus is on profitable growth in the years to come as we execute our strategy of expanding geographically and adding new services
for our customers. K-Bro is committed to building value for our shareholders, our customers and our employees.
K-Bro also has several proposals pending and has entered into discussions with potential new customers. In addition, K-Bro continues to seek
potential acquisition candidates. Neither the timing nor the degree of likelihood of success of any of these proposals or acquisitions can be
stated with any degree of accuracy.
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RESULTS oF oPERATIoNS
Quarterly Financial Information
The following table provides certain selected consolidated financial and operating data prepared by K-Bro management for the preceding
eight quarters:
($ Thousands, except per share
amounts and percentages)
2013
2012
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
22,607
9,737
21,874
12,677
22,124
10,536
22,288
9,359
22,222
9,364
21,418
11,595
21,713
9,813
21,257
8,908
Total revenue
32,344
34,551
32,660
31,647
31,586
33,013
31,526
30,165
Expenses including EBITDA
EBITDA(1)
EBITDA as % of revenue (%)
Adjusted EBITDA(2)
Depreciation and amortization
Financial charges
Loss (gain) on disposal of equipment
Earnings before income taxes
Income tax expense
Net earnings
Net earnings as a % of revenue (%)
Basic earnings per share
Diluted earnings per share
Adjusted net earnings(3)
Basic adjusted earnings per share(3)
Diluted adjusted earnings per share(3)
26,923
5,421
16.8
5,421
2,304
176
25
2,916
799
2,117
6.5
0.301
0.300
2,117
0.301
0.300
28,816
5,735
16.6
6,448
1,887
169
5
3,674
1,103
2,571
7.4
0.366
0.364
3,070
0.437
0.435
26,403
6,257
19.2
6,257
1,940
127
78
4,112
1,226
2,886
8.8
0.411
0.410
2,886
0.411
0.410
25,743
5,904
18.7
5,904
1,974
123
-
3,807
1,045
2,762
8.7
0.393
0.391
2,762
0.393
0.391
25,809
5,777
18.3
5,777
1,924
(66)
39
3,880
1,122
2,758
8.7
0.393
0.393
2,758
0.393
0.393
26,274
6,739
20.4
6,739
2,283
272
1
4,183
1,224
2,959
9.0
0.422
0.420
2,959
0.422
0.420
25,122
6,404
20.3
6,404
2,263
67
(10)
4,084
1,121
2,963
9.4
0.424
0.423
2,963
0.424
0.423
24,568
5,597
18.6
5,597
2,207
84
129
3,177
708
2,469
8.2
0.356
0.353
2,469
0.356
0.353
Total assets
Total long-term financial liabilities
112,330
25,619
107,911
22,515
104,226
20,794
99,452
10,442
94,800
11,023
94,166
12,830
90,505
11,963
92,529
8,795
Funds provided by operations
Long-term debt
Dividends declared per share
6,399
19,640
0.288
5,106
17,028
0.288
(1,499)
15,338
0.288
9,180
5,162
0.288
7,928
5,818
0.287
6,223
7,787
0.288
(5)
7,113
0.283
6,653
4,000
0.275
(1) EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, gain or loss on disposals, financial charges and
amortization). See Terminology.
(2) Adjusted EBITDA is defined as EBITDA (defined above) plus or minus non-recurring, infrequent and/or unusual transactions which did not occur during the
preceding two years and are not expected to recur within the next two years. See Terminology for a complete description of the adjusted items.
(3) Adjusted net earnings is defined as net earnings plus or minus non-recurring, infrequent and/or unusual transactions net of corporate income taxes which
did not occur during the preceding two years and are not expected to recur within the next two years. See Terminology for a complete description of the
adjusted items.
18
Revenue, Earnings and EBITDA
For the year ended December 31, 2013, K-Bro’s revenue was $131.2 million, compared to $126.3 million in the prior year. This represents a 3.9%
increase in revenue and is due to a combination of organic growth and price increases at existing customers across the plants, offset by price
concessions as the result of the new contract with AHS in Edmonton. In 2013 approximately 67.8% of K-Bro’s revenue was generated from
healthcare institutions compared to 68.6% in 2012.
EBITDA was $23.3 million in 2013, compared to $24.5 million in 2012. This 4.9% decrease was predominantly a result of the negative impact
on efficiency and productivity as a result of the transfer of operations in Edmonton and the recognition of expenses for the remaining lease
payments and decommissioning costs on the former processing facility. This was partially offset by organic growth and price increases
from existing customers, and a settlement pertaining to disputed development costs in the amount of $0.6 million. This decline in EBITDA is
consistent with the Company’s expectations. The transition to the new facility commenced in Q3, 2013 and concluded in Q4.
Adjusted EBITDA, after normalization for the recognition of the remaining lease payments on the former Edmonton processing facility, was
$24.0 million for the year compared to $24.5 million in 2012, or a 2.0% decline. Adjusted net earnings decreased to $10.8 million compared to
$11.1 million in the comparative year. During the fourth quarter, the EBITDA and net earnings benefited from the settlement with the Landlord,
however, the overall detrimental impact of reduced labour efficiencies and productivity and incremental utilities expenses throughout the 2013
fiscal year more than offset the financial benefit of the settlement.
Net earnings decreased in 2013 to $10.3 million from $11.1 million in 2012. Net earnings as a percentage of revenue decreased to 7.9%
compared to 8.8% in 2012. This margin decrease is due to a flow through effect of the decrease in the EBITDA.
Operating Expenses
Wages and benefits increased from $58.2 million in 2012 to $60.9 million in 2013 and increased as a percentage of revenues to 46.4% from 46.1%. Despite
the control over labor costs, pressures continue to increase as the economy recovers, employment rates improve and provincially regulated minimum
wages increase. Linen expenses increased to $13.8 million from $12.7 million and to 10.5% from 10.0% as a percentage of revenue.
Utility costs slightly decreased from 6.6% in 2012 to 6.4% as a percentage of revenue in 2013. The decrease is as a result of lower market rates in 2013.
Delivery costs have increased to $6.0 million or 4.6% of revenues compared to 4.4% in 2012. The rising cost of diesel fuel has contributed to the
increase on a year-over-year basis. Additionally the delivery of linens to Saskatoon Health Region has increased delivery expenses as these
services are being performed by the Corporation’s Calgary facility. Incremental delivery costs for Saskatoon are offset by additional revenues.
Materials and supplies and repairs and maintenance as a percentage of revenue remained stable in 2013 compared to 2012. During the quarter
a $0.3 million charge for estimated decommissioning costs of the former Edmonton facility was recorded to repairs and maintenance expense.
Occupancy costs increased to $4.7 million or 3.6% of revenues compared to $3.9 million and 3.1% in 2012. The increase is mainly attributable
to the recognition of a liability and corresponding expense of $0.7 million for the remaining lease payments that relate to decommissioned
facilities as well as increased lease costs of the new Edmonton processing plant. In the fourth quarter a settlement pertaining to disputed
development costs was reached and a rental credit of $0.6 million was recorded as a reduction of occupancy costs.
Corporate costs increased in 2013 by $0.3 million over the comparative period of 2013 and remained constant as a percentage of revenues
at approximately 4.1%. The increase in corporate costs is due increases in legal and consulting fees as well as the long term incentive
compensation plan.
Depreciation of property, plant and equipment and amortization of intangible assets represents the expense related to the appropriate
matching of certain of K-Bro’s long-term assets to the estimated useful life and period of economic benefit of those assets. Depreciation of
property, plant and equipment and amortization of intangibles assets has decreased from the comparable period in 2012 primarily due to the
full depreciation of assets that related to the previous Edmonton facility, prior to the move to the new Edmonton facility. Depreciation of the
newly commissioned facility in Edmonton commenced in November 2013.
Income tax includes current and deferred income taxes based on taxable income and the temporary timing differences between the tax and
accounting bases of assets and liabilities. The Corporation’s effective tax rate increased to approximately 28.8% of net earnings from 27.2% in
2012. This increase was a result of an increase in the statutory rate from 25.3% to 25.6% as well as an increase in non-deductible expenses.
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LIQUIDITY AND CAPITAL RESoURCES
In 2013 cash generated by operating activities was $19.2 million, compared to cash generated by operating activities of $20.8 million in 2012.
The change in cash from operations is due to the decrease in earnings offset by smaller changes in other operating accounts.
During 2013, cash generated from financing activities amounted to $5.7 million compared to $8.2 million used in 2012 mainly attributable to the
purchase of property, plant and equipment for the new Edmonton facility. Financing activities in 2013 included $13.8 million in net proceeds of
long term debt and $8.1 million in dividends paid to Shareholders.
The Corporation used cash of $24.9 million in investing activities during 2013 compared to $12.7 million in 2012. The increase in cash used in
investing activities is driven by the purchase of property, plant and equipment primarily for existing operations and the new Edmonton facility.
Contractual Obligations
At December 31, 2013, payments due under contractual obligations for the next five years and thereafter are as follows:
($ Thousands)
Total
<1 Year
1-3 Years
4-5 Years
>5 Years
Long-term debt
Operating leases and utility commitments
Linen purchase obligations
Property, plant and equipment commitments
19,640
27,727
3,562
22,066
-
4,343
3,562
4,246
19,640
7,426
-
17,820
-
3,122
-
-
-
12,836
-
-
Payments due by Period
Scheduled lease payments for 2014 are expected to be $4.3 million. The operating lease obligations are secured by automotive equipment
and are more fully described in the audited annual consolidated financial statements. The source of funds for these commitments will be from
operating cash flow and, if necessary, the undrawn portion of the revolving credit facility.
Financial Position
($ Thousands, except percentages)
Long term debt
Shareholders’ equity
Total capitalization
Debt to total capitalization (see Terminology for definition)
December 31,
2013
December 31,
2012
19,640
71,116
90,756
21.6%
5,818
67,685
73,503
7.9%
For the year ended December 31, 2013, the Corporation had a payout ratio (see Terminology) of 44.2%, a debt to total capitalization of 21.6%,
an unused revolving credit facility of $19.7 million and has not incurred any events of default under the terms of its credit facility agreement.
As at December 31, 2013, the Corporation had net working capital of $9.4 million compared to its working capital position of $8.1 million at
December 31, 2012.
Management believes that K-Bro has the capital resources and liquidity necessary to meet its commitments, support its operations and
finance its growth strategies. In addition to K-Bro’s ability to generate cash from operations and its revolving credit facility, K-Bro may also
be able to access equity financing, depending upon pricing and availability, for capital spending to sustain its property, plant and equipment.
20
DIVIDENDS
Fiscal Period
Payment Date
# of Shares
Outstanding
Amount per
Share
Total
Amount(2)
Amount Per
Unit
Total
Amount(1)
2013
2012
January
February
March
February 15
March 15
April 13
May 15
June 15
July 13
August 15
September 15
October 15
November 15
December 14
January 15
Q1
April
May
June
Q2
July
August
September
Q3
October
November
December
Q4
YTD
7,055,207
7,055,207
7,055,207
7,055,207
7,095,343
7,095,343
7,095,343
7,095,343
7,095,343
7,095,343
7,095,343
7,095,343
0.09580
0.09580
0.09580
676
676
676
0.09167
0.09167
0.09167
642
642
642
0.28741
2,028
0.27501
1,927
0.09580
0.09580
0.09580
676
680
680
0.09167
0.09580
0.09580
642
676
676
0.28741
2,036
0.28328
1,994
0.09580
0.09580
0.09580
680
680
680
0.09580
0.09580
0.09580
676
676
676
0.28741
2,039
0.28741
2,028
0.09580
0.09580
0.09580
0.28741
1.15
680
680
680
2,039
8,142
0.09580
0.09580
0.09580
0.28741
1.13
676
676
676
2,028
7,977
(1) The total amount of dividends paid was $0.09167 per share for a total of $642.273 per month for Jan - Apr 2012; when rounded in thousands $1,927 of
dividends were paid for the quarterly period.
(2) The total amount of dividends paid was $0.09580 per share for a total of $679,734 per month for May - Dec 2013; when rounded in thousands $2,039 of
dividends were paid for each of the quarterly periods, respectively.
For the year ended December 31, 2013, the Corporation distributed $1.15 per share compared with $2.61 per diluted share of Distributable Cash
(see Terminology). The actual payout ratio was 44.2%.
The Corporation’s policy is to pay dividends to Shareholders from its available distributable cash flow while considering requirements for
capital expenditures, working capital, growth capital and other reserves considered advisable by the Directors of the Corporation. All such
dividends are discretionary. Dividends are declared payable each month in equal amounts to Shareholders on the last business day of each
month and are paid by the 15th of the following month.
The Corporation designates all dividends paid or deemed to be paid as Eligible Dividends for purposes of subsection 89(14) of the Income Tax
Act (Canada), and similar provincial and territorial legislation, unless indicated otherwise.
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DISTRIBUTABLE CASh FLoW (See Terminology)
The Corporation’s source of cash for dividends is distributable cash flow provided by operating activities. Distributable cash flow, reconciled
to cash provided by operating activities as calculated under IFRS, is presented as follows:
($ Thousands, except per share
amounts and percentages)
Cash provided by operating activities
Deduct (add):
Net changes in non-cash
working capital items(1)
Share-based compensation expense(2)
Maintenance capital expenditures(3)
2013
2012
Q4
Q3
Q2
Q1
Q4
Q3
6,399
5,106
(1,499)
9,180
7,928
6,223
Q2
(5)
Q1
6,653
1,201
332
(6,956)
4,049
2,866
598
(5,544)
1,659
261
180
279
293
377
240
320
173
176
486
177
168
250
232
502
134
Distributable cash flow
4,757
4,202
4,840
4,638
4,400
5,280
5,067
4,358
Distributable cash flow per weighted
average diluted shares outstanding
Dividends declared
Dividends declared per share
Payout ratio(4) (%)
Weighted average shares outstanding
during the period, basic
Weighted average shares outstanding
during the period, diluted
TRAILING-TWELVE MoNThS
(“TTM”)
0.673
0.596
0.688
0.657
0.624
0.750
0.719
0.622
2,039
0.288
42.8
2,039
0.288
48.4
2,036
0.288
41.9
2,028
0.288
43.9
2,028
0.287
46.1
2,028
0.288
38.3
1,994
0.283
39.2
1,927
0.275
44.2
7,031
7,031
7,020
7,019
7,007
7,007
6,979
6,932
7,065
7,055
7,038
7,054
7,019
7,040
7,009
7,003
Distributable cash flow
Dividends
Payout ratio(4) (%)
18,437
8,142
44.2
18,080
8,131
45.0
19,158
8,120
42.5
19,358
8,077
41.7
19,105
7,977
41.8
18,535
7,876
42.5
18,535
7,774
41.9
17,358
7,706
44.4
(1) Net changes in non-cash working capital is excluded from the calculation as management believes it would introduce significant cash flow variability and
affect underlying cash flow from operating activities. Significant variability can be caused by such things as the timing of receipts (which individually are large
because of the nature of K-Bro’s customer base and timing may vary due to the timing of customer approval, vacations of customer personnel, etc.) and the
timing of disbursements (such as the payment of large volume rebates done once annually). As well, large increases in working capital are generally required
when contracts with new customers are signed as linen is purchased and accounts receivable increase. Management feels that this amount should be
excluded from the distributable cash flow calculation.
(2) Share-based compensation expenses have historically been excluded from the calculation of distributable cash flow. Previously the share-based
compensation was recorded as part of the net changes in non-cash working capital items, however the amount has been disclosed separately commencing in
Q4, 2012. The comparative figures for the quarterly periods as presented have been restated to reflect this revised presentation.
(3) Maintenance capital expenditures costs required to maintain or replace assets which do not have a discreet return on investment.
(4) The ratio of dividends paid compared to distributable cash flow is periodically reviewed by the Board of Directors to take into account the current and
prospective performance of the business and other items considered to be prudent. Payout ratio is calculated on the dividends declared per share divided by
the distributable cash flow per weighted average diluted shares outstanding.
22
oUTSTANDING ShARES
At December 31, 2013, the Corporation had 7,095,343 common shares outstanding. Basic and diluted weighted average number of common
shares outstanding for 2013 were 7,022,699 and 7,054,235 respectively, (6,981,432 and 6,993,561, respectively for the comparative 2012 periods).
In accordance with the LTI plan and in conjunction with the performance of the Corporation in the 2012 fiscal year, on April 24, 2013 the
Compensation, Nominating and Corporate Governance Committee of the Board of Directors approved LTI compensation of $1.5 million (2012 –
$1.2 million) to be paid as shares issued from treasury. As at December 31, 2013, the market value of the shares held in trust by the LTI trustee
was $2.5 million (December 31, 2012 – $1.4 million) which was comprised of 63,604 in unvested common shares (December 31, 2012 – 48,191)
with a nil aggregate cost (December 31, 2012 – $0.3 million).
As at March 12, 2014, there were 7,095,343 common shares issued and outstanding.
RELATED PARTY TRANSACTIoNS
The Corporation incurred expenses in the normal course of business for advisory consulting services provided by Mr. Matthew Hills, a director
of the Corporation, primarily relating to acquisitions. The amounts charged are recorded at their exchange amounts and are subject to normal
trade terms. For the year ended December 31, 2013, the Corporation incurred fees totaling $138,000 (2012 – $138,000).
CRITICAL ACCoUNTING ESTIMATES
The Corporation’s summary of significant accounting policies are contained in note 2 to the audited consolidated financial statements.
The Corporation’s financial statements include estimates and assumptions made by management in respect of operating results, financial
conditions, contingencies, commitments, and related disclosures. Actual results may vary from these estimates. The following are, in the
opinion of management, the Corporation’s most critical accounting estimates, being those that involve the most difficult, subjective and
complex judgments, and/or requiring estimates that are inherently uncertain and which may change in subsequent reporting periods.
K-Bro has continuously refined and documented its management and internal reporting systems to ensure that accurate, timely, internal and
external information is gathered and disseminated. Management also regularly evaluates these estimates and assumptions which are based
on past experience and other factors that are deemed reasonable under the circumstances.
K-Bro has hired individuals and consultants who have the skills required to make such estimates and ensures that individuals or departments
with the most knowledge of the activity are responsible for the estimates. Furthermore, past estimates are reviewed and compared to actual
results, and actual results are compared to budgets in order to make more informed decisions on future estimates.
K-Bro’s leadership team’s mandate includes ongoing development of procedures, standards and systems to allow K-Bro staff to make the best
decisions possible and ensuring those decisions are in compliance with the Corporation’s policies.
Preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect:
• volume rebates;
• linen in service;
• intangible assets;
• goodwill;
• income taxes;
• provisions; and,
• allowance for doubtful accounts.
Volume Rebates
The Corporation earns revenue from linen management and laundry services based on written service agreements whereby K-Bro has agreed
to collect, launder, deliver and replenish linens. K-Bro recognizes revenue in the period in which the services are provided. Volume rebates,
where applicable, are recorded based on annualized expected volumes when it is reasonable that the criteria are likely to be met. Based on
past experience, management believes that volumes utilized for any estimates are reasonable and would not expect a material deviation to
the balance of accrued liabilities or revenue.
Linen in Service
Linen in service is recorded at cost. Operating room linen is amortized on a straight-line method over an estimated service life of 24 months.
General linen is amortized based on usage which results in an estimated service life of the linen equal to 24 months. Based on past experience,
management believes that a service life of 24 months is representative of the average service life of linen and would not expect a material
deviation to the balance of linen in service or linen expense.
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Intangible Assets
The Corporation accounts for intangible assets and goodwill in accordance with IFRS 3, Business Combinations and IAS 38, Intangible Assets. In a
business combination, K-Bro may acquire the assets and assume certain liabilities of an acquired entity. The allocation of the purchase price for these
transactions involves judgment in determining the fair values assigned to the tangible and intangible assets acquired and the liabilities assumed on
the acquisition. The determination of these fair values involves a variety of assumptions, including revenue growth rates, expected operating income,
discount rates, and earnings multiples. If K-Bro’s estimates or assumptions change prior to finalizing the purchase price allocation for a transaction, a
revision to the purchase price allocation or the carrying value of the related assets and liabilities acquired may impact our net income in future periods.
The Corporation early adopted the amendment to IAS 36 that removed the requirement to disclose the recoverable amount of CGU’s with significant
carrying amounts of goodwill.
At the date of the acquisition, K-Bro must estimate the value of acquired intangible assets that do not have a well defined market value, such as the
value of customer lists and relationships and non-competition agreements.
Valuing these assets involves estimates of the future net benefit to K-Bro and the useful life of such benefits and is based upon various internal and
external factors. A change in those estimates could cause a material change to the value of the intangible assets.
Although intangible assets are amortized over their useful life, if the estimated value of an intangible asset has declined below its amortized book
value, a write-down would be recorded in the period in which the event causing the decline in value occurred, which would increase amortization
expense and decrease the intangible assets balance. At this time, K-Bro does not believe any intangible assets have a book value in excess of their
fair market value.
TERMINoLoGY
Additional GAAP Measures
EBITDA
We report on our EBITDA (Earnings before interest, taxes, depreciation and amortization) because it is a key measure used by management to evaluate
performance. EBITDA is utilized in measuring compliance with debt covenants and in making decisions relating to dividends to Shareholders. We
believe EBITDA assists investors in assessing our performance on a consistent basis as it is an indication of our capacity to generate income from
operations before taking into account management’s financing decisions and costs of consuming tangible and intangible capital assets, which vary
according to their vintage, technological currency and management’s estimate of their useful life. Accordingly, EBITDA comprises revenues less
operating costs before: financing costs, capital asset and intangible asset amortization, loss on disposal and impairment charges, and income taxes.
EBITDA is not a calculation based on IFRS and is not considered an alternative to net earnings in measuring K-Bro’s performance. EBITDA does not
have a standardized meaning and is therefore not likely to be comparable with similar measures used by other issuers. EBITDA should not be used as
an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt changes and other
sources and uses of cash, which are disclosed in the consolidated statements of cash flows.
($ Thousands)
Net earnings
Add:
Income tax expense
Interest expense and financial charges, net
Depreciation of property, plant and equipment
Amortization of intangible assets
Loss on disposal of property, plant and equipment
EBITDA
Non-GAAP Measures
Adjusted EBITDA
Three Months Ended December 31
Year Ended December 31
2013
2,117
799
176
1,774
530
25
5,421
2012
2,758
1,122
(66)
1,617
307
39
5,777
2013
10,336
4,173
595
5,965
2,140
108
2012
11,149
4,175
357
6,350
2,327
159
23,317
24,517
Adjusted EBITDA is a measure which has been reported in order to assist in the comparison of historical EBITDA to current results. The calculation of
Adjusted EBITDA normalizes the impact of non-recurring infrequent and/or unusual transactions which did not occur during the preceding two years
and are not expected to recur within the next two years, and the related impact on EBITDA (as defined above). During the third quarter ended September
30, 2013, a charge equivalent to the remaining lease payments for decommissioned facilities was recognized as occupancy costs. The normalization of
this expense from the calculation of EBITDA is considered by Management to be a more accurate representation of continuing operations.
24
($ Thousands)
EBITDA
Add:
Occupancy expanse of decommisioned facilities
Three Months Ended December 31
Year Ended December 31
2013
5,421
-
2012
5,777
-
2013
23,317
713
2012
24,517
-
Adjusted EBITDA
5,421
5,777
24,030
24,517
Adjusted Net Earnings and Adjusted Net Earnings per Share
Adjusted net earnings and adjusted net earnings per share are measures which have been reported in order to assist in the comparison of historical net
earnings to current results. The calculation of Adjusted net earnings normalizes the impact of non-recurring infrequent and/or unusual transactions net
of corporate income taxes which did not occur during the preceding two years and are not expected to recur within the next two years, and the related
impact on net earnings and net earnings per share. The normalization of this net expense in the calculation of adjusted net earnings and adjusted net
earnings per share is considered by management to be a more accurate representation of the net earnings from continuing operations.
($ Thousands)
Net earnings
Add/(deduct), net of corporate income taxes:
Occupancy expanse of decommisioned facilities
Adjusted net earnings
Adjusted net earnings, per share:
Three Months Ended December 31
Year Ended December 31
2013
2,117
-
2,117
2012
2,758
-
2,758
2013
10,336
499
10,835
2012
11,149
-
11,149
Basic 0.30 0.39 1.54 1.60
Diluted 0.30 0.39 1.54 1.59
Distributable Cash Flow
Distributable cash flow is a measure used by management to evaluate its performance. While the closest IFRS measure is cash provided by operating
activities, distributable cash flow is considered relevant because it provides an indication of how much cash generated by operations is available after
capital expenditures. It shall be noted that although we consider this measure to be distributable cash flow, financial and non-financial covenants in our
credit facilities and dealer agreements may restrict cash from being available for dividends, re-investment in the Corporation, potential acquisitions, or
other purposes. Investors should be cautioned that distributable cash flow may not actually be available for growth or distribution from the Corporation.
References to “Distributable cash flow” are to cash provided by (used in) operating activities (including the net change in non-cash working capital
balances) less capital expenditures.
Payout Ratio
Payout ratio is defined by management as the actual cash dividend divided by distributable cash. This is a key measure used by investors to value
K-Bro, assess its performance and provide an indication of the sustainability of dividends. The payout ratio depends on the distributable cash and the
Corporation’s dividend policy.
Debt to Total Capitalization
Debt to total capitalization is defined by management as the total long-term debt divided by the Corporation’s total shareholder’s equity. This is a measure used by
investors to assess the Corporation’s financial structure.
Distributable Cash Flow, Payout Ratio, Debt to Total Capitalization, Adjusted EBITDA, Adjusted net earnings, and Adjusted net earnings per share are not
calculations based on IFRS and are not considered an alternative to IFRS measures in measuring K-Bro’s performance. Distributable Cash Flow, Payout Ratio,
Adjusted EBITDA, Adjusted net earnings, and Adjusted net earnings per share do not have standardized meanings in IFRS and are therefore not likely to be
comparable with similar measures used by other issuers.
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Off Balance Sheet Arrangements
As at December 31, 2013, the Corporation has not entered into any off balance sheet arrangements.
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ChANGES IN ACCoUNTING PoLICIES
The Corporation has prepared its December 31, 2013 audited Consolidated Financial Statements in accordance with IFRS. See note 2 of the
Corporation’s audited Consolidated Financial Statements for more information regarding the significant accounting principles used to prepare the
audited Consolidated Financial Statements.
The Corporation has adopted the following new and revised standards, along with any consequential amendments, effective January 1, 2013. These changes
were made in accordance with the applicable transitional provisions.
• IFRS 10, Consolidated Financial Statements, replaces the guidance on control and consolidation in IAS 27, Consolidated and Separate Financial
Statements, and SIC-12, Consolidation - Special Purpose Entities. IFRS 10 requires consolidation of an investee only if the investor possesses power
over the investee, has exposure to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect
its returns. Detailed guidance is provided on applying the definition of control. The accounting requirements for consolidation have remained largely
consistent with IAS 27. The Corporation assessed its consolidation conclusions on January 1, 2013 and determined that the adoption of IFRS 10 did not
result in any change in the consolidation status of any of its subsidiaries and investees.
• IFRS 12, Disclosures of interests in other entities includes the disclosure requirements for all forms of interests in other entities, including joint
arrangements, associates, structured entities and other off balance sheet vehicles.
• IFRS 13, Fair value measurement, provides a single framework for measuring fair value. The measurement of the fair value of an asset or liability is based
on assumptions that market participants would use when pricing the assets or liability under current market conditions, including assumptions about risk.
The Corporation adopted IFRS 13 on January 1, 2013 on a prospective basis. The adoption of IFRS did not require any adjustments to valuation techniques
used by the Corporation to measure fair value and did not result in any measurement adjustments as at January 1, 2013.
• IAS 36, Amendment, Impairment of Assets, removes the requirement to disclose the recoverable amount of CGU’s with significant carrying amounts of
goodwill. The Corporation has early adopted this amendment on January 1, 2013.
RECENT ACCoUNTING PRoNoUNCEMENTS
There are no changes in accounting standards applicable to future periods that are relevant and significant to the Corporation other than as disclosed in the most
recent audited Consolidated Financial Statements as at and for the year ended December 31, 2013.
FINANCIAL INSTRUMENTS
K-Bro’s financial instruments at December 31, 2013 consist of accounts receivable, accounts payable and accrued liabilities and long-term debt. The
Corporation does not enter into financial instruments for trading or speculative purposes. Financial assets are either classified as available for sale,
held to maturity, trading or loans and receivables. Financial liabilities are recorded at amortized cost. Initially, all financial assets and financial liabilities
must be recorded on the balance sheet at fair value. Subsequent measurement is determined by the classification of each financial asset and liability.
Unrealized gains and losses on financial assets that are held as available for sale are recorded in other comprehensive income until realized, at which
time they are recorded in the consolidated statement of earnings. All derivatives, including embedded derivatives that must be separately accounted
for, are recorded at fair value in the consolidated balance sheet. Transaction costs related to financial instruments are capitalized and then amortized
over the expected life of the financial instrument using the effective interest method.
Derivative financial instruments are utilized by K-Bro to manage cashflow risk against the volatility in interest rates on its long-term debt and foreign exchange
rates on its equipment purchase commitments. K-Bro typically does not utilize derivative financial instruments for trading or speculative purposes. K-Bro has
floating interest rate debt that gives rise to risks that its earnings and cash flows may be adversely impacted by fluctuations in interest rates. In order to manage
these risks, K-Bro may enter into interest rate swaps, forward contracts on foreign currency, utilities and textiles or option contracts.
CRITICAL RISKS AND UNCERTAINTIES
As at December 31, 2013, there are no material changes in the Corporation’s risks or risk management activities since December 31, 2012.
The Corporation’s results of operations, business prospects, financial condition, cash dividends to Shareholders and the trading price of the
Corporation’s Shares are subject to a number of risks. These risk factors include: dependence on long-term contracts and the associated
renewal risk thereof; the effects of market volatility and uncertainty; potential future tax changes; the competitive environment; our ability to
acquire and successfully integrate and operate additional businesses; utility costs; the labour markets; the fact that our credit facility imposes
numerous covenants and encumbers assets; and, environmental matters.
For a discussion of these risks and other risks associated with an investment in Corporation Shares, see Risk Factors – Risks Related to K-Bro
and the Laundry and Linen Industry detailed in the Corporation’s Annual Information Form that is available at www.sedar.com.
26
CoNTRoLS AND PRoCEDURES
In order to ensure that information with regard to reports filed or submitted under securities legislation present fairly in all material
respects the financial information of K-Bro, management, including the President and Chief Executive Officer (“CEO”) and the Vice-
President and Chief Financial Officer (“CFO”), are responsible for establishing and maintaining disclosure controls and procedures,
as well as internal control over financial reporting.
Disclosure Controls and Procedures
The Corporation has established disclosure controls and procedures to ensure that information disclosed in this MD&A and the
related financial statements of K-Bro was properly recorded, processed, summarized and reported to the Board of Directors and
the Audit Committee. The Corporation’s CEO and CFO have evaluated the effectiveness of these disclosure controls and procedures
for the year ended December 31, 2013, and the CEO and CFO have concluded that these controls were operating effectively.
Internal Controls over Financial Reporting
The CEO and CFO acknowledge responsibility for the design of internal controls over financial reporting (“ICFR”). Consequently the
CEO and CFO confirm that the additions to these controls that occurred during the year ended December 31, 2013 did not materially
affect, or are reasonably likely to materially affect, the Corporation’s ICFR. Based upon their evaluation of these controls for the
year ended December 31, 2013, the CEO and CFO have concluded that these controls were operating effectively.
A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the control system are met. As a result of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues, including instance of fraud, if any, have been detected. These inherent
limitations include, amongst other items: (i) that managements’ assumptions and judgments could ultimately prove to be incorrect
under varying conditions and circumstances; or, (ii) the impact of isolated errors.
Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management
override. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions.
Additional information regarding K-Bro including required securities filings are available on our website at www.k-brolinen.com and on the
Canadian Securities Administrators’ website at www.sedar.com; the System for Electronic Document Analysis and Retrieval (“SEDAR”).
Vous pouvez obtenir des renseignements supplémentaires sur la Société, y compris les documents déposés auprès des autorités de
réglementation, sur notre site Web, au www.k-brolinen.com et sur le site Web des autorités canadiennes en valeurs mobilières au www.
sedar.com, le site Web du Système électronique de données, d’analyse et de recherche (« SEDAR »).
Consolidated
Financial Statements
INDEPENDENT AUDIToR’S REPoRT
March 12, 2014
Independent Auditor’s Report
To the Shareholders of K-Bro Linen Inc.
We have audited the accompanying consolidated financial statements of K-Bro Linen Inc. and its subsidiaries, which comprise the
consolidated statements of financial position as at December 31, 2013 and December 31, 2012 and the consolidated statements of earnings
and comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of
significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation
of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of K-Bro Linen Inc. and its
subsidiaries as at December 31, 2013 and December 31, 2012 and their financial performance and their cash flows for the years then ended in
accordance with International Financial Reporting Standards.
Chartered Accountants
Edmonton, Canada
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CoNSoLIDATED STATEMENTS oF FINANCIAL PoSITIoN
($ Thousands of Canadian dollars)
ASSETS
Current assets
Accounts receivable
Linen in service (note 6)
Prepaid expenses and deposits
Property, plant and equipment (note 7)
Intangible assets (note 8)
Goodwill (note 9)
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (note 10 and 11)
Income taxes payable
Dividends payable to shareholders
Long-term debt (note 12)
Unamortized lease inducements (note 14)
Deferred income taxes (note 15)
ShAREhoLDERS’ EQUITY
Share capital (note 17)
Contributed surplus
Deficit
Contingencies and commitments (note 16)
December 31
2013
December 31
2012
15,465
8,647
917
25,029
57,972
8,873
20,456
112,330
14,824
91
680
15,595
19,640
947
5,032
41,214
72,158
1,732
(2,774)
71,116
112,330
14,197
8,888
1,071
24,156
39,175
11,013
20,456
94,800
13,001
2,415
676
16,092
5,818
415
4,790
27,115
71,444
1,209
(4,968)
67,685
94,800
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the Corporation
Ross S. Smith
Chair
Matthew B. hills
Director
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CoNSoLIDATED STATEMENTS oF EARNINGS & CoMPREhENSIVE INCoME
($ Thousands of Canadian dollars,
except share and per share amounts)
Revenue
Expenses
Wages and benefits
Linen (note 6)
Utilities
Delivery
Materials and supplies
Occupancy costs (note 10)
Repairs and maintenance
Corporate
EBITDA (note 23)
Other expenses
Depreciation of property, plant and equipment (note 7)
Amortization of intangible assets (note 8)
Financial charges (note 13)
Loss on disposal of property, plant and equipment
Earnings before income taxes
Current income tax expense
Deferred income tax expense
Income tax expense (note 15)
Net earnings and Comprehensive income
Net earnings per share (note 18)
Basic
Diluted
Year ended December 31
2013
2012
131,202
126,290
60,858
13,781
8,400
5,979
4,337
4,703
4,398
5,429
58,248
12,706
8,276
5,583
4,058
3,896
3,832
5,174
107,885
101,773
23,317
24,517
5,965
2,140
595
108
8,808
14,509
3,931
242
4,173
10,336
7,928
1.47
1.47
6,350
2,327
357
159
9,193
15,324
3,981
194
4,175
11,149
1.60
1.59
Weighted average number of shares outstanding (note 17)
Basic
Diluted
7,022,699
7,054,235
6,981,432
6,993,561
The accompanying notes are an integral part of these consolidated financial statements.
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CoNSoLIDATED STATEMENTS oF ChANGES IN EQUITY
($ Thousands of Canadian dollars)
As at December 31, 2012
Net earnings
Dividends declared (note 20)
Employee share based
compensation expense
Shares vested during the year
Total Share Capital
Contributed
surplus
Deficit
Total equity
71,444
-
-
-
1,209
-
-
1,237
(4,968)
10,336
(8,142)
-
67,685
10,336
(8,142)
1,237
714
(714)
-
-
As at December 31, 2013
72,158
1,732
(2,774)
71,116
As at December 31, 2011
Net earnings
Dividends declared (note 20)
Employee share based
compensation expense
Settlement of former LTI plan
Shares vested during the year
69,493
-
-
-
-
1,951
1,580
-
-
1,105
475
(1,951)
(8,140)
11,149
(7,977)
-
-
-
62,933
11,149
(7,977)
1,105
475
-
As at December 31, 2012
71,444
1,209
(4,968)
67,685
The accompanying notes are an integral part of these consolidated financial statements.
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CoNSoLIDATED STATEMENTS oF CASh FLoW
($ Thousands of Canadian dollars)
oPERATING ACTIVITIES
Net earnings
Depreciation of property, plant and equipment (note 7)
Amortization of intangible assets (note 8)
Lease inducements, net of amortization
Share-based compensation expense
Loss on disposal of property, plant and equipment
Deferred income taxes
Year ended December 31
2013
2012
10,336
5,965
2,140
532
1,237
108
242
20,560
11,149
6,350
2,327
(54)
1,105
159
194
21,230
Change in non-cash balances relating to operations (note 21)
(1,374)
(421)
Cash provided by operating activities
19,186
20,809
FINANCING ACTIVITIES
Net proceeds (repayments of) from revolving credit facility
Dividends paid to shareholders (note 20)
Cash used in financing activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment (note 7)
Proceeds from disposal of property, plant and equipment
Cash used in investing activities
Change in cash during the year
Cash, beginning of year
Cash, end of year
Supplementary cash flow information
Interest paid
Income taxes
The accompanying notes are an integral part of these consolidated financial statements.
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13,822
(8,138)
5,684
(277)
(7,943)
(8,220)
(24,914)
44
(12,650)
61
(24,870)
(12,589)
-
-
-
-
-
-
462
6,255
143
3,423
d
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NoTES To ThE CoNSoLIDATED FINANCIAL STATEMENTS
(Thousands of Canadian dollars except share and per share amounts, years ended December 31, 2013 and 2012)
K-Bro Linen Inc. (the “Corporation” or “K-Bro”) is incorporated in Canada under the Business Corporations Act (Alberta). The Corporation
and its wholly owned subsidiaries provide a range of linen services to healthcare institutions, hotels and other commercial accounts that
include the processing, management and distribution of general linen and operating room linen. The Corporation provides services from eight
processing facilities in seven major cities across Canada from Victoria, British Columbia to Québec City, Québec.
The Corporation’s common shares are traded on the Toronto Stock Exchange under the symbol “KBL”. The address of the Corporation’s
registered head office is 14903 – 137 Avenue, Edmonton, Alberta, Canada.
These audited annual consolidated financial statements (the “consolidated financial statements”) were approved and authorized for issuance
by the Board of Directors (“the Board”) on March 12, 2014.
1 Basis of Presentation
The consolidated financial statements of the Corporation have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) and Canadian Generally Accepted Accounting Principles (“GAAP”) as issued by CPA Canada. The preparation of
financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management
to exercise its judgment in the process of applying the Corporation’s accounting policies. The areas involving a higher degree of
judgment or complexity, or areas where assumptions and estimates are significant to the Consolidated Financial Statements are
disclosed in Note 5.
2 Significant accounting policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
These policies have been consistently applied to all the periods presented, unless otherwise stated.
a) Basis of Measurement
The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of
certain financial assets and financial liabilities to fair value, including derivative instruments.
b) Principles of Consolidation
The consolidated financial statements include the Corporation, its wholly owned subsidiaries and the long-term incentive
plan trust, a structured entity (notes 2(q) (ii) and (iii)). All intercompany balances and transactions have been eliminated
upon consolidation.
c) Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, deposits with banks, other short-term highly liquid investments with original
maturities of three months or less.
Cash and cash equivalents are classified as loans and receivables and are carried at amortized cost, which is equivalent to fair value.
d) Linen in Service
Linen in service is stated at cost less accumulated depreciation. The cost is based on the expenditures that are directly attributable
to the acquisition of linen, with operating room linen amortized across its estimated service life of 24 months and general linen
amortized based on usage which results in an estimated average service life of 24 months.
e) Revenue Recognition
Revenue from linen management and laundry services is primarily based on written service agreements whereby the Corporation
agrees to collect, launder, deliver and replenish linens. The Corporation recognizes revenue in the period in which the services
are provided.
f) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included
in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Corporation and the cost of the item can be reliably measured. The carrying
amount of a replaced part is derecognized. Repairs and maintenance are charged to the income statement during the financial
period in which they are incurred.
34
2 Significant accounting policies (continued)
g)
Impairment of Financial Assets
At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is impaired. If such evidence
exists, the Corporation recognizes an impairment loss equal to the difference between the amortized cost of the loan or receivable and the
present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount
of the asset is reduced by this amount either directly or indirectly through the use of an allowance account.
Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss
decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.
h)
Impairment of Non-Financial Assets
Property, plant and equipment and intangible assets are tested for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable. Long-lived assets that are not amortized are subject to an annual
impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest level for which there
are separately identifiable cash flows (cash-generating unit or “CGU”). The recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU).
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.
The Corporation evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances
warrant such consideration.
The major categories of property, plant and equipment are depreciated on a straight-line basis as follows:
Asset
Buildings
Laundry equipment
Office equipment
Delivery equipment
Computer equipment
Leasehold improvements
Rate
15-25 years
7-20 years
2-5 years
5 years
2 years
Lease term
Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying
amount of the asset and are included as part of other gains and losses in the statement of earnings and comprehensive income.
i)
Intangible Assets
Intangible assets are recorded at cost and include customer contracts in progress and related relationships, which are being
amortized using the straight-line method over the remaining lives of the related contracts and relationships. Intangible assets
which relate to computer software are amortized using the straight-line method over five years when put into service. These
estimates are reviewed at least annually and are updated if expectations change as a result of changing client relationships or
technological obsolescence.
j)
Income Taxes
The tax expense for the year comprises current and deferred tax. Tax is recognized in statement of earnings, except to the
extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also
recognized in other comprehensive income or directly in equity, respectively.
The current income tax provision is calculated on the basis of the tax laws enacted or substantively enacted at the balance
sheet date of the taxation authority where the Corporation operates and generates taxable income. Management periodically
evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.
It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the Consolidated Financial Statements. Deferred income tax is determined
using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply
when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available
against which the temporary differences can be utilized.
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k) Business Combinations
Business combinations are accounted for using the acquisition method. The acquired identifiable net assets are measured at
their fair value at the date of acquisition. The consideration transferred includes the fair value of any asset or liability resulting
from a contingent consideration arrangement. Any excess of the purchase price over the fair value of the net assets acquired is
recognized as goodwill. Any deficiency of the purchase price below the fair value of the net assets acquired is recorded as a gain
in net earnings. Associated transaction costs are expensed when incurred.
l) Goodwill
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts
allocated to the identifiable assets acquired, less liabilities assumed, based on their estimated fair values at the acquisition date.
Goodwill is allocated as of the date of the business combination. Goodwill is tested for impairment annually in the fourth quarter,
or more frequently if events or changes in circumstances indicate a potential impairment.
Goodwill acquired through a business combination is allocated to each CGU, or group of CGUs, that are expected to
benefit from the related business combination. A CGU represents the lowest level within the entity at which the goodwill
is monitored for internal management purposes.
m) Volume Rebates
Certain customers receive a rebate based on specified annual processing volumes. A rebate liability is recorded in the period it
is expected that the customer will meet the specified annual volume levels.
n) Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net earnings for the period attributable to Shareholders of the
Corporation by the weighted average number of Common shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments.
The number of common shares included within the weighted average is computed using the treasury stock method.
The Corporation’s potentially dilutive Common shares are comprised of long-term incentive plan equity compensation granted
to officers and key employees (notes 2(q) (ii) and (iii)).
o) Foreign Currency Translation
Foreign currency transactions are translated into Canadian dollars using the exchange rates prevailing at the dates of
the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement
of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognized in the income statement. Foreign exchange gains and losses that relate to borrowings
and cash and cash equivalents are presented in the statement of earnings within “financial charges”.
p) Lease Inducements
Tenant allowances and lease inducements are deferred when credited or received and amortized on a straight-line basis as
a reduction of rent expense over the term of the related lease. For lease contracts with escalating lease payments, total
rent expense for the lease term is expensed on a straight-line basis over the lease term. The difference between rent expensed
and amounts paid is recorded as an increase or deferral in unamortized lease inducements.
36
2 Significant accounting policies (continued)
q) Employee Benefits
i) Post-employment benefit obligations
The Corporation contributes on behalf of its employees to their individual Registered Retirement Savings Plans subject to an
annual maximum of 4% of gross personal earnings. The Corporation accounts for contributions as an expense in the period that
they are incurred. The Corporation does not provide any other post-employment or post-retirement benefits.
ii) Former equity-based compensation plan
The officers and key employees were eligible to participate in a past long-term incentive plan (“LTIP”), which involved equity-
settled share-based payments. The Corporation set aside funds each year based on the amount by which distributable cash flow
exceeded a base distributable amount for the fiscal year.
The LTIP trustee purchased common shares in the open market and held such common shares until ownership vests to
each participant. Subject to the Board’s discretion to accelerate vesting, one-quarter of the LTIP grant vested thirty days
following the date that the Trustees of the Fund approved the audited Consolidated Financial Statements (the
“Determination Date”). The remaining three-quarters vested on the second anniversary of the Determination Date.
In most circumstances, unvested grant amounts held by the trustee for an LTIP participant are forfeited if the participant
resigns or is terminated for cause prior to the applicable vesting date, and any equity will be sold and the proceeds returned
to the Corporation.
As of May 1, 2011 no additional compensation will be issued under this LTIP. Any unvested compensation granted under the
terms of this plan will vest under the original terms and conditions of issue. All remaining compensation under this LTIP
vested during the year ending December 31, 2013.
iii) Existing equity-based compensation plan of the Corporation
On June 16, 2011, the Shareholders of the Corporation approved a new Long-term Incentive Plan (“LTI”). Under the LTI, awards
are granted annually in respect of the prior fiscal year to the eligible participants based on a percentage of annual salary. The
amount of the award (net of withholding obligations) is satisfied by issuing treasury shares to be held in trust by the trustee
pursuant to the terms of the LTI. All awards issued under the provisions of the LTI are recorded as compensation expense.
Subject to the discretion of the Compensation, Nominating and Corporate Governance Committee of the Board of Directors,
one-quarter of a Participant’s grant will vest on the Determination Date (defined as the first May 15th following the date that
the Directors of the Corporation approve the audited consolidated financial statements of the Corporation for the prior year).
The remaining three-quarters of the Participant’s grant will vest on November 30th following the second anniversary of
the Determination Date.
If a change of control occurs, all LTI Shares held by the Trustee in respect of unvested grants will vest immediately.
LTI participants are entitled to receive dividends on all common shares granted under the LTI whether vested or unvested. In
most circumstances, unvested common shares held by the LTI trustee for a participant will be forfeited if the participant
resigns or is terminated for cause prior to the applicable vesting date, and those common shares will be disposed of by the
trustee to K-Bro for no consideration and such Common shares shall thereupon be cancelled. If a participant is
terminated without cause, retires or resigns on a basis which constitutes constructive dismissal, the participant will be
entitled to receive his or her unvested common shares on the regular vesting schedule under the LTI.
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r) Financial Instruments
Financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for based on their
classification as described below. The classification depends on the purpose for which the financial instruments were acquired
and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition.
Transaction costs are recognized immediately in income or are capitalized, depending upon the nature of the transaction and the
associated instrument.
Loans, receivables and other liabilities
Loans, receivables and other liabilities are accounted for at amortized cost using the effective interest method.
The Corporation has made the following classifications:
FINANCIAL ASSETS
Cash and Cash Equivalents
Accounts receivable
FINANCIAL LIABILITIES
Accounts payable and accrued liabilities
Long-term debt
Classification
Measurement
Loans and receivables
Loans and receivables
Amortized cost
Amortized cost
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to
offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.
3 Significant accounting policies adopted January 1, 2013
The Corporation has adopted the following new and revised standards, along with any consequential amendments, effective
January 1, 2013. These changes were made in accordance with the applicable transitional provisions:
•
•
•
IFRS 10, Consolidated Financial Statements, replaces the guidance on control and consolidation in IAS 27, Consolidated and
Separate Financial Statements, and SIC-12, Consolidation - Special Purpose Entities. IFRS 10 requires consolidation of an investee
only if the investor possesses power over the investee, has exposure to variable returns from its involvement with the investee and
has the ability to use its power over the investee to affect its returns. Detailed guidance is provided on applying the definition of
control. The accounting requirements for consolidation have remained largely consistent with IAS 27. The Corporation assessed
its consolidation conclusions on January 1, 2013 and determined that the adoption of IFRS 10 did not result in any change in the
consolidation status of any of its subsidiaries or investees.
IFRS 12, Disclosures of interests in other entities includes the disclosure requirements for all forms of interests in other entities,
including joint arrangements, associates, structured entities and other off balance sheet vehicles.
IFRS 13, Fair value measurement, provides a single framework for measuring fair value. The measurement of the fair value
of an asset or liability is based on assumptions that market participants would use when pricing the assets or liability
under current market conditions, including assumptions about risk. The Corporation adopted IFRS 13 on January 1, 2013 on
a prospective basis. The adoption of IFRS 13 did not require any adjustments to valuation techniques used by the Corporation
to measure fair value and did not result in any measurement adjustments as at January 1, 2013.
•
IAS 36, Amendment, Impairment of Assets, removes the requirement to disclose the recoverable amount of CGU’s with significant
carrying amounts of goodwill. The Corporation has early adopted this amendment on January 1, 2013.
38
4 New Standards and interpretations not yet adopted
The following accounting standard has been issued but has not been applied in preparing these consolidated financial statements.
This standard currently has no mandatory effective date:
•
IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial
liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that related to the classification and
measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those
measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification
depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of
the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases
where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is
recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The
Corporation has yet to assess IFRS 9’s full impact. The Corporation will also consider the impact of the remaining phases of IFRS
9 when completed by the board.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Corporation.
5 Critical accounting estimates and judgments
The preparation of the Corporation’s consolidated financial statements, in conformity with IFRS, requires management of the
Corporation to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
The estimates and associated assumptions are based on historical experience and various other factors that are believed to
be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of
assets and liabilities that are not readily apparent from other sources. These estimates and judgments have been applied in a
manner consistent with prior periods.
The following discusses the most significant accounting judgments and estimates that the Corporation has made in the preparation
of the financial statements:
Impairment of goodwill and non-financial assets
The Corporation reviews goodwill at least annually and other non-financial assets when there is any indication that the asset
might be impaired. The Corporation applies judgment in assessing the likelihood of renewal of significant contracts included in
the intangible assets described in note 8. The Corporation has estimated the value in use and fair value of CGUs to which goodwill
is allocated using discounted cash flow models that required assumptions about future cash flows, margins, and discount rates.
Refer to note 9 for more details about methods and assumptions used in estimating net recoverable amount.
Recognition of Rebate Liabilities
In applying its accounting policy for volume rebates, the Corporation must determine whether the processing volume thresholds
will be achieved. The most difficult and subjective area of judgment is whether a contract will generate satisfactory volume to
achieve minimum levels. Management considers all appropriate facts and circumstances in making this assessment including
historical experience, current volumetric run-rates, and expected future events.
Linen in Service
The estimates are reviewed at least annually and are updated if expectations change as a result of physical wear and tear,
technical or commercial obsolescence and legal or other limits of use.
Management regularly evaluates these estimates and judgments. Revisions to accounting estimates are recognized in the period in
which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision
affects both current and future periods.
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6
Linen in Service
($ Thousands)
Balance, beginning of year
Additions
Amortization charge
Balance, end of year
2013
8,888
13,540
(13,781)
8,647
2012
8,182
13,412
(12,706)
8,888
7 Property, plant and equipment
($ Thousands)
Laundry
Land Buildings Equipment(1)
Office
Equipment
Delivery
Equipment
Computer
Leasehold
Equipment Improvements (2)
Spare
Parts
Total
Year ended, December 31, 2012
Opening net book amount
Additions
Disposals
Depreciation charge
125
-
-
-
1,122
103
-
(85)
24,528
12,249
(184)
(4,737)
200
15
-
(63)
641
-
(34)
(90)
100
95
(2)
(88)
5,687
107
-
(1,287)
692
81
-
-
33,095
12,650
(220)
(6,350)
Closing net book amount
125
1,140
31,856
152
517
105
4,507
773
39,175
At December 31, 2012
Cost
Accumulated depreciation
125
-
1,377
(237)
58,637
(26,781)
617
(465)
913
(396)
1,636
(1,531)
11,544
(7,037)
773
-
75,622
(36,447)
Net book amount
125
1,140
31,856
152
517
105
4,507
773
39,175
Year ended, December 31, 2013
Opening net book amount
Additions
Disposals
Depreciation charge
125
-
-
-
1,140
23
-
(89)
31,856
15,247
(100)
(4,457)
152
154
-
(38)
517
100
(52)
(74)
105
389
-
(114)
4,507
8,964
-
(1,193)
773
37
-
-
39,175
24,914
(152)
(5,965)
Closing net book amount
125
1,074
42,546
268
491
380
12,278
810
57,972
At December 31, 2013
Cost
Accumulated depreciation
125
-
1,400
(326)
73,562
(31,016)
771
(503)
928
(437)
2,025
(1,645)
20,508
(8,230)
810
-
100,129
(42,157)
Net book amount
125
1,074
42,546
268
491
380
12,278
810
57,972
(1) Included in laundry equipment are $10,686 of assets that were transferred on November 1, 2013 from “under development“ to “in service“ and were amortized
once put into service
(2) Included in leasehold improvements are $10,892 of assets that were transferred on November 1, 2013 from “under development“ to “inservice“ are were
amortized once put into service.
40
8
Intangible assets
($ Thousands)
Year ended, December 31, 2012
Opening net book amount
Acquisition of business
Amortization charge
Closing net book amount
At December 31, 2012
Cost
Accumulated amortization
Net book amount
Year ended, December 31, 2013
Opening net book amount
Amortization charge
Closing net book amount
At December 31, 2013
Cost
Accumulated amortization
Net book amount
9 Goodwill
Healthcare
Contracts
Hospitality
Contracts
Computer
Software
8,020
-
(1,251)
6,769
4,761
-
(891)
3,870
19,200
(12,431)
8,366
(4,496)
6,769
3,870
6,769
(1,064)
5,705
3,870
(891)
2,979
19,200
(13,495)
8,366
(5,386)
5,705
2,980
559
-
(185)
374
923
(549)
374
374
(185)
189
923
(735)
188
Total
13,340
-
(2,327)
11,013
28,489
(17,476)
11,013
11,013
(2,140)
8,873
28,489
(19,616)
8,873
The Corporation performed its annual assessment for goodwill impairment as at December 31, 2013 in accordance with its policy
described in Note 2(l). Goodwill has been allocated to the following CGUs:
($ Thousands)
Edmonton
Calgary
Vancouver 1
Victoria
Québec
Vancouver 2
Montréal
Total
2013
4,346
5,382
2,630
3,208
654
3,413
823
2012
4,346
5,382
2,630
3,208
654
3,413
823
20,456
20,456
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In assessing goodwill for impairment at December 31, 2013, the Corporation determined that: the assets and liabilities of the Corporation
have not changed significantly from the prior year at December 31, 2012; the estimated recoverable amounts of the CGUs exceeded
their carrying amounts by a significant amount; no events or circumstances have changed; and, the likelihood of an impairment in
goodwill is remote.
The Corporation early adopted the amendment to IAS 36 that removed the requirement to disclose the recoverable amount of
CGU’s with significant carrying amounts of goodwill.
In performing our analysis, estimated recoverable amounts were determined based on the value in use of the CGUs using
available cash flow budgets that made maximum use of observable markets for inputs and outputs, including actual
historical performance. For periods beyond the budgeted period, cash flows were extrapolated using growth rates that did not
exceed the long-term averages for the business. Key assumptions included a weighted average growth rate of 3% and a
pre-tax discount rate of 19% for all CGUs.
The fair value of each CGU was significantly in excess of its carrying amount. Based on sensitivity analysis, no reasonably
possible change in key assumptions would cause the carrying amount of any CGU to exceed its recoverable amount. The
total recoverable amount for all CGU’s exceeded their carrying amount by $48,765.
10 Accounts payable and accrued liabilities
As at December 31, 2013, the Corporation has recognized a liability for the remaining lease payments for decommissioned facilities as
a result of the transition to the new Edmonton plant as follows:
•
•
In 2009 the Corporation entered into a non-cancellable lease for corporate office space which, due to the transition to the
new Edmonton facility, the Corporation had ceased to use by September 30, 2013. The lease expired in January 2014 and the
Corporation has vacated the office space.
In 2004 the Corporation entered into a non-cancellable lease for the building used by the Edmonton plant. In October 2013, the
corporation transitioned the Edmonton operations to the new Edmonton facility. The lease for the prior building space expires in
November 2014.
The charge to occupancy costs as a result of the decommissioned facilities was $713 for the year ended December 31, 2013,
of which $543 was still outstanding at as December 31, 2013.
11 Provisions
As at December 31, 2013, the Corporation has recognized a liability of $250 charged to occupancy costs for the decommissioning
costs related to the former Edmonton facility.
($)
Balance, beginning of year
Adjustment made during the year
Balance, end of year
2013
-
250
250
2012
-
-
-
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12 Long-term debt
($ Thousands)
At January 1, 2012
New debt advanced for acquisition
Closing Balance at December 31, 2012
Current portion of long-term debt
Non-current portion of long-term debt
At January 1, 2013
Draws
Closing Balance at December 31, 2013
Current portion of long-term debt
Non-current portion of long-term debt
Bankers
Prime Rate
Acceptances(1)
Loan(2)
Total Long
Term Debt
4,000
-
4,000
-
4,000
4,000
-
4,000
-
4,000
2,095
(277)
1,818
-
1,818
1,818
13,822
15,640
-
15,640
6,095
(277)
5,818
-
5,818
5,818
13,822
19,640
-
19,640
(1) Banker’s Acceptances bear interest at 30 day BA rates plus 1.25% depending on certain financial ratios, renewable monthly until July 31, 2016. As at December
31, 2013, the interest rate was 2.40%.
(2) Prime rate loan, collateralized by a general security agreement, bear interest at prime plus 0.0% depending on certain financial ratios, monthly repayment of
interest only, maturing on July 31, 2016. As at December 31, 2013, the interest rate was 3.0%.
The Corporation has a revolving credit facility of up to $40,000 of which $20,290 is drawn (including letters of credit totaling $650
per Note 16(a)) as at December 31, 2013. The agreement is a committed facility maturing on July 31, 2016. Interest payments only
are due during the term of the facility.
Drawings under the revolving credit facility are available by way of Bankers’ Acceptances, Canadian prime rate loans, letters of
credit or standby letters of guarantee. Drawings under the revolving credit facility bear interest at a floating rate, plus an
applicable margin based on certain financial performance ratios.
A general security agreement over all assets, a mortgage against all leasehold interests and real property, insurance policies and
an assignment of material agreements have been pledged as collateral.
The carrying value of borrowings approximate their fair value as the debt is based on a floating rate, the interest rate risk has
not changed, and the impact of discounting is not significant.
The Corporation has incurred no events of default under the terms of its credit facility agreement.
13 Financial charges
($) Years Ended December 31
Interest on long-term debt
Other charges, net
2013
413
182
595
2012
94
263
357
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14 Unamortized lease inducements
($ Thousands)
Lease inducements received
Accumulated amortization, net
Less current portion, included in accrued liabilities
15
Income taxes
A reconciliation of the expected income tax expense to the actual income tax expense is as follows:
($ Thousands)
Current tax:
Current tax on profits for the year
Total current tax
Deferred tax:
Origination and reversal of temporary differences
Impact of change in substantively enacted tax rate
Total deferred tax
2013
1,390
(300)
1,090
(143)
947
2012
699
(187)
512
(97)
415
2013
2012
3,931
3,931
203
39
242
3,981
3,981
222
(28)
194
The tax on the Corporation’s earnings differs from the theoretical amount that would arise using the weighted average tax rate
applicable to earnings of the consolidated entities as follows:
($ Thousands)
Earnings before income taxes
Non-deductable expenses
Income subject to tax
Income tax at statutory rate of 25.6% (2012 - 25.3%)
Impact of substantively enacted rates and other
Income tax expense
2013
14,509
1,573
16,082
4,118
55
4,173
2012
15,324
951
16,275
4,118
57
4,175
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15
Income taxes (continued)
The analysis of the deferred tax assets and deferred tax liabilities is as follows:
($ Thousands)
Deferred tax assets:
Deferred tax asset to be recovered after more than 12 months
Deferred tax asset to be recovered within 12 months
Deferred tax liabilities:
Deferred tax liability to be recovered after more than 12 months
Deferred tax liability to be recovered within 12 months
Deferred tax liabilities, net
2013
2012
(81)
(141)
(222)
3,101
2,153
5,254
5,032
(184)
(152)
(336)
2,950
2,176
5,126
4,790
The movement of deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances
within the same tax jurisdictions, is as follows:
Accounts payable
and accrued
liabilities
Offering costs
and other
Total
(534)
276
(258)
117
(141)
(91)
13
(78)
(3)
(81)
(625)
289
(336)
114
(222)
($ Thousands)
Deferred tax assets
At January 1, 2012
Charged to the statement of earnings
At December 31, 2012
Charged to the statement of earnings
At December 31, 2013
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($ Thousands)
Linen in
service
Property, plant
and equipment
Intangible assets
and Goodwill
Deferred tax liabilities
At January 1, 2012
Charged (credited) to the statement of earnings
At December 31, 2012
Charged (credited) to the statement of earnings
At December 31, 2013
2,001
159
2,160
(7)
2,153
1,083
59
1,142
337
1,479
2,137
(313)
1,824
(202)
1,622
Total
5,221
(95)
5,126
(128)
5,254
16 Contingencies and commitments
a) Contingencies - Letters of credit
The Corporation has standby letters of credit issued as part of normal business operations in the amount of $650 (2012 – $400)
which will remain outstanding for an indefinite period of time.
b) Commitments
i)
Operating leases and utility commitments
Minimum lease payments for operating leases on buildings and equipment and estimated natural gas and electricity
commitments for the next five calendar years are as follows:
(Thousands)
2014
2015
2016
2017
Subsequent
$
4,343
3,883
3,543
3,122
12,836
27,727
ii)
Linen purchase commitments
At December 31, 2013, the Corporation was committed to linen expenditure obligations in the amount of $3,562 (2012 – $2,551)
to be incurred over the next twelve months.
iii) Capital equipment commitments
At December 31, 2013, the Corporation was committed to capital expenditure obligations in the amount of $22,066
(2012 – $21,544) to be incurred over the next twelve months.
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17 Share Capital
a) Authorized
The Corporation is authorized to issue an unlimited number of Common shares and such number of shares of one class designated
as Preferred Shares which number shall not exceed 1/3 of the Common shares issued and outstanding from time to time.
b)
Issued
Balance, beginning of year
Shares issued under LTI
Balance, end of year
Unvested common shares held in trust for LTI
c) Weighted average number of shares outstanding
Balance, beginning of year
Weighted average unvested shares issued for LTI
Basic weighted average shares for the year
Basic weighted average shares for the year
Dilutive effect of LTI shares
Fully diluted weighted average shares for the year
18 Earning Per Share
a) Basic
2013
2012
7,055,207
40,136
7,006,365
48,842
7,095,343
7,055,207
63,604
48,191
2013
2012
7,055,207
(32,508)
7,006,365
(24,933)
7,022,699
6,981,432
7,022,699
31,536
6,981,432
12,129
7,054,235
6,993,561
Basic earnings per share is calculated by dividing the net earnings attributable to equity holders of the Corporation by the
weighted average number of ordinary shares in issue during the year.
11,149
Net earnings
Weighted average number of shares outstanding (thousands)
6,981
Net earnings per share, basic 1.47 1.60
10,336
7,023
2013
2012
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a) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to assume conversion of
all dilutive potential ordinary shares.
11,149
Net earnings
Weighted average number of shares outstanding (thousands)
6,994
Net earnings per share, basic 1.47 1.59
10,336
7,054
2013
2012
19 Long-Term Incentive Plan
A trust was formed to hold equity grants issued under the terms of the LTI on behalf of the participants (the “LTIP Trust”). The Corporation
is neither a trustee of the LTIP Trust nor a direct participant of the LTI; however, under certain circumstances the Corporation may be
the beneficiary of forfeited Common shares held by the LTIP Trust. Consequently, the LTIP Trust is considered a structured entity for
accounting purposes and the Corporation has consolidated the LTIP Trust in accordance with IFRS 2, Share-based Payment, and IFRS
10, Consolidated Financial Statements. Compensation expense is recorded by the Corporation in the period earned. Dividends paid by
the Corporation with respect to unvested Common shares held by the LTIP Trust are paid to LTI participants. Unvested Common shares
held by the LTIP Trust are shown as a reduction of shareholders’ equity.
Balance, beginning of year
Issued during year
Vested during year
2013
2012
Unvested
Vested
Unvested
48,191
26,978
(11,565)
243,628
13,158
11,565
74,511
36,626
(62,946)
Vested
168,466
12,216
62,946
Balance, end of year
63,604
268,351
48,191
243,628
The cost of the 63,604 (2012 – 48,191) unvested Common shares held by the LTIP Trust at December 31, 2013 was nil (2012 - $281).
The basic net earnings per share calculation excludes the unvested Common shares held by the LTIP Trust.
20 Dividends to Shareholders
During the year ended December 31, 2013, the Corporation declared total dividends to Shareholders of $8,142 or $1.15 per share
(2012 - $7,977 or $1.10 per share).
The Corporation’s policy is to pay dividends to Shareholders of its available cash to the maximum extent possible consistent
with good business practice considering requirements for capital expenditures, working capital, growth capital and other reserves
considered advisable by the Directors of the Corporation. All such dividends are discretionary. Dividends are declared payable
each month to the Shareholders on the last business day of each month and are paid by the 15th day of the following month.
21 Net change in non-cash working capital items
($ Thousands)
Accounts receivable
Linen in service
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Income taxes payable
2013
(1,268)
241
154
1,823
(2,324)
(1,374)
2012
705
(706)
379
(1,357)
558
(421)
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22 Financial Instruments
a) Fair value
The Corporation’s financial instruments at December 31, 2013 consist of accounts receivable, accounts payable and accrued
liabilities, dividends payable and long-term debt. The carrying value of accounts receivable, accounts payable and accrued
liabilities, and dividends payable to Shareholders approximate fair value due to the immediate or short-term maturity of these
financial instruments. The fair value of the Corporation’s interest-bearing debt approximates the respective carrying amount due
to the floating rate nature of the debt.
b) Financial risk management
The Corporation’s activities are exposed to a variety of financial risks: price risk, credit risk and liquidity risk. The Corporation’s
overall risk management program focuses on the unpredictability of financial and economic markets and seeks to minimize
potential adverse effects on the Corporation’s financial performance. Risk management is carried out by financial management
in conjunction with overall corporate governance.
c) Price risk
i)
ii)
Currency risk
Foreign currency risk arises from the fluctuations in foreign exchange rates and the degree of volatility of these rates relative
to the Canadian dollar. The Corporation is not significantly exposed to foreign currency risk as all revenues are received
in Canadian dollars and minimal expenses are incurred in foreign currencies. For large capital expenditure commitments
denominated in a foreign currency, the Corporation will enter into foreign exchange forward contracts if considered prudent
to mitigate this risk.
Interest rate risk
The Corporation is subject to interest rate risk as its credit facility bears interest at rates that depend on certain financial
ratios of the Corporation and vary in accordance with market interest rates. Based on the outstanding balance on the
Corporation’s revolving credit facility, a 1% increase in the Canadian prime rate would result in an additional $196 in annual
interest expense.
iii) Other price risk
The Corporation’s exposure to other price risk is limited since there are no significant financial instruments which fluctuate
as a result of changes in market prices.
d) Credit risk
The Corporation’s financial assets that are exposed to credit risk consist of accounts receivable. The Corporation, in the normal
course of business, is exposed to credit risk from its customers. The allowance for doubtful accounts and past due receivables
are reviewed by management at each balance sheet reporting date. Any amounts greater than 60 days are considered overdue
and all impaired amounts have been fully allowed for as at December 31, 2013.
The Corporation updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability
of accounts receivable balances of each customer taking into account historic collection trends, the contractual relationship
with the customer and the nature of the customer which in many cases is a publicly funded health care entity.
Management believes that the risks associated with concentrations of credit risk with respect to accounts receivable are
limited due to the nature of the customers and the generally short payment terms.
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The aging of the Corporation’s receivables and related allowance for doubtful accounts are:
($ Thousands)
December 31, 2012
Current
31-60 days
Greater than 60 days
December 31, 2013
Current
31-60 days
Greater than 60 days
Gross
Allowance
Net
10,486
3,589
152
14,227
11,608
3,411
483
15,502
-
-
30
30
-
-
37
37
10,486
3,589
122
14,197
11,608
3,411
446
15,465
While the Corporation evaluates a customer’s credit worthiness before credit is extended, provisions for potential credit losses
are also maintained. The change in allowance for doubtful accounts was as follows:
($ Thousands)
Balance, beginning of year
Adjustments made during the year
Write-offs
Balance, end of year
2013
2012
30
7
-
37
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e) Liquidity risk
The Corporation’s accounts payable and dividend payable are due within one year.
The Corporation has a credit facility with a maturity date of July 31, 2016 (Note 12). The degree to which the Corporation
is leveraged may reduce its ability to obtain additional financing for working capital and to finance investments to maintain
and grow the current levels of cash flows from operations. The Corporation may be unable to extend the maturity date of
the credit facility.
Management, to reduce liquidity risk, has historically renewed the terms of the credit facility in advance of its maturity dates
and the Corporation has maintained financial ratios that management believes are conservative compared to financial
covenants applicable to the credit facility. A significant portion of the available facility remains undrawn.
Management measures liquidity risk through comparisons of current financial ratios with financial covenants contained in
the credit facility.
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23 Capital management
The Corporation views its capital resources as the aggregate of its debt, shareholders’ equity and amounts available under its credit
facility. In general, the overall capital of the Corporation is evaluated and determined in the context of its financial objectives and its
strategic plan.
The Corporation’s objective in managing capital is to ensure sufficient liquidity to pursue its growth and expansion strategy,
while taking a conservative approach towards financial leverage and management of financial risk. The Corporation’s capital
is composed of shareholders’ equity and long-term debt. The Corporation’s primary uses of capital are to finance its growth
strategies and capital expenditure programs. The Corporation currently funds these requirements from internally-generated
cash flows and interest bearing debt.
The Corporation pays a dividend which reduces its ability to internally finance growth and expansion. However the availability of
line of credit provides sufficient access to capital to allow K-Bro to take advantage of
the Corporation’s revolving
acquisition opportunities. The merits of the dividend are periodically evaluated by the Board.
The primary measures used by the Corporation to monitor its financial leverage are the ratios of Funded Debt to EBITDA
(earnings before income taxes, depreciation and amortization) and Fixed Charge Coverage. EBITDA is an additional GAAP measure
as prescribed by IFRS and has been presented in the manner in which the chief operating decision maker assesses performance.
The Corporation manages a Funded Debt to EBITDA ratio calculated as follows:
($ Thousands)
Long-term debt, including current portion
Issued and outstanding letters of credit
Funded debt
Net earnings for the trailing twelve months
Add:
Income tax expense
Financial charges
Depreciation of property, plant and equipment
Amortization of intangible assets
Loss on disposal of property, plant and equipment
EBITDA
Funded debt to EBITDA
The Corporation manages a Fixed Charge Coverage calculated on a trailing twelve-month basis as follows:
($ Thousands)
EBITDA
Financial charges
Dividends to shareholders
Fixed charge coverage
2013
19,640
650
20,290
10,336
4,173
595
5,965
2,140
108
23,317
0.87x
2013
23,317
595
8,142
8,737
2.7x
2012
5,818
400
6,218
11,149
4,175
357
6,350
2,327
159
24,517
0.25x
2012
24,517
357
7,977
8,334
2.9x
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24 Related party transactions
The Corporation transacts with key individuals from management and with the Board who have authority and responsibility to plan,
direct and control the activities of the Corporation. The nature of these dealings were in the form of payments for services rendered
in their capacity as Directors (retainers and meeting fees, including share-based payments) and as employees of the Corporation
(salaries, benefits, short-term bonuses and share-based payments).
Key management personnel are defined as the executive officers of the Corporation including the President and Chief Executive
Officer, Senior Vice-President and General Manager, Vice-President and Chief Financial Officer and three employees acting in the
capacity of Vice-President and General Manager.
During 2013 and 2012, remuneration to directors and key management personnel was as follows:
($ Thousands)
Salaries and retainer fees
Short-term bonus incentives
Post-employment benefits
Unit-based payments
2013
1,708
757
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1,139
3,655
2012
1,168
750
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943
3,358
The Corporation incurred expenses in the normal course of business for advisory consulting services provided by a Director primarily
relating to acquisitions. The amounts charged are included as salaries and retainer fees. For the year ended December 31, 2013, the
Corporation incurred such fees totaling $138 (2012 – $138).
25 Expenses by nature
($ Thousands)
Wages and benefits
Linen
Utilities
Delivery
Repairs and maintenance
Occupancy costs
Materials and supplies
Other expenses
2013
64,760
13,781
8,400
5,979
4,398
4,819
5,553
195
2012
61,831
12,706
8,276
5,583
3,832
4,012
5,346
187
107,885
101,773
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26 Segmented information
The Chief Executive Officer is the corporation’s chief operating decision-maker. Management has determined the operating segments
based on information reviewed by the Chief Executive Officer for the purposes of allocating resources and assessing performance.
The Corporation provides laundry and linen services to the healthcare and hospitality sectors through eight operating divisions
located in Vancouver, Victoria, Calgary, Edmonton, Toronto, Montréal, and Québec City. The services offered and the economic
characteristics associated with these divisions are similar, therefore they have been aggregated into one reportable segment
which operates exclusively in Canada.
In Edmonton, the Corporation is the significant supplier of laundry and linen services to the entity which manages all major
healthcare facilities in the region. This contract expires on March 31, 2023. In Calgary, the major customer is contractually
committed to February 28, 2018 and in Vancouver the major customer is contractually committed to November 12, 2015. For the
year ended December 31, 2013, the Corporation has recorded revenue of $58,652 (2012 – $59,531) from these three major customers,
representing 45% (2012 – 47%) of total revenue.
Healthcare
Hospitality
2013
2012
88,893
42,309
67.8%
32.2%
86,610
39,680
131,202
100.0%
126,290
68.6%
31.4%
100%
27 Subsequent events
The Corporation’s Board of Directors declared an eligible dividend of $0.0958 per Common share of the Corporation payable on each
of February 15, March 15 and April 15 to Shareholders of record on January 31, February 28, and March 31, respectively.
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Corporate information
CoRPoRATE oFFICE
VANCoUVER 1 PLANT
QUÉBEC PLANT
14903 - 137 Avenue
Edmonton, Alberta T5V 1R9
Phone 780.453.5218
Fax
780.455.6676
inquiries@k-brolinen.com
www.k-brolinen.com
BoARD oF DIRECToRS
Ross Smith, FCA (Chair)
Corporate Director
Matthew Hills, MBA
Managing Director
LLM Capital Partners LLC
Steven Matyas, BSc
President
Staples Canada Inc.
Michael Percy, PhD
Professor, School of Business
University of Alberta
Linda McCurdy, MBA
President & Chief Executive Officer
K-Bro Linen Systems Inc.
EXECUTIVE oFFICERS
Linda McCurdy, MBA
President & Chief Executive Officer
Sean Curtis
Senior Vice-President &
General Manager (Edmonton)
Christopher Burrows
Vice-President & Chief Financial Officer
VICToRIA PLANT
861 Van Isle Way
Victoria, British Columbia V9B 5R8
Phone 250.474.5699
250.474.5680
Fax
Kevin Stephenson
General Manager
Andrew Mackeen
Plant Manager
8035 Enterprise Street
Burnaby, British Columbia V5A 1V5
Phone 604.420.2203
604.420.2313
Fax
367 Boulevard Des Chutes
Québec City, Québec G1E 3G1
Phone 418.661.6163
418.661.4000
Fax
Ron Graham
General Manager
Kevin McElgunn
Operations Manager
Maxim Lortie
Directeur Général
Jessica Lévesque
Directrice des Opérations
VANCoUVER 2 PLANT
MoNTRÉAL PLANT
4590 Canada Way
Burnaby, British Columbia V5G 1J6
Phone 604.681.3291
604.685.1458
Fax
Ken Chu
General Manager
John Truong
Operations Manager
CALGARY PLANT
6969 – 55 Street SE
Calgary, Alberta T2C 4Y9
Phone 403.724.9001
403.720.2959
Fax
Jeff Gannon
General Manager
Sean Jackson
Operations Manager
EDMoNToN PLANT
14903 - 137 Avenue
Edmonton, Alberta T5V 1R9
Phone 780.451.3131
780.452.2838
Fax
Sean Curtis
Senior Vice-President &
General Manager
Trevor Rye
Operations Manager
ToRoNTo PLANT
15 Shorncliffe Road
Toronto, Ontario M9B 3S4
Phone 416.233.5555
416.233.4434
Fax
Jerry Ostrzyzek
General Manager
Michael Beach
Operations Manager
599, rue Simonds Sud
Granby, Québec J2J 1C1
Phone 450.378.3187
450.378.8245
Fax
Sylvain Tremblay
Directeur Général
TRANSFER AGENT
AND REGISTRAR
CST Trust Company
Calgary, Alberta
AUDIToRS
PricewaterhouseCoopers LLP
Edmonton, Alberta
LEGAL CoUNSEL
Goodmans LLP, Toronto
Bennett Jones LLP, Edmonton
PRINCIPAL BANK
TD Bank, Edmonton
SToCK EXChANGE LISTING
TSX: KBL
NoTICE oF ANNUAL MEETING
The annual meeting of Shareholders
will be held at the Sheraton Centre
Hotel, Kent Room, 123 Queen Street
West, Toronto, Ontario, Canada on
June 17, 2014 at 1:00pm EDT
54
K-Bro Linen Inc.