K-Bro Linen
Annual Report 2017

Plain-text annual report

201 7 A N N U A L R E P O R T TA B L E O F C O N T E N T S 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 O F F I C E R S & D I R E C TO R S 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 AT E D F I N A N C I A L S TAT E M E N T S 2 4 5 7 1 3 4 3 “ W E W I L L C O N T I N U E T O P U R S U E P R O F I TA B L E G R O W T H D O M E S T I C A L L Y A N D I N T E R N AT I O N A L L Y , & I A M E X C I T E D A B O U T O U R O P P O R T U N I T I E S I N 2 0 1 8 A N D B E Y O N D .” P R E S I D E N T ’ S M E S S A G E 2017 WAS A YEAR UNLIKE ANY OTHER IN OUR HISTORY. THE YEAR ENDED WITH K-BRO HAVING MORE PATHS TO PROFITABLE GROWTH THAN AT ANY TIME IN OUR HISTORY, AND WE BELIEVE THAT WE ARE WELL POSITIONED FOR GROWTH ACROSS OUR DIFFERENT MARKETS. KEY ACHIEVEMENT INCLUDED: • Our acquisition of Fishers in November for $58 million • Revenue and Adjusted EBITDA were $171 million and (£35 million). Fishers is a leading UK linen services $26.8 million respectively, representing changes from company with six plants and one depot in Scotland 2016 of 7.2% and -4.7% respectively. We have and the North East of England. We believe the commented on 2017 and 2018 margins in past filings, acquisition was well-priced and provides a platform and noted in our 2016 Annual Report that “…we will for further growth opportunities in the UK and Europe. also incur transition and other one-time costs related The Fishers acquisition is K-Bro’s first growth to positioning our Company for years of new growth opportunity outside of Canada. opportunities”. We have communicated in our filings that we expect a return to historical margins in 2019. • We opened our new Toronto plant, moving from a 39,000 square foot plant into our 80,000 square foot plant. With our significant increase in capacity and lower operating costs, we are optimistic about our Toronto growth prospects. In late 2016 and early 2017 we added healthcare accounts representing $7.6 million in additional revenue. • We made substantial progress in building a new state- of-the-art healthcare plant in Vancouver, which will enable us to realize lower operating costs and greater capacity. We also began renovation of our hospitality plant, which will further provide us with lower costs and additional capacity. Both plants are expected to open in the first half of 2018, and in the past year we have already added healthcare accounts representing $5.2m in additional revenue. • Our Regina plant had a full year of smooth operations, with the transition of our Saskatchewan volume having been completed in 2016. We are pleased with Regina’s operations and have additional capacity to meet growth opportunities. We begin 2018 as the largest company in our industry in Canada and a leading position in the UK, with growth opportunities both in Canada and overseas. We are excited about our two new state-of-the-art Vancouver plants that will open in 2018, and we now operate nine plants in Canada and six plants in the UK. We are optimistic about our growth opportunities, and look forward to an exciting future for K-Bro and our customers, employees, and suppliers. Our management team and 2,800 employees appreciate your confidence and support, and we work hard every day to earn it. We look forward to • ~$92 million of equity was raised in April and sharing a successful future with you. December, and we increased our credit facility with TD to $100 million (leaving us with approximately $55.6 million of unused drawdown capacity at year-end). The additional equity offerings enabled us to maintain significant flexibility in our capital structure, and our larger bank line allows us to fund additional organic and acquisition growth. LINDA McCURDY 2 WE ARE DEPENDABLE.“ O U R C O N T I N U I N G E F F O R T S T O B U I L D N E W S TAT E - O F - T H E - A R T P L A N T S H AV E S T R E N G T H E N E D O U R C O M P E T I T I V E P O S I T I O N S & E N A B L E D U S T O O F F E R A N I M P R O V E D S E R V I C E AT L O W E R C O S T S F O R O U R C U S T O M E R S .” CHAIRMAN’S MESSAGE 2017 WAS AN IMPORTANT YEAR FOR K-BRO, AND WE ARE PLEASED THAT THE COMPANY IS WELL-POSITIONED FOR PROFITABLE GROWTH. The Fishers acquisition is the Company’s first outside of Canada. We have acquired a market leader with six plants in Scotland and the North East of England, and we now have additional overseas growth opportunities going forward. Our new Toronto plant opened in 2017, and we are opening two new and refurbished Vancouver plants in 2018. Our continuing efforts to build new state-of-the-art plants have strengthened our competitive positions and enabled us to offer an improved service at lower costs for our customers. This will continue to be our model in the years ahead as we grow and strengthen our valued relationships. On behalf of our entire Company, thank you for your support and confidence. All of us at K-Bro — the management team, our 2,800 employees, and our Board — will continue to work hard every day to earn your loyalty and trust. We look forward to a successful 2018 and beyond. ROSS SMITH V I C TO R I A | VA N C O U V E R | C A L G A R Y | E D M O N TO N | R E G I N A TO R O N TO | M O N T R É A L | Q U É B E C C I T Y | S C OT L A N D 4 WE ARE DEPENDABLE.O F F I C E R S & D I R E C TO R S K-BRO IS CANADA’S LARGEST HEALTHCARE AND HOSPITALITY LAUNDRY AND LINEN PROCESSOR IN CANADA, AND WITH THE ACQUISITION OF FISHERS WE ARE NOW ONE OF THE LARGEST IN THE UK AND EUROPE. We operate 15 facilities and three distribution centers, including K-Bro provides the vital products and services that help nine facilities and two distributions centers in Canada, and people heal, travel, live, and play. We’re helping hospitals and six facilities and one distribution center in the UK (Scotland extended care centres care for the young, old and vulnerable and the North East of England). in environmentally responsible ways. Our responsibility also Our core values remain central to our reputation, and we continue to relentlessly focus on providing industry-leading quality and service. Our ability to deliver on commitments to our valued customers remains second to none. 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 7 W E O P E N E D O U R N E W S TAT E - O F - T H E - A R T T O R O N T O F A C I L I T Y , A N D B E G A N C O N S T R U C T I O N A N D R E N O VAT I O N O F O U R T W O VA N C O U V E R F A C I L I T I E S T H AT W I L L O P E N I N 2 0 1 8 . B Y T H E E N D O F 2 0 1 8 W E W I L L H AV E M O S T O F O U R C A N A D I A N V O L U M E P R O C E S S E D I N R E C E N T L Y C O N S T R U C T E D A N D M O D E R N I Z E D F A C I L I T I E S A C R O S S T H E C O U N T R Y .” SEAN CURTIS, SENIOR VICE-PRESIDENT AND COO “ B E C A U S E L E A D E R S H I P A N D P R O G R E S S A R E I M P O R TA N T T O S TA K E H O L D E R S , W E H AV E M A D E S I G N I F I C A N T I N V E S T M E N T S I N E X I S T I N G M A R K E T S A S W E L L A S N E W O N E S . I N 2 0 1 8 W E W I L L O P E N O N E N E W P L A N T A N D R E N O VAT E A N O T H E R . A S W E L L K - B R O W I L L S E E T H E F I R S T F U L L - Y E A R B E N E F I T O F O U R F I S H E R S A C Q U I S I T I O N . W I T H O U R O P E R AT I N G A N D F I N A N C I A L T R A N S A C T I O N S N E A R L Y C O M P L E T E , W E H AV E B U I L T T H E P L AT F O R M F O R P R O F I TA B L E G R O W T H A N D N E W C H A N N E L S O F VA L U E C R E AT I O N .” LINDA MCCURDY, PRESIDENT AND CHIEF EXECUTIVE OFFICER “ W E M A I N TA I N A F L E X I B L E C A P I TA L S T R U C T U R E E V E N A S W E H AV E C O M P L E T E D S I G N I F I C A N T A C Q U I S I T I O N S A N D T H E C O N S T R U C T I O N O F N E W P L A N T S . T H I S F L E X I B I L I T Y P R O V I D E S K - B R O W I T H T H E A B I L I T Y T O F U N D N E W G R O W T H O P P O R T U N I T I E S .” KRISTIE PLAQUIN, CHIEF FINANCIAL OFFICER FROM LEFT TO RIGHT: ROSS SMITH, LINDA MCCURDY, KRISTIE PLAQUIN, MICHAEL PERCY, SEAN CURTIS, STEVEN MATYAS, MATTHEW HILLS, SYLVAIN TREMBLAY, DIMITRI HAMM, KEVIN STEPHENSON, STEVE CUMMINGS, JEFF GANNON, KEVIN MCELGUNN, SEAN JACKSON REVENUE (In millions of Canadian dollars) Years ended December 31 2017 2016 2015 2014 2013 2012 50 100 150 200 EBITDA AND ADJUSTED EBITDA (In millions of Canadian dollars) Years ended December 31 3 2017 2016 2015 2014 2013 2012 18 20 22 24 26 28 TOTAL SHAREHOLDER RETURN $100 investment in 2009 375 372 429 384 327 239 K-Bro Linen Inc. S&P/TSX Composite Index 100 200 300 400 2017 2016 2015 2014 2013 2012 174 160 132 144 130 115 7 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 UP 7.2% EBITDA DOWN 14.7% ADJUSTED EBITDA DOWN 4.7% 1 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. 2 The year-end values of each investment shown on the total shareholder return graph are based on share price appreciation plus dividend reinvestment. 3 Adjusted EBITDA is a measure which has been reported in order to assist in the comparison of historical EBITDA to current results. Adjusted EBITDA is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. The calculation of Adjusted EBITDA normalizes the impact of the transaction costs related to the acquisition of Fishers, and the related impact on EBITDA (as defined above). During the fourth quarter in 2017, K-Bro incurred $2.8 million in transaction costs directly related to the acquisition of Fishers, which is not expected to occur in the normal course of operations. The normalization of this expense from the calculation of EBITDA is considered by Management to be a more accurate representation of continuing operations. 2017 ANNUAL REPORT “ W E R E L E N T L E S S L Y F O C U S O N D E L I V E R I N G T H E H I G H E S T Q U A L I T Y & S E R V I C E T O O U R M A N Y VA L U E D C U S T O M E R S . T H AT C O R E C O M M I T M E N T E N A B L E S U S T O C O N T I N U E TO G R O W & D E L I V E R 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 are committed to remain as Canada’s premier linen processing company, with nine plants across our country. We have also welcomed Fishers to the K-Bro family with our 2017 acquisition of one of the UK’s largest and highest quality linen processors. We continue to focus our growth initiatives on businesses that we know and have a track record of operating in a superior fashion. We remain focused on growth in regions where we have an existing competitive advantage or can develop one. K-Bro has invested over $250 million in our business in the last decade. These investments have enabled K-Bro to grow in current and new markets in Canada and overseas. We continue to play a significant role in providing high quality linen services to health care and hospitality customers in all of our markets. W E A R E D E P E N D A B L E . Our 15 plants and three distribution centres in Canada and the UK provide services to almost 2,900 customers, and we have more than 2,800 employees. We finished 2017 with total assets of $295 million, market capitalization of $434 million and significant financial capacity to finance further organic and acquisition growth. “ K - B R O C O N T I N U E S T O E X C E L AT 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 R E N E W I N G O U R E X I S T I N G C O N T R A C T S W I T H O U R VA L U E D C U S T O M E R S . W E C O N T I N U E TO F O C U S O N O U R C O R E B U S I N E S S O F P R O V I D I N G T H E H I G H E S T Q U A L I T Y L I N E N S E R V I C E S I N T H E I N D U S T R Y , B U I L D I N G O N D E C A D E S O F E X P E R I E N C E .” SEAN CURTIS, SENIOR VICE-PRESIDENT AND COO 9 2017 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 DIVERSIFIED & INTEGRATED SERVICES We provide critical services including, support and management of linen requirements that address each and every one of our customers’ needs. serves? Will we be able to build on relationships the company STRATEGICALLY POSITIONED 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 team of a company. The ability and commitment demonstrated by staff members is a factor in K-Bro has fifteen plants (nine in Canada) and three distribution centres located in Canada and Scotland, which ensure our ability to provide uninterrupted service in the wake of disasters, pandemics or other adversity. our decision-making process for acquisitions. The bottom LONG-TERM STABLE CONTRACTS 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. Our November 2017 acquisition of Fishers was an excellent fit with these criteria. We were attracted to Fishers because the Company has a strong position in a well-defined market and a strong and successful management team. Its leading position in the growing UK market, specifically in Scotland and northern England, provides a foundation for future organic and acquisition growth overseas for K-Bro. There are By anticipating our customers’ needs, delivering consistently dependable service and acting with integrity, K-Bro has developed long-term relationships with its customers. COMMITTED WORKFORCE Our corporate culture enables us to attract and retain quality laundry staff and our national presence provides opportunities for career advancement. Eight members of our senior management team have an average tenure of in excess of 15 years with K-Bro. SINGLE SOURCE FOR CUSTOMERS customer and operating synergies that are already being K-Bro is able to deliver total linen management services, shared between our Canadian and UK businesses. Our including laundering, drying, folding, quota cart development, acquisition price was accretive to K-Bro, and we have sterilization, and more that focus on efficiencies and cost maintained financial flexibility to fund organic and savings. As one of the largest linen purchasers in Canada, we acquisition growth going forward. leverage our market position to drive savings for our customers. K-Bro works in partnership with our clients to reduce their linen consumption. K-BRO CONTINUED TO ADD NEW CLIENTS AND ADD BUSINESS FROM EXISTING CLIENTS IN 2017. We successfully integrated significant new healthcare volume in British Columbia (previously processed by another linen processor), and in Toronto we were awarded two large healthcare accounts (also previously processed by another linen processor). In Alberta we added additional volume from our current healthcare clients. We also completed our acquisition During 2017 we enjoyed an entire year of fine-tuning our Regina operations after the large volume transitions in 2015 and 2016, completed the transition to our new highly- automated Toronto plant, and began construction and renovation of two Vancouver plants. Each of our new plants is a state-of-the-art facility that provides us with significant capacity increases while also lowering our operating costs. K-Bro’s value-added services provide a ‘one-stop shop’ for linen services, and currently include: of Fishers, providing us with a significant UK presence. • Exchange cart preparation 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 • 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 and equipment in anticipation of higher volume. At K-Bro, we continue to innovate and develop new 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. 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 thirteen 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. 1 1 2017 ANNUAL REPORT“ A S E V E N T S H AV 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 & 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 2017 2016 2015 2014 2013 2012 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: 170,559 159,089 144,537 136,440 131,202 126,290 23,985 28,236 27,140 26,241 23,317 14.1 5,718 0.63 17.7 18.8 19.2 17.8 11,527 12,068 12,198 10,336 1.44 1.52 1.72 1.47 24,517 19.4 11,149 1.59 32,008 13,766 42,780 25,800 8,670 2,349 21,717 9,434 0 19,640 8,064 5,818 2.20 55.5 65.6 15.7 2.8 0.9 19.3 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 41.2 155.0 182.9 235.2 2.72 41.8 18.1 8.2 16.5 34.9 253.8 434.211 338,190 406,872 367,023 280,976 203,613 High Low Close 45.00 37.39 41.32 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 ($ Thousands of Canadian dollars, except per share data and percentages) 1 2 WE ARE DEPENDABLE. 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 1 3 2017 ANNUAL REPORTI N T R O D U C T I O N S T R AT 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 U M M A R Y O F 2 0 1 7 R E S U L T S , K E Y E V E N T S & O U T L O O K O U T L O O K K E Y P E R F O R M A N C E D R I V E R S R E S U L T S O F O P E R AT I O N S L I Q U I D I T Y & C A P I TA 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 TA B L E C A S H F L O W 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 & U N C E R TA I N T I E S C O N T R O L S & P R O C E D U R E S 1 7 1 8 1 8 2 0 2 5 2 6 2 7 3 3 3 4 3 5 3 7 40 40 4 1 4 1 42 1 4 WE ARE DEPENDABLE.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 AT 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, 2017 and 2016, as well as the unaudited interim condensed Consolidated Financial Statements for the periods ended March 31, 2017, June 30, 2017 and September 30, 2017. The Corporation and its wholly-owned subsidiaries, including K-Bro Linen Systems Inc. and Fishers Topco Ltd., 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 14, 2018. In the interest of providing current holders (“Shareholders”) of common shares 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. information that This MD&A contains forward-looking 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) 1 5 include: information utility costs, minimum wage legislation 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; (viii) changes or proposed changes to minimum wage laws in Ontario, British Columbia, Alberta and the United Kingdom (the “UK”), which could have an adverse effect on expenses in respect of employees situated in those jurisdictions and while a portion of such expenses may be passed on to or be recoverable from customers, there can be no assurances that will occur; (ix) the availability of future financing and (x) foreign exchange rates. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward- looking (i) volumes and pricing assumptions; (ii) expected impact of labour cost initiatives; (iii) frequency of one-time costs impacting quarterly and annual financial results; and (iv) 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 Corporation’s contracts with the William Osler Health System and Trillium Health Partners and other new customers, the anticipated capital costs for the Toronto and Vancouver facilities, calculation of costs, including one-time costs impacting the quarterly financial results, 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. 2017 ANNUAL REPORT“ E V E R Y D AY W E M U S T E A R N T H E R E S P E C T & 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 VA L U E S E R V I C E .” 1 6 WE ARE DEPENDABLE.I N T R O D U C T I O N CORE BUSINESS The Corporation is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the North East of England. K-Bro and its wholly owned subsidiaries, operate across Canada and the United Kingdom (“UK”), providing 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’s operations in Canada include nine processing facilities and two distribution centres under three distinctive brands,: K-Bro Linen Systems Inc., Buanderie HMR and Les Buanderies Dextraze. The Corporation operates in ten Canadian cities: Québec City, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria. The Corporation’s operations in the UK include Fishers Topco Ltd. (“Fishers”) which was acquired by K-Bro on November 27, 2017. Fishers was established in 1900 and is a leading operator of laundry and linen processing facilities in Scotland, management and distribution of general, workwear and clean room garment services. Other types of processors in Fishers industry in the UK include independent privately owned facilities (i.e., typically, small single facility companies), public sector central laundries and public and private sector OPLs. Our partnerships with healthcare institutions and hospitality clients across Canada and the UK demonstrate K-Bro’s commitment to building relationships that foster continuous improvement, providing flexibility to adjust to changing circumstances as required and which incorporate incentives, penalties and the sharing of risks and rewards as circumstances warrant. In this competitive industry, KBro is distinctive 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. providing linen rental, workwear hire and cleanroom garment INDUSTRY CHARACTERISTICS & TRENDS services to the hospitality, healthcare, manufacturing and pharmaceutical sectors. The Corporation operates seven sites, including one distribution center, which are located in Cupar, Perth, Newcastle, Livingston, Inverness and Coatbridge. INDUSTRY & MARKET 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 In Canada, K-Bro provides laundry and linen services to the hospitality industry. The potential for step-changes in healthcare, hospitality and other commercial customers. volumes and revenues that align with contractual 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 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 Canadian 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. 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 In Canada, 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 In the UK, Fishers provides laundry and linen services to and significant management expertise that can be provided on healthcare, hospitality and other commercial customers. a more comprehensive & cost-effective basis than customers Typical services offered by Fishers include the processing, can achieve in operating their own laundry facilities. 1 7 2017 ANNUAL REPORTFragmentation Most cities have at least one and sometimes several private sector competitors operating in the healthcare and hospitality sectors of the laundry and linen services industry. Management believes that the presence of these operators provides consolidation opportunities for larger industry participants with the financial means to complete acquisitions. CUSTOMERS & PRODUCT MIX K-Bro’s Canadian customers include some of the largest healthcare institutions and hospitality providers in Canada. In the UK, Fishers customer includes some of the largest hotel chains operating in Scotland. Healthcare customers include acute care hospitals and long-term care facilities primarily in Canada. 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 Canadian healthcare region. S T R AT 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 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. K-Bro performs the sterilization of operating room linen packs for six major hospitals in Toronto. F O U R T H Q U A R T E R O V E R V I E W In the fourth quarter of 2017, revenue increased by 21.0% to $47.5 million from $39.3 million in the comparative period. This increase was due to the acquisition of Fishers, additional awarded healthcare volume from the Vancouver lower mainland contract, William Osler Health System volume, Trillium Health Partners volume, organic growth at existing customers, and new customers secured in existing markets. EBITDA was $4.5 million for the three months ended December 31, 2017, compared to $6.4 million in the comparative period of 2016. The change in EBITDA and margin was primarily associated with the one-time transaction costs related to the acquisition of Fishers which was $2.8 Management has demonstrated its ability to successfully million, offset by efficiencies gained as a result of the capital expand K-Bro’s business into new markets from its expenditures made in Toronto. established bases. Since 2005, K-Bro has entered four new geographic markets across Canada, and in late 2017 entered into the UK market. These new markets have contributed significantly to K-Bro’s growth. Management believes that new outsourcing opportunities will continue to arise in the near to medium-term and that K-Bro is well-positioned for continued growth, particularly as healthcare and hospitality institutions continue to increase their focus on core services and confront pressures for capital and cost savings. REVENUE UP 7.2% SELECTED ANNUAL FINANCIAL INFORMATION Revenue Earnings before income taxes Net earnings Adjusted net earnings Net earnings (loss) per share: Basic Diluted Adjusted net earnings (loss) per share: Basic Diluted Total assets Long-term debt CANADIAN DIVISION 2017 UK DIVISION 2017 165,831 12,402 8,599 8,599 0.947 0.943 0.947 0.943 4,728 (2,923) (2,881) (50) (0.317) (0.316) (0.006) (0.005) Weighted average number of shares outstanding: Basic Diluted ($ Thousands, except percentages and per share amounts) 1 Prior to the acquisition of Fishers on November 27, 2017, K-Bro was reporting and operating as a single Canadian division. 2017 2016 1 2015 1 170,559 9,479 5,7 18 8,549 0.629 0.627 0.94 1 0.938 295,213 42,780 159,089 144,537 16,367 1 1 ,527 1 1 ,527 17,261 12,068 12,068 1.449 1.443 1.524 1.522 1.449 1.443 168,289 25,800 1.524 1.522 143,023 2,349 9,083,693 9, 1 1 4,874 7,955,026 7,920,609 7,986,729 7,930,492 1 9 2017 ANNUAL REPORT S U M M A R Y O F 2 0 1 7 R E S U L T S , K E Y E V E N T S & O U T L O O K FINANCIAL GROWTH K-Bro’s Canadian division delivered strong financial results in 2017 driven by the operating results from all nine of its processing plants and two distribution centers. In the UK, net earnings were impacted as a result of $2.8 million in K-Bro financed the cash portion of the acquisition, the repayment of Fishers’ outstanding debt facilities and the payment of management fees and transaction costs from existing cash resources and existing loan facilities, including an amendment to its existing revolving credit facility. acquisition costs incurred in the quarter. Net earnings were As part of the Fishers’ acquisition, the purchase price $5.7 million or $0.63 per Common Share (basic). Cash flow included an earn out to be paid dependent upon financial from operating activities was $18.8 million and distributable performance of Fishers for the year ended December 31, cash flow was $20 million. Revenue increased in fiscal 2017 2017. Based off the Fishers’ audited financial statements and to $170.6 million or by 7.2% compared to 2016. This increase the calculation in accordance with the share purchase was due to the acquisition of Fishers, additional awarded agreement, no additional consideration for the earnout is healthcare volume from the Vancouver lower mainland payable as at December 31, 2017 or in future periods. contract, William Osler Health System volume, Trillium Health Partners volume, organic growth at existing customers, and new customers secured in existing markets. The acquired business contributed revenues of $4.7 million (in Sterling £2.8 million) and a net loss of $2.9 million (in Sterling £1.7 million) to the Corporation for the period from EBITDA (see Terminology) decreased in 2017 to $24.0 million November 27, 2017 to December 31, 2017. or by 14.7% compared to $28.1 million in 2016. The Corporation’s EBITDA margin decreased from 17.7% in 2016 compared to 14.1% in 2017. The change in EBITDA and margin was primarily associated with one-time transaction costs of $2.8 million related to the acquisition of Fishers, the relocation of our new Toronto facility, offset by the efficiencies gained as a result of the capital expenditures made in Toronto. Management estimates the one-time costs incurred related to the Toronto transition and capacity constraints at certain plants on a year-to-date basis to be approximately $4.7 million. Acquisition of Fishers Fishers was acquired by K-Bro on November 27, 2017 for cash consideration of $57.6 million (in Sterling £33.9 million). Fishers, an operator of laundry and linen processing facilities established in 1900, is a leading commercial laundry business in Scotland and the North East of England which provides linen rental, workwear hire and cleanroom garment services to the hospitality, healthcare, manufacturing and pharmaceutical sectors. The company operates seven facilities, including one distribution center, which are located in Cupar, Perth, Newcastle, Livingston, Inverness and Coatbridge. If the acquisition had occurred on January 1, 2017, consolidated pro-forma revenue and profit for the year ended December 31, 2017 would have been $223.5 million and $8.8 million respectively. These amounts have been calculated using the Fishers results and adjusting them for: • differences in the accounting policies between the group and the subsidiary; and • the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2017, together with the consequential tax effects. Pro-forma net profit includes expenses which are not expected to be recurring as part of normal operations, which include transaction costs incurred in the sale of Fishers’ for $1.0 million (in Sterling £0.6 million), and loss on disposal of assets of $1.1 million (in Sterling £0.6 million). 2 0 WE ARE DEPENDABLE.Equity Offerings On April 25, 2017 the Corporation closed a bought deal offering of 1,518,000 common shares at $38.00/share. The net proceeds of the offering after deducting expenses of the offering and the underwriter’s fee were $55.0 million. The net proceeds of the offering were used to reduce the revolving debt to nil, and to fund the build out of the Corporation’s state-of-the-art facilities in Toronto and Vancouver, and for general corporate purposes. Build out of Corporation’s facilities in Toronto and Vancouver Repayment of indebtedness General corporate purpose Use of proceeds as at December 31, 2017 Amount remaining Net proceeds from share issuance on April 25, 2017 ($ Millions) 2017 22.3 32.4 0.3 55.0 – 55.0 On December 12, 2017 the Corporation closed a bought deal offering of 924,600 common shares at $37.35/share. The net proceeds of the offering after deducting expenses of the offering and the underwriter’s fee were $32.7 million. The net proceeds of the offering were used to partially pay down indebtedness that was incurred under K-Bro’s amended $100 million senior secured revolving credit facility to fund the acquisition of Fishers. Cash Consideration of acquisition of Fishers Indebtedness incurred to fund acquisition Repayment of indebtedness Use of proceeds as at December 31, 2017 Amount remaining Net proceeds from share issuance on December 12, 2017 ($ Millions) 2017 57.6 (57.6) 32.7 32.7 – 32.7 2 1 2017 ANNUAL REPORT“ R E V E N U E I N C R E A S E D I N F I S C A L 2 0 1 7 T O $ 1 7 0 . 6 M O R B Y 7 . 2 % C O M PA R E D T O 2 0 1 6 .” 2 2 WE ARE DEPENDABLE.Revolving Credit Facility On November 27, 2017, K-Bro completed an amendment to its existing revolving credit facility, which extended the agreement to July 31, 2021, and increased the available limit from $85 million to $100 million plus a $25 million accordion, of which $44.4 million is utilized (including letters of credit totaling $1.7 million as at December 31, 2017). Management intends to continually assess its opportunities to maintain a conservative amount of leverage and balance The construction and/or upgrade of three of our large facilities will enable us to bid on a significant amount of additional business, but also will create margin pressure through 2018 as K-Bro incurs one-time and transition costs associated with these large investments. While the margin pressure may vary by quarter through 2018, management believes that the one-time and transition costs incurred in 2017 and 2018 will position K-Bro to achieve more growth and a lower cost structure into the future and that K-Bro will return to normalized margins closer to those achieved in sheet flexibility in the short and long-term basis in order to 2015 as it enters 2019. ensure that sufficient capital is available for future growth needs. A copy of the Corporation’s amended and restated Key events in our Toronto and Vancouver markets are credit agreement is available under the Corporation’s summarized below. profile at www.sedar.com. Near-Term and Long-Term Growth and Margin Impact 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 Management has embarked on a strategy in its Toronto and with a projected investment of up to $55 million. As at Vancouver markets that it believes will position K-Bro for December 31, 2017, K-Bro has incurred $29.8 million of the accelerated growth in its healthcare and hospitality total expected capital costs. The new Vancouver plant will businesses. The strategy includes capital investments to be located in Burnaby, and K-Bro expects to transition to the build large efficient state-of-the-art facilities with meaningful new facility during the second quarter of 2018. The new additional capacity in Toronto and Vancouver. In addition, facility will enable K-Bro to expand current capacity, to K-Bro will invest to upgrade one of its current Vancouver accommodate the additional awarded volume, and to plants to create a more efficient facility with meaningful provide the opportunity to consolidate the healthcare additional capacity. These investments are being made because management believes that new opportunities, both current and future, justify the significant additional capacity. As previously announced we have secured $7.6 million of new revenue from William Osler Health Systems and Trillium Health Partners. The transition of the William Osler Health Systems to K-Bro was completed in the second quarter of 2017 and the transition of Trillium Health Partners to K-Bro commenced in the third quarter and was completed early 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. It is anticipated that transition costs associated with the new Vancouver plant will negatively impact EBITDA margins over the second and third quarters of 2018 while in the fourth quarter of 2017. Management believes that the plant becomes operational. many new customer opportunities will present themselves to K-Bro going forward. Toronto Facility Development Furthermore, during the prior year in Vancouver we re-signed During the first quarter, K-Bro completed the transition to most of our current healthcare volume through to 2027 its new state-of-the-art facility in Toronto. Management and were awarded six new healthcare accounts representing estimates that the cost to commission the new leased an additional $5.2 million in annual revenue with additional facility is $37 million for new efficiency enhancing new customer opportunities going forward. Service to equipment, and leaseholds. As at December 31, 2017, K-Bro these six new healthcare customers commenced during has incurred $37 million of the total expected capital cost. Q4 2017, which was earlier than anticipated to help facilitate K-Bro’s strategy includes significant growth in its healthcare the logistical management and strategic requirements of and hospitality volumes, and the additional capacity and the customers. the long-term lease enables K-Bro to grow into the additional capacity as opportunities emerge. 2 3 2017 ANNUAL REPORTToronto Contract Awards On February 28, 2017 K-Bro was awarded a five year contract to provide laundry and linen services to St. Michael’s Hospital. The contract contains two renewal options for an additional two years. The contract extends the existing relationship between K-Bro and St. Michaels Hospital and is a result of a competitive RFP process. On March 24, 2017 K-Bro 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 and processing commenced in Q3 2017. Toronto Collective Bargaining Agreement Teamsters Canada represented 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 K-Bro’s contract proposal and on January 31, 2017 K-Bro locked out the 14 Toronto drivers and employed replacement drivers to service its Toronto accounts. There have been no service interruptions to any customers as a result of the lock-out. In September, K-Bro reinstated five drivers on terms agreed to between the employee and employer. No collective agreement has been negotiated and employees are operating in a non- union environment on terms substantially the same as the contract drivers. K-Bro has been advised that the Ministry of Labour is closing the file regarding this labour dispute. Management estimates transition and one-time costs associated with this lock-out were approximately $0.6 million on a year-to-date basis. Alberta Contract Awards On March 1, 2018, K-Bro was awarded a one year extension to provide laundry and linen services to Calgary Alberta Health Services. The contract extends the existing relationship between K-Bro and Alberta Health Services Calgary. 2 4 WE ARE DEPENDABLE.O U T L O O K "We are very excited to add the Fishers platform as K-Bro's K-Bro’s focus is on profitable growth in the years to come first acquisition outside of Canada. Fisher’s is our largest as we execute our strategy of expanding geographically acquisition to date and is aligned with our growth strategy. and adding new services for our customers. K-Bro is Fishers provides us with critical mass in an attractive new committed to building value for our Shareholders, our geographical region and is well positioned for future customers and our employees. growth." said Linda McCurdy, President & Chief Executive Officer of K-Bro. "The UK linen hospitality market is mature and highly fragmented and we expect to leverage Fishers' leading market position, experienced local management team, entrenched customer relationships and proven track record of stable and profitable operations to take advantage of the significant organic growth and consolidation opportunities available to us, similar to what we have achieved in Canada.” “We continue to make progress in the construction of our new Vancouver facility with a targeted completion date of early 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 2018, we believe that the one-time and 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. EFFECTS OF ECONOMIC UNCERTAINTY K-Bro believes that it is positioned to withstand market volatility and uncertainty given that: • Approximately 66.1% of its revenues in the quarter were from large publicly funded healthcare customers which are geographically diversified across multiple provinces; transition costs incurred in 2018 will position the company • at December 31, 2017, K-Bro had unutilized borrowing to achieve more growth and a lower cost structure into the capacity of $55.6 million or 55.6% of its revolving future and that the company will return to normalized credit facility available; and, 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’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 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 VA L U E T O O U R C U S T O M E R S & S H A R E H O L D E R S .” 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 table outlines our results on a period-to-period comparative basis in each of these areas: CAN UK Q4 2017 Q4 2017 Q4 2017 UK Q4 20165 YTD 2017 YTD 2017 CAN YTD 2017 YTD 20165 GROWTH EBITDA1 % Adjusted EBITDA2 % Revenue Distributable cash flow % PROFITABILITY 10.1 10.1 9.0 EBITDA1 6 EBITDA margin % Adjusted EBITDA2 Adjusted EBITDA margin2 % Net earnings Adjusted net earnings3 % 6,961 16.3 6,961 16.3 1,594 1,594 (2,508) -53.0 323 6.8 (2,881) (50) STABILITY Debt to total capitalization4 % Unutilized line of credit Cash on hand Payout ratio% Dividends declared per share COST CONTAINMENT -29.6 15.2 21.0 -52.0 4,453 9.4 7,284 15.3 (1,287) 1,544 18.4 55,570 11,276 107.1 0.300 5.3 5.3 4.2 25.5 6,321 16.1 6,321 16.1 2,197 2,197 18.1 57,550 – 41.7 0.300 -5.8 -5.8 4.2 26,493 (2,508) 16.0 26,493 16.0 8,599 8,599 -53.0 323 6.8 (2,881) (50) -14.7 -4.7 7.2 -9.2 23,985 14.1 26,816 15.7 5,718 8,549 4.4 4.4 10.1 3.4 28,131 17.7 28,131 17.7 11,527 11,527 18.4 55,570 11,276 – 55.5 1.200 18.1 57,550 43.5 1.200 Wages and benefits% Utilities% 5.7 Expenses included in EBITA% 83.7 41.7 37.4 7.7 153.0 41.3 5.9 90.6 41.1 6.4 83.9 41.4 6.0 84.0 37.4 7.7 153.0 41.2 6.1 85.9 40.9 6.1 82.3 ($ Thousands, except percentages and per share amounts) 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense (recovery) and depreciation and amortization). See Terminology. 2 Adjusted EBITDA is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considering part of our core operations. See Terminology for a complete description of the adjusted items. 3 Adjusted net earnings is defined as net earnings with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 4 Debt to total capitalization is defined as total debit divided by total capital. See Terminology. 5 Prior to the acquisition of Fishers on November 27, 2017, K-Bro was reporting and operating as a single Canadian division 6 EBITDA in prior periods has been restarted with ‘gain (loss) on disposal of assets’ in included expenses. 2 6 WE ARE DEPENDABLE. R E S U L T S O F O P E R AT I O N S QUARTERLY FINANCIAL INFORMATION - CONSOLIDATED The following table provides certain selected consolidated financial and operating data prepared by K-Bro management for the preceding eight quarters: Healthcare revenue Hospitality revenue Total revenue Expenses included in EBITDA4 EBITDA1 4 EBITDA as a % of revenue Adjusted EBITDA2 Adjusted EBITDA as a % of revenue Depreciation and amortization Finance expense (recovery) Earnings before income taxes Income tax expense Net earnings (loss) Net earning (loss) as a % of revenue Basic earnings (loss) per share2 Diluted earnings (loss) per share3 Adjusted net earnings Basic adjusted earnings (loss) per share Diluted adjusted earnings (loss) per share3 Q4 Q3 Q2 2017 Q1 Q4 Q3 Q2 Q1 2016 31,385 16,124 29,021 14,577 28,499 28,053 10,905 11,995 28,374 27,333 27,553 28,124 10,877 14,224 11,916 10,688 47,509 43,598 40,494 38,958 39,251 41,557 39,469 38,812 43,056 4,453 9.4 7,284 15.3 4,105 786 (438) 849 (1,287) -2.7 (0.132) (0.132) 1,544 0.159 0.158 35,487 33,837 8,111 18.6 8,111 18.6 6,657 16.4 6,693 16.5 3,213 3,246 101 4,797 1,379 61 3,350 1,013 3,418 2,337 7.8 0.359 0.358 3,418 0.359 0.358 5.8 0.257 0.256 2,337 0.257 0.256 34,194 4,764 12.2 4,764 12.2 2,809 185 1,770 520 1,250 3.2 0.157 0.156 1,250 0.157 0.156 32,930 34,019 31,973 32,036 6,321 7,538 7,496 6,776 16.1 18.1 19.0 17.5 6,321 7,538 7,496 6,776 16.1 18.1 19.0 17.5 2,866 2,748 2,674 2,737 247 3,208 1,011 (11) 4,801 1,387 110 393 4,712 3,646 1,328 1,114 2,197 3,414 3,384 2,532 5.6 0.276 0.274 2,197 0.276 0.274 8.2 0.429 0.427 3,414 0.429 0.427 8.6 0.426 0.425 3,384 0.426 0.425 6.5 0.319 0.318 2,532 0.319 0.318 Total assets Total long-term financial liabilities 295,213 57,594 199,452 9,205 195,957 180,583 41,134 8,407 168,289 153,923 148,068 146,816 33,949 17,596 14,360 12,717 Funds provided by operations Long-term debt Dividends declared per share 6,395 42,780 0.300 3,788 2,297 - - 0.300 0.300 6,300 32,363 0.300 6,071 7,581 4,143 6,726 25,800 10,338 7,252 5,970 0.300 0.300 0.300 0.300 ($ Thousands, except percentages and per share amounts) 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense (recovery) and depreciation and amortization). See Terminology. 2 Adjusted EBITDA is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 3 Adjusted net earnings is defined as net earnings with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 4 EBITDA in prior periods has been restated with ‘gain (loss) on disposal of assets’ in included expenses. 2 7 2017 ANNUAL REPORT $170.559 MILLION 2017 REVENUE $116.958 $53.601 (In Millions) HEALTHCARE HOSPITALITY $159.089 MILLION 2016 REVENUE $111.384 $47.705 (In Millions) HEALTHCARE HOSPITALITY Historically, the Corporation’s financial and operating results capitalization of 18.4% Due to the strategic plans K-Bro are stronger in the second and third quarters as a result of expects to execute in the coming fiscal year, management seasonality and the associated higher hospitality volumes. expects the debt to total capitalization to increase, mainly as Other fluctuations in net income from quarter-to-quarter can a result of strategic capital expenditures as part of the also be attributed to hiring and labour cost trends, timing investment in the new Vancouver facility. Management of linen purchases, utility costs, timing of repairs and believes the unutilized balance of $55.6 million with respect maintenance expenditures, business development, capital to its revolving credit facility is sufficient for the Corporation’s spending patterns and changes in corporate tax rates and operations in the foreseeable future. However, management income tax expenses. For the year ended December 31, 2017, the Corporation’s distributable cash flow was $20 million with a debt to total intends to continually assess its opportunities to maintain a conservative amount of leverage and balance sheet flexibility in the short and long-term basis in order to ensure that sufficient capital is available for future growth needs. 2 8 WE ARE DEPENDABLE.Q U A R T E R L Y F I N A N C I A L I N F O R M AT I O N – C A N A D I A N D I V I S I O N The following table provides certain selected consolidated financial and operating data prepared by K-Bro management for the preceding eight quarters: Healthcare revenue Hospitality revenue Total revenue Expenses included in EBITDA4 EBITDA1 4 EBITDA as a % of revenue (EBITDA margin) Adjusted EBITDA2 Adjusted EBITDA as a % of revenue Q4 Q3 Q2 2017 Q1 Q4 Q3 Q2 2016 Q1 31,375 11,406 29,021 28,499 14,577 11,995 28,053 10,905 28,374 27,333 27,553 28,124 10,877 14,224 11,916 10,688 42,781 43,598 40,494 38,958 39,251 41,557 39,469 38,812 35,820 6,961 35,487 33,837 8,111 6,657 34,194 4,764 32,930 34,019 31,973 32,036 6,321 7,538 7,496 6,776 16.3 6,961 18.6 8,111 16.4 6,693 12.2 4,764 16.1 6,321 18.1 19.0 17.5 7,538 7,496 6,776 (Adjusted EBITDA margin) 16.3 18.6 16.5 12.2 16.1 18.1 19.0 17.5 Depreciation and amortization Finance expense (recovery) Earnings before income taxes Income tax expense Net earnings Net earning as a % of revenue Basic earnings per share Diluted earnings per share Adjusted net earnings Basic adjusted earnings per share Diluted adjusted earnings per share 3,708 768 2,485 891 1,594 3.7 0.164 0.163 1,594 0.164 0.163 3,213 3,246 101 4,797 1,379 61 3,350 1,013 3,418 2,337 7.8 0.359 0.358 3,418 0.359 0.358 5.8 0.257 0.256 2,337 0.257 0.256 2,809 185 1,770 520 1,250 3.2 0.157 0.156 1,250 0.157 0.156 ($ Thousands, except percentages and per share amounts) 2,866 2,748 2,674 247 3,208 1,011 2,197 5.6 0.276 0.274 2,197 0.276 0.274 (11) 4,801 1,387 3,414 8.2 0.429 0.427 3,414 0.429 0.427 2,737 393 3,646 1,114 110 4,712 1,328 3,384 2,532 8.6 0.426 0.425 3,384 0.426 0.425 6.5 0.319 0.318 2,532 0.319 0.318 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense (recovery) and depreciation and amortization). See Terminology. 2 Adjusted EBITDA is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 3 Adjusted net earnings is defined as net earnings with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 4 EBITDA in prior periods has been restated with ‘gain (loss) on disposal of assets’ in included expenses. 2 9 2017 ANNUAL REPORT Q U A R T E R L Y F I N A N C I A L I N F O R M AT I O N – U K D I V I S I O N The following table provides certain selected consolidated financial and operating data prepared by K-Bro management for the preceding eight quarters: In reporting currency Canadian $ Q4 Q3 Q2 2017 Q1 Q4 Q3 Q2 2016 Q1 Healthcare revenue Hospitality revenue Total revenue Expenses included in EBITDA EBITDA1 (EBITDA margin) Adjusted EBITDA2 Adjusted EBITDA as a % of revenue (Adjusted EBITDA margin) Depreciation and amortization Finance expense (recovery) Earnings before income taxes Income tax expense Net earnings Net earning as a % of revenue Basic earnings per share Diluted earnings per share Adjusted net earnings3 Basic adjusted earnings per share3 Diluted adjusted earnings per share3 10 4,718 4,728 7,236 (2,508) -53.0 323 6.8 397 18 (2,923) (42) (2,881) -60.9 (0.296) (0.295) (50) (0.005) (0.005) ($ Thousands, except Percentages and per share Amounts) 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense (recovery) and depreciation and amortization). See Terminology. 2 Adjusted EBITDA is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 3 Adjusted net earnings is defined as net earnings with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 4 EBITDA in prior periods has been restated with ‘gain (loss) on disposal of assets’ in included expenses. 3 0 WE ARE DEPENDABLE. In local currency sterling £ Q4 Q3 Q2 2017 Q1 Q4 Q3 Q2 Q1 2016 Healthcare revenue Hospitality revenue Total revenue Expenses included in EBITDA EBITDA1 (EBITDA margin) Adjusted EBITDA 2 Adjusted EBITDA as a % of revenue (Adjusted EBITDA margin) Depreciation and amortization Finance expense (recovery) Earnings before income taxes Income tax expense Net earnings Net earning as a % of revenue Basic earnings per share Diluted earnings per share 6 2,755 2,761 4,227 (1,466) -53.1 188 6.8 232 (3) (1,695) (25) (1,670) -60.5 (0.172) (0.171) Adjusted net earnings 3 Basic adjusted earnings per share 3 Diluted adjusted earnings per share 3 (16) (0.002) (0.002) ($ Thousands, except Percentages and per share Amounts) 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense (recovery) and depreciation and amortization). See Terminology. 2 Adjusted EBITDA is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. 3 Adjusted net earnings is defined as net earnings with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See Terminology for a complete description of the adjusted items. REVENUE, EARNINGS & EBITDA For the year ended December 31, 2017, K-Bro’s revenue Fishers, transition costs related to the transition to our new increased by 7.2% to $170.6 million from $159.1 million in the Toronto facility, training costs related to new staff, labour comparative period. This increase was due to additional costs associated transitioning volume in Vancouver during volume from the acquisition of Fishers, additional awarded Q4 2017 and costs related to mitigating the effect related to healthcare volume from the Vancouver lower mainland the lock-out of the unionized delivery drivers in Toronto, contract signed in 2016, William Osler Health System offset by higher revenues. In addition, throughout 2017 the volume, Trillium Health Partners volume, organic growth at company incurred significant overtime and one-time costs existing customers, and new customers secured in existing to support new business, strong volumes and temporary markets. In 2017, approximately 68.6% of K-Bro’s revenue capacity constraints in certain markets that we operate in. was generated from healthcare institutions, which is slightly lower compared to 70.0% in 2016, primarily related to the acquisition of Fishers which is hospitality based. Net earnings decreased by $5.8 million from $11.5 million in 2016 to $5.7 million in 2017. Net earnings as a percentage of revenue decreased by 3.8%, from 7.2% in 2016 to 3.4% in EBITDA decreased in the year to $24.0 million from $28.1 2017. This decrease in net earnings is primarily due to the million in 2016, which is a decrease of 14.7%. The EBITDA flow through items in EBITDA discussed above and higher margin decreased to 14.1% in 2017 compared to 17.7% in depreciation of property, plant and equipment and interest 2016, due to transaction costs related to the acquisition of expense, offset by a lower income tax expense. 3 1 2017 ANNUAL REPORT OPERATING EXPENSES Wages and benefits increased to $70.4 million in 2017 from storage requirements related to the additional volume from $65.1 million in 2016, and increased as a percentage of the Vancouver lower mainland contract. Occupancy costs revenue from 40.9% in 2016 to 41.2% in the same period of include $0.2 million related to the incremental volume 2017. The increase in the period is due to the incremental processed as a result of the acquisition of Fishers. 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. Wages and benefits include $1.8 million related to the incremental volume processed as a result of the acquisition of Fishers. Materials and supplies increased to $5.5 million and to 3.2% as a percentage of revenue, compared to $4.8 million and 3.0% in 2016, due to higher costs associated with the move to the new Toronto facility and to support the increased volumes in certain markets. Materials and supplies include $0.2 million related to the incremental volume processed as a result of the acquisition of Fishers. Linen expenses increased to $19.0 million in 2017 from $17.5 million in 2016, and increased as a percentage of revenue to 11.1% from 11.0% in 2016. The increase is a result of increased healthcare volumes from new customers. Linen expenses include $0.6 million related to the incremental volume processed as a result of the acquisition of Fishers. Repairs and maintenance increased to $5.6 million and to 3.3% as a percentage of revenues, compared to $4.9 million and 3.1% in 2016, primarily related to the timing of scheduled maintenance activities. Repairs and maintenance include $0.2 million related to the incremental volume processed as a result of the acquisition of Fishers. Utility costs increased to $10.4 million compared to $9.8 million in 2016 and remained constant as a percentage of revenue at 6.1%. The increase is primarily due to the incremental volume processed, the transition to the new Toronto facility, the new carbon levy in Ontario and Alberta, offset by improved efficiencies in the new Toronto facility. Utility costs include $0.4 million related to the incremental volume processed as a result of the acquisition of Fishers. Corporate costs increased to $10.9 million and to 6.4% as a percentage of revenues compared to $7.5 million and 4.7% in 2016, primarily due to the timing of costs and initiatives to support the Corporation’s growth and business strategies across the plants. Corporate costs include an additional $3.0 million related to the acquisition of Fishers of which $2.8 million are transaction related costs and $0.2 million relates to the ongoing operations of Fishers. Delivery costs increased to $18.3 million and to 10.7% as a percentage of revenues compared to $16.0 million and 10.0% in 2016. The increase is a result of increased business activity, higher cost of diesel, transition costs related to the new Toronto facility and temporary costs to mitigate the effects related to the lock-out of the Toronto unionized delivery drivers. Delivery costs include $1.0 million related to the incremental volume processed as a result of the acquisition of Fishers. Occupancy costs increased to $6.5 million and to 3.8% as a percentage of revenue, compared to $5.3 million and 3.3% in 2016. This increase is a result of the new Toronto facility and additional warehousing costs to address the temporary 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 quarter is related to the completion of the new Toronto facility and the acquisition of Fishers. 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. 3 2 WE ARE DEPENDABLE.L I Q U I D I T Y & C A P I TA L R E S O U R C E S In 2017 cash generated by operating activities was $18.8 issuance of Common Shares, offset by net repayment to the million, compared to $24.5 million during 2016. The change revolving credit facility, and dividends paid to Shareholders. 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 2017, cash used in investing activities was $101.3 million compared to $38.4 million in 2016. Investing activities related primarily to the acquisition of Fishers, purchase of During 2017, cash generated by financing activities was plant equipment for the new Vancouver plant, cash $93.8 million compared to $13.8 million in 2016. Financing settlement of plant equipment for the new Toronto plant, activities in 2017 consisted of net proceeds from the and the purchase of equipment in existing plants to revolving credit facility, $87.7 million net proceeds from facilitate strategic growth. CONTRACTUAL OBLIGATIONS Payments due under contractual obligations for the next five years and thereafter are as follows: PAYMENTS DUE BY PERIOD Long-term debt Operating lease commitments Utility commitments Linen purchase obligations Property, plant and equipment Total 42,780 68,276 9,676 10,232 < 1 Year - 9,588 5,827 10,232 commitments 28,748 28,748 1-3 Years 42,780 15,379 2,575 - - 4-5 Years - 11,115 1,274 - - > 5 Years - 32,194 - - - The operating lease obligations are secured by automotive equipment and plants, and are more fully described in the Corporation’s audited annual consolidated financial statements. The source of funds for these commitments will be from operating cash flow and, if necessary, the undrawn portion of the revolving credit facility. FINANCIAL POSITION Cash and cash equivalents Long-term debt Shareholders' equity Total capitalization Debt to total capitalization % (see Terminology for definition) 2017 2016 (11,276) 42,780 201,587 233,091 18.4 - 25,800 116,672 142,472 18.1 For the year ended December 31, 2017, the Corporation had a deposits related to the acquisition of equipment related debt to total capitalization ratio of 18.4%, unused borrowing across the plants. capacity of $55.6 million and has not incurred any events of default under the terms of its credit agreement. Management believes that K-Bro has the capital resources and liquidity necessary to meet its commitments, support As at December 31, 2017, the Corporation had net working its operations and finance its growth strategies. In addition capital of $32.0 million compared to its working capital to K-Bro’s ability to generate cash from operations and its position of $13.8 million at December 31, 2016. The increase in revolving credit facility, K-Bro believes it is also able to issue working capital is primarily attributable to timing differences additional Common Shares or increase its borrowing related in the cash settlement of new plant equipment, and capacity, if necessary, to provide for capital spending and sustain its property, plant and equipment. 3 3 2017 ANNUAL REPORT D I V I D E N D S #OF SHARES FISCAL PERIOD PAYMENT DATE OUTSTANDING AMOUNT PER SHARE 1 2 3 4 2017 TOTAL AMOUNT 1 2 3 4 AMOUNT PER SHARE 2016 TOTAL AMOUNT 5 6 7 January February March Q1 April May June Q2 July August September Q3 October November December Q4 YTD February 15 March 15 April 13 8,023,480 8,023,480 8,023,480 May 15 June 15 July 14 9,541,480 9,583,902 9,583,902 August 15 September 15 October 13 9,583,902 9,583,902 9,583,902 November 15 December 15 9,583,902 9,583,902 January 15 10,508,502 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 802 802 802 2,407 954 958 958 2,871 958 958 958 2,875 958 958 1,501 2,968 11,121 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 1 The total amount of dividends paid was $0.10000 per share for a total of $802,348 per month for January - March 2017; when rounded in thousands, $2,407 of dividends were paid for the quarterly period. 2 The total amount of dividends paid was $0.10000 per share for a total of $954,148 for April 2017, $958,390 for May 2017, and $958,390 for June 2017. When rounded in thousands, $2,871 of dividends were paid for the quarterly period. 3 The total amount of dividends paid was $0.10000 per share for a total of $958,390 per month for July - September 2017; when rounded in thousands, $2,875 of dividends were paid in Q3. 4 The total amount of dividends paid was $0.10000 per share for a total of $958,390 for October 2017, $958,390 for November 2017, and $1,050,850 for December 2017; when rounded in thousands, $2,968 of dividends were paid in Q4. 5 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. 6 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. 7 The total amount of dividends paid was $0.10000 per share for a total of $802,348 per month for July - September 2016; when rounded in thousands, $2,407 of dividends were paid in Q3 and Q4. For the three months ended December 31, 2017, the the Directors of the Corporation. All such dividends are Corporation declared a $0.300 per Common Share dividend discretionary. Dividends are declared payable each month in compared to $0.284 per Common Share of Distributable equal amounts to Shareholders on the last business day of Cash Flow (see Terminology). The payout ratio for the three each month and are paid by the 15th of the following month. months ended December 31, 2017 was 107.1% The Corporation’s policy is to pay dividends to Shareholders from its available distributable cash flow while considering requirements for capital expenditures, working capital, growth capital and other reserves considered advisable by The 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. 3 4 WE ARE DEPENDABLE. D I S T R I B U TA B L E C A S H F L O W (see Terminology) (all amounts in this section in $000’s except per share amounts and percentages) The Corporation’s source of cash for dividends is distributable cash flow provided by operating activities. Distributable cash flow, reconciled to cash provided by operating activities as calculated under IFRS, is presented as follows: Q4 Q3 Q2 2017 Q1 Q4 Q3 Q2 2016 Q1 Cash provided by operating activities 6,395 3,788 2,297 6,300 6,071 7,581 4,143 6,726 Deduct (add): Net changes in non-cash working capital items1 Share-based compensation Maintenance capital expenditures 2 2,942 333 349 (3,917) (4,161) 276 192 494 427 1,214 405 179 (336) 1,102 (2,625) 368 264 337 289 330 1,270 665 483 293 Distribution cash flow Dividends declared Dividends declared per share Payout ratio 3 % Weighted average shares outstanding 7,237 5,537 4,502 2,771 2,968 2,407 0.300 0.300 0.300 0.300 53.5 2,875 2,871 107.1 39.7 51.8 5,775 5,853 5,168 5,285 2,407 2,407 2,403 2,396 0.300 0.300 0.300 0.300 41.7 41.1 46.5 45.3 during the period, basic 9,718 9,511 9,104 7,979 7,965 7,957 7,952 7,946 Weighted average shares outstanding during period, diluted 9,755 9,548 9,133 7,999 8,004 7,991 7,965 7,965 Trailing-twelve months ("TTM") Distributable cash flow Dividends Payout ratio 3 % 20,047 23,051 21,667 21,298 9,624 45.2 11,121 10,560 10,092 55.5 46.6 45.8 22,081 20,908 21,426 21,731 9,613 9,602 9,591 9,579 43.5 45.9 44.8 44.1 ($ Thousands, except percentages and per share amounts) 1 Net changes in non-cash working capital is excluded from the calculation as management believes it would introduce significant cash flow variability and affect underlying cash flow from operating activities. Significant variability can be caused by such things as the timing of receipts (which individually are large because of the nature of K-Bro’s customer base and timing may vary due to the timing of customer approval, vacations of customer personnel, etc.) and the timing of disbursements (such as the payment of large volume rebates done once annually). As well, large increases in working capital are generally required when contracts with new customers are signed as linen is purchased and accounts receivable increase. Management feels that this amount should be excluded from the distributable cash flow calculation. 2 Maintenance capital expenditures include costs required to maintain or replace assets which do not have a discrete return on investment. 3 The ratio of dividends paid compared to distributable cash flow is periodically reviewed by the Board of Directors to take into account the current and prospective performance of the business and other items considered to be prudent. Payout ratio is calculated on the dividends declared divided by the distributable cash flow. 3 5 2017 ANNUAL REPORT OUTSTANDING SHARES As at December 31, 2017, the Corporation had 10,508,502 Common Shares outstanding. Basic and diluted weighted these estimates and assumptions which are based on past experience and other factors that are deemed reasonable under the circumstances. average number of Common Shares outstanding for 2017 K-Bro has hired individuals and consultants who have the were 9,083,693 and 9,114,874, respectively, (7,955,026 and skills required to make such estimates and ensures that 7,986,729, respectively, for the comparative 2016 periods). individuals or departments with the most knowledge of the In accordance with the Corporation’s long term incentive plan (the “LTI Plan”) and in conjunction with the performance of the Corporation in the 2016 fiscal year, on April 21, 2017 the Compensation, Nominating and Corporate Governance 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. Committee of the Board of Directors approved LTI K-Bro’s leadership team’s mandate includes ongoing compensation of $1.7 million (2016 – $1.6 million) to be paid development of procedures, standards and systems to as Common Shares issued from treasury. As at December 31, allow K-Bro staff to make the best decisions possible 2017, the value of the Common Shares held in trust by the and ensuring those decisions are in compliance with the LTI trustee was $2.3 million (December 31, 2016 – $1.9 million) Corporation’s policies. which was comprised of 54,880 in unvested Common Shares (December 31, 2016 – 44,634) with a nil aggregate cost (December 31, 2016 – $nil). As at March 14, 2018 there were 10,508,502 Common Shares issued and outstanding including 54,880 Common Shares issued but held as unvested treasury shares. RELATED PARTY TRANSACTIONS 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; The Corporation incurred expenses in the normal course of • provisions; business for advisory consulting services provided by Mr. • allowance for doubtful accounts; Matthew Hills, a Director of the Corporation. The amounts • segment information; and, charged are recorded at their exchange amounts and are on • business combinations. arm’s length terms. For the year ended December 31, 2017, the Corporation incurred fees totaling $138,000 (2016– $138,000). CRITICAL ACCOUNTING ESTIMATES The following discusses the most significant accounting judgments and estimates in the Corporation’s consolidated financial statements. The Corporation’s summary of significant accounting Intangible Assets policies are contained in note 2 to the audited consolidated financial statements. The Corporation’s financial statements include estimates and assumptions made by management in respect of operating results, financial conditions, contingencies, commitments, and related disclosures. Actual results may vary from these estimates. The following are, in the opinion of management, the Corporation’s most critical accounting estimates, being those that involve the most difficult, subjective and complex judgments, and/or requiring estimates that are inherently uncertain and which may change in subsequent reporting periods. K-Bro has continuously refined and documented its management and internal reporting systems to ensure that 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 accurate, timely, internal and external information is gathered income in future periods. and disseminated. Management also regularly evaluates 3 6 WE ARE DEPENDABLE.At the date of the acquisition, K-Bro must estimate the as the Chief Executive Officer. Aggregation occurs when the value of acquired intangible assets that do not have a well- operating segments have similar economic characteristics, defined market value, such as the value of customer lists and have similar (a) products and services; (b) geographic and relationships and non-competition agreements. proximity; (c) type or class of customer for their products 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. and services; (d) methods used to distribute their products or provide their services; and (e) nature of the regulatory environment, if applicable. Provisions The Corporation is required to restore the leased premises of Although intangible assets are amortized over their useful its leased plants. A provision has been recognized for the life, if the estimated value of an intangible asset has declined present value of the estimated expenditure required to remove below its amortized book value, a write-down would be any leasehold improvements and installed equipment. 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. Management regularly evaluates these estimates and judgments. Revisions to accounting estimates are recognized in the period in which the estimate is revised if The Corporation reviews goodwill at least annually and the revision affects only that period or in the period of the other non-financial assets when there is any indication that revision and future periods if the revision affects both the asset might be impaired. The Corporation applies current and future periods. 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, T E R M I N O L O G Y margins, and discount rates. At this time, K-Bro does not EBITDA believe any intangible assets have a book value in excess of their fair market value. Recognition of Rebate Liabilities 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 applying its accounting policy for volume rebates, the in making decisions relating to dividends to Shareholders. Corporation must determine whether the processing We believe EBITDA assists investors in assessing our volume thresholds will be achieved. The most difficult and performance on a consistent basis as it is an indication of subjective area of judgment is whether a contract will our capacity to generate income from operations before generate satisfactory volume to achieve minimum levels. taking into account management’s financing decisions and Management considers all appropriate facts and costs of consuming tangible and intangible capital assets, circumstances in making this assessment including which vary according to their vintage, technological historical experience, current volumetric run-rates, and currency and management’s estimate of their useful life. 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. Segment Identification Accordingly, EBITDA comprises revenues less operating costs before financing costs, capital asset and intangible asset amortization, and income taxes. 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 When determining its reportable segments, the Corporation the impact of working capital changes, capital expenditures, considers qualitative factors, such as operations that offer debt changes and other sources and uses of cash, which are distinct products and services and are considered to be disclosed in the consolidated statements of cash flows. significant by the Chief Operating Decision Maker, identified 3 7 2017 ANNUAL REPORT 3 MTHS ENDED DECEMBER 31 YEARS ENDED DECEMBER 31 2017 (1,287) 849 786 3,543 562 4,453 2016 2,197 1,011 247 2,438 428 6,321 2017 5,718 3,761 1,133 11,606 1,767 23,985 2016 11,527 4,840 739 9,235 1,790 28,131 Net earnings (loss) Add Income tax expense Finance expense Depreciation of property, plant and equipment Amortization of intangible EBITDA ($ Thousands of CDN) NON-GAAP MEASURES Adjusted EBITDA Adjusted EBITDA is a measure which has been reported in quarter in 2017, K-Bro incurred $2.8 million in transaction order to assist in the comparison of historical EBITDA to costs directly related to the acquisition of Fishers, which is current results. Adjusted EBITDA is defined as EBITDA not expected to occur in the normal course of operations. (defined above) with the exclusion of certain material items The normalization of this expense from the calculation of that are unusual in nature, infrequently occurring or not EBITDA is considered by Management to be a more accurate considered part of our core operations. The calculation of representation of continuing operations. One-time costs Adjusted EBITDA normalizes the impact of the transaction related to the Toronto plant transition, capacity constraints costs related to the acquisition of Fishers, and the related and the Toronto driver lock-out have not been adjusted for impact on EBITDA (as defined above). During the fourth in the table below. CAN UK 2017 6,961 2017 (2,508) 3 MTHS ENDED DECEMBER 31 2017 4,453 2016 6,321 CAN UK YEARS END DECEMBER 2017 26,493 2017 (2,508) 2017 23,985 2016 28,131 EBITDA Add: Transaction costs incurred in the acquisition of Fishers - 2,831 2,831 - - 2,831 2,831 - Adjusted EBITDA 6,961 323 7,284 6,321 26,493 323 26,816 28,131 ($ Thousands CDN) 3 8 WE ARE DEPENDABLE. ADJUSTED NET EARNINGS & ADJUSTED NET EARNINGS PER SHARE Adjusted net earnings and adjusted net earnings per share normalizes the impact of the transaction costs related to are measures which have been reported in order to assist in the acquisition of Fishers, and the related impact on net the comparison of historical net earnings to current results. earnings and net earnings per share. The normalization of Adjusted net earnings is defined as net earnings with the this net expense in the calculation of adjusted net earnings exclusion of certain material items that are unusual in and adjusted net earnings per share is considered by nature, infrequently occurring or not considered part of our management to be a more accurate representation of the core operations. The calculation of adjusted net earnings net earnings from core operations. Net earnings (loss) Add (net of corporate income taxes): Transaction costs incurred in the CAN 2017 1,594 UK 2017 (2,881) 2017 (1,287) 2016 2,197 CAN 2017 8,599 UK 2017 (2,881) 2017 5,718 2016 11,527 acquisition of Fishers - 2,831 2,831 - - 2,831 2,831 - Adjusted net earnings 1,594 (50) 1,544 2,197 8,599 (50) 8,549 11,527 Weighted average number of shares outstanding: Basic Diluted Adjusted net earnings per share: 9,717,890 9,717,890 9,717,890 7,964,645 9,083,693 9,083,693 9,083,693 7,955,026 9,755,183 9,755,183 9,755,183 8,003,999 9,114,874 9,114,874 9,114,874 7,986,729 Basic Diluted 0.164 (0.005) 0.163 (0.005) 0.159 0.158 0.276 0.274 0.947 0.943 (0.006) (0.005) 0.941 0.938 1.449 1.443 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 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 of how much cash generated by operations is available after Debt to total capitalization is defined by management as the capital expenditures. It shall be noted that although we total long-term debt less cash and cash equivalents divided consider this measure to be distributable cash flow, financial by the Corporation’s total shareholder’s equity. This is a and non-financial covenants in our credit facilities and measure used by investors to assess the Corporation’s dealer agreements may restrict cash from being available financial structure. 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. PAYOUT RATIO Distributable Cash Flow, Payout Ratio, Debt to Total Capitalization, Adjusted EBITDA, Adjusted net earnings, and Adjusted net earnings per share are not calculations based on IFRS and are not considered an alternative to IFRS measures in measuring K-Bro’s performance. Distributable Cash Flow, Payout Ratio, Adjusted EBITDA, Adjusted net earnings, and Adjusted net earnings per share do not have standardized meanings in IFRS and are therefore not likely to be comparable with similar measures used by other issuers. Payout ratio 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 OFF BALANCE SHEET ARRANGEMENTS As at December 31, 2017, the Corporation has not entered into any off balance sheet arrangements. 3 9 2017 ANNUAL REPORT C H A N G E S I N ACCO U N T I N G P O L I C I E S The Corporation has prepared its December 31, 2017 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 AC 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 new standard introduces expanded disclosure requirements. The Corporation has undertaken a detailed review of contracts entered with key customers and other forms of agreements with customers and has evaluated the provisions under the five-step model specified by the new guidance. In addition, the Corporation continues to monitor additional interpretive guidance related to the new standard as it becomes available, as well as comparing the conclusions made on specific interpretative issues to other peers in the packaging industry, to the extent that such information is available. The standard will be implemented by the Corporation in 2018. The Corporation expects the new revenue recognition guidance will not have a material impact on the consolidated financial statements. The Corporation currently intends to select the modified retrospective approach with results in the cumulative effect of adoption recognized at the date of initial application at January 1, 2018. • 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 has determined the adoption of the standard will not have a material impact to the consolidated 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. The standard will affect primarily the accounting for the Corporation's operating leases. The Corporation has not yet determined to what extent these commitments will result in the recognition of assets and liabilities for future payments and how this will affect EBITDA, net earnings and classification of cash flows. • 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 amendments are effective for periods beginning on or after January 1, 2018. The Corporation has determined the adoption of the standard will not have a material impact to the consolidated financial statements. 4 0 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, 2017 consist Derivative financial instruments are utilized by the of cash and cash equivalents, accounts receivable, accounts Corporation to manage cash flow risk against the volatility payable and accrued liabilities, dividends payable and long- in interest rates on its long-term debt and foreign exchange term debt. The Corporation does not enter into financial rates on its equipment purchase commitments. The instruments for trading or speculative purposes. Financial Corporation typically does not utilize derivative financial assets are either classified as available for sale, held to instruments for trading or speculative purposes. The maturity, trading or loans and receivables. Financial liabilities Corporation has a floating interest rate debt that gives rise are recorded at amortized cost. Initially, all financial assets to risks that its earnings and cash flows may be adversely and financial liabilities must be recorded on the balance impacted by fluctuations in interest rates. In order to sheet at fair value. Subsequent measurement is determined manage these risks, the Corporation may enter into interest by the classification of each financial asset and liability. rate swaps, forward contracts on foreign currency, utilities Unrealized gains and losses on financial assets that are held and textiles or option contracts. The Corporation has entered as available for sale are recorded in other comprehensive into several electrical and natural gas contracts at December income until realized, at which time they are recorded in the 31, 2017. The Corporation has examined the terms of the consolidated statement of earnings. All derivatives, including natural gas and electricity contracts and has determined embedded derivatives that must be separately accounted that these contracts will be physically settled and as such for, are recorded at fair value in the consolidated balance are not considered to be financial instruments. 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. C R I T I C A L R I S K S & U N C E R TA I N T I E S As at December 31, 2017, there are no material changes in successfully integrate and operate additional businesses; the Corporation’s risks or risk management activities since utility costs; the labour markets; the fact that our credit December 31, 2016. The Corporation’s results of operations, facility imposes numerous covenants and encumbers assets; business prospects, financial condition, cash dividends to and environmental matters. Shareholders and the trading price of the Corporation’s Common 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 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 under the Corporation’s profile at www.sedar.com. 4 1 2017 ANNUAL REPORTC O N T R O L S & 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 & PROCEDURES The Corporation has established disclosure controls and Corporation’s CEO and CFO have evaluated the effectiveness procedures to ensure that information disclosed in this of these disclosure controls and procedures for the year MD&A and the related financial statements of K-Bro was ended December 31, 2017, and the CEO and CFO have properly recorded, processed, summarized and reported concluded that these controls were operating effectively. to the Board of Directors and the Audit Committee. The INTERNAL CONTROLS OVER FINANCIAL REPORTING The CEO and CFO acknowledge responsibility for the design no evaluation of controls can provide absolute assurance of internal controls over financial reporting (“ICFR”). that all control issues, including instance of fraud, if any, Consequently the CEO and CFO confirm that the additions have been detected. These inherent limitations include, to these controls that occurred during the year ended amongst other items: (i) that managements’ assumptions December 31, 2017 did not materially affect, or are reasonably and judgments could ultimately prove to be incorrect under likely to materially affect, the Corporation’s ICFR. Based varying conditions and circumstances; or, (ii) the impact of upon their evaluation of these controls for the year ended isolated errors. December 31, 2017, subject to the limitation on scope of design as discussed below, the CEO and CFO have concluded that these controls were operating effectively. 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 A control system, no matter how well conceived and of controls is also based, in part, upon certain assumptions operated, can provide only reasonable, and not absolute, about the likelihood of future events, and there can be no assurance that the objectives of the control system are met. assurance that any design will succeed in achieving its As a result of the inherent limitations in all control systems, stated goals under all potential (future) conditions. LIMITATION ON SCOPE OF DESIGN K-Bro has limited the scope of design of DCP and our Internal Controls over Financial Reporting (ICFR) to exclude controls, policies and procedures of Fishers acquired on November 27, 2017. The scope limitation is in accordance with section 3.3(1) (b) of NI 52-109 which allows an issuer to limit its design of ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the end of the fiscal period. FISHERS Current assets Non-current assets Current liabilities Non-current liabilities (Millions) AS AT DEC 31, 2017 27.9 42.0 11.3 4.0 FISHERS Revenue Expense Income from operations (Millions) YEAR ENDED DEC 31, 2017 4.7 (7.6) (2.9) 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 »). 4 2 WE ARE DEPENDABLE. C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S YEAR ENDED DEC 31, 2017 4 3 2017 ANNUAL REPORTI N D E P E N D E N T A U D I TO R ' S R E P O R T C O N S O L I D AT E D S TAT 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 C O N S O L I D AT E D S TAT 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 C O N S O L I D AT E D S TAT E M E N T S O F C H A N G E S I N E Q U I T Y C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W N O T E S TO T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O R P O R AT E I N F O R M AT I O N 4 5 4 6 4 7 4 8 4 9 5 0 7 9 4 4 WE ARE DEPENDABLE.MARCH 14, 2018 I N D E P E N D E N T A U D I TO R ' S R E P O R T TO THE SHAREHOLDERS OF K-BRO LINEN INC. We have audited the accompanying consolidated financial An audit involves performing procedures to obtain audit statements of K-Bro Linen Inc. and its subsidiaries, which evidence about the amounts and disclosures in the comprise the consolidated statements of financial position consolidated financial statements. The procedures selected as at December 31, 2017 and December 31, 2016, and the depend on the auditor’s judgment, including the assessment consolidated statements of earnings and comprehensive of the risks of material misstatement of the consolidated income, changes in equity and cash flows for the years financial statements, whether due to fraud or error. In then ended, and the related notes, which comprise a making those risk assessments, the auditor considers summary of significant accounting policies and other internal control relevant to the entity’s preparation and fair 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 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. Our responsibility is to express an opinion on these Opinion 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. 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, 2017 and December 31, 2016 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. 4 5 CHARTERED PROFESSIONAL ACCOUNTANTS 2017 ANNUAL REPORTC O N S O L I D AT E D S TAT 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, 2017 DEC 31, 2016 ASSETS Current assets Cash and cash equivalents Accounts receivable Income tax receivable Prepaid expenses and deposits Linen in service (note 7) Property, plant and equipment (note 8) Intangible assets (note 9) Goodwill (note 10) LIABILITIES Current liabilities Accounts payable and accrued liabilities Income taxes payable Dividends payable to shareholders Long-term debt (note 12) Unamortized lease and inducements (note 14) Provisions (note 11) Deferred income taxes (note 15) SHAREHOLDERS' EQUITY Share capital Contributed surplus Retained earnings (deficit) Accumulated other comprehensive loss Contingencies and commitments (note 16) (Thousands of Canadian dollars) Approved by the Board of Directors 11,276 29,718 2,281 3,309 21,456 68,040 171,668 16,979 38,526 295,213 34,143 838 1,051 36,032 42,780 2,583 2,393 9,838 93,626 199,772 1,952 (65) (72) 201,587 295,213 ROSS S. SMITH, DIRECTOR MATTHEW HILLS, DIRECTOR The accompanying notes are an integral part of these consolidated financial statements. - 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 - 116,672 168,289 4 6 WE ARE DEPENDABLE. C O N S O L I D AT E D S TAT 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 REVENUE Expenses Wages and benefits (note 27) Linen (note 7) Utilities Delivery (note 27) Occupancy costs Materials and supplies Repairs and maintenance Corporate Loss on disposal of property, plant and equipment (note 28) EBITDA (note 28) Other expenses Depreciation of property, plant and equipment (note 8) Amortization of intangible assets (note 9) Finance expense (note 13)295,213 Earnings before income taxes Current income tax expense Deferred income tax expense Income tax expense Net earnings 36,032 Other comprehensive loss Item that may be subsequently reclassified to earnings: Foreign currency translation differences on foreign operations Total comprehensive income Net earnings per share (note 18) Basic Diluted 2017 170,559 70,352 18,998 10,393 18,292 6,460 5,537 5,627 10,879 36 146,574 23,985 11,606 1,767 1,133 14,506 9,479 2,137 1,624 3,761 5,718 (72) 5,646 0.63 0.63 2016 159,089 65,075 17,547 9,776 15,965 5,313 4,808 4,855 7,514 105 130,958 28,131 9,235 1,790 739 11,764 16,367 4,467 373 4,840 11,527 - 11,527 1.45 1.44 Weighted average number of shares outstanding: Basic Diluted 9,083,693 9,114,874 7,955,026 7,986,729 ($ Thousands of Canadian dollars, except share and per share amounts) The accompanying notes are an integral part of these consolidated financial statements. 4 7 2017 ANNUAL REPORT C O N S O L I D AT E D S TAT 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 (DEFICIT) ACCUMULATED OTHER COMPREHENSIVE LOSS TOTAL EQUITY As at January 1, 2017 109,390 1,944 Total comprehensive income - Net proceeds from common shares issued (note 17) Deferred income tax impact of share issuance (note 17) Dividends declared (note 20) Employee share based compensation expense Shares vested during the year As at December 31, 2017 (Thousands of Canadian dollars) 87,655 1,227 - - 1,500 199,772 - - - - 1,508 (1,500) 1,952 5,338 5,718 - - (11,121) - - (65) - 116,672 (72) 5,646 - - - - - 87,655 1,227 (11,121) 1,508 - (72 ) 201,587 TOTAL SHARE CAPITAL CONTRIBUTED SURPLUS RETAINED EARNINGS (DEFICIT) ACCUMULATED OTHER COMPREHENSIVE LOSS As at January 1, 2016 108,079 1,737 Total comprehensive income Dividends declared (note 20) Employee share based compensation expense - - - Shares vested during the year 1,311 As at December 31, 2016 109,390 ($ Thousands of Canadian dollars) - - 1,518 (1,311) 1,944 3,424 11,527 (9,613) - - 5,338 - - - - - - The accompanying notes are an integral part of these consolidated financial statements. TOTAL EQUITY 113,240 11,527 (9,613) 1,518 - 116,672 4 8 WE ARE DEPENDABLE. C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W Years ended December 31 OPERATING ACTIVITIES Net Earnings Depreciation of property, plant and equipment (note 8) Amortization of intangible assets (note 7) Lease inducements, net of amortization Accretion expense Employee share based compensation expense Loss on disposal of property, plant and equipment Deferred income taxes 146,574 Change in non-cash working capital items (note 21) Cash provided by operating activities 14,506 FINANCING ACTIVITIES 3 Net proceeds of revolving debt Net proceeds from issuance of common shares (note 17) Dividends paid to shareholders Cash used in financing activities INVESTING ACTIVITIES Purchase of property, plant and equipment (note 8) Proceeds from disposal of property, plant and equipment Acquisition of business (note 6) Cash provided by financing activities Ch ange in cash and cash equivalents during the year Effect of exchanges on cash Cash and cash equivalents, beginning of year Supplementary cash flow information Interest paid Income taxes paid ($ Thousands of Canadian dollars) 2017 5,718 11,606 1,767 401 42 1,508 36 1,624 22,702 (3,922) 18,780 16,980 87,655 (10,872) 93,763 (44,494) - (56,774) (101,268) 11,275 1 11,276 703 5,000 2016 11,527 9,235 1,790 1,167 - 1,518 105 373 25,715 (1,194) 24,521 23,451 - (9,610) 13,841 (38,367) 5 (38,362) - - - 631 4,062 The accompanying notes are an integral part of these consolidated financial statements. 4 9 2017 ANNUAL REPORT N O T E S TO T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (Thousands of Canadian dollars, except share and per share amounts, years ended December 31, 2017 and 2016) K-Bro Linen Inc. (the "Corporation" or “K-Bro”) is incorporated in Canada under the Business Corporations Act (Alberta). K-Bro is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile services in Scotland and the North East of England. K-Bro and its wholly owned subsidiaries, operate across Canada and the United Kingdom (“UK”), provide a range of linen services to healthcare institutions, hotels and other commercial organizations that include the processing, management and distribution of general linen and operating room linen. 1. BASIS OF PRESENTATION The consolidated financial statements of the Corporation have been prepared in accordance with International Financial Reporting Standards (IFRS) as published in the CPA Canada 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 Corporation’s operations in Canada include nine the Consolidated Financial Statements are disclosed in processing facilities and two distribution centres under Note 5. three distinctive brands, including K-Bro Linen Systems Inc., Buanderie HMR and Les Buanderies Dextraze, in ten Canadian cities: Québec City, Montréal, Toronto, Regina, Saskatoon, Prince Albert, Edmonton, Calgary, Vancouver and Victoria. 2. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all The Corporation’s operations include Fishers Topco Ltd. the periods presented, unless otherwise stated. ("Fishers") which was acquired by K-Bro on November 27, 2017. Fishers was established in 1900 and is an operator of A. Basis of Measurement laundry and linen processing facilities in Scotland, providing linen rental, workwear hire and cleanroom garment services to the hospitality, healthcare, manufacturing and pharmaceutical sectors. Fishers' client base includes major hotel chains and prestigious venues across Scotland and the North East of England. The company operates in seven cities, in Scotland and the North East of England with facilities in Cupar, Perth, Newcastle, Livingston, Inverness and Coatbridge. The consolidated financial statements have been prepared under the historical cost convention. 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 intercompany balances and transactions have been eliminated upon consolidation. The Corporation’s common shares are traded on the Toronto Stock Exchange under the symbol “KBL”. The address of the C. Cash and Cash Equivalents Corporation’s registered head office is 14903 – 137 Avenue, Edmonton, Alberta, Canada. These audited annual consolidated financial statements (the “consolidated financial statements”) were approved and authorized for issuance by the Board of Directors (“the Board”) on March 14, 2018. 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. 5 0 WE ARE DEPENDABLE.D. Linen in Service Gains and losses on disposals of property, plant and Linen in service is stated at cost less accumulated depreciation. equipment are determined by comparing the proceeds The cost is based on the expenditures that are directly with the carrying amount of the asset. attributable to the acquisition of linen, amortization commences when linen is put into service, with operating G. Impairment of Financial Assets 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 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 Revenue from linen management and laundry services is value of the estimated future cash flows, discounted using primarily based on written service agreements whereby the the instrument's original effective interest rate. The carrying Corporation agrees to collect, launder, deliver and replenish amount of the asset is reduced by this amount either directly linens. The Corporation recognizes revenue in the period in or indirectly through the use of an allowance account. which the services are provided. F. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Corporation and the cost of the item can be reliably measured. The carrying amount of a replaced part is derecognized. Repairs and maintenance are charged to the statement of earnings during the financial period in which they are incurred. 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 General and specific borrowing costs that are directly and value in use (being the present value of the expected attributable to the acquisition, construction or production of future cash flows of the relevant asset or CGU). An a qualifying asset are capitalized during the period of time impairment loss is recognized for the amount by which the that is required to complete and prepare the asset for its asset's carrying amount exceeds its recoverable amount. intended use or sale. Qualifying assets are assets that The Corporation evaluates impairment losses, other than necessarily take a substantial period of time to get ready for goodwill impairment, for potential reversals when events or their intended use or sale. circumstances warrant such consideration. 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 Building Laundry Equipment Office Equipment Delivery Equipment Computer Equipment Leasehold Improvements RATE 15 - 25 Years 7 - 20 Years 2 - 5 Years 5 - 10 Years 2 Years Lease Term 5 1 2017 ANNUAL REPORTI. Intangible Assets K. Business Combinations Intangible assets acquired in a business combination are Business combinations are accounted for using the recorded at fair value at the acquisition date. Subsequently acquisition method. The acquired identifiable net assets are they are carried at cost less accumulated amortization and measured at their fair value at the date of acquisition. The accumulated impairment losses. The major categories of intangible assets are depreciated on a straight-line basis to allocate their cost over their estimated useful lives as follows: ASSET Customer Contracts Computer software Brand RATE 1 - 20 Years 5 Years Indefinite 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 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 The tax expense for the year comprises current and deferred impairment annually in the fourth quarter, or more tax. Tax is recognized in statement of earnings, except to the frequently if events or changes in circumstances indicate a extent that it relates to items recognized in other potential impairment. comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. 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 The current income tax provision is calculated on the basis represents the lowest level within the entity at which the of the tax laws enacted or substantively enacted at the goodwill is monitored for internal management purposes. balance sheet date of the taxation authority where the Corporation operates and generates taxable income. M. Volume Rebates Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. 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. 5 2 WE ARE DEPENDABLE.Diluted EPS is calculated by adjusting the weighted average • Revenue and expense items are translated at the number of common shares outstanding for dilutive instruments. average rates of exchange, except depreciation and The number of common shares included within the weighted amortization, which are translated at the rates of average is computed using the treasury stock method. The exchange applicable to the related assets, with any Corporation’s potentially dilutive Common shares are gains or losses recognized within “finance expense” in the comprised of long-term incentive plan equity compensation consolidated statements of earnings & comprehensive granted to officers and key employees (notes 2(q)(ii)). income (loss). O. Foreign Currency Translation P. Lease Inducements The consolidated financial statements are presented in Leases in which substantially all the risks and rewards of Canadian dollars. The Corporation's operations in Canada ownership are retained by the lessor are classified as have a functional currency of Canadian dollars. The operating leases. Tenant allowances and lease inducements Corporation's operations in the UK have a functional are deferred when credited or received and amortized on a currency of pounds sterling. i. Translation of foreign entities The functional currency for each of the Corporation’s subsidiaries is the currency of the primary economic environment in which it operates. Operations with foreign functional currencies are translated into the Corporation’s presentation currency in the following manner: • Monetary and non-monetary assets and liabilities are translated at the spot exchange rate in effect at the reporting date; • Revenue and expense items (including depreciation and amortization) are translated at average rates of exchange prevailing during the period, which approximate the exchange rates on the transaction dates; • Impairment of assets are translated at the prevailing rate of exchange on the date of the impairment recognition, and; 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 10% 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 • Exchange gains and losses that result from translation are year to the eligible participants based on a percentage of recognized as a foreign currency translation difference annual salary. The amount of the award (net of withholding in accumulated other comprehensive income. ii. Translation of transactions and balances Transactions in currencies other than the entity’s functional currency are recognized at the rates of exchange prevailing at the date of the transaction as follows: • Monetary assets and liabilities are translated at the exchange rate in effect at the reporting date; obligations) is satisfied by issuing treasury shares to be held in trust by the trustee pursuant to the terms of the LTI. All awards issued under the provisions of the LTI are recorded as compensation expense. Subject to the discretion of the Compensation, Nominating and Corporate Governance Committee of the Board of Directors, one-quarter of a Participant’s grant will vest on the Determination Date (defined as the first May 15th • Non-monetary items are translated at historical exchange following the date that the Directors of the Corporation rates; and 5 3 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. 2017 ANNUAL REPORTIf a change of control occurs, all LTI Shares held by the R. Financial Instruments 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 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. or resigns on a basis which constitutes constructive Derivatives are initially recognized at fair value on the date a dismissal, the participant will be entitled to receive his or derivative contract is entered into and are subsequently her unvested common shares on the regular vesting remeasured to their fair value at the end of each reporting schedule under the LTI. 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: Financial assets Accounts receivable Financial liabilities Accounts payable and accrued liabilities Dividends payable Long-term debt CLASSIFICATION MEASUREMENT Loans and receivables Amortized cost Other liabilities Amortized cost Other liabilities Amortized cost 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. 5 4 WE ARE DEPENDABLE. 3. SIGNIFICANT ACCOUNTING POLICIES On January 1, 2017 the Corporation adopted the amendments to IAS 7, Statement of Cash Flows, and amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealized Losses. IAS 7 was amended to improve information provided to users of financial statements about an entity's financing activities. IAS 12 was amended to provide further clarity and examples in the practice around the recognition of a deferred tax asset that is related to a debt instrument measured at fair value. Adoption of the amendments did not result in any changes to the presentation or disclosures in the financial statements. On October 1, 2017 the Corporation adopted a policy to account for asset retirement obligations to restore the premises of its leased plants. Previously the effect of applying this policy was immaterial. The present value of the obligation is recognized in the period in which the obligations are incurred. The estimated present value of the obligation is the discounted expected future cash flows to settle the obligation at a pre-tax risk free interest rate that reflects current market assessments of the time value of money. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the lease or estimated life of the asset, whichever is shorter. In subsequent periods, the asset retirement obligation is adjusted for the passage of time through accretion expense, which is recognized as a finance cost and for changes in the amount or timing of the underlying future cash flows. Changes in the estimated future costs or in the discount rate applied are added to, or deducted from, the cost of the asset. Actual expenditures are charged against the provision when incurred with any difference between actual and estimated costs recorded in net earnings. 4. NEW STANDARDS & INTERPRETATIONS NOT YET ADOPTED The following standards have been issued but have not yet been applied in preparing the interim condensed 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 new standard introduces expanded disclosure requirements. The Corporation has undertaken a detailed review of contracts entered with key customers and other forms of agreements with customers and has evaluated the provisions under the five-step model specified by the new guidance. In addition, the Corporation continues to monitor additional interpretive guidance related to the new standard as it becomes available, as well as comparing the conclusions made on specific interpretative issues to other peers in the industry, to the extent that such information is available. The standard will be implemented by the Corporation in 2018. The Corporation expects the new revenue recognition guidance will not have a material impact on the consolidated financial statements other than additional disclosure requirements. The Corporation currently intends to select the modified retrospective approach with results in the cumulative effect of adoption recognized at the date of initial application at January 1, 2018. • 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 has determined the adoption of the standard will not have a material impact to the consolidated 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. The standard will affect primarily the accounting for the Corporation's operating leases. The Corporation has not yet determined to what extent these commitments will result in the recognition of assets and liabilities for future payments and how this will affect EBITDA, net earnings and classification of cash flows. 5 5 2017 ANNUAL REPORT• On June 20, 2016 the IASB issued an amendment to IFRS 2 "Share based Payment" addressing three Recognition of Rebate Liabilities In applying its accounting policy for volume rebates, the classification and measurement issues. The amendment Corporation must determine whether the processing clarifies the measurement basis for cash-settled, share volume thresholds will be achieved. The most difficult and based payments and the accounting for modifications subjective area of judgment is whether a contract will that change an award from cash-settled to equity generate satisfactory volume to achieve minimum levels. settled. It also introduces an exception to the principles Management considers all appropriate facts and in IFRS 2 that will require an award to be treated as if it circumstances in making this assessment including was wholly-equity settled, where an employer is obliged historical experience, current volumetric run-rates, and to withhold an amount for the employee's tax obligation expected future events. associated with a share based payment and pay that amount to the tax authority. The amendments are effective for periods beginning on or after January 1, 2018. The Corporation has determined the adoption of the standard will not have a material impact to the consolidated financial statements. 5. CRITICAL ACCOUNTING ESTIMATES & JUDGMENTS The preparation of the Corporation’s consolidated financial statements, in conformity with IFRS, requires management of the Corporation to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual 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. Segment identification When determining its reportable segments, the Corporation considers qualitative factors, such as operations that offer distinct products and services and are considered to be significant by the Chief Operating Decision Maker, identified as the Chief Executive Officer. Aggregation occurs when the operating segments have similar economic characteristics, and have similar (a) products and services; (b) geographic proximity; (c) type or class of customer for their products and services; (d) methods used to distribute their products or provide their services; and (e) nature of the regulatory results could differ from those estimates. environment, if applicable. The estimates and associated assumptions are based on historical experience and various other factors that are believed Provisions The Corporation is required to restore the leased premises of to be reasonable under the circumstances, the results of its leased plants. A provision has been recognized for the which form the basis of making the judgments about present value of the estimated expenditure required to carrying values of assets and liabilities that are not readily remove any leasehold improvements and installed apparent from other sources. These estimates and judgments equipment. Refer to note 11 for more details about estimation have been applied in a manner consistent with prior periods. and judgments for this provision. The following discusses the most significant accounting judgments and estimates that the Corporation has made in the preparation of the consolidated 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 9. The Corporation has estimated the fair value of CGUs to which goodwill is allocated based on value in use using Business Combinations In a business combination the Corporation acquires assets and assumes liabilities of an acquired business. Judgment is required to determine the fair values assigned to the tangible and intangible assets acquired and liabilities assumed in the acquisition. Determining fair values involves a variety of assumptions, including revenue growth rates, expected operating income and discount rates. During a measurement period, not to exceed one year, adjustments of the initial estimates may be required to finalize the fair value of assets acquired and liabilities assumed. discounted cash flow models that required assumptions Management regularly evaluates these estimates and about future cash flows, margins, and discount rates. Refer judgments. Revisions to accounting estimates are to note 10 for more details about methods and assumptions recognized in the period in which the estimate is revised if used in estimating net recoverable amount. 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. 5 6 WE ARE DEPENDABLE.6. BUSINESS ACQUISITIONS On November 27, 2017, the Corporation acquired all of the from existing cash resources and existing loan facilities, outstanding shares of Fishers Topco Limited ("Fishers"), a including an amendment to its existing revolving credit United Kingdom-based laundry and linen services company which increased the available limit from $85,000 to (the "Acquisition"). Fishers was a private company limited by $100,000 plus a $25,000 accordion. shares and is incorporated in the United Kingdom. The acquired business consisted of contracts primarily in the hospitality sector in Scotland and the North East of England, which complements the existing business of the Corporation. The business acquisition has been accounted for using the acquisition method, whereby the purchase consideration was allocated to the fair values of the net assets acquired. The Corporation financed the cash portion of the acquisition, the repayment of Fishers’ outstanding debt facilities and the payment of management fees and transaction costs In addition, on December 12, 2017 the Corporation entered into an agreement to sell common shares , the net proceeds from the share offering were used to partially pay down the indebtedness that was incurred under the Corporation’s amended revolving credit facility to initially fund the Acquisition. For further details regarding the share offering refer to note 17. The purchase price allocated to the net assets acquired, based on their estimated fair values, was as follows: Cash consideration Net assets acquired: Cash working capital Non-cash working capital, net Property, plant & equipment Leasehold inducements Asset retirement obligations Intangible assets Deferred income tax liabilities Goodwill (In Thousands) 2017 IN STERLING £ 1 2017 IN CAN $ 33,910 57,610 492 4,365 11,594 (219) (316) 9,200 (1,860) 10,654 33,910 836 7,416 19,697 (372) (537) 15,630 (3,160) 18,100 57,610 1 For the year ended December 31, 2017, $2,831 (in Sterling £1,654) in professional fees associated with the acquisition has been included in Corporate expenses. 5 7 2017 ANNUAL REPORT As part of the acquired working capital, the Corporation ended December 31, 2017 would have been $223,454 and received various accounts receivable which when valued at $8,798 respectively. These amounts have been calculated fair value of $8,307 (in Sterling £4,898) were equivalent to their using the subsidiary’s results and adjusting them for: exchange amounts, all of which are expected to be collectible. • Differences in the accounting policies between the Intangible assets acquired are made up of $4,247 (in Sterling group and the subsidiary; and £2,500) for the brand, and $11,383 (in Sterling £6,700) for the customer contracts along with related relationships and customer lists. The goodwill is attributable to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes. The acquired business contributed revenues of $4,728 (in Sterling £2,761) and net loss of $2,881 (in Sterling £1,670) to the group for the period from November 27, 2017 to December 31, 2017. • The additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2017, together with the consequential tax effects. Pro-forma net profit includes expenses which are not expected to be recurring as part of normal operations, which include transaction costs incurred in the sale of Fishers’ for $972 (in Sterling £568), and loss on disposal of assets of $1,089 If the acquisition had occurred on January 1, 2017, (in Sterling £636). consolidated pro-forma revenue and net profit for the year 7. LINEN IN SERVICE Balance, beginning of year Acquisition of business Additions Amortization charge Effect of movement in charge Balance, end of year 2017 11,511 7,234 21,718 (18,998) (9) 21,456 2016 11,279 17,779 (17,547) - 11,511 5 8 WE ARE DEPENDABLE. 8. PROPERTY, PLANT & EQUIPMENT LAND BUILDINGS LAUNDRY OFFICE DELIVERY COMPUTER EQUIP EQUIP 1 EQUIP EQUIP LEASEHOLD SPARE IMPROVEMENTS2 PARTS TOTAL YEAR ENDED, DECEMBER 31, 2016 Opening net book amount 2,454 17,964 54,316 341 Additions Disposals Depreciation charge - - - 281 21,464 - (107) 71 - (980) (6,056) (108) Closing net book amount 2,454 17,265 69,617 304 AT DECEMBER 31, 2016 Cost 2,454 19,012 110,175 710 Accumulated depreciation - (1,747) (40,558) (406) Net book amount 2,424 17,265 69,617 304 266 60 (3) (73) 250 683 (433) 250 YEAR ENDED, DECEMBER 31, 2017 Opening net book amount 2,454 17,265 69,617 304 250 Additions 4 - 20 36,599 49 Acquisitions of business 5 1,571 3,947 14,177 Disposals Depreciation charge Effect of movement in exchange rates - - (2) - (36) (990) (7,207) (108) (7) (21) - - - Closing net book amount 4,023 20,235 113,129 245 AT DECEMBER 31, 2017 17 - - (59) - 208 539 208 - (370) 377 1,279 (902) 377 377 417 - - (423) - 371 11,834 427 88,141 12,242 136 34,462 - (1,648) - - (110) (9,235) 22,428 563 113,258 32,065 563 166,941 (9,637) - (53,683) 22,428 563 113,258 22,428 563 113,258 13,141 144 50,387 - - (2,819) - - - 19,695 (36) - (11,606) - (30) 32,750 707 171,668 Cost 4,023 22,972 160,031 759 701 1,695 45,163 707 236,051 Accumulated depreciation - (2,737) (46,902) (514) (493) (1,324) (12,413) - (64,383) Net book amount 4,023 20,235 113,129 245 208 371 32,750 707 171,668 1 2 Included in laundry equipment are assets under development in the amount of $23,625 (2016 - $16,536). 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 $8,251 (2016 - $11,547). These assets are not available for service and accordingly are not presently being depreciated. 3 Total property, plant and equipment additions include amounts in accounts payable of $5,799 (2016 - $1,721). 2017 Additions include amounts from the Canadian Division of $50,387 and from the UK Division of $0. Includes amounts related to property, plant and equipment assets of the acquired business which are included in the reportable segment for the UK division. 4 5 5 9 2017 ANNUAL REPORT 9. INTANGIBLE ASSETS YEAR ENDED, DECEMBER 31, 2016 Open net book amount Additions Amortization charge Closing net book amount At December 31, 2016 Cost Accumulated amortization Net book amount YEAR ENDED, DECEMBER 31, 2017 Opening net book amount Additions Acquisition of business 1 Amortization charge Effect of movement in exchange rates Closing net book amount AT DECEMBER 31, 2017 Cost Accumulated amortization Net book amount HEALTHCARE RELATIONSHIPS HOSPITALITY RELATIONSHIP COMPUTER SOFTWARE BRAND TOTAL 3,550 - (1,043) 2,507 19,200 (16,693) 2,507 2,507 - - (1,043) - 1,464 19,200 (17,736) 1,464 1,381 - (747) 634 8,550 (7,916) 634 634 - 11,383 (724) (18) 11,275 - - - - 927 (927) - - - - - - - - - - - - - - - - 4,247 - (7) 4,240 4,931 - (1,790) 3,141 28,677 (25,536) 3,141 3,141 - 15,630 (1,767) (25) 16,979 19,915 (8,640) 11,275 927 (927) 4,240 44,282 - (27,303) - 4,240 16,979 1 Includes amounts related to intangible assets of the acquired business which are included in the reportable segment for the UK division. 6 0 WE ARE DEPENDABLE. 10. GOODWILL The Corporation performed its annual assessment for goodwill impairment for the Canadian CGU as at December 31, 2017 and for the UK division as at November 28, 2017 in accordance with its policy described in note 2(l). Goodwill has been allocated to the following CGUs: Calgary Edmonton Vancouver 2 Victoria Vancouver 1 Montréal Québec Canadian division UK division Changes due to movement in exchange rate UK division Goodwill ($ Thousands) 2017 5,382 4,346 3,413 3,208 2,630 823 654 20,456 2017 18,100 (30) 18,070 38,526 2016 5,382 4,346 3,413 3,208 2,630 823 654 20,456 2016 - - - 20,456 6 1 2017 ANNUAL REPORT “ T H E G O O D W I L L I S AT T R I B U TA B L E T O T H E W O R K F O R C E , & T H E E F F I C I E N C I E S & S Y N E R G I E S C R E AT E D B E T W E E N T H E E X I S T I N G B U S I N E S S O F T H E C O R P O R AT I O N & T H E A C Q U I R E D B U S I N E S S” 6 2 WE ARE DEPENDABLE.Canadian division In assessing goodwill for impairment at December 31, 2017, the Corporation determined that: the assets and liabilities of the CGUs evaluated have not changed significantly from the prior year at December 31, 2016; the estimated recoverable amounts of the CGUs exceeded their carrying amounts by a significant amount; no events or circumstances have changed. 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% (2016 – 3%) and a pre-tax discount rate of 10% to 12% (2016 – 11% to 13%) 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. after the acquisition that gave rise to the goodwill (note 6). The best evidence of fair value is the acquisition price paid by the Corporation which was negotiated between two unrelated parties adjusted for estimated disposal costs and any entity specific considerations. This analysis indicated the recoverable amount was not significantly different from the carrying amount of the CGU. The fair value estimate is included in level 2 of the fair value hierarchy. 11. PROVISIONS The Corporation's provision includes obligations to restore leased premises of its leased plants. A provision has been recognized for the present value of the estimated expenditure required to remove leasehold improvements and installed equipment. The Corporation estimates the undiscounted, inflation adjusted cash flows required to settle these obligations at December 31, 2017 to be $2,853. Management has estimated the present value of this obligation at December 31, 2017 to be $2,393 using an inflation rate of 1.72% and pre-tax weighted average risk- free interest rate of 0.75% to 2.5% dependent upon length of the lease term, which reflects current market assessments The recoverable amount of each CGU was in excess of its of the time value of money. These obligations are expected carrying amount. Significant CGUs with an individual to be incurred over an estimated period from 2019 to 2033. 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 these CGUs to exceed its recoverable amount. Management estimates the provision based on information from previous asset retirement obligations, as well as plant specific factors. Factors that could impact the estimated obligation are labour costs, the extent of removal work required, the number of lease extensions exercised and the inflation rate. As at December 31, 2017, if actual costs were to differ by 10% from management's estimate the obligation Based on sensitivity analysis, no reasonably possible change would be an estimated $239 higher or lower. It is possible in growth rate assumptions would cause the carrying value the estimated costs could change and changes to these to exceed the recoverable amount. A 1% change in the estimates could have a significant effect on the Corporation's discount rate would not have a significant impact on the consolidated financial statements. The Corporation recoverable amounts of CGUs. The recoverable amount of recorded the following asset retirement obligation activity each CGU is sensitive to changes in market conditions and during the year: could result in material changes. The process for determining the recoverable amount is subjective and requires management to exercise significant judgment in determining the future Balance, beginning of year growth rates and discount rates. UK Division In performing our analysis, estimated recoverable amounts were determined based on fair value less costs of disposal. Management performed its assessment for goodwill Adoption of standard Additions Acquisition of business Accretion expense Changes due to movement in exchange rates impairment on November 28, 2017, the day immediately Balance, end of year 2017 2016 - 1,302 513 537 42 (1) 2,393 - - - - - - - ($ Thousands of Canadian dollars, except share and per share amounts) 6 3 2017 ANNUAL REPORT 12. LONG-TERM DEBT AT JANUARY 1, 2016 Net proceeds from debt Closing balance at December 31, 2016 AT JANUARY 1, 2017 Net proceeds from debt Closing balance at December 31, 2017 PRIME RATE LOAN 1 2,349 23,451 25,800 25,800 16,980 42,780 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, 2021 (December 31, 2016 – July 31, 2020). 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, 2017, the combined interest rate was 3.7% (December 31, 2016 – 2.7%). During 2017 the Corporation completed an amendment to A general security agreement over all assets, a mortgage its existing revolving credit facility, which extended the against all leasehold interests and real property, insurance agreement to July 31, 2021, and increased the available limit policies and an assignment of material agreements have from $85,000 to $100,000 plus a $25,000 accordion, of been pledged as collateral. which $44,430 is utilized (including letters of credit totaling $1,650) as at December 31, 2017. Interest payments only are due during the term of the facility. Drawings under the revolving credit facility are available by way of Bankers’ Acceptances, Canadian prime rate loans, Libor of UK pounds based loans, letters of credit or standby letters of guarantee. Drawings under the revolving credit facility bear interest at a floating rate, plus an applicable margin based on certain financial performance ratios. The carrying value of borrowings approximate their fair value as the debt is based on a floating rate, the interest rate risk has not changed, and the impact of discounting is not significant. The Corporation has incurred no events of default under the terms of its credit facility agreement. 13. FINANCE EXPENSE Interest on long-term debt Accretion expense Other charges, net 14. UNAMORTIZED LEASE INDUCEMENTS Balance, beginning of year Lease inducement received Acquisition charge Amortization charge Less current portion, including in accrued liabilities 2017 2016 396 42 695 1,133 2017 2,112 408 370 (98) 2,792 372 - 367 739 2016 839 1,497 - (224) 2,112 (209) (249) 2,583 1,863 ($ Thousands of Canadian dollars, except share and per share amounts) 6 4 WE ARE DEPENDABLE. 15. INCOME TAXES 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 rated and other Total deferred tax 2017 2016 2,137 2,137 4,467 4,467 1,578 46 1,624 385 (12) 373 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 26.53% (2016 - 26.58%) Difference between Canadian and foreign tax rates Impact of substantively enacted rates and other Income tax expense 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 liability to be recovered within 12 months Deferred tax liabilities: Deferred tax asset to be recovered after more than 12 months Deferred tax liability to be recovered within 12 months Deferred tax liabilities, net 2017 2016 9,479 4,657 14,136 3,750 1 10 3,761 16,367 1,743 18,110 4,814 - 26 4,840 2017 2016 (2,368) (95) (2,463) 8,467 3,834 12,301 9,838 (601) (94) (695) 3,982 2,999 6,981 6,286 6 5 2017 ANNUAL REPORT 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: ASSET OFFERING RETIREMENT COSTS OBLIGATION AND OTHER - - - - (451) (244) (695) (238) 196 (1,227) 1 TOTAL (451) (244) (695) (238) (304) (1,227) 1 DEFERRED TAX ASSETS AT JANUARY 1, 2016 Charged (credited) to the statement of earning AT DECEMBER 31, 2016 Acquisition of business Charged (credited) to the statement of changes in earnings (500) Charged (credited) to the statement of changes in equity Related to movements in exchange rates - - At December 31, 2017 (500) (1,963) (2,463) DEFERRED TAX LIABILITIES AT JANUARY 1, 2016 Charged (credited) to the statement of earnings AT DECEMBER 31, 2016 Acquisition of business Charged (credited) to the statement of earnings Related to movements in exchange rate At December 31, 2017 ($ Thousands of Canadian dollars) LINEN IN SERVICE INTANGIBLE PROPERTY, PLANT AND ASSETS AND GOODWILL EQUIPMENT TOTAL 2,923 2,432 1,009 6,364 76 2,999 32 800 1 3,832 786 3,218 708 1,406 (1) 5,331 (245) 764 2,657 617 6,981 3,397 (282) 1,924 (1) (1) 3,138 12,301 16. CONTINGENCIES & COMMITMENTS A. Contingencies The Corporation has standby letters of credit issued as part of normal business operations in the amount of $1,650 (December 31, 2016 – $1,650) which will remain outstanding for an indefinite period of time. Grievances for unspecified damages were lodged against the Corporation in relation to labour matters. The Corporation has disclaimed liability and is defending the actions. It is not practical to estimate the potential effect of these grievances but legal advice indicates that it is not probable that a significant liability will arise. B. Commitments i. Operating leases and utility commitments At December 31, 2017, the Corporation was committed to minimum lease payments for operating leases on buildings and equipment and estimated natural gas and electricity commitments for the next five calendar years and thereafter are as follows: OPERATING LEASE COMMITMENTS UTILITY COMMITMENTS 2018 2019 2020 2021 2022 Subsequent ($ Thousands of Canadian dollars) 9,588 8,629 6,750 5,760 5,355 32,194 68,276 2018 2019 2020 2021 2022 Subsequent 5,827 1,287 1,288 1,274 - - 9,676 i. Linen purchase commitments At December 31, 2017, the Corporation was committed to linen expenditure obligations in the amount of $10,232 (December 31, 2016 – $6,926) to be incurred within the next year. ii. Property, plant and equipment commitments At December 31, 2017, the Corporation was committed to capital expenditure obligations in the amount of $28,748 (December 31, 2016 – $28,897) to be incurred within the next year and $0 (December 31, 2016 – $8,628) to be incurred in the next two years. 6 7 2017 ANNUAL REPORT 17. SHARE CAPITAL A. Authorized The Corporation is authorized to issue an unlimited number of common shares and such number of shares of one class designated as preferred shares which number shall not exceed 1/3 of the common shares issued and outstanding from time to time. B. Issued Balance, beginning of the year Common share issued under LTI Common share issuance under equity offering 2017 8,023,480 42,422 2,442,600 2016 7,985,713 37,767 - Balance, end of year 10,508,502 8,023,480 Unvested common shares held in trust for LTI 54,880 44,634 Proceeds from share issuance Underwriter fee Cost associated with share issuance Net proceeds from share issuance Deferred income tax impact of share issuance (note 17) Total impact to share capital 2017 92,218 (3,689) (874) 87,655 1,227 88,882 On April 25, 2017 the Corporation closed a bought deal On December 12, 2017 the Corporation closed a bought deal offering of 1,518,000 common shares at $38.00/share. The offering of 924,600 common shares at $37.35/share. The net net proceeds of the offering after deducting expenses of the proceeds of the offering after deducting expenses of the offering and the underwriter’s fee were $55,000. The net offering and the underwriter’s fee were $32,655. The net proceeds of the offering were used to reduce the revolving proceeds of the offering were used to partially pay down debt to nil, and to fund the build out of the Corporation’s indebtedness that was incurred under K-Bro's amended state-of-the-art facilities in Toronto and Vancouver, and for $100,000 senior secured revolving credit facility to fund the general corporate purposes. acquisition of Fishers. 18. EARNINGS PER SHARE A. Basic Basic earnings per share is calculated by dividing the net earnings attributable to equity holders of the Corporation by the weighted average number of ordinary shares in issue during the year. Net earnings Weighted average number of shares outstanding (thousands) Net earnings per share, basic 2017 2016 5,718 9,084 0.63 11,527 7,955 1.45 The basic net earnings per share calculation excludes the unvested Common shares held by the LTIP Trust. 6 8 WE ARE DEPENDABLE. 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 Net earnings per share, diluted 2017 9,083,693 31,181 9,114,874 2017 5,718 9,115 0.63 2016 7,955,026 31,703 7,986,729 2016 11,527 7,987 1.44 19. LONG-TERM INCENTIVE PLAN A trust was formed to hold equity grants issued under the terms its power over the LTIP Trust. Therefore the Corporation has of the LTI on behalf of the participants (the “LTIP Trust”). The consolidated the LTIP Trust. Compensation expense is recorded Corporation is neither a trustee of the LTIP Trust nor a direct by the Corporation in the period earned. Dividends paid by participant of the LTI; however, under certain circumstances the Corporation with respect to unvested Common shares the Corporation may be the beneficiary of forfeited Common held by the LTIP Trust are paid to LTI participants. Unvested shares held by the LTIP Trust. The Corporation has control Common shares held by the LTIP Trust are shown as a reduction over the LTIP Trust as it is exposed, or has rights, to variable of shareholders’ equity. returns and has the ability to affect those returns through Balance, beginning of year Issued during year Vested during year 2017 2016 Unvested 44,634 28,544 (18,298) Vested 375,958 13,879 18,298 Unvested 39,716 26,336 (21,418) Vested 343,109 11,431 21,418 Balance, end of year 54,880 408,135 44,634 375,958 The cost of the 54,880 (2016 – 39,716) unvested Common shares held by the LTIP Trust at December 31, 2017 was nil (2016 - nil). 20. DIVIDENDS TO SHAREHOLDERS During the year ended December 31, 2017, the Corporation capital expenditures, working capital, growth capital and other declared total dividends to shareholders of $11,121 or $1.200 reserves considered advisable by the Directors of the per share (2016 - $9,613 or $1.200 per share). Corporation. All such dividends are discretionary. Dividends 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 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. 6 9 2017 ANNUAL REPORT 21. NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS Accounts receivable Linen in service Prepaid expenses and deposits Accounts payable and accrued liabilities 1 Income taxes payable / receivable 2017 (2,961) (2,720) (309) 4,930 (2,862) (3,922) 2016 (1,296) (232) (411) 340 405 (1,194) 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 $4,078 (2016 - $3,905). 22. FINANCIAL INSTRUMENTS A. Fair value The Corporation’s financial instruments at December 31, 2017 and 2016 consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, dividends payable to shareholders, 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 The Corporation’s operations in the UK transacts in Sterling pounds £, with minimal revenue and expenses that are incurred in other foreign currencies. The Corporation is sensitive to foreign exchange risk arising from the translation of the financial statements of subsidiaries with a functional currency other than the Canadian dollar impacting other comprehensive income (loss). 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. respective carrying amount due to the floating rate nature Based on financial instrument balances as at December 31, 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’s operations in Canada are not significantly exposed to foreign currency risk as all revenues are received in Canadian dollars and minimal expenses are incurred in foreign currencies. 2017, a strengthening or weakening of $0.01 of the Canadian dollar to the U.S. dollar with all other variables held constant could have a favorable or unfavorable impact of approximately $46, respectively, on net earnings. Based on financial instrument balances as at December 31, 2017, a strengthening or weakening of $0.01 of the Canadian dollar to the Sterling pounds £, with all other variables held constant could have an unfavorable or favorable impact of approximately $54, respectively, on other comprehensive loss. 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 $428 to net earnings. 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. 7 0 WE ARE DEPENDABLE. D. Credit risk The Corporation’s financial assets that are exposed to credit contractual relationship with the customer and the nature risk consist of cash and cash equivalents and accounts of the customer which in many cases is a publicly funded receivable. The Corporation, in the normal course of business, health care entity. 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, 2017. 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 credit risk associated with cash and cash equivalents is minimized by ensuring these financial assets are held with Canadian chartered The Corporation updates its estimate of the allowance banks and Standard Chartered Bank United Kingdom. for doubtful accounts based on the evaluation of the recoverability of accounts receivable balances of each customer taking into account historic collection trends, the The aging of the Corporation’s receivables and related allowance for doubtful accounts are: DECEMBER 31, 2016 GROSS ALLOWANCE Current 31-60 days Greater than 60 days 15,470 2,730 282 18,482 - - 31 31 DECEMBER 31, 2017 GROSS ALLOWANCE Current 31-60 days Greater than 60 days 22,813 5,906 1,367 30,086 - - 368 368 NET 15,470 2,730 251 18,451 NET 22,813 5,906 999 29,718 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 Adjustment made during the year Acquisition of business Effect of movements in exchange rates Balance, end of year 2017 31 (10) 348 (1) 368 2016 30 1 - - 31 7 1 2017 ANNUAL REPORT 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: Long-term debt Operating lease commitments Utility commitments Linen purchase obligations Property, plant and equipment commitments PAYMENTS DUE PERIOD TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS > 5 YEARS 42,780 68,276 9,676 10,232 28,748 - 9,588 5,827 10,232 28,748 42,780 15,379 2,575 - - - 11,115 1,274 - - - 32,194 - - - The Corporation has a credit facility with a maturity date of and the Corporation has maintained financial ratios that July 31, 2021 (Note 12). The degree to which the Corporation is management believes are conservative compared to financial leveraged may reduce its ability to obtain additional financing covenants applicable to the credit facility. A significant portion for working capital and to finance investments to maintain of the available facility remains undrawn. 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 Management measures liquidity risk through comparisons of current financial ratios with financial covenants contained in the credit facility. 7 2 WE ARE DEPENDABLE. 23. CAPITAL MANAGEMENT The Corporation views its capital resources as the aggregate The Corporation pays a dividend which reduces its ability of its debt, shareholders’ equity and amounts available under to internally finance growth and expansion. However the its credit facility. In general, the overall capital of the Corporation availability of the Corporation’s revolving line of credit provides is evaluated and determined in the context of its financial sufficient access to capital to allow K-Bro to take advantage objectives and its strategic plan. of acquisition opportunities. The merits of the dividend are The Corporation’s objective in managing capital is to ensure periodically evaluated by the Board. sufficient liquidity to pursue its growth and expansion strategy, The primary measures used by the Corporation to monitor while taking a conservative approach towards financial its financial leverage are the ratios of Funded Debt to EBITDA leverage and management of financial risk. The Corporation’s (earnings before income taxes, depreciation and amortization) capital is composed of shareholders’ equity and long-term and Fixed Charge Coverage. EBITDA is an additional GAAP debt. The Corporation’s primary uses of capital are to finance measure as prescribed by IFRS and has been presented in its growth strategies and capital expenditure programs. the manner in which the chief operating decision maker The Corporation currently funds these requirements from assesses performance. internally-generated cash flows and interest bearing debt. The Corporation manages a Funded Debt to EBITDA ratio calculated as follows: Long-term debt, including current proportion Issued and outstanding letters of credit Cash and cash equivalents Funded debt Net earnings for the trailing twelve months Add: Income tax expense Finance expense Depreciation of property, plant and equipment Amortization of intangible assets EBITDA (note 28) Funded debt to EBITDA 2017 42,780 1,650 (11,276) 33,154 5,718 3,761 1,133 11,606 1,767 23,985 1.38x 2016 25,800 1,650 - 27,450 11,527 4,840 739 9,235 1,790 28,131 0.98x The Corporation manages a Fixed Charge Coverage calculated on a trailing twelve-month basis as follows: 2017 23,985 1,133 11,121 12,254 2.0x 2016 28,131 739 9,613 10,352 2.7x EBITDA (note28) Finance expense Dividends to shareholders Fixed charge coverage 7 3 2017 ANNUAL REPORT 24. RELATED PARTY TRANSACTIONS The Corporation transacts with key individuals from Key management personnel are defined as the executive management and with the Board who have authority and officers of the Corporation including the President and Chief responsibility to plan, direct and control the activities of the Executive Officer, Senior Vice-President, Chief Financial Corporation. The nature of these dealings were in the form Officer and one employee acting in the capacity of Managing of payments for services rendered in their capacity as Director, UK. Directors (retainers and meeting fees, including share-based payments) and as employees of the Corporation (salaries, benefits, short-term bonuses and share-based payments). During 2017 and 2016, remuneration to directors and key management personnel was as follows: Salaries and retainer fees Short-term bonus incentives Post-employment benefits Share-based payments 2017 1,487 912 45 1,290 3,734 2016 1,431 867 43 1,181 3,522 1 Renumeration to directors and key management personnel for 2016 has been restated based off the change in key management personnel as defined. 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, 2017, the Corporation incurred such fees totaling $138 (2016 – $138). 25. EXPENSES BY NATURE Wages and benefits Linen Utilities Delivery Material and supplies Occupancy costs Repair and maintenance Other expenses 2017 82,184 18,998 10,393 11,358 6,683 6,652 5,627 4,679 2016 77,154 17,547 9,776 8,793 6,083 5,505 4,855 1,245 146,574 130,958 7 4 WE ARE DEPENDABLE. 26. SEGMENTED INFORMATION The Chief Executive Officer (“CEO”) is the corporation’s chief The CEO primarily uses a measure of EBITDA to assess the operating decision-maker. The Chief Executive Officer performance of the operating segments. However, the CEO examines the Corporation’s performance and allocation of also receives information about the segments’ revenue and resources both from geographic perspective and service assets on a monthly basis. type, and has identified two reportable segments of its business: A. Segment revenue 1. Canadian division - 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. 2. UK division - provides laundry and linen services primarily to the hospitality sector with less than 10% of the revenue generated in other service sectors, through six plants and a distribution center located in North Lanarkshire, Inverness, West Lothian, North Shields, Perth, and Fife. 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. Healthcare Hospitality Canadian division Healthcare Hospitality UK division The Corporation disaggregates revenue from contracts with customers by geographic location and customer-type for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Sales between segments are carried out at arm’s length and are eliminated on consolidation. The revenue from external parties is measured in the same manner as in the consolidated statements of earnings & comprehensive income and as disclosed in Note 2(e). 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, 2019, 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 twelve months ended December 31, 2017, from these four major customers the Corporation has recorded revenue of $92,340 (2016 – $87,782), representing 54.1% (2016 – 55.2%) of total revenue. 2017 2016 116,948 48,883 165,831 10 4,718 4,728 68.6 % 28.7 % 97.2 % 0.0 % 2.8 % 2.8 % 111,384 47,705 70.0 % 30.0 % 159,089 100.0 % - - - 0.0 % 0.0 % 0.0 % Total segment revenue 170,559 100.0 % 159,089 100.0 % 7 5 2017 ANNUAL REPORT B. Segment EBITDA Segment EBITDA is calculated consistent with the presentation in the financial statements. The EBITDA is allocated based on the operations of the segment, and where the earnings and costs are generated from. Net earnings (loss) Add: Income tax expense (recovery) Finance expense Depreciation of property, plant and equipment Amortization of intangible assets Transaction costs due to acquisition of business EBITDA Net earnings (loss) Add: Income tax expense Finance expense Depreciation of property, plant and equipment Amortization of intangible assets EBITDA CANADIAN DIVISION UK DIVISION 2017 8,599 3,803 1,115 11,400 1,576 26,493 CANADIAN DIVISION 2016 11,527 4,840 739 9,235 1,790 28,131 2017 (2,881) (42) 18 206 191 2,831 323 UK DIVISION 2016 - - - - - - OTHER 2017 - - - - - (2,831) (2,831) OTHER 2016 - - - - - - 2017 5,718 3,761 1,133 11,606 1,767 - 23,985 2016 11,527 4,840 739 9,235 1,790 28,131 The Canadian division net earnings includes non-cash employee share based compensation expense of $1,508 (2016 – $1,518). C. Segment assets Segment assets are measured in the same way as in the financial The Corporation’s cash and cash equivalents are not statements. These assets are allocated based on the operations considered to be segment assets, but are managed by the of the segment and the physical location of the asset. treasury function. YEAR ENDED DECEMBER 31 Total assets Other: Cash and cash equivalents Intercompany loans Total segment assets YEAR ENDED DECEMBER 31 Total assets Total segment assets CANADIAN DIVISION UK DIVISION 2017 2017 2017 225,339 69,874 295,213 - (10,934) 214,405 CAN DIVISION 2016 168,289 168,289 (11,276) 10,934 (11,276) - 69,532 283,937 UK DIVISION 2016 - - 2016 168,289 168,289 7 6 WE ARE DEPENDABLE. D. Segment liabilities Segment liabilities are measured in the same way as in the financial statements. These liabilities are allocated based on the operations of the segment. The Corporation’s borrowings are not considered to be segment liabilities, but are managed by the treasury function. YEAR ENDED DECEMBER 31 Total liabilities Other: Long-term debt (note 12) Total segment assets YEAR ENDED DECEMBER 31 Total liabilities Other: Long-term debt (note 12) Total segment assets CANADIAN DIVISION UK DIVISION 2017 78,410 (42,780) 35,630 CANADIAN DIVISION 2016 51,617 (25,800) 25,817 2017 15,216 2017 93,626 - (42,780) 15,216 50,846 UK DIVISION 2016 - - - 2016 51,617 (25,800) 25,817 27. STATEMENTS OF EARNINGS & COMPREHENSIVE INCOME - RECLASSIFICATION The Corporation has made a reclassification that affects emphasized with the strategic growth of the Corporation. In some of the costs related to wages and benefits, and delivery order to maintain comparability, the financial statements costs. The reason is to give a true and fair view based on the for 2016 and 2017 have been adjusted. The reclassification intended function of the delivery costs, which have been does not affect EBITDA or net earnings. YEAR ENDED DECEMBER 31,2017 YEAR ENDED DECEMBER 31, 2016 After Reclassification Reclassification Reclassification Reclassification Reclassification Reclassification Before Before After Wages & benefits Delivery Total 77,286 11,358 88,644 (6,934) 6,934 - 70,352 18,292 88,644 72,247 8,793 81,040 (7,172) 7,172 - 65,075 15,965 81,040 7 7 2017 ANNUAL REPORT 28. EBITDA RECLASSIFICATION The Corporation has made a reclassification on the statement of earnings and comprehensive income, in which the “loss on disposal of property plant and equipment” has now been included as part of EBITDA, the financial statements for 2016 and 2017 have been adjusted. The reclassification does not affect net earnings. 29. SUBSEQUENT EVENTS 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, 2018 to Shareholders of record on January 31, February 28, and March 31, 2018 respectively. B. Alberta Healthcare Contract Extension On March 1, 2018, the Corporation was awarded a 1 year extension to provide laundry and linen services to Alberta Health Services Calgary. The contract extends the existing relationship between the Corporation and Alberta Health Services Calgary. “ K - B R O ’ S F O C U S I S O N P R O F I TA B L E G R O W T H I N T H E Y E A R S T O C O M E A S W E E X E C U T E O U R S T R AT E G Y O F E X PA N D I N G G E O G R A P H I C A L L Y & A D D I N G N E W S E R V I C E S F O R O U R C U S T O M E R S .” 7 8 WE ARE DEPENDABLE.BOARD OF DIRECTORS ROSS SMITH, FCPA, FCA (Chair) Corporate Director MATTHEW HILLS, MBA Managing Director LLM Capital Partners STEVEN MATYAS, BSc CEO Staples Retail Inc. LINDA MCCURDY, MBA President & CEO K-Bro Linen Systems Inc. MICHAEL PERCY, PhD Professor School of Business University of Alberta EXECUTIVE OFFICERS LINDA MCCURDY, MBA President & CEO SEAN CURTIS, Senior VP & COO (Edmonton) CORPO RAT E I NF OR MATI ON LOCATIONS - CANADA CORPORATE OFFICE VANCOUVER 2 REGINA QUÉBEC 4590 Canada Way Burnaby, BC V5G 1J6 P 604 681 3291 F 604 685 1458 730 Dethridge Bay Regina, SK S4N 6H9 P 306 757 5276 F 306 757 5280 367 Boulevard Des Chutes, Québec City QC G1E 3G1 P 418 661 6163 F 418 661 4000 John Truong Operations Manager Sean Jackson General Manager Dimitri Hamm Directeur Général Fabien Poirier Directeur Opérations CALGARY TORONTO 6969 – 55 St SE Calgary, AB T2C 4Y9 P 403 724 9001 F 403 720 2959 6045 Freemont Blvd Mississauga, ON L5R 4J3 P 416 233 5555 F 416 233 4434 Jeff Gannon General Manager Kevin Stephenson General Manager Andrew Mackeen Operations Manager Johan Sellarajah Operations Manager 14903 - 137 Ave 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 Steve Cummings General Manager VANCOUVER 1 8035 Enterprise St Burnaby, BC V5A 1V5 P 604 420 2203 F 604 420 2313 Kevin McElgunn General Manager KRISTIE PLAQUIN, CPA, CA Chief Financial Officer Peter Papagianeas Operations Manager P 780 451 3131 F 780 452 2838 Trevor Rye General Manager EDMONTON 15223 – 121 A Ave Edmonton, AB T5V 1N1 MONTRÉAL 599, Rue Simonds Sud Granby, QC J2J 1C1 P 450 378 3187 F 450 378 8245 Sylvain Tremblay Directeur Général TRANSFER AGENT & REGISTRAR AST Trust Company Calgary, Alberta AUDITORS PricewaterhouseCoopers LLP Edmonton, Alberta LEGAL COUNSEL Stikeman Elliott Toronto, Ontario McLennan Ross LLP Edmonton, Alberta PRINCIPAL BANK TD Bank Edmonton, Alberta STOCK EXCHANGE LISTING TSX: KBL LOCATIONS - UK HEAD OFFICE 3 Riggs Place, Cupar, Fife, KY155JA P 01334654033 CUPAR Prestonhall Industrial Estate, Cupar, Fife, KY154RD P 01334655220 David Emslie General Manager PERTH LIVINGSTON NEWCASTLE Inveralmond Industrial Estate, Ruthvenfield Avenue, Perth, PH13UF P 01738210106 James Dearsley General Manager INVERNESS Unit 63, Carsegate Road, Inverness, IV38EX P 01463229537 James Dearsley General Manager 2 Gregory Road, Kirkton Campus, Livingston, EH547DR P 01506426816 Joe White General Manager RIGGS PLACE 3 Riggs Place, Cupar, Fife, KY155JA P 01334654033 Joe White General Manager Unit L4, Intersect 19, High Flatworth, Tyne Tunnel Industrial Estate, North Shields, NE297UT P 01916053106 Mark Ferguson General Manager COATBRIDGE 18 Palacraig Street, Coatbridge, ML54RY P 01236449010 John Marshall General Manager NOTICE OF ANNUAL MEETING The annual meeting of Shareholders will be held at the Offices of Stikeman Elliott LLP, Calgary and Elliott Boardrooms, 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario on Wednesday, June 13, 2018 at 9:00 a.m. EDT INQUIRIES@K-BROLINEN.COM | K-BROLINEN.COM INQUIRIES@K-BROLINEN.COM | K-BROLINEN.COM 

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