ANNUAL
REPORT
2018
WE ARE
DEPENDABLE.
TABLE OF CONTENTS
2
PRESIDENT’S MESSAGE
3
CHAIRMAN’S MESSAGE
5
OFFICERS & DIRECTORS
8
FINANCIAL HIGHLIGHTS
13
MANAGEMENT’S DISCUSSION & ANALYSIS
39
CONSOLIDATED FINANCIAL STATEMENTS
1
2018 ANNUAL REPORT PRESIDENT’S MESSAGE
KEY ACHIEVEMENTS FOR 2018
Fiscal year 2018 was a year of continuous improvement as we remained committed to upgrading assets.
The impact of these improvements resulted in a network of state-of-the-art facilities that helped to
generate record annual revenue.
· The $4.7 million acquisition of 9306145 Canada Corp.
(“Linitek”) in Calgary closed in October and solidified
our position as a market leader in southern Alberta
for hospitality and healthcare laundry solutions. Since
the closing date in October 2018, we have transi-
tioned all of Linitek’s volumes into our high-efficiency
Calgary location.
·
·
In K-Bro’s largest market in Toronto, we ramped up
operations at our new plant, which opened in 2017.
Throughout the year, we grew volumes organically
through a new and existing customer base.
In Vancouver, we completed construction on a new
state-of-the-art facility, along with significant refur-
bishments to an existing facility. A third facility was
decommissioned with volumes transitioned to the
updated facilities. Based on what we have been able to
achieve at our Toronto plant, we expect similar reduc-
tions in operating costs through improved efficiencies.
· After acquiring Fishers late in 2017, our hospitality
segment benefited from a full year of operations in
the UK, as we optimized operations and increased
market share. Along with contributions to revenue and
EBITDA, Fishers has provided us with an important
home base in the UK as we continue to consider new
international markets.
· Record annual revenue of $239.5 million, an increase
of 40.4% over the previous year, and EBITDA of $29.6
million.
· K-Bro’s focus on investing for the long-term has
created a highly efficient, environmentally conscious
and cost-effective network across Canada whereby
most of our Canadian volumes are processed in
newly constructed or modernized facilities across the
country. We have also established a foothold into the
UK where we apply the same operational principles to
our facilities in Scotland and northern England.
Over the past five years, we have committed more than $200
million to building new, state-of-the-art facilities and refur-
bishing select existing locations across Canada, along with
acquiring two businesses - Linitek Inc. in Calgary, AB, and
Fishers in the UK.
We completed the last of our major capital projects with the
transition into new and refurbished facilities in Vancouver
and now shift our focus from execution to operations and
growth. We have the ability to optimize and take advantage of
the efficiencies we have worked so hard to put in place. With
increased automation through new and upgraded systems
and equipment, we aim to reduce and manage operating
costs. In 2019, we are now focused on improving margins
as we progress through the year with spending focused on
maintenance rather than major investment.
K-Bro remains committed to the fundamentals of our
business – delivering industry-leading quality and service
to our customers and deliver on commitments to our valued
customers. We remain committed to a safe culture and
environment, including our commitment to diversity and
inclusion. As always, our employees, management team
and Board of Directors thank you for your continued support
and confidence in K-Bro, and we look forward to sharing a
successful and exciting 2019 with you.
L I N D A M CC U R DY
2
WE ARE DEPENDABLE.
CHAIRMAN’S MESSAGE
2018 MARKED THE END OF K-BRO’S
MAJOR CAPITAL SPENDING PROGRAM
FOR OUR EXISTING CUSTOMER
BASE AND THE BEGINNING OF
THE RETURN TO HISTORICAL
MARGINS IN CANADA.
Significant investments made in new and upgraded facilities
have provided us with a platform to achieve market leading
operating costs in Canada. We have capacity to spare in all of
our markets at highly efficient, cost-effective facilities.
Late in the year, we acquired Calgary’s Linitek and quickly
transitioned all volumes into K-Bro’s Calgary facility. Linitek
is a great example of our approach to acquisitions, to identify
profitable and dependable operators in existing markets to
consolidate and grow our existing business.
Much like Linitek, the Fishers acquisition in the UK continues to
be a point of strength. We have focused on making operational
improvements by leveraging our size, scale and experience in
Canada and applying lessons learned. We have been able to
grow market share and are confident we can strengthen our
position further. We also view Fishers as opportunity to grow
our business overseas.
With no near-term major investments planned going into
2019 to support our existing customer base and a significantly
reduced capital spending program, we expect to return to
historical EBITDA margins for our Canadian operations during
the latter half of the year.
On behalf of the entire Company, I sincerely thank all stake-
holders for their continued interest in and support of K-Bro.
We look forward to a successful 2019.
RO S S S M I T H
3
2018 ANNUAL REPORT
SCOTLAND
VICTORIA
VANCOUVER
CALGARY
EDMONTON
REGINA
TORONTO
MONTRÉAL
QUÉBEC CITY
4
WE ARE DEPENDABLE. OFFICERS &
DIRECTORS
K-BRO IS THE LARGEST
HEALTHCARE & HOSPITALITY
LAUNDRY & LINEN PROCESSOR
IN CANADA, & 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 nine facilities and two distributions centers in
Canada, and six facilities and one distribution center in the
UK (Scotland and the North East of England).
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.
K-Bro provides the vital products and services that help
people heal, travel, live, and play. We’re helping hospi-
tals and extended care centers care for the young, old
and vulnerable in environmentally responsible ways. Our
responsibility also extends to ensuring that we have a safe
culture at K-Bro. As our society becomes more diverse, we
integrate our commitment to responsibility into our new
businesses, employees and the communities in which we
live and work.
5
“ K- B RO ’ S FO C U S O N I N V E ST I N G
FO R T H E LO N G T E R M H AS
C R E AT E D A H I G H LY E F F I C I E N T,
E N V I RO N M E N TA L LY C O N S C I O U S
A N D C O ST- E F F E CT I V E N E T W O R K
AC RO S S C A N A D A .”
- LINDA MCCURDY
President & Chief Executive Officer
2018 ANNUAL REPORT LIN D A M C C U R D Y
S E A N C U R TIS
K E VIN S T E P H E N S O N
L U C Y R E N A U T
K RIS TIE P L A Q UIN
R Y O U T A H A R A
S E A N J A C K S O N
R O S S S M IT H
S T E V E N M A T Y A S
J E F F G A N N O N
S C O T T IN G LIS
M IC H A E L P E R C Y
M
DIM IT RI H A M
A N D R E W M A C K E E N
M A T T H E W HIL L S
K E VIN M C E L G U N N
M IC H A E L J O N E S
6
WE ARE DEPENDABLE. “ 2018 M A R K E D T H E E N D O F K- B RO ’ S M A J O R C A P I TA L
S P E N D I N G P RO G R A M A N D T H E B E G I N N I N G O F T H E
R E T U R N TO H I STO R I C A L C A N A D I A N M A R G I N S .”
- ROSS SMITH Chair
7
2018 ANNUAL REPORT FINANCIAL HIGHLIGHTS
The following unaudited financial data has been derived from K-Bro’s consolidated financial statements, which have
been audited by PricewaterhouseCoopers LLP. The information set forth below should be read in conjunction with the
Management’s Discussion & Analysis, Consolidated Financial Statements and Notes sections of this Annual Report.
REVENUE UP
EBITDA UP
ADJUSTED EBITDA UP
40.4%
23.3%
10.3%
REV ENUE
EBITDA & ADJUSTED E BITDA
TOTA L SH A REHOLD ER R ETU RN
250
200
150
100
50
30
28
26
24
22
20
500
400
300
200
100
9
2
4
4
8
3
2
7
3
5
7
3
7
2
3
6
2
3
0
3
1
4
4
1
2
3
1
0
6
1
4
7
1
9
5
1
2013
2014
2015 2016
2017
2018
2013
2014
2015 2016
2017
2018
2013
2014
2015
2016
2017
2018
(In millions of Canadian dollars)
Years ended December 31
(In millions of Canadian dollars)
Years ended December 31
S&P/TSX Composite Index
K-Bro Linen Inc.
$100 investment in 2013
1 The total shareholder return graph reflects the total cumulative return, assuming reinvestment of all dividends, of $100 invested on December 31, 2013 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.
8
WE ARE DEPENDABLE. PROFILE
K-BRO PROVIDES THE VITAL
PRODUCTS & SERVICES
THAT HELP PEOPLE HEAL,
TRAVEL, LIVE & PLAY.
We are the largest healthcare and hospitality
laundry and linen processor in Canada and one
of the largest in the UK and Europe. We operate
15 facilities and three distribution centers,
including nine facilities and two distributions
centers across Canada, and six facilities and
one distribution center in the UK (Scotland and
the North East of England).
9
2018 ANNUAL REPORT SPOTLIGHT ON
VANCOUVER
In Vancouver, K-Bro completed construction of a new facility along with renovations
made to another by the close of 2018. As we continue to add business from new and
existing clients in this important market, we are in an even better position to offer
competitive pricing through increased efficiencies and reduced operating costs.
10
WE ARE DEPENDABLE. GOALS
FOR 2019
CONTINUE TO GROW
MARKET SHARE
K-Bro has strong market positions within the regions it
operates. The Canadian and UK markets are large with
significant organic and acquisition growth opportunities. We
will continue to focus on organic growth through new and
existing clients, and through strategic acquisitions.
SECURE ADDITIONAL LONG-TERM
CONTRACTS THAT OFFER STEADY,
RECURRING REVENUE
We have a solid customer base with top-tier companies in
both healthcare and hospitality with key customers retained
over long periods of time. 54% of Canada-based revenue is
from contracts that extend from 2023 and beyond for our
Canadian operations and we look to add to that base.
11
OPTIMIZE OUR VERTICALLY
INTEGRATED BUSINESS MODEL TO
CONTROL PROCESS AND COSTS
Integrated services reduce costs and strengthens competi-
tive advantage. Our state-of-the-art facilities in Toronto and
Vancouver (our two biggest markets) along with modernized
facilities across Canada increase efficiencies and reduce
operating costs.
BUILD ON TRACK RECORD
OF VALUE CREATION
THROUGH OPERATING &
FINANCIAL STRATEGY
Revenue and EBITDA have steadily grown. We take a disci-
plined and systematic approach to management of the
business, which continues to provide strong cash flow.
Our balance sheet provides the right mix of leverage with
the flexibility to grow the business. We aim to build on our
successful track record of value creation.
2018 ANNUAL REPORT Years ended December 31,
2018
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
239,534
29,581
12.3
6,169
0.59
170,559
23,985
14.1
5,718
0.63
159,089
28,236
17.7
11,527
1.44
144,537
27,140
18.8
12,068
1.52
136,440
26,241
19.2
12,198
1.72
131,202
23,317
17.8
10,336
1.47
126,390
24,517
19.4
11,149
1.59
34,825
70,203
32,008
42,780
13,766
25,800
8,670
2,349
21,717
0
9,434
19,640
8,064
5,818
Other Financial Data
Distributable cash per share
Payout ratio (%)
Price to earnings multiple (12 months trailing)
Price to EBITDA multiple (12 months trailing)
Return on shareholders’ equity (ROE)(%)
Total shareholder return, YTD (%)
Total shareholder return, 5 yrs (%)
Market capitalization
Share price:
High
Low
Close
2.36
51.1
56.7
11.9
3.1
16.2
14.5
431,794
41.71
32.00
33.44
2.20
55.5
65.6
15.7
2.8
0.9
19.3
434,211
2.76
43.5
29.3
11.9
9.9
14.9
66.4
338,190
2.69
44.8
33.5
14.9
10.7
13.1
155.0
406,872
2.85
42.0
26.9
12.5
11.1
19.4
182.9
367,023
2.61
44.2
27.0
12.0
14.5
41.2
235.2
280,976
2.72
41.8
18.1
8.2
16.5
34.8
253.8
203,613
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, except per share data and percentages)
12
WE ARE DEPENDABLE.
MANAGEMENT’S
DISCUSSION & ANALYSIS
17
INTRODUCTION
18
STRATEGY
20
OUTLOOK
21
RESULTS OF OPERATIONS
18
FOURTH QUARTER OVERVIEW
28
LIQUIDITY & CAPITAL RESOURCES
19
SELECTED ANNUAL FINANCIAL INFORMATION
19
SUMMARY OF 2018 RESULTS,
KEY EVENTS & OUTLOOK
29
DIVIDENDS
30
DISTRIBUTABLE CASH FLOW
13
2018 ANNUAL REPORT 31
OUTSTANDING SHARES
35
RECENT ACCOUNTING PRONOUNCEMENTS
31
RELATED PARTY TRANSACTION
37
FINANCIAL INSTRUMENTS
31
CRITICAL ACCOUNTING ESTIMATES
38
CRITICAL RISKS & UNCERTAINTIES
32
TERMINOLOGY
38
CONTROLS & PROCEDURES
35
CHANGES IN ACCOUNTING POLICIES
14
WE ARE DEPENDABLE. MANAGEMENT’S
DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION &
RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis
(“MD&A”) is supplemental to, and should be read in
conjunction with, the audited Consolidated Financial
Statements of K-Bro Linen Inc. (“the Corporation”) for
the years ended December 31, 2018 and 2017, as well as
the unaudited interim condensed Consolidated Financial
Statements for the periods ended March 31, 2018, June
30, 2018 and September 30, 2018. 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 infor-
mation 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 13, 2019.
In the interest of providing current holders (“Shareholders”)
of common shares of K-Bro Linen Inc. and potential inves-
tors with information regarding current results and future
prospects, our public communications often include written
or verbal forward-looking statements. Forward-looking
statements are disclosures regarding possible events,
conditions, or results of operations that are based on
assumptions about future economic conditions and courses
of action, and include future-oriented financial information.
This MD&A contains forward-looking information that
represents internal expectations, estimates or beliefs
concerning, among other things, future activities or future
operating results and various components thereof. The use
of any of the words “anticipate”, “continue”, “expect”, “may”,
“will”, “project”, “should”, “believe”, and similar expres-
sions 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 perfor-
mance 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 finan-
cial results in future periods to differ materially from the
forward-looking information contained in this MD&A. These
risks and uncertainties include, among other things: (i)
risks associated with acquisitions, including the possibility
of undisclosed material liabilities; (ii) K-Bro’s competitive
environment; (iii) utility costs, minimum wage legislation
and labour costs; (iv) K-Bro’s dependence on long-term
contracts with the associated renewal risk; (v) increased
15
2018 ANNUAL REPORT 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 that will occur; (ix) the availability of future financing
and (x) foreign exchange rates. Material factors or assump-
tions that were applied in drawing a conclusion or making
an estimate set out in the forward-looking information
include: (i) volumes and pricing assumptions; (ii) expected
impact of labour cost initiatives; (iii) frequency of one-time
costs impacting quarterly and annual financial results; (iv)
foreign exchange rates; and (v) the level of capital expendi-
tures. 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 informa-
tion included in this MD&A includes the expected annual
healthcare revenues to be generated from the Corporation’s
contracts with 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 obliga-
tion 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 compa-
rable to similar measures presented by other issuers.
Please see “Terminology” for further discussion.
16
WE ARE DEPENDABLE. INTRODUCTION
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, providing linen rental, workwear
hire and cleanroom garment services to the hospitality,
healthcare, manufacturing and pharmaceutical sectors.
The Corporation operates six sites, including one distribu-
tion center, which are located in Cupar, Perth, Newcastle,
Livingston, Inverness and Coatbridge.
INDUSTRY & MARKET
In Canada, K-Bro provides laundry and linen services to
healthcare, hospitality and other commercial customers.
Typical services offered by K-Bro include the processing,
management and distribution of general and operating
room linens, including sheets, blankets, towels, surgical
gowns and drapes and other linen. Other types of proces-
sors in K-Bro’s industry include independent privately
owned facilities (i.e. typically small, single facility compa-
nies), 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.
In the UK, Fishers provides laundry and linen services to
healthcare, hospitality and other commercial customers.
Typical services offered by Fishers include the processing,
management and distribution of general linen, workwear
and clean room garment services. Other types of proces-
sors in Fishers industry in the UK include publicly traded
companies, 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 hospi-
tality 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, K-Bro is distinctive in its
ability to deliver products and services that provide value
to our customers. Management believes that the health-
care and hospitality sectors of the laundry and linen
services industry represent a stable base of annual recur-
ring business with opportunities for growth as additional
healthcare beds and funds are made available to meet the
needs of an aging demographic.
INDUSTRY CHARACTERISTICS
& TRENDS
Management believes that the industry in which K-Bro
operates exhibits the following characteristics and trends:
Stable Industry with Moderate Cyclicality – As evidenced by
the stability in the number of approved hospital beds in
the healthcare system and hotel rooms in the hospitality
industry. The potential for step-changes in volumes and
revenues that align with contractual arrangements exists
within this industry. Service relationships are generally
formalized through contracts in the healthcare sector
that are typically long term (from five 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 alloca-
tion of scarce resources. Consequently, there are often
advantages to healthcare institutions in outsourcing the
processing of healthcare linen to private sector laundry
companies such as K-Bro because of the economies of
scale and significant management expertise that can be
17
2018 ANNUAL REPORT
provided on a more comprehensive and cost-effective
basis than customers can achieve in operating their own
laundry facilities.
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 customers include 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 greater than 250 rooms) generate between 0.5
million and 3 million pounds of linen per year. Most health-
care customers generate between 0.5 million pounds of
linen per year for a hospital and up to 41 million pounds of
linen per year for a Canadian healthcare region.
STRATEGY
K-Bro maintains the following three-part strategic focus:
Secure and Maintain Long-Term Contracts with Large
Healthcare and Hospitality Customers – K-Bro’s core
service is providing high quality laundry and linen services
at competitive prices to large healthcare and hospitality
customers under long-term contracts. K-Bro’s contracts
in the healthcare sector typically range from five to
ten years in length. Contracts in the hospitality sector
typically range from two to five years.
Extend Core Services To New Markets – Management
has demonstrated its ability to successfully expand K-Bro’s
business into new markets from its established bases.
Since 2005, K-Bro has entered four new geographic markets
across Canada, 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 oppor-
tunities will continue to arise in the near to medium-term
and that K-Bro is well-positioned for continued growth,
particularly as healthcare and hospitality
institutions
continue to increase their focus on core services and
confront pressures for capital and cost savings.
Management may in the future expand its core services
to new markets either through acquisitions or by estab-
lishing new facilities. Its choice of areas for expansion will
depend on the availability of suitable acquisition candi-
dates, 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.
FOURTH QUARTER
OVERVIEW
Revenue increased in the fourth quarter of 2018 to $59.4
million or by 25.1% compared to 2017. This increase was
due to volume from the acquisition of Fishers, acquisition
of Linitek, additional awarded healthcare volume from the
Vancouver lower mainland contract, organic growth at existing
customers, and new customers secured in existing markets.
EBITDA (see Terminology) increased in the fourth quarter
to $6.6 million from $4.5 million in 2017, which is an
increase of 48.6%. On a consolidated basis, the EBITDA
margin increased from 9.4% in 2017 to 11.1% in 2018. For
the UK division, corporate costs in the prior year include
one-time costs of $2.8 million related to transaction costs
for the acquisition of Fishers. For the Canadian division, the
EBITDA margin decreased, in line with management expec-
tations, to 10.7% from 16.3% for the comparative quarter of
2017. The change in the Canadian EBITDA margin, relates
to the Vancouver transition, rising minimum wage rates in
advance of future revenue price escalators, price increases
from renewals of out-sourced freight contracts, and higher
carbon taxes in Alberta as well as tight labour markets in
both British Columbia and Quebec, offset with the efficien-
cies gained as a result of the capital expenditures made
in Toronto. Management estimates the costs incurred
related to the Vancouver transition and other one-time
costs for the quarter were approximately $1.1 million. After
adjusting for these one-time costs, the Canadian EBITDA
margin would have been 13.2% as compared to 10.7% on
an unadjusted basis.
18
WE ARE DEPENDABLE.
SELECTED ANNUAL FINANCIAL INFORMATION
Canadian
Division
2018
UK
Division
2018
179,889
21,370
2,701
2,701
59,645
8,211
3,468
3,468
Canadian
UK
Division Division(1)
2017
2017
2017
2016(1)
165,831
26,493
8,599
8,599
4,728
(2,508)
(2,881)
(50)
170,559
23,985
5,718
8,549
159,089
28,131
11,527
11,527
2018
239,534
29,581
6,169
6,169
0.258
0.257
0.331
0.330
0.589
0.588
0.947
0.943
(0.317)
(0.316)
0.629
0.627
1.449
1.443
($ Thousands, except percentages
and per share amounts)
Revenue
EBITDA
Net earnings (loss)
Adjusted net earnings
Net earnings (loss) per share:
Basic
Diluted
Adjusted net earnings
(loss) per share:
Basic
Diluted
Total assets
Long-term debt
0.258
0.257
0.331
0.330
0.589
0.588
322,229
70,203
10,466,458
10,500,014
0.947
0.943
(0.006)
(0.005)
0.941
0.938
295,213
42,780
1.449
1.443
168,289
25,800
9,083,693
9,114,874
7,955,026
7,986,729
Weighted average number of shares outstanding:
Basic
Diluted
1 Prior to the acquisition of Fishers on November 27, 2017, K-Bro was reporting and operating as a single Canadian division.
SUMMARY OF 2018 RESULTS,
KEY EVENTS & OUTLOOK
FINANCIAL GROWTH
Net earnings were $6.2 million or $0.59 per Common Share
(basic). Cash flow from operating activities was $17.6 million
and distributable cash flow was $24.8 million. Revenue
increased in fiscal 2018 to $239.5 million or by 40.4%
compared to 2017. This increase was due to the acquisition
of Fishers, acquisition of Linitek, additional awarded health-
care volume from the Vancouver lower mainland contract,
Trillium Health Partners volume, William Osler Health
System volume, organic growth at existing customers, and
new customers secured in existing markets.
EBITDA (see Terminology) increased in 2018 to $29.6
million or by 23.3% compared to $24.0 million in 2017. The
Corporation’s EBITDA margin decreased from 14.1% in
2017 compared to 12.3% in 2018. For the UK division, corpo-
rate costs in the prior year include one-time costs of $2.8
million related to transaction costs for the acquisition of
19
Fishers. The change in the Canadian EBITDA margin relates
to the Vancouver transition, rising minimum wage rates
in advance of future revenue price escalators, as well as
tight labour markets in both British Columbia and Quebec,
increased carbon taxes and increases in out-sourced
freight costs, offset with the efficiencies gained as a result
of the capital expenditures made in Toronto as well as costs
related to the acquisition of Fishers included in Q4 2017.
Management estimates the costs incurred related to the
Vancouver transition and other one-time costs for the year
were approximately $6.7 million. After adjusting for these
one-time costs, the Canadian EBITDA margin would have
been 15.6% as compared to 11.9% on an unadjusted basis.
Near-Term and Long-Term Growth and Margin Impact
Management has completed its strategy in its Toronto
and Vancouver markets that it believes will position K-Bro
for accelerated growth in its healthcare and hospitality
2018 ANNUAL REPORT
businesses. The strategy included capital investments
to build large efficient state-of-the-art facilities with
meaningful additional capacity in Toronto and Vancouver.
In addition, K-Bro made investments to upgrade one of its
previous Vancouver plants to create a more efficient facility
with meaningful additional capacity.
These investments have been made because management
believes that new opportunities, both current and future,
justify the significant additional capacity. The construction
and/or upgrade of three of our large facilities enables us
to bid on a significant amount of additional business, but
has created margin pressure through 2017 and 2018 as
K-Bro incurred significant one-time and transition costs
associated with these large investments. Management
believes that the one-time and transition costs incurred in
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, for its Canadian operations, closer to
those achieved in 2015 as we progress through 2019.
Key events in our markets are summarized below.
Vancouver Facility Development
K-Bro has now completed the development of a new state-
of-the-art facility located in Burnaby. As at December 31,
2018, K-Bro has completed the transition to the new facility
and has incurred all the capital cost related to this facility.
The new facility has enabled K-Bro to expand current
capacity, to accommodate the additional awarded volume,
and to provide the opportunity to consolidate the healthcare
volume from its existing two Vancouver-area facilities.
In addition to investing in the new facility, K-Bro has upgraded
and replaced equipment at one of its existing Vancouver-area
facilities, which is being used to process the consolidated
hospitality volume. During the third quarter of 2018, K-Bro
completed the decommissioning of the third Vancouver-area
facility, with related assets and volume transitioned to the
existing upgraded Vancouver K-Bro facility.
K-Bro believes it will achieve significant operating efficien-
cies at both the new Vancouver plant and the upgraded
Vancouver plant. It is anticipated that transition costs
associated with both plants will continue to negatively
impact EBITDA margins over the first and second quarters
of 2019.
Business Acquisition
On October 3, 2018, the Corporation announced that it
successfully completed the previously announced $4.7
million acquisition (the “Acquisition”) of Linitek, a private
laundry and linen services company operating in Calgary,
is accounted for using the
Alberta. The acquisition
acquisition method, whereby the purchase consideration is
allocated to the net assets acquired.
Alberta Contract Award
On March 1, 2019, K-Bro was awarded a one year extension
to provide laundry and linen services to Calgary Alberta
Health Services. The contract extends the existing relation-
ship between K-Bro and Alberta Health Services Calgary.
National Contract Award
Effective January 1, 2019, K-Bro replaced its existing agree-
ment with Avendra Canada, Inc. (“Avendra”) with a new
five-year agreement pursuant to which K-Bro became an
Avendra-approved provider of laundry and linen services
across Canada, with exclusivity
in K-Bro’s markets
commencing at various stages throughout the term.
Avendra is North America’s leading hospitality procurement
and supply chain service provider. While K-Bro has existing
contracts with and services the customers initially covered
by the agreement, the new arrangement with Avendra will
strengthen its relationships with these customers and
secure K-Bro’s position with them as well as open up new
opportunities in the hospitality segment. These existing
customers currently represent approximately 24% of
K-Bro’s Canadian hospitality revenue for the year ended
December 31, 2018.
OUTLOOK
“The Linitek acquisition is a great example of our strategy
to acquire high-quality operators in order to grow market
share in key regions, and to focus on operations that are
immediately accretive to earnings,” said Linda McCurdy,
President and Chief Executive Officer at K-Bro. “We believe
the acquisition adds significant and immediate value to
shareholders by strengthening our competitive position and
growing market share in Calgary.”
“With the successful transition to our newly constructed
state-of-the-art Vancouver facility, we view 2018 as a
transition year that have decreased margins, however going
forward will enable us to realize additional efficiencies,
increase capacity and increase market share. We believe
that the one-time and transition costs incurred in 2018 will
position the company to achieve more growth and a lower
cost structure into the future and that the company will
return to normalized margins closer to those achieved in
2015 as it progresses through 2019 for its Canadian opera-
tions. We remain excited about our growth plans and are
confident in our ability to continue to provide value to our
customers and our Shareholders.”
20
WE ARE DEPENDABLE. K-Bro’s focus is on profitable growth in the years to come
as we execute our strategy of expanding geographically and
adding new services for our customers. K-Bro is committed
to building value for our shareholders, our customers and
our employees.
K-Bro also has several proposals pending and has entered
into discussions with potential new customers. In addition,
K-Bro continues to seek potential acquisition candidates.
Neither the timing nor the degree of likelihood of success
of any of these proposals or acquisitions can be stated with
any degree of accuracy.
EFFECTS OF ECONOMIC
UNCERTAINTY
K-Bro believes that it is positioned to withstand market
volatility and uncertainty given that:
· Approximately 53.8% of the revenues were from
large publicly funded Canadian healthcare customers
which are geographically diversified across multiple
provinces; and
· At December 31, 2018, K-Bro had unutilized borrowing
capacity of $28.6 million or 28.6% of the revolving credit
line available.
RESULTS OF OPERATIONS
KEY PERFORMANCE DRIVERS
K-Bro’s key performance drivers focus on growth, profitability, stability and cost containment in order to maintain dividends
and maximize Shareholder value. The following table outlines our results on a period-to-period comparative basis in each
of these areas:
($ Thousands, except percentages and per share amounts) Canadian
Division
Q4 2018
Indicator
Category
UK
Division
Q4 2018
Growth
Profitability
Stability
EBITDA(1)
Adjusted EBITDA(4)
Revenue
Distributable cash flow
-30.5%
-30.5%
5.3%
171.0%
451.4%
204.0%
EBITDA(1)
EBITDA margin
Adjusted EBITDA(4)
Adjust ed EBITDA margin(2)
Net earnings (loss)
Adjusted net earnings (loss)(5)
4,838
10.7%
4,838
10.7%
32
32
1,781
12.4%
1,781
12.4%
1,020
1,020
Debt to total capitalization(2)
Unutilized line of credit
Cash on hand
Payout ratio
Dividends declared per share
Cost containment Wages and benefits
Utilities
Expenses included in EBITDA
43.3%
6.6%
89.3%
36.3%
7.9%
87.6%
21
Canadian
Division
Q4 2017
UK
Division(3)
Q4 2017
Q4 2017
10.1%
10.1%
9.0%
6,961
16.3%
6,961
16.3%
1,594
1,594
(2,508)
-53.0%
323
6.8%
(2,881)
(50)
41.7%
5.7%
83.7%
37.4%
7.7%
153.0%
-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
41.3%
5.9%
90.6%
Q4 2018
48.6%
-9.1%
25.1%
109.7%
6,619
11.1%
6,619
11.1%
1,052
1,052
26.4%
28,647
2,827
54.5%
0.300
41.6%
6.9%
88.9%
2018 ANNUAL REPORT
($ Thousands, except percentages and per share amounts) Canadian
Division
YTD 2018
Indicator
Category
UK
Division
YTD 2018
YTD 2018
Canadian
Division
YTD 2017
UK
Division(3)
YTD 2017
YTD 2017
Growth
Profitability
Stability
EBITDA(1)
Adjusted EBITDA(4)
Revenue
Distributable cash flow
-19.3%
-19.3%
8.5%
427.4%
2442.1%
1161.5%
EBITDA(1)
EBITDA margin
Adjusted EBITDA(4)
Adjusted EBITDA margin(4)
Net earnings (loss)
Adjusted net earnings (loss)(5)
21,370
11.9%
21,370
11.9%
2,701
2,701
8,211
13.8%
8,211
13.8%
3,468
3,468
Debt to total capitalization(2)
Unutilized line of credit
Cash on hand
Payout ratio
Dividends declared per share
Cost containment Wages and benefits
Utilities
Expenses included in EBITDA
43.7%
5.9%
88.1%
36.0%
7.2%
86.2%
23.3%
10.3%
40.4%
23.5%
29,581
12.3%
29,581
12.3%
6,169
6,169
26.4%
28,647
2,827
51.1%
1.200
41.7%
6.3%
87.7%
-5.8%
-5.8%
4.2%
26,493
16.0%
26,493
16.0%
8,599
8,599
(2,508)
-53.0%
323
6.8%
(2,881)
(50)
41.4%
6.0%
84.0%
37.4%
7.7%
153.0%
-14.7%
-4.7%
7.2%
-9.2%
23,985
14.1%
26,816
15.7%
5,718
8,549
18.4%
55,570
11,276
55.5%
1.200
41.2%
6.1%
85.9%
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 Debt to total capitalization is defined as total debt divided by total capital. See Terminology.
3 Prior to the acquisition of Fishers on November 27, 2017, K-Bro was reporting and operating as a single Canadian division.
4 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 opera-
tions. See Terminology for a complete description of the adjusted items.
5 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.
22
WE ARE DEPENDABLE.
QUARTERLY FINANCIAL
INFORMATION - CONSOLIDATED
Historically, the Corporation’s financial and operating
results, particularly as it relates to Fishers, are stronger in
the second and third quarters as a result of seasonality and
the associated higher hospitality volumes. Other fluctuations
in net income from quarter-to-quarter can also be attributed
to hiring and labour cost trends, timing of linen purchases,
utility costs, timing of repairs and maintenance expendi-
tures, business development, capital spending patterns and
changes in corporate tax rates and income tax expenses.
The following table provides certain selected consolidated
financial and operating data prepared by K-Bro manage-
ment for the preceding eight quarters:
Quarterly Financial Information
- Consolidated
($ Thousands, except percentages
and per share amounts)
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue(4)
34,469
24,971
59,440
33,378
30,594
63,972
33,868
26,870
60,738
33,601
21,783
55,384
31,936
15,573
47,509
29,021
14,577
43,598
28,499
11,995
40,494
28,053
10,905
38,958
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
Adjusted EBITDA(2)
Adjusted EBITDA as a % of revenue
(Adjusted EBITDA margin)
52,821
6,619
11.1%
6,619
11.1%
55,662
8,310
13.0%
8,310
13.0%
52,286
8,452
13.9%
8,452
13.9%
49,184
6,200
11.2%
6,200
11.2%
Depreciation and amortization
Finance expense (recovery)
Earnings before income taxes
Income tax expense
Net earnings (loss)
Net earnings (loss) as a % of revenue
Basic earnings (loss) per share
Diluted earnings (loss) per share
Adjusted net earnings(3)
Basic adjusted earnings (loss) per share(3)
Diluted adjusted earnings (loss) per share(3)
5,252
866
501
(551)
1,052
1.8%
0.100
0.100
1,052
0.100
0.100
5,069
857
2,384
498
1,886
2.9%
0.180
0.179
1,886
0.180
0.179
4,271
716
3,465
881
2,584
4.3%
0.247
0.246
2,584
0.247
0.246
4,283
876
1,041
394
647
1.2%
0.062
0.062
647
0.062
0.062
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
8,111
18.6%
8,111
18.6%
33,837
6,657
16.4%
6,657
16.4%
34,194
4,764
12.2%
4,764
12.2%
3,213
101
4,797
1,379
3,418
7.8%
0.359
0.358
3,418
0.359
0.358
3,246
61
3,350
1,013
2,337
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
Total assets
Total long-term financial liabilities
322,229
87,831
316,968
84,436
317,051
86,675
312,193
72,189
295,213
57,594
199,452
9,205
195,957
8,407
180,583
41,134
Funds provided by
(used in) operations
Long-term debt
Dividends declared per share
7,799
70,203
0.300
9,759
67,045
0.300
(4,629)
70,505
0.300
4,625
56,356
0.300
6,395
42,780
0.300
3,788
-
0.300
2,297
-
0.300
6,300
32,363
0.300
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 opera-
tions. 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 For the UK Division, during Q3 2018, management revised the classification between healthcare revenue and hospitality revenue, and as a result the comparative figures for Q2 2018, Q1 2018,
and Q4 2017 have been restated to account for the revised classifications.
23
2018 ANNUAL REPORT
QUARTERLY FINANCIAL INFORMATION - CANADIAN DIVISION
The following table provides certain selected consolidated financial and operating data prepared by K-Bro management for
the preceding eight quarters:
Quarterly Financial Information
- Canadian Division
($ Thousands, except percentages
and per share amounts)
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue
32,912
12,155
45,067
31,818
15,054
46,872
32,193
12,465
44,658
32,010
11,282
43,292
31,375
11,406
42,781
29,021
14,577
43,598
28,499
11,995
40,494
28,053
10,905
38,958
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
Adjusted EBITDA(2)
Adjusted EBITDA as a % of revenue
(Adjusted EBITDA margin)
40,229
4,838
10.7%
4,838
10.7%
41,758
5,114
10.9%
5,114
10.9%
38,758
5,900
13.2%
5,900
13.2%
37,774
5,518
12.7%
5,518
12.7%
35,820
6,961
16.3%
6,961
16.3%
35,487
8,111
18.6%
8,111
18.6%
33,837
6,657
16.4%
6,657
16.4%
34,194
4,764
12.2%
4,764
12.2%
Net earnings
Net earnings as a % of revenue
Basic earnings per share
Diluted earnings per share
Adjusted net earnings(3)
Basic adjusted earnings per share(3)
Diluted adjusted earnings per share(3)
32
0.1%
0.003
0.003
32
0.003
0.003
200
0.4%
0.019
0.019
200
0.019
0.019
1,421
3.2%
0.136
0.135
1,421
0.136
0.135
1,048
2.4%
0.100
0.100
1,048
0.100
0.100
1,594
3.7%
0.164
0.163
1,594
0.164
0.163
3,418
7.8%
0.359
0.358
3,418
0.359
0.358
2,337
5.8%
0.257
0.256
2,337
0.257
0.256
1,250
3.2%
0.157
0.156
1,250
0.157
0.156
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 opera-
tions. 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.
24
WE ARE DEPENDABLE.
QUARTERLY FINANCIAL INFORMATION - UK DIVISION
The following table provides certain selected consolidated financial and operating data prepared by K-Bro management for
the preceding eight quarters:
Quarterly Financial Information - UK Division
(in reporting currency Canadian $)
($ Thousands, except percentages
and per share amounts)
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue(4)
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
Adjusted EBITDA(2)
Adjusted EBITDA as a % of revenue
(Adjusted EBITDA margin)
Net earnings (loss)
Net earnings (loss) as a % of revenue
Basic earnings (loss) per share
Diluted earnings (loss) per share
Adjusted net earnings (loss)(3)
Basic adjusted earnings (loss) per share(3)
Diluted adjusted earnings (loss) per share(3)
1,557
12,816
14,373
12,592
1,781
12.4%
1,781
12.4%
1,020
7.1%
0.097
0.097
1,020
0.097
0.097
1,560
15,540
17,100
1,675
14,405
16,080
13,904
3,196
18.6%
3,196
18.6%
13,528
2,552
15.9%
2,552
15.9%
1,686
9.9%
0.161
0.160
1,686
0.161
0.160
1,163
7.2%
0.111
0.111
1,163
0.111
0.111
1,591
10,501
12,092
11,410
682
5.6%
682
5.6%
(401)
-3.3%
(0.038)
(0.038)
(401)
(0.038)
(0.038)
561
4,167
4,728
7,236
(2,508)
-53.1%
323
6.8%
(2,881)
-60.9%
(0.296)
(0.295)
(50)
(0.005)
(0.005)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25
2018 ANNUAL REPORT
Quarterly Financial Information - UK Division
(in reporting currency Sterling £)
($ Thousands, except percentages
and per share amounts)
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue(4)
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
Adjusted EBITDA(2)
Adjusted EBITDA as a % of revenue
(Adjusted EBITDA margin)
Net earnings (loss)
Net earnings (loss) as a % of revenue
Basic earnings (loss) per share
Diluted earnings (loss) per share
Adjusted net earnings (loss)(3)
Basic adjusted earnings (loss) per share(3)
Diluted adjusted earnings (loss) per share(3)
917
7,550
8,467
7,413
1,054
12.4%
1 ,054
12.4%
600
7.1%
0.057
0.057
600
0.057
0.057
916
9,077
9,993
8,139
1,854
18.6%
1,854
18.6%
972
9.7%
0.093
0.092
972
0.093
0.092
952
8,201
9,153
7,700
1,453
15.9%
1,453
15.9%
662
7.2%
0.063
0.063
660
0.063
0.063
903
5,963
6,866
6,480
386
5.6%
386
5.6%
(229)
-3.3%
(0.022)
(0.022)
(229)
(0.022)
(0.022)
328
2,433
2,761
4,227
(1,466)
-53.1%
188
6.8%
(1,670)
-60.5%
(0.172)
(0.171)
(16)
(0.002)
(0.002)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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 opera-
tions. See Terminology for a complete description of the adjusted items.
3 Adjusted net loss 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 For the UK Division, during Q3 2018, management revised the classification between healthcare revenue and hospitality revenue, and as a result the comparative figures for Q2 2018, Q1 2018,
and Q4 2017 have been restated to account for the revised classifications.
5 For the UK Division, Q1 2018 includes $170k (98k GBP) in transaction costs related to the acquisition of Fishers.
REVENUE, EARNINGS & EBITDA
For the year ended December 31, 2018, K-Bro’s consoli-
dated revenue increased by 40.4% to $239.5 million from
$170.6 million in the comparative period. This increase
was due to the acquisition of Fishers, acquisition of Linitek,
additional awarded healthcare volume from the Vancouver
lower mainland contract signed in 2016, Trillium Health
Partners volume, William Osler Health System volume,
organic growth at existing customers, and new customers
secured in existing markets. In 2018, approximately 56.5%
of K-Bro’s consolidated revenue was generated from
healthcare institutions, which is lower compared to 68.9%
in 2017, primarily related to Fishers’ volume being concen-
trated within the hospitality sector.
Consolidated EBITDA increased in the year to $29.6 million
from $24.0 million in 2017, which is an increase of 23.3%.
The consolidated EBITDA margin decreased to 12.3% in
2018 compared to 14.1% in 2017. The change in EBITDA
and margin is primarily associated with one-time acquisi-
tion costs related to Fishers in 2017, the efficiencies gained
as a result of the capital expenditures made in Toronto,
volume related to the acquisition of Fishers, and acquisi-
tion of Linitek, offset by Vancouver transition costs, tight
labour markets in British Columbia and Quebec, and rising
minimum wage rates the timing of which is not offset by
price increases. Management estimates the one-time
costs incurred related to the Vancouver transition for the
year were approximately $6.7 million. After adjusting for
these one-time costs, the Canadian EBITDA margin would
have been 15.6% as compared to 12.3% on an unadjusted
basis and the consolidated EBITDA margin would have been
15.2% as compared to 12.3% on an unadjusted basis.
Net earnings increased by $0.5 million or 7.9% from $5.7
million in 2017 to $6.2 million in 2018, and net earnings as
a percentage of revenue decreased by 0.8% to 2.6% in 2018
from 3.4% in 2017. This increase in net earnings is primarily
due to the flow through items in EBITDA discussed above,
26
WE ARE DEPENDABLE.
higher finance costs related with the revolving credit facility,
higher depreciation of property, plant and equipment
associated with new plant builds and the acquisition of
Fishers, offset by a lower income tax expense.
OPERATING EXPENSES
Wages and benefits increased to $100.0 million and to 41.7%
as a percentage of revenues compared to $70.4 million and
41.2% in 2017, this includes $21.5 million related to our
UK Division. The remaining increase in wages and benefits
in the period is due to the incremental labour required
to process higher volumes, one-time costs related to the
Vancouver transition, higher labour costs from incremental
increases in the wage rate, escalating minimum wage rates,
and tight labour markets in British Columbia and Quebec.
Linen expenses increased to $26.7 million in 2018 from $19.0
million in 2017, and remained constant as a percentage of
revenue at 11.1%, this includes $6.8 million related to our
UK Division. The remaining increase is a result of increased
healthcare volumes from new Canadian customers and the
associated linen costs.
Utility costs increased to $15.0 million compared to $10.4
million in 2017 and increased as a percentage of revenue
to 6.3% in 2018 from 6.1% in 2017, this includes $4.3
million related to our UK Division. The remaining variance
is primarily due to incremental volume processed, transi-
tion of our Vancouver facilities, higher commodity costs in
British Columbia as a result of a temporary natural gas
supply shortage, and higher carbon levy rates in Alberta,
offset by improved efficiencies in the new Toronto facility.
Delivery costs increased to $30.7 million and to 12.8%
as a percentage of revenues compared to $18.3 million
and 10.7% in 2017, this includes $10.9 million related
to our UK Division. The remaining increase is a result of
increased business activity, price increases from renewals
of out-sourced freight contracts, transition of our Vancouver
facilities, higher carbon levy rates in Alberta, and higher cost
of diesel and external freight charges tied to diesel price.
Occupancy costs increased to $9.9 million and to 4.1% as a
percentage of revenue, compared to $6.5 million and 3.8%
in 2017, this includes $2.6 million related to our UK Division.
The remaining increase is a result of 2018 being reflective of
a full year of the occupancy costs related to the new Toronto
facility and additional occupancy costs in Vancouver related
to our plant build out strategy.
Materials and supplies increased to $8.5 million and to
3.5% as a percentage of revenue, compared to $5.5 million
and 3.2% in 2017, this includes $2.6 million related to our
UK Division. Materials and supplies as a percent of revenue
increased primarily related to higher costs due to the
transition of our Vancouver facilities and certain one-time
set-up costs that were required.
Repairs and maintenance increased to $8.2 million and
to 3.4% as a percentage of revenues, compared to $5.6
million and 3.3% in 2017, this includes $1.3 million related
to our UK Division. Changes in repairs and maintenance
are primarily due to the timing of scheduled maintenance
activities and one-time costs related to the transition of our
Vancouver facilities.
Corporate costs increased to $11.0 million and to 4.6% as
a percentage of revenues compared to $10.9 million and
6.4% in 2017, this includes $1.4 million related to our UK
Division. Changes in corporate costs are primarily related to
initiatives to support the Corporation’s growth and business
strategies across the plants. Corporate costs in the prior
year include $2.8 million related to transaction costs for the
acquisition of Fishers.
Depreciation of property, plant and equipment and amorti-
zation of intangible assets represents the expense related
to the appropriate matching of certain K-Bro 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 and Vancouver
facilities 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.
27
2018 ANNUAL REPORT LIQUIDITY & CAPITAL RESOURCES
In 2018, cash generated by operating activities was $24.8 million with a debt to total capitalization of 26.4%. Management
believes the unutilized balance of $28.6 million with respect to its revolving credit facility is sufficient for the Corporation’s
operations in the foreseeable future. However, management intends to continually assess its opportunities to maintain
a conservative amount of leverage and balance sheet flexibility in the short and long-term basis in order to ensure that
sufficient capital is available for future growth needs.
During 2018, cash generated by financing activities was $14.8 million compared to $93.8 million in 2017. Financing activi-
ties in 2018 consisted of net proceeds from the revolving credit facility, offset by dividends paid to shareholders, compared
to 2017 which included $87.7 million net proceeds from issuance of Common Shares.
During 2018, cash used in investing activities was $40.9 million compared to $101.3 million in 2017. Investing activities
related primarily to the purchase of plant equipment for the new Vancouver plant, the purchase of Linitek, and the purchase
of equipment in existing plants to facilitate strategic growth.
CONTRACTUAL OBLIGATIONS
Payments due under contractual obligations for the next five years and thereafter are as follows:
($ Thousands)
Payments Due by Period
Total
1–3 Years
< 1 Year
Long-term debt
Operating lease commitments
Utility commitments
Linen purchase obligations
Property, plant and equipment commitments
70,203
61,188
8,422
9,314
1,622
-
9,181
5,860
9,314
1,622
70,203
13,685
2,562
-
-
4–5 Years
> 5 Year
-
10,379
-
-
-
-
27,943
-
-
-
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
($ Thousands, except percentages)
2018
2017
Cash and cash equivalents
Long-term debt
Shareholders’ equity
Total capitalization
Debt to total capitalization
(see Terminology for definition)
(2,827)
70,203
198,660
266,036
26.4%
(11,276)
42,780
201,587
233,091
18.4%
For the year ended December 31, 2018, the Corporation had
a debt to total capitalization of 26.4%, unused revolving credit
facility of $28.6 million and has not incurred any events of
default under the terms of its credit facility agreement.
As at December 31, 2018, the Corporation had net working
capital of $34.8 million compared to its working capital
position of $32.0 million at December 31, 2017. The increase
in working capital is primarily attributable to timing differ-
ences related to the cash settlement of new plant equip-
ment, timing of income tax recovery, deposits related to
the acquisition of equipment related across the plants, and
timing of cash receipts from customers.
Management believes that K-Bro has the capital resources
and liquidity necessary to meet its commitments, support
its operations and finance its growth strategies. In addition
to K-Bro’s ability to generate cash from operations and
its revolving credit facility, K-Bro believes it is also able to
issue additional shares or increase its borrowing capacity,
if necessary, to provide for capital spending and sustain its
property, plant and equipment.
28
WE ARE DEPENDABLE.
DIVIDENDS
Fiscal Period
Payment Date
# of Shares
Outstanding
2018
Amount Total Amount
(1)(3)(5)(7)
Per Share
Amount
Per Share
2017
Total
(2)(4)(6)(8)
January
February
March
Q1
April
May
June
Q2
July
August
September
Q3
October
November
December
Q4
YTD
February 15
March 15
April 13
May 15
June 15
July 13
August 15
September 14
October 15
November 15
December 14
January 15
10,508,502
10,508,502
10,508,502
10,508,502
10,559,936
10,559,936
10,559,936
10,559,936
10,559,936
10,559,936
10,559,936
10,559,936
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
1,051
1,051
1,051
3,153
1,051
1,056
1,056
3 ,163
1,056
1,056
1,056
3,168
1,056
1,056
1,056
3,168
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
802
802
802
2,407
954
958
958
2,871
958
958
958
2,875
958
958
1,051
2,968
1.20000
12,652
1.20000
11,121
1 The total amount of dividends declared was $0.10000 per share for a total of $1,050,850 per month for January - March 2018; when rounded in thousands, $3,153 of dividends were declared for the
quarterly period.
2 The total amount of dividends declared 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 declared for
the quarterly period.
3 The total amount of dividends declared was $0.10000 per share for a total of $1,050,850 per month for April - May 2018, and $1,055,994 for June 2018. When rounded in thousands, $3,163 of
dividends were declared for the quarterly period.
4 The total amount of dividends declared 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 declared for the quarterly period.
5 The total amount of dividends declared was $0.10000 per share for a total of $1,055,994 per month for July - September 2018; when rounded in thousands, $3,168 of dividends were declared in Q3.
6 The total amount of dividends declared 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 declared in Q3.
7 The total amount of dividends declared was $0.10000 per share for a total of $1,055,994 per month for October - December 2018; when rounded in thousands, $3,168 of dividends were declared in Q4.
8 The total amount of dividends declared 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 declared in Q4.
For the year ended December 31, 2018, the Corporation
declared a $1.200 per Common Share dividend compared to
$2.359 per Common Share of Distributable Cash Flow (see
Terminology). The actual payout ratio was 51.1%
by the Directors of the Corporation. All such dividends are
discretionary. Dividends are declared payable each month in
equal amounts to Shareholders on the last business day of
each month and are paid by the 15th of the following month.
The Corporation’s policy is to pay dividends to Shareholders
from its available distributable cash flow while considering
requirements for capital expenditures, working capital,
growth capital and other reserves considered advisable
The Corporation designates all dividends paid or deemed
to be paid as Eligible Dividends for purposes of subsection
89(14) of the Income Tax Act (Canada), and similar provin-
cial and territorial legislation, unless indicated otherwise.
29
2018 ANNUAL REPORT
DISTRIBUTABLE CASH FLOW
(see Terminology) (all amounts in this section in $000’s except per share amounts and percentages)
The Corporation’s source of cash for dividends is distributable cash flow provided by operating activities. Distributable
cash flow, reconciled to cash provided by operating activities as calculated under IFRS, is presented as follows:
($ Thousands, except percentages
and per share amounts)
Cash provided by (used in)
operating activities
Deduct (add):
Net changes in non-cash
working capital items(1)
Share-based compensation expense
Maintenance capital expenditures(2)
Q4
Q3
Q2
2018
Q1
Q4
Q3
Q2
2017
Q1
7,799
9,759
(4,629)
4,625
6,395
3,788
2,297
6,300
1,082
1,176
(12,167)
(1,471)
2,942
(3,917)
(4,161)
1,214
380
526
403
908
625
430
409
488
333
349
276
192
494
427
405
179
Distributable cash flow
5,811
7,272
6,483
5,199
2,771
7,237
5,537
4,502
Dividends declared
Dividends declared per share
Payout ratio(3)
3,168
0.300
54.5%
3,168
0.300
43.6%
3,163
0.300
48.8%
3,153
0.300
60.6%
2,968
0.300
107.1%
2,875
0.300
39.7%
2,871
0.300
51.8%
2,407
0.300
53.5%
Weighted average shares outstanding
during the period, basic
Weighted average shares outstanding
during the period, diluted
Trailing-twelve months (“TTM”)
Distributable cash flow
Dividends
Payout ratio(3)
10,479
10,470
10,462
10,454
9,718
9,511
9,104
7,979
10,525
10,540
10,509
10,491
9,755
9,548
9,133
7,999
24,765
12,651
51.1%
21,725
12,452
57.3%
21,690
12,159
56.1%
20,744
11,867
57.2%
20,047
11,121
55.5%
23,051
10,560
45.8%
21,667
10,092
46.6%
21,298
9,624
45.2%
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.
30
WE ARE DEPENDABLE.
OUTSTANDING SHARES
As at December 31, 2018, the Corporation had 10,559,936
Common Shares outstanding. Basic and diluted weighted
average number of Common Shares outstanding for 2018
were 10,466,458 and 10,500,014, respectively (9,083,693 and
9,114,874, respectively, for the comparative 2017 periods).
In accordance with the Corporation’s long term incentive
plan (the “LTI Plan”) and in conjunction with the perfor-
mance of the Corporation in the 2017 fiscal year, on April
16, 2018 the Compensation, Nominating and Corporate
Governance Committee of the Board of Directors approved
LTI compensation of $1.6 million (2017 – $1.7 million) to
be paid as Common Shares issued from treasury. As at
December 31, 2018, the value of the Common Shares held in
trust by the LTI trustee was $3.0 million (December 31, 2017
– $2.3 million) which was comprised of 63,346 in unvested
Common Shares (December 31, 2017 – 54,880) with a nil
aggregate cost (December 31, 2017 – $nil).
As at March 13, 2019 there were 10,559,936 Common
Shares issued and outstanding including 63,346 Common
Shares issued but held as unvested treasury shares.
RELATED PARTY
TRANSACTIONS
of management, the Corporation’s most critical accounting
estimates, being those that involve the most difficult,
subjective and complex
judgments, and/or requiring
estimates that are inherently uncertain and which may
change in subsequent reporting periods.
K-Bro has continuously refined and documented
its
management and internal reporting systems to ensure
that accurate, timely, internal and external information is
gathered and disseminated. Management also regularly
evaluates these estimates and assumptions which are
based on past experience and other factors that are deemed
reasonable under the circumstances.
K-Bro has hired individuals and consultants who have the
skills required to make such estimates and ensures that
individuals or departments with the most knowledge of the
activity are responsible for the estimates. Furthermore, past
estimates are reviewed and compared to actual results, and
actual results are compared to budgets in order to make
more informed decisions on future estimates.
K-Bro’s leadership team’s mandate
includes ongoing
development of procedures, standards and systems to
allow K-Bro staff to make the best decisions possible
and ensuring those decisions are in compliance with the
Corporation’s policies.
Preparation of the Corporation’s consolidated financial
statements requires management to make estimates and
assumptions that affect:
The Corporation incurred expenses in the normal course of
business for advisory consulting services provided by Mr.
Matthew Hills, a Director of the Corporation. The amounts
charged are recorded at their exchange amounts and are
on arm’s length terms. For the year ended December 31,
2018, the Corporation incurred fees totaling $138,000 (2017
– $138,000).
·
·
·
volume rebates;
linen in service;
intangible assets;
· goodwill;
·
income taxes;
· provisions; and,
CRITICAL ACCOUNTING
ESTIMATES
The Corporation’s summary of significant accounting
policies are contained in Note 2 to the audited Consolidated
Financial Statements.
· allowance for doubtful accounts;
· segment information; and,
· business combinations.
The following discusses the most significant accounting
judgments and estimates in the Corporation’s Consolidated
Financial Statements.
Impairment of Goodwill and Non-Financial Assets
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
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 signifi-
cant contracts included in the intangible assets described
31
2018 ANNUAL REPORT
in Note 9. 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 assump-
tions about future cash flows, margins, and discount rates
and the earnings multiple approach that utilizes Board
approved budgets and implied multiples. The implied
multiple is calculated by utilizing multiples of comparable
public companies. Judgment is required in determining
the appropriate comparable companies. Refer to Note 10
for more details amount methods and assumptions used
in estimated net recoverable.
Recognition of Rebate Liabilities
In applying its accounting policy for volume rebates, the
Corporation must determine whether the processing
volume thresholds will be achieved. The most difficult
and subjective area of judgment is whether a contract will
generate satisfactory volume to achieve minimum levels.
Management considers all appropriate facts and circum-
stances in making this assessment including historical
experience, current volumetric run-rates, and expected
future events.
Linen in Service
The estimated service lives of linen in service are
reviewed at least annually and are updated if expectations
change as a result of physical wear and tear, technical or
commercial obsolescence and legal or other limits of use.
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
environment, if applicable.
Provisions
The Corporation is required to restore the leased premises
of its leased plants. A provision has been recognized for
the present value of the estimated expenditure required to
remove any leasehold improvements and installed equip-
ment. Refer to Note 11 in the Corporation’s Consolidated
Financial Statements for more details about estimation
and judgments for this provision.
Business Combinations
In a business combination the Corporation acquires
assets and assumes liabilities of an acquired business.
Judgement 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.
Management regularly evaluates these estimates and
judgments. Revisions to accounting estimates are recog-
nized in the period in which the estimate is revised if the
revision affects only that period or in the period of the
revision and future periods if the revision affects both
current and future periods
TERMINOLOGY
EBITDA
K-Bro reports EBITDA (Earnings before interest, taxes,
depreciation and amortization) as a key measure used by
management to evaluate performance. EBITDA is utilized
to measure compliance with debt covenants and to make
decisions related to dividends to Shareholders. We believe
EBITDA assists investors to assess our performance on
a consistent basis as it is an indication of our capacity to
generate income from operations before taking into account
management’s financing decisions and costs of consuming
tangible and intangible capital assets, which vary according
to their vintage, technological currency and management’s
estimate of their useful life. Accordingly, EBITDA comprises
revenues less operating costs before financing costs, capital
asset and intangible asset amortization, 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
the impact of working capital changes, capital expenditures,
debt changes and other sources and uses of cash, which are
disclosed in the consolidated statements of cash flows.
32
WE ARE DEPENDABLE.
3 Months Ended December 31,
2017
2018
Years Ended December 31,
2017
2018
1,052
(551)
866
4,484
768
6,619
(1,287)
849
786
3,543
562
4,453
6,169
1,222
3,315
15,871
3,004
29,581
5,718
3,761
1,133
11,606
1,767
23,985
($ Thousands)
Net earnings (loss)
Add:
Income tax expense (recovery)
Finance expense
Depreciation of property, plant and equipment
Amortization of intangible assets
EBITDA
NON-GAAP MEASURES
Adjusted EBITDA
Adjusted EBITDA is a measure which has been reported in order to assist in the comparison of historical EBITDA to current
results. 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 in
2017, and the related impact on EBITDA (as defined above). During the fourth quarter of 2017, K-Bro incurred $2.8 million
in transaction costs directly related to the acquisition of Fishers, which is not expected to occur in the normal course of
operations. The normalization of this expense from the calculation of EBITDA is considered by Management to be a more
accurate representation of continuing operations. One-time costs related to the Vancouver plant transition have not been
adjusted for in the table below.
3 Months Ended December 31,
($ Thousands)
EBITDA
Add:
Transaction costs incurred
in the acquisition of Fishers
Adjusted EBITDA
Canadian
Division
2018
UK Division
2018
4,838
1,781
-
-
2018
6,619
-
4,838
1,781
6,619
Canadian
Division
2017
UK Division
2017
6,961
(2,508)
-
6,961
2,831
323
2017
4,453
2,831
7,284
2017
Canadian
Division
2018
UK Division
2018
Canadian
Division
2017
UK Division
2017
2018
21,370
8,211
29,581
26,493
(2,508)
23,985
-
-
-
-
2,831
2,831
21,370
8,211
29,581
26,493
323
26,816
Years Ended December 31,
($ Thousands)
EBITDA
Add:
Transaction costs incurred
in the acquisition of Fishers
Adjusted EBITDA
33
2018 ANNUAL REPORT
Adjusted Net Earnings and Adjusted Net Earnings per Share
Adjusted net earnings and adjusted net earnings per share are measures which have been reported in order to assist in the
comparison of historical net earnings to current results. 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.
The calculation of adjusted net earnings normalizes the impact of the transaction costs related to the acquisition of Fishers,
and the related impact on net earnings and net earnings per share. The normalization of this net expense in the calculation
of adjusted net earnings and adjusted net earnings per share is considered by management to be a more accurate repre-
sentation of the net earnings from core operations.
3 Months Ended December 31,
($ Thousands)
Canadian
Division
2018
UK Division
2018
Net earnings (loss)
Add (net of corporate income taxes):
Transaction costs incurred
in the acquisition of Fishers
Adjusted net earnings (loss)
32
-
32
1,020
-
2018
1,052
-
Canadian
Division
2017
UK Division
2017
2017
1,594
(2,881)
(1,287)
-
2,831
(50)
2,831
1,544
1,020
1,052
1,594
Weighted average number
of shares outstanding:
Basic
Diluted
Adjusted net earnings
(loss) per share:
Basic
Diluted
Years Ended December 31,
($ Thousands)
Net earnings (loss)
Add (net of corporate income taxes):
Transaction costs incurred
in the acquisition of Fishers
Adjusted net earnings (loss)
Weighted average number
of shares outstanding:
Basic
Diluted
Adjusted net earnings
(loss) per share:
Basic
Diluted
10,479,415
10,525,450
10,479,415
10,525,450
10,479,415
10,525,450
9,717,890
9,755,183
9,717,890
9,755,183
9,717,890
9,755,183
0.003
0.003
0.097
0.097
0.100
0.100
0.164
0.163
(0.005)
(0.005)
0.159
0.158
Canadian
Division
2018
UK Division
2018
2,701
3,468
-
-
2018
6,169
-
Canadian
Division
2017
UK Division
2017
8,599
(2,881)
-
2,831
(50)
2017
5,718
2,831
8,549
2,701
3,468
6,169
8,599
10,466,458
10,500,014
10,466,458
10,500,014
10,466,458
10,500,014
9,083,693
9,114,874
9,083,693
9,114,874
9,083,693
9,114,874
0.258
0.257
0.331
0.330
0.589
0.588
0.947
0.943
(0.006)
(0.005)
0.941
0.938
34
WE ARE DEPENDABLE.
Distributable Cash Flow
Distributable cash flow is a measure used by manage-
ment to evaluate its performance. While the closest IFRS
measure is cash provided by operating activities, distribut-
able cash flow is considered relevant because it provides
an indication of how much cash generated by operations
is available after capital expenditures. It shall be noted
that although we consider this measure to be distribut-
able cash flow, financial and non-financial covenants in
our credit facilities and dealer agreements may restrict
cash from being available for dividends, re-investment in
the Corporation, potential acquisitions, or other purposes.
Investors should be cautioned that distributable cash flow
may not actually be available for growth or distribution from
the Corporation. Management refers to “Distributable cash
flow” as to cash provided by (used in) operating activities
with the addition of net changes in non-cash working capital
items, less share-based compensation, and maintenance
capital expenditures.
Payout Ratio
CHANGES IN
ACCOUNTING POLICIES
The Corporation has prepared its December 31, 2018
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.
RECENT ACCOUNTING
PRONOUNCEMENTS
Significant Accounting Policies Adopted January 1, 2018
The following standards have been applied in preparing the
consolidated financial statements.
Payout ratio is defined by management as the actual cash
dividend divided by distributable cash. This is a key measure
used by investors to value K-Bro, assess its performance
and provide an indication of the sustainability of dividends.
The payout ratio depends on the distributable cash and the
Corporation’s dividend policy.
·
Debt to Total Capitalization
Debt to total capitalization is defined by management as
the total long-term debt less cash and cash equivalents
divided by the Corporation’s total shareholder’s equity. This
is a measure used by investors to assess the Corporation’s
financial structure.
Distributable Cash Flow, Payout Ratio, Debt to Total
Capitalization, Adjusted EBITDA, Adjusted net earnings,
and Adjusted net earnings per share are not calculations
based on IFRS and are not considered an alternative to IFRS
measures in measuring K-Bro’s performance. Distributable
Cash Flow, Payout Ratio, Adjusted EBITDA, Adjusted net
earnings, and Adjusted net earnings per share do not have
standardized meanings in IFRS and are therefore not likely to
be comparable with similar measures used by other issuers.
Off Balance Sheet Arrangements
As at December 31, 2018, the Corporation has not entered
into any off balance sheet arrangements.
35
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 recog-
nition 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
retrospectively and is effective for annual periods begin-
ning on or after January 1, 2018, with earlier application
permitted. The Corporation adopted the requirements
of IFRS 9 using the retrospective approach without
restating comparative information effective January
1, 2018. The adoption of IFRS 9 had no impact on the
Corporation’s financial position or results of operations.
No retrospective adjustments were required in relation
to amendments made to the Corporation’s credit facility
prior to January 1, 2018, as the amendments were
considered to be an extinguishment. The Corporation
considers both quantitative and qualitative factors to
assess if an amendment should be accounted for as an
extinguishment or a modification.
·
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 establishes a single comprehen-
sive model for entities to use in accounting for revenue
arising from contracts with customers. IFRS 15 is to be
2018 ANNUAL REPORT
applied using a full retrospective or a modified retro-
spective approach and is effective for annual periods
beginning on or after January 1, 2018, with earlier
application permitted. The core principle of IFRS 15 is
that an entity should recognize revenue based on the
transfer of promised goods or services to customers
in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those
goods or services. Specifically, IFRS 15 introduces a
5-step approach to revenue recognition:
requirements of IFRS 2 effective January 1, 2018, for
any accounting or disclosure changes required under
this standard. Adoption of the amendments did not
result in any changes to the presentation or disclosures
in the financial statements.
New Standards and Interpretations Not Yet Adopted
The following standards have been issued but have not
yet been applied in preparing the Consolidated Finan-
cial Statements.
· Step 1: Identify the contract(s) with a customer.
·
· Step 2: Identify the performance obligations in the
contract.
· Step 3: Determine the transaction price.
· Step 4: Allocate the transaction price to the perfor-
mance obligations in the contract.
· Step 5: Recognize revenue when (or as) the entity
satisfies a performance obligation.
Under IFRS 15, an entity recognizes revenue as a
performance obligation is satisfied, i.e. when control of
the goods or services underlying the particular perfor-
mance obligation is transferred to the customer. The
Corporation adopted the requirements of IFRS 15 using
the modified retrospective approach, effective January
1, 2018, for any accounting or disclosure changes
required under this standard. The adoption of IFRS 15
had no impact on the Corporation’s financial position or
results of operations.
IFRS 15 also requires disclosure of the aggregation
of revenue into categories that depict how the nature,
amount, timing and uncertainty of revenue and cash
flows are affected by economic factors. The Corporation
determined this disclosure was already provided
through the segment disclosure in Note 26.
· On June 20, 2016 the IASB issued an amendment
to IFRS 2 “Share based Payment” addressing three
classification and measurement issues. The amend-
ment clarifies the measurement basis for cash-settled,
share based payments and the accounting for modifica-
tions 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 amend-
ments are effective for periods beginning on or after
January 1, 2018. The Corporation adopted the amended
IFRS 16, Leases, was issued in January 2016 and
applies to annual reporting periods beginning on or
after January 1, 2019. IFRS 16 establishes principles
for the recognition, measurement, presentation and
disclosure of leases, with the objective of ensuring
that lessees and lessors provide relevant information
that faithfully represents those transactions. IFRS 16
will supersede the current lease recognition guidance
including IAS 17 “Leases” and the related interpreta-
tions when it becomes effective. Under IAS 17, lessees
were required to make a distinction between a finance
lease (on balance sheet) and an operating lease (off
balance sheet). IFRS 16 now requires lessees to recog-
nize a lease liability reflecting future lease payments
and a
‘right-of-use asset’ for virtually all lease
contracts. The IASB has included an optional exemption
for certain short-term leases and leases of low-value
assets; however, this exemption can only be applied
by lessees. Under IFRS 16, a contract is, or contains, a
lease if the contract conveys the right to control the use
of an identified asset for a period of time in exchange
for consideration.
The Corporation evaluated the impact the adoption of
this standard will have on its consolidated financial
statements and expects:
·
IFRS 16 will result in on-balance sheet recognition
of most of its leases that are considered operating
leases under IAS 17. This will result in the gross-up
of the balance sheet through the recognition of a
right(of)use asset and a liability for the present value
of the future lease payments.
· This change in policy is expected to result in the
recognition of right-of-use assets and lease liabili-
ties amounting to approximately $50 million to $55
million. In addition, the Corporation has $2.9 million
of liabilities at December 31, 2018 that are recorded
in unamortized leasehold inducements that will be
reclassified to lease liability on January 1, 2019.
· The Corporation continues to assess the impact of
adopting IFRS 16 on deferred tax balances.
36
WE ARE DEPENDABLE.
· Depreciation expense on the right-of-use asset and
interest expense on the lease liability will replace
the operating lease expense.
· Cash flows from operating activities is expected
to increase under IFRS 16 as lease payments for
substantially all leases will be recorded as financing
outflows in the statement of cash flows as opposed
to operating cash flows.
IFRS 16 will applied for the 2019 using the modified
approach and the Corporation will therefore not be
restating comparative information. In addition, the
Corporation has elected to use the following practical
expedients on adoption of IFRS 16:
· The Corporation has not reassessed, under IFRS
16, contracts that were identified as leases under
previous accounting standard (IAS 17).
· The Corporation will use a single discount rate
to a portfolio of leases with reasonably similar
underlying characteristics.
· The Corporation has used hindsight in deter-
mining the lease term where the lease contracts
contain options to extend or terminate the lease.
· The Corporation expects to adopt the recognition
exemptions permitted for short-term leases (less
than twelve months) and leases for which the
underlying asset has a low value, whereby the
lease payments associated with these leases will
continue to be expensed on a straight-line basis
over the lease term.
In determining the lease term, Management consider
all factors that may create an economic incentive to
exercise a renewal option or termination option where
determining the lease term under the new standard.
FINANCIAL
INSTRUMENTS
The Corporation’s financial instruments at December
31, 2018 consist of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities,
dividends payable, and long-term debt. The Corporation
does not enter into financial instruments for trading or
speculative purposes.
The Corporation classifies its financial assets as those to be
measured subsequently at fair value (either through other
comprehensive income or loss, or though profit or loss), and
those to be measured at amortized cost. The Corporation’s
financial assets are measured at amortized cost using the
effective interest method under IFRS 9 and were previously
measured at amortized cost under IAS 39. At initial recogni-
tion, K-Bro measures a financial asset at fair value plus, in
the case of a financial asset not at fair value through profit
or loss, transaction costs that are directly attributable to
the acquisition of the financial asset. Transaction costs of
financial assets carried at fair value through profit or loss
are expensed in profit or loss.
Accounts payable and accrued liabilities and dividends
payable are recognized initially at their fair value and
subsequently measured at amortized cost using the effec-
tive interest method. The Corporation’s financial liabili-
ties consist of accounts payable and accrued liabilities,
dividends payable and long-term debt.
Long-term debt and borrowings are initially recognized at
fair value, net of transaction costs incurred and is subse-
quently measured at amortized cost. Long-term debt and
borrowings are removed from the balance sheet when the
obligation specified in the contract is discharged, cancelled
or expired.
The difference between the carrying amount of a financial
liability that has been extinguished or transferred to another
party and the consideration paid, including any non-cash
assets transferred or liabilities assumed, is recognised in
profit or loss as other income or finance costs. Borrowings
are classified as current liabilities unless the group has an
unconditional right to defer settlement of the liability for at
least 12 months after the reporting period.
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.
Derivatives are initially recognized at fair value on the date
a derivative contract is entered into and are subsequently
remeasured to their fair value at the end of each reporting
period and included as part of the profit and loss. Derivative
financial instruments are utilized by the Corporation to
manage cash flow risk against the volatility in interest
rates on its long-term debt and foreign exchange rates on
its equipment purchase commitments. The Corporation
typically does not utilize derivative financial instruments for
trading or speculative purposes.
The Corporation has a floating interest rate debt that
gives rise to risks that its earnings and cash flows may
be adversely impacted by fluctuations in interest rates. In
37
2018 ANNUAL REPORT
order to manage these risks, the Corporation may enter into
interest rate swaps, forward contracts on foreign currency,
utilities and textiles or option contracts.
The Corporation has entered into several electrical and
natural gas contracts at December 31, 2018. The Corporation
has examined the terms of the natural gas and electricity
contracts and has determined that these contracts will
be physically settled and as such are not considered to be
financial instruments.
CRITICAL RISKS &
UNCERTAINTIES
As at December 31, 2018, there are no material changes in
the Corporation’s risks or risk management activities since
December 31, 2017. The Corporation’s results of operations,
business prospects, financial condition, cash dividends to
Shareholders and the trading price of the Corporation’s
Shares are subject to a number of risks. These risk factors
include: dependence on long-term contracts and the associ-
ated renewal risk thereof; the effects of market volatility
and uncertainty; potential future tax changes; the compet-
itive environment; our ability to acquire and successfully
integrate and operate additional businesses; utility costs;
the labour markets; the fact that our credit facility imposes
numerous covenants and encumbers assets; and, environ-
mental matters.
For a discussion of these risks and other risks associated
with an investment in Corporation Shares, see Risk Factors
– Risks Related to K-Bro and the Laundry and Linen Industry
detailed in the Corporation’s Annual Information Form that
is available at www.sedar.com.
CONTROLS &
PROCEDURES
In order to ensure that information with regard to reports
filed or submitted under securities legislation present fairly
in all material respects the financial information of K-Bro,
management, including the President and Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”), are
responsible for establishing and maintaining disclosure
controls and procedures, as well as internal control over
financial reporting.
Disclosure Controls and Procedures
The Corporation has established disclosure controls and
procedures to ensure that information disclosed in this
MD&A and the related financial statements of K-Bro was
properly recorded, processed, summarized and reported
to the Board of Directors and the Audit Committee. The
Corporation’s CEO and CFO have evaluated the effective-
ness of these disclosure controls and procedures for the
year ended December 31, 2018, and the CEO and CFO have
concluded that these controls were operating effectively.
Internal Controls Over Financial Reporting
The CEO and CFO acknowledge responsibility for the
design of internal controls over financial reporting (“ICFR”).
Consequently the CEO and CFO confirm that the additions
to these controls that occurred during the year ended
December 31, 2018, did not materially affect, or are reason-
ably likely to materially affect, the Corporation’s ICFR. Based
upon their evaluation of these controls for the year ended
December 31, 2018, the CEO and CFO have concluded that
these controls were operating effectively.
A control system, no matter how well conceived and
operated, can provide only reasonable, and not absolute,
assurance that the objectives of the control system are met.
As a result of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance
that all control issues, including instance of fraud, if any,
have been detected. These inherent limitations include,
amongst other items: (i) that managements’ assumptions
and judgments could ultimately prove to be incorrect under
varying conditions and circumstances; or, (ii) the impact of
isolated errors.
Additionally, controls may be circumvented by the unautho-
rized acts of individuals, by collusion of two or more people,
or by management override. The design of any system of
controls is also based, in part, upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its
stated goals under all potential (future) conditions.
Additional information regarding K-Bro including required securities filings
are available on our website at www.k-brolinen.com and on the Canadian
Securities Administrators’ website at www.sedar.com; the System for Electronic
Document Analysis and Retrieval (“SEDAR”).
Vous pouvez obtenir des renseignements supplémentaires sur la Société,
y compris les documents déposés auprès des autorités de réglementation,
sur notre site Web, au www.k-brolinen.com et sur le site Web des autorités
canadiennes en valeurs mobilières au www.sedar.com, le site Web du Système
électronique de données, d’analyse et de recherche (« SEDAR »).
38
WE ARE DEPENDABLE. CONSOLIDATED
FINANCIAL STATEMENTS
39
2018 ANNUAL REPORT 41
INDEPENDENT AUDITOR’S REPORT
43
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
44
CONSOLIDATED STATEMENTS OF EARNINGS & COMPREHENSIVE INCOME
45
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
46
CONSOLIDATED STATEMENTS OF CASH FLOW
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
75
CORPORATE INFORMATION
40
WE ARE DEPENDABLE. Independent auditor’s report
To the Shareholders of K-Bro Linen Inc.
Other Information
Our Opinion
In our opinion, the accompanying consolidated financial
statements present fairly, in all material respects, the
financial position of K-Bro Linen Inc. and its subsidiaries
(together, the Company) as at December 31, 2018 and 2017,
and its financial performance and its cash flows for the
years then ended in accordance with International Financial
Reporting Standards (IFRS).
What We Have Audited
The Company’s consolidated financial statements comprise:
·
·
·
·
·
the consolidated statements of financial position as at
December 31, 2018 and 2017;
the consolidated statements of earnings and compre-
hensive income for the years then ended;
the consolidated statements of changes in equity for
the years then ended;
the consolidated statements of cash flow for the years
then ended; and
the notes to the consolidated financial statements, which
include a summary of significant accounting policies.
Basis for Opinion
We conducted our audit in accordance with Canadian gener-
ally accepted auditing standards. Our responsibilities under
those standards are further described in the Auditor’s
responsibilities for the audit of the consolidated financial
statements section of our report.
We believe that the audit evidence we have obtained is suffi-
cient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Company in accordance with
the ethical requirements that are relevant to our audit of
the consolidated financial statements in Canada. We have
fulfilled our other ethical responsibilities in accordance
with these requirements.
Management is responsible for the other information. The
other information comprises the Management’s Discussion
and Analysis, which we obtained prior to the date of this
auditor’s report and the information, other than the consoli-
dated financial statements and our auditor’s report thereon,
included in the annual report, which is expected to be made
available to us after that date.
Our opinion on the consolidated financial statements does not
cover the other information and we do not and will not express
an opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other informa-
tion identified above and, in doing so, consider whether the
other information is materially inconsistent with the consol-
idated financial statements or our knowledge obtained in
the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other infor-
mation that we obtained prior to the date of this auditor’s
report, we conclude that there is a material misstatement
of this other information, we are required to report that
fact. We have nothing to report in this regard. When we
read the information, other than the consolidated financial
statements and our auditor’s report thereon, included in
the annual report, if we conclude that there is a material
misstatement therein, we are required to communicate the
matter to those charged with governance.
Responsibilities of Management and Those Charged with
Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair
presentation of the consolidated financial statements in
accordance with IFRS, and for such internal control as
management determines is necessary to enable the prepa-
ration of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
the consolidated
financial statements,
In preparing
management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as appli-
cable, matters related to going concern and using the going
41
2018 ANNUAL REPORT concern basis of accounting unless management either
intends to liquidate the Company or to cease operations, or
has no realistic alternative but to do so.
Those charged with governance are responsible for
overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the
Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about
whether the consolidated financial statements as a whole
are free from material misstatement, whether due to fraud
or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accor-
dance with Canadian generally accepted auditing standards
will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with Canadian generally
accepted auditing standards, we exercise professional
judgment and maintain professional skepticism throughout
the audit. We also:
·
Identify and assess the risks of material misstatement
of the consolidated financial statements, whether due
to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or
the override of internal control.
· Obtain an understanding of internal control relevant
to the audit 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 Company’s internal control.
· Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting estimates
and related disclosures made by management.
· Conclude on the appropriateness of management’s use
of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that
may cast significant doubt on the Company’s ability
to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclo-
sures in the consolidated financial statements or, if such
disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained
up to the date of our auditor’s report. However, future
events or conditions may cause the Company to cease
to continue as a going concern.
· Evaluate the overall presentation, structure and content
of the consolidated financial statements, including the
disclosures, and whether the consolidated financial
statements represent the underlying transactions and
events in a manner that achieves fair presentation.
· Obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business
activities within the Company to express an opinion on
the consolidated financial statements. We are respon-
sible for the direction, supervision and performance of
the group audit. We remain solely responsible for our
audit opinion.
We communicate with those charged with governance
regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including
any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a
statement that we have complied with relevant ethical
requirements regarding independence, and to communi-
cate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and
where applicable, related safeguards.
The engagement partner on the audit resulting in this
independent auditor’s report is Anna Coghill.
(Signed) “PricewaterhouseCoopers LLP”
Chartered Professional Accountants
Edmonton, Alberta / March 13, 2019
PricewaterhouseCoopers LLP
Stantec Tower, 10220 103 Avenue NW, Suite 2200,
Edmonton, Alberta, Canada T5J 0K4
T: +1 780 441 6700 F: +1 780 441 6776
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
42
WE ARE DEPENDABLE. CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION
($ Thousands of Canadian dollars)
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 inducements (note 14)
Provisions (note 11)
Deferred income taxes (note 15)
SHAREHOLDERS’ EQUITY
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income (loss)
Contingencies and commitments (note 16)
DEC 31, 2018
DEC 31, 2017
2,827
33,536
3,601
4,228
26,371
70,563
194,248
15,682
41,736
322,229
34,682
-
1,056
35,738
70,203
2,854
2,645
12,129
123,569
201,429
2,112
(6,547)
1,666
198,660
322,229
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
The accompanying notes are an integral part of these consolidated financial statements.
APPROVED BY THE BOARD OF DIRECTORS
ROSS S. SMITH
Director
MATTHEW HILLS
Director
43
2018 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS
& COMPREHENSIVE INCOME
($ Thousands of Canadian dollars, except share and per share amounts)
Years ended December 31,
REVENUE
Expenses
Wages and benefits
Linen (note 7)
Utilities
Delivery
Occupancy costs
Materials and supplies
Repairs and maintenance
Corporate
(Gain) loss on disposal of property, plant and equipment
EBITDA
Other expenses
Depreciation of property, plant and equipment (note 8)
Amortization of intangible assets (note 9)
Finance expense (note 13)
Earnings before income taxes
Current income tax (recovery) expense
Deferred income tax expense
Income tax expense
Net earnings
Other comprehensive income (loss)
Items 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
Weighted average number of shares outstanding:
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
2018
239,534
99,992
26,699
14,991
30,736
9,883
8,471
8,215
11,030
(64)
209,953
29,581
15,871
3,004
3,315
22,190
7,391
(984)
2,206
1,222
6,169
1,738
7,907
0.59
0.59
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
10,466,458
10,500,014
9,083,693
9,114,874
44
WE ARE DEPENDABLE.
CONSOLIDATED STATEMENTS
OF CHANGES IN EQUITY
($ Thousands of Canadian dollars)
Total Share Contributed
Surplus
Capital
Accumulated Other
Comprehensive
Income (loss)
Deficit
As at January 1, 2018
Total comprehensive income
Dividends declared (note 20)
Employee share based compensation expense
Shares vested during the year
As at December 31, 2018
199,772
-
-
-
1,657
201,429
1,952
-
-
1,817
(1,657)
2,112
(65)
6,169
(12,651)
-
-
(6,547)
(72)
1,738
-
-
-
1,666
($ Thousands of Canadian dollars)
Total Share Contributed
Surplus
Capital
Retained Accumulated Other
Comprehensive
Earnings
Income (loss)
(Deficit)
As at January 1, 2017
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
109,390
-
87,655
1,227
-
-
1,500
199,772
1,944
-
-
-
-
1,508
(1,500)
1,952
5,338
5,718
-
-
(11,121)
-
-
(65)
-
(72)
-
-
-
-
-
(72)
Total
Equity
201,587
7,907
(12,651)
1,817
-
198,660
Total
Equity
116,672
5,646
87,655
1,227
(11,121)
1,508
-
201,587
The accompanying notes are an integral part of these consolidated financial statements.
45
2018 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOW
($ Thousands of Canadian dollars)
Years ended December 31,
OPERATING ACTIVITIES
Net earnings
Depreciation of property, plant and equipment (note 8)
Amortization of intangible assets (note 9)
Lease inducements, net of amortization (note 14)
Accretion expense (note 11)
Employee share based compensation expense
(Gain) loss on disposal of property, plant and equipment
Settlement of provision (note 11)
Deferred income taxes
Change in non-cash working capital items (note 21)
Cash provided by operating activities
FINANCING ACTIVITIES
Net proceeds of revolving debt
Net proceeds from issuance of common shares
Dividends paid to shareholders
Cash provided by financing activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment (note 8)
Proceeds from disposal of property, plant and equipment
Purchase of intangible assets (note 9)
Acquisition of business (note 6)
Cash used in investing activities
Change in cash and cash equivalents during the year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary cash flow information
Interest paid
Income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
2018
6,169
15,871
3,004
262
129
1,817
(64)
(460)
2,206
28,934
(11,380)
17,554
27,423
-
(12,646)
14,777
(36,527)
397
(106)
(4,700)
(40,936)
(8,605)
156
11,276
2,827
2,959
1,199
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
46
WE ARE DEPENDABLE.
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
($ Thousands of Canadian dollars except share and per share amounts, Years ended December 31, 2018 and 2017)
K-Bro Linen Inc. (the “Corporation” or “K-Bro”) is incor-
porated 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.
The Corporation’s operations in Canada include nine
processing facilities and two distribution centres under
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.
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 an operator of laundry and linen processing facilities
in Scotland, providing linen rental, workwear hire and
cleanroom garment services to the hospitality, health-
care, 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 six cities, in Scotland and the North
East of England with facilities in Cupar, Perth, Newcastle,
Livingston, Inverness and Coatbridge.
The Corporation’s common shares are traded on the Toronto
Stock Exchange under the symbol “KBL”. The address of the
Corporation’s registered head office is 14903 – 137 Avenue,
Edmonton, Alberta, Canada.
These audited annual consolidated financial statements
(the “Consolidated Financial Statements”) were approved
and authorized for issuance by the Board of Directors (“the
Board”) on March 13, 2019.
47
1) BASIS OF PRESENTATION
The Consolidated Financial Statements of the Corporation
have been prepared in accordance with International
Financial Reporting Standards as published in the CPA
Canada Handbook (IFRS). The preparation of financial
statements in conformity with IFRS requires the use of
certain critical accounting estimates. It also requires
management to exercise its judgment in the process of
applying the Corporation’s accounting policies. The areas
involving a higher degree of judgment or complexity, or
areas where assumptions and estimates are significant
to the Consolidated Financial Statements are disclosed in
Note 5.
2) SIGNIFICANT ACCOUNTING
POLICIES
The principal accounting policies applied in the preparation
of these Consolidated Financial Statements are set out
below. These policies have been consistently applied to all
the periods presented, unless otherwise stated.
A) Basis of Measurement
The Consolidated Financial Statements have been prepared
under the historical cost convention.
B) Principles of Consolidation
financial statements
the
The consolidated
Corporation,
its wholly owned subsidiaries and the
long-term incentive plan account (Note 2(p)). All intercom-
pany balances and transactions have been eliminated upon
consolidation.
include
C) Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, deposits
with banks, other short-term highly liquid investments with
original maturities of three months or less.
Cash and cash equivalents are classified as loans and
receivables and are carried at amortized cost, which is
equivalent to fair value.
2018 ANNUAL REPORT D) Linen in Service
Linen in service is stated at cost less accumulated depre-
ciation. The cost is based on the expenditures that are
directly attributable to the acquisition of linen, amortization
commences when linen is put into service; with operating
room linen amortized across its estimated service life of 24
months and general linen amortized based on usage which
results in an estimated average service life of 24 months.
E) Revenue Recognition
i) Accounting Policy After January 1, 2018
A laundry services contract is a contract specifically negoti-
ated for the provision of laundry and linen services. Revenue
is based on contractually set pricing on a consistent unit-of-
weight or price-per-piece basis for each service over the
term of the contract. The Corporation reports revenue
under two revenue categories: healthcare and hospitality
services. When determining the proper revenue recognition
method for contracts, the Corporation evaluates whether
two or more contracts should be combined and accounted
for as one single contract and whether the combined or
single contract should be accounted for as more than one
performance obligation. The Corporation accounts for a
contract when, it has commercial substance, the parties
have approved the contract in accordance with customary
business practices and are committed to their obligations,
the rights of the parties and payment terms are identified,
and collectability of consideration is probable.
1) Identifying the Contract
The Corporation’s policy for revenue recognition requires
an appropriately authorized contract, with sign-off by
representatives from all respective parties, before any
services are provided to a customer. Contained within
the terms of these contracts is detailed information
identifying each party’s rights regarding the laundry
and linen services to be provided, as well as associ-
ated payment terms (i.e. service pricing, early payment
discounts, invoicing requirements, etc.). In addition, the
Corporation’s contracts have commercial substance
as the services to be provided will directly impact the
Corporation’s future cash flows via incoming revenue and
related outgoing expenditures.
As part of the Corporation’s analysis in reviewing and
accepting a contract, the Corporation assesses the likeli-
hood of collection from all prospective customers and
only transacts with those customers from which payment
is probable. As the Corporation’s significant customer
contracts are generally with government-funded health
agencies and large volume hotels, it is probable that the
Corporation will collect the consideration to which is
entitled for the performance of these contracts.
For services provided following the expiration of a
contract and subsequent renewal negotiations, the
terms of the original contract carry forward until the new
agreement has been appropriately authorized. This is
confirmed through verbal approval, and is consistent with
customary business practices.
2) Identifying Performance Obligations in a Contract
Linen services are provided to the Corporation’s
customers consecutively over a period of time (i.e. daily
deliveries over the contract term) and the same method is
used to measure the Corporation’s progress in satisfying
the performance of the contract (i.e. revenue is based on
contractually set pricing on a consistent unit-of-weight
or price-per-piece basis for each service over the term
of the contract). Additionally, these services generally
include integrated processing and delivery, consist of a
single deliverable (clean processed volume), and in the
case of rental linen, are not offered individually (rental
linen is used as an input in the provision of standard
laundry and linen services). Therefore, the services
provided under one service agreement constitute a
single performance obligation.
3) Determining the Transaction Price
The majority of the Corporation’s contracts utilize a fixed
pricing model. These contracts stipulate a fixed rate to be
charged to customers on a price-per-unit basis, including
either weight-based or item-based billing. For these
types of arrangements, revenue is recognized over time
as each unit of linen is processed and delivered using
the fixed consideration rate per the contract. In addition
to the above pricing methodology, some contracts have
additional components which meet the definition of
variable consideration per IFRS 15, which are accounted
for using the most likely amount method. The estimates
of variable consideration and determination of whether
to include estimated amounts in the transaction price
are based largely on an assessment of the Corporation’s
anticipated performance and all information, historical,
current and forecasted, that is reasonably available.
4) Allocating the Transaction Price
Each of the customer’s individual customer contracts
represents a single performance obligation. As a result,
the transaction price for each contract (based on contrac-
tually stipulated fixed and variable pricing for a single
deliverable) is allocated to each processed item based on
the agreed upon rate.
48
WE ARE DEPENDABLE.
Volume rebates, where applicable, are recorded based
on annualized expected volumes of individual customer
contracts 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.
ASSET
Buildings
Laundry equipment
Office equipment
Delivery equipment
RATE
15 – 25 years
7 – 20 years
2 – 5 years
5 – 10 years
Computer equipment
2 years
5) Performance Obligations Satisfied Over Time
Leasehold improvements
Lease term
The Corporation typically transfers control of goods or
services and satisfies performance obligations over time,
once clean linen has been provided to the customer and the
customer has accepted delivery of the processed items.
Payment of laundry services are due respective of the
terms as indicated in the customer’s laundry service
contract, whereby customers are generally invoiced on a
monthly basis and consideration is payable when invoiced.
ii) Accounting Policy Up to December 31, 2017
Revenue from linen management and laundry services is
primarily based on written service agreements whereby the
Corporation agrees to collect, launder, deliver and replenish
linens. The Corporation recognizes revenue in the period in
which the services are provided.
F) Property, Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and accumulated impairment
losses. Cost includes expenditures that are directly attrib-
utable 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.
General and specific borrowing costs that are directly
attributable to the acquisition, construction or production
of a qualifying asset are capitalized during the period of
time that is required to complete and prepare the asset for
its intended use or sale. Qualifying assets are assets that
necessarily take a substantial period of time to get ready for
their intended use or sale.
The Corporation has not capitalized any borrowing costs
during the year as there were no qualifying assets.
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:
Gains and losses on disposals of property, plant and equip-
ment are determined by comparing the proceeds with the
carrying amount of the asset.
G) Intangible Assets
Intangible assets acquired in a business combination are
recorded at fair value at the acquisition date. Subsequently
they are carried at cost less accumulated amortization and
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
RATE
Customer contracts
1 – 20 years
Computer software
Brand
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.
H) Impairment of Non-Financial Assets
Property, plant and equipment and intangible assets are
tested for impairment when events or changes in circum-
stances indicate that the carrying amount may not be recov-
erable. Long-lived assets that are not amortized are subject
to an annual impairment test. For the purpose of measuring
recoverable amounts, assets are grouped at the lowest
level for which there are separately identifiable cash flows
(cash-generating unit or “CGU”). The recoverable amount is
the higher of an asset’s fair value less costs to sell and value
in use (being the present value of the expected future cash
flows of the relevant asset or CGU). An impairment loss is
recognized for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The Corporation
evaluates impairment losses, other than goodwill impair-
ment, for potential reversals when events or circumstances
warrant such consideration.
49
2018 ANNUAL REPORT
I) Income Taxes
The tax expense for the year comprises current and deferred
tax. Tax is recognized in statement of earnings, except to the
extent that it relates to items recognized in other compre-
hensive income or directly in equity. In this case, the tax is
also recognized in other comprehensive income or directly
in equity, respectively.
The current income tax provision is calculated on the
basis of the tax laws enacted or substantively enacted at
the balance sheet date of the taxation authority where
the Corporation operates and generates taxable income.
Management periodically evaluates positions taken in tax
returns with respect to situations in which applicable tax
regulation is subject to interpretation. It establishes provi-
sions 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.
J) Business Combinations
Business combinations are accounted for using the acqui-
sition method. The acquired identifiable net assets are
measured at their fair value at the date of acquisition. The
consideration transferred includes the fair value of any
asset or liability resulting from a contingent consideration
arrangement. Any excess of the purchase price over the fair
value of the net assets acquired is recognized as goodwill.
Any deficiency of the purchase price below the fair value of
the net assets acquired is recorded as a gain in net earnings.
Associated transaction costs are expensed when incurred.
K) Goodwill
Goodwill is the residual amount that results when the
purchase price of an acquired business exceeds the sum of
the amounts allocated to the identifiable assets acquired,
less liabilities assumed, based on their estimated fair
values at the acquisition date. Goodwill is allocated as of
the date of the business combination. Goodwill is tested
for impairment annually in the fourth quarter, or more
frequently if events or changes in circumstances indicate a
potential impairment.
Goodwill acquired through a business combination is
allocated to each CGU, or group of CGUs, that are expected
to benefit from the related business combination. A CGU
represents the lowest level within the entity at which the
goodwill is monitored for internal management purposes.
L) Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing
net earnings for the period attributable to Shareholders
of the Corporation by the weighted average number of
Common shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted average
number of common shares outstanding for dilutive instru-
ments. The number of common shares included within the
weighted average is computed using the treasury stock
method. The Corporation’s potentially dilutive Common
shares are comprised of long-term incentive plan equity
compensation granted to officers and key employees
(Note 2(p)).
M) Foreign Currency Translation
The consolidated financial statements are presented
in
in Canadian dollars. The Corporation’s operations
Canada have a functional currency of Canadian dollars.
The Corporation’s operations in the UK have a functional
currency of pounds sterling.
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 approxi-
mate the exchange rates on the transaction dates;
·
Impairment of assets are translated at the prevailing
rate of exchange on the date of the impairment recog-
nition, and;
· Exchange gains and losses that result from translation
are recognized as a foreign currency translation differ-
ence in accumulated other comprehensive income (loss).
50
WE ARE DEPENDABLE. Translation of Transactions and Balances
P) Employee Benefits
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;
· Non-monetary
items are translated at historical
exchange rates; and
· Revenue and expense items are translated at the average
rates of exchange, except depreciation and amortization,
which are translated at the rates of exchange applicable
to the related assets, with any gains or losses recognized
within “finance expense” in the consolidated statements
of earnings & comprehensive income.
N) Provision
Provisions are recognised when the Corporation has a
present obligation (legal or constructive) as a result of
a past event, it is probable that an outflow of resources
embodying economic benefits will be required to settle
the obligation and a reliable estimate can be made of the
amount of the obligation. Provisions are not recognised for
future operating losses.
Where there are a number of similar obligations, the likeli-
hood that an outflow will be required in settlement is deter-
mined by considering the class of obligations as a whole. A
provision is recognised even if the likelihood of an outflow
with respect to any one item included in the same class of
obligations may be small.
Provisions are measured at the present value of manage-
ment’s best estimate of the expenditure required to settle
the present obligation at the end of the reporting period.
The discount rate used to determine the present value is
a pre-tax rate that reflects current market assessments of
the time value of money and the risks specific to the liability.
The increase in the provision due to the passage of time is
recognised as interest expense.
O) Lease Inducements
Leases in which substantially all the risks and rewards
of ownership are retained by the lessor are classified as
operating leases. Tenant allowances and lease inducements
are deferred when credited or received and amortized on
a straight-line basis as a reduction of rent expense over
the term of the related lease. For lease contracts with
escalating lease payments, total rent expense for the lease
term is expensed on a straight-line basis over the lease
term. The difference between rent expensed and amounts
paid is recorded as an increase or deferral in unamortized
lease inducements.
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.
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”), which was amended
and restated as of December 31, 2018. Under the LTI, awards
are granted annually in respect of the prior fiscal year to the
eligible participants based on a percentage of annual salary.
The amount of the award (net of withholding obligations) is
satisfied by issuing treasury shares or cash 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 compen-
sation expense over the relevant service period, being the year
to which the LTI relates and the vesting period of the shares.
The Amendment made on December 31, 2018 gave the
Board of Directors the right to elect to satisfy the award
in cash. The Corporation has determined that this change
did not create an obligation to satisfy the award in cash and
therefore the LTI continues to be treated as an equity settled
share based payment.
Subject to the discretion of the Compensation, Nominating
and Corporate Governance Committee of the Board of
Directors, one-quarter of a Participant’s grant will vest
on the Determination Date (defined as the first May 15th
following the date that the Directors of the Corporation
approve the audited consolidated financial statements of the
Corporation for the prior year). The remaining three-quar-
ters of the Participant’s grant will vest on November 30th
following the second anniversary of the Determination Date.
If a change of control occurs, all LTI Shares held by the
Administrator in respect of unvested grants will vest immedi-
ately. 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 Administrator 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 Administrator to K-Bro for no consideration
and such Common shares shall thereupon be cancelled. If a
participant is terminated without cause, retires or resigns on
a basis which constitutes constructive dismissal, the partici-
pant will be entitled to receive his or her unvested common
shares on the regular vesting schedule under the LTI.
51
2018 ANNUAL REPORT Q) Financial Instruments
i) Accounting Policy After January 1, 2018
The Corporation classifies its financial assets in the
following measurement categories:
· Those to be measured subsequently at fair value (either
through other comprehensive income or loss, or though
profit or loss); and
·
those to be measured at amortized cost.
The classification depends on the Corporation’s business
model for managing the financial assets and contractual
terms of the cash flows.
At initial recognition, the Corporation measures a financial
asset at fair value plus, in the case of a financial asset not at
fair value through profit or loss, transaction costs that are
directly attributable to the acquisition of the financial asset.
The Corporation’s financial assets consist of cash and cash
equivalents and accounts receivable, which are measured
at amortized cost using the effective interest method under
IFRS 9 and were previously measured at amortized cost
under IAS 39.
The Corporation’s financial liabilities consist of accounts
payable and accrued liabilities, dividends payable and
long-term debt. Accounts payable and accrued liabilities
and dividends payable are recognized initially at their fair
value and subsequently measured at amortized cost using
the effective interest method.
Long-term debt and borrowings are initially recognized at
fair value, net of transaction costs incurred and is subse-
quently measured at amortized cost. Long-term debt and
borrowings are removed from the balance sheet when the
obligation specified in the contract is discharged, cancelled
or expired.
The difference between the carrying amount of a financial
liability that has been extinguished or transferred to another
party and the consideration paid, including any non-cash
assets transferred or liabilities assumed, is recognised in
profit or loss as other income or finance costs. Borrowings
are classified as current liabilities unless the group has an
unconditional right to defer settlement of the liability for at
least 12 months after the reporting period.
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.
Derivatives are initially recognized at fair value on the date
a derivative contract is entered into and are subsequently
remeasured to their fair value at the end of each reporting
period and included as part of the profit and loss.
ii) Accounting Policy Up to December 31, 2017
Financial assets and financial liabilities are initially recog-
nized at fair value and are subsequently accounted for
based on their classification as described below. The
classification depends on the purpose for which the finan-
cial 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 capital-
ized, depending upon the nature of the transaction and the
associated instrument.
Derivatives are initially recognized at fair value on the date
a derivative contract is entered into and are subsequently
remeasured to their fair value at the end of each reporting
period and included as part of the profit and loss.
Loans, receivables and other liabilities
Loans, receivables and other liabilities are accounted for at
amortized cost using the effective interest method.
The Corporation has made the following classifications:
CLASSIFICATION
MEASUREMENT
Financial assets
Accounts receivable Loans and receivables Amortized cost
Financial liabilities
Accounts payable
and accrued liabilities
Other liabilities
Amortized cost
Dividends payable
Other liabilities
Amortized cost
Long-term debt
Other liabilities
Amortized cost
Financial assets and liabilities are offset and the net
amount reported in the balance sheet when there is a
legally enforceable right to offset the recognized amounts
and there is an intention to settle on a net basis or realize
the asset and settle the liability simultaneously.
R) Impairment of Financial Assets
The Corporation has adopted IFRS 9, which expands on
the guidance and disclosure requirements on the impair-
ment of loans and receivables, and credit risk disclosure.
Information about the impairment of financial assets, their
credit quality and the Corporation’s exposure to credit risk
52
WE ARE DEPENDABLE.
can be found in Note 22(d). The Corporation has adopted
the application of the simplified approach to providing for
expected credit losses prescribed by IFRS 9, which permits
the use of the lifetime expected loss provision for all trade
receivables. To measure the expected credit losses, the
Corporation’s trade receivables have been grouped based
on operating segment, shared credit risk characteristics
and days past due. Accounting judgment and estimate is
required in the assessment of the lifetime expected default
rate of each trade receivables grouping. The lifetime
expected default rates are reviewed at least annually and
are updated if expectations change.
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 impair-
ment loss equal to the difference between the amortized
cost of the loan or receivable and the present value of the
estimated future cash flows, discounted using the instru-
ment’s original effective interest rate. The carrying amount
of the asset is reduced by this amount either directly
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.
3) CHANGES IN
ACCOUNTING POLICIES
assess if an amendment should be accounted for as an
extinguishment or a modification.
·
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 establishes a single comprehen-
sive model for entities to use in accounting for revenue
arising from contracts with customers. IFRS 15 is to be
applied using a full retrospective or a modified retro-
spective approach and is effective for annual periods
beginning on or after January 1, 2018, with earlier
application permitted. The core principle of IFRS 15 is
that an entity should recognize revenue based on the
transfer of promised goods or services to customers
in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those
goods or services. Specifically, IFRS 15 introduces a
5-step approach to revenue recognition:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations
in the contract
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the perfor-
mance obligations in the contract
The following standards have been applied in preparing the
Consolidated Financial Statements.
Step 5: Recognize revenue when (or as) the entity
satisfies a performance obligation.
·
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 recog-
nition 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
retrospectively and is effective for annual periods begin-
ning on or after January 1, 2018, with earlier application
permitted. The Corporation adopted the requirements
of IFRS 9 using the retrospective approach without
restating comparative information effective January
1, 2018. The adoption of IFRS 9 had no impact on the
Corporation’s financial position or results of operations.
No retrospective adjustments were required in relation
to amendments made to the Corporation’s credit facility
prior to January 1, 2018, as the amendments were
considered to be an extinguishment. The Corporation
considers both quantitative and qualitative factors to
· Under IFRS 15, an entity recognizes revenue as a
performance obligation is satisfied, i.e. when control of
the goods or services underlying the particular perfor-
mance obligation is transferred to the customer. The
Corporation adopted the requirements of IFRS 15 using
the modified retrospective approach, effective January
1, 2018, for any accounting or disclosure changes
required under this standard. The adoption of IFRS 15
had no impact on the Corporation’s financial position or
results of operations.
·
IFRS 15 also requires disclosure of the aggregation
of revenue into categories that depict how the nature,
amount, timing and uncertainty of revenue and cash
flows are affected by economic factors. The Corporation
determined this disclosure was already provided
through the segment disclosure in Note 26.
· On June 20, 2016 the IASB issued an amendment
to IFRS 2 “Share based Payment” addressing three
classification and measurement issues. The amend-
ment clarifies the measurement basis for cashsettled,
53
2018 ANNUAL REPORT
share based payments and the accounting for modifica-
tions that change an award from cashsettled 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 amend-
ments are effective for periods beginning on or after
January 1, 2018. The Corporation adopted the amended
requirements of IFRS 2 effective January 1, 2018, for
any accounting or disclosure changes required under
this standard. Adoption of the amendments did not
result in any changes to the presentation or disclosures
in the financial statements.
4) NEW STANDARDS &
INTERPRETATIONS NOT
YET ADOPTED
The following standards have been issued but have not
yet been applied in preparing the Consolidated Finan-
cial Statements.
·
IFRS 16, Leases, was issued in January 2016 and applies
to annual reporting periods beginning on or after
January 1, 2019. IFRS 16 establishes principles for the
recognition, measurement, presentation and disclosure
of leases, with the objective of ensuring that lessees
and lessors provide relevant information that faithfully
represents those transactions. IFRS 16 will supersede
the current lease recognition guidance including IAS
17 “Leases” and the related interpretations when it
becomes effective. Under IAS 17, lessees were required
to make a distinction between a finance lease (on balance
sheet) and an operating lease (off balance sheet). IFRS
16 now requires lessees to recognize a lease liability
reflecting future lease payments and a ‘right-of-use
asset’ for virtually all lease contracts. The IASB has
included an optional exemption for certain short-term
leases and leases of low-value assets; however, this
exemption can only be applied by lessees. Under IFRS
16, a contract is, or contains, a lease if the contract
conveys the right to control the use of an identified
asset for a period of time in exchange for consideration.
The Corporation evaluated the impact the adoption of
this standard will have on its consolidated financial
statements and expects:
·
IFRS 16 will result in on-balance sheet recognition
of most of its leases that are considered operating
leases under IAS 17. This will result in the gross-up
of the balance sheet through the recognition of a
right-of-use asset and a liability for the present
value of the future lease payments.
· This change in policy is expected to result in the
recognition of right-of-use assets and lease liabili-
ties amounting to approximately $50 million to $55
million. In addition, the Corporation has $2.9 million
of liabilities at December 31, 2018 that are recorded
in unamortized leasehold inducements that will be
reclassified to lease liability on January 1, 2019.
· The Corporation continues to assess the impact of
adopting IFRS 16 on deferred tax balances.
· Depreciation expense on the right-of-use asset and
interest expense on the lease liability will replace
the operating lease expense.
· Cash flows from operating activities is expected
to increase under IFRS 16 as lease payments for
substantially all leases will be recorded as financing
outflows in the statement of cash flows as opposed
to operating cash flows.
IFRS 16 will be applied for 2019 using the modified
approach and the Corporation will therefore not be
restating comparative information. In addition, the
Corporation has elected to use the following practical
expedients on adoption of IFRS 16:
· The Corporation has not reassessed, under IFRS
16, contracts that were identified as leases under
previous accounting standard (IAS 17).
· The Corporation will use a single discount rate to a
portfolio of leases with reasonably similar under-
lying characteristics.
· The Corporation has used hindsight in determining
the lease term where the lease contracts contain
options to extend or terminate the lease.
· The Corporation expects to adopt the recognition
exemptions permitted for short-term leases (less
than twelve months) and leases for which the
underlying asset has a low value, whereby the lease
payments associated with these leases will continue
to be expensed on a straight-line basis over the
lease term.
In determining the lease term, Management considers
all factors that may create an economic incentive to
exercise a renewal option or termination option where
determining the lease term under the new standard.
54
WE ARE DEPENDABLE.
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
environment, if applicable.
Provisions
The Corporation is required to restore the leased premises
of its leased plants. A provision has been recognized for
the present value of the estimated expenditure required to
remove any leasehold improvements and installed equip-
ment. Refer to Note 11 for more details about estimation
and judgments for this provision.
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.
Management regularly evaluates these estimates and
judgments. Revisions to accounting estimates are recog-
nized in the period in which the estimate is revised if the
revision affects only that period or in the period of the
revision and future periods if the revision affects both
current and future periods.
5) CRITICAL ACCOUNTING
ESTIMATES & JUDGMENTS
The preparation of the Corporation’s consolidated financial
statements, in conformity with IFRS, requires management
of the Corporation to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual
results could differ from those estimates.
The estimates and associated assumptions are based on
historical experience and various other factors that are
believed to be reasonable under the circumstances, the
results of which form the basis of making the judgments
about carrying values of assets and liabilities that are not
readily apparent from other sources. These estimates and
judgments have been applied in a manner consistent with
prior periods.
The following discusses the most significant accounting
judgments and estimates that the Corporation has made
in the preparation of the 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 signifi-
cant 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 discounted cash flow models that required assump-
tions about future cash flows, margins, and discount rates
and the earnings multiple approach that utilizes Board
approved budgets and implied multiples. The implied
multiple is calculated by utilizing multiples of comparable
public companies. Judgment is required in determining the
appropriate comparable companies. Refer to Note 10 for
more details amount methods and assumptions used in
estimated net recoverable.
Recognition of Rebate Liabilities
In applying its accounting policy for volume rebates, the
Corporation must determine whether the processing
volume thresholds will be achieved. The most difficult
and subjective area of judgment is whether a contract will
generate satisfactory volume to achieve minimum levels.
Management considers all appropriate facts and circum-
stances in making this assessment including historical
experience, current volumetric run-rates, and expected
future events.
55
2018 ANNUAL REPORT 6) BUSINESS ACQUISITIONS
Linitek
On October 3, 2018, the Corporation completed the acqui-
sition of 9306145 Canada Corp. operating as Linitek (the
“Acquisition”), a private laundry and linen services company
operating in Calgary, Alberta. The Acquisition was completed
through an asset purchase agreement consisting of existing
fixed assets, contracts and employee base. The contracts
acquired are in the Alberta hospitality sector, which
complements the existing business of the Corporation. The
Acquisition has been accounted for using the acquisition
method, as per the criteria in IFRS 3 for identification of a
business combination, whereby the purchase consideration
was allocated to the fair values of the net assets acquired.
The Corporation financed the cash portion of the Acquisition
and transaction costs from existing loan facilities.
The purchase price allocated to the net assets acquired,
based on their estimated fair values, was as follows:
Cash consideration
Net assets acquired:
Property, plant & equipment
Lease provision
Intangible assets
Goodwill
2018
4,700
931
(117)
1,186
2,700
4,700
1 For the year ended December 31, 2018, $111 in professional fees associated with the acqui-
sition has been included in Corporate expenses.
Intangible assets acquired are made up of $1,186 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 be fully deductible for tax purposes.
The acquired business contributed revenues of $469 to the
Corporation for the period from October 3, 2018 to December
31, 2018. If the Acquisition had occurred on January 1, 2018,
consolidated pro-forma revenue the year ended December
31, 2018 would have been $241,709.
Annualized net profitability of the acquired business as if
the acquisition had taken place at the beginning of the year
have not been presented for the year ended December 31,
2018, due to the impracticality for the Corporation to disag-
gregate the information from the Corporation’s existing
business. Immediately following the acquisition, Linitek’s
business and operations were transitioned into the existing
business of the Corporation to leverage efficiencies and
synergies between the businesses.
Fishers
On November 27, 2017, the Corporation acquired all of the
outstanding shares of Fishers Topco Limited (”Fishers”), a
United Kingdom-based laundry and linen services company
(the “Acquisition”). Fishers’ was a private company limited
by 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 acquisi-
tion, the repayment of Fishers’ outstanding debt facilities
and the payment of management fees and transaction
costs from existing cash resources and existing loan facil-
ities, including an amendment to its existing revolving
credit which increased the available limit from $85,000 to
$100,000 plus a $25,000 accordion.
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.
56
WE ARE DEPENDABLE.
The purchase price allocated to the net assets acquired,
based on their estimated fair values, was as follows:
2017 in
Sterling
£000’s(1)
2017 in
Canadian
£000’s(1)
Cash consideration
33,910
57,610
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
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 asso-
ciated with the acquisition has been included in Corporate expenses.
As part of the acquired working capital, the Corporation
received various accounts receivable which when valued at
fair value of $8,307 (in Sterling £4,898) were equivalent to
their exchange amounts.
Intangible assets acquired are made up of $4,247 (in
Sterling £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 attribut-
able 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.
If the acquisition had occurred on January 1, 2017, consol-
idated pro-forma revenue and net profit for the year ended
December 31, 2017 would have been $223,454 and $8,798
respectively. These amounts have been calculated using the
subsidiary’s 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 $972 (in Sterling £568), and loss on disposal of
assets of $1,089 (in Sterling £636).
7) LINEN IN SERVICE
Balance, beginning of year
Acquisition of business
Additions
Amortization charge
Effect of movement
in exchange rates
Balance, end of year
2018
2017
21,456
-
31,393
(26,699)
221
11,511
7,234
21,718
(18,998)
(9)
26,371
21,456
57
2018 ANNUAL REPORT
8) PROPERTY, PLANT & EQUIPMENT
YEAR ENDED, DEC 31, 2017
Opening net book amount
Additions(4)
Acquisition of business(5)
Disposals
Depreciation charge
Effect of movement in exchange rates
Closing net book amount
AT DECEMBER 31, 2017
Cost
Accumulated depreciation
Net book amount
YEAR ENDED, DEC 31, 2018
Opening net book amount
Additions(4)
Acquisition of business(6)
Disposals
Transfers
Depreciation charge
Effect of movement in exchange rates
Closing net book amount
AT DECEMBER 31, 2018
Cost
Accumulated depreciation
Net book amount
Land Buildings
Laundry
Equip(1)
Office Delivery Computer
Equip
Equip
Equip
Leasehold
Improvements(2)
Spare
Parts
Total
2,454
-
1,571
-
-
(2)
4,023
17,265
20
3,947
-
(990)
(7)
69,617
36,599
14,177
(36)
(7,207)
(21)
20,235 113,129
304
49
-
-
(108)
-
245
250
17
-
-
(59)
-
208
377
417
-
-
(423)
-
371
22,428
13,141
-
-
(2,819)
-
32,750
563 113,258
50,387
144
19,695
-
-
(36)
- (11,606)
(30)
-
707 171,668
4,023
-
4,023
160,031
22,972
(2,737)
(46,902)
20,235 113,129
759
(514)
245
701
(493)
208
1,695
(1,324)
371
45,163
(12,413)
32,750
707
36,051
- (64,383)
707 171,668
4,023
-
-
-
-
-
44
4,067
20,235
152
-
-
(257)
(1,129)
108
113,129
20,979
712
(310)
-
(10,654)
396
19,109 124,252
245
273
-
-
-
(132)
1
387
208
77
138
(23)
-
(76)
-
324
3 71
979
81
-
-
(473)
-
958
32,750
14,318
-
-
257
(3,407)
-
71,668
707
37,304
526
931
-
(333)
-
-
-
- (15,871)
549
-
43,918 1,233 194,248
4,067
-
4,067
179,727
22,980
(3,871)
(55,475)
19,109 124,252
975
(588)
387
872
(548)
324
2,755
(1,797)
958
1,233
72,288
59,679
(15,761)
- (78,040)
43,918 1,233 194,248
1 Included in laundry equipment are assets under development in the amount of $1,582 (2017 - $23,625). These assets are not available for service and accordingly are not presently being depreciated.
2 Included in leasehold improvements are assets under development in the amount of $0 (2017 - $8,251). 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 $6,127 (2017 - $5,799).
4 Additions include amounts from the Canadian Division of $34,421 (2017-$50,387) and from the UK Division of $2,883 (2017 - $0).
5 Includes amounts related to property, plant and equipment assets of the acquired business which are included in the reportable segment for the UK division.
6 Includes amounts related to property, plant and equipment assets of the acquired business which are included in the reportable segment for the Canadian division.
58
WE ARE DEPENDABLE.
9) INTANGIBLE ASSETS
YEAR ENDED, DEC 31, 2017
Opening net book amount
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
YEAR ENDED, DEC 31, 2018
Opening net book amount
Additions(1)
Acquisition of business (2)
Amortization charge
Effect of movement in exchange rates
Closing net book amount
AT DECEMBER 31, 2018
Cost
Accumulated amortization
Net book amount
Healthcare
Relationships
Hospitality
Relationships
Computer
Software
Brand
Total
2,507
-
(1,043)
-
1,464
19,200
(17,736)
1,464
1,464
-
-
(481)
-
983
634
11,383
(724)
(18)
11,275
19,915
(8,640)
11,275
11,275
104
1,186
(2,523)
297
10,339
19,200
(18,217)
983
21,502
(11,163)
10,339
-
-
-
-
-
927
(927)
-
-
-
-
-
-
-
927
(927)
-
-
4,247
-
(7)
4,240
4,240
-
4,240
4,240
-
-
-
120
4,360
4,360
-
4,360
3,141
15,630
(1,767)
(25)
16,979
44,282
(27,303)
16,979
16,979
104
1,186
(3,004)
417
15,682
45,989
(30,307)
15,682
1 Includes amounts related to intangible assets of the acquired business which are included in the reportable segment for the UK division.
2 Includes amounts related to intangible assets of the acquired business which are included in the reportable segment for the Canadian division.
59
2018 ANNUAL REPORT
10) GOODWILL
The Corporation performed its annual assessment for goodwill impairment for the Canadian division and for the UK division as
at December 31, 2018 in accordance with its policy described in Note 2(k). 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 rates
UK division
Goodwill
2018
8,082
4,346
3,413
3,208
2,630
823
654
23,156
18,100
480
18,580
41,736
2017
5,382
4,346
3,413
3,208
2,630
823
654
20,456
18,100
(30)
18,070
38,526
Management has adjusted its approach in testing goodwill.
The change in methodology was used to balance the extent of
testing and analysis required for CGUs where no indication of
goodwill exists and CGUs where additional analysis is required.
Key Assumptions Used in 2018 Impairment Test
To calculate the recoverable amount for the CGUs manage-
ment uses the higher of the fair value less costs of disposal
and value in use. The recoverable amount was determined
using either a discounted cash flow approach or an earnings
multiple approach. The Corporation references Board
approved budgets and cash flow forecasts, trailing twelve-
month EBITDA, implied multiples and appropriate discount
rates in the valuation calculations. The implied multiple is
calculated by utilizing the average multiples of comparable
public companies. For the significant Canadian CGU’s, the
Corporation used implied average forward multiples that
ranged from 10.0 to 11.4 to calculate the recoverable amounts.
For the UK division, the implied average forward multiples
ranged from 9.0 to 10.5 to calculate the recoverable amount.
The fair value of calculations are categorized as Level 3 fair
value based on the unobservable inputs.
Key Assumptions Used in 2017 Impairment Test
Canadian Division
Management performed its assessment for goodwill impair-
ment on December 31, 2017, by measuring the recoverable
amount based off the value in use by discounting the future
cash flows generated from continued use. The model calcu-
lated the present value of the estimated future earnings for
all CGUs in the Canadian division. The Corporation determined
that the estimated recoverable amounts of the CGUs exceeded
their carrying amounts by a significant amount. The 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 perfor-
mance. For periods beyond the budgeted period, cash flows
were extrapolated using growth rates that did not exceed
the long-term averages for the business. Key assumptions
included a weighted average growth rate of 3% and a pre-tax
discount rate of 10% to 12% for all CGUs. The growth rates
represented management’s assessment of future industry
trends and were based on both external and internal sources,
as well as historical data.
60
WE ARE DEPENDABLE.
The recoverable amount of each CGU was in excess of its
carrying amount. Significant CGUs with an individual carrying
value greater than 10% of the total consolidated carrying value
include Edmonton, Calgary, Victoria, Vancouver 1 and 2. For
these CGUs the recoverable amount significantly exceeded 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.
UK Division
Management performed its assessment for goodwill impair-
ment on November 28, 2017, the day immediately 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 recover-
able 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 lease provisions and
obligations to restore leased premises of its leased plants.
A provision has been recognized for the present value of
the estimated expenditure required to settle the lease
provision and to remove leasehold improvements and
installed equipment. The Corporation estimates the undis-
counted, inflation adjusted cash flows required to settle
these obligations at December 31, 2018 to be $3,150 (2017
– $2,853). Management has estimated the present value of
this obligation at December 31, 2018 to be $2,645 (2017 –
$2,393) using an inflation rate of 1.72% (2017 – 1.72%) and
pre-tax weighted average risk-free interest rate of 1.85% to
2.13% (2017 – 0.75% to 2.5%) dependent upon length of the
lease term, which reflects current market assessments of
the time value of money. These obligations are expected to
be incurred over an estimated period from 2019 to 2033.
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, 2018, if actual costs were
to differ by 10% from management’s estimate the obligation
would be an estimated $265 (2017 – $239) higher or lower.
It is possible the estimated costs could change and changes
to these estimates could have a significant effect on the
Corporation’s consolidated financial statements.
The Corporation recorded the following provision activity
during the year:
Balance, beginning of year
Adoption of standard
Additions
Acquisition of business
Accretion expense
Changes due to movement
in exchange rates
Settlement
Balance, end of year
2018
2017
2,393
-
450
117
129
16
(460)
2,645
-
1,302
513
537
42
(1)
-
2,393
12) LONG-TERM DEBT
At January 1, 2017
Net proceeds from debt
Closing balance at December 31, 2017
At January 1, 2018
Net proceeds from debt
Closing balance at December 31, 2018
Prime Rate Loan(1)
25,800
16,980
42,780
42,780
27,423
70,203
1 Prime rate loan, collateralized by a general security agreement, bears 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, 2017 – July 31, 2021). The additional interest
margin can range between 0.0% to 1.25% dependent upon the calculated Debt/EBITDA finan-
cial ratio, with a range between 0 to 3.5x. As at December 31, 2018, the combined interest rate
was 4.70% (December 31, 2017 – 3.7%).
The Corporation has a revolving credit facility of up to
$100,000 plus a $25,000 accordion of which $71,353 is
utilized (including letters of credit totaling $1,150) as at
December 31, 2018. 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.
A general security agreement over all assets, a mortgage
against all leasehold interests and real property, insurance
policies and an assignment of material agreements have
been pledged as collateral.
61
2018 ANNUAL REPORT
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
2018
2,793
129
393
3,315
2017
396
42
695
1,133
14) UNAMORTIZED LEASE
INDUCEMENTS
Balance, beginning of year
Lease inducements received
Acquisition of business
Amortization charge
Effect of movement
in exchange rates
Less current portion, included
in accrued liabilities
2018
2017
2,792
438
-
(209)
9
3,030
(176)
2,854
2,112
408
370
(98)
-
2,792
(209)
2,583
15) INCOME TAXES
A reconciliation of the expected income tax expense to the
actual income tax expense is as follows:
Current tax:
Current tax (recovery)
on profits for the year
Total current tax
Deferred tax:
Origination and reversal
of temporary differences
Impact of substantively
enacted rates and other
Total deferred tax
2018
2017
(984)
(984)
2,241
(35)
2,206
2,137
2,137
1,578
46
1,624
62
WE ARE DEPENDABLE.
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)/taxable expenses
Income subject to tax
Income tax at statutory rate of 26.9% (2017 - 26.53%)
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 asset to be recovered within 12 months
Deferred tax liabilities:
Deferred tax liability to be recovered after more than 12 months
Deferred tax liability to be recovered within 12 months
Deferred tax liabilities, net
2018
7,391
(1,189)
6,202
1,668
(61)
(385)
1,222
2017
9,479
4,657
14,136
3,750
1
10
3,761
2018
2017
(1,846)
(484)
(2,330)
10,283
4,176
14,459
12,129
(2,368)
(95)
(2,463)
8,467
3,834
12,301
9,838
The movement of deferred income tax assets and liabilities during the year, without taking into consideration the offsetting
of balances within the same tax jurisdictions, is as follows:
Deferred tax assets:
Asset Retirement
Obligation
Offering Costs
and Other
At January 1, 2017
Acquisition of business
Charged (credited) to the statement of earnings
Charged (credited) to the statement of changes in equity
Related to movements in exchange rates
At December 31, 2017
Charged (credited) to the statement of earnings
Related to movements in exchange rates
At December 31, 2018
-
-
(500)
-
-
(500)
(30)
-
(530)
(695)
(238)
196
(1,227)
1
(1,963)
169
(6)
(1,800)
Total
(695)
(238)
(304)
(1,227)
1
(2,463)
139
(6)
(2,330)
63
2018 ANNUAL REPORT
Deferred tax liabilities:
At January 1, 2017
Acquisition of business
Charged (credited) to the statement of earnings
Related to movements in exchange rates
At December 31, 2017
Acquisition of business
Charged (credited) to the statement of earnings
Related to movements in exchange rates
At December 31, 2018
16) CONTINGENCIES
& COMMITMENTS
A) Contingencies
The Corporation has standby letters of credit issued as
part of normal business operations in the amount of $1,150
(December 31, 2017 – $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 signif-
icant liability will arise.
B) Commitments
Operating Leases and Utility Commitments
At December 31, 2018, 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
2019
2020
2021
2022
2023
Subsequent
9,181
7,373
6,312
5,650
4,729
27,943
61,188
Linen in
Service
Property, Plant
and Equipment
Intangible Assets
and Goodwill
764
2,657
(282)
(1)
3,138
17
(421)
70
2,804
2,999
32
800
1
3,832
-
344
-
4,176
3,218
708
1,406
(1)
5,331
-
2,127
21
7,479
Utility commitments
2019
2020
2021
2022
2023
Subsequent
Total
6,981
3,397
1,924
(1)
12,301
17
2,050
91
14,459
5,860
1,288
1,274
-
-
-
8,422
Linen Purchase Commitments
At December 31, 2018, the Corporation was committed
to linen expenditure obligations in the amount of $9,314
(December 31, 2017 – $10,232) to be incurred within the
next year.
Property, Plant and Equipment Commitments
At December 31, 2018, the Corporation was committed to
capital expenditure obligations in the amount of $1,622
(December 31, 2017 – $28,748) to be incurred within the
next year.
64
WE ARE DEPENDABLE.
17) SHARE CAPITAL
A) Authorized
The Corporation is authorized to issue an unlimited number of common shares and such number of shares of one class
designated as preferred shares which number shall not exceed 1/3 of the common shares issued and outstanding from
time to time.
B) Issued
Balance, beginning of year
Common shares issued under LTI
Common share issuance under equity offering
Balance, end of year
2018
10,508,502
51,434
-
10,559,936
2017
8,023,480
42,422
2,442,600
10,508,502
Unvested common shares held in trust for LTI
63,346
54,880
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 $55,000. 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.
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 $32,655. The
net proceeds of the offering were used to partially pay down
indebtedness that was incurred under K-Bro’s amended
$100,000 senior secured revolving credit facility to fund the
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
2018
6,169
10,466
0.59
2017
5,718
9,084
0.63
The basic net earnings per share calculation excludes the unvested Common shares held by the LTIP Account.
65
2018 ANNUAL REPORT
B) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to assume conver-
sion of all dilutive potential ordinary shares.
Basic weighted average shares for the year
Dilutive effect of LTI shares
Diluted weighted average shares for the year
Net earnings
Weighted average number of shares outstanding (thousands)
Net earnings per share, diluted
2018
10,466,458
33,556
10,500,014
6,169
10,500
0.59
2017
9,083,693
31,181
9,114,874
5,718
9,115
0.63
19) LONG-TERM INCENTIVE PLAN
An account was formed to hold equity grants issued under
the terms of the LTI on behalf of the participants (the “LTIP
Account”) and under certain circumstances the Corporation
may be the beneficiary of forfeited Common shares held by
the LTIP Account. The Corporation has control over the LTIP
Account as it is exposed, or has rights, to variable returns
and has the ability to affect those returns through its power
over the LTIP Account. Therefore the Corporation has
consolidated the LTIP Account. Compensation expense is
recorded by the Corporation in the period earned. Dividends
paid by the Corporation with respect to unvested Common
shares held by the LTIP Account are paid to LTI participants.
Unvested Common shares held by the LTIP Account are
shown as a reduction of shareholders’ equity.
Balance, beginning of year
Issued during year
Vested during year
Balance, end of year
2018
Unvested
54,880
34,802
(26,336)
63,346
Vested
408,135
16,633
26,336
451,104
2017
Unvested
44,634
28,544
(18,298)
54,880
Vested
375,958
13,879
18,298
408,135
The cost of the 63,346 (2017 – 54,880) unvested Common shares held by the LTIP Account at December 31, 2018 was nil (2017 - nil).
20) DIVIDENDS TO SHAREHOLDERS
During the years ended December 31, 2018, the Corporation
declared total dividends to shareholders of $12,651 or
$1.200 per share (2017 - $11,121 or $1.200 per share).
The Corporation’s policy is to pay dividends to Shareholders
of its available cash to the maximum extent possible
consistent with good business practice considering require-
ments for capital expenditures, working capital, growth
capital and other reserves considered advisable by the
Directors of the Corporation. All such dividends are discre-
tionary. Dividends are declared payable each month to the
Shareholders on the last business day of each month and
are paid by the 15th day of the following month.
66
WE ARE DEPENDABLE.
21) NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS
Years ended December 31,
Accounts receivable
Linen in service
Prepaid expenses and deposits
Accounts payable and accrued liabilities(1)
Income taxes payable / receivable
2018
(3,571)
(4,695)
(876)
(62)
(2,176)
(11,380)
2017
(2,961)
(2,720)
(309)
4,930
(2,862)
(3,922)
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
$328 (2017 - $4,078).
22) FINANCIAL INSTRUMENTS
A) Fair Value
The Corporation’s financial
instruments at December
31, 2018 and 2017 consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabil-
ities, 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 approx-
imates the respective carrying amount due to the floating
rate nature of the debt.
B) Financial Risk Management
The Corporation’s activities are exposed to a variety of
financial risks: price risk, credit risk and liquidity risk. The
Corporation’s overall risk management program focuses
on the unpredictability of financial and economic markets
and seeks to minimize potential adverse effects on the
Corporation’s financial performance. Risk management is
carried out by financial management in conjunction with
overall corporate governance.
C) Price Risk
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.
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 trans-
lation 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.
Based on financial instrument balances as at December
31, 2018, 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 $57, respectively, on net earnings.
Based on financial instrument balances as at December 31,
2018, 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 $22, respectively, on other comprehensive loss.
Interest Rate Risk
The Corporation is subject to interest rate risk as its credit
facility bears interest at rates that depend on certain finan-
cial 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 $702 to net earnings.
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.
67
2018 ANNUAL REPORT
D) Credit Risk
Accounts Receivable
The Corporation has financial assets that are subject to
the expected credit loss model. The Corporation’s financial
assets that are exposed to credit risk consist of cash and
cash equivalents and accounts receivable. The Corporation,
in the normal course of business, is exposed to credit risk
from its customers.
Management believes that the risks associated with concen-
trations of credit risk with respect to accounts receivable
are limited due to the generally short payment terms, and
the nature of the customers, which are primarily publicly
funded health care entities. The credit risk associated with
cash and cash equivalents is minimized by ensuring these
financial assets are held with Canadian chartered banks
and Standard Chartered Bank United Kingdom.
Cash and Cash Equivalents
While cash and cash equivalents are also subject to the
impairment requirements of IFRS 9, the identified impair-
ment loss was immaterial.
The Corporation applies the IFRS 9 simplified approach to
measuring expected credit losses which uses a lifetime
expected loss allowance for all trade receivables and
contract assets.
To measure the expected credit losses, trade receivables
have been grouped based on shared credit risk characteris-
tics and the days past due. The expected loss rates are based
on the payment profiles of sales over a period of 60 months
before December 31, 2018 or January 1, 2018 respectively
and the corresponding historical credit losses experienced
within this period. The historical loss rates are adjusted to
reflect current and forward-looking information on macro-
economic factors affecting the ability of the customers
to settle the receivables. The Corporation has identified
the GDP and the unemployment rate of the countries in
which it provide services to be the most relevant factors,
and accordingly adjusts the historical loss rates based on
expected changes in these factors.
On that basis, the loss allowance as at December 31, 2018
or January 1, 2018 (on adoption of IFRS 9) was determined
as follows for trade receivables:
December 31, 2017
Current
1 to 60 days
61 to 90 days
Greater than 90 days
December 31, 2018
Current
1 to 60 days
61 to 90 days
Greater than 90 days
Gross
Allowance
22,060
6,659
573
794
30,086
-
-
-
368
368
Gross
Allowance
24,540
7,208
1,139
754
33,641
-
-
-
105
105
Net
22,060
6,659
573
426
29,718
Net
24,540
7,208
1,139
649
33,536
68
WE ARE DEPENDABLE.
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 (calculated under IAS 39)
Amounts restated under opening retained earnings
Opening loss allowance at January 1, 2018 (calculated under IFRS 9)
Adjustment made during the year
Acquisition of business
Write-offs
Effect of movements in exchange rates
Balance, end of year
2018
2017
368
-
368
(10)
-
(262)
9
105
31
-
31
(10)
348
-
(1)
368
Previous Accounting Policy for Impairment of
Trade Receivables
In the prior year, the impairment of trade receivables was
assessed based on the incurred loss model. Individual
receivables which were known to be uncollectible were
written off by reducing the carrying amount directly. The
other receivables were assessed collectively, to determine
whether there was objective evidence that impairment had
been incurred but not yet been identified. For these receiv-
ables, the estimated impairment losses were recognized
in a separate provision for impairment. The Corporation
considered that there was evidence of impairment if any of
the following indicators were present:
· significant financial difficulties of the debtor
· probability that the debtor will enter bankruptcy or
financial reorganization, and
· default or delinquency in payments (more than 60
days overdue).
E) Liquidity Risk
The Corporation’s accounts payable and dividend payable are due within one year. Payments due under contractual obliga-
tions for the next five years and thereafter are as follows:
Deferred tax liabilities:
Payments Due by Period
Total
1–3 Years
< 1 Year
Long-term debt
Operating lease commitments
Utility commitments
Linen purchase obligations
Property, plant and equipment commitments
70,203
61,188
8,422
9,314
1,622
-
9,181
5,860
9,314
1,622
70,203
13,685
2,562
-
-
4–5 Years
> 5 Year
-
10,379
-
-
-
-
27,943
-
-
-
The Corporation has a credit facility with a maturity date of
July 31, 2021 (Note 12). The degree to which the Corporation
is leveraged may reduce its ability to obtain additional
financing for working capital and to finance investments
to maintain and grow the current levels of cash flows from
operations. The Corporation may be unable to extend the
maturity date of the credit facility.
Management, to reduce liquidity risk, has historically
renewed the terms of the credit facility in advance of its
maturity dates and the Corporation has maintained financial
ratios that management believes are conservative compared
to financial covenants applicable to the credit facility. A
significant portion of the available facility remains undrawn.
Management measures liquidity risk through comparisons
of current financial ratios with financial covenants contained
in the credit facility.
69
2018 ANNUAL REPORT
23) CAPITAL MANAGEMENT
The Corporation views its capital resources as the aggre-
gate of its debt, shareholders’ equity and amounts available
under its credit facility. In general, the overall capital of the
Corporation is evaluated and determined in the context of
its financial objectives and its strategic plan.
The Corporation’s objective in managing capital is to ensure
sufficient liquidity to pursue its growth and expansion
strategy, while taking a conservative approach towards
financial leverage and management of financial risk. The
Corporation’s capital is composed of shareholders’ equity
and long-term debt. The Corporation’s primary uses of
capital are to finance its growth strategies and capital
expenditure programs. The Corporation currently funds
these requirements from internally-generated cash flows
and interest bearing debt.
The Corporation pays a dividend which reduces its ability to
internally finance growth and expansion. However the avail-
ability of the Corporation’s revolving line of credit provides
sufficient access to capital to allow K-Bro to take advantage
of acquisition opportunities. The merits of the dividend are
periodically evaluated by the Board.
The primary measures used by the Corporation to monitor
its financial leverage are the ratios of Funded Debt to
EBITDA (earnings before income taxes, depreciation and
amortization) and Fixed Charge Coverage. EBITDA is an
additional GAAP measure as prescribed by IFRS and has
been presented in the manner in which the chief operating
decision maker assesses performance.
The Corporation manages a Funded Debt to EBITDA ratio
calculated as follows:
Long-term debt, including current portion
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
Funded debt to EBITDA
2018
70,203
1,150
(2,827)
68,526
6,169
1,222
3,315
15,871
3,004
29,581
2.32x
The Corporation manages a Fixed Charge Coverage calculated on a trailing twelve-month basis as follows:
EBITDA
Finance expense
Dividends to shareholders
Fixed charge coverage
2018
29,581
3,315
12,651
15,966
1.9x
2017
42,780
1,650
(11,276)
33,154
5,718
3,761
1,133
11,606
1,767
23,985
1.38x
2017
23,985
1,133
11,121
12,254
2.0x
70
WE ARE DEPENDABLE.
24) RELATED PARTY
TRANSACTIONS
The Corporation transacts with key
individuals from
management and with the Board who have authority and
responsibility to plan, direct and control the activities of
the Corporation. The nature of these dealings were in the
form of payments for services rendered in their capacity as
Directors (retainers and meeting fees, including share-based
payments) and as employees of the Corporation (salaries,
benefits, short-term bonuses and share-based payments).
Key management personnel are defined as the executive
officers of the Corporation including the President and Chief
Executive Officer, Senior Vice-President, Chief Financial
Officer and one employee acting in the capacity of Managing
Director, UK.
During 2018 and 2017, remuneration to directors and key
management personnel was as follows:
Salaries and retainer fees
Short-term bonus incentives
Post-employment benefits
Share-based payments
2018
1,836
935
63
1,438
4,272
2017
1,487
912
45
1,290
3,734
The Corporation incurred expenses in the normal course
of business for advisory consulting services provided by
a Director. The amounts charged are recorded at their
exchange amounts and are subject to normal trade terms.
For the years ended December 31, 2018, the Corporation
incurred such fees totaling $138 (2017 – $138).
25) EXPENSES BY NATURE
Wages and benefits
Linen
Utilities
Delivery
Materials and supplies
Occupancy costs
Repairs and maintenance
Other expenses
2018
2017
118,347
26,699
14,991
18,197
10,485
10,075
8,215
2,944
209,953
82,184
18,998
10,393
11,358
6,683
6,652
5,627
4,679
146,574
26) SEGMENTED INFORMATION
The Chief Executive Officer (“CEO”) is the Corporation’s
chief operating decision-maker. The Chief Executive Officer
examines the Corporation’s performance and allocation of
resources both from geographic perspective and service type,
and has identified two reportable segments of its business:
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 there-
fore they have been aggregated into one reportable
segment which operates exclusively in Canada. This
reportable segment is inclusive of the Corporation’s
acquisition of Linitek on October 3, 2018.
2) UK division - provides laundry and linen services
primarily to the hospitality sector, with other sectors
including healthcare, manufacturing and pharmaceu-
tical, through seven sites including one distribution
center, which are located in Cupar, Perth, Newcastle,
Livingston, Inverness and Coatbridge.
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.
The CEO primarily uses a measure of EBITDA to assess the
performance of the operating segments. However, the CEO
also receives information about the segments’ revenue and
assets on a monthly basis.
Segment Revenue
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 consoli-
dated statements of earnings & comprehensive income.
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, 2020, in Vancouver
71
2018 ANNUAL REPORT
the major customer is contractually committed to March 1, 2027, and in Saskatchewan the major customer is contractually
committed to June 1, 2025. For the years ended December 31, 2018, from these four major customers the Corporation has
recorded revenue of $98,850 (2017 – $92,340), representing 41.2% (2017 – 54.1%) of total revenue.
Healthcare
Hospitality
Canadian division
Healthcare
Hospitality
UK division
2018
2017
128,933
50,956
179,889
6,379
53,266
59,645
53.8%
21.3%
75.1%
2.7%
22.2%
24.9%
116,948
48,883
165,831
561
4,167
4,728
68.6%
28.7%
97.3%
0.3%
2.4%
2.7%
Total segment revenue
239,534
100.0%
170,559
100.0%
Segment Net Earnings and EBITDA
Segment net earnings and EBITDA are calculated consistent with the presentation in the financial statements. The net
earnings and EBITDA is allocated based on the operations of the segment, and where the earnings and costs are generated from.
2018
Net earnings
EBITDA
2017
Net earnings
EBITDA
Canadian Division
UK Division
2,701
21,370
3,468
8,211
Canadian Division
UK Division(1)
8,599
26,493
(2,881)
(2,508)
Total
6,169
29,581
Total
5,718
23,985
The Canadian division net earnings includes non-cash employee share based compensation expense of $1,817 (2017 – $1,508).
72
WE ARE DEPENDABLE.
Segment Assets
Segment assets are measured in the same way as in the financial statements. These assets are allocated based on the
operations of the segment and the physical location of the asset.
The Corporation’s cash and cash equivalents are not considered to be segment assets, but are managed by the treasury function.
At December 31, 2018
Total assets
Other:
Cash and cash equivalents
Total segment assets
At December 31, 2017
Total assets
Other:
Cash and cash equivalents
Intercompany loans
Total segment assets
Segment Liabilities
Canadian Division
UK Division
Total
244,768
77,461
322,229
-
244,768
(2,827)
74,634
(2,827)
319,402
Canadian Division
UK Division
Total
225,339
69,874
295,213
-
(10,934)
214,405
(11,276)
10,934
69,532
(11,276)
-
283,937
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.
Canadian Division
UK Division
Total
111,044
12,525
123,569
(70,203)
40,841
-
12,525
(70,203)
53,366
Canadian Division
UK Division
78,410
15,216
Total
93,626
(42,780)
35,630
-
15,216
(42,780)
50,846
At December 31, 2018
Total liabilities
Other:
Long-term debt (note 12)
Total segment liabilities
At December 31, 2017
Total liabilities
Other:
Long-term debt (note 12)
Total segment liabilities
73
2018 ANNUAL REPORT
27) SUBSEQUENT EVENTS
B) Alberta Healthcare Contract Extension
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 15, 2019
to Shareholders of record on January 31, February 28, and
March 31, 2019 respectively.
On March 1, 2019, 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.
74
WE ARE DEPENDABLE. CORPORATE
INFORMATION
LOCATIONS - CANADA
CORPORATE OFFICE
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
Andrew MacKeen
General Manager
VANCOUVER 1
CALGARY
REGINA
MONTRÉAL
#401 - 8340
Fraser Reach Court,
Burnaby, BC V3N 0G2
P 604 420 2203
F 604 420 2313
Kevin McElgunn
General Manager
VANCOUVER 2
8035 Enterprise Street
Burnaby, BC V5A 1V5
P 604 681 3291
F 604 685 1458
Ryo Utahara
General Manager
6969 – 55 St SE
Calgary, AB T2C 4Y9
P 403 724 9001
F 403 720 2959
Jeff Gannon
General Manager
730 Dethridge Bay
Regina, SK S4N 6H9
P 306 757 5276
F 306 757 5280
Sean Jackson
General Manager
EDMONTON
TORONTO
15223 – 121 A Ave
Edmonton, AB T5V 1N1
P 780 451 3131
F 780 452 2838
Trevor Rye
General Manager
6045 Freemont Blvd
Mississauga, ON L5R 4J3
P 416 233 5555
F 416 233 4434
Kevin Stephenson
General Manager
Johan Sellarajah
Operations Manager
599, Rue Simonds
Sud Granby, QC J2J 1C1
P 450 378 3187
F 450 378 8245
QUÉBEC
367 Boulevard Des Chutes,
Québec City, QC G1E 3G1
P 418 661 6163
F 418 661 4000
Dimitri Hamm
Directeur Général
Fabien Poirier
Directeur Opérations
LOCATIONS - UK
HEAD OFFICE
PERTH
RIGGS PLACE
COATBRIDGE
3 Riggs Place,
Cupar, Fife, KY155JA
P 01334654033
CUPAR
Prestonhall Industrial
Estate, Cupar, Fife,
KY154RD
P 01334655220
David Emslie
General Manager
Inveralmond Industrial
Estate, Ruthvenfield
Avenue, Perth, PH13UF
P 01738210106
Andy Mackay
General Manager
LIVINGSTON
2 Gregory Road, Kirkton
Campus, Livingston,
EH547DR
P 01506426816
Joe White
General Manager
3 Riggs Place,
Cupar, Fife, KY155JA
P 01334654033
Joe White
General Manager
18 Palacraig Street,
Coatbridge, ML54RY
P 01236449010
John Marshall
General Manager
NEWCASTLE
Unit L4, Intersect 19,
High Flatworth, Tyne
Tunnel Industrial Estate,
North Shields, NE297UT
P 01916053106
John Wellford
General Manager
INQUIRIES@K-BROLINEN.COM | K-BROLINEN.COM
BOARD OF DIRECTORS
ROSS SMITH, FCPA
MATTHEW HILLS, MBA
STEVEN MATYAS, BSc
LINDA MCCURDY, MBA
MICHAEL PERCY, PhD
FCA (Chair)
Corporate Director
Managing Director
LLM Capital Partners
Corporate Director
President & CEO
K-Bro Linen Systems Inc.
Professor
School of Business
University of Alberta
EXECUTIVE OFFICERS
LINDA MCCURDY, MBA
SEAN CURTIS
KRISTIE PLAQUIN, CPA, CA
President & CEO
Senior VP & COO
(Edmonton)
Chief Financial Officer
TRANSFER AGENT
& REGISTRAR
AST Trust Company
Calgary, Alberta
AUDITORS
Pricewaterhouse-
Coopers 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
NOTICE OF ANNUAL & SPECIAL MEETING
T H E A N N U A L M E E T I N G O F S H A R E H O L D E R S W I L L B E H E L D AT T H E O F F I C E S
O F ST I K E M A N E L L I OT T L L P, 53 00 C O M M E R C E C O U RT W E ST, 199 B AY ST R E E T,
T O RO N TO , O N TA R I O O N T H U R S D AY, J U N E 6, 2019 AT 9: 00 A . M . E DT
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