2016
A N N U A L
R E P O R T
WE ARE
DEPENDABLE.
T A B L E O F
C O N T E N T S
1
4
7
13
38
P R E S I D E N T ’ S M E S S A G E
C H A I R M A N ’ S M E S S A G E
F I N A N C I A L H I G H L I G H T S
M A N A G E M E N T ’ S D I S C U S S I O N & A N A L Y S I S
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
P R E S I D E N T ’ S
M E S S A G E
2016 WAS AN IMPORTANT YEAR IN K-BRO’S HISTORY.
Once completed, K-Bro will have a network of large,
efficient, and state-of-the-art plants in most of our markets
across the country.
Often our long-term opportunities have short-term trade-offs,
and we will work through transitions to our new plants in 2017
and 2018. While we expect continuing growth in revenue and
profitability, we will also incur transition and other one-time
costs related to positioning our Company for years of new
growth opportunities.
We work hard every day to exceed the high expectations of our
customers and suppliers, to provide the best possible careers
for our employees, and to continue to earn the confidence of
our shareholders. Our management team and our nearly 2,000
employees thank you for your continuing support, and we look
forward to a successful future.
2016 was an important year in K-Bro’s history. We had solid
revenue and EBITDA growth of 10.1% and 4%, and maintained
our dividend of $1.20/share. At the same time, we continued to
maintain a flexible capital structure in order to capitalize on all
of our growth opportunities.
We have positioned the Company for significant growth in
several of our markets, and expect to reap the benefits of these
investments in the years ahead.
•
•
•
We fully-transitioned our Saskatchewan volume into our
new modern Regina facility, providing us with the capacity to
continue to grow our healthcare and hospitality businesses.
We completed the transition to our new state-of-the-
art Toronto facility during the first quarter 2017, one
that will give us tens of millions of pounds of additional
capacity at a favorable cost structure. We have recently
signed almost $7.6 million in revenue of new business.
We are building a large state-of-the-art healthcare
plant in Vancouver that will enable us to process tens of
millions of pounds of additional volume at a competitive
cost structure. We have re-signed a significant amount
of our existing Vancouver healthcare volume to new
long-term contracts and have been awarded most of
the healthcare volume processed by our competitor.
We are also investing significant capital to upgrade and
modernize our Vancouver hospitality plant.
1
2016 ANNUAL REPORT
“ W E W I L L I N V E S T
I N O U R S E LV E S
& C O N T I N U E T O
E V O LV E A B O V E
T H E R E S T ”
LINDA MCCURDY
W E A R E D E P E N D A B L E .
2
2
WE ARE DEPENDABLE. K - B R O I S C A N A D A ’ S
L A R G E S T H E A L T H C A R E &
H O S P I T A L I T Y L A U N D R Y &
L I N E N P R O C E S S O R W I T H
F A C I L I T I E S A L L A C R O S S
T H E C O U N T R Y.
3
2016 ANNUAL REPORT Victoria
Vancouver
Calgary
Edmonton
Regina
Toronto
Montréal
Québec City
C H A I R M A N ’ S
M E S S A G E
WE ARE PLEASED THAT 2016 REPRESENTED
ANOTHER YEAR OF GROWTH FOR K-BRO.
We are pleased that 2016 represented another year
of growth for K-Bro. We are optimistic that we have
taken key steps to position the Company for growth in
several key markets. 2016 was truly an important year
for our Company.
The Board of Directors remains dedicated to strong
corporate governance and oversight, and to ensuring
the Company continues to best position itself for future
growth and profitability.
I want to thank you for your trust and confidence on
behalf of the Company, our 2,000 employees, our
executive team, and our Board. We will always work
hard to earn your loyalty and trust every day.
ROSS SMITH
4
WE ARE DEPENDABLE.
O F F I C E R S & D I R E C T O R S
K-Bro is the largest healthcare and hospitality laundry and
linen processor in Canada. K-Bro operates nine facilities and
two distribution centres in eight major cities across Canada
providing management services and laundry processing of
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
people heal, travel, live, and play. We’re helping hospitals and
extended care centres care for the young, old and vulnerable
in environmentally responsible ways. Our responsibility also
extends to ensuring that we have a safe culture at K-Bro. As our
society becomes more diverse, we integrate our commitment
to responsibility into our new businesses, employees and the
communities in which we live and work.
“ I N 2 0 1 6 W E C O M M E N C E D C O N S T R U C T I O N O F O U R M O D E R N
N E W T O R O N T O F A C I L I T Y A N D B E G A N P L A N N I N G F O R A
M U C H L A R G E R S T A T E - O F -T H E - A R T P L A N T I N VA N C O U V E R .”
SEAN CURTIS SENIOR VICE-PRESIDENT AND GENERAL MANAGER
5
2016 ANNUAL REPORT
“ By expanding our capabilities into new markets, we have
opportunities to leverage our operating strengths, grow our
revenue, and further enhance operating margins, ensuring
consistent value creation for stakeholders.”
LINDA McCURDY PRESIDENT AND CHIEF EXECUTIVE OFFICER
“ K - B R O H A S A S T A B L E B U S I N E S S M O D E L
W I T H S T R O N G F U N D A M E N T A L S T H A T
S U P P O R T O U R M A R K E T V A L U A T I O N A N D
R E L I A B L E S H A R E H O L D E R D I V I D E N D S .”
KRISTIE PLAQUIN CHIEF FINANCIAL OFFICER
FROM LEFT TO RIGHT: Ross Smith, Linda McCurdy, Kristie Plaquin, Michael Percy, Sean Curtis, Steven Matyas, Matthew Hills,
Ryo Utahara, Sylvain Tremblay, Jerry Ostrzyzek, Jessica Lévesque, Kevin Stephenson, Jeff Gannon, Kevin McElgunn, Sean Jackson
W E A R E D E P E N D A B L E .
6
6
WE ARE DEPENDABLE.
F I N A N C I A L H I G H L I G H T S
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 (In millions of Canadian dollars) Years ended December 31
2016
2015
2014
2013
2012
2011
110
120
130
140
150
160
EBITDA (In millions of Canadian dollars) Years ended December 31
2016
2015
2014
2013
2012
2011
18
20
22
24
26
28
TOTAL SHAREHOLDER RETURN $100 investment in 2009
364
429
384
327
239
181
200
K-Bro Linen Inc.
S&P/TSX Composite Index
300
400
500
2016
2015
2014
2013
2012
2011
160
132
144
130
115
107
100
7
REVENUE
UP
10.1%
EBITDA
UP
4.0%
1
2
The total shareholder return graph reflects the total
cumulative return, assuming reinvestment of all
dividends, of $100 invested on December 31, 2009
in each of the Shares of the Corporation and the
S&P/TSX Composite (TRIV) Index.
The year-end values of each
investment
shown on the total shareholder return graph
are based on share price appreciation plus
dividend reinvestment.
2016 ANNUAL REPORT “ W E A R E F O C U S E D O N
D E L I V E R I N G T H E B E S T
P O S S I B L E V A L U E T O O U R
C U S T O M E R S , W H I C H
I N T U R N W I L L E N A B L E
K - B R O T O C O N T I N U E
T O S H O W S T R O N G
F I N A N C I A L R E S U L T S .”
8
WE ARE DEPENDABLE. 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 $147 million in
modern 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 linen services in
all markets that we service.
W E A R E D E P E N D A B L E .
In aggregate, our nine plants provided services to more than
1,700 customers and employed 1,900 employees in 2016. At
December 31, 2016, total assets were $168 million, equity was
$117 million and market capitalization was $338 million.
“ K - B R O E X C E L S A T
D I S C O V E R I N G
A N D W I N N I N G N E W
O P P O R T U N I T I E S
A N D C L I E N T S A N D
B U I L D I N G O N T H E
S U C C E S S E S W E ’ V E
H A D I N O U R D E C A D E S
O F E X P E R I E N C E
A S L E A D E R S I N
O U R S E C T O R .”
SEAN CURTIS SENIOR VP & GM
9
2016 ANNUAL REPORT
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 pre-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.
We’re dependent on our reputation, resources, and track
record as we develop relationships with potential new clients
and compete for contracts. These factors are also critical in
maintaining stable, responsive, and loyal relationships with
our existing customers.
D I V E R S I F I E D A N D
I N T E G R A T E D S E R V I C E S
We provide critical services
including, support and
management of linen requirements that address each and
every one of our customers’ needs.
S T R A T E G I C A L L Y P O S I T I O N E D
K-Bro has nine plants and two distribution centres located
in ten different cities, which ensure our ability to provide
uninterrupted service in the wake of disasters, pandemics or
other adversity.
L O N G - T E R M S T A B L E C O N T R A C T S
By anticipating our customers’ needs, delivering consistently
dependable service and acting with integrity, K-Bro has
developed long-term relationships with its customers.
C O M M I T T E D W O R K F O R C E
Our corporate culture enables us to attract and retain quality
laundry staff and our national presence provides opportunities
for career advancement. Five members of our senior
management team commenced their careers with K-Bro and
have an average tenure in excess of 20 years.
S I N G L E S O U R C E F O R
C U S T O M E R S
K-Bro is able to deliver total linen management services,
including laundering, drying, folding, quota cart development,
sterilization, and more that focus on efficiencies and cost
savings. As one of the largest linen purchasers 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.
10
WE ARE DEPENDABLE. AT K-BRO, WE INNOVATE AND DEVELOP NEW PROCESSES AND SYSTEMS,
AND FURTHER REFINE BUSINESS DELIVERY AND PRACTICES.
In 2016, K-Bro continued to excel at 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 six major healthcare
customers and one hospitality customer to our base. We also
secured four more hospitably customers in Quebec, as well as
one major healthcare customer in Ontario and added another
major healthcare customer in early 2017. In Alberta, we
signed three additional hoteliers and extended agreements
with several others. Our new clients include some of the finest
hotels in the country.
Each new customer was a victory for the entire K-Bro team
and a reflection of the company as a whole, rather than any
individual. The qualities that contribute to our success are the
same ones that define us as leaders in customer service – an
impeccable and dependable record, comprehensive service
programs, financial stability, competitive costs, experience in
transitioning large accounts, and access to the resources that
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 clients talk to us
not only about their present needs, but about the direction of
the future. They depend on the knowledge we’ve accumulated
over our history.
During 2016 we refined our operating processes at the new
Regina processing facility, began construction of our new
Toronto processing facility and commenced planning for our
new Vancouver facility while continuing 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
• Delivery of carts to user wards and departments
• Reusable OR linen and pack rental (KOR services)
• Distribution and control of uniforms
• Personal clothing services
• Customer service programs
• Linen purchase and supply
• Linen inventory management reports and services
• Sterilization of operating room linen packs
At K-Bro, we continue to 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 twelve 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 are the source of our advantage.
WE ARE DEPENDABLE.
11
2016 ANNUAL REPORT “ A S E V E N T S H A V E U N F O L D E D S I N C E E N T E R I N G T H E
P U B L I C M A R K E T, O U R R E A D I N E S S H A S C O N T R I B U T E D
T O O U R S U C C E S S I N D E P E N D A B I L I T Y A N D G R O W T H .”
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.
Years ended December 31
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
2016
2015
2014
2013
2012
2011
159,089
28,236
17.7
11,527
1.44
144,537
27,140
18.8
12,068
1.52
136,440
131,202
126,290
116,859
26,241
19.2
12,198
1.72
23,317
17.8
10,336
1.47
24,517
19.4
11,149
1.59
19,946
17.1
7,928
1.14
13,766
25,800
8,670
2,349
21,717
0
9,434
19,640
8,064
5,818
7,245
6,095
2.76
43.5
29.3
11.9
9.9
14.9
66.4
2.69
44.8
33.5
14.9
10.7
13.1
2.85
42.0
26.9
12.5
11.1
19.4
2.61
44.2
27.0
12.0
14.5
41.2
2.72
41.8
18.1
8.2
16.5
34.9
2.40
45.9
19.6
7.8
12.6
27.5
155.0
182.9
235.2
253.8
121.1
338,190
406,872
367,023
280,976
203,613
155,821
50.98
36.69
42.15
56.99
43.00
50.95
47.90
36.90
46.11
40.50
28.38
39.60
30.18
21.20
28.86
22.98
17.28
22.24
($ Thousands of Canadian dollars, except per share data and percentages)
12
WE ARE DEPENDABLE. 17
18
18
19
20
23
24
26
27
29
30
31
31
31
32
34
34
35
36
36
I N T R O D U C T I O N
S T R A T E G Y
F O U R T H Q U A R T E R O V E R V I E W
S E L E C T E D A N N U A L F I N A N C I A L I N F O R M A T I O N
S U M M A R Y O F 2 0 1 6 R E S U L T S A N D E V E N T S
K E Y P E R F O R M A N C E D R I V E R S
O U T L O O K
R E S U L T S O F O P E R A T I O N S
L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S
D I V I D E N D S
D I S T R I B U T A B L E C A S H F L O W
O U T S T A N D I N G S H A R E S
R E L A T E D P A R T Y T R A N S A C T I O N S
C R I T I C A L A C C O U N T I N G E S T I M A T E S
T E R M I N O L O G Y
C H A N G E S I N A C C O U N T I N G P O L I C I E S
R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S
F I N A N C I A L I N S T R U M E N T S
C R I T I C A L R I S K S A N D U N C E R T A I N T I E S
C O N T R O L S A N D P R O C E D U R E S
13
2016 ANNUAL REPORT 14
WE ARE DEPENDABLE. “ E V E R Y D A Y W E M U S T E A R N
T H E R E S P E C T A N D F A I T H
O F O U R C U S T O M E R S W I T H
T H E H I G H E S T Q U A L I T Y &
H I G H E S T V A L U E S E R V I C E .”
15
2016 ANNUAL REPORT M A N A G E M E N T ’ S
D I S C U S S I O N & A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N
& R E S U L T S O F O P E R A T I O N S
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, 2016 and
2015, as well as the unaudited interim condensed Consolidated
Financial Statements for the periods ended March 31, 2016,
June 30, 2016 and September 30, 2016. 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 24, 2017.
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.
Forward looking information included in this MD&A includes
the expected annual healthcare revenues to be generated from
the Company’s contracts with the William Osler Health System
and Trillium Health Partners as well as the anticipated capital
costs for the new Vancouver facility, and statements with
respect to future expectations on margins and volume growth.
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 non-GAAP
measures. These measures may not be comparable to similar
measures presented by other issuers. Please see “Terminology”
for further discussion.
16
WE ARE DEPENDABLE. I N T R O D U C T I O N
C O R E B U S I N E S S
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 nine processing facilities in eight
major Canadian cities including Victoria, Vancouver, Calgary,
Edmonton, Regina, Toronto, Montréal and Québec City, and
two distribution centers in Saskatchewan.
I N D U S T R Y & M A R K E T
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.
I N D U S T R Y C H A R A C T E R I S T I C S
& T R E N D S
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
industry
provides consolidation opportunities for
participants with the financial means to complete acquisitions.
larger
C U S T O M E R S & P R O D U C T M I X
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 41
million pounds of linen per year for a healthcare region.
17
2016 ANNUAL REPORT S T R A T E G Y
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.
Extend Core Services To New Markets
Management has demonstrated its ability to successfully
expand K-Bro’s business into new markets from its established
bases. Since 2005, K-Bro has entered four new geographic
markets across Canada. These new markets have contributed
significantly to K-Bro’s growth. Management believes that new
outsourcing opportunities will continue to arise in the near to
medium-term and that K-Bro is well-positioned for continued
growth, particularly as healthcare and hospitality institutions
continue to increase their focus on core services and confront
pressures for capital and cost savings.
Management may in the future expand its core services to
new markets either through acquisitions or by establishing
new facilities. Its choice of areas for expansion will depend on
the availability of suitable acquisition candidates, the volume
of healthcare and hospitality linen to be processed and the
policies of applicable governments.
Introduce Related Services
In addition to focusing on its core services, the Corporation also
attempts to capitalize on attractive business opportunities by
introducing closely-related services that enable it to provide
more complete solutions to K-Bro’s healthcare and hospitality
customers. These related service offerings include K-Bro
Operating Room (“KOR”) services and on-site services. For three
major hospitals in Toronto, K-Bro performs the sterilization of
operating room linen packs.
F O U R T H
Q U A R T E R
R E V I E W
In the fourth quarter of 2016, revenue increased by 4.2% to
$39.3 million from $37.7 million in the comparative period.
This increase was due to additional volume from the 3sHealth
region associated with the commissioning of the new facility
in Regina, additional awarded healthcare volume from the
recently signed Vancouver lower mainland contract, organic
growth at existing customers, and new customers secured
in existing markets. These gains were partially offset by price
concessions in Vancouver as a result of contractual terms
related to the new ten year contract.
EBITDA was $6.4 million for the three months ended December
31, 2016, compared to $6.2 million in the comparative period
of 2015. EBITDA margins have been impacted by one-time
and transition costs associated with the relocation of our new
Toronto facility and one-time and transition costs needed
to support new business and resulting temporary capacity
constraints in Toronto and Vancouver. Management estimates
these one-time and transition costs in the quarter to be
approximately $0.5 million and expects margins to return to
2015 historical levels after the completion of and transition into
our new facilities in Toronto in 2017 and Vancouver in 2018.
REVENUE UP
10.1%
“ I N T H E F O U R T H
Q U A R T E R O F 2 0 1 6 ,
R E V E N U E W A S $ 3 9 . 3
M I L L I O N W H I C H W A S
4 . 2 % H I G H E R T H A N
T H E $ 3 7 . 7 M I L L I O N
G E N E R A T E D I N
T H E C O M P A R A T I V E
Q U A R T E R O F 2 0 1 5 .”
18
WE ARE DEPENDABLE. S E L E C T E D A N N U A L
F I N A N C I A L I N F O R M A T I O N
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
Weighted Average Number of Shares Outstanding:
Basic
Diluted
($ Thousands of Canadian dollars, except per share data and percentages)
19
2016
2015
2014
159,089
16,367
11,527
1.45
1.44
168,289
25,800
9,613
1.200
144,537
17,261
12,068
136,440
16,663
12,198
1.52
1.52
1.72
1.72
143,023
132,638
2,349
9,570
1.200
-
8,498
1.183
7,955,026
7,986,729
7,920,609
7,930,492
7,090,937
7,111,232
2016 ANNUAL REPORT S U M M A R Y O F 2 0 1 6
R E S U L T S A N D K E Y E V E N T S
F I N A N C I A L G R O W T H
accounts representing an additional $5.2 million in revenue with
additional new customer opportunities going forward.
K-Bro delivered strong financial results in 2016 driven by the
operating results from all nine of its processing plants and two
distribution centers. Net earnings were $11.5 million or $1.45
per share (basic). Cash flow from operating activities was $24.5
million and distributable cash flow was $22.1 million. Revenue
increased in fiscal 2016 to $159.1 million or by 10.1% compared
to 2015. This increase was due to additional volume from the
3sHealth region associated with the commissioning of the
new facility in Regina, additional awarded healthcare volume
from the recently signed Vancouver lower mainland contract,
organic growth at existing customers, and new customers
secured in existing markets. These gains were partially offset
by price concessions in Vancouver as a result of contractual
terms related to the new ten year contract.
EBITDA (see Terminology) increased in the year to $28.2 million
from $27.1million in 2015, which is an increase of 4.0%. The
EBITDA margin decreased from 18.8% in 2015 compared
to 17.7% in 2016. The change in EBITDA and margin was
predominantly impacted by one-time and transition costs
associated with the relocation of our new Toronto facility
and one-time and transition costs needed to support new
business and resulting temporary capacity constraints in
Toronto and Vancouver. Management estimates these one-
time and transition costs incurred primarily in Q3 and Q4 to be
approximately $0.9 million.
Near-Term & Long-Term Growth & Margin Impact
Management has embarked on a strategy in its Toronto and
Vancouver markets that it believes will position the company for
accelerated growth in its healthcare and hospitality businesses.
The strategy includes capital investments to build large efficient
state-of-the-art facilities with meaningful additional capacity in
Toronto and Vancouver. In addition, the company will invest to
upgrade one of its Vancouver plants to create a more efficient
facility with meaningful additional capacity.
These investments are being made because management
believes that new opportunities, both current and future, justify
the significant additional capacity. Since the third quarter we
have been awarded two new healthcare accounts in Toronto
(William Osler Health System and Trillium Health Partners),
representing total revenue of $7.6 million annually and
management believes that it has many additional new customer
opportunities going forward. Furthermore, in the past year in
Vancouver we have re-signed most of our current healthcare
volume through to 2027 and been awarded six new healthcare
The construction and/or upgrade of three large facilities enable
us to bid on significant amount of additional business, but
also will create margin pressure through 2017 and 2018 as the
company incurs one-time and transition costs associated with
these large investments. Those one-time and transition costs
were approximately $0.9mm for the second half of 2016. While
the margin pressure may vary by quarter through 2017 and
2018, management believes that the one-time and transition
costs incurred in 2017 and 2018 will position the company to
achieve more growth and a lower cost structure into the future
and that the company will return to normalized margins closer
to those achieved in 2015 as it enters 2019.
Key events in our Toronto and Vancouver markets are
summarized below.
Vancouver Facility Development
As announced on March 2, 2016, K-Bro has commenced the
planning and development of a new state-of-the- art facility
with a projected investment of up to $50 million with the
potential for an additional $5 million due to exposure from
the U.S. dollar and construction costs that have not been
fully tendered. The new Vancouver plant will be located in
Burnaby, and the Corporation expects to transition to the new
facility during the third quarter of 2018. The new facility will
enable K-Bro to expand current capacity, to accommodate the
additional awarded volume, and to provide the opportunity
to consolidate the healthcare volume from its existing two
Vancouver-area facilities. In addition to investing in the new
facility, K-Bro will upgrade and replace equipment at one of
its existing Vancouver-area facilities, which will be used to
process the consolidated hospitality volume. K-Bro will not be
renewing the lease for the remaining Vancouver-area facility
and related assets will be transferred to the other K-Bro
facilities. K-Bro believes it will achieve significant operating
efficiencies at its new plant. K-Bro plans to finance the entire
amount from its existing $85 million credit facility. However,
management intends to continually assess its opportunities
to maintain a conservative amount of leverage and balance
sheet flexibility in the short and long-term basis in order to
ensure that sufficient capital is available for future growth
needs. It is anticipated that transition costs associated with
the new Vancouver plant will negatively impact EBITDA
margins over the third and fourth quarters of 2018 while the
plant becomes operational.
20
WE ARE DEPENDABLE. Toronto Facility Development
As announced on February 3, 2016, K-Bro is in the process of
relocating to a new state-of-the-art facility in Toronto. The new
Toronto plant is located in Mississauga, and the Corporation
expects to complete its transition to the new facility during the
first quarter of 2017. Management estimates that the costs to
commission a new leased facility are $37 million for new efficiency
enhancing equipment, and leaseholds. As at December 31, 2016,
K-Bro has incurred $24.9 million of the total expected capital cost.
K-Bro’s strategy includes significant growth in its healthcare and
hospitality volumes, and the additional capacity and the long-
term lease enables K-Bro to grow into the additional capacity as
opportunities emerge. K-Bro plans to finance the entire amount
from its existing $85 million credit facility. However, management
intends to continually assess its opportunities to maintain a
conservative amount of leverage and balance sheet flexibility in the
short and long-term basis in order to ensure that sufficient capital
is available for future growth needs. It is anticipated that transition
costs associated with the new Toronto plant will negatively impact
EBITDA margins over several quarters as the plant becomes
operational. Management anticipates that transition costs will
impact the first three quarters of 2017 with margins returning to
historical levels during the fourth quarter of 2017.
Toronto Contract Awards
On February 28, 2017 the Corporation was awarded a five year
contract to provide laundry and linen services to St. Michaels
Hospital. The contract contains two renewal options for an
additional two years. The contract extends the existing relationship
between the Corporation and St. Michael’s Hospital and is a result
of a competitive RFP process.
On March 24, 2017 the Corporation was awarded a contract to
provide laundry and linen services to Trillium Health Partners.
The new contract is for seven years with renewal options for
an additional eight years, and is a result of a competitive RFP
process. Expected additional annual revenue from the contract is
$4 million.
Toronto Collective Bargaining Agreement
The Teamsters represent 14 drivers in our Toronto facility. The
Collective Bargaining Agreement representing these employees
expired on December 31, 2016. The members of the bargaining
unit rejected the company’s contract proposal and on January
31, 2017 the Corporation locked out the 14 Toronto drivers and
employed replacement drivers to service its Toronto accounts.
The Corporation is presently in negotiations with the Teamsters
to reach a new collective bargaining agreement. There have
been no service interruptions to any customers as a result of the
lock-out. Management anticipates one-time and transition costs
associated with this lock-out in the amount of $0.4 million to be
incurred in the first quarter of 2017.
21
2016 ANNUAL REPORT “ D U R I N G 2 0 1 6
W E R E F I N E D
O U R O P E R A T I N G
P R O C E S S E S , B E G A N
C O N S T R U C T I O N
A N D C O M M E N C E D
P L A N N I N G , A L L
W H I L E D E L I V E R I N G
S T R O N G E R
R E S U L T S T O O U R
S H A R E H O L D E R S .”
22
WE ARE DEPENDABLE. K E Y P E R F O R M A N C E D R I V E R S
K-Bro’s key performance drivers focus on growth, profitability, stability and cost containment in order to maintain dividends and
maximize Shareholder value. The following outlines our results on a period-to-period comparative basis in each of these areas:
Q4, 2016
YTD, 2016
Q4, 2015
YTD, 2015
Growth
EBITDA1 %
Revenue%
Distributable cash flow%
Profitability
EBITDA1
EBITDA Margin%
Net earnings
Stability
Debt to total capitalization2 %
Unutilized line of credit
Payout ratio%
Dividends declared per share
Cost Containment
Wages and Benefits%
Utilities%
Expenses included in EBITDA%
($ Thousands of Canadian dollars, except percentages)
1
2
EBITDA is defined as revenue less operating expenses (which equates to net
earnings before income tax, gain or loss on disposals, finance expense and
depreciation and amortization). See Terminology.
Debt to total capitalization is defined as total debt divided by total capital.
See Terminology.
3.8
4.2
25.5
6,407
16.3
2,197
18.1
57,550
41.7
0.300
45.6
6.4
83.7
4.0
10.1
3.4
28,236
17.7
11,527
18.1
57,550
43.5
1.200
45.4
6.1
82.3
-2.5
11.5
-6.2
6,173
16.4
2,158
2.0
46,001
52.1
0.300
46.0
6.3
83.6
3.4
5.9
5.6
27,140
18.8
12,068
2.0
46,001
44.8
1.200
45.1
6.1
81.2
23
2016 ANNUAL REPORT O U T L O O K
“We are pleased with the solid growth during 2016, driven
by additional volume from the Vancouver lower mainland,
3sHealth contracts and customers secured
in existing
markets.” said Linda McCurdy, President & Chief Executive
Officer. “We look forward to 2017, especially in light of securing
two new Toronto healthcare contracts starting in 2017, and
the renewal of an existing Toronto healthcare contract. In
terms of our previously announced plant builds, we have
nearly completed the successful transition of the volume
to our newly constructed state-of-the-art Toronto facility
and are confident that we will secure additional business to
fill capacity. We continue to make progress in the planning
and design of our new Vancouver facility with a targeted
completion date of 2018. We view 2017 and 2018 as transition
years that will impact our margins but once complete will
enable us to realize additional efficiencies, increase capacity
and increase market share. While the margin pressure may
vary by quarter through 2017 and 2018, we believe that the
one-time and transition costs incurred in 2017 and 2018 will
position the company to achieve more growth and a lower
cost structure into the future and that the company will return
to normalized margins closer to those achieved in 2015 as it
enters 2019. We remain excited about our growth plans and
are confident in our ability to continue to provide value to our
customers and our shareholders.”
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.
R E V O LV I N G C R E D I T F A C I L I T Y
On September 26, 2016, K-Bro renewed the credit facility
through to July 31, 2020 with substantially the same terms.
As a part of this renewal, the credit facility was increased to
$85.0 million. Management intends to continually assess its
opportunities to maintain a conservative amount of leverage
and balance sheet flexibility in the short and long-term basis
in order to ensure that sufficient capital is available for future
growth needs.
E F F E C T S O F E C O N O M I C
U N C E R T A I N T Y
K-Bro believes that it is positioned to withstand market
volatility and uncertainty given that:
• Approximately 72.3% of its revenues in the quarter were
from large publicly funded healthcare customers which
are geographically diversified across multiple provinces;
• At December 31, 2016, K-Bro had unutilized borrowing
capacity of $57.6 million or 67.7% of the revolving credit
line available; and,
• K-Bro’s prudent approach to managing capital has added
cash flow and liquidity to the Corporation, thereby
improving its ability to withstand the turmoil in the
national and global capital markets.
“ W E R E M A I N E X C I T E D
A B O U T O U R G R O W T H
P L A N S A N D A R E
C O N F I D E N T I N O U R
A B I L I T Y T O C O N T I N U E
P R O V I D I N G V A L U E T O
O U R C U S T O M E R S A N D
S H A R E H O L D E R S .”
24
WE ARE DEPENDABLE. R E V E N U E , E B I T D A
& E A R N I N G S
For the year ended December 31, 2016, K-Bro’s revenue
increased by 10.1% to $159.1 million from $144.5 million
in the comparative period. This increase was due to
additional volume from the 3sHealth region associated
with the commissioning of the new facility in Regina,
additional awarded healthcare volume from the recently
signed Vancouver lower mainland contract, organic
growth at existing customers, and new customers
secured in existing markets, offset by price concessions
in Vancouver as a result of contractual terms related to
a new ten year contract. In 2016, approximately 70.0%
of K-Bro’s revenue was generated from healthcare
institutions which is slightly higher compared to 68.5%
in 2015, mainly due to volume from the 3sHealth region
and additional Vancouver lower mainland volume.
EBITDA increased in the year to $28.2 million from
$27.1million in 2015, which is an increase of 4.0%. The
EBITDA margin decreased from 18.8% in 2015 compared
to 17.7% in 2016. The change in EBITDA and margin was
predominantly impacted by one-time and transition
costs associated with the relocation of our new Toronto
facility and one-time and transition costs needed to
support new business and resulting temporary capacity
constraints in Toronto and Vancouver. Management
estimates these one-time and transition costs incurred
primarily in Q3 and Q4 to be approximately $0.9 million.
Net earnings decreased by $0.6 million or from $12.1
million in 2015 to $11.5 million in 2016. Net earnings as
a percentage of revenue decreased by 1.1% to 7.2% in
2016 from 8.3% in 2015. This decrease in net earnings
is primarily due to the flow through items in EBITDA
discussed above and higher depreciation of property,
plant and equipment and interest expense, offset by a
lower income tax expense.
25
$159.089
MILLION
2016 REVENUE
$111.384
$47.705
(IN MILLIONS)
HEALTHCARE
HOSPITALITY
$144.537 MILLION
2015 REVENUE
$98.940
$45.597
(IN MILLIONS)
HEALTHCARE
HOSPITALITY
$ Thousands of CDN, except per share data and percentages
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.
2016 ANNUAL REPORT R E S U L T S O F O P E R A T I O N S
Q U A R T E R L Y F I N A N C I A L I N F O R M A T I O N
The following table provides certain selected consolidated financial and operating data
prepared by K-Bro management for the preceding eight quarters:
2016
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue
28,374
10,877
39,251
27,333
14,224
41,557
27,553
11,916
39,469
28,124
10,688
38,812
27,100
10,580
37,680
23,978
13,722
37,700
24,005
11,332
35,337
23,857
9,963
33,820
Expenses included in EBITDA
EBITDA1
EBITDA as a % of revenue%
Depreciation and amortization
Finance expense (recovery)
Loss 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
32,844
34,019
31,954
32,036
31,507
30,123
28,251
27,516
6,407
16.3
2,866
247
86
3,208
1,011
2,197
5.6
0.276
0.274
7,538
18.1
2,748
(11)
-
4,801
1,387
3,414
8.2
0.429
0.427
7,515
19.0
2,674
110
19
4,712
1,328
3,384
8.6
0.426
0.425
6,776
17.5
2,737
393
-
3,646
1,114
2,532
6.5
0.319
0.318
6,173
16.4
2,859
156
172
2,986
828
2,158
5.7
0.272
0.271
7,577
20.1
2,326
(128)
4
5,375
1,523
3,852
10.2
0.486
0.483
7,086
20.1
2,219
177
14
4,676
1,637
3,039
8.6
0.384
0.382
6,304
18.6
2,178
(98)
-
4,224
1,205
3,019
8.9
0.381
0.380
Total assets
168,289
153,923
148,068
146,816
143,023
145,106
135,516
133,229
Total long-term financial liabilities
33,949
17,596
14,360
12,717
8,958
6,776
6,361
5,892
Funds provided by operations
Long-term debt
Dividends declared per share
6,071
7,581
25,800
10,338
0.300
0.300
4,143
7,252
0.300
6,726
5,970
0.300
3,897
2,349
0.300
5,733
3,773
4,214
-
-
-
0.300
0.300
0.300
Historically, the Corporation’s financial and operating results
are stronger in the second and third quarters as a result of
seasonality and the associated higher hospitality volumes.
Other fluctuations in net income from quarter-to-quarter
can also be attributed to hiring and labour cost trends,
timing of linen purchases, utility costs, timing of repairs and
maintenance expenditures, business development, capital
spending patterns and changes in corporate tax rates and
income tax expenses.
For the year ended December 31, 2016, the Corporation’s
distributable cash flow was $22.1 million with a debt to total
capitalization of 18.1% Due to the strategic plans K-Bro expects
to execute in the coming fiscal year, management expects the
debt to total capitalization to increase, mainly as a result of
strategic capital expenditures as part of the investment in the
new Vancouver facility and remaining commitments related to
the new Toronto facility. Management believes the unutilized
balance of $57.6 million is sufficient for the company’s
operations in the foreseeable future. However, management
intends to continually assess its opportunities to maintain a
conservative amount of leverage and balance sheet flexibility in
the short and long-term basis in order to ensure that sufficient
capital is available for future growth needs.
26
WE ARE DEPENDABLE. O P E R A T I N G E X P E N S E S
Wages and benefits increased to $72.2 million in 2016 from
$65.2 million in 2015, and increased as a percentage of revenue
from 45.1% in 2015 to 45.4% in the same period of 2016. The
increase in the period is due to the incremental labour required
to process the increased volumes, significant overtime costs
and one-time costs to support new business, strong volumes
and temporary capacity constraints in certain of our markets
as well as one-time transition costs associated with the
Toronto facility move and rising labour costs from incremental
increases in the wage rate.
Linen expenses increased to $17.5 million in 2016 from $15.0
million in 2015, and increased as a percentage of revenue to
11.0% from 10.4% in 2015. The increase in costs is primarily
due to the additional linen required for the 3sHealth volume
and linen required for the additional volume awarded as part
of the Vancouver lower mainland contract.
Utility costs increased to $9.8 million compared to $8.8 million
in 2015 and remained constant as a percentage of revenue at
6.1%, with higher costs associated with the new Regina facility
and the increased volumes in certain markets.
Delivery costs increased to $8.8 million and to 5.5% as a
percentage of revenues compared to $7.0 million and 4.8%
in 2015. The increase is a result of increased business activity,
geographical dispersity of the Corporation’s new customer
base in Saskatchewan and transition costs associated with the
additional volume from the Vancouver lower mainland contract.
Occupancy costs increased to $5.3 million and to 3.3% as a
percentage of revenue, compared to $5.2 million and 3.6%
in 2015. This increase is a result of a new distribution facility,
additional costs associated with the commissioning of the new
Regina facility, and additional warehousing costs to address
the temporary storage requirements related to the additional
volume from the Vancouver lower mainland contract.
Materials and supplies increased to $4.8 million and to 3.0% as
a percentage of revenue, compared to $4.2 million and 2.9% in
2015, due to higher costs associated with the new Regina facility
and to support the increased volumes in certain markets.
Repairs and maintenance increased to $4.9 million and to
3.1% as a percentage of revenues, compared to $4.6 million
and 3.2% in 2015, primarily related to the timing of scheduled
maintenance activities.
Corporate costs increased to $7.5 million and to 4.7% as a
percentage of revenues compared to $7.4 million and 5.1%
in 2015, primarily due to the timing of costs and initiatives
to support the Corporation’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. The increase during the year is related
to the completion of the new Regina facility.
Income tax includes current and future income taxes based on
taxable income and the temporary timing differences between
the tax and accounting bases of assets and liabilities. Income
tax reflects the provision on the earnings of the Corporation.
L I Q U I D I T Y & C A P I T A L R E S O U R C E S
In 2016 cash generated by operating activities was $24.5
million, compared to $17.6 million during 2015. The change in
cash from operations is primarily due to the change in working
capital items driven mainly from the timing of business activity
and payments related to capital commitments.
During 2016, cash generated by financing activities was $13.8
million compared to cash used in financing activities $7.2
million in 2015. Financing activities in 2016 consisted of net
proceeds from the revolving credit facility, offset by dividends
paid to Shareholders.
During 2016, cash used in investing activities was $38.4 million
compared to $24.1 million in 2015. Investing activities during
the year related primarily to the cash settlement of plant
equipment for the new Regina plant, leasehold improvements
and purchase of plant equipment for the new Toronto and
Vancouver plant, and the purchase of equipment in existing
plants to facilitate strategic growth.
27
2016 ANNUAL REPORT C O N T R A C T U A L O B L I G A T I O N S
Payments due under contractual obligations for the next five years and thereafter are as follows:
PAYMENTS DUE BY PERIOD
TOTAL
< 1 YEAR
1-3 YEARS
4-5 YEARS
> 5 YEARS
Long-term debt
Operating lease commitments
Utility commitments
Linen purchase obligations
Property, plant and equipment commitments
25,800
55,407
7,721
6,926
37,525
-
5,236
2,078
6,926
28,897
25,800
10,259
3,081
-
8,628
-
8,751
2,562
-
-
-
31,161
-
-
-
The operating lease obligations are secured by automotive equipment and 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.
“ W E H A V E R E C E N T L Y S I G N E D $ 7 . 6 M I L L I O N
I N R E V E N U E O F N E W B U S I N E S S .”
F I N A N C I A L P O S I T I O N
Long-term debt
Shareholders’ equity
Total capitalization
Debt to Total Capitalization%
(see Terminology for definition)
2016
2015
25,800
116,672
142,472
18.1
2,349
113,240
115,589
2.0
For the year ended December 31, 2016, the Corporation had a
debt to total capitalization of 18.1%, unused revolving credit
facility of $57.6 million and has not incurred any events of default
under the terms of its credit facility agreement.
As at December 31, 2016, the Corporation had net working capital
of $13.8 million compared to its working capital position of $8.7
million at December 31, 2015. The increase in working capital is
primarily attributable to timing differences related in the cash
settlement of new plant equipment, and deposits related to the
acquisition of equipment related across the plants.
Management believes that K-Bro has the capital resources
and liquidity necessary to meet its commitments, support its
operations and finance its growth strategies. In addition to K-Bro’s
ability to generate cash from operations and its revolving credit
facility, K-Bro believes it is also able to issue additional shares or
increase its borrowing capacity, if necessary, to provide for capital
spending and sustain its property, plant and equipment.
28
WE ARE DEPENDABLE. D I V I D E N D S
FISCAL PERIOD
PAYMENT DATE
# OF SHARES
OUTSTANDING
AMOUNT
PER SHARE$
TOTAL
AMOUNT123 $
AMOUNT
PER SHARE$
TOTAL
AMOUNT4 56 $
2016
2015
January
February
March
Q1
April
May
June
Q2
July
August
February 12
March 15
April 15
May 13
June 15
July 15
August 15
September 15
September
October 14
Q3
October
November
December
Q4
YTD
November 15
December 15
January 13
7,985,713
7,985,713
7,985,713
7,985,713
8,023,480
8,023,480
8,023,480
8,023,480
8,023,480
8,023,480
8,023,480
8,023,480
0.10000
0.10000
0.10000
0.30000
0.10000
0.10000
0.10000
0.30000
0.10000
0.10000
0.10000
0.30000
0.10000
0.10000
0.10000
0.30000
1.20000
799
799
799
2,396
799
802
802
2,403
802
802
802
2,407
802
802
802
2,407
9,613
0.10000
0.10000
0.10000
0.30000
0.10000
0.10000
0.10000
0.30000
0.10000
0.10000
0.10000
0.30000
0.10000
0.10000
0.10000
0.30000
1.20000
796
796
796
2,388
796
796
799
2,391
799
799
799
2,396
799
799
799
2,396
9,570
$ Thousands of CDN, except per share data and percentages
1
2
3
4
5
6
The total amount of dividends paid was $0.10000 per share for a total of $798,571 per month for January - March 2016; when rounded in thousands, $2,396 of dividends were paid for the quarterly period.
The total amount of dividends paid was $0.10000 per share for a total of $798,571 for April 2016, $802,348 for May 2016, and $802,348 for June 2016. When rounded in thousands, $2,403 of dividends were
paid for the quarterly period.
The total amount of dividends paid was $0.10000 per share for a total of $802,348 per month for July - December 2016; when rounded in thousands, $2,407 of dividends were paid in Q3 and Q4.
The total amount of dividends paid was $0.10000 per share for a total of $795,974 per month for January - March 2015; when rounded in thousands, $2,388 of dividends were paid for the quarterly period.
The total amount of dividends paid was $0.10000 per share for a total of $795,974 for April 2015, $795,974 for May 2015, and $798,571 for June 2015. When rounded in thousands, $2,391 of dividends were
paid for the quarterly period.
The total amount of dividends paid was $0.10000 per share for a total of $798,571 per month for July - December 2015; when rounded in thousands, $2,396 of dividends were paid in Q3 and Q4.
For the three months ended December 31, 2016, the
Corporation declared a $0.300 per share dividend compared to
$0.722 per Share of Distributable Cash Flow (see Terminology).
The payout ratio for the three months ended December 31,
2016 was 41.7%
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’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
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.
29
2016 ANNUAL REPORT D I S T R I B U T A B L E C A S H F L O W
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:
2016
2015
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Cash provided by operating activities
6,071
7,581
4,143
6,726
3,897
5,733
3,773
4,214
Deduct (add):
Net Changes in non-cash
working capital items1
Share-based compensation
Maintenance capital expenditures2
(336)
1,102
(2,625)
368
264
337
289
330
1,270
665
483
293
(1,387)
(1,193)
(2,302)
(1,439)
262
420
329
226
334
268
379
365
Distributable cash flow
5,775
5,853
5,168
5,285
4,602
6,371
5,473
4,909
Dividends declared
Dividends declared per share
Payout ratio3 %
2,407
0.300
41.7
2,407
0.300
41.1
2,403
0.300
46.5
2,396
0.300
45.3
2,396
0.300
52.1
2,396
0.300
37.6
2,391
0.300
43.7
2,388
0.300
48.6
Weighted average shares outstanding
during the period, basic
Weighted average shares outstanding
during the period, diluted
Trailing-twelve months (“TTM“)
7,965
7,957
7,952
7,946
7,930
7,922
7,916
7,914
8,004
7,991
7,965
7,965
7,948
7,974
7,966
7,942
Distributable cash flow
22,081
20,908
21,426
21,731
21,355
21,661
21,086
20,721
Dividends
Payout ratio3 %
9,613
43.5
9,602
45.9
9,591
44.8
9,579
44.1
9,570
44.8
9,394
43.4
9,136
43.3
8,847
42.7
$ Thousands of CDN, except per share data and percentages
1
2
3
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.
Maintenance capital expenditures include costs required to maintain or replace assets which do not have a discrete return on investment.
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.
30
WE ARE DEPENDABLE. O U T S T A N D I N G S H A R E S
As at December 31, 2016, the Corporation had 8,023,480
common shares outstanding. Basic and diluted weighted
average number of common shares outstanding for 2016
were 7,955,026 and 7,986,729, respectively, (7,920,609 and
7,930,492, respectively, for the comparative 2015 periods).
In accordance with the LTI plan and in conjunction with the
performance of the Corporation in the 2015 fiscal year, on
April 18, 2016 the Compensation, Nominating and Corporate
Governance Committee of the Board of Directors approved LTI
compensation of $1.6 million (2015 – $1.4 million) to be paid as
shares issued from treasury. As at December 31, 2016, the value
of the shares held in trust by the LTI trustee was $1.9 million
(December 31, 2015 – $2.0 million) which was comprised of
44,634 in unvested common shares (December 31, 2015 –
39,716) with a nil aggregate cost (December 31, 2015 – $nil).
As at March 24, 2017 there were 8,023,480 common shares
issued and outstanding including 44,634 shares issued but
held as unvested treasury shares.
R E L A T E D P A R T Y T R A N S A C T I O N S
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, 2016, the Corporation incurred fees totaling $138,000
(2015 – $138,000).
C R I T I C A L A C C O U N T I N G
E S T I M A T E S
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.
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.
leadership
K-Bro’s
includes ongoing
team’s mandate
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.
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.
Linen in Service
K-Bro has continuously
its
management and internal reporting systems to ensure that
accurate, timely, internal and external information is gathered
refined and documented
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
31
2016 ANNUAL REPORT 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.
T E R M I N O L O G Y
A D D I T I O N A L G A A P M E A S U R E S
Intangible Assets
EBITDA
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.
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, gain/loss on disposal
and impairment charges, and income taxes.
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.
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. The Corporation has
estimated the fair value of CGUs to which goodwill is allocated
based on value in use using discounted cash flow models
that required assumptions about future cash flows, margins,
and discount rates. At this time, K-Bro does not believe any
intangible assets have a book value in excess of their fair
market value.
EBITDA is a sub-total presented within the statement of
earnings in accordance with the amendments made to IAS
1 which became effective January 1, 2016. EBITDA is not
considered an alternative to net earnings in measuring K-Bro’s
performance. 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.
N O N - G A A P M E A S U R E S
Distributable Cash Flow
Distributable cash flow is a measure used by management
to evaluate its performance. While the closest IFRS measure
is cash provided by operating activities, distributable cash
flow is considered relevant because it provides an indication
of how much cash generated by operations is available after
capital expenditures. It shall be noted that although we
consider this measure to be distributable cash flow, financial
and non-financial covenants in our credit facilities and
dealer agreements may restrict cash from being available
for dividends, re-investment in the Corporation, potential
acquisitions, or other purposes. Investors should be cautioned
that distributable cash flow may not actually be available for
growth or distribution from the Corporation. Management
refers to “Distributable cash flow” as to cash provided by (used
in) operating activities with the addition of net changes in non-
cash working capital items, less share-based compensation,
and maintenance capital expenditures.
32
WE ARE DEPENDABLE. Net Earnings
Add
Income tax expense
Finance expense
Depreciation of property, plant and equipment
Amortization of intangible assets
Loss on disposal of property, plant and equipment
EBITDA
$ Thousands of CDN
Payout Ratio
Payout ratio is defined by management as the actual cash
dividend divided by distributable cash. This is a key measure
used by investors to value K-Bro, assess its performance
and provide an indication of the sustainability of dividends.
The payout ratio depends on the distributable cash and the
Corporation’s dividend policy.
Debt to Total Capitalization
3 MTHS ENDED DEC 31
YEAR ENDED DEC 31
2016
2015
2016
2015
2,197
2,158
11,527
12,068
1,011
247
2,438
428
86
828
154
2,353
506
172
4,840
739
9,235
1,790
105
5,193
107
7,573
2,009
190
6,407
6,171
28,236
27,140
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.
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.
Off Balance Sheet Arrangements
As at December 31, 2016, the Corporation has not entered into
any off balance sheet arrangements.
33
2016 ANNUAL REPORT “ W E L O O K F O R W A R D T O 2 0 1 7 ,
E S P E C I A L L Y I N L I G H T O F S E C U R I N G
T W O N E W T O R O N T O H E A L T H C A R E
C O N T R A C T S S T A R T I N G T H I S Y E A R .”
C H A N G E S I N A C C O U N T I N G P O L I C I E S
The Corporation has prepared its December 31, 2016 audited consolidated financial statements in accordance with IFRS. See
Note 2 of the Corporation’s audited annual Consolidated Financial Statements for more information regarding the significant
accounting principles used to prepare the Consolidated Financial Statements.
R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S
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, 2018, with
earlier application permitted. The Corporation 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
Corporation is in the process of evaluating the impact that
IFRS 9 may have on the financial statements.
IFRS 2, Share-based Payment, was amended in June 2016
by IASB, addressing three classification and measurement
issues. The amendment clarifies the measurement basis
for cash-settled, share based payments and the accounting
for modifications that change an award from cash-settled
to equity settled. It also introduces an exception to the
principles in IFRS 2 that will require an award to be treated
as if it was wholly-equity settled, where an employer is
obliged to withhold an amount for the employee’s tax
obligation associated with a share based payment and
pay that amount to the tax authority. The Corporation is in
the process of evaluating the impact that the amendment
may have on the financial statements.
•
IFRS 16, Leases, was issued in January 2016 and applies to
annual reporting periods beginning on or after January 1,
2019. IFRS 16 specifies how an IFRS reporter will recognize,
measure, present and disclose leases. The standard
provides a single lessee accounting model, requiring
lessees to recognize assets and liabilities for all leases
unless the lease term is 12 months or less or the underlying
asset has a low value. Lessors continue to classify leases
as operating or finance, with IFRS 16’s approach to lessor
accounting substantially unchanged from its predecessor,
IAS 17. The Corporation is in the process of evaluating the
impact that IFRS 16 may have on the financial statements.
34
WE ARE DEPENDABLE. F I N A N C I A L
I N S T R U M E N T S
K-Bro’s financial instruments at December 31, 2016
consist of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities,
long-term debt. The
dividends payable and
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, 2016. 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.
35
35
2 0 1 6 A N N U A L R E P O R T
2016 ANNUAL REPORT C R I T I C A L R I S K S A N D U N C E R T A I N T I E S
As at December 31, 2016, there are no material changes in
the Corporation’s risks or risk management activities since
December 31, 2015. 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.
C O N T R O L S A N D P R O C E D U R E S
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 Chief Financial Officer (“CFO”), are
responsible for establishing and maintaining disclosure
controls and procedures, as well as internal control over
financial reporting.
Disclosure Controls and Procedures
The Corporation has established disclosure controls and
procedures to ensure that information disclosed in this MD&A
and the related financial statements of K-Bro was properly
recorded, processed, summarized and reported to the Board
of Directors and the Audit Committee. The Corporation’s CEO
and CFO have evaluated the effectiveness of these disclosure
controls and procedures for the year ended December 31,
2016, and the CEO and CFO have concluded that these controls
were operating effectively.
Internal Controls over Financial Reporting
The CEO and CFO acknowledge responsibility for the
design of internal controls over financial reporting (“ICFR”).
Consequently the CEO and CFO confirm that the additions to
these controls that occurred during the year ended December
31, 2016 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,
2016, the CEO and CFO have concluded that these controls
were operating effectively.
A control system, no matter how well conceived and operated,
can provide only reasonable, and not absolute, assurance that
the objectives of the control system are met. As a result of
the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues, including instance of fraud, if any, have been detected.
These inherent limitations include, amongst other items:
(i) that managements’ assumptions and judgments could
ultimately prove to be incorrect under varying conditions and
circumstances; or, (ii) the impact of isolated errors.
Additionally, controls may be circumvented by
the
unauthorized acts of individuals, by collusion of two or more
people, or by management override. The design of any system
of controls is also based, in part, upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated
goals under all potential (future) conditions.
Additional information regarding K-Bro including required securities filings are
available on our website at www.k-brolinen.com and on the Canadian Securities
Administrators’ website at www.sedar.com; the System for Electronic Document
Analysis and Retrieval (“SEDAR”).
Vous pouvez obtenir des renseignements supplémentaires sur la Société, y compris
les documents déposés auprès des autorités de réglementation, sur notre site Web,
au www.k-brolinen.com et sur le site Web des autorités canadiennes en valeurs
mobilières au www.sedar.com, le site Web du Système électronique de données,
d’analyse et de recherche (« SEDAR »).
36
WE ARE DEPENDABLE. 37
2016 ANNUAL REPORT C O N S O L I D A T E D
F I N A N C I A L
S T A T E M E N T S
39
40
41
42
43
44
63
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
F I N A N C I A L P O S I T I O N
E A R N I N G S A N D C O M P R E H E N S I V E I N C O M E
C H A N G E S I N E Q U I T Y
C A S H F L O W
N O T E S T O T H E C O N S O L I D A T E D S T A T E M E N T S
C O R P O R A T E I N F O R M A T I O N
38
WE ARE DEPENDABLE. MARCH 24, 2017
I N D E P E N D E N T
A U D I T O R ’ S R E P O R T
TO THE SHAREHOLDERS OF K-BRO LINEN INC.
We have audited the accompanying consolidated financial
statements of K-Bro Linen Inc. and its subsidiaries, which
comprise the consolidated statements of financial position
as at December 31, 2016 and 2015, 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, 2016 and
2015 and their financial performance and their cash flows
for the years then ended in accordance with International
Financial Reporting Standards.
PRICEWATERHOUSECOOPERS LLP
TD Tower, 10088 102 Avenue NW, Suite 1501
Edmonton, AB, Canada T5J 3N5
T 1 780 441 6700
F 1 780 441 6776
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
39
CHARTERED PROFESSIONAL ACCOUNTANTS
2016 ANNUAL REPORT C O N S O L I D A T E D S T A T E M E N T S
O F F I N A N C I A L P O S I T I O N
DEC 31, 2016
DEC 31, 2015
ASSETS
Current assets
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
Shareholder’s Equity Total
18,451
1,472
11,511
31,434
113,258
3,141
20,456
168,289
16,270
596
802
17,668
25,800
1,863
6,286
51,617
109,390
1,944
5,338
116,672
17,155
1,061
11,279
29,495
88,141
4,931
20,456
143,023
19,835
191
799
20,825
2,349
696
5,913
29,783
108,079
1,737
3,424
113,240
Contingencies and commitments (note 15)
168,289
143,023
$ Thousands of CDN
APPROVED ON BEHALF OF THE CORPORATION
ROSS S. SMITH
DIRECTOR
MATTHEW HILLS
DIRECTOR
The accompanying notes are an integral part of these consolidated financial statements.
40
WE ARE DEPENDABLE. C O N S O L I D A T E D S T A T E M E N T S
O F E A R N I N G S &
C O M P R E H E N S I V E I N C O M E
YEARS ENDED DECEMBER 31
2016
2015
REVENUE
Expenses
Wages and benefits
Linen (note 6)
Utilities
Delivery
Occupancy costs
Materials and supplies
Repairs and maintenance
Corporate
Total
EBITDA
Other expenses
Depreciation of property, plant and equipment (note 7)
Amortization of intangible assets (note 8)
Finance expense (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
159,089
144,537
72,247
17,547
9,776
8,793
5,313
4,808
4,855
7,514
130,853
28,236
9,235
1,790
739
105
11,869
16,367
4,467
373
4,840
11,527
1.45
1.44
65,213
15,041
8,788
7,001
5,183
4,204
4,597
7,370
117,397
27,140
7,573
2,009
107
190
9,879
17,261
4,245
948
5,193
12,068
1.52
1.52
Weighted average number of shares outstanding:
Basic
Diluted
7,955,026
7,986,729
7,920,609
7,930,492
$ Thousands of CDN, except share and per share amounts
The accompanying notes are an integral part of these consolidated financial statements.
41
2016 ANNUAL REPORT C O N S O L I D A T E D S T A T E M E N T S
O F C H A N G E S I N E Q U I T Y
TOTAL SHARE
CAPITAL
CONTRIBUTED
SURPLUS
RETAINED
EARNINGS
TOTAL
EQUITY
As at January 1, 2016
Net earnings
Dividends declared (note 19)
Employee share based compensation expense
Shares vested during the year
As at December 31, 2016
108,079
-
-
-
1,311
109,390
1,737
-
-
1,518
(1,311)
1,944
3,424
11,527
(9,613)
-
-
113,240
11,527
(9,613)
1,518
-
5,338
116,672
As at January 1, 2015
Net earnings
Dividends declared (note 19)
Employee share based compensation expense
Shares vested during the year
As at December 31, 2015
$ Thousands of CDN
106,870
1,642
926
109,438
-
-
-
1,209
108,079
-
-
1,304
(1,209)
1,737
12,068
(9,570)
-
-
12,068
(9,570)
1,304
-
3,424
113,240
The accompanying notes are an integral part of these consolidated financial statements.
42
WE ARE DEPENDABLE. C O N S O L I D A T E D S T A T E M E N T S
O F C A S H F L O W
YEARS ENDED DECEMBER 31
2016
2015
OPERATING ACTIVITIES
Net earnings
Depreciation of property, plant and equipment (note 7)
Amortization of intangible assets (note 8)
Lease inducements, net of amortization
Employee share based compensation expense
Loss on disposal of property, plant and equipment
Deferred income taxes
Change in non-cash working capital items (note 20)
Cash provided by operating activities
FINANCING ACTIVITIES
Net proceeds of revolving credit facility
Dividends paid to shareholders (note 19)
Cash provided (used in) by financing activities
INVESTING ACTIVITIES
11,527
12,068
9,235
1,790
1,167
1,518
105
373
7,573
2,009
(154)
1,304
190
948
25,715
23,938
(1,194)
24,521
23,451
(9,610)
13,841
(6,321)
17,617
2,349
(9,567)
(7,218)
Purchase of property, plant and equipment (note 7)
(38,367)
(23,981)
Proceeds from disposal of property, plant and equipment
Purchase of intangible assets (note 8)
Cash used in investing activities
Change in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid
Income taxes paid
$ Thousands of CDN
5
-
22
(184)
(38,362)
(24,143)
-
-
-
(13,744)
13,744
-
631
4,062
282
4,297
The accompanying notes are an integral part of these consolidated financial statements.
43
2016 ANNUAL REPORT N O T E S T O T H E
C O N S O L I D A T E D S T A T E M E N T S
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 nine
processing facilities in eight major cities across Canada from
Victoria, British Columbia to Québec City, Québec and two
distribution centres in Saskatchewan.
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 unaudited interim condensed consolidated financial
statements were approved and authorized for issuance by the
Board of Directors (“the Board”) on March 24, 2017.
1 . B A S I S O F P R E S E N T A T I O N
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 . S I G N I F I C A N T A C C O U N T I N G
P O L I C I E S
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.
1
2
Years Ended December 31, 2016 and 2015.
$ Thousands of CDN, except per share data and percentages.
B. Principles of Consolidation
The consolidated financial statements include the Corporation,
its wholly owned subsidiaries and the long-term incentive
plan trust (note 2(q) (ii)). All inter-company balances and
transactions have been eliminated upon consolidation.
C. Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, deposits
with banks, other short-term highly liquid investments with
original maturities of three months or less.
Cash and cash equivalents are classified as loans and receivables
and are carried at amortized cost, which is equivalent to fair value.
D. Linen in Service
Linen in service is stated at cost less accumulated depreciation.
The cost is based on the expenditures that are directly
attributable to the acquisition of linen, with operating room
linen amortized across its estimated service life of 24 months
and general linen amortized based on usage which results in
an estimated average service life of 24 months.
E. Revenue Recognition
Revenue from linen management and laundry services is
primarily based on written service agreements whereby the
Corporation agrees to collect, launder, deliver and replenish
linens. The Corporation recognizes revenue in the period in
which the services are provided.
F. Property, Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and accumulated
impairment
losses. Cost includes expenditures that are directly attributable
to the acquisition of the items. Subsequent costs are included in
the asset’s carrying amount or recognized as a separate asset,
as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Corporation
and the cost of the item can be reliably measured. The carrying
amount of a replaced part is de-recognized. Repairs and
maintenance are charged to the statement of earnings during
the financial period in which they are incurred.
General and specific borrowing costs that are directly
attributable to the acquisition, construction or production of a
qualifying asset are capitalized during the period of time that
is required to complete and prepare the asset for its intended
use or sale.
44
WE ARE DEPENDABLE. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale.
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
RATE
15-25 years
7-20 years
2-5 years
5 years
2 years
Leasehold improvements
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.
Impairment losses on financial assets carried at amortized
cost are reversed in subsequent periods if the amount of the
loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognized.
H. Impairment of Non-Financial Assets
Property, plant and equipment and intangible assets are tested
for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Long-lived assets that are not amortized are subject to
an annual impairment test. For the purpose of measuring
recoverable amounts, assets are grouped at the lowest level
for which there are separately identifiable cash flows (cash-
generating unit or “CGU”). The recoverable amount is the
higher of an asset’s fair value less costs to sell and value in use
(being the present value of the expected future cash flows of
the relevant asset or CGU). An impairment loss is recognized for
the amount by which the asset’s carrying amount exceeds its
recoverable amount. The Corporation evaluates impairment
losses, other than goodwill impairment, for potential reversals
when events or circumstances warrant such consideration.
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
income. Management
operates and generates
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.
taxable
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.
45
2016 ANNUAL REPORT 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.
K. Business Combinations
Business combinations are accounted for using the acquisition
method. The acquired identifiable net assets are measured at
their fair value at the date of acquisition. The consideration
transferred includes the fair value of any asset or liability
resulting from a contingent consideration arrangement. Any
excess of the purchase price over the fair value of the net
assets acquired is recognized as goodwill. Any deficiency of the
purchase price below the fair value of the net assets acquired is
recorded as a gain in net earnings. Associated transaction costs
are expensed when incurred.
L. Goodwill
Goodwill is the residual amount that results when the
purchase price of an acquired business exceeds the sum of
the amounts allocated to the identifiable assets acquired,
less liabilities assumed, based on their estimated fair values
at the acquisition date. Goodwill is allocated as of the date of
the business combination. Goodwill is tested for impairment
annually in the fourth quarter, or more frequently if events or
changes in circumstances indicate a potential impairment.
Goodwill acquired through a business combination is allocated
to each CGU, or group of CGUs, that are expected to benefit from
the related business combination. A CGU represents the lowest
level within the entity at which the goodwill is monitored for
internal management purposes.
M. Volume Rebates
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.
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)).
O. Foreign Currency Translation
Foreign currency transactions are translated into Canadian
dollars using the exchange rates prevailing at the dates of the
transactions or valuation where items are re-measured. Foreign
exchange gains and losses resulting from the settlement
of such transactions and from the translation at year-end
exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognized in the income statement.
Foreign exchange gains and losses that relate to borrowings
and cash and cash equivalents are presented in the statement
of earnings within “finance expense”.
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. Existing equity-based compensation plan of
the Corporation
On June 16, 2011, the Shareholders of the Corporation
approved a new Long-term Incentive Plan (“LTI”). Under the
LTI, awards are granted annually in respect of the prior fiscal
year to the eligible participants based on a percentage of
annual salary. The amount of the award (net of withholding
obligations) is satisfied by issuing treasury shares to be held
in trust by the trustee pursuant to the terms of the LTI. All
awards issued under the provisions of the LTI are recorded as
compensation expense.
46
WE ARE DEPENDABLE. 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.
Derivatives are initially recognized at fair value on the date
a derivative contract is entered into and are subsequently
remeasured to their fair value at the end of each reporting
period and included as part of the profit and loss.
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
CLASSIFICATION
MEASUREMENT
Accounts receivable
Loans and receivables
Amortized cost
Financial liabilities
Accounts payable
and accrued liabilities
Other liabilities
Amortized cost
Dividends payable
Other liabilities
Amortized cost
Long-term debt
Other liabilities
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 . S I G N I F I C A N T A C C O U N T I N G
P O L I C I E S A D O P T E D J A N 1 , 2 0 1 6
On January 1, 2016, the Corporation adopted the Amendments
to IAS 1, Presentation of Financial Statements. IAS 1 was
amended to clarify guidance on materiality and aggregation,
the presentation of subtotals, the structure of financial
statements and the disclosure of accounting policies. Adoption
of the amendments did not result in any changes to the
presentation or disclosures in the financial statements.
4 . N E W S T A N D A R D S
A N D I N T E R P R E T A T I O N S
N O T Y E T A P P L I E D
The following standards have been issued but have 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
47
2016 ANNUAL REPORT annual periods beginning on or after January 1, 2018, with
earlier application permitted. The Corporation is in the
process of evaluating the impact that IFRS 15 may have on
the financial statements.
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.
•
•
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
Corporation is in the process of evaluating the impact that
IFRS 9 may have on the financial statements.
IFRS 16, Leases, was issued in January 2016 and applies to
annual reporting periods beginning on or after January 1,
2019. IFRS 16 specifies how an IFRS reporter will recognize,
measure, present and disclose leases. The standard
provides a single lessee accounting model, requiring
lessees to recognize assets and liabilities for all leases
unless the lease term is 12 months or less or the underlying
asset has a low value. Lessors continue to classify leases
as operating or finance, with IFRS 16’s approach to lessor
accounting substantially unchanged from its predecessor,
IAS 17. The Corporation is in the process of evaluating the
impact that IFRS 16 may have on the financial statements.
• On June 20, 2016 the IASB issued an amendment to IFRS
2 “Share based Payment” addressing three classification
and measurement
issues. The amendment clarifies
the measurement basis for cash-settled, share based
payments and the accounting for modifications that
change an award from cash-settled to equity settled. It
also introduces an exception to the principles in IFRS 2
that will require an award to be treated as if it was wholly-
equity settled, where an employer is obliged to withhold
an amount for the employee’s tax obligation associated
with a share based payment and pay that amount to
the tax authority. The Corporation is in the process of
evaluating the impact that the amendment may have on
the financial statements. The amendments are effective
for periods beginning on or after January 1, 2018.
5 . C R I T I C A L A C C O U N T I N G
E S T I M A T E S A N D J U D G M E N T S
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
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 fair value of CGUs to which
goodwill is allocated based on value in use 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
judgment
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
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.
regularly evaluates
Management
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.
48
WE ARE DEPENDABLE. 6 . L I N E N I N S E R V I C E
Balance, beginning of year
Additions
Amortization charge
Balance, end of year
2016
2015
11,279
17,779
(17,547)
11,511
9,794
16,526
(15,041)
11,279
7 . P R O P E R T Y, P L A N T & E Q U I P M E N T
LAND
BUILDINGS
LAUNDRY
EQUIP1
OFFICE
EQUIP
DELIVERY
EQUIP
COMPUTER
EQUIP
LEASEHOLD
IMPROVEMENTS2
SPARE
PARTS
TOTAL3
YEAR ENDED, DEC 31, 2016
Opening net book amount
2,454
Additions
Disposals
Transfers
Depreciation charge
-
-
-
-
17,964
281
-
-
54,316
21,464
(107)
-
341
71
-
-
(980)
(6,056)
(108)
Closing net book amount
2,454
17,265
69,617
304
266
60
(3)
-
(73)
250
AT DEC 31, 2016
Cost
2,454
19,012
110,175
Accumulated depreciation
-
(1,747)
(40,558)
Net book amount
2,454
17,265
69,617
YEAR ENDED, DEC 31, 2015
Opening net book amount
2,425
Additions
Disposals
Transfers
Depreciation charge
29
-
-
-
6,676
11,638
-
-
(350)
44,257
17,161
(138)
(1,857)
(5,107)
Closing net book amount
2,454
17,964
54,316
AT DEC 31, 2015
Cost
2,454
18,730
88,858
Accumulated depreciation
-
(766)
(34,542)
Net book amount
2,454
17,964
54,316
710
(406)
304
683
(433)
250
274
164
-
-
(97)
341
417
15
(74)
-
(92)
266
640
(299)
341
641
(375)
266
539
208
-
-
(370)
377
1,279
(902)
377
324
509
-
-
(294)
539
1,071
(532)
539
11,834
12,242
427
136
-
-
(1,648)
-
-
-
88,141
34,462
(110)
-
(9,235)
22,428
563
113,258
32,065
(9,637)
563
166,941
-
(53,683)
22,428
563
113,258
11,188
758
66,319
74
-
17
29,607
-
(212)
2,205
(348)
-
(1,633)
-
(7,573)
11,834
427
88,141
19,823
(7,989)
427
132,644
-
(44,503)
11,834
427
88,141
1
2
3
Included in laundry equipment are assets under development in the amount of $16,536 (2015 - $65). These assets are not available for service and accordingly are not presently being depreciated.
Included in leasehold improvements are assets under development in the amount of $11,547 (2015 - $0). These assets are not available for service and accordingly are not presently being depreciated.
Total property, plant and equipment additions include amounts in accounts payable of $1,721 (2015 - $5,626).
49
2016 ANNUAL REPORT 8 . I N T A N G I B L E A S S E T S
HEALTHCARE
CONTRACTS
HOSPITALITY
CONTRACTS
COMPUTER
SOFTWARE
YEAR ENDED, DEC 31, 2016
Opening net book amount
Additions
Amortization charge
Closing net book amount
AT DEC 31, 2016
Cost
Accumulated depreciation
Net book amount
YEAR ENDED, DEC 31, 2015
Opening net book amount
Additions
Amortization charge
Closing net book amount
AT DEC 31, 2015
Cost
Accumulated depreciation
Net book amount
9 . G O O D W I L L
3,550
-
(1,043)
2,507
19,200
(16,693)
2,507
4,663
-
(1,113)
3,550
19,200
(15,650)
3,550
1,381
-
(747)
634
8,550
(7,916)
634
2,088
184
(891)
1,381
8,550
(7,169)
1,381
-
-
-
-
927
(927)
-
5
-
(5)
-
927
(927)
-
TOTAL
4,931
-
(1,790)
3,141
28,677
(25,536)
3,141
6,756
184
(2,009)
4,931
28,677
(23,746)
4,931
The Corporation performed its annual assessment for goodwill impairment as at December 31, 2016 in accordance with its policy
described in note 2(l). Goodwill has been allocated to the following CGUs:
Calgary
Edmonton
Vancouver 2
Victoria
Vancouver 1
Montréal
Québec
Total
2016
2015
5,382
4,346
3,413
3,208
2,630
823
654
5,382
4,346
3,413
3,208
2,630
823
654
20,456
20,456
50
WE ARE DEPENDABLE. In assessing goodwill for impairment at December 31, 2016,
the Corporation determined that: the assets and liabilities of
the CGUs evaluated have not changed significantly from the
prior year at December 31, 2015; 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 forecasts over a 5 year period 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% (2015 – 3%) and a pre-tax discount rate
of 11% to 13% (2015 – 12% to 14%) for all CGUs. The growth
rates represent management’s current assessment of future
industry trends and are based on both external and internal
sources, as well as historical data.
The recoverable amount of each CGU was in excess of its
carrying amount. Significant CGUs with an individual carrying
value greater than 10% of the total consolidated carrying value
include Edmonton, Calgary, Victoria, Vancouver 1 and 2. For
these CGUs the recoverable amount significantly exceeds the
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.
Based on sensitivity analysis, no reasonably possible change
in growth rate assumptions would cause the carrying value to
exceed the recoverable amount. 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. The process for determining the recoverable
amount is subjective and requires management to exercise
significant judgment in determining the future growth rates
and discount rates.
“ K - B R O H A S I N V E S T E D
O V E R $ 1 4 7 M I L L I O N I N
H I G H Q U A L I T Y P L A N T S ,
I N V E S T M E N T S T H A T H A V E
A L L O W E D T H E C O M P A N Y
T O M O V E F O R W A R D I N
A C H I E V I N G I T S V I S I O N .”
51
51
2 0 1 6 A N N U A L R E P O R T
2016 ANNUAL REPORT 1 0 . P R O V I S I O N S
The Corporation has recognized provisions as at December 31, 2016 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:
Balance, beginning of year
Additions
Payments
Balance, end of year
2016
2015
-
-
-
-
262
-
(262)
-
1 1 . L O N G - T E R M D E B T
PRIME RATE
LOAN 1
At January 1, 2016
Net proceeds from debt
Repayment of debt
Closing Balance at December 31, 2016
At January 1, 2015
Net proceeds from debt
Closing Balance at December 31, 2015
2,349
23,451
-
25,800
-
2,349
2,349
1
Prime rate loan, collateralized by a general security agreement, bear interest at prime plus an interest margin dependent on certain financial ratios, with a monthly repayment of interest only,
maturing on July 31, 2020 (December 31, 2015 – July 31, 2018). The additional interest margin can range between 0.0% to 1.25% dependent upon the calculated Debt/EBITDA financial ratio, with a
range between 0 to 3.5x. As at December 31, 2016, the combined interest rate was 2.7% (December 31, 2015 – 2.7%).
The Corporation has a revolving credit facility of up to $85,000
of which $27,450 is utilized (including letters of credit totaling
$1,650 per Note 15(a)) as at December 31, 2016). Interest
payments only are due during the term of the facility.
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.
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.
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.
1 2 . F I N A N C E E X P E N S E
Interest on long-term debt
Other charges, net
Total
2016
2015
372
367
739
70
37
107
52
WE ARE DEPENDABLE. 1 3 . U N A M O R T I Z E D L E A S E I N D U C E M E N T S
Balance, beginning of year
Lease inducements received
Amortization charge
Total
Less current portion, included in accrued liabilities
Total
2016
839
1,497
(224)
2,112
(249)
1,863
2015
993
-
(154)
839
(143)
696
1 4 . I N C O M E T A X E S
A reconciliation of the expected income tax expense to the actual income tax expense is as follows:
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
2016
2015
4,467
4,467
4,245
4,245
385
(12)
373
708
240
948
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:
Earnings before income taxes
Non-deductible expenses
Income subject to tax
Income tax at statutory rate of 26.58% (2015 - 26.2%)
Impact of substantively enacted rates and other
Income tax expense
2016
2015
16,367
1,743
18,110
4,814
26
4,840
17,261
1,667
18,928
4,953
240
5,193
53
2016 ANNUAL REPORT The analysis of the deferred tax assets and deferred tax liabilities is as follows:
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
2016
2015
(601)
(94)
(695)
3,982
2,999
6,981
6,286
(357)
(94)
(451)
3,441
2,923
6,364
5,913
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:
Deferred tax assets
At January 1, 2015
Charged (credited) to the statement of earnings
At December 31, 2015
Charged (credited) to the statement of earnings
At December 31, 2016
OFFERING COSTS
AND OTHER
TOTAL
(561)
110
(451)
(244)
(695)
(561)
110
(451)
(244)
(695)
LINEN IN
SERVICE
PROPERTY, PLANT
AND EQUIPMENT
INTANGIBLE ASSETS
AND GOODWILL
TOTAL
Deferred tax liabilities
At January 1, 2015
Charged (credited) to the statement of earnings
At December 31, 2015
Charged (credited) to the statement of earnings
At December 31, 2016
2,411
512
2,923
76
2,999
1,796
636
2,432
786
3,218
1,319
(310)
5,526
838
1,009
6,364
(245)
617
764
6,981
54
WE ARE DEPENDABLE. 1 5 . C O N T I N G E N C I E S A N D C O M M I T M E N T S
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 (December 31,
2015 – $1,650) which will remain outstanding for an indefinite period of time.
B. Commitments
i. Operating leases and utility commitments
At December 31, 2016, the Corporation was committed to minimum lease payments for operating leases on buildings and
equipment and estimated natural gas and electricity commitments for the next five calendar years and thereafter are as follows:
OPERATING LEASE COMMITMENTS
UTILITY LEASE COMMITMENTS
2017
2018
2019
2020
2021
Subsequent
Total
5,236
5,321
4,938
4,637
4,114
31,161
55,407
2017
2018
2019
2020
2021
Subsequent
Total
2,078
1,794
1,287
1,288
1,274
-
7,721
ii. Linen purchase commitments
At December 31, 2016, the Corporation was committed to linen expenditure obligations in the amount of $6,926 (December 31,
2015 – $5,254) to be incurred within the next year.
iii. Property, plant and equipment commitments
At December 31, 2016, the Corporation was committed to capital expenditure obligations in the amount of $28,897 (December
31, 2015 – $3,675) to be incurred within the next year and $8,628 (December 31, 2015 – $0) to be incurred in the next two years.
1 6 . S H A R E C A P I T A L
A. Authorized
The Corporation is authorized to issue an unlimited number of common shares and such number of shares of one class designated
as preferred shares which number shall not exceed 1/3 of the common shares issued and outstanding from time to time.
B. Issued
Balance, beginning of year
Common shares issued under LTI
Balance, end of year
2016
2015
7,985,713
7,959,735
37,767
25,978
8,023,480
7,985,713
Unvested common shares held in trust for LTI
44,634
39,716
55
2016 ANNUAL REPORT 1 7 . E A R N I N G S P E R S H A R E
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.
Net earnings
Weighted average number of shares outstanding (thousands)
Net earnings per share, basic
2016
11,527
7,955
1.45
2015
12,068
7,921
1.52
The basic net earnings per share calculation excludes the unvested Common shares held by the LTIP Trust.
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.
Basic weighted average shares for the year
Dilutive effect of LTI shares
Diluted weighted average shares for the year
Net earnings
Weighted average number of shares outstanding (thousands)
Net earnings per share, diluted
1 8 . L O N G -T E R M I N C E N T I V E P L A N
2016
2015
7,955,026
31,703
7,986,729
11,527
7,987
1.44
7,920,609
9,883
7,930,492
12,068
7,930
1.52
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.
The cost of the 44,634 (2015 – 39,716) unvested Common shares
held by the LTIP Trust at December 31, 2016 was nil (2015 - nil).
Balance, beginning of year
Issued during year
Cancelled during year
Vested during year
Balance, end of year
2016
2015
UNVESTED
VESTED
UNVESTED
VESTED
39,716
26,336
-
(21,418)
44,634
343,109
11,431
-
21,418
375,958
45,368
18,298
-
(23,950)
39,716
311,479
7,680
-
23,950
343,109
56
WE ARE DEPENDABLE.
1 9 . D I V I D E N D S T O S H A R E H O L D E R S
During the year ended December 31, 2016, the Corporation declared total dividends to shareholders of $9,613 or $1.200 per share
(2015 - $9,570 or $1.200 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.
2 0 . N E T C H A N G E I N N O N - C A S H W O R K I N G C A P I T A L I T E M S
YEARS ENDED DECEMBER 31
2016
2015
Accounts receivable
Linen in service
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Income taxes payable
Total
(1,296)
(232)
(411)
340
405
(1,194)
(2,595)
(1,485)
(52)
(2,137)
(52)
(6,321)
1
Accounts payable and accrued liabilities exclude the net change in non-cash amounts related to the acquisition
of property, plant and equipment that have been committed to but not yet paid of $3,905 (2015 - $5,626).
2 1 . F I N A N C I A L I N S T R U M E N T S
A. Fair Value
The Corporation’s financial instruments at December 31, 2015
consist of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, dividends payable
and long-term debt. The carrying value of accounts receivable,
accounts payable and accrued liabilities, and dividends payable
to Shareholders approximate fair value due to the immediate
or short-term maturity of these financial instruments. The fair
value of the Corporation’s interest bearing debt approximates
the respective carrying amount due to the floating rate nature
of the debt.
B. Financial Risk Management
The Corporation’s activities are exposed to a variety of
financial risks: price risk, credit risk and liquidity risk. The
Corporation’s overall risk management program focuses
on the unpredictability of financial and economic markets
and seeks to minimize potential adverse effects on the
Corporation’s financial performance. Risk management is
carried out by financial management in conjunction with
overall corporate governance.
C. Price Risk
i. 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. Based on the net liability at year end, the
sensitivity to a 100 basis point movement in US to CAD currency
rates would result in an impact of $68 to the net balance.
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. Based on the credit facility at year end, the
sensitivity to a 100 basis point movement in interest rates
would result in an impact of $258 to the net balance.
57
2016 ANNUAL REPORT
iii. Other price risk
The Corporation’s exposure to other price risk is limited since there are no significant financial instruments which fluctuate as a
result of changes in market prices.
D. Credit Risk
The Corporation’s financial assets that are exposed to credit risk consist of accounts receivable. The Corporation, in the normal
course of business, is exposed to credit risk from its customers. The allowance for doubtful accounts and past due receivables are
reviewed by management at each balance sheet reporting date. Any amounts greater than 60 days are reviewed for impairment
on a specific identification basis and have been fully accounted for as at December 31, 2016.
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:
December 31, 2015
Current
31-60 days
Greater than 60 days
Total
December 31, 2016
Current
31-60 days
Greater than 60 days
Total
GROSS
ALLOWANCE
NET
12,861
3,875
449
17,185
15,470
2,730
282
18,482
-
-
30
30
-
-
31
31
12,861
3,875
419
17,155
15,470
2,730
251
18,451
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:
Balance, beginning of year
Adjustments made during the year
Write-offs
Balance, end of year
2016
2015
30
1
-
31
31
(1)
-
30
58
WE ARE DEPENDABLE. E. Liquidity Risk
The Corporation’s accounts payable and dividend payable are due within one year. Payments due under contractual obligations
for the next five years and thereafter are as follows:
PAYMENTS DUE BY PERIOD
TOTAL
< 1 YEAR
1-3 YEARS
4-5 YEARS
> 5 YEARS
Long-term debt
Operating lease commitments
Utility commitments
Linen purchase obligations
Property, plant and equipment commitments
25,800
55,407
7,721
6,926
37,525
-
5,236
2,078
6,926
28,897
25,800
10,259
3,081
-
8,628
-
8,751
2,562
-
-
-
31,161
-
-
-
The Corporation has a credit facility with a maturity date of July 31, 2020 (Note 11). 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.
2 2 . C A P I T A L M A N A G E M E N T
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.
59
2016 ANNUAL REPORT The Corporation manages a Funded Debt to EBITDA ratio calculated as follows:
Long-term debt, including current portion
Issued and outstanding letters of credit
Funded debt
2016
25,800
1,650
27,450
2015
2,349
1,650
3,999
Net earnings for the trailing twelve months
11,527
12,068
Add:
Income tax expense
Finance expense
Depreciation of property, plant and equipment
Amortization of intangible assets
Loss on disposal of property, plant and equipment
EBITDA
Funded debt to EBITDA
4,840
739
9,235
1,790
105
28,236
0.97x
5,193
107
7,573
2,009
190
27,140
0.15x
The Corporation manages a Fixed Charge Coverage calculated on a trailing twelve-month basis as follows:
EBITDA
Finance expense
Dividends to shareholders
Total
Fixed charged coverage
2016
2015
28,236
27,140
739
9,613
10,352
2.7x
107
9,570
9,677
2.8x
23. REL ATE D PART Y TRA NS ACTIO NS
individuals
The Corporation
from
transacts with key
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 2016 and 2015, remuneration to directors and key
management personnel was as follows:
60
WE ARE DEPENDABLE. Salaries and retainer fees
Short-term bonus incentives
Post-employment benefits
Share-based payments
Total
2016
1,887
1,080
57
1,379
4,403
2015
1,814
885
55
1,156
3,910
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, 2016, the Corporation incurred such
fees totaling $138 (2015– $138).
2 4 . E X P E N S E S B Y N A T U R E
Wages and benefits
Linen
Utilities
Delivery
Materials and supplies
Occupancy costs
Repairs and maintenance
Other expenses
Total
2016
77,154
17,547
9,776
8,793
6,083
5,505
4,855
1,140
2015
69,796
15,041
8,788
7,001
5,581
5,375
4,597
1,218
130,853
117,397
2 4 . S E G M E N T E D I N F O R M A T I O N
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,
Regina, Toronto, Montréal, and Québec City. Management
has assessed that the services offered and the economic
characteristics associated with these divisions are similar,
and therefore they have been aggregated into one reportable
segment which operates exclusively in Canada.
The aggregation assessment requires significant judgment by
management. Economic indicators used by management to
assess the economic characteristics are the gross margin and
the growth rate of each division.
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 and this contract
expires on March 31, 2023. In Calgary, the major customer is
contractually committed to February 28, 2018, in Vancouver
the major customer is contractually committed to March 1,
2027, and in Saskatchewan the major customer is contractually
committed to June 1, 2025. For the Years ended December 31,
2016, from these four major customers the Corporation has
recorded revenue of $87,286 (2015 – $74,570), representing
54.9% (2015 – 51.6%) of total revenue.
61
2016 ANNUAL REPORT 2016
2015
Healthcare
Hospitality
Total
111,384
47,705
70.0%
30.0%
98,940
45,597
68.5%
31.5%
159,089
100.0%
144,537
100.0%
2 6 . S U B S E Q U E N T E V E N T S
A. Dividends
The Corporation’s Board of Directors declared an eligible
dividend of $0.10 per Common share of the Corporation
payable on each of February 15, March 15 and April 13, 2017 to
Shareholders of record on January 31, February 28, and March
31, 2017 respectively.
B. Additional Toronto Healthcare Contract
On February 28, 2017 the Corporation was awarded a 5 year
contract to provide laundry and linen services to St. Michaels
Hospital. The contract contains two renewal options for
an additional 2 years. The contract extends the existing
relationship between the Corporation and St. Michael’s
Hospital and is a result of a competitive RFP process.
On March 24, 2017 the Corporation was awarded a contract to
provide laundry and linen services to Trillium Health Partners.
The new contract is for 7 years with renewal options for an
additional 8 years, and is a result of a competitive RFP process.
“ A T K - B R O , W E
I N N O V A T E A N D
D E V E L O P N E W
P R O C E S S E S A N D
S Y S T E M S , A N D
F U R T H E R R E F I N E
B U S I N E S S D E L I V E R Y
A N D P R A C T I C E S .”
62
WE ARE DEPENDABLE. C O R P O R A T E I N F O R M A T I O N
B O A R D O F D I R E C T O R S
ROSS SMITH,
FCPA, FCA (CHAIR)
Corporate Director
MATTHEW HILLS,
MBA
Managing Director
LLM Capital Partners
STEVEN MATYAS,
BSC
President, North
American Retail for
Staples Inc.
LINDA MCCURDY,
MBA
President & CEO
K-Bro Linen Systems Inc.
MICHAEL PERCY,
PHD
Professor, School of Business
University of Alberta
E X E C U T I V E O F F I C E R S
LINDA MCCURDY,
MBA
President & CEO
SEAN CURTIS,
Senior VP & GM
(Edmonton)
KRISTIE PLAQUIN,
CPA, CA
Chief Financial Officer
L O C A T I O N S
CORPORATE OFFICE
14903 - 137 AVENUE
EDMONTON, AB T5V 1R9
P 780 453 5218
F 780 455 6676
VICTORIA
861 VAN ISLE WAY
VICTORIA, BC V9B 5R8
P 250 474 5699
F 250 474 5680
VANCOUVER 1
8035 ENTERPRISE STREET
BURNABY, BC V5A 1V5
P 604 420 2203
F 604 420 2313
VANCOUVER 2
4590 CANADA WAY
BURNABY, BC V5G 1J6
P 604 681 3291
F 604 685 1458
CALGARY
6969 – 55 STREET SE
CALGARY, AB T2C 4Y9
P 403 724 9001
F 403 720 2959
Kevin Stephenson
General Manager
Kevin McElgunn
General Manager
Ryo Utahara
General Manager
Jeff Gannon
General Manager
Steve Cummings
Plant Manager
Peter Papagianeas
Operations Manager
John Truong
Operations Manager
Andrew Mackeen
Operations Manager
EDMONTON
15223 – 121 A AVENUE
EDMONTON, AB T5V 1N1
P 780 451 3131
F 780 452 2838
REGINA
730 DETHRIDGE BAY
REGINA, SK S4N 6H9
P 306 757 5276
F 306 757 5280
TORONTO
6045 FREEMONT BLVD
MISSISSAUGA, ON L5R 4J3
P 416 233 5555
F 416 233 4434
Sean Curtis
Senior Vice-President
& General Manager
Trevor Rye
Operations Manager
Sean Jackson
General Manager
Jerry Ostrzyzek
General Manager
Johan Sellarajah
Operations Manager
QUÉBEC
367 BOULEVARD DES
CHUTES, QUÉBEC CITY
QC G1E 3G1
P 418 661 6163
F 418 661 4000
Jessica Lévesque
Directeur Général
Fabien Poirier
Directeur Opérations
MONTRÉAL
599, RUE SIMONDS SUD
GRANBY, QC J2J 1C1
P 450 378 3187
F 450 378 8245
Sylvain Tremblay
Directeur Général
TRANSFER AGENT & REGISTRAR
AUDITORS
LEGAL COUNSEL
PRINCIPAL BANK
STOCK EXCHANGE LISTING
CST Trust Company
Calgary, Alberta
PricewaterhouseCoopers LLP
Edmonton, Alberta
Stikeman Elliott
Toronto, Ontario
TD Bank
Edmonton, Alberta
TSX: KBL
McLennan Ross LLP
Edmonton, Alberta
63
2016 ANNUAL REPORT N O T I C E O F
A N N U A L M E E T I N G
THE ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD
AT THE OFFICES OF STIKEMAN ELLIOTT LLP, VANCOUVER
& MONTREAL BOARDROOMS, 5300 COMMERCE COURT
WEST, 199 BAY STREET, TORONTO, ONTARIO ON
WEDNESDAY, JUNE 14, 2017 AT 9:00 A.M. EDT
INQUIRIES@K-BROLINEN.COM
K-BROLINEN.COM
64
WE ARE DEPENDABLE. INQUIRIES@K-BROLINEN.COM
K-BROLINEN.COM