2014
Annual
Report
Visit the new K-BroLinen.com
1.
2.
6.
12.
34.
President’s Message
Chairman’s Message
Financial Highlights
Management’s Discussion and Analysis
Consolidated Financial Statements
K-Bro is Canada’s healthcare &
hospitality laundry & linen processor
with facilities all across the country.
Vancouver
(Two Locations)
Victoria
Calgary
Edmonton
Regina
Québec City
Montréal
Toronto
Clean Green TRSA Certified
President’s Message
2014 was an exciting year for K-Bro as
we celebrated our 60th anniversary
and completed another record year.
We remained focused on providing
the best possible laundry and linen
services to our valued customers.
As a result, we were rewarded with
the continuing loyalty and trust of our
many existing and new customers.
In 2014, we began construction of our 9th plant. This new
Regina facility will service all of Saskatchewan and is
expected to open in late Q3 2015. As with all new K-Bro
facilities, the new Regina plant will include new, modern and
highly-automated equipment that will allow us to provide
outstanding quality and service to our customers. We remain
committed to investments that enable us to provide higher-
quality and more efficient service to our customers.
2014 also saw increased operating efficiencies in our
Edmonton facility as we continually worked to refine our
operating processes to find further savings.
At the end of the year we completed a $35 million dollar
equity offering strengthening our balance sheet. As a result,
we have a capital structure that will support significant
future organic and acquisition growth.
With all of our new customers and contract renewals from
existing customers, we enter 2015 with a substantial portion
of our healthcare business under long-term contracts.
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 1,650 employees, 2014 was a year of success:
Linda McCurdy
President & Chief Executive Officer
Ross Smith
Chairman
• Total shareholder return of 19.4%;
• Revenue in excess of $136 million compared with $121 million
in 2013;
• EBITDA of $26.2 million compared with $23.3 million in 2013;
• Earnings per share of $1.72, compared with $1.47 in 2013; and,
• $8.5 million in dividends ($1.18/share);
• Market capitalization of $367 million and with the debt to total
capitalization ratio decreasing to 0.0x.
We will always ensure that our business adapts to new and
changing customer needs and that we continue to provide the
highest quality services to our customers. 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 customers across
Canada, we know we must continue to find ways to improve
every single day.
On behalf of our management team and our 1,650 dedicated
employees, thank you for your continued support of K-Bro.
Chairman’s Message
2014 was another year of tremendous
growth and progress for K-Bro.
K-Bro delivered strong financial results, strengthened
capital ratios and increased dividend payments.
We continued to focus on superior customer service as we
believe doing what is best for our customers is also what is
best for K-Bro.
K-Bro’s Board of Director’s is committed to sound
corporate governance. We continually try to balance
risk and opportunities, and as a result the Company has
continued to deliver strong results.
On behalf of K-Bro, I thank all of our customers, employees,
shareholders and other stakeholders for your continued
confidence and commitment to K-Bro. We will continue to
work hard every day to earn your trust.
Linda McCurdy
President & CEO
Ross Smith
Chairman
1
2
K-Bro Linen Inc. | 2014 Annual ReportDependable. Officers & Directors
K-Bro is the largest
healthcare and
hospitality laundry
and linen processor
in Canada.
K-Bro operates eight facilities and a distribution center in eight cities,
processing hospitality, healthcare and specialty 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 hospitals
and extended care centres care for the young, old and vulnerable in
environmentally responsible ways. Our responsibility extends to ensuring
that we have a safe culture at K-Bro.
K-Bro delivers excellence and
dependability in providing
efficient, environmentally
conscious and cost-effective
laundry and linen services.
By expanding our expertise into new markets and leveraging our
operating strengths, we have opportunities to continue the
growth of revenue, further enhance operating margins, and ensure
consistent and sustainable value creation for stakeholders.
Linda McCurdy, President and Chief Executive Officer
Our devotion to quality, innovation, and respect for our customers, employees and
communities is at the heart of everything K-Bro has accomplished for the past 60 years.
K-Bro has been positioned as the preeminent partner of choice by delivering solutions
and services to our partners across Canada.
Sean Curtis, Senior Vice-President and General Manager
K-Bro has a stable business model with strong fundamentals that
support our market valuation, reliable shareholder returns,
and sustainable growth of our business.
Kristie Plaquin, Interim Chief Financial Officer
Ross Smith
Linda McCurdy
Kristie Plaquin
Ron Graham
Kevin Stephenson
Jeff Gannon
Jessica Lévesque
Sylvain Tremblay
Steven Matyas
Matthew Hills
Sean Curtis
Ken Chu
Jerry Ostrzyzek
3
4
K-Bro Linen Inc. | 2014 Annual ReportDependable.
As our society
grows, we integrate
our commitment to
responsibility into
our new businesses,
employees and
the communities
in which we live
and work.
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
140
130
120
110
100
90
80
70
500
400
300
200
100
30
25
20
18
16
14
12
10
2009 2010 2011
2012
2013 2014
2009 2010 2011
2012
2013 2014
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 2009)
K-Bro Linen Inc.
S&P/TSX Composite Index
149
118
212
107
2010
2011
100
2009
263
115
2012
468
144
344
130
2013
2014
(1)
The graph reflects the total cumulative return, assuming reinvestment of all dividends, of $100 invested on December 31, 2009 in each of the Common
Shares of the Corporation and the S&P/TSX Composite (TRIV) Index.
(2)
The year-end values of each investment shown on the graph are based on share price appreciation plus dividend.
5
6
K-Bro Linen Inc. | 2014 Annual ReportDependable. In 2014, 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.
Sean Curtis
Senior VP & General Manager
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?
Taking advantage of relationships already in
place 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.
We are
the largest
healthcare &
hospitality
laundry &
linen processor
in Canada.
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 $95 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.
In aggregate, our eight plants provided services to more than 1,500
customers and employed almost 1650 employees in 2014.
At December 31, 2014, total assets were $132.6 million, equity was
$109.4 million and market capitalization was $367 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
Long-term stable contracts
K-Bro has 8 plants and one
distribution center located
in 8 different cities, which
ensures our ability to provide
uninterrupted service in the
wake of disasters, pandemics
or other adversity.
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
Single source for customers
Our corporate culture enables us to
attract and retain quality laundry
staff and our national presence
provides opportunities for career
advancement. Six members of
our senior management team
commenced their careers with
K-Bro and have an average tenure
in excess of 20 years.
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.
7
8
K-Bro Linen Inc. | 2014 Annual ReportDependable.
In 2014, 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,
eight in Quebec, one in Ontario, and in Alberta we added
two additional hoteliers and extended agreements with
several more.
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 2014 we refined our operating processes at the
new Edmonton processing facility, completed our third
equity offering, began construction of our new Regina
processing facility and were able to deliver stronger
results to our shareholders.
K-Bro’s value-added services provide a ‘one-stop shop’ for
linen services, and currently include:
• Exchange cart preparation
Our new clients include some of the finest hotels in
the country.
• Delivery of carts to user wards and departments
• Reusable OR linen and pack rental (KOR services)
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
• 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 ten 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.
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)
Years ended December 31(1)
2014
2013
2012
2011
2010
2009
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
136,440
26,241
19.2
12,198
1.72
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
21,722
0
9,434
19,640
8,064
5,818
7,245
6,095
8,664
10,763
7,896
4,043
2.85
42.0
26.9
12.5
11.1
19.4
182.9
367,023
47.90
36.90
46.11
2.61
44.2
27.0
12.0
14.5
41.2
2.72
41.8
18.1
8.2
16.5
34.9
235.2
253.8
2.40
45.9
19.6
7.8
12.6
27.5
121.1
2.15
51.4
18.5
7.6
11.4
43.9
146.7
1.99
55.1
12.1
6.1
12.0
50.0
87.5
280,976
203,613
155,821
126,866
93,451
40.50
28.38
39.60
30.18
21.20
28.86
22.98
17.28
22.24
19.29
13.02
18.30
13.84
9.70
13.48
(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.
9
10
K-Bro Linen Inc. | 2014 Annual ReportDependable.
Management’s
Discussion & Analysis
16.
17.
17.
18.
18.
20.
20.
21.
23.
24.
25.
26.
26.
26.
27.
30.
30.
30.
31.
31.
Introduction
Strategy
Fourth Quarter Overview
Selected Annual Financial Information
Summary of 2014 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
Changes in Accounting Policies
Recent Accounting Pronouncements
Financial Instruments
Critical Risks and Uncertainties
Controls and Procedures
Management’s Discussion & Analysis
of Financial Condition & 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, 2014 and 2013, as well as the
unaudited interim condensed Consolidated Financial
Statements for the periods ended March 31, 2014, June
30, 2014 and September 30, 2014. 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 11, 2015.
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.
As events have unfolded since
entering the public market, our
readiness has contributed to our
success in dependability & growth.
13
14
K-Bro Linen Inc. | 2014 Annual ReportDependable. Quality, innovation and respect
for our customers, employees
and communities is at the very
centre of everything we have
done for the past 60 years.
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 and
one distribution centre in eight Canadian cities including
Victoria, Vancouver, Calgary, Edmonton, Saskatoon, 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) 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.
15
16
K-Bro Linen Inc. | 2014 Annual ReportDependable. Strategy
Selected Annual Financial Information
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.
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.
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,
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 2014, revenue was $33.8 million which was 4.5% higher than the $32.3 million generated in the comparative
quarter of 2013. This year-over-year increase was due to organic growth from existing customers across the plants and additional
services provided to the Saskatoon Health Region. EBITDA increased from $5.4 million in Q4, 2013 to $6.3 million in Q4, 2014, this
increase was a result of increased efficiencies resulting from the move to the new Edmonton facility, organic growth from existing
customers across the plants and additional services provided to the Saskatoon Health Region.
($ Thousands, except share & per share amounts)
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
2014
136,440
16,663
12,198
1.72
1.72
132,638
-
8,498
1.183
2013
131,202
14,509
10,336
1.47
1.47
112,330
19,640
8,142
1.150
2012
126,290
15,324
11,149
1.60
1.59
94,800
5,818
7,977
1.133
7,090,937
7,111,232
7,022,699
7,054,235
6,981,432
6,993,561
Summary of 2014 Results & Key Events
Financial Growth
Regina Facility Development
Management estimates that the costs to commission a
new facility in Regina are expected to be approximately
$35.6 million for new equipment, land and building.
The expected costs to commission the facility have
increased from that previously disclosed as a result of
the weakening Canadian dollar. Costs associated with
the new facility began to be incurred in Q2, 2014 and will
continue to be incurred until Q3, 2015. As at December
31, 2014, K-Bro has incurred $11.2 million of the total
expected capital cost. Management expects the new
facility to commence processing in late Q3, 2015.
K-Bro delivered strong financial results in 2014 driven by
the operating results from all eight of its processing plants.
Net earnings were $12.2 million or $1.72 per share (basic).
Cash flow from operating activities was $23.9 million and
distributable cash flow was $20.2 million. Revenue increased
in fiscal 2014 to $136.4 million or by 4.0% compared to
2013. This increase was due to a combination of additional
services provided to the Saskatoon Health Region and
organic growth from existing customers across the plants.
EBITDA (see Terminology) increased in the year to
$26.2 million from $23.3 million in 2013, which is an
increase of 12.5%. The EBITDA margin increased to
19.2% in 2014 compared 17.8% in 2013. Both the EBITDA
and EBITDA margin increase were predominantly a
result of increased efficiencies as a result of the move
to the new Edmonton facility, organic growth from
existing customers across the plants, and additional
services provided to the Saskatoon Health Region.
17
18
K-Bro Linen Inc. | 2014 Annual ReportDependable.
Equity Offering
On December 9, 2014, the Corporation issued
839,500 common shares (10.5% of total share
capital issued) as a part of an equity offering.
The common shares issued have the same
rights as the other shares in issue. The fair
market value of the shares issued amounted
to $34.8 million ($41.50/share). The related
transaction costs amounting to $1.3 million have
been netted against the deemed proceeds.
Effects of Economic Uncertainty
K-Bro believes that it is positioned to withstand
market volatility and uncertainty given that:
• Approximately 70.6% of its revenues in the
quarter were from large publicly funded
healthcare customers which are geographically
diversified across multiple provinces;
• At December 31, 2014, K-Bro had unutilized
borrowing capacity of $38.4 million or
95.9% of the revolving credit line available
and cash of $13.7 million; and,
• K-Bro’s prudent approach to managing
capital has added cash flow and liquidity
to the Corporation, thereby improving
its ability to withstand the turmoil in the
national and global capital markets.
K-Bro is a participant in the temporary foreign
worker (“TFW”) program in our facilities where
genuine labour shortages exist, predominantly
within our Alberta plants. During the year, the
federal government reviewed the TFW program
and implemented various rule changes. These
changes include stricter application requirements,
higher application fees, caps on TFW in low wage
positions, refusal of applications in regions of
high unemployment, reduction to work permit
durations, and increased government inspections.
The rule changes, if implemented as set out, are
not expected to have a material effect on the
financial results or operations of the Corporation.
Key Performance Drivers
K-Bro’s key performance drivers focus on growth, profitability, stability and cost containment in order to maintain dividends and
maximize Shareholder value. The following outlines our results on a period-to-period comparative basis in each of these areas:
($ Thousands, except percentages)
Category
Indicator
Q4, 2014
Q4, 2013
YTD 2014
YTD 2013
Growth
Profitability
Stability
Cost Containment
EBITDA(1)(%)
Adjusted EBITDA(2)(%)
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(%)
16.8
16.8
4.5
3.2
6,333
18.7
6,333
18.7
3,083
3,083
0.0
38,350
45.2
0.300
44.8
6.4
81.3
-6.2
-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
12.5
9.2
4.0
9.7
26,241
19.2
26,241
19.2
12,198
12,198
0.0
38,350
42.0
1.183
44.8
6.5
80.8
-4.9
-3.0
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
(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.
19
20
K-Bro Linen Inc. | 2014 Annual ReportDependable. 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)
2014
Q4
Q3
Q2
Q1
2013
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue
23,848
9,945
23,068
12,960
23,330
11,018
33,793
36,028
34,348
22,641
9,630
32,271
22,607
9,737
21,874
12,677
22,124
22,288
10,536
9,359
32,344
34,551
32,660
31,647
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % 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)
27,460
6,333
18.7
6,333
2,255
103
(30)
4,005
922
3,083
9.1
0.433
0.432
3,083
0.433
0.432
28,411
27,344
26,984
26,923
28,816
26,403
7,617
21.1
7,617
2,273
125
37
5,182
1,431
3,751
10.4
0.533
0.529
3,751
0.533
0.529
7,004
20.4
7,004
2,216
196
12
4,580
1,247
3,333
9.7
0.474
0.471
3,333
0.474
0.471
5,287
16.4
5,287
2,194
169
28
2,896
865
2,031
6.3
0.289
0.287
2,031
0.289
0.287
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
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
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
Total assets
132,638
117,983
117,984
113,824
112,330
107,911
104,226
Total long-term financial liabilities
5,815
28,267
29,081
25,066
25,619
22,515
20,794
Funds provided by operations
Long-term debt
Dividends declared per share
9,401
-
0.300
7,787
21,908
0.300
2,705
22,587
0.296
4,016
18,609
0.288
6,399
19,640
0.288
5,106
17,028
0.288
(1,499)
15,338
0.288
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
99,452
10,442
9,180
5,162
0.288
(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.
Occupancy costs increased slightly to $4.8 million or
3.5% of revenues compared to $4.7 million and 3.6%
in 2013. The increase is mainly attributable to the
increased lease costs of the new Edmonton facility
offset by the recognition in 2013 of the onerous
contract that related to the old Edmonton facility.
Corporate costs increased in 2014 by $0.5 million over the
comparative period of 2013 and increased as a percentage
of revenues to approximately 4.4%. The increase is due to
an increase in the management personal to support the
company’s growth and business strategies across the plants.
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.
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 decreased to approximately 26.8%
of net earnings from 28.8% in 2013. This decrease was
a result of a decrease in non-deductible expenses.
Revenue, EBITDA, Adjusted EBITDA & Earnings
For the year ended December 31, 2014, K-Bro’s revenue
was $136.4 million, compared to $131.2 million in the prior
year. This represents a 4.0% increase in revenue and is
due to a combination of organic growth and additional
services provided to the Saskatoon Health Region. In 2014
approximately 68.1% of K-Bro’s revenue was generated
from healthcare institutions compared to 67.8% in 2013.
EBITDA was $26.2 million in 2014, compared to $23.3 million
in 2013. This 12.5% increase was predominantly a result of
increased efficiencies as a result of the move to the new
Edmonton facility, organic growth from existing customers
across the plants, additional volume from Saskatoon
Health Region, and the recognition of an expense for the
remaining lease payments on the former processing facility
in Edmonton in Q3, 2013 which was offset by increased
lease costs for the new Edmonton facility in 2014.
Net earnings increased in 2014 to $12.2 million from $10.3 million
in 2013. Net earnings as a percentage of revenue increased
to 8.9% compared to 7.9% in 2013. This margin increase is
due to a flow through effect of the increase in the EBITDA.
Operating Expenses
Wages and benefits increased from $60.9 million in 2013
to $61.2 million in 2014 and decreased as a percentage of
revenues to 44.8% from 46.4%. This decrease was a result
of increased efficiencies as a result of the move to the new
Edmonton facility, partially offset by incremental increases
in the wage rate provided earlier in the year during Q1, 2014.
Linen expenses increased to $14.4 million from $13.8
million and increased to 10.6% from 10.5% as a
percentage of revenue. The increase was a result of
additional services provided to healthcare customers
along with organic growth across the plants.
Utility costs slightly increased from 6.4% in 2013 to 6.5%
as a percentage of revenue in 2014. This increase was a
result of higher commodity costs in early 2014 as compared
to 2013 and was partially offset by increased efficiencies
as a result of the move to the new Edmonton facility.
Delivery costs have increased to $6.2 million
compared to $6.0 million in 2013, but remained
constant as a percentage of revenues at 4.6%.
Materials and supplies and repairs and
maintenance remained constant as a percentage
of revenue 2014 compared to 2013.
21
22
K-Bro Linen Inc. | 2014 Annual ReportDependable. Liquidity & Capital Resources
In 2014 cash generated by operating activities was $23.9 million, compared to cash generated by operating activities of $19.2 million
in 2013. The change in cash from operations is due to the increase in earnings and changes in working capital.
During 2014, cash generated from financing activities amounted to $5.1 million compared to $5.7 million generated in 2013. Financing
activities in 2014 included $33.1 million in net proceeds from issuance of common shares offset by $19.6 million in repayment of long
term debt and $8.4 million in dividends paid to Shareholders.
The Corporation used cash of $15.2 million in investing activities during 2014 compared to $24.9 million in 2013. The decrease in cash
used in investing activities is driven by the purchase of property, plant and equipment for the new Edmonton facility in 2013, offset
by the purchase of property, plant and equipment across the plants and purchases associated with the construction of the new
Regina facility in 2014.
Contractual Obligations
At December 31, 2014, payments due under contractual obligations for the next five years and thereafter are as follows:
($ Thousands)
Long term debt
Operating leases and utility commitments
Linen purchase obligations
Property, plant and equipment commitments
Total
-
32,650
4,322
21,741
Payments due by Period
1-3 Years
< 1 Year
4-5 Years
-
5,740
4,322
21,741
-
10,023
-
-
-
5,159
-
-
> 5 Years
-
11,728
-
-
The operating lease obligations are secured by automotive equipment, plants 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)(%)
2014
-
109,438
109,438
0.0
2013
19,640
71,116
90,756
21.6
For the year ended December 31, 2014, the Corporation had a payout ratio (see Terminology) of 42.0%, a debt to total capitalization
of 0%, an unused revolving credit facility of $38.4 million and has not incurred any events of default under the terms of its credit
facility agreement.
As at December 31, 2014, the Corporation had net working capital of $21.7 million compared to its working capital position of $9.4
million at December 31, 2013.
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.
Dividends
Fiscal
Period
Payment
Date
# of Shares
Outstanding
Amount
per Share
2014
(1)(2)
Total
Amount
2013
Amount
per Share
Total
Amount
January
February 15
February
March 15
March
April 13
Q1
April
May
June
Q2
May 15
June 15
July 15
July
August 15
August
September 15
September
October 15
Q3
October
November 15
November
December 14
December
January 15
Q4
YTD
7,095,343
7,095,343
7,095,343
7,095,343
7,095,343
7,129,619
7,129,619
7,120,235
7,120,235
7,120,235
7,120,235
7,959,735
0.09580
0.09580
0.09580
0.28740
0.09580
0.10000
0.10000
0.29580
0.10000
0.10000
0.10000
0.30000
0.10000
0.10000
0.10000
0.30000
680
680
680
2,039
680
710
713
2,102
713
712
712
2,137
712
712
796
2,220
0.09580
0.09580
0.09580
0.28741
0.09580
0.09580
0.09580
0.28741
0.09580
0.09580
0.09580
0.28741
0.09580
0.09580
0.09580
0.28741
676
676
676
2,028
676
680
680
2,036
680
680
680
2,039
680
680
680
2,039
1.18320
8,498
1.14964
8,142
(1)
The total amount of dividends paid was $0.09580 per share for a total of $679,734 per month for Jan-March 2014; when rounded in thousands, $2,039 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 for April, $709,534 for May, and $0.10000 per share for a total of $712,961 for June 2014. When rounded in thousands,$2,102 of dividends
were paid for the quarterly period.
For the year ended December 31, 2014, the Corporation distributed $1.18 per share compared with $2.85 per diluted share of
Distributable Cash (see Terminology). The actual payout ratio was 42.0%.
The Corporation’s policy is to pay dividends to Shareholders from its available distributable cash flow while considering
requirements for capital expenditures, working capital, growth capital and other reserves considered advisable by the Directors of
the Corporation. All such dividends are discretionary. Dividends are declared payable each month in equal amounts to Shareholders
on the last business day of each month and are paid by the 15th of the following month.
The Corporation designates all dividends paid or deemed to be paid as Eligible Dividends for purposes of subsection 89(14) of the
Income Tax Act (Canada), and similar provincial and territorial legislation, unless indicated otherwise.
23
24
K-Bro Linen Inc. | 2014 Annual ReportDependable. Distributable Cash Flow (See Terminology)
(All amounts in this section in thousands, except per share amounts and percentages)
The Corporation’s source of cash for dividends is distributable cash flow provided by operating activities. Distributable cash flow,
reconciled to cash provided by operating activities as calculated under IFRS, is presented as follows:
($ Thousands, except per share
amounts & percentages )
2014
Q4
Q3
Q2
Q1
2013
Q4
Q3
Q2
Q1
Cash provided by operating activities
9,401
7,787
2,705
4,016
6,399
5,106
(1,499)
9,180
Deduct (add):
Net Changes in non-cash working
capital items(1)
Share-based compensation expense
Maintenance capital expenditures(2)
3,878
1,544
(2,995)
(1,087)
306
309
319
127
102
491
372
315
1,201
261
180
332
279
293
(6,956)
4,049
377
240
320
173
Distributable cash flow
4,908
5,797
5,107
4,416
4,757
4,202
4,840
4,638
Distributable cash flow per weighted
average diluted shares outstanding
Dividends declared
Dividends declared per share
Payout ratio(3)(%)
Weighted average shares outstanding
0.688
2,220
0.300
45.2
0.817
2,137
0.300
36.7
0.721
2,102
0.296
41.0
0.624
2,039
0.288
46.2
0.673
2,039
0.288
42.8
0.596
2,039
0.288
48.4
0.688
2,036
0.288
41.9
0.657
2,028
0.288
43.9
during the period, basic
7,113
7,042
7,034
7,032
7,031
7,031
7,020
7,019
Weighted average shares outstanding
during the period, diluted
7,134
7,096
7,083
7,072
7,065
7,055
7,038
7,054
Trailing-twelve months (“TTM“)
Distributable cash flow
Dividends
Payout ratio(3)(%)
20,228
20,077
18,482
18,215
18,437
18,080
19,158
19,358
8,498
42.0
8,317
41.4
8,219
44.5
8,153
44.8
8,142
44.2
8,131
45.0
8,120
42.5
8,077
41.7
(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)
Maintenance capital expenditures includes costs required to maintain or replace assets which do not have a discrete return on investment.
(3)
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 divided by the distributable cash flow.
Outstanding Shares
At December 31, 2014, the Corporation had 7,959,735 common
shares outstanding. Basic and diluted weighted average
number of common shares outstanding for 2014 were
7,090,937 and 7,111,232 respectively, (7,022,699 and 7,054,235,
respectively for the comparative 2013 periods).
In accordance with the LTI plan and in conjunction with the
performance of the Corporation in the 2013 fiscal year, on
May 8, 2014 the Compensation, Nominating and Corporate
Governance Committee of the Board of Directors approved
LTI compensation of $1.4 million (2013 – $1.5 million) to be
paid as shares issued from treasury. As at December 31, 2014,
the market value of the shares held in trust by the LTI trustee
was $2.1 million (December 31, 2013 – $2.5 million) which was
comprised of 45,368 in unvested common shares (December
31, 2013 – 63,604) with a nil aggregate cost (December 31,
2013 – $nil). As at March 11, 2015, there were 7,959,735 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.
The amounts charged are recorded at their exchange
amounts and are subject to normal trade terms. For the year
ended December 31, 2014, the Corporation incurred fees
totaling $138,000 (2013 – $138,000).
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.
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.
The following discusses the most significant accounting
judgments and estimates in the Corporation’s consolidated
financial statements.
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.
25
26
K-Bro Linen Inc. | 2014 Annual ReportDependable. 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.
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.
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.
3 Months ended Dec. 31
Year ended Dec. 31
2014
3,083
922
103
1,725
530
(30)
2013
2,117
799
176
1,774
530
25
2014
12,198
4,465
593
6,817
2,121
47
2013
10,336
4,173
595
5,965
2,140
108
6,333
5,421
26,241
23,317
($ Thousands)
Net Earnings
Add
Income tax expense
Financial charges
Depreciation of property, plant and equipment
Amortization of intangible assets
(Gain) Loss on disposal of property, plant
and equipment
EBITDA
Non- GAAP Measures
Adjusted EBITDA
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.
($ Thousands)
EBITDA
Add
3 Months ended Dec. 31
Year ended Dec. 31
2014
6,333
2013
5,421
2014
26,241
2013
23,317
Occupancy expense of decommissioned facilities
-
-
-
713
Adjusted EBITDA
6,333
5,421
26,241
24,030
Adjusted Net Earnings & 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.
27
28
K-Bro Linen Inc. | 2014 Annual ReportDependable. ($ Thousands)
Net Earnings
3 Months ended Dec. 31
Year ended Dec. 31
2014
3,083
2013
2014
2,117
12,198
2013
10,336
Add/(deduct), net of corporate income taxes
Occupancy expense of decommissioned facilities
-
-
-
499
Adjusted net earnings
3,083
2,117
12,198
10,835
Adjusted net earnings, per share:
Basic
Diluted
0.43
0.43
0.30
0.30
1.72
1.72
1.54
1.54
For the year ended December 31, 2014, each of the non-GAAP adjusted measures noted above (adjusted EBITDA, adjusted
net earnings and adjusted net earnings per share) are equivalent to their unadjusted measures. Accordingly, no calculations
have been presented for these three measures.
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 nonfinancial 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.
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.
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
Off Balance Sheet Arrangements
As at December 31, 2014, the Corporation has not entered
into any off balance sheet arrangements.
Changes in
Accounting Policies
The Corporation has prepared its December 31, 2014 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, 2014. These changes were made in
accordance with the applicable transitional provisions.
• IFRS 21, Levies, requires the Corporation to consider certain
government imposed payments, or levies, such as property
tax to determine whether the obligating event requiring
recognition of a liability arises at a point in time or a period
of time. As legislation can vary in different jurisdictions this
change was applied and considered for each jurisdiction
based on the relevant facts and circumstances. The adoption
of IFRIC 21 did not result in any change to the method of
recognizing liabilities arising from levies for the Corporation.
Recent Accounting
Pronouncements
The following standard has been issued but has not yet been
applied in preparing the consolidated financial statements.
• IFRS 15, Revenue from Contracts with Customers, was issued
in May 2014 by the IASB and supersedes IAS 18, “Revenue”,
IAS 11 “Construction Contracts” and other interpretive
guidance associated with revenue recognition. IFRS 15
provides a single model to determine how and when
an entity should recognize revenue, as well as requiring
entities to provide more informative, relevant disclosures
in respect of its revenue recognition criteria. IFRS 15 is to
be applied prospectively and is effective for annual periods
beginning on or after January 1, 2017, with earlier application
permitted. The company is in the process of evaluating the
impact that IFRS 15 may have on the financial statements.
• IFRS 9, Financial Instruments, was issued in July 2014 by
the IASB and supersedes IAS 39, “Financial Instruments:
Recognition and Measurement”. IFRS 9 addresses the
classification, measurement and recognition of financial
assets and financial liabilities. IFRS 9 retains but simplifies the
mixed measurement model and establishes three primary
measurement categories for financial assets: amortized cost,
fair value through OCI and fair value through P&L. IFRS 9 is to
be applied prospectively and is effective for annual periods
beginning on or after January 1, 2018, with earlier application
permitted. The company is in the process of evaluating the
impact that IFRS 9 may have on the financial statements.
Financial Instruments
K-Bro’s financial instruments at December 31, 2014 consist
of cash and cash equivalents, accounts receivable, accounts
payable, dividends payable, and accrued liabilities.
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 the Corporation
to manage cashflow risk against the volatility in interest rates on
its long-term debt and foreign exchange rates on its equipment
purchase commitments. The Corporation typically does not
utilize derivative financial instruments for trading or speculative
purposes. The Corporation has a 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, the Corporation may enter
into interest rate swaps, forward contracts on foreign currency,
utilities and textiles or option contracts. The Corporation
has entered into several electrical and natural gas contracts
at December 31, 2014. The Corporation has examined the
terms of the natural gas and electricity contracts and has
determined that these contracts will be physically settled
and as such are not considered to be financial instruments.
29
30
K-Bro Linen Inc. | 2014 Annual ReportDependable. 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, 2014 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, 2014, 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.
Critical Risks &
Uncertainties
As at December 31, 2014, there are no material changes
in the Corporation’s risks or risk management activities
since December 31, 2013. 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.
Controls & 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.
During the fourth quarter of 2014, the Corporation adopted
the Internal Control-Integrated Framework (2013 COSO
Framework) as published by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).
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, 2014, and the CEO and CFO have
concluded that these controls were operating effectively.
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 »).
31
32
K-Bro Linen Inc. | 2014 Annual ReportDependable. Consolidated
Financial
Statements
PricewaterhouseCoopers LLP
TD Tower, 10088 102 Avenue NW, Suite 1501, Edmonton, Alberta, Canada T5J 3N5
Phone 1 780 441 6700 | Fax 1 780 441 6776 | Website pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Consolidated Statements of Financial Position
($ Thousands of Canadian dollars)
December 31, 2014
December 31, 2013
March 11, 2015
To the Shareholders of
K-Bro Linen Inc.
Independent Auditor’s Report
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, 2014 and December 31, 2013 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, 2014 and December 31, 2013 and their financial performance and their cash
flows for the years then ended in accordance with International Financial Reporting Standards.
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses and deposits
Linen in service (note 6)
Total
Property, plant and equipment (note 7)
Intangible assets (note 8)
Goodwill (note 9)
Assets Total
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 10)
Income taxes payable
Dividends payable to shareholders
Total
Long-term debt (note 11)
Unamortized lease inducements (note 13)
Deferred income taxes (note 14)
Liabilities Total
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings (deficit)
Shareholders’ Total
Contingencies and commitments (note 15)
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the Corporation.
13,744
14,560
1,009
9,794
39,107
66,319
6,756
20,456
132,638
16,346
243
796
17,385
-
850
4,965
23,200
106,870
1,642
926
109,438
132,638
-
15,465
917
8,647
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
Chartered Accountants
Edmonton, Canada
35
Ross Smith
Chairman
Matthew Hills
Director
36
K-Bro Linen Inc. | 2014 Annual ReportDependable. Consolidated Statements of Earnings
& Comprehensive Income
($ Thousands of Canadian dollars, except share and per share amounts)
Years ended December 31
Revenue
Expenses
Wages and benefits
Linen (note 6)
Utilities
Delivery
Occupancy costs
Materials and supplies
Repairs and maintenance
Corporate
Total
EBITDA (note 22)
Other expenses
Depreciation of property, plant and equipment (note 7)
Amortization of intangible assets (note 8)
Financial charges (note 12)
Loss on disposal of property, plant and equipment
Total
Earning before income taxes
Current income tax expense
Deferred income tax expense
Income tax expense
Net earnings and Comprehensive income
Net earnings per share: (note 17)
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
2014
136,440
61,162
14,438
8,898
6,246
4,800
4,474
4,232
5,949
110,199
26,241
6,817
2,121
593
47
9,578
16,663
4,081
384
4,465
12,198
1.72
1.72
2013
131,202
60,858
13,781
8,400
5,979
4,703
4,337
4,398
5,429
107,885
23,317
5,965
2,140
595
108
8,808
14,509
3,931
242
4,173
10,336
1.47
1.47
7,090,937
7,111,232
7,022,699
7,054,235
Consolidated Statements of Changes in Equity
($ Thousands of Canadian dollars)
Total Share
Capital
Contributed
Surplus
Retained
Earnings
(deficit)
Total
Equity
As at January 1, 2014
Net earnings
Net proceeds from common shares issued (note 16)
Dividends declared (note 19)
Employee share based compensation expense
Cash settled employee share based compensation
Shares vested during the year
As at December 31, 2014
72,158
-
33,523
-
-
-
1,189
106,870
1,732
-
-
-
1 ,136
(37)
(1,189)
1,642
(2,774)
12,198
-
(8,498)
-
-
-
71,116
12,198
33,523
(8,498)
1,136
(37)
-
926
109,438
($ Thousands of Canadian dollars)
Total Share
Capital
Contributed
Surplus
Retained
Earnings
(deficit)
Total
Equity
As at January 1, 2013
Net earnings
Dividends declared (note 19)
Employee share based compensation expense
Shares vested during the year
As at December 31, 2013
71,444
-
-
-
714
72,158
1,209
-
-
1,237
(714)
1,732
(4,968)
10,336
(8,142)
-
-
(2,774)
67,685
10,336
(8,142)
1,237
-
71,116
The accompanying notes are an integral part of these consolidated financial statements.
37
38
K-Bro Linen Inc. | 2014 Annual ReportDependable. Consolidated Statements of Cash Flow
($ Thousands of Canadian dollars, except share and per share amounts)
Years ended December 31
Operating Activities
Net earnings
Depreciation of property, plant and equipment (note 7)
Amortization of intangible assets (note 8)
Lease inducements, net of amortization
Cash settled employee share based compensation
Employee share based compensation expense
Loss on disposal of property, plant and equipment
Deferred income taxes
Total
Change in non-cash working capital items (note 20)
Cash provided by operating activities
Financing Activities
Net proceeds (repayments) of revolving credit facility
Net proceeds from issuance of common shares (note 16)
Dividends paid to shareholders (note 19)
Cash provided by financing activities
Investing Activities
Purchase of property, plant and equipment (note 7)
Proceeds from disposal of property, plant and equipment
Purchase of intangible assets (note 8)
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 paid
The accompanying notes are an integral part of these consolidated financial statements.
2014
12,198
6,817
2,121
(97)
(37)
1,136
47
384
22,569
1,340
23,909
(19,640)
33,072
(8,382)
5,050
(15,522)
311
(4)
(15,215)
13,744
-
13,744
577
3,929
2013
10,336
5,965
2,140
532
-
1,237
108
242
20,560
(1,374)
19,186
13,822
-
(8,138)
5,684
(24,914)
44
-
(24,870)
-
-
-
462
6,255
Notes to the Consolidated Statements
($ Thousands of Canadian dollars, except share and per share amounts, years ended December 31, 2014 and 2013)
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 and one distribution centre in
eight 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 11, 2015.
1 Basis of Presentation
The consolidated financial statements of the Corporation
have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as published in the
CPA Handbook. 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 (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.
39
40
K-Bro Linen Inc. | 2014 Annual ReportDependable. 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.
The major categories of property, plant and equipment are depreciated on a straight-line basis to allocate their cost over
their estimated useful lives 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.
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.
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.
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
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.
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)).
k) Business Combinations
o) Foreign Currency Translation
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.
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”.
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
41
42
K-Bro Linen Inc. | 2014 Annual ReportDependable. 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.
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 t(“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.
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:
Asset
Financial assets
Cash and cash equivalents
Accounts receivable
Financial liabilities
Accounts payable and accrued liabilities
Dividends payable
Long-term debt
Classification
Measurement
Loans and receivables
Loans and receivables
Amortized cost
Amortized cost
Other liabilities
Other liabilities
Other liabilities
Amortized cost
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, 2014
The Corporation has adopted the following new and revised standards, along with any consequential amendments, effective
January 1, 2014. These changes were made in accordance with the applicable transitional provisions.
• IFRIC 21, Levies, requires the Corporation to consider certain government imposed payments, or levies, such as property
tax to determine whether the obligating event requiring recognition of a liability arises at a point in time or a period
of time. As legislation can vary in different jurisdictions this change was applied and considered for each jurisdiction
based on the relevant facts and circumstances. The adoption of IFRIC 21 did not result in any change to the method of
recognizing liabilities arising from levies for the Corporation.
43
44
K-Bro Linen Inc. | 2014 Annual ReportDependable. 4 New Standards and interpretations
not yet adopted
The following standard has been issued but has not yet been
applied in preparing the consolidated financial statements.
• IFRS 15, Revenue from Contracts with Customers, was
issued in May 2014 by the IASB and supersedes IAS 18,
“Revenue”, IAS 11 “Construction Contracts” and other
interpretive guidance associated with revenue recognition.
IFRS 15 provides a single model to determine how and
when an entity should recognize revenue, as well as
requiring entities to provide more informative, relevant
disclosures in respect of its revenue recognition criteria.
IFRS 15 is to be applied prospectively and is effective
for annual periods beginning on or after January 1, 2017,
with earlier application permitted. The company is in the
process of evaluating the impact that IFRS 15 may have on
the financial statements.
• IFRS 9, Financial Instruments, was issued in July 2014 by
the IASB and supersedes IAS 39, “Financial Instruments:
Recognition and Measurement”. IFRS 9 addresses the
classification, measurement and recognition of financial
assets and financial liabilities. IFRS 9 retains but simplifies
the mixed measurement model and establishes three
primary measurement categories for financial assets:
amortized cost, fair value through OCI and fair value
through P&L. IFRS 9 is to be applied prospectively and is
effective for annual periods beginning on or after January
1, 2018, with earlier application permitted. The company
is in the process of evaluating the impact that IFRS 9 may
have on the financial statements.
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
& 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 estimated service lives of linen in service 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.
45
6 Linen in Service
($ Thousands of Canadian dollars)
Balance, beginning of year
Additions
Amortization charge
Balance, end of year
2014
8,647
15,585
(14,438)
9,794
2013
8,888
13,540
(13,781)
8,647
46
K-Bro Linen Inc. | 2014 Annual ReportDependable. 7 Property, Plant & Equipment
($ Thousands of Canadian dollars)
Land
Buildings(1)
Laundry
Equipment(2)
Office
Equipment
Delivery
Equipment
Computer
Equipment
Leasehold
Improvements
Spare Parts
Total
Year ended, December 31, 2013
Opening net book amount
Additions
Disposals
Depreciation charge
Closing net book amount
At December 31, 2013
Cost
Accumulated depreciation
Net book amount
Year ended, December 31, 2014
Opening net book amount
Additions
Disposals
Transfers
Depreciation charge
Closing net book amount
At December 31, 2014
Cost
Accumulated depreciation
Net book amount
125
-
-
-
125
125
-
125
125
2,300
-
-
-
2,425
2,425
-
2,425
1,140
23
-
(89)
1,074
1 ,400
(326)
1,074
1,074
5,692
-
-
(90)
6,676
7,092
(416)
6,676
31,856
15,247
(100)
(4,457)
42,546
73,562
(31,016)
42,546
42,546
6,698
(295)
58
(4,750)
44,257
80,023
(35,766)
44,257
152
154
-
(38)
268
771
(503)
268
268
77
-
-
(71)
274
848
(574)
274
517
100
(52)
(74)
491
928
(437)
491
491
69
(63)
-
(80)
417
934
(517)
417
105
389
-
(114)
380
2,025
(1,645)
380
380
178
-
-
(234)
324
2,203
(1,879)
324
4,507
8,964
-
(1,193)
12,278
20,508
(8,230)
12,278
12,278
502
-
-
(1,592)
11,188
21,010
(9,822)
11,188
773
37
-
-
810
810
-
810
810
6
-
(58)
-
758
758
-
758
39,175
24,914
(152)
(5,965)
57,972
100,129
(42,157)
57,972
57,972
15,522
(358)
-
(6,817)
66,319
115,293
(48,974)
66,319
(1)
Included in buildings are assets under development in the amount of $5,683. These assets are not available for service and accordingly are not presently being depreciated.
(2)
Included in laundry equipment are assets under development in the amount of $3,345. These assets are not available for service and accordingly are not presently being depreciated.
47
48
K-Bro Linen Inc. | 2014 Annual ReportDependable. 8 Intangible Assets
9 Goodwill
($ Thousands of Canadian dollars)
Healthcare
Contracts
Hospitality
Contracts
Computer
Software
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
Year ended, December 31, 2014
Opening net book amount
Additions
Amortization charge
Closing net book amount
At December 31, 2014
Cost
Accumulated amortization
Net book amount
6,769
(1,064)
5,705
19,200
(13,495)
5,705
5,705
-
(1,042)
4,663
19,200
(14,537)
4,663
3,870
(891)
2,979
8,366
(5,386)
2,980
2,980
-
(892)
2,088
8,366
(6,278)
2,088
374
(185)
189
923
(735)
188
188
4
(187)
5
927
(922)
5
Total
11,013
(2,140)
8,873
28,489
(19,616)
8,873
8,873
4
(2,121)
6,756
28,493
(21,737)
6,756
The Corporation performed its annual assessment for goodwill impairment as at December 31, 2014 in accordance with its
policy described in Note 2(l). Goodwill has been allocated to the following CGUs:
($ Thousands of Canadian dollars)
Calgary
Edmonton
Vancouver 2
Victoria
Vancouver 1
Montréal
Québec
Total
2014
5,382
4,346
3,413
3,208
2,630
823
654
20,456
2013
5,382
4,346
3,413
3,208
2,630
823
654
20,456
In assessing goodwill for impairment at December 31, 2014, the Corporation determined that: the assets and liabilities of the
Corporation have not changed significantly from the prior year at December 31, 2013; 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.
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 14% 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 $176,784.
The recoverable amount for the CGUs that were in excess of their carrying values was 186% of the carrying value of the
applicable CGUs based on a weighted average.
Based on sensitivity analysis, no reasonably possible change in growth rate assumptions would cause the recoverable
amount of any CGU to have a significant change from its current valuation. A 1% change in the discount rate would not have
a significant impact on the recoverable amounts of CGUs. The recoverable amount of each CGU is sensitive to changes in
market conditions and could result in material changes in the carrying value of intangible assets in the future.
49
50
K-Bro Linen Inc. | 2014 Annual ReportDependable.
10 Provisions
The Corporation has recognized provisions as at December 31, 2014 to recognize estimated obligations resulting from operations.
The carrying amount of the provisions is estimated at the end of the reporting period based on best available information.
The following table provides a continuity schedule of all recorded provisions:
($ Thousands of Canadian dollars)
Balance, beginning of year
Additions
Payments
Balance, end of year
11 Long Term Debt
($ Thousands of Canadian dollars)
At January 1, 2013
Net proceeds from debt
Closing Balance at December 31, 2013
Current portion of long-term debt
Non-current portion of long-term debt
At January 1, 2014
Net proceeds from debt
Repayment of debt
Closing Balance at December 31, 2014
2014
250
350
(338)
262
2013
-
250
-
250
Bankers
Acceptances(1)
Prime
Rate Loan(2)
Total Long
Term Debt
4,000
-
4,000
-
4,000
4,000
-
(4,000)
-
1,818
13,822
15,640
-
15,640
15,640
-
(15,640)
-
5,818
13,822
19,640
-
19,640
19,640
-
(19,640)
-
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.
12 Financial Charges
($ Thousands of Canadian dollars)
Interest on long-term debt
Other charges, net
Total
2014
578
15
593
2014
1,090
-
(97)
993
(143)
850
2013
413
182
595
2013
512
691
(113)
1,090
(143)
947
(1)
Bankers’ Acceptances bear interest at 30 day BA rates plus 1.25% depending on certain financial ratios.
(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, 2014, the interest rate was 3.0%.
($ Thousands of Canadian dollars)
13 Unamortized Lease Inducements
The Corporation has a revolving credit facility of up to $40,000 of which $1,650 is drawn (including letters of credit totaling
$1,650 per Note 15(a)) as at December 31, 2014. The agreement is a committed facility maturing on July 31, 2016.
Interest payments only are due during the term of the facility. The amounts borrowed were repaid on December 9, 2014.
Drawings under the revolving credit facility are available by way of Bankers’ Acceptances, Canadian prime rate loans, letters
of credit or standby letters of guarantee. Drawings under the revolving credit facility bear interest at a floating rate, plus an
applicable margin based on certain financial performance ratios.
Balance, beginning of year
Lease inducements received
Amortization charge
Total
Less current portion, included in accrued liabilities
Total
51
52
K-Bro Linen Inc. | 2014 Annual ReportDependable.
14 Income Taxes
A reconciliation of the expected income tax expense to the actual income tax expense is as follows:
($ Thousands of Canadian dollars)
Current tax:
Current tax on profits for the year
Total current tax
Deferred tax:
Origination and reversal of temporary differences
Impact of substantively enacted rates and other
Total deferred tax
2014
4,081
4,081
543
(159)
384
2013
3,931
3,931
203
39
242
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 of Canadian dollars)
Earnings before income taxes
Non-deductible expenses
Income subject to tax
Income tax at statutory rate of 25.6% (2013 - 25.6%)
Impact of substantively enacted rates and other
Income tax expense
2014
16,663
1,403
18,066
4,624
(159)
4,465
The analysis of the deferred tax assets and deferred tax liabilities is as follows:
2013
14,509
1,573
16,082
4,118
55
4,173
($ Thousands of Canadian dollars)
2014
2013
Deferred tax assets:
Deferred tax asset to be recovered after more than 12 months
Deferred tax asset to be recovered within 12 months
Total
Deferred tax liabilities:
Deferred tax liability to be recovered after more than 12 months
Deferred tax liability to be recovered within 12 months
Total
Deferred tax liabilities, net
(471)
(90)
(561)
3,115
2,411
5,526
4,965
(81)
(141)
(222)
3,101
2,153
5,254
5,032
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:
($ Thousands of Canadian dollars)
Deferred tax assets
At January 1, 2013
Charged (credited) to the statement
of earnings
At December 31, 2013
Charged (credited) to the statement
of earnings
Charged (credited) to the statement
of changes in equity
At December 31, 2014
Accounts Payable
and Accrued Liabilities
Offering Costs
and Other
Total
(258)
117
(141)
141
-
-
(78)
(336)
(3)
(81)
114
(222)
(29)
112
(451)
(561)
(451)
(561)
($ Thousands of Canadian dollars)
Linen
in Service
Property, Plant
and Equipment
Intangible Assets
and Goodwill
Total
Deferred tax liabilities
At January 1, 2013
Charged (credited) to the statement
of earnings
At December 31, 2013
Charged (credited) to the statement
of earnings
At December 31, 2014
2,160
(7)
2,153
258
2,411
1,142
337
1,479
317
1,796
1,824
5,126
(202)
1,622
128
5,254
(303)
1,319
272
5,526
53
54
K-Bro Linen Inc. | 2014 Annual ReportDependable.
15 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 $1,650 (2013 – $650)
which will remain outstanding for an indefinite period of time.
b) Commitments
(i) Operating leases and utility commitments
Minimum lease payments for operating leases on buildings and equipment and estimated natural gas and electricity commitments
for the next five calendar years are as follows:
b) Issued
($ Thousands of Canadian dollars)
Balance, beginning of year
Common shares issued under LTI
Common share issuance under equity offering
Balance, end of year
Unvested common shares held in trust for LTI
2014
7,095,343
24,892
839,500
7,959,735
45,368
2013
7,055,207
40,136
-
7,095,343
63,604
($ Thousands of Canadian dollars)
2015
2016
2017
2018
Subsequent
Total
5,740
5,355
4,668
3,307
13,580
32,650
The Corporation has examined the terms of the natural gas and electricity contracts and has determined that these contracts will be
physically settled and as such are not considered to be financial instruments.
(ii) Linen purchase commitments
At December 31, 2014, the Corporation was committed to linen expenditure obligations in the amount of $4,322 (2013 – $3,562) to be
incurred over the next twelve months.
(iii) Capital expenditure commitments
At December 31, 2014, the Corporation was committed to capital expenditure obligations in the amount of $21,741 (2013 – $22,066) to
be incurred over the next twelve months.
16 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.
The Corporation issued 839,500 common shares on December 9, 2014 (10.5% of total share capital issued) as a part of an
equity offering. The common shares issued have the same rights as the other shares in issue. The fair market value of the
shares issued amounted to $34,839 ($41.50/share). The related transaction costs amounting to $1,316 have been netted
against the deemed proceeds.
17 Earnings per Share
a) Basic
Basic earnings per share is calculated by dividing the net earnings attributable to equity holders of the Corporation by the weighted
average number of ordinary shares in issue during the year.
($ Thousands of Canadian dollars)
Net earnings
Weighted average number of shares outstanding (thousands)
Net earnings per share, basic
2014
12,198
7,091
1.72
2013
10,336
7,023
1.47
The basic net earnings per share calculation excludes the unvested Common shares held by the LTIP Trust.
55
56
K-Bro Linen Inc. | 2014 Annual ReportDependable. b) 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.
20 Net Change in Non-Cash Working Capital Items
($ Thousands of Canadian dollars)
Basic weighted average shares for the year
Dilutive effect of LTI shares
Fully diluted weighted average shares for the year
Net earnings
Weighted average number of shares outstanding (thousands)
Net earnings per share, diluted
18 Long-Term Incentive Plan
2014
7,090,937
20,295
7,111,232
12,198
7,111
1.72
2013
7,022,699
31,536
7,054,235
10,336
7,054
1.47
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. The Corporation has control over the LTIP
Trust as it is exposed, or has rights, to variable returns and has the ability to affect those returns through its power over the LTIP
Trust. Therefore the Corporation has consolidated the LTIP Trust. 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.
($ Thousands of Canadian dollars)
Balance, beginning of year
Issued during year
Cancelled during year
Vested during year
Balance, end of year
2014
2013
Unvested
Vested
Unvested
Vested
63,604
24,311
(9,384)
(33,163)
45,368
268,351
9,965
-
33,163
311,479
48,191
26,978
-
(11,565)
63,604
243,628
13,158
-
11,565
268,351
The cost of the 45,368 (2013 – 63,604) unvested Common shares held by the LTIP Trust at December 31, 2014 was nil (2013 - nil).
19 Dividends to Shareholders
During the year ended December 31, 2014, the Corporation declared total dividends to Shareholders of $8,498 or $1.18 per
share (2013 - $8,142 or $1.15 per share).
The Corporation’s policy is to pay dividends to Shareholders of its available cash to the maximum extent possible consistent
with good business practice considering requirements for capital expenditures, working capital, growth capital and other
reserves considered advisable by the Directors of the Corporation. All such dividends are discretionary. Dividends are
declared payable each month to the Shareholders on the last business day of each month and are paid by the 15th day of the
following month.
($ Thousands of Canadian dollars)
Accounts receivable
Linen in service
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Income taxes payable
Total
21 Financial Instruments
a) Fair Value
2014
905
(1,147)
(92)
1,522
152
1,340
2013
(1,268)
241
154
1,823
(2,324)
(1,374)
The Corporation’s financial instruments at December 31, 2014 consist of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, and dividends payable. 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) 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.
(ii) 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.
(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.
57
58
K-Bro Linen Inc. | 2014 Annual ReportDependable. 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, 2014.
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.
The aging of the Corporation’s receivables and related allowance for doubtful accounts are:
($ Thousands of Canadian dollars)
Gross
Allowance
Net
December 31, 2013
Current
31-60 days
Greater than 60 days
Total
December 31, 2013
Current
31-60 days
Greater than 60 days
Total
11,608
3,411
483
15,502
11,636
2,794
161
14,591
-
-
37
37
-
-
31
31
11,608
3,411
446
15,465
11,636
2,794
130
14,560
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 of Canadian dollars)
Balance, beginning of year
Adjustments made during the year
Write-offs
Balance, end of year
2014
37
15
(22)
30
2013
30
7
-
37
d) 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 10). 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.
22 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 the Corporation’s revolving line of credit provides sufficient access to capital to allow K-Bro to take advantage of 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 of Canadian dollars)
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
2014
-
1,650
1,650
12,198
4,465
593
6,817
2,121
47
26,241
0.06x
2013
19,640
650
20,290
10,336
4,173
595
5,965
2,140
108
23,317
0.87x
59
60
K-Bro Linen Inc. | 2014 Annual ReportDependable. The Corporation manages a Fixed Charge Coverage calculated on a trailing twelve-month basis as follows:
($ Thousands of Canadian dollars)
EBITDA
Financial charges
Dividends to shareholders
Total
Fixed charged coverage
2014
26,241
593
8,498
9,091
2.9x
2013
23,317
595
8,142
8,737
2.7x
23 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 2014 and 2013, remuneration to directors and key management personnel was as follows:
($ Thousands of Canadian dollars)
Salaries and retainer fees
Short-term bonus incentives
Post-employment benefits
Share-based payments
Total
2014
1,790
902
57
1,067
3,816
2013
1,708
757
51
1,139
3,655
The Corporation incurred expenses in the normal course of business for advisory consulting services provided by a Director.
The amounts charged are included as salaries and retainer fees. For the year ended December 31, 2014, the Corporation
incurred such fees totaling $138 (2013 – $138).
24 Expenses by Nature
($ Thousands of Canadian dollars)
Wages and benefits
Linen
Utilities
Delivery
Materials and supplies
Occupancy costs
Repairs and maintenance
Other expenses
Total
25 Segmented information
2014
65,414
14,438
8,898
6,246
5,775
5,002
4,232
194
110,199
2013
64,760
13,781
8,400
5,979
5,553
4,819
4,398
195
107,885
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 nine operating
divisions located in Vancouver, Victoria, Calgary, Edmonton, Saskatchewan, 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, 2014, the Corporation has recorded revenue of $61,489 (2013 – $58,652) from these three
major customers, representing 45% (2013 – 45%) of total revenue.
($ Thousands of Canadian dollars)
Healthcare
Hospitality
Total
2014
92,887
43,553
68.1%
31.9%
136,440
100.0%
2013
88,893
42,309
131,202
67.8%
32.2%
100%
26 Subsequent Events
The Corporation’s Board of Directors declared an eligible dividend of $0.10 per Common share of the Corporation payable on each of
February 13, March 13 and April 15, 2015 to Shareholders of record on January 31, February 28, and March 31, 2015 respectively.
61
62
K-Bro Linen Inc. | 2014 Annual ReportDependable. Corporate
Information
Board of Directors
Corporate Office
Vancouver 2
Toronto
Dependable.
Ross Smith, FCA (Chair)
Corporate Director
Matthew Hills, MBA
Managing Director
LLM Capital Partners LLC
Steven Matyas, BSc
President
Staples Canada Inc.
Linda McCurdy, MBA
President & CEO
K-Bro Linen Systems Inc.
Executive Officers
Linda McCurdy, MBA
President & CEO
Sean Curtis
Senior Vice-President &
General Manager
(Edmonton)
Kristie Plaquin
Interim Chief Financial Officer
14903 - 137 Avenue
Edmonton, AB T5V 1R9
Phone 780.453.5218
Fax 780.455.6676
4590 Canada Way
Burnaby, BC V5G 1J6
Phone 604.681.3291
Fax 604.685.1458
15 Shorncliffe Road
Etobicoke, ON M9B 3S4
Phone 416.233.5555
Fax 416.233.4434
Ken Chu
General Manager
John Truong
Operations Manager
Jerry Ostrzyzek
General Manager
Michael Beach
Operations Manager
Calgary
Québec
inquiries@k-brolinen.com
www.k-brolinen.com
Victoria
861 Van Isle Way
Victoria, BC V9B 5R8
Phone 250.474.5699
Fax 250.474.5680
Kevin Stephenson
General Manager
Andrew Mackeen
Plant Manager
6969 – 55 Street SE
Calgary, AB T2C 4Y9
Phone 403.724.9001
Fax 403.720.2959
Jeff Gannon
General Manager
Vancouver 1
Edmonton
8035 Enterprise Street
Burnaby, BC V5A 1V5
Phone 604.420.2203
Fax 604.420.2313
15223 – 121 A Avenue
Edmonton, AB T5V 1N1
Phone 780.451.3131
Fax 780.452.2838
Ron Graham
General Manager
Kevin McElgunn
Operations Manager
Sean Curtis
Senior Vice-President &
General Manager
Trevor Rye
Operations Manager
367 Boulevard Des Chutes
Québec City, QC G1E 3G1
Phone 418.661.6163
Fax 418.661.4000
Jessica Lévesque
Directeur Général
Fabien Poirier
Directeur Opérations
Montréal
599, rue Simonds Sud
Granby, QC J2J 1C1
Phone 450.378.3187
Fax 450.378.8245
Sylvain Tremblay
Directeur Général
Transfer Agent
& Registrar
CST Trust Company
Calgary, Alberta
Auditors
Legal Counsel
Principal Bank
Stock Exchange Listing
PricewaterhouseCoopers LLP
Edmonton, Alberta
Stikeman Elliott
Toronto, Ontario
McLennan Ross LLP
Edmonton, Alberta
TD Bank
Edmonton, Alberta
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 16, 2015 at 1:00pm EDT