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WE ARE
DEPENDABLE.
TABLE OF CONTENTS
1 PRESIDENT’S MESSAGE
4 CHAIRMAN’S MESSAGE
5 OFFICERS & DIRECTORS
8 FINANCIAL HIGHLIGHTS
9 MANAGEMENT’S DISCUSSION & ANALYSIS
35 CONSOLIDATED FINANCIAL STATEMENTS
1
PRESIDENT’S MESSAGE
That doesn’t mean it will be easy, but rather that we are
prepared and well-positioned. We will continue to navigate
these rapidly evolving issues and pursue growth oppor-
tunities both during the crisis and after it has receded. In
the meantime, our thoughts are with people throughout
Canada and the UK—and across the world—who are
suffering from the health, emotional and financial implica-
tions of the pandemic.
K-Bro will continue to do as much as we can for all of our
communities and customers, especially our healthcare
customers, in this time of need. We will continue to have
the well-being and safety of all our employees at the center
of our concerns, taking action to ensure our plants and
employees remain as safe and healthy as possible.
Thank you for your support and confidence. Together we will
continue to deliver the best possible services and results
as we move through this period of crisis, to a better and
brighter future for everyone.
Warmly,
LINDA MCCURDY
I am writing to you a quarter into 2020 with two
distinct messages. Under normal circumstances,
my letter would be about 2019 results and their
meaning for the future. These are anything but
normal times, with the COVID-19 global pandemic
and the near-shutdown of economies around the
world including Canada and the UK. My report on
2019 is tempered by the health and economic crises
challenging our countries and much of the world.
2019 was a year of significant accomplishments for K-Bro,
including record revenue and EBITDA before the adoption
of IFRS 16 of $252.4 million and $38.7 million, representing
an increase of 5.4% and 30.8% compared with 2018. We
realized growth in our key markets and a return to historical
EBITDA margins for our Canadian operations. We also saw
a return to positive total cash flow, enabling us to further
strengthen our balance sheet and provide even greater
flexibility in our capital structure. We entered 2020 well-po-
sitioned for a bright future, with the ability to profitably grow
in our existing markets and expand into new markets both
organically and through acquisitions.
The COVID-19 pandemic and resulting economic contrac-
tion reached Canada and the UK in March 2020. As of this
writing, although K-Bro’s healthcare business remains
solid, representing more than 70% of our Canadian revenue
and more than 55% of our total revenue however we have
seen a recent decline in overall healthcare volumes as
hospitals take measures to prepare for increased COVID-19
outbreaks. It is no surprise in light of circumstances that
our hospitality business has quickly fallen, alongside the
industry, to historically low levels which we expect will
impact our company’s results until national economic
activity begins to turn around.
People ask how K-Bro has had to adapt in order to address
an unprecedented pandemic of the contagion and lethality
of COVID-19, with massive impacts in healthcare as well as
in hospitality, where numerous people are isolating. The
reality is that although we have made some modifications
specific to logistics and shifts in demand, we always handle
all materials as though they are hazardous. It is just one
part of the dependability for which we are built, and for
which we have earned the trust of our markets.
2019 ANNUAL REPORT
2
WE ARE DEPENDABLE. 3
2019 ANNUAL REPORT 4
CHAIRMAN’S MESSAGE
WHILE 2019 WAS A YEAR OF
ACCOMPLISHMENTS FOR K-BRO, WE
FACE A RAPIDLY CHANGING ENVIRONMENT
AS WE MOVE THROUGH 2020.
After several years during which we invested more than
$200 million in five new facilities and two acquisitions,
K-Bro turned its attention in 2019 to organic growth and the
optimization of operations at all of our plants. The results
included 5.4% revenue growth, 30.8% EBITDA growth
before the adoption of IFRS 16 and significant improvement
in margins at our Canadian facilities.
Our healthcare business remains solid, while at the same
time we recognize that the COVID-19 pandemic will signifi-
cantly impact our hospitality business in Canada and the
UK. To our credit, K-Bro entered 2020 with a flexible capital
structure and we anticipate we will continue to pursue
growth opportunities even during the pandemic and finan-
cial crisis. We expect to emerge with an even stronger
market position in our businesses.
On behalf of our Company and Board, thank you for your
confidence and trust in supporting K-Bro. We remain
committed to ensuring the best possible service for our
customers—especially during a time of crisis for our health-
care customers—and to providing the safest and healthiest
workplace possible.
ROSS SMITH
WE ARE DEPENDABLE.
5
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 & EUROPE.
We operate 15 facilities and two 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 relent-
lessly 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 hospitals 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.
TREVOR RYE,
SCOTT INGLIS,
MICHAEL JONES,
LUCY RENAUT
JACKIE BELANGER, ANDREW MACKEEN, SEAN JACKSON
2019 ANNUAL REPORT 6
KRISTIE PLAQUIN, ROSS SMITH, MICHAEL PERCY
SEAN CURTIS, STEVEN MATYAS, MATTHEW HILLS, RYO UTAHARA
KEVIN MCELGUNN, KEVIN STEPHENSON, JEFF GANNON, DIMITRI HAMM
“ K-BRO’S FOCUS ON INVESTING
FOR THE LONG TERM HAS
CREATED A HIGHLY EFFICIENT,
ENVIRONMENTALLY CONSCIOUS
& COST-EFFECTIVE NET WORK
ACROSS CANADA.”
LINDA MCCURDY, President & Chief Executive Officer
WE ARE DEPENDABLE. 7
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(1) UP
EBITDA BEFORE
IFRS 16(1) UP
5.4%
60.8%
30.8%
250
200
150
100
50
48
44
40
36
32
28
24
20
48
44
40
36
32
28
24
20
2014
2015
2016 2017
2018
2019
2014
2015
2016 2017
2018
2019
2014
2015
2016 2017
2018
2019
(In millions of Canadian dollars)
Years ended December 31
(In millions of Canadian dollars)
Years ended December 31
(In millions of Canadian dollars)
Years ended December 31
1 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as
permitted under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net
earnings without adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
2 The year-end values of each investment shown on the graph are based on share price appreciation plus dividend reinvestment.
2019 ANNUAL REPORT 8
Years ended December 31,
2019
2018
2017
2016
2015
2014
2013
Income Statement Data
Revenue
EBITDA
EBITDA (%)
EBITDA without adoption of IFRS 16[1]
EBITDA (%) without adoption of IFRS 16[1]
Net earnings
Net earnings without adoption of IFRS 16[1]
Net earnings per share (Diluted)
Net earnings per Share without
adoption of IFRS 16 (Diluted)[1]
Balance Sheet Data
Working capital
Long-term debt
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
252,410
47,573
18.8
38,693
15.3
10,906
11,339
1.03
1.07
239,534
29,581
12.3
29,581
12.3
6,169
6,169
0.59
0.59
170,559
23,985
14.1
23,985
14.1
5,718
5,718
0.63
0.63
159,089
28,236
17.7
28,236
17.7
11,527
11,527
1.44
1.44
144,537
27,140
18.8
27,140
18.8
12,068
12,068
1.52
1.52
136,440
26,241
19.2
26,241
19.2
12,198
12,198
1.72
1.72
131,202
23,317
17.8
23,317
17.8
10,336
10,336
1.47
1.47
31,021
62,494
34,825
70,203
32,008
42,780
13,766
25,800
8,670
2,349
21,717
0
9,434
19,640
2.80
42.9
40.8
9.3
5.6
25.7
8.0
445,914
43.16
32.74
42.05
2.36
51.1
56.7
11.9
3.1
19.1
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
45.00
37.39
41.32
50.98
36.69
42.15
56.99
43.00
50.95
2.85
42.0
26.9
12.5
11.1
19.4
182.9
367,023
47.90
36.90
46.11
2.61
44.2
27.0
12.0
14.5
41.2
235.2
280,976
40.50
28.38
39.60
1 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as
permitted under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net
earnings without adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
($ Thousands of CDN dollars, except percentages and per share data)
WE ARE DEPENDABLE.
9
MANAGEMENT’S
DISCUSSION & ANALYSIS
12
INTRODUCTION
13 STRATEGY
28 OUTSTANDING COMMON SHARES
28 RELATED PARTY TRANSACTION
14 FOURTH QUARTER OVERVIEW
28 CRITICAL ACCOUNTING ESTIMATES
14 SELECTED ANNUAL FINANCIAL INFORMATION
29 TERMINOLOGY
15 SUMMARY OF RESULTS & KEY EVENTS
31 CHANGES IN ACCOUNTING POLICIES
17 OUTLOOK
31 RECENT ACCOUNTING PRONOUNCEMENTS
17 RESULTS OF OPERATIONS
33 FINANCIAL INSTRUMENTS
25 LIQUIDITY & CAPITAL RESOURCES
33 CRITICAL RISKS & UNCERTAINTIES
26 DIVIDENDS
34 CONTROLS & PROCEDURES
27 DISTRIBUTABLE CASH FLOW
2019 ANNUAL REPORT 10
WE ARE DEPENDABLE. 11
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 conjunc-
tion with, the audited consolidated financial statements of
K-Bro Linen Inc. (“the Corporation”) for the years ended
December 31, 2019 and 2018 (the “2019 Audited Financial
Statements”), as well as the unaudited interim condensed
consolidated financial statements for the periods ended
March 31, 2019, June 30, 2019 and September 30, 2019. 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 19, 2020.
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 performance
and are based on management’s estimates and assump-
tions that are subject to risks and uncertainties, which could
cause K-Bro’s actual performance and financial results in
future periods to differ materially from the forward-looking
information contained in this MD&A. These risks and uncer-
tainties 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 associ-
ated renewal risk; (v) increased capital expenditure require-
ments; (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,
Québec, Saskatchewan 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 recover-
able from customers, there can be no assurances that that
will occur; (ix) the availability of future financing; (x) textile
demand; (xi) the adverse impact of the coronavirus (COVID-
19) pandemic on the Corporation, which is likely to be signifi-
cant, particularly to our hospitality segment; and (xii) foreign
currency risk. Material factors or assumptions that were
applied in drawing a conclusion or making an estimate set
out in the forward-looking information include: (i) volumes
and pricing assumptions; (ii) expected impact of labour
cost initiatives; (iii) frequency of one-time costs impacting
quarterly and annual financial results; (iv) foreign exchange
rates; and (v) the level of capital expenditures. Although
the forward-looking information contained in this MD&A
is based upon what management believes are reasonable
assumptions, there can be no assurance that actual results
will be consistent with these forward-looking statements.
Certain statements regarding forward-looking information
2019 ANNUAL REPORT 12
included in this MD&A may be considered “financial outlook”
for purposes of applicable securities laws, and such finan-
cial outlook may not be appropriate for purposes other than
this MD&A. Forward looking information included in this
MD&A includes the expected annual healthcare revenues
to be generated from the Corporation’s contracts with new
customers, the anticipated capital costs for the Toronto and
Vancouver facilities, calculation of costs, including one-time
costs impacting the quarterly financial results, anticipated
future capital spending 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 comparable to
similar measures presented by other issuers. Please see
“Terminology” for further discussion.
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 UK sites located in Cupar,
Perth, Newcastle, Livingston 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 healthcare and
hospitality sectors of the laundry and linen services industry
represent a stable base of annual recurring business with
opportunities for growth as additional healthcare beds and
funds are made available to meet the needs of an aging
demographic.
INDUSTRY CHARACTERISTICS
& TRENDS
Management believes that the industry in which K-Bro
operates has historically exhibited the following character-
istics and trends:
WE ARE DEPENDABLE. 13
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. We note that the ongoing coronavirus
(“COVID-19”) pandemic has introduced atypical insta-
bility in the hospitality sector which is inconsistent with
the historical characteristics of and trends in K-Bro’s
industry. The continued spread of COVID-19 throughout
Canada and the UK, at least in the short-term, is expected
to have a significant negative impact on the Corporation’s
hospitality business (though, to date, we have seen a
slight increase in our healthcare business).
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
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) have historically gener-
ated between 0.5 million and 3 million pounds of linen per
year. Most healthcare customers have historically generated
between 0.5 million pounds of linen per year for a hospital
and up to approximately 40 million pounds of linen per year
for a Canadian healthcare region. We note that the ongoing
coronavirus (“COVID-19”) pandemic has introduced atypical
instability in the hospitality sector which is inconsistent
with such historical linen generation trends. As COVID-19
continues to spread throughout Canada and the UK, at
least in the short term, we expect significant reductions in
linen volume generation by our customers in the hospitality
segment, primarily as a result of decreased willingness
and ability of the general population to travel to and within
Canada and the UK during the course of the pandemic.
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 signifi-
cantly to K-Bro’s growth. Management believes that new
outsourcing opportunities will continue to arise in the near
to medium-term and that K-Bro is well-positioned for
continued growth, particularly as healthcare and hospitality
institutions continue to increase their focus on core services
and confront pressures for capital and cost savings.
Management may in the future expand its core services
to new markets either through acquisitions or by 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.
2019 ANNUAL REPORT
14
FOURTH QUARTER
OVERVIEW
Revenue increased in the fourth quarter of 2019 to $62.9
million or by 5.8% compared to 2018. This increase was due to
volume from the acquisition of an Aberdeen laundry, organic
growth at existing customers, and new customers secured in
existing markets. Net earnings for the fourth quarter were
$2.2 million or $0.21 per share (basic). Cash generated by
operating activities for the quarter was $11.6 million and
distributable cash flow was $7.0 million compared to $7.8
million and $5.8 million respectively for the comparative
quarters in the previous fiscal year.
EBITDA (see Terminology) increased in the fourth quarter to
$11.1 million from $6.6 million in 2018, which is an increase of
67.7%. On a consolidated basis, the EBITDA margin increased
from 11.1% in 2018 to 17.7% in 2019. For the Canadian
division, the EBITDA margin increased to 19.0% from 10.7%
for the comparative quarter of 2019, which primarily relates
to the operating efficiencies gained in the Canadian division
in the quarter and the adoption of IFRS 16 Leases. For the
UK division, the EBITDA margin increased to 14.0% from
12.4% for the comparative quarter of 2019, which primarily
relates to the adoption of IFRS 16 Leases, offset by higher
commodity costs in the UK related to timing of contracts and
market conditions, and higher corporate costs. On a consol-
idated basis, the adoption of the IFRS 16 Leases resulted in
an increase to EBITDA of $2.0 million and accounts for 3.2%
of the change in EBITDA margin for the three months ended
December 31, 2019. The remainder of the increase is due
to the flow through of revenue growth as discussed above,
efficiencies gained as a result of the capital expenditures
made in our new facilities and the associated operational
efficiencies, offset by rising minimum wage rates in advance
of future revenue price escalators, and tight labour markets in
both British Columbia and Québec.
SELECTED ANNUAL FINANCIAL INFORMATION
($ Thousands of CDN dollars, except
percentages and per share amounts)
Canadian
Division
2019
UK
Division
2019
Revenue
EBITDA
EBITDA without adoption of IFRS 16
Net earnings
Net earnings without
adoption of IFRS 16
186,624
35,843
30,052
7,787
7,997
65,786
11,730
8,641
3,119
3,342
Canadian
Division
2018
UK
Division
2018
2018
2017(1)
179,889
21,370
21,370
2,701
2,701
59,645
8,211
8,211
3,468
3,468
239,534
29,581
29,581
6,169
6,169
170,559
23,985
23,985
5,718
5,718
2019(2)
252,410
47,573
38,693
10,906
11,339
Net earnings per share:
Basic
Diluted
0.741
0.737
0.297
0.295
1.038
1.032
0.258
0.257
0.331
0.330
0.589
0.588
0.629
0.627
Net earnings without adoption
of IFRS 16 per share:
Basic
Diluted
0.761
0.756
0.318
0.316
Total assets
Long-term debt
Weighted average number of shares outstanding:
Basic
Diluted
1.079
1.072
352,059
62,494
10,508,080
10,571,347
0.258
0.257
0.331
0.330
0.589
0.588
0.629
0.627
322,229
70,203
295,213
42,780
10,466,458
10,500,014
9,083,693
9,114,874
1 Prior to the acquisition of Fishers on November 27, 2017, K-Bro was reporting and operating as a single Canadian division.
2 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as permitted
under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without adoption
of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
WE ARE DEPENDABLE.
15
SUMMARY OF 2019 RESULTS,
KEY EVENTS & OUTLOOK
FINANCIAL GROWTH
Net earnings were $10.9 million or $1.04 per Common
Share (basic). Cash flow from operating activities was
$43.9 million and distributable cash flow was $29.6 million.
Revenue increased in fiscal 2019 to $252.4 million or by
5.4% compared to 2018. This increase was due to volume
from the acquisition of Linitek, acquisition of an Aberdeen
laundry, organic growth at existing customers, and new
customers secured in existing markets.
EBITDA (see Terminology) increased in 2019 to $47.6 million
or by 60.8% compared to $29.6 million in 2018. On a consoli-
dated basis, EBITDA margin increased from 12.3% in 2018 to
18.8% in 2019. For the Canadian division, the EBITDA margin
increased to 19.2% in 2019 from 11.9% in 2018. For the UK
division, the EBITDA margin increased to 17.8% in 2019 from
13.8% in 2018. The changes in EBITDA and EBITDA margin
relates primarily to the operating efficiencies gained in the
Canadian division, as well as changes in accounting policies
and the adoption of IFRS 16 Leases. The adoption of the
IFRS 16 Leases in 2019 resulted in an increase to EBITDA of
$8.9 million and accounts for 3.5% of the change in EBITDA
margin. The remainder of the increase is due to the flow
through of revenue growth as discussed above, efficiencies
gained as a result of the capital expenditures made in our
new facilities and the associated operational efficiencies,
offset by rising minimum wage rates in advance of future
revenue price escalators, and tight labour markets in both
British Columbia and Québec.
NEAR-TERM & LONG-TERM GROWTH & 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
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 has made investments to upgrade one of its
existing Vancouver plants to create a more efficient facility
with meaningful additional capacity.
The construction and/or upgrade of three of our large facil-
ities enables us to bid on a significant amount of additional
business, but created margin pressure through 2017, 2018
and Q1 2019 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 will position K-Bro to achieve more growth
and a lower cost structure into the future and that K-Bro
will ultimately return to normalized margins upon resolu-
tion of the coronavirus (“COVID-19”) pandemic, as more
specifically discussed below.
As disclosed above, the continued spread of COVID-19
throughout Canada and the UK, at least in the short-term,
is expected to have a significant negative impact on the
amount of volume processed by the Corporation’s hospi-
tality segment. Management believes that, depending on the
duration of the pandemic, the Corporation’s capital invest-
ments in Vancouver and Toronto could position us to profit-
ably grow our business as, for example, hotel occupancy
rates rebound upon resolution of the public health crisis.
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, BC and has incurred
all of the capital costs related to this facility. The new facility
has enabled K-Bro to expand current capacity, to accommo-
date additional awarded volume, and to provide the oppor-
tunity to consolidate the healthcare volume from its existing
two Vancouver-area facilities.
In addition to investing in this 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.
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,
Alberta. The Acquisition is accounted for using the acqui-
sition method, whereby the purchase consideration is
allocated to the net assets acquired.
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
in K-Bro’s markets
across Canada, with exclusivity
2019 ANNUAL REPORT 16
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.
REVOLVING CREDIT FACILITY
During 2019 K-Bro completed amendments to its existing
$100 million revolving credit facility, which extended the
agreement to July 31, 2022 and made changes to the
definitions within the agreement to clarify that all financial
covenants would be tested on a pre-IFRS 16 Leases basis.
UK ACQUISITION
On July 19, 2019, the Corporation signed a share purchase
agreement to acquire all the assets of a Scotland-
incorporated private laundry and linen services company
operating in Aberdeen. This acquisition closed in September
2019 for a total consideration of £775k plus a working capital
adjustment. For accounting purposes, the transaction
has been treated as an asset acquisition, whereby the net
working capital was recorded at closing, and the customer
contracts acquired have been recorded as an intangible
asset for £883k representing the total purchase price of
£775k and associated transaction costs of £88k.
CAPITAL INVESTMENT PLAN
For fiscal 2020, K-Bro had previously anticipated capital
spending to be approximately $5.0 million on a consolidated
basis. However, in light of the current public health crisis,
management is considering whether to significantly lower
the Corporation’s planned capital spending for fiscal 2020 in
order to mitigate the expected significant negative impacts
of the COVID-19 pandemic on the Corporation’s results
of operations. This guidance includes both strategic and
maintenance capital requirements to support existing base
business in both Canada and the UK.
ALBERTA CONTRACT AWARD
On March 1, 2020, the Corporation was awarded a one-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.
LOSS OF WHITBREAD GROUP CONTRACT
Subsequent to the 2019 fiscal year, the Corporation was
unsuccessful in renewing its UK-based contract with the
Whitbread Group. The associated volume will be phased out
of the relevant plant over the first two quarters of 2020. For
the year ended December 31, 2019, this contract accounted
for approximately 14% of Fishers’ overall revenue.
CORONAVIRUS (“COVID-19”) PANDEMIC
The ongoing COVID-19 pandemic has caused world govern-
ments to institute travel restrictions both in and out of and
within Canada and the UK, which has had, and is expected
to continue to have, a significant adverse impact on the
Corporation’s hospitality business, the duration of which we
are unable to predict with any degree of accuracy. In recent
weeks, we have seen significantly reduced hotel occupancy
rates compared to historical levels. More recently, demand
for both business and leisure airline travel has declined
significantly on a global basis, and airlines are responding by
cancelling international and domestic flights. Accordingly,
hospitality volume in all of our Canadian and UK markets
have slowed to historically low levels. To date, we have seen
a slight increase in our healthcare business as the result of
increased demand for certain products caused by COVID-19.
We have adjusted operations at many of our plants that
have experienced significant declines in hospitality volume,
including by reducing the size of the workforce. We anticipate
implementing further adjustments as circumstances develop.
Management believes that liquidity remains strong, with
cash flow generation and access to significant undrawn
credit line capacity being sufficient throughout 2020.
The extent of such negative effects on our hospitality
business and our financial and operational performance
will depend on future developments, including the duration,
spread and severity of the outbreak, the duration and
geographic scope of related travel advisories and restric-
tions and the extent of the impact of COVID-19 on overall
demand for personal and business travel, all of which are
highly uncertain and cannot be predicted with any degree
of accuracy. If hotels continue to experience significantly
reduced occupancy rates for an extended period, our 2020
consolidated results of operations will be significantly
impacted. The extent to which the outbreak affects our
earnings will depend in part on our ability to implement
various measures intended to reduce expenses, including
consolidating production capacity and laying off additional
workers. Earnings in the hospitality segment will continue
to be particularly affected if we continue to experience
further reductions in travel. Additionally, our suppliers or
other third parties we rely upon may experience delays
or shortages, which could have an adverse effect on our
business prospects and results of operations.
WE ARE DEPENDABLE. 17
OUTLOOK
While COVID-19 will have a significant negative impact on our hospitality revenue, management believes the prospects for
the Corporation’s healthcare business remains strong in the medium- to long-term. In addition, management believes that
the financial flexibility provided by our strong balance sheet will enable us to operate without disruption to our business
model while maintaining our ability to service the healthcare and hospitality sectors in our Canadian and UK markets. For
further information about the impact of COVID-19 on our business, see the “Summary of 2019 Results, Key Events and
Outlook – Coronavirus (“COVID-19”) Pandemic”.
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 in the long term. The following outlines our results on a period-to-period comparative
basis in each of these areas:
($ Thousands of CDN dollars, except
percentages and per share amounts)
Category
Indicator
Canadian
Division
Q4 2019
UK
Division
Q4 2019
(3)
Q4 2019
Canadian
Division
Q4 2018
UK
Division
Q4 2018
Growth
Profitability
EBITDA(1)
EBITDA without adoption of IFRS 16
Revenue
Distributable cash flow (4)
80.6%
50.5%
2.1%
8,737
EBITDA(1)
19.0%
EBITDA margin
7,283
EBITDA without adoption of IFRS 16
EBITDA without adoption of IFRS 16 margin 15.8%
1,760
Net earnings
1,835
Net earnings without
adoption of IFRS 16
32.8%
2.9%
17.5%
2,365
14.0%
1,833
10.9%
435
573
Stability
Debt to total capital(2)
Unutilized line of credit
Cash on hand
Payout ratio
Dividends declared per share
Cost containment Wages and benefits
Utilities
Expenses included in EBITDA
40.5%
5.4%
81.0%
35.8%
8.9%
86.0%
($ Thousands of CDN dollars, except percentages and per share data)
67.7%
37.7%
5.8%
21.2%
11,102
17.7%
9,116
14.5%
2,195
2,408
24.7%
36,356
5,301
45.2%
0.300
39.3%
6.3%
82.3%
-30.5%
-30.5%
5.3%
171.0%
171.0%
204.0%
4,838
10.7%
4,838
10.7%
32
32
1,781
12.4%
1,781
12.4%
1,020
1,020
43.3%
6.6%
89.3%
36.3%
7.9%
87.6%
Q4 2018
48.6%
48.6%
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%
2019 ANNUAL REPORT
18
($ Thousands of CDN dollars, except
percentages and per share amounts)
Category
Indicator
Canadian
Division
YTD 2019
UK
Division
YTD 2019
(3)
YTD 2019
Canadian
Division
YTD 2018
UK
Division
YTD 2018
YTD 2018
Growth
Profitability
67.7%
EBITDA(1)
EBITDA without adoption of IFRS 16 40.6%
3.7%
Revenue
Distributable cash flow (4)
35,843
EBITDA(1)
19.2%
EBITDA margin
EBITDA without adoption of IFRS 16 30,052
EBITDA without adoption of IFRS 16 margin 16.1%
7,787
Net earnings
7,997
Net earnings without
adoption of IFRS 16 margin
42.9%
5.2%
10.3%
11,730
17.8%
8,641
13.1%
3,119
3,342
Stability
Debt to total capital(2)
Unutilized line of credit
Cash on hand
Payout ratio
Dividends declared per share
Cost containment Wages and benefits
Utilities
Expenses included in EBITDA
40.9%
5.7%
80.8%
35.4%
8.9%
82.2%
60.8%
30.8%
5.4%
19.6%
47,573
18.8%
38,693
15.3%
10,906
11,339
24.7%
36,356
5,301
42.9%
1.200
39.4%
6.5%
81.2%
-19.3%
-19.3%
8.5%
-427.4%
-427.4%
1161.5%
21,370
11.9%
21,370
11.9%
2,701
2,701
8,211
13.8%
8,211
13.8%
3,468
3,468
43.7%
5.9%
88.1%
36.0%
7.2%
86.2%
23.3%
23.3%
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%
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 D ebt to total capital is defined as total debt divided by total capital. See Terminology.
3 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as permitted
under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without
adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
4 Effective January 1, 2019, distributable cash flow includes the addition of principal elements of lease payments. This accounts for the change in accounting policies and the adoption of IFRS
16, where now the principal elements of lease payments flow through financing outflows opposed to operating cash flows.
($ Thousands of CDN dollars, except percentages and per share data)
WE ARE DEPENDABLE.
19
FINANCIAL IMPACT OF THE ADOPTION OF NEW ACCOUNTING STANDARDS
As discussed in Note 3 – Changes in accounting policies to the 2019 Audited Financial Statements, the Corporation has
adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparatives for the 2018 reporting period, as
permitted under the specific transitional provisions set out in IFRS 16.
The tables below provide a reconciliation of actual Q4 2019 financial results compared with what would have occurred had
we not adopted this new accounting policy.
EBITDA without adoption of IFRS 16 Leases
3 Months Ended December 31,
($ Thousands of CDN dollars)
Segment EBITDA
2019
Adjustments on
Adoption of IFRS 16
2019
EBITDA Without
Adoption of IFRS 16
2019
Canadian Division
UK Division
8,737
2,365
11,102
(1,454)
(532)
(1,986)
7,283
1,833
9,116
Years Ended December 31,
($ Thousands of CDN dollars)
Segment EBITDA
2019
Adjustments on
Adoption of IFRS 16
2019
EBITDA Without
Adoption of IFRS 16
2019
Canadian Division
UK Division
35,843
11,730
47,573
(5,791)
(3,089)
(8,880)
30,052
8,641
38,693
Net earnings without adoption of IFRS 16 Leases
3 Months Ended December 31,
($ Thousands of CDN dollars)
Segment Net
Earnings (Loss)
2019
Adjustments on
Adoption of IFRS 16
2019
Net earnings (Loss) Without
Adoption of IFRS 16
2019
Canadian Division
UK Division
1,760
435
2,195
75
138
213
1,835
573
2,408
Years Ended December 31,
($ Thousands of CDN dollars)
Segment Net
Earnings (Loss)
2019
Adjustments on
Adoption of IFRS 16
2019
Net Earnings (Loss) Without
Adoption of IFRS 16
2019
Canadian Division
UK Division
7,787
3,119
10,906
210
223
433
7,997
3,342
11,339
2018
4,838
1,781
6,619
2018
21,370
8,211
29,581
2018
32
1,020
1,052
2018
2,701
3,468
6,169
2019 ANNUAL REPORT
20
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 of CDN dollars, except
percentages and per share data)
2019(2)
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue
35,482
27,410
62,892
34,710
33,132
67,842
34,729
29,164
63,893
34,103
23,680
57,783
34,469
24,971
59,440
33,378
30,594
63,972
33,868
26,870
60,738
33,601
21,783
55,384
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
EBITDA without adoption of IFRS 16
EBITDA without adoption of IFRS 16
as % of revenue
51,790
11,102
17.7%
9,116
14.5%
53,225
14,617
21.5%
12,286
18.1%
51,154
12,739
19.9%
10,488
16.4%
48,668
9,115
15.8%
6,803
11.8%
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
Earnings before income taxes
Income tax expense
Net earnings
Net earnings as a % of revenue
Basic earnings per share
Diluted earnings per share
Net earnings without adoption of IFRS 16
Basic earnings per share
without adoption of IFRS 16
Diluted earnings per share
without adoption of IFRS 16
7,011
1,213
2,878
683
2,195
3.5%
0.209
0.207
2,408
0.229
7,059
1,510
6,048
1,379
4,669
6.9%
0.444
0.441
4,736
0.451
6,979
1,566
4,194
647
3,547
5.6%
0.338
0.336
3,637
0.346
6,916
1,513
686
191
495
0.9%
0.047
0.047
558
0.053
5,252
866
501
(551)
1,052
1.8%
0.100
0.100
1,052
0.100
5,069
857
2,384
498
1,886
2.9%
0.180
0.179
1,886
0.180
4,271
716
3,465
881
2,584
4.3%
0.247
0.246
2,584
0.247
4,283
876
1,041
394
647
1.2%
0.062
0.062
647
0.062
0.227
0.447
0.344
0.053
0.100
0.179
0.246
0.062
Total assets
Total long-term financial liabilities
352,059
116,455
353,021
119,102
361,018
129,862
360,563
123,049
322,229
87,831
316,968
84,436
317,051
86,675
312,193
72,189
Funds provided by (used in) operations
Long-term debt
Dividends declared per share
11,555
62,494
0.300
19,816
66,070
0.300
2,875
75,952
0.300
9,670
67,444
0.300
7,799
70,203
0.300
9,759
67,045
0.300
(4,629)
70,505
0.300
4,625
56,356
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 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as permitted
under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without
adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
WE ARE DEPENDABLE.
21
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
2019 (2)
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue
33,839
12,162
46,001
33,224
16,267
49,491
33,122
13,477
46,599
32,435
12,098
44,533
32,912
12,155
45,067
31,818
15,054
46,872
32,193
12,465
44,658
32,010
11,282
43,292
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
EBITDA without adoption of IFRS 16
EBITDA without adoption of IFRS 16
as % of revenue
37,264
8,737
19.0%
7,283
15.8%
39,068
10,423
21.1%
8,925
18.0%
37,300
9,299
20.0%
7,884
16.9%
37,149
7,384
16.6%
5,960
13.4%
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%
Net earnings
Net earnings as a % of revenue
Basic earnings per share
Diluted earnings per share
Net earnings without adoption of IFRS 16
Basic earnings per share
without adoption of IFRS 16
Diluted earnings per share
without adoption of IFRS 16
1,760
3.8%
0.167
0.166
1,835
0.174
2,893
5.8%
0.275
0.273
2,919
0.278
2,403
5.2%
0.229
0.228
2,456
0.234
731
1.6%
0.070
0.069
787
0.075
32
0.1%
0.003
0.003
32
0.003
200
0.4%
0.019
0.019
200
0.019
1,421
3.2%
0.136
0.135
1,421
0.136
1,048
2.4%
0.100
0.100
1,048
0.100
0.173
0.276
0.233
0.075
0.003
0.019
0.135
0.100
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 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as permitted
under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without
adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
($ Thousands of CDN dollars, except percentages and per share data)
2019 ANNUAL REPORT
22
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 $)
2019 (2)
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue
1,643
15,248
16,891
1,486
16,865
18,351
1,607
15,687
17,294
1,668
11,582
13,250
1,557
12,816
14,373
1,560
15,540
17,100
1,675
14,405
16,080
1,591
10,501
12,092
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
EBITDA without adoption of IFRS 16
EBITDA without adoption of IFRS 16
as % of revenue
Net earnings (loss)
Net earnings (loss) as a % of revenue
Basic earnings (loss) per share
Diluted earnings (loss) per share
14,526
2,365
14.0%
1,833
10.9%
435
2.6%
0.041
0.041
14,157
4,194
22.9%
3,361
18.3%
13,854
3,440
19.9%
2,604
15.1%
11,519
1,731
13.1%
843
6.4%
12,592
1,781
12.4%
1,781
12.4%
13,904
3,196
18.6%
3,196
18.6%
13,528
2,552
15.9%
2,552
15.9%
11,410
682
5.6%
682
5.6%
1,776
9.7%
0.169
0.168
1,144
6.6%
0.109
0.108
(236)
-1.8%
(0.022)
(0.022)
1,020
7.1%
0.097
0.097
1,686
9.9%
0.161
0.160
1,163
7.2%
0.111
0.111
(401)
-3.3%
(0.038)
(0.038)
Net earnings (loss)
without adoption of IFRS 16
Basic earnings (loss) per share
without adoption of IFRS 16
Diluted earnings (loss) per share
without adoption of IFRS 16
573
1,817
1,181
(229)
1,020
1,686
1,163
(401)
0.054
0.173
0.112
(0.022)
0.097
0.161
0.111
(0.038)
0.054
0.172
0.112
(0.022)
0.097
0.160
0.111
(0.038)
1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense (recovery) and depreciation and amortization). See Terminology.
2 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as permitted
under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without
adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
($ Thousands of CDN dollars, except percentages and per share data)
WE ARE DEPENDABLE.
23
Quarterly Financial Information
- UK Division
(in reporting currency Sterling £)
2019 (2)
2018
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Healthcare revenue
Hospitality revenue
Total revenue
Expenses included in EBITDA
EBITDA(1)
EBITDA as a % of revenue (EBITDA margin)
EBITDA without adoption of IFRS 16
EBITDA without adoption of IFRS 16
as a % of revenue
Net earnings (loss)
Net earnings (loss) as a % of revenue
Basic earnings (loss) per share
Diluted earnings (loss) per share
Net earnings (loss)
without adoption of IFRS 16
Basic earnings (loss) per share
without adoption of IFRS 16
Diluted earnings (loss) per share
without adoption of IFRS 16
966
8,967
9,933
8,543
1,390
14.0%
1,077
10.9%
254
2.6%
0.024
0.024
913
10,359
11,272
935
9,126
10,061
963
6,689
7,652
6,654
998
13.1%
485
6.4%
8,058
2,003
19.9%
1,517
15.1%
668
6.6%
0.064
0.063
(138)
-1.8%
(0.013)
(0.013)
917
7,550
8,467
7,413
1,054
12.4%
1,054
12.4%
600
7.1%
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
952
8,201
9,153
7,700
1,453
15.9%
1,453
15.9%
903
5,963
6,866
6,480
386
5.6%
386
5.6%
662
7.2%
0.063
0.063
(229)
-3.3%
(0.022)
(0.022)
8,696
2,576
22.9%
2,065
18.3%
1,091
9.7%
0.104
0.103
336
1,115
690
(134)
600
972
662
(229)
0.032
0.106
0.066
(0.013)
0.057
0.093
0.063
(0.022)
0.032
0.105
0.065
(0.013)
0.057
0.092
0.063
(0.022)
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 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as permitted
under the specific transitional provisions of IFRS 16. To enable the comparability of previous periods, the Corporation has provided the 2019 figures for both EBITDA and net earnings without
adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of this MD&A for more information.
(Thousands, except percentages and per share data)
REVENUE, EARNINGS & EBITDA
For the year ended December 31, 2019, K-Bro’s consol-
idated revenue increased by 5.4% to $252.4 million from
$239.5 million in the comparative period. This increase was
due to the acquisition of Linitek, acquisition of an Aberdeen
laundry, organic growth at existing customers, and new
customers secured in existing markets. In 2019, approxi-
mately 55.1% of K-Bro’s consolidated revenue was gener-
ated from healthcare institutions, which is lower compared
to 56.5% in 2018, primarily related to the most recent acqui-
sitions being concentrated within the hospitality sector.
Consolidated EBITDA increased in the year to $47.6 million
from $29.6 million in 2018, which is an increase of 60.8%.
The consolidated EBITDA margin increased to 18.8% in
2019 compared to 12.3% in 2018. EBITDA benefited signifi-
cantly from operating efficiencies gained in our Canadian
division as a result of capital investments made in 2018.
The adoption of IFRS 16 Leases, increased EBITDA by $8.9
million and accounts for 3.5% of the increase in EBITDA
margin. The remainder of the increase in EBITDA is due to
flow through of revenue growth as discussed above, offset
by higher commodity costs in the UK, higher costs in British
Columbia as a result of a temporary natural gas supply
shortage during the first quarter, rising minimum wage
rates in advance of future revenue price escalators, and
tight labour markets in both British Columbia and Québec.
Net earnings increased by $4.7 million or 76.8% from $6.2
million in 2018 to $10.9 million in 2019, and net earnings as
a percentage of revenue increased by 1.7% to 4.3% in 2019
from 2.6% in 2018. The change in net earnings is primarily
related to the flow through items in EBITDA discussed
above, offset by higher depreciation and finance costs due
to the adoption of IFRS 16 Leases of $9.4 million, higher
depreciation associated with new plant builds and acqui-
sitions, higher finance costs related to the revolving credit
facility, and offset by a higher income tax expense.
2019 ANNUAL REPORT
24
OPERATING EXPENSES
Wages and benefits decreased by $0.4 million to $99.6
million compared to $100.0 million in the same comparative
period of 2018, and as a percentage of revenue decreased
by 2.3% to 39.4%. The decrease as a percentage of revenue
is primarily related to the elimination of one-time costs
related to the Vancouver transition when compared to 2018,
improved labour efficiencies, offset by wages and benefits
is related to incremental labour required to process higher
volumes, escalating minimum wage rates, and tight labour
markets in British Columbia and Québec.
Linen increased by $0.8 million to $27.5 million compared
to $26.7 million in the same comparative period of 2018, and
as a percentage of revenue decreased by 0.2% to 10.9%. The
decrease as a percentage of revenue is primarily related to
the higher proportion of hospitality revenue in the quarter
that doesn’t require linen replacement.
Utilities increased by $1.4 million to $16.4 million compared
to $15.0 million in the same comparative period of 2018, and
as a percentage of revenue increased by 0.2% to 6.5%. The
increase as a percentage of revenue is primarily related
to higher commodity costs in the UK related to timing of
contracts and market conditions, higher utility costs in
British Columbia as a result of a temporary natural gas
supply shortage during the end of 2018 and first quarter
of 2019, and offset by improved efficiencies in the new
Vancouver facilities.
Delivery decreased by $1.9 million to $28.8 million compared
to $30.7 million in the same comparative period of 2018, and
as a percentage of revenue decreased by 1.4% to 11.4%. The
decrease as a percentage of revenue is primarily related to
the adoption of IFRS 16 Leases, which accounts for 1.3% and
a decrease to delivery costs of $3.4 million. The remaining
decrease is a result of diminishing one-time costs related to
the Vancouver transition when compared to 2018, offset by
increased business activity, price increases from renewals
of out-sourced freight contracts, and higher cost of diesel
and external freight charges tied to diesel price.
Occupancy costs decreased by $5.4 million to $4.5 million
compared to $9.9 million in the same comparative period of
2018, and as a percentage of revenue decreased by 2.3% to
1.8%. The decrease as a percentage of revenue is primarily
related to the adoption of IFRS 16 Leases, which accounts
for 2.2% and a decrease to occupancy costs of $5.5 million,
and one-time Vancouver transition costs, partially offset by
costs associated with the acquisition of Linitek.
Materials and supplies decreased by $0.2 million to $8.3
million compared to $8.5 million in the same comparative
period of 2018, and as a percentage of revenue decreased
by 0.2% to 3.3%. The decrease as a percentage of revenue
is primarily related to costs related to the transition of our
Vancouver facilities and certain one-time recoverable costs.
Repairs and maintenance increased by $0.6 million to $8.8
million compared to $8.2 million in the same comparative
period of 2018, and as a percentage of revenue increased
by 0.1% to 3.5%. The increase as a percentage of revenue is
primarily related to the timing of maintenance activities, and
non-reoccurring costs related to laundry accreditation and
health and safety initiatives, offset by one-time Vancouver
transition costs in 2018.
Corporate costs increased by $0.1 million to $11.1 million
compared to $11.0 million in the same comparative period of
2018, and as a percentage of revenue decreased by 0.2% to
4.4%. The decrease as a percentage of revenue is primarily
related to the timing of initiatives to support the Corporation’s
growth and business strategies across the plants.
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. Depreciation of property, plant
and equipment increased by $8.8 million to $24.7 million
compared to $15.9 million in the same comparative period
of 2018, the increase is primarily related to the adoption of
IFRS 16 Leases of $7.4 million, and the completion of the
new Toronto and Vancouver facilities.
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 liabil-
ities. Income tax reflects the provision on the earnings of
the Corporation.
WE ARE DEPENDABLE. 25
LIQUIDITY & CAPITAL RESOURCES
In 2019, cash generated by operating activities was $43.9 million with a debt to total capitalization of 24.7%. The change in cash
from operations is primarily due to the change in working capital items driven mainly from the timing of business activity, along with
increased earnings from operations, and the adoption of IFRS 16 Leases, where the principal elements of lease payments are now
recorded as financing outflows as opposed to flowing through operating cash flows. Management believes the unutilized balance
of $36.4 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 longterm basis in order to ensure that sufficient capital is available for future growth needs.
During 2019, cash used in financing activities was $27.1 million compared to cash generated by financing activities of $14.8
million in 2018. Financing activities consisted of net repayment of the revolving credit facility, offset by dividends paid to
shareholders, and principal elements of lease payments.
During 2019, cash used in investing activities was $14.3 million compared to $40.9 million in 2018. Investing activities
related primarily to the purchase of plant equipment.
CONTRACTUAL OBLIGATIONS
Payments due under contractual obligations for the next five years and thereafter are as follows:
($ Thousands of CDN dollars)
Long-term debt
Lease liabilities
Utility commitments
Linen purchase obligations
Property, plant and equipment commitments
Total
62,494
63,004
10,625
9,821
641
Payments Due by Period
1–3 Years
< 1 Year
4–5 Years
> 5 Year
-
8,207
6,401
9,821
641
62,494
13,784
4,224
-
-
-
10,450
-
-
-
-
30,563
-
-
-
The lease liabilities are secured by automotive equipment and plants, and are more fully described in the 2019 Audited
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)
2019
2018
Cash and cash equivalents
Long-term debt
(excludes lease liabilities)
Shareholders’ equity
Total capital
Debt to total capital
(see Terminology for definition)
(5,301)
62,494
196,051
253,244
24.7%
(2,827)
70,203
198,660
266,036
26.4%
For the year ended December 31, 2019, the Corporation
had a debt to total capital of 24.7%, unused revolving credit
facility of $36.4 million and has not incurred any events of
default under the terms of its credit facility agreement.
As at December 31, 2019, the Corporation had net working
capital of $31.0 million compared to its working capital
position of $34.8 million at December 31, 2018. The decrease
in working capital is primarily attributable to the adoption
of IFRS 16 Leases, offset by an increase in cash and cash
equivalents, timing differences related to cash settlement
of new plant equipment, income tax payments, deposits
related to the acquisition of equipment related across the
plants, and 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 raise
capital through equity issuances in the market or increase
its borrowing capacity, if necessary, to provide for capital
spending and to sustain its property, plant and equipment.
2019 ANNUAL REPORT
26
DIVIDENDS
Fiscal Period
Payment Date
# of Shares
Outstanding
2019
Amount Total Amount
(1)(3)(5)(7)
Per Share
2018
Amount Total Amount
(2)(4)(6)(8)
Per Share
January
February
March
Q1
April
May
June
Q2
July
August
September
Q3
October
November
December
Q4
YTD
February 15
March 15
April 15
May 15
June 14
July 15
August 15
September 13
October 15
November 15
December 13
January 15
10,559,936
10,559,936
10,559,936
10,559,936
10,604,029
10,604,382
10,604,382
10,604,382
10,604,382
10,604,382
10,604,382
10,604,382
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
1,056
1,056
1,056
3,168
1,056
1,060
1,060
3 ,177
1,060
1,060
1,060
3,181
1,060
1,060
1,060
3,181
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
1.20000
12,707
1.20000
12,651
1 The total amount of dividends declared was $0.10000 per share for a total of $1,055,994 per month for January - March 2019; when rounded in thousands, $3,168 of dividends were declared in Q1 2019.
2 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 in Q1 2018.
3 The total amount of dividends declared was $0.10000 per share for a total of $1,055,994 for April, $1,060,403 for May 2019, and $1,060,438 for June 2019. When rounded in thousands, $3,177
of dividends were declared in Q2 2019.
4 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 in Q2 2018.
5 The total amount of dividends declared was $0.10000 per share for a total of $1,060,438 per month for July - September 2019; when rounded in thousands, $3,181 of dividends were declared in Q3 2019.
6 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 2018.
7 The total amount of dividends declared was $0.10000 per share for a total of $1,060,438 per month for October - December 2019; when rounded in thousands, $3,181 of dividends were declared in Q4 2019.
8 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 2018.
For the year ended December 31, 2019, the Corporation
declared a $1.200 per Common Share dividend compared to
$2.801 per Common Share of Distributable Cash Flow (see
Terminology). The actual payout ratio was 42.9%.
by the Directors of the Corporation. All such dividends are
discretionary. Dividends are declared payable each month in
equal amounts to Shareholders on the last business day of
each month and are paid by the 15th of the following month.
The Corporation’s policy is to pay dividends to Shareholders
from its available distributable cash flow while considering
requirements for capital expenditures, working capital,
growth capital and other reserves considered advisable
The Corporation designates all dividends paid or deemed
to be paid as Eligible Dividends for purposes of subsection
89(14) of the Income Tax Act (Canada), and similar provincial
and territorial legislation, unless indicated otherwise.
WE ARE DEPENDABLE.
27
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:
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)
Principle elements of lease payments(5)
Q4
Q3
2019 (4)
Q1
Q2
Q4
Q3
Q2
2018
Q1
11,555
19,816
2,875
9,670
7,799
9,759
(4,629)
4,625
1,534
7,463
(8,615)
1,484
1,082
1,176
(12,167)
(1,471)
404
1,072
1,501
427
1,352
1,806
439
1,143
1,736
540
374
1,648
380
526
-
403
908
-
625
430
-
409
488
-
Distributable cash flow(5)
7,044
8,768
8,172
5,624
5,811
7,272
6,483
5,199
Dividends declared
Dividends declared per share
Payout ratio(3)
3,181
0.300
45.2%
3,181
0.300
36.3%
3,177
0.300
38.9%
3,168
0.300
56.3%
3,168
0.300
54.5%
3,168
0.300
43.6%
3,163
0.300
48.8%
3,153
0.300
60.6%
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)
10,521
10,511
10,504
10,497
10,479
10,470
10,462
10,454
10,588
10,584
10,558
10,546
10,525
10,540
10,509
10,491
29,608
12,707
42.9%
28,375
12,694
44.7%
26,879
12,681
47.2%
25,190
12,667
50.3%
24,765
12,651
51.1%
21,725
12,452
57.3%
21,690
12,159
56.1%
20,744
11,867
57.2%
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.
4 Effective January 1, 2019, the Corporation has adopted IFRS 16 Leases (“IFRS 16”) using the modified retrospective method but has not restated comparatives for the prior periods, as permitted
under the specific transitional provisions of IFRS 16. Refer to the Accounting Changes section of this MD&A for more information.
5 Effective January 1, 2019, distributable cash flow includes the addition of principal elements of lease payments. This accounts for the change in accounting policies and the adoption of IFRS
16, where now the principal elements of lease payments flow through financing outflows opposed to operating cash flows.
($ Thousands of CDN dollars, except percentages and per share data)
2019 ANNUAL REPORT
28
OUTSTANDING SHARES
As at December 31, 2019, the Corporation had 10,604,382
Common Shares outstanding. Basic and diluted weighted
average number of Common Shares outstanding for 2019
were 10,508,080 and 10,571,347, respectively (10,466,458 and
10,500,014, respectively, for the comparative 2018 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 2018 fiscal year, on April
16, 2019 the Compensation, Nominating and Corporate
Governance Committee of the Board of Directors approved
LTI compensation of $1.7 million (2018 – $1.7 million) to
be paid as Common Shares issued from treasury. As at
December 31, 2019, the value of the shares held by the
LTI administrator was $2.7 million (December 31, 2018 –
$2.1 million) which was comprised of 64,924 in unvested
common shares (December 31, 2018 – 63,346) with a nil
aggregate cost (December 31, 2018 – $nil).
As at March 19, 2020 there were 10,604,382 common shares
issued and outstanding including 64,924 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,
judgments, and/or requiring
subjective and complex
estimates that are inherently uncertain and which may
change in subsequent reporting periods.
its
K-Bro has continuously refined and documented
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.
includes ongoing
K-Bro’s leadership team’s mandate
development of procedures, standards and systems to
allow K-Bro staff to make the best decisions possible
and ensuring those decisions are in compliance with the
Corporation’s policies.
Preparation of the Corporation’s consolidated financial
statements requires management to make estimates and
assumptions that affect:
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,
2019, the Corporation incurred fees totaling $138,000 (2018
– $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 2019 Audited Financial
Statements.
· allowance for doubtful accounts;
· segment information; and,
· business combinations; and,
·
lease terms.
The following discusses the most significant accounting
judgments and estimates in the 2019 Audited Financial
Statements.
The 2019 Audited 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
IMPAIRMENT OF GOODWILL & NON-FINANCIAL ASSETS
The Corporation reviews goodwill at least annually and
other non-financial assets when there is any indica-
tion that the asset might be impaired. The Corporation
applies judgment in assessing the likelihood of renewal
WE ARE DEPENDABLE.
29
of significant contracts included in the intangible assets
described in Note 9. The Corporation has estimated the
fair value of CGUs to which goodwill is allocated based
on value in use using discounted cash flow models that
required assumptions 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.
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.
RECOGNITION OF REBATE LIABILITIES
LEASE TERM
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 for more details about estimation
and judgments for this provision.
In determining the lease term, management considers all
facts and circumstances that create an economic incentive
to exercise an extension option, or not exercise a termina-
tion option. Extension options (or periods after termination
options) are only included in the lease term if the lease is
reasonably certain to be extended (or not terminated). For
many of the leases the cash outflows associated with the
lease extension term would be material. The assessment
is reviewed if a significant event or a significant change in
circumstances occurs which affects this assessment and
that is within the control of the lessee.
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.
2019 ANNUAL REPORT
30
EBITDA is a subtotal 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.
($ Thousands of CDN dollars)
Net earnings
Add:
Income tax expense
Finance expense
Depreciation of property, plant and equipment
Amortization of intangible assets
EBITDA
3 Months Ended December 31,
2018
2019
Years Ended December 31,
2018
2019
2,195
683
1,213
6,053
958
11,102
1,052
(551)
866
4,484
768
6,619
10,906
2,900
5,802
24,705
3,260
47,573
6,169
1,222
3,315
15,871
3,004
29,581
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.
ADJUSTED NET EARNINGS & ADJUSTED NET EARNINGS
PER SHARE
Adjusted net earnings and adjusted net earnings per share
are measures which have been reported in order to assist in
the comparison of historical net earnings to current results.
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.
DISTRIBUTABLE CASH FLOW
Distributable cash flow is a measure used by management
to evaluate its performance. While the closest IFRS measure
is cash provided by operating activities, distributable cash
flow is considered relevant because it provides an indica-
tion of how much cash generated by operations is available
after capital expenditures. It shall be noted that although
we consider this measure to be distributable cash flow,
financial and non-financial covenants in our credit facili-
ties and dealer agreements may restrict cash from being
available for dividends, reinvestment 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, maintenance capital expenditures
and principal elements of lease payments.
PAYOUT RATIO
Payout ratio is defined by management as the actual cash
dividend divided by distributable cash. This is a key measure
used by investors to value K-Bro, assess its performance
and provide an indication of the sustainability of dividends.
The payout ratio depends on the distributable cash and the
Corporation’s dividend policy.
DEBT TO TOTAL CAPITAL
Debt to Total Capital is defined by management as the
total long-term debt divided by the Corporation’s total
capital. This is a measure used by investors to assess the
Corporation’s financial structure.
Distributable Cash Flow, Payout Ratio, Debt to Total Capital
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 compa-
rable with similar measures used by other issuers.
OFF BALANCE SHEET ARRANGEMENTS
As at December 31, 2019, the Corporation has not entered
into any off balance sheet arrangements.
WE ARE DEPENDABLE.
31
CHANGES IN
ACCOUNTING POLICIES
The Corporation has prepared its December 31, 2019
audited consolidated financial statements in accordance
with IFRS. See Note 2 of the 2019 Audited Financial
Statements for more information regarding the significant
accounting principles used to prepare the 2019 Audited
Financial Statements.
RECENT ACCOUNTING
PRONOUNCEMENTS
SIGNIFICANT ACCOUNTING POLICIES ADOPTED
JANUARY 1, 2019
The Corporation has adopted IFRS 16 retrospectively from
January 1, 2019, but has not restated comparatives for
the 2018 reporting period, as permitted under the specific
transitional provisions in IFRS 16. The reclassifications
and the adjustments arising from the new leasing rules
are therefore recognized in the opening balance sheet on
January 1, 2019.
ADJUSTMENTS RECOGNIZED ON ADOPTION OF IFRS 16
On adoption of IFRS 16, the Corporation recognized lease
liabilities in relation to leases which had previously been
classified as operating leases under the principles of IAS
17 Leases. These liabilities were measured at the present
value of the remaining lease payments, discounted using
the lessee’s incremental borrowing rate as of January 1,
2019. The average lessee’s incremental borrowing rate
applied to the Corporation’s lease liabilities on January 1,
2019 for the Canadian division were 4.0% to 4.7%, and for
the UK division were 3.7% to 3.8%
($ Thousands of CDN dollars) except number of leases
Operating lease commitments disclosed as at December 31, 2018
Discounted using the lessee’s incremental borrowing rate of at the date of initial application
Less: short-term leases recognized on a straight-line basis as expense
Less: low-value leases recognized on a straight-line basis as expense
Lease liability recognized as at January 1, 2019
Of which are:
Current lease liabilities
Non-current lease liabilities
2019
62,655
51,861
(57)
(111)
51,693
8,921
42,772
51,693
2019 ANNUAL REPORT
32
Basic and diluted earnings per share for the Years ended
December 31, 2019 decreased by 0.04 as a result of the
adoption of IFRS 16.
iI) Practical Expedients Applied
In applying IFRS 16 for the first time, the Corporation has
used the following practical expedients permitted by the
standard:
·
·
·
·
·
the use of a single discount rate to a portfolio of leases
with reasonably similar characteristics,
reliance on previous assessments on whether leases
are onerous,
the accounting for operating leases with a remaining
lease term of less than 12 months as at January 1, 2019
as short-term leases,
the exclusion of initial direct costs for the measure-
ment of the right-of-use asset at the date of initial
application, and
the use of hindsight in determining the lease term
where the contract contains options to extend or termi-
nate the lease.
The Corporation has also elected not to reassess whether
a contract is, or contains a lease at the date of initial
application. Instead, for contracts entered into before the
transition date the Corporation relied on its assessment
made applying IAS 17 and IFRIC 4 Determining whether an
Arrangement contains a Lease.
NEW STANDARDS & INTERPRETATIONS NOT YET ADOPTED
New standards, interpretations or amendments that
have been issued but are not yet effective have not
been early adopted by the Corporation, and no material
impact is expected on the Corporation’s consolidated
financial statements.
The associated right-of-use assets for building leases
were measured on a retrospective basis as if the new rules
had always been applied. Other right-of use assets were
measured at the amount equal to the lease liability, adjusted
by the amount of any prepaid or accrued lease payments
relating to that lease recognized in the balance sheet as at
December 31, 2018. There were no material onerous lease
contracts that would have required an adjustment to the
right-of-use assets at the date of initial application.
The recognized right-of-use assets relate to the following
types of assets:
($ Thousands of CDN dollars)
Buildings
Vehicles
Total right-of-use assets
December 31,
2019
January 1,
2019
34,593
6,310
40,903
38,141
8,129
46,270
The change in accounting policy affected the following items
in the balance sheet on January 1, 2019:
a. right-of-use assets – increased by $46,270
b. deferred tax assets – increased by $668
c. lease liabilities:
i. lease liabilities increased by $51,693
ii. unamortized lease inducements decreased by $2,854
iii. current portion of unamortized lease inducements
decreased by $171
The net impact on retained earnings on January 1, 2019 was
a decrease of $1,730.
i) Impact on Segment Disclosures and Earnings per Share
Segment EBITDA, segment assets and segment liabilities
for December 31, 2019 all increased as a result of the
change in accounting policy. The following segments were
affected by the change in policy:
($ Thousands
of CDN dollars)
Segment
EBITDA
Segment
Assets
Segment
Liabilities
Canadian Division
UK Division
5,791
3,089
8,880
29,768
11,135
40,903
31,978
11,213
43,191
WE ARE DEPENDABLE.
33
FINANCIAL
INSTRUMENTS
The Corporation’s financial
instruments at December
31, 2019 and 2018 consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabil-
ities, lease liabilities, dividends payable to shareholders,
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. 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 subse-
quently measured at amortized cost using the effective
interest method. Lease liabilities are recognized initially
at their net present value and subsequently measured
at amortized cost using the effective interest method.
The Corporation’s financial liabilities consist of accounts
payable and accrued liabilities, lease liabilities, dividends
payable to shareholders, and long-term debt.
Long-term debt and borrowings are initially recognized at
fair value, net of transaction costs incurred and are 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 recognized 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 longterm debt and foreign exchange rates on
its equipment purchase commitments. The Corporation
typically does not utilize derivative financial instruments for
trading or speculative purposes.
The Corporation has a floating interest rate debt that
gives rise to risks that its earnings and cash flows may
be adversely impacted by fluctuations in interest rates. In
order to manage these risks, the Corporation may enter into
interest rate swaps, forward contracts on foreign currency,
utilities and textiles or option contracts.
The Corporation has entered into several electrical and
natural gas contracts at December 31, 2019. 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, 2019, there are no material changes in
the Corporation’s risks or risk management activities since
December 31, 2018. 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.
2019 ANNUAL REPORT
34
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 & 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, 2019, 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, 2019, 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, 2019, 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 evalu-
ation 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 condi-
tions 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 »).
WE ARE DEPENDABLE. 35
2019 ANNUAL REPORT 36
CONSOLIDATED
FINANCIAL STATEMENTS
37
INDEPENDENT AUDITOR’S REPORT
39 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
40 CONSOLIDATED STATEMENTS OF EARNINGS & COMPREHENSIVE INCOME
41 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
42 CONSOLIDATED STATEMENTS OF CASH FLOW
43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
71 CORPORATE INFORMATION
WE ARE DEPENDABLE. 37
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, 2019 and 2018,
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, 2019 and 2018;
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
generally 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
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.
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.
the consolidated
In preparing
financial statements,
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
concern basis of accounting unless management either
2019 ANNUAL REPORT 38
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 19, 2020
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.
WE ARE DEPENDABLE. 39
CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION
($ Thousands of CDN 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
Lease liabilities (note 14)
Income taxes payable
Dividends payable to shareholders
Long-term debt (note 12)
Lease liabilities (note 14)
Provisions (note 11)
Deferred income taxes (note 15)
SHAREHOLDERS’ EQUITY
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income
Contingencies and commitments (note 16)
DEC 31, 2019
DEC 31, 2018
5,301
34,900
-
4,334
26,039
70,574
226,332
13,699
41,454
352,059
28,689
8,297
1,507
1,060
39,553
62,494
38,531
2,838
12,592
156,008
203,110
2,241
(10,078)
778
196,051
352,059
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
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
2019 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS
& COMPREHENSIVE INCOME
Years ended December 31
REVENUE
Expenses
Wages and benefits
Linen (note 7)
Utilities
Delivery
Occupancy costs
Materials and supplies
Repairs and maintenance
Corporate
Gain 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 expense (recovery)
Deferred income tax expense
Income tax expense
Net earnings
Other comprehensive income
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
($ Thousands of CDN dollars, except share and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
2019
252,410
99,562
27,463
16,427
28,789
4,483
8,256
8,761
11,104
(8)
204,837
47,573
24,705
3,260
5,802
33,767
13,806
1,722
1,178
2,900
10,906
(888)
10,018
1.04
1.03
10,508,080
10,571,347
10,466,458
10,500,014
40
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
WE ARE DEPENDABLE.
CONSOLIDATED STATEMENTS
OF CHANGES IN EQUITY
($ Thousands of CDN dollars)
Total Share Contributed
Surplus
Capital
Accumulated Other
Comprehensive
Income (loss)
Deficit
As at December 31, 2018
Change in accounting policy (note 3)
Restated total equity at January 1, 2019
Total comprehensive income
Dividends declared (note 20)
Employee share based compensation expense
Shares vested during the year
As at December 31, 2019
201,429
-
201,429
-
-
-
1,681
203,110
2,112
-
2,112
-
-
1,810
(1,681)
2,241
(6,547)
(1,730)
(8,277)
10,906
(12,707)
-
-
(10,078)
1,666
-
1,666
(888)
-
-
-
778
($ Thousands of CDN 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
The accompanying notes are an integral part of these consolidated financial statements.
Total
Equity
198,660
(1,730)
196,930
10,018
(12,707)
1,810
-
196,051
Total
Equity
201,587
7,907
(12,651)
1,817
-
198,660
42
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
CONSOLIDATED STATEMENTS OF CASH FLOW
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 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 (repayment) proceeds of revolving debt
Principle elements of lease payments (note 14)
Dividends paid to shareholders
Cash (used in) 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
($ Thousands of CDN dollars)
The accompanying notes are an integral part of these consolidated financial statements.
2019
10,906
24,705
3,260
-
199
1,810
(8)
-
1,178
42,050
1,866
43,916
(7,709)
(6,691)
(12,703)
(27,103)
(12,942)
51
(1,439)
-
(14,330)
2,483
(9)
2,827
5,301
5,459
228
WE ARE DEPENDABLE.
43
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
($ Thousands of Canadian dollars except share and per share amounts, Years ended December 31, 2019 and 2018)
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 five cities, in Scotland and the North
East of England with facilities in Cupar, Perth, Newcastle,
Livingston 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 19, 2020.
($ Thousands of CDN dollars, except share and per share amounts)
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
its wholly owned subsidiaries and the
Corporation,
long-term incentive plan account (Note 2(o)). All inter-
company balances and transactions have been eliminated
upon consolidation.
include
c) CASH & 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.
2019 ANNUAL REPORT 44
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 to
36 months.
e) REVENUE RECOGNITION
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.
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
45
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.
f) PROPERTY, PLANT & 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.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
46
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(o)).
m) FOREIGN CURRENCY TRANSLATION
The consolidated financial statements are presented
in Canadian dollars. The Corporation’s operations
in
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).
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE. 47
Translation of Transactions & Balances
Transactions in currencies other than the entity’s functional
currency are recognized at the rates of exchange prevailing
at the date of the transaction as follows:
·
Monetary assets and liabilities are translated at the
exchange rate in effect at the reporting date;
· 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) EMPLOYEE BENEFITS
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-retire-
ment 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 provi-
sions of the LTI are recorded as compensation 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 construc-
tive dismissal, the participant will be entitled to receive
his or her unvested common shares on the regular vesting
schedule under the LTI.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT 48
p) FINANCIAL INSTRUMENTS
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.
The Corporation’s financial liabilities consist of accounts
payable and accrued liabilities, lease 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. Lease liabilities
are recognized initially at their net present value and subse-
quently 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 are 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 recognized 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.
q) IMPAIRMENT OF FINANCIAL ASSETS
Information about the impairment of financial assets, their
credit quality and the Corporation’s exposure to credit
risk can be found in Note 22(d). The Corporation utilizes
the application of the simplified approach to provide 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
impairment loss equal to the difference between the
amortized cost of the loan or receivable and the present
value of the estimated future cash flows, discounted using
the instrument’s original effective interest rate. The carrying
amount of the asset is reduced by this amount either directly
or indirectly through the use of an allowance account.
Impairment losses on financial assets carried at amortized
cost are reversed in subsequent periods if the amount of the
loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognized.
r) THE CORPORATION’S LEASING ACTIVITIES & HOW
THESE ARE ACCOUNTED FOR
The Corporation leases various buildings, vehicles and
equipment. Rental contracts are typically made for fixed
periods of one to fifteen years but may have extension
options as described in Note 2(r)(ii) below. Lease terms are
negotiated on an individual basis and contain a wide range
of different terms and conditions. The lease agreements do
not impose any financial covenants, but leased assets may
not be used as security for borrowing purposes.
Until the 2018 financial year, leases of property, plant and
equipment were classified as either finance or operating
leases. Payments made under operating leases (net of any
incentives received from the lessor) were charged to profit
or loss on a straight-line basis over the period of the lease.
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE. 49
From January 1, 2019, leases are recognized as a right-
of-use asset and a corresponding liability at the date
at which the leased asset is available for use by the
Corporation. Each lease payment is allocated between
the liability and finance cost. The finance cost is charged
to profit or loss over the lease period so as to produce a
constant periodic rate of interest on the remaining balance
of the liability for each period. The right-of-use asset is
depreciated over the shorter of the asset’s useful life and
the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially
measured on a present value basis. Lease liabilities include
the net present value of the following lease payments:
·
·
fixed payments (including in-substance fixed payments),
less any lease incentives receivable
variable lease payment that are based on an index or
a rate
· amounts expected to be payable by the lessee under
residual value guarantees, and
Payments associated with short-term leases and leases
of low-value assets are recognized on a straight-line basis
as an expense in profit or loss. Short-term leases are
leases with a lease term of 12 months or less. Low-value
assets are comprised of IT-equipment and small items of
office furniture.
(i) Variable lease payments
Based on the valuation of the Corporation’s leases, no leases
have been identified that are directly tied to an index or rate,
and whereby an estimate would be required in determining
the uncertainty arising from variable lease payments.
(ii) Extension and termination options
Extension and termination options are included in a number
of property and equipment leases across the Corporation.
These terms are used to maximize operational flexibility
in terms of managing contracts. The majority of extension
and termination options held are exercisable only by the
Corporation and not by the respective lessor.
·
the exercise price of a purchase option if the lessee is
reasonably certain to exercise that option.
3) CHANGES IN
ACCOUNTING POLICIES
This note explains the impact of the adoption of IFRS 16
Leases on the Corporation’s financial statements and
discloses the new accounting policies that have been
applied from January 1, 2019.
The Corporation has adopted IFRS 16 retrospectively from
January 1, 2019, but has not restated comparatives for
the 2018 reporting period, as permitted under the specific
transitional provisions in the standard. The reclassifications
and the adjustments arising from the new leasing rules
are therefore recognized in the opening balance sheet on
January 1, 2019.
ADJUSTMENTS RECOGNIZED ON ADOPTION OF IFRS 16
On adoption of IFRS 16, the Corporation recognized lease
liabilities in relation to leases which had previously been
classified as operating leases under the principles of IAS
17 Leases. These liabilities were measured at the present
value of the remaining lease payments, discounted using
the lessee’s incremental borrowing rate as of January 1,
2019. The average lessee’s incremental borrowing rate
applied to the Corporation’s lease liabilities on January 1,
2019 for the Canadian division were 4.0% to 4.7%, and for
the UK division were 3.7% to 3.8%.
The lease payments are discounted using the interest rate
implicit in the lease. If that rate cannot be determined,
the lessee’s incremental borrowing rate is used, being the
rate that the lessee would have to pay to borrow the funds
necessary to obtain an asset of similar value in a similar
economic environment with similar terms and conditions.
To determine
Corporation:
the
incremental borrowing rate,
the
· where possible, uses recent third-party financing
received by the individual lessee as a starting point,
adjusted to reflect changes in financing conditions
since third party financing was received,
· uses a build-up approach that starts with a risk-free
interest rate adjusted for credit risk, and
· makes adjustments specific to the lease, eg. term,
country, currency and security.
Right-of-use assets are measured at cost comprising the
following:
·
the amount of the initial measurement of lease liability,
· any lease payments made at or before the commence-
ment date less any lease incentives received,
· any initial direct costs, and
·
restoration costs.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT ($ Thousands of CDN dollars)
Operating lease commitments disclosed as at December 31, 2018
Discounted using the lessee’s incremental borrowing rate of at the date of initial application
Less: short-term leases recognized on a straight-line basis as expense
Less: low-value leases recognized on a straight-line basis as expense
Lease liability recognized as at January 1, 2019
Of which are:
Current lease liabilities
Non-current lease liabilities
50
2019
62,655
51,861
(57)
(111)
51,693
8,921
42,772
51,693
The associated right-of-use assets for building leases
were measured on a retrospective basis as if the new rules
had always been applied. Other right-of use assets were
measured at the amount equal to the lease liability, adjusted
by the amount of any prepaid or accrued lease payments
relating to that lease recognized in the balance sheet as at
December 31, 2018. There were no material onerous lease
contracts that would have required an adjustment to the
right-of-use assets at the date of initial application.
i) Impact on Segment Disclosures and Earnings per Share
Segment EBITDA, segment assets and segment liabilities
for December 31, 2019 all increased as a result of the
change in accounting policy. The following segments were
affected by the change in policy:
($ Thousands
of CDN dollars)
Segment
EBITDA
Segment
Assets
Segment
Liabilities
The recognized right-of-use assets relate to the following
types of assets:
Canadian Division
UK Division
5,791
3,089
8,880
29,768
11,135
40,903
31,978
11,213
43,191
($ Thousands of CDN dollars)
December 31,
2019
January 1,
2019
Buildings
Vehicles
Total right-of-use assets
34,593
6,310
40,903
38,141
8,129
46,270
Basic and diluted earnings per share for the Years ended
December 31, 2019 decreased by 0.04 as a result of the
adoption of IFRS 16.
ii) Practical Expedients Applied
The change in accounting policy affected the following items
in the balance sheet on January 1, 2019:
In applying IFRS 16 for the first time, the Corporation has
used the following practical expedients permitted by the
standard:
a. right-of-use assets – increased by $46,270
b. deferred tax assets – increased by $668
c. lease liabilities:
i. lease liabilities increased by $51,693
ii. unamortized lease inducements decreased by $2,854
iii. current portion of unamortized lease inducements
decreased by $171
The net impact on retained earnings on January 1, 2019 was
a decrease of $1,730.
·
·
·
·
the use of a single discount rate to a portfolio of leases
with reasonably similar characteristics,
reliance on previous assessments on whether leases
are onerous,
the accounting for operating leases with a remaining
lease term of less than 12 months as at January 1, 2019
as short-term leases,
the exclusion of initial direct costs for the measure-
ment of the right-of-use asset at the date of initial
application, and
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
51
·
the use of hindsight in determining the lease term
where the contract contains options to extend or termi-
nate the lease.
The Corporation has also elected not to reassess whether
a contract is, or contains a lease at the date of initial
application. Instead, for contracts entered into before the
transition date the Corporation relied on its assessment
made applying IAS 17 and IFRIC 4 Determining whether an
Arrangement contains a Lease.
4) NEW STANDARDS &
INTERPRETATIONS NOT
YET ADOPTED
New standards, interpretations or amendments that
have been issued but are not yet effective have not
been early adopted by the Corporation, and no material
impact is expected on the Corporation’s consolidated
financial statements.
5) CRITICAL ACCOUNTING
ESTIMATES & JUDGMENTS
The preparation of the Corporation’s consolidated financial
statements, in conformity with IFRS, requires management
of the Corporation to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual
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 & 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.
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.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
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.
LEASE TERM
In determining the lease term, management considers all
facts and circumstances that create an economic incentive
to exercise an extension option, or not exercise a termina-
tion option. Extension options (or periods after termination
options) are only included in the lease term if the lease is
reasonably certain to be extended (or not terminated). For
many of the leases the cash outflows associated with the
lease extension term would be material. The assessment
is reviewed if a significant event or a significant change in
circumstances occurs which affects this assessment and
that is within the control of the lessee.
52
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:
($ Thousands of CDN dollars)
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.
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.
Intangible assets acquired are made up of $1,186 for the
customer contracts along with related relationships and
customer lists. The goodwill is attributable to the workforce,
and the efficiencies and synergies created between the
existing business of the Corporation and the acquired
business. Goodwill will be fully deductible for tax purposes.
6) BUSINESS ACQUISITIONS
7) LINEN IN SERVICE
LINITEK
On October 3, 2018, the Corporation completed the
acquisition of 9306145 Canada Corp. operating as Linitek
(the “Acquisition”), a private laundry and linen services
company operating in Calgary, Alberta. The Acquisition
was completed through an asset purchase agreement
consisting of existing fixed assets, contracts and employee
base. The contracts acquired are in the Alberta hospitality
sector, which complements the existing business of the
($ Thousands of CDN dollars)
2019
2018
Balance, beginning of year
Additions
Amortization charge
Effect of movement
in exchange rates
Balance, end of year
26,371
27,307
(27,463)
(176)
21,456
31,393
(26,699)
221
26,039
26,371
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
53
8) PROPERTY, PLANT & EQUIPMENT
Land Buildings
Laundry
Equip(1)
Office Delivery Computer
Equip
Equip
Equip
Leasehold
Improvements
Spare
Parts
Total
YEAR ENDED, DEC 31, 2018
Opening net book amount
Additions(3)
Acquisition of business(4)
Disposals
Transfers
Depreciation charge
Effect of movement in exchange rates
Closing net book amount
AT DECEMBER 31, 2018
Cost
Accumulated depreciation
Net book amount
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
371
979
81
-
-
(473)
-
958
32,750
14,318
-
-
257
(3,407)
-
707 171,668
37,304
526
931
-
(333)
-
-
-
(15,871)
-
549
-
43,918 1,233 194,248
4,067
-
4,067
179,727
22,980
(55,475)
(3,871)
19,109 124,252
975
(588)
387
872
(548)
324
2,755
(1,797)
958
59,679 1,233 272,288
(78,040)
(15,761)
43,918 1,233 194,248
-
YEAR ENDED, DEC 31, 2019
Opening net book amount
Adjustment for change in
accounting policy (note 3)
Restated opening net book amount
Additions(3)
Disposals
Depreciation charge
Effect of movement in exchange rates
Closing net book amount
4,067
-
4,067
-
-
-
(24)
4,043
19,109
38,141
124,252
-
387
-
324
8,129
580
-
(5,251)
(55)
57,250 124,252
7,283
(5)
(11,635)
(191)
52,524 119,704
387
69
-
(146)
(1)
309
8,453
1,551
(38)
(3,366)
(22)
6,578
958
-
958
328
-
(578)
-
708
43,918 1,233 194,248
46,270
-
-
423
-
(3,729)
(2)
43,918 1,233 240,518
10,857
623
(43)
-
(24,705)
-
(295)
-
40,610 1,856 226,332
AT DECEMBER 31, 2019
Cost
Accumulated depreciation
Net book amount
4,043
-
4,043
186,714
61,656
(9,132)
(67,010)
52,524 119,704
1,043
(734)
309
10,513
(3,935)
6,578
3,083
(2,375)
708
60,099 1,856 329,007
(19,489)
- (102,675)
40,610 1,856 226,332
1 Included in laundry equipment are assets under development in the amount of $103 (2018 - $1,582). These assets are not available for service and accordingly are not presently being depreciated.
2 Total property, plant and equipment additions include amounts in accounts payable of $2,037 (2018 - $6,127)
3 Additions include amounts from the Canadian Division of $5,461 (2018 - $34,421) and from the UK Division of $5,396 (2018 - $2,883).
4 Includes amounts related to property, plant and equipment assets of the acquired business which are included in the reportable segment for the Canadian division.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
54
9) INTANGIBLE ASSETS
YEAR ENDED, DEC 31, 2018
Opening net book amount
Additions
Acquisition of business (1)
Amortization charge
Effect of movement in exchange rates
Closing net book amount
AT DECEMBER 31, 2018
Cost
Accumulated amortization
Net book amount
YEAR ENDED, DEC 31, 2019
Opening net book amount
Additions(2)
Amortization charge
Effect of movement in exchange rates
Closing net book amount
AT DECEMBER 31, 2019
Cost
Accumulated amortization
Net book amount
Healthcare
Relationships
Hospitality
Relationships
Computer
Software
Brand
Total
1,464
-
-
(481)
-
983
19,200
(18,217)
983
983
-
(453)
-
530
19,200
(18,670)
530
11,275
104
1,186
(2,523)
297
10,339
21,502
(11,163)
10,339
10,339
1,439
(2,807)
(96)
8,875
22,845
(13,970)
8,875
-
-
-
-
-
-
927
(927)
-
-
-
-
-
-
927
(927)
-
4,240
-
-
-
120
4,360
4,360
-
4,360
4,360
-
-
(66)
4,294
4,294
-
4,294
16,979
104
1,186
(3,004)
417
15,682
45,989
(30,307)
15,682
15,682
1,439
(3,260)
(162)
13,699
47,266
(33,567)
13,699
1 Includes amounts related to intangible assets of the acquired business which are included in the reportable segment for the Canadian division.
2 Includes amounts related to intangible assets purchased from a private laundry and linen services company incorporated in Scotland and operating in Aberdeen which are included in the report-
able segment for the UK division.
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
55
10) GOODWILL
The Corporation performed its annual assessment for goodwill impairment for the Canadian division and for the UK division as
at December 31, 2019 in accordance with its policy described in Note 2(k). Goodwill has been allocated to the following CGUs:
($ Thousands of CDN dollars)
Calgary
Edmonton
Vancouver 2
Victoria
Vancouver 1
Montréal
Québec
Canadian division
UK division
Changes due to movement in exchange rates
UK division
Goodwill
2019
8,082
4,346
3,413
3,208
2,630
823
654
23,156
18,100
198
18,298
41,454
2018
8,082
4,346
3,413
3,208
2,630
823
654
23,156
18,100
480
18,580
41,736
KEY ASSUMPTIONS USED IN IMPAIRMENT TEST
11) PROVISIONS
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 11.9 to 12.2 to calculate the recoverable amounts.
For the UK division, the implied average forward multiples
ranged from 11.9 to 12.2 to calculate the recoverable amount.
The fair value of calculations are categorized as Level 3 fair
value based on the unobservable inputs.
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, 2019 to be $3,063 (2018
-$3,150). Management has estimated the present value of
this obligation at December 31, 2019 to be $2,838 (2018 -
$2,645) using an inflation rate of 1.90% (2018 – 1.72%) and
pre-tax weighted average risk-free interest rate of 1.68% to
1.76% (2018 - 1.85% to 2.13%) dependent upon length of the
lease term, which reflects current market assessments of
the time value of money. These obligations are expected to
be incurred over an estimated period from 2020 to 2033.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT 56
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, 2019, if actual costs were
to differ by 10% from management’s estimate the obligation
would be an estimated $284 (2018 - $265) higher or lower.
It is possible the estimated costs could change and changes
to these estimates could have a significant effect on the
Corporation’s consolidated financial statements.
The Corporation recorded the following provision activity
during the year:
During 2019, the Corporation completed amendments to its
existing revolving credit facility, which extended the agree-
ment to July 31, 2022 and made changes to the definitions
within the agreement to clarify that all financial covenants
would be tested on a pre-IFRS 16 basis.
Under the credit facility, the Corporation is required, among
other conditions, to respect certain covenants on a consoli-
dated basis. The main covenants are in regard to its Funded
Debt to Credit Facility EBITDA ratio and Total Fixed Charge
Coverage ratio. Management reviews compliance with these
covenants on a quarterly basis in conjunction with filing
requirements under its credit facility. All covenants have
been met as at December 31, 2019 and December 31, 2018.
($ Thousands of CDN dollars)
2019
2018
Balance, beginning of year
Additions
Acquisition of business
Accretion expense
Changes due to movement
in exchange rates
Settlement
Balance, end of year
2,645
-
-
199
(6)
-
2,838
2,393
450
117
129
16
(460)
2,645
12) LONG-TERM DEBT
($ Thousands of CDN dollars)
Prime Rate Loan (1)
At January 1, 2018
Net proceeds from debt
Closing balance at December 31, 2018
At January 1, 2019
Net repayment of debt
Closing balance at December 31, 2019
42,780
27,423
70,203
70,203
(7,709)
62,494
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, 2022 (December 31, 2018 – July 31, 2021). The additional interest
margin can range between 0.0% to 1.25% dependent upon the calculated Funded Debt / Credit
Facility EBITDA financial ratio, with a range between 0 to 3.5x. As at December 31, 2019 the
combined interest rate was 4.5% (December 31, 2018 – 4.7%).
The Corporation has a revolving credit facility of up to
$100,000 plus a $25,000 accordion of which $63,644 is
utilized (including letters of credit totaling $1,150) as at
December 31, 2019. Interest payments only are due during
the term of the facility.
Drawings under the revolving credit facility are available by
way of Bankers’ Acceptances, Canadian prime rate loans,
Libor of UK pounds based loans, letters of credit or standby
letters of guarantee. Drawings under the revolving credit
facility bear interest at a floating rate, plus an applicable
margin based on certain financial performance ratios.
A general security agreement over all assets, a mortgage
against all leasehold interests and real property, insurance
policies and an assignment of material agreements have
been pledged as collateral.
The carrying value of borrowings approximate their fair
value as the debt is based on a floating rate, the interest
rate risk has not changed, and the impact of discounting is
not significant.
The Corporation has incurred no events of default under the
terms of its credit facility agreement.
13) FINANCE EXPENSE
($ Thousands of CDN dollars)
Interest on long-term debt
Lease interest expense
Accretion expense
Other charges, net
2019
3,302
2,070
199
231
5,802
2018
2,793
-
129
393
3,315
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
57
14) LEASES
A) AMOUNTS RECOGNIZED IN THE BALANCE SHEET
The balance sheet reflects the following amounts relating to leases:
($ Thousands of CDN dollars)
Right-of-use assets
Buildings
Equipment
Lease liabilities
Buildings
Equipment
Total lease liabilities
Less, current portion
of lease liabilities
Long term lease liabilities
December 31,
2019
34,593
6,310
40,903
40,357
6,471
46,828
(8,297)
38,531
January 1,
2019 (1)
38,141
8,129
46,270
43,564
8,129
51,693
(8,921)
42,772
1 In the previous year, the Corporation only recognized lease assets and lease liabilities in relation to leases that were classified as ‘finance leases’ under IAS 17 Leases. The assets were presented in
property, plant and equipment and the liabilities as part of the Corporation’s borrowings. For adjustments recognized on adoption of IFRS 16 on January 1, 2019, please refer to Note 3.
Additions to the right of-of-use assets during the 2019 financial year were $2,013.
B) AMOUNTS RECOGNIZED IN THE STATEMENT OF EARNINGS
The statement of earnings reflects the following amounts relating to leases:
($ Thousands of CDN dollars)
Depreciation charge of right-of-use assets
Buildings
Equipment
Interest expense (included in finance expense)
Expense relating to short-term leases (included in delivery and corporate expenses)
Expense relating to leases of low-value assets that are not shown above
as short-term leases (included in administrative expenses)
The total cash outflow for leases in 2019
December 31,
2019
4,097
3,268
7,365
2,070
57
38
8,856
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
C) RECONCILIATION OF EXPECTED LEASE LIABILITIES
($ Thousands of CDN dollars)
Lease liabilities
Balance at January 1,
Adjustment for change in accounting policy (note 3)
Right-of-use asset additions
Interest expense
Cash payment of lease payments
Effect of movement in exchange rates
Total lease liabilities
Less current portion, included in accrued liabilities
Long term lease liabilities
15) INCOME TAXES
58
December 31,
2019
3,030
48,668
2,013
1,620
(8,487)
(16)
46,828
(8,297)
38,531
A reconciliation of the expected income tax expense to the actual income tax expense is as follows:
($ Thousands of CDN dollars)
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
2019
2018
1,722
1,722
1,501
(323)
1,178
(984)
(984)
2,241
(35)
2,206
The tax on the Corporation’s earnings differs from the theoretical amount that would arise using the weighted average tax
rate applicable to earnings of the consolidated entities as follows:
($ Thousands of CDN dollars)
Earnings before income taxes
Non (deductible)/taxable expenses
Income subject to tax
Income tax at statutory rate of 26.74% (2018 - 26.9%)
Difference between Canadian and foreign tax rates
Impact of substantively enacted rates and other
Income tax expense
2019
13,806
(209)
13,597
3,636
(195)
(541)
2,900
2018
7,391
(1,189)
6,202
1,668
(61)
(385)
1,222
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE. 59
The analysis of the deferred tax assets and deferred tax liabilities is as follows:
($ Thousands of CDN dollars)
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
2019
2018
(12,085)
-
(12,085)
20,545
4,132
24,677
12,592
(1,846)
(484)
(2,330)
10,283
4,176
14,459
12,129
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:
Lease Liabilities
Provisions
Offering Costs & Other
Total
At January 1, 2018
Charged (credited) to the statement of earnings
Related to movements in exchange rates
At December 31, 2018
Charged (credited) to the statement of earnings
Change in accounting policy
Related to movements in exchange rates
At December 31, 2019
($ Thousands of CDN dollars)
-
-
-
-
777
(11,774)
2
(10,995)
(500)
(30)
-
(530)
(33)
-
-
(563)
(1,963)
169
(6)
(1,800)
1,269
-
4
(527)
(2,463)
139
(6)
(2,330)
2,013
(11,774)
6
(12,085)
Deferred tax liabilities:
Linen in
Service
Property, Plant
& Equipment
Intangible Assets
& Goodwill
LTIP &
Other
At January 1, 2018
Acquisition of business
Charged (credited) to the statement of earnings
Related to movements in exchange rates
At December 31, 2018
Charged (credited) to the statement of earnings
Change in accounting policy
Related to movements in exchange rates
At December 31, 2019
($ Thousands of CDN dollars)
3,832
-
344
-
4,176
(44)
-
-
4,132
5,331
-
2,127
21
7,479
(806)
11,106
(11)
17,768
3,138
17
(421)
70
2,804
(416)
-
(42)
2,346
-
-
-
-
-
431
-
-
431
Total
12,301
17
2,050
91
14,459
(835)
11,106
(53)
24,677
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
60
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, 2018 – $1,150) which will remain outstanding
for an indefinite period of time.
Grievances for unspecified damages were lodged against the
Corporation in relation to labour matters. The Corporation
has disclaimed liability and is defending the actions. It is not
practical to estimate the potential effect of these grievances
but legal advice indicates that it is not probable that a signif-
icant liability will arise.
B) COMMITMENTS
Utility Commitments
Utility commitments ($ Thousands of CDN dollars)
2020
2021
2022
2023
2024
Subsequent
6,401
4,224
-
-
-
-
10,625
Linen Purchase Commitments
At December 31, 2019, the Corporation was committed
to linen expenditure obligations in the amount of $9,821
(December 31, 2018 – $9,314) to be incurred within the
next year.
Property, Plant & Equipment Commitments
The Corporation was committed to estimated natural gas
and electricity commitments for the next five calendar
years and thereafter as follows:
At December 31, 2019, the Corporation was committed
to capital expenditure obligations in the amount of $641
(December 31, 2018 – $1,622) to be incurred within the
next year.
17) SHARE CAPITAL
A) AUTHORIZED
The Corporation is authorized to issue an unlimited number of common shares and such number of shares of one class
designated as preferred shares which number shall not exceed 1/3 of the common shares issued and outstanding from
time to time.
B) ISSUED
($ Thousands of CDN dollars, except share and per share amounts)
Balance, beginning of year
Common shares issued under LTI
Balance, end of year
2019
10,559,936
44,446
10,604,382
2018
10,508,502
51,434
10,559,936
Unvested common shares held in trust for LTI
64,924
63,346
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
61
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.
($ Thousands of CDN dollars, except share and per share amounts)
Net earnings
Weighted average number of shares outstanding (thousands)
Net earnings per share, basic
2019
10,906
10,508
1.04
2018
6,169
10,466
0.59
The basic net earnings per share calculation excludes the unvested Common shares held by the LTIP Account.
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.
($ Thousands of CDN dollars, except share and per share amounts)
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
2019
10,508,080
63,267
10,571,347
10,906
10,571
1.03
2018
10,466,458
33,556
10,500,014
6,169
10,500
0.59
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
2019
Unvested
63,346
30,122
(28,544)
64,924
Vested
451,104
14,324
28,544
493,972
2018
Unvested
54,880
34,802
(26,336)
63,346
Vested
408,135
16,633
26,336
451,104
The cost of the 64,924 (2018 – 63,346) unvested Common shares held by the LTIP Account at December 31, 2019 was nil (2018 - nil).
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
62
20) DIVIDENDS TO SHAREHOLDERS
During the Years ended December 31, 2019, the Corporation
declared total dividends to shareholders of $12,707 or
$1.200 per share (2018 - $12,651 or $1.200 per share).
The Corporation’s policy is to pay dividends to Shareholders
of its available cash to the maximum extent possible
consistent with good business practice considering require-
ments for capital expenditures, working capital, growth
capital and other reserves considered advisable by the
Directors of the Corporation. All such dividends are discre-
tionary. Dividends are declared payable each month to the
Shareholders on the last business day of each month and
are paid by the 15th day of the following month.
21) NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS
($ Thousands of CDN dollars) Years ended December 31,
Accounts receivable
Linen in service
Prepaid expenses and deposits
Accounts payable and accrued liabilities(1)
Income taxes payable / receivable
2019
(1,514)
174
(136)
(1,765)
5,107
1,866
2018
(3,571)
(4,695)
(876)
(62)
(2,176)
(11,380)
1 Accounts payable and accrued liabilities exclude the net change in non-cash amounts related to the acquisition of property, plant and equipment that have been committed to but not yet paid of
$-4,090 (2018 - $328).
22) FINANCIAL INSTRUMENTS
A) FAIR VALUE
C) PRICE RISK
Currency Risk
instruments at December
The Corporation’s financial
31, 2019 and 2018 consist of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabili-
ties, lease liabilities, dividends payable to shareholders, and
long term debt. The carrying value of accounts receivable,
accounts payable and accrued liabilities, lease liabilities,
and dividends payable to shareholders approximate fair
value due to the immediate or short-term maturity of these
financial instruments. The fair value of the Corporation’s
interest-bearing debt approximates the respective carrying
amount due to the floating rate nature of the debt.
B) FINANCIAL RISK MANAGEMENT
The Corporation’s activities are exposed to a variety of
financial risks: price risk, credit risk and liquidity risk. The
Corporation’s overall risk management program focuses
on the unpredictability of financial and economic markets
and seeks to minimize potential adverse effects on the
Corporation’s financial performance. Risk management is
carried out by financial management in conjunction with
overall corporate governance.
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, 2019, 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 $3, respectively, on net earnings.
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
63
Based on financial instrument balances as at December 31,
2019, 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 $36, 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 $625 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.
D) CREDIT RISK
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 & Cash Equivalents
While cash and cash equivalents are also subject to the
impairment requirements of IFRS 9, the identified impair-
ment loss was immaterial.
Accounts Receivable
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, 2019 or January 1, 2019 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, 2019
and 2018 was determined as follows for trade receivables:
December 31, 2018
Current
1 to 60 days
61 to 90 days
Greater than 90 days
December 31, 2019
Current
1 to 60 days
61 to 90 days
Greater than 90 days
($ Thousands of CDN dollars)
($ Thousands of CDN dollars, except share and per share amounts)
Gross
Allowance
24,540
7,208
1,139
754
33,641
-
-
-
105
105
Gross
Allowance
26,634
6,464
1,164
732
34,994
-
-
-
94
94
Net
24,540
7,208
1,139
649
33,536
Net
26,634
6,464
1,164
638
34,900
2019 ANNUAL REPORT
64
While the Corporation evaluates a customer’s credit worthiness before credit is extended, provisions for potential credit
losses are also maintained. The change in allowance for doubtful accounts was as follows:
($ Thousands of CDN dollars)
Opening loss allowance at January 1,
Adjustment made during the year
Write-offs
Effect of movements in exchange rates
Balance, end of year
E) LIQUIDITY RISK
2019
105
105
(114)
(2)
94
2018
368
(10)
(262)
9
105
The Corporation’s accounts payable and dividend payable are due within one year. Payments due under contractual obliga-
tions on an undiscounted basis for the next five years and thereafter are as follows:
($ Thousands of CDN dollars)
Long-term debt
Lease liabilities
Utility commitments
Linen purchase obligations
Property, plant and equipment commitments
Total
62,494
63,004
10,625
9,821
641
Payments Due by Period
1–3 Years
< 1 Year
4–5 Years
> 5 Years
-
8,207
6,401
9,821
641
62,494
13,784
4,224
-
-
-
10,450
-
-
-
-
30,563
-
-
-
The Corporation has a credit facility with a maturity date of
July 31, 2022 (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.
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
65
23) CAPITAL MANAGEMENT
The Corporation’s primary objectives when managing its
capital structure are as follows:
· maintain financial flexibility and availability of capital in
order to, meet financial obligations, provide dividends,
execute growth plans, and to continue growth through
business acquisitions;
· manage the Corporation’s activities in a responsible
way in order to provide an adequate return for its
shareholders, while taking a conservative approach
towards financial leverage and management of finan-
cial risk; and
· comply with financial covenants required under the
credit facility.
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
($ Thousands of CDN dollars) Years ended December 31,
Long-term debt, including current portion
Issued and outstanding letters of credit
Shareholders’ equity
Less: Cash and cash equivalents
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 Corporation monitors its capital structure and financing
requirements using non-GAAP financial metrics required
under its Credit Facility debt covenants, consisting of
Funded Debt to Credit Facility EBITDA ratio and Total Fixed
Charge Coverage ratio. The Funded Debt, Credit Facility
EBITDA, and Total Fixed Charge Coverage are defined under
the terms of the Credit Facility (see Note 12) and do not
have any standardized meaning prescribed under IFRS. It
is therefore unlikely to be comparable to similar measures
presented by other companies. Debt covenant restrictions
will vary due to the timing of Material Transactions as
defined under the terms of the Credit Facility.
The Corporation’s capital structure is comprised of borrow-
ings under its credit facility, shareholders’ equity, less cash
and cash equivalents.
2019
62,494
1,150
196,051
259,695
(5,301)
254,394
2018
70,203
1,150
198,660
270,013
(2,827)
267,186
The Corporation’s financing strategy is to maintain a flexible structure consistent with the objectives stated above, to
respond adequately to changes in economic conditions and to allow growth organically and through business acquisitions.
In order to maintain and adjust its capital structure, the Corporation may issue new shares in the market, contract bank
loans and negotiate new credit facilities.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
66
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 2019 and 2018, remuneration to directors and key
management personnel was as follows:
($ Thousands of CDN dollars)
Salaries and retainer fees
Short-term bonus incentives
Post-employment benefits
Share-based payments
2019
1,882
967
64
1,446
4,359
2018
1,836
935
63
1,438
4,272
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, 2019, the Corporation
incurred such fees totaling $138 (2018– $138).
25) EXPENSES BY NATURE
($ Thousands of CDN dollars)
2019
2018
Wages and benefits
Linen
Utilities
Delivery
Materials and supplies
Occupancy costs
Repairs and maintenance
Other expenses
118,851
27,463
16,427
15,567
10,172
4,675
8,761
2,921
204,837
118,347
26,699
14,991
18,197
10,485
10,075
8,215
2,944
209,953
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.
2) UK division - provides laundry and linen services
primarily to the hospitality sector, with other sectors
including healthcare, manufacturing and pharma-
ceutical, through six sites which are located in Cupar,
Perth, Newcastle, Livingston and Coatbridge.
WE ARE DEPENDABLE.
67
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.
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.
The CEO primarily uses a measure of EBITDA to assess the
performance of the operating segments. In addition, 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.
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
the major customer is contractually committed to March 1,
2027, and in Saskatchewan the major customer is contrac-
tually committed to June 1, 2025. For the Years ended
December 31, 2019, from these four major customers the
Corporation has recorded revenue of $102,460 (2018 –
$98,979), representing 40.6% (2018 – 41.3%) of total revenue.
($ Thousands of CDN dollars)
2019
2018
Healthcare
Hospitality
Canadian division
Healthcare
Hospitality
UK division
132,620
54,004
186,624
6,404
59,382
65,786
52.6%
21.4%
74.0%
2.5%
23.5%
26.0%
128,933
50,956
179,889
6,379
53,266
59,645
53.8%
21.3%
75.1%
2.7%
22.2%
24.9%
Total segment revenue
252,410
100.0%
239,534
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.
2019
Net earnings
EBITDA
2018
Net earnings
EBITDA
Canadian Division
UK Division
7,787
35,843
3,119
11,730
Canadian Division
UK Division
2,701
21,370
3,468
8,211
Total
10,906
47,573
Total
6,169
29,581
The Canadian division net earnings includes non-cash employee share based compensation expense of $1,810 (2018 – $1,817).
($ Thousands of CDN dollars)
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT
68
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. See Note 3 for details about the impact of the change in accounting policy on the current period
segment disclosures.
($ Thousands of CDN dollars) At December 31, 2019
Canadian Division
UK Division
Total
Total assets
Other:
Cash and cash equivalents
Total segment assets
260,560
91,499
352,059
-
260,560
(5,301)
86,198
(5,301)
346,758
($ Thousands of CDN dollars) At December 31, 2018
Canadian Division
UK Division
Total
Total assets
Other:
Cash and cash equivalents
Total segment assets
Segment Liabilities
244,768
77,461
322,229
-
244,768
(2,827)
74,634
(2,827)
319,402
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. See Note 3 for details about the impact of the change in accounting policy on the current period
segment disclosures.
($ Thousands of CDN dollars) At December 31, 2019
Canadian Division
UK Division
Total
Total liabilities
Other:
Long-term debt (note 12)
Total segment liabilities
132,156
23,852
156,008
(62,494)
69,662
-
23,852
(62,494)
93,514
($ Thousands of CDN dollars) At December 31, 2018
Canadian Division
UK Division
Total
Total liabilities
Other:
Long-term debt (note 12)
Total segment liabilities
111,044
12,525
123,569
(70,203)
40,841
-
12,525
(70,203)
53,366
($ Thousands of CDN dollars, except share and per share amounts)
WE ARE DEPENDABLE.
69
27) SUBSEQUENT EVENTS
A) DIVIDENDS
The Corporation’s Board of Directors declared an eligible
dividend of $0.10 per Common share of the Corporation
payable on each of February 14, March 13 and April 15, 2020
to Shareholders of record on January 31, February 29, and
March 31, 2020 respectively.
B) ALBERTA HEALTHCARE CONTRACT EXTENSION
On March 1, 2020, 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.
C) CORONAVIRUS DISEASE 2019 (“COVID-19 “)
The ongoing COVID-19 pandemic has caused world govern-
ments to institute travel restrictions both in and out of and
within Canada and the UK, which has had, and is expected
to continue to have, a significant adverse impact on the
Corporation’s hospitality business, the duration of which we
are unable to predict with any degree of accuracy. In recent
weeks, we have seen significantly reduced hotel occupancy
rates compared to historical levels. More recently, demand
for both business and leisure airline travel has declined
significantly on a global basis, and airlines are responding by
cancelling international and domestic flights. Accordingly,
hospitality volume in all of our Canadian and UK markets
have slowed to historically low levels. To date, we have seen
a slight increase in our healthcare business as the result of
increased demand for certain products caused by COVID-19.
The extent of such negative effects on our hospitality
business and our financial and operational performance
will depend on future developments, including the duration,
spread and severity of the outbreak, the duration and
geographic scope of related travel advisories and restric-
tions and the extent of the impact of COVID-19 on overall
demand for personal and business travel, all of which are
highly uncertain and cannot be predicted with any degree
of accuracy. If hotels continue to experience significantly
reduced occupancy rates for an extended period, our 2020
consolidated results of operations will be significantly
impacted. The extent to which the outbreak affects our
earnings will depend in part on our ability to implement
various measures intended to reduce expenses, including
consolidating production capacity and laying off additional
workers. Earnings in the hospitality segment will continue
to be particularly affected if we continue to experience
further reductions in travel. Additionally, our suppliers or
other third parties we rely upon may experience delays
or shortages, which could have an adverse effect on our
business prospects and results of operations.
($ Thousands of CDN dollars, except share and per share amounts)
2019 ANNUAL REPORT 70
WE ARE DEPENDABLE. 71
CORPORATE
INFORMATION
BOARD OF DIRECTORS
ROSS SMITH, FCPA
FCA (Chair)
Corporate Director
MATTHEW HILLS, MBA
Managing Director
LLM Capital Partners
STEVEN MATYAS, BSC
Corporate Director
LINDA MCCURDY, MBA
President & CEO
K-Bro Linen Systems Inc.
MICHAEL PERCY, PHD
Professor
School of Business
University of Alberta
EXECUTIVE OFFICERS
LINDA MCCURDY, MBA
President & CEO
SEAN CURTIS
Senior VP & COO
(Edmonton)
KRISTIE PLAQUIN, CPA, CA
Chief Financial Officer
TRANSFER AGENT
& REGISTRAR
AST Trust Company
Calgary, Alberta
AUDITORS
PricewaterhouseCoopers LLP
Edmonton, Alberta
LEGAL COUNSEL
Stikeman Elliott
Toronto, Ontario
PRINCIPAL BANK
TD Bank
Edmonton, Alberta
STOCK EXCHANGE LISTING
TSX: KBL
2019 ANNUAL REPORT
72
CANADA LOCATIONS
CORPORATE
OFFICE
14903 - 137 Ave
Edmonton, AB T5V 1R9
P 780 453 5218
F 780 455 6676
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
6969 – 55 St SE
Calgary, AB T2C 4Y9
730 Dethridge Bay
Regina, SK S4N 6H9
599, Rue Simonds
Sud Granby, QC J2J 1C1
P 403 724 9001
F 403 720 2959
Jeff Gannon
General Manager
P 306 757 5276
F 306 757 5280
Jackie Belanger
General Manager
P 450 378 3187
F 450 378 8245
VICTORIA
VANCOUVER 2
EDMONTON
TORONTO
QUÉBEC
861 Van Isle Way
Victoria, BC V9B 5R8
8035 Enterprise Street
Burnaby, BC V5A 1V5
15223 – 121 A Ave
Edmonton, AB T5V 1N1
6045 Freemont Blvd
Mississauga, ON L5R 4J3
367 Boulevard Des Chutes,
Québec City, QC G1E 3G1
P 250 474 5699
F 250 474 5680
Andrew MacKeen
General Manager
P 604 681 3291
F 604 685 1458
Ryo Utahara
General Manager
P 780 451 3131
F 780 452 2838
Trevor Rye
General Manager
P 416 233 5555
F 416 233 4434
Sean Jackson
General Manager
P 418 661 6163
F 418 661 4000
Dimitri Hamm
Directeur Général
UK LOCATIONS
HEAD OFFICE
PERTH
RIGGS PLACE
COATBRIDGE
3 Riggs Place,
Cupar, Fife, KY155JA
P 01334654033
Inveralmond Industrial
Estate, Ruthvenfield
Avenue, Perth, PH13UF
P 01738210106
Andy Mackay
General Manager
3 Riggs Place,
Cupar, Fife, KY155JA
18 Palacraig Street,
Coatbridge, ML54RY
P 01334654033
P 01236449010
David Emslie
General Manager
CUPAR
LIVINGSTON
NEWCASTLE
Prestonhall Industrial
Estate, Cupar, Fife,
KY154RD
2 Gregory Road, Kirkton
Campus, Livingston,
EH547DR
P 01334655220
David Emslie
General Manager
P 01506426816
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
WE ARE DEPENDABLE. INQUIRIES@K-BROLINEN.COM | K-BROLINEN.COM