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MJ Hudson Group plcA N N U A L R E P O R T WE ARE TABLE OF CONTENTS 1 4 5 7 9 39 P R E S I D E N T ’S M E S S A G E C H A I R M A N ’S M E S S A G E O F F I C E R S & D I R E C T O R S F I N A N C I A L H I G H L I G H T S M A N A G E M E N T’S D I S C U S S I O N & A N A LY S I S C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S PRESIDENT'S M E S S A G E 2022 was a year of continuing recovery, with our country and the world emerging from the worst impacts of the pandemic. K-Bro is also moving forward and leaving behind some of the worst effects of COVID-19. Our business continued to recover in 2022 as we saw ongoing strength in revenue, our healthcare volume continued to be higher than historical amounts and hospitality volumes approached pre-pandemic levels. While labour and utility cost pressures impacted our operations, we also realized price adjustments to help mitigate the impacts. As a result, 2022 was a solid year for K-Bro and we enter 2023 filled with optimism for our company. While deliv- ering industry-leading service, we have always embraced our responsibility to society. We prioritize customer and employee relationships, environmental stewardship and creating positive impacts where we do business. In 2023, we are excited to advance our sustainability agenda for the long-term and intend to publish our inaugural sustain- ability report by the end of the year. We begin 2023 expecting continuing increases in our volumes throughout our Canadian and UK operations, while also seeing the benefits of our labour optimization and utility hedging efforts. We will have a full year of processing 100% of Alberta Health Services (“AHS”) volume throughout Alberta, having integrated all of the additional volume during 2022. At the same time, we continue to pursue strategically valuable acquisitions and will move quickly when we see opportunities, including the recently announced acquisi- tion of Paranet in Quebec City. All of these factors should present strong organic and acquisition growth opportunities for K-Bro in 2023. · We saw strong Canadian results and continuing recovery in our UK operations. · Our balance sheet remained conservative throughout the year, with year-end debt of $45mm. We expect a strong balance sheet throughout 2023. We are appreciative of your continuing support and confi- dence, and we commit ourselves every day to providing the best possible service for our customers, a safe and fulfilling environment for all of our Canadian and UK employees, and superior financial performance for our shareholders. We wish you a good 2023. Our 2022 highlights included: · Revenue and EBITDA were $277mm and $36.5mm. In addition to other changes, we expect to realize the full-year benefit from 100% of the new AHS volume and the annual impact of price adjustments agreed to in 2022 across various markets. L I N D A M c C U R D Y 2 WE ARE DEPENDABLE. I A M P L E A S E D T H AT K - B R O F I N I S H E D 202 2 W I T H S T R E N G T H A N D M O M E N T U M , A N D W E A R E O P T I M I S T I C A B O U T O U R O R G A N I C A N D A C Q U I S I T I O N G R O W T H O P P O R T U N I T I E S A S W E M O V E A H E A D I N T O 2023. 3 2022 ANNUAL REPORT CHAIRMAN'S M E S S A G E Almost all companies have faced significant challenges in the aftermath of the pandemic, yet K-Bro has dealt with the challenges in ways that bode well for our growth and financial performance. We are especially grateful that our Canadian and UK staff have overall remained healthy and that we have continued to provide a safe environment for all of our employees. This is a reflection of our Company’s values, including how important it is that we provide the best possible workplace for our team. We never stop working hard every day to provide best-in-class service to all of our customers and the best possible results for our shareholders. I am optimistic about 2023, and especially happy that we began the year with an acquisition in our existing Quebec market. On behalf of our Company and Board, thank you for our confi- dence and loyalty. We will continue to do what is best for our customers, employees, community and shareholders, and we look forward to a bright future. M I C H A E L P E R C Y 4 WE ARE DEPENDABLE. OFFICERS & D I R E C T O R S K-BRO IS THE L ARGEST HEALTHCARE & HOSPITALIT Y L AUNDRY & LINEN PRO CESSOR IN CANADA , & WITH THE ACQUISITION OF FISHERS WE ARE NO W ONE OF THE L ARGEST IN THE UK & EUROPE. We operate 15 facilities and two distribution centers, including ten facilities and two distributions centers in Canada, and five facilities in the UK (Scotland and the North East of England). Our core values remain central to our reputation, and we continue to relentlessly focus on providing industry-leading quality and service. Our ability to deliver on commitments to our valued customers remains second to none. K-Bro provides the vital products and services that help people heal, travel, live, and play. We’re helping 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. RO W 1 MATTHEW HILLS, STEVEN MATYAS, ELISE REES, MICHAEL PERCY RO W 2 RYO UTAHARA, TREVOR RYE, SCOTT INGLIS RO W 3 MICHAEL JONES, LUCY RENAUT, DIMITRI HAMM, BARB LEWIS RO W 4 KEVIN STEPHENSON, JAMES EWART, ANDREW MACKEEN RO W 5 KRISTIE PLAQUIN, SEAN CURTIS, JEFF GANNON, LINDA MCCURDY 5 2022 ANNUAL REPORT 6 FINANCIAL H I G H L I G H T S The following unaudited financial data has been derived from K-Bro’s consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP. The information set forth below should be read in conjunction with the Management’s Discussion & Analysis, Consolidated Financial Statements and Notes sections of this Annual Report. R E V E N U E U P 23.5% E B I T D A(1)(2 ) D O W N 14.7% 275 250 225 200 175 48 44 40 36 32 28 24 ($) 2018 2019 2020 2021 2022 ($) 2018 2019 2020 2021 2022 (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 2020 and 2019 figures for both EBITDA and net earnings without adoption of IFRS 16 as separate line items. Refer to the Accounting Changes section of the MD&A for more information. 2 The COVID-19 pandemic caused world governments to institute travel restrictions both in and out of and within Canada and the UK, which has had an adverse impact on the Corporation’s hospitality business. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficiencies in attracting, training and retaining employees. While the Corporation anticipates labour markets will stabilize, the timing remains uncertain. In addition to this, certain geopolitical events and other factors have resulted in rising and unstable commodity costs for key inputs such as natural gas, electricity and diesel. The combination of all these events has had a negative impact to consolidated EBITDA. 7 2022 ANNUAL REPORT Years ended December 31, 2022 2021 2020 2019 2018 Income Statement Data Revenue EBITDA[1] EBITDA (%)[1] Net earnings[1] Net earnings per share (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 276,623 36,492 13.2 3,906 0.37 36,635 45,166 1.81 65.9 73.8 8.0 2.2 16.7 0.4 294,108 36.0 27.6 27.3 223,992 42,791 19.1 8,692 0.81 196,591 38,244 19.5 3,782 0.36 252,410 47,573 18.8 10,906 1.03 239,534 29,581 12.3 6,169 0.59 30,271 37,973 27,922 40,657 31,021 62,494 34,825 70,203 2.57 46.8 42.2 8.5 4.7 9.2 2.7 366,616 47.2 33.4 34.2 2.94 40.9 93.0 10.8 2.3 4.5 6.7 416,078 46.4 23.7 39.0 2.80 51.1 40.8 9.3 5.6 29.3 5.7 445,914 43.2 32.7 42.1 2.36 51.1 56.7 11.9 3.1 16.2 14.5 351,404 41.7 32.0 33.4 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. Refer to the Accounting Changes section of this MD&A for more information. ($ Thousands of CDN dollars, except percentages and per share data) 8 WE ARE DEPENDABLE. MANAGEMENT'S D I S C U S S I O N & A N A LY S I S 12 13 14 14 15 19 20 26 28 29 30 30 I N T R O D U C T I O N S T R AT E G Y F O U R T H Q U A R T E R O V E R V I E W S E L E C T E D A N N U A L F I N A N C I A L I N F O R M AT I O N S U M M A R Y O F R E S U LT S & K E Y E V E N T S O U T L O O K R E S U LT S O F O P E R AT I O N S L I Q U I D I T Y & C A P I TA L R E S O U R C E S D I V I D E N D S D I S T R I B U TA B L E C A S H F L O W O U T S TA N D I N G C O M M O N S H A R E S R E L AT E D PA R T Y T R A N S A C T I O N 9 2022 ANNUAL REPORT 30 33 34 34 35 35 35 C R I T I C A L A C C O U N T I N G E S T I M AT E S T E R M I N O L O G Y C H A N G E S I N A C C O U N T I N G P O L I C I E S R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S F I N A N C I A L I N S T R U M E N T S C R I T I C A L R I S K S & U N C E R TA I N T I E S C O N T R O L S & P R O C E D U R E S 10 WE ARE DEPENDABLE. M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S O F F I N A N C I A L C O N D I T I O N & R E S U LT S O F O P E R AT I O N S The following Management's Discussion and Analysis (“MD&A”) is supplemental to, and should be read in conjunc- tion with, the audited consolidated financial statements of K-Bro Linen Inc. (“the Corporation”) for the years ended December 31, 2022 and 2021 (the “2022 Audited Financial Statements”), as well as the unaudited interim condensed consolidated financial statements for the periods ended March 31, 2022, June 30, 2022 and September 30, 2022. 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 21, 2023. In the interest of providing current holders (“Shareholders”) of common shares of K-Bro Linen Inc. (“Common Shares”) and potential investors with information regarding current results and future prospects, our public communications often include written or verbal forward looking statements. Forward looking statements are disclosures regarding possible events, conditions, or results of operations that are based on assumptions about future economic condi- tions and courses of action, and include future oriented financial information. This MD&A contains forward looking information that represents internal expectations, estimates or beliefs concerning, among other things, future activities or future operating results and various components thereof. The use of any of the words “anticipate”, “continue”, “expect”, “may”, “will”, “project”, “should”, “believe”, and similar expres- sions suggesting future outcomes or events are intended to identify forward looking information. Statements regarding such forward looking information reflect management’s current beliefs and are based on information currently available to management. These statements are not guarantees of future perfor- mance and are based on management’s estimates and assumptions that are subject to risks and uncertainties, which could cause K-Bro’s actual performance and finan- cial results in future periods to differ materially from the forward-looking information contained in this MD&A. These risks and uncertainties include, among other things: (i) risks associated with acquisitions, including the possibility of undisclosed material liabilities; (ii) K-Bro's competitive environment; (iii) utility costs, minimum wage legislation and labour costs; (iv) K-Bro's dependence on long-term contracts with the associated renewal risk including, without limitation, in connection with the settlement of definitive documentation in respect there of; (v) increased capital expenditure requirements; (vi) reliance on key personnel; (vii) changing trends in government outsourcing; (viii) changes or proposed changes to minimum wage laws in Ontario, British Columbia, Alberta, Quebec, Saskatchewan and the United Kingdom (the “UK”); (ix) the availability of future financing; (x) textile demand; (xi) the adverse impact of the COVID-19 pandemic on the Corporation, which has been significant to date and which we believe will continue to be significant for the short to medium term; (xii) avail- ability and access to labour; (xiii) rising wage rates in all jurisdictions the Corporation operates and (ix) 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) interest and foreign exchange rates; (v) the level of capital expenditures and (vi) the expected impact of the COVID-19 pandemic on the Corporation. Although the forward-looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain statements regarding forward-looking information included in this MD&A may be considered “financial outlook” for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this MD&A. Forward 11 2022 ANNUAL REPORT 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 processors in K-Bro's industry include independent privately-owned facil- ities (i.e., typically small, single facility companies), public sector central laundries and public and private sector on premise laundries (known as “OPLs”). Participants in other sectors of the Canadian laundry and linen services industry, such as uniform rental companies (which own and launder uniforms worn by their customers' employees) typically do not offer services that significantly overlap with those offered by K-Bro. In the UK, Fishers provides laundry and linen services to healthcare, hospitality and other commercial customers. Typical services offered by Fishers include the processing, management and distribution of general linen, workwear and clean room garment services. Other types of proces- sors in Fishers’ industry in the UK include publicly traded companies, independent privately-owned facilities (i.e., typically, small single facility companies), public sector central laundries and public and private sector OPLs. Our partnerships with healthcare institutions and hospi- tality clients across Canada and the UK demonstrate K-Bro’s commitment to building relationships that foster continuous improvement, providing flexibility to adjust to changing circumstances as required and which incorporate incentives, penalties and the sharing of risks and rewards as circumstances warrant. In this competitive industry, K-Bro is distinctive in its ability to deliver products and services that provide value to our customers. Management believes that the health- care and hospitality sectors of the laundry and linen services industry represent a stable base of annual recur- ring business with opportunities for growth as additional healthcare beds and funds are made available to meet the needs of an aging demographic. looking information included in this MD&A includes the expected annual healthcare revenues to be generated from the Corporation’s contracts with new customers, 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, as well as statements related to the impact of the COVID-19 pandemic on the Corporation. All forward looking information in this MD&A is qualified by these cautionary statements. Forward looking information in this MD&A is presented only as of the date made. Except as required by law, K-Bro does not undertake any obliga- tion to publicly revise these forward looking statements to reflect subsequent events or circumstances. This MD&A also makes reference to certain measures in this document that do not have any standardized meaning as prescribed by IFRS and, therefore, are considered non-GAAP measures. These measures may not be compa- rable to similar measures presented by other issuers. Please see “Terminology” for further discussion. I N T R O D U C T I O N CORE BUSINESS The Corporation is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the North East of England. K-Bro and its wholly owned subsidiaries operate across Canada and the UK, providing a range of linen services to healthcare insti- tutions, 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 facil- ities in Scotland, providing linen rental, workwear hire and cleanroom garment services to the hospitality, health- care, manufacturing and pharmaceutical sectors. The Corporation operates five UK sites located in Cupar, Perth, Newcastle, Livingston and Coatbridge. 12 WE ARE DEPENDABLE. INDUSTRY CHARACTERISTICS & TRENDS Management believes that the industry in which K-Bro operates has historically exhibited the following character- istics and trends: Generally 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 relation- ships 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 COVID-19 pandemic and other geopolitical risks have introduced atypical instability in both the healthcare and the hospitality sectors which is inconsistent with the historical characteristics of and trends in K-Bro’s industry. 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. Management evaluates M&A opportunities on an ongoing basis and looks to leverage the Corporation’s strong liquidity position, balance sheet and access to the capital markets to execute on these opportunities as they arise. 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. S T R AT E G Y K-Bro maintains the following three-part strategic focus: Secure and Maintain LongTerm 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 longterm 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 services and onsite services. K-Bro performs the sterilization of operating room linen packs for nine major hospitals in Toronto and the four health authorities in the Vancouver area. 13 2022 ANNUAL REPORT FO U R T H Q U A R T E R O V E R V I E W Net earnings for the fourth quarter of 2022 were $0.3 million or $0.03 per Common Share (basic). Cash flow from operating activities for the fourth quarter of 2022 was $1.0 million and distributable cash flow was $3.0 million. Consolidated revenue for the fourth quarter of 2022 increased to $70.7 million or by 13.6% compared to 2021 primarily related to restrictions from the COVID-19 pandemic being eased which drove stronger hospitality client activity and the continued strength of healthcare revenues as a result of the transition of the new rural AHS business which commenced in late Q3 2021, healthcare practice changes as a result of the COVID-19 pandemic and price increases across various markets serviced. EBITDA (see “Terminology”) remained relatively consistent quarter over quarter with EBITDA for the fourth quarter of 2022 being $8.7 million compared to $8.9 million in the fourth quarter of 2021, which is a decrease of 2.3%. For the Canadian division, the Corporation recorded EBITDA of $7.7 million during the fourth quarter of 2022 which was consis- tent with the $7.8 million recorded in the fourth quarter of 2021. The UK division also saw consistent EBITDA whereby the Corporation recorded EBITDA of $1.0 million during the fourth quarter of 2022 compared to $1.1 million in the fourth quarter of 2021. On a consolidated basis, the Corporation’s EBITDA margin decreased from 14.4% in 2021 to 12.3% in 2022. For the Canadian division, Q4 EBITDA margin decreased to 14.2% from 16.2% for the compara- tive quarter of 2021. For the UK division, Q4 EBITDA margin decreased to 6.0% from 8.0% for the comparative quarter of 2021. For the Canadian division, the reduction in EBITDA margin is primarily related to temporary labour inefficien- cies resulting from unusually competitive labour markets in certain cities in which we operate as well as the AHS transi- tion, higher natural gas rates and higher delivery costs related to increased diesel rates and the AHS transition. For the UK division, the reduction in EBITDA margin is primarily related to labour efficiencies offset by significant increases in natural gas rates in 2022. S E L E C T E D A N N U A L F I N A N C I A L I N FO R M AT I O N Years Ended December 31, ($ Thousands of CDN dollars, except percentages and per share amounts) UK Canadian Division Division 2022 2022 Canadian UK Division Division 2021 2021 2022 Canadian UK Division Division 2020 2020 2021 Revenue EBITDA(1) Net earnings (loss) 212,035 32,365 6,042 64,588 4,127 (2,136) 276,623 36,492 3,906 183,073 39,678 13,604 40,919 3,113 (4,912) 223,992 42,791 8,692 166,682 38,365 10,892 29,909 (121) (7,110) 2020(2) 196,591 38,244 3,782 Net earnings (loss) per share: Basic Diluted 0.567 0.563 (0.200) (0.199) 0.366 0.364 1.282 1.273 (0.463) (0.460) 0.819 0.813 1.032 1.025 (0.673) (0.669) 0.358 0.356 Total assets Long-term debt (excludes lease liabilities) 325,760 45,166 332,519 37,973 323,811 40,657 Weighted average number of shares outstanding: Basic Diluted 10,657,742 10,735,269 10,608,539 10,686,187 10,557,147 10,629,237 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense, and depreciation and amortization). See “Terminology”. 2 Q1 2020 includes an adjustment of $5.5 million for an impairment related charge to the Canadian Division. 14 WE ARE DEPENDABLE. S U M M A RY O F 2022 R E S U LT S , K E Y E V E N T S & O U T LO O K Net earnings were $3.9 million or $0.37 per Common Share (basic). Cash flow from operating activities was $26.1 million and distributable cash flow was $19.6 million. Revenue increased in fiscal 2022 to $276.6 million or by 23.5% compared to 2021. Consolidated revenue for the fourth quarter of 2022 increased to $70.7 million or by 13.6% compared to 2021 primarily related to easing of COVID-19 pandemic restrictions which drove stronger hospitality client activity combined with the continued strength of healthcare revenues. Healthcare revenue benefitted from the transition of the new rural AHS business, which commenced in late Q3 2021, and changes to healthcare practices following the COVID-19 pandemic. Certain price increases were secured across various markets serviced to offset inflation-related cost increases with further increases to be implemented in Q1 and Q2 2023. EBITDA (see “Terminology”) decreased in 2022 to $36.5 million or by 14.7% compared to $42.8 million in 2021. On a consolidated basis, EBITDA margin decreased from 19.1% in 2021 to 13.2% in 2022. For the Canadian division, the EBITDA margin decreased to 15.3% in 2022 from 21.7% in 2021. The decrease in margin is primarily related to temporary labour inefficiencies resulting from unusually competitive labour markets in certain cities in which we operate, higher natural gas rates, higher delivery costs related to increased diesel rates, and lower government assistance received. The margin is also impacted by the AHS transition and the repricing of the Corporation’s existing business in Edmonton and Calgary with AHS which took effect on August 1, 2021 in advance of the business being fully transitioned. For the UK division, the EBITDA margin decreased to 6.4% in 2022 from 7.6% in 2021. The reduction in EBITDA margin is primarily related to labour efficiencies which are offset by increases in natural gas rates in 2022. KEY EVENTS IN OUR MARKETS ARE SUMMARIZED BELO W ACQUISITION OF BUANDERIE PARANET On March 2, 2023, the Corporation announced the closing of a share purchase agreement to acquire all the assets of a private laundry and linen services company incorporated in Canada and operating in Quebec City, Quebec for total consideration of $11.5 million and a potential earnout of $1.9 million. The acquisition will be accounted for using the acquisition method, whereby the purchase consideration will be allocated to the net assets acquired. Paranet is a private laundry and linen services company for the Quebec City healthcare and hospitality markets. The purchase price will be satisfied by drawing down on the Corporation’s revolving credit facility. At the time the financial state- ments were authorized for issue, and due to the timing of the acquisition, the Corporation has not yet completed the accounting for the acquisition of Paranet. 3SHEALTH CONTRACT EXTENSION In Q2 2022, the Corporation extended its existing contract with 3sHealth for an additional six years to May 31, 2031 on terms that are consistent with the existing contract. ALBERTA CONTRACT AWARD In October 2020, AHS issued a request for proposal for linen services (the "AHS RFP"). The AHS RFP encompassed the linen services provided by the Corporation to AHS under its AHS Calgary contract, as well as the linen services provided by the Corporation to AHS in Edmonton, for which volumes were under contract as part of two existing agreements until 2022 and 2023 respectively. The AHS RFP also included new volume for additional rural and urban locations in Alberta. 15 2022 ANNUAL REPORT On April 27, 2021, the Corporation was selected to provide laundry services for Alberta Health Services ("AHS") for the entire province. The award was the result of a competitive RFP process and extends K-Bro's existing relationships with AHS. account amounts accrued in 2022 that are to be paid in 2023. We will continue to assess capital needs within our facilities and prioritize projects that have shorter term paybacks as well as those that are required to maintain efficient and reliable operations. On July 26, 2021, the Corporation announced the signing of a new 11-year contract, with renewal options for up to an additional 9 years, to provide laundry and linen services for AHS province-wide. In 2022, the Corporation incurred one-time transition costs and experienced temporary margin impacts as the new volume was transitioned into the Corporation’s two facilities in Edmonton and Calgary. Management is confident in their ability to return to 2019 margin levels, consistent with historical seasonal trends, once we gain efficiencies from the AHS transition which is anticipated to occur in the later half of 2023. The award renews all of K-Bro's existing volume in Edmonton and Calgary and awards additional health- care volume for other sites in Alberta. The new volume is serviced from K-Bro's existing state-of-the-art facilities in Edmonton and Calgary. The transition of new rural business from AHS commenced in late Q3 2021 and was completed in early April 2022. REVOLVING CREDIT FACILITY In Q2 2022, the Corporation completed an amendment to its existing revolving credit facility, which extended the agree- ment from July 31, 2024 to July 31, 2026. The Corporation’s incremental borrowing rate under its existing credit facility is determined by the Canadian prime rate plus an applicable margin based on the ratio of Funded Debt to EBITDA as defined in the credit agreement. Throughout fiscal 2022, the Canadian prime rate has risen from 3.7% in January 2022 to 6.45% in December 2022. As a result of this increase, total interest rate expense would increase $1.1 million on an annual basis assuming the December 31, 2022 credit facility utilization rate of $47,002. CAPITAL INVESTMENT PLAN For fiscal 2023, the Corporation’s planned capital spending is expected to be approximately $7.0 million on a consol- idated basis. This guidance includes both strategic and maintenance capital requirements to support existing base business in both Canada and the UK and does not take into COVID-19 RISK & GEOPOLITICAL STABILITY 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 an adverse impact on the Corporation’s hospitality business. While government-imposed restric- tions eased significantly over the course of 2022, and vacci- nation rates continued to rise, the uncertainty regarding the ongoing COVID-19 pandemic remains a threat to the continued recovery in the Corporation’s hospitality business. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficien- cies in attracting, training and retaining employees. While the Corporation anticipates labour markets will stabilize, the timing remains uncertain. In addition to this, certain geopolitical events and other factors have resulted in rising and unstable commodity costs for key inputs such as natural gas, electricity and diesel. In the event these cost increases exceed price increase mechanisms this could have an adverse effect on our business prospects and results of operations. The Corporation’s Credit Facility is subject to floating interest rates and, therefore, is subject to fluctuations in interest rates which are beyond the Corporation’s control. Increases in interest rates, both domestically and interna- tionally, could negatively affect the Corporation’s cost of financing its operations and investments. The duration and full financial effects of the COVID-19 pandemic, geopolitical events and rising interest rates, continue to be uncertain at this time. The Corporation is managing ongoing risks through the Corporation’s business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is there- fore subject to significant uncertainty. The following table depicts the impact of the COVID-19 pandemic on the Corporation’s revenue for 2022 and 2021. 16 WE ARE DEPENDABLE. Healthcare Revenue Hospitality Revenue Change (2021 Change (2021 compared to 2019) compared to 2019) Consolidated Revenue Change (2021 compared to 2019) Month Healthcare Revenue Hospitality Revenue Change (2022 Change (2022 compared to 2019) compared to 2019) Month 25% January 26% February 28% March Q1 2021 compared to 26% Q1 2019 (Jan to Mar) 24% April 21% May 22% June Q2 2021 compared to 23% Q2 2019 (Apr to Jun) 16% July 11% August 12% September Q3 2021 compared to 13% Q3 2019 (Jul to Sep) 12% October 19% November 20% December Q4 2021 compared to 17% Q4 2019 (Oct to Dec) -80% -82% -80% -81% -81% -69% -49% -66% -40% -30% -28% -33% -28% -23% -23% -25% -14% -19% -20% -18% -22% -19% -13% -18% -11% -9% -8% -9% -5% 1% 1% -1% 24% January 28% February 30% March Q1 2022 compared to 27% Q1 2019 (Jan to Mar) 24% April 26% May 26% June Q2 2022 compared to 25% Q2 2019 (Apr to Jun) 20% July 27% August 22% September Q3 2022 compared to 23% Q3 2019 (Jul to Sep) 20% October 26% November 25% December Q4 2022 compared to 24% Q4 2019 (Oct to Dec) -37% -26% -10% -23% -7% -3% -8% -6% -4% -2% -13% -6% -1% 2% -7% -3% YTD 20% -49% -11% YTD 25% -11% Consolidated Revenue Change (2022 compared to 2019) 1% 5% 12% 6% 11% 13% 9% 11% 9% 12% 5% 9% 11% 16% 11% 12% 9% Uncertainty about judgments, estimates and assump- tions made by management during the preparation of the Corporation’s consolidated financial statements related to potential impacts of the COVID-19 pandemic, geopolit- ical events and rising interest rates on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected. For both periods, the recoverable amount for the CGUs was assessed using an earnings multiple approach. If the result of the earnings multiple approach indicated a higher level of sensitivity a probability weighted discounted cash flow approach was performed. The Corporation refer- ences Board approved budgets and cash flow forecasts, trailing twelve-month EBITDA, implied multiples and discount rates in the valuation calculations. IMPAIRMENT OF ASSETS Earnings multiple approach (FVLCD) (i) The Corporation performed its annual assessment for goodwill impairment for the Canadian division and for the UK division as at December 31, 2022 and December 31, 2021 in accordance with its policy described in Note 2(k) and Note 2(h). The Corporation also performed impair- ment assessments for CGUs where there could be a risk of impairment due to the presence of potential impair- ment indicators at the CGU level. The assumptions used are based on the Corporation’s board approved budgets, cash flow forecasts, trailing twelve-month EBITDA and the implied multiples. For both fiscal years, cash flows were projected based on actual results for the fiscal year tested as well as business forecasts for the immediate fiscal year following the testing period and then extrapolated for revenue growth and expected changes in the general economy and specific markets within which the CGU operates. 17 2022 ANNUAL REPORT The implied multiple is calculated by utilizing the average multiples of comparable public companies. The Corporation used an implied average forward multiple of 10.60 (2021 - 10.80) to calculate the recoverable amounts. Where a CGU has sufficient headroom a probability weighted discounted cash flow approach was not performed. Where a CGU shows sensitivity to the earnings multiple approach, particularly those CGUS with a strong hospi- tality base, higher uncertainty as a result of COVID-19 or higher uncertainty due to geopolitical events or unusu- ally competitive labour markets, a secondary test in performed based on a probability-weighted discounted cash flow approach. Probability weighted discounted cash flow (VIU) The recoverable amounts are determined using the value- in-use (“VIU”) approach which considers the probability weighted discounted future cash flows specific to each CGU tested. The assumptions used are based on the Corporation’s board approved budgets, cash flow forecasts, trailing twelve-month EBITDA, the pre-tax discount rate and terminal value growth rate. For both fiscal years, cash flows were projected based on actual results for the fiscal year tested as well as business forecasts for the immediate fiscal year following the testing period and then extrapolated for revenue growth and expected changes in the general economy and specific market within which the CGU operates. The discounted cash flows consider the specifics environ- ment within which each of the CGUs operate. Estimating the specific cash flows requires judgments on both past and future performance as well as overall market expec- tations. The calculation of the recoverable amount using the discounted cash flow was based on the following key assumptions: Testing Methodology December 31, 2022 Pre-tax Discount Rate December 31, 2022 Terminal Value Growth Rate December 31, 2022 December 31, 2021 Calgary Edmonton Vancouver 2* Vancouver 1 Victoria* UK FVLCD FVLCD FVLCD FVLCD FVLCD VIU n/a n/a n/a n/a n/a 15.4% n/a n/a n/a n/a n/a 2.0% n/a n/a 2.0% n/a 2.0% 2.0% * For the year ended December 31, 2021, these CGUs were tested using the VIU methodology. For the December 31, 2022 impairment test, manage- ment’s probability weighted approach was evaluated based on an equally weighted probability of a continued one-year downturn in sales to the worst case scenario of a two year downturn in sales. The scenarios estimated a decline of 8% to 12 % for 2023, 7% for 2024 with sales returning to normalized levels thereafter with sales growth estimates used 2%. These represent the Corporation’s best estimate of cash flows over the forecast period. For the December 31, 2021 impairment test, manage- ment’s probability weighted approach was evaluated based on an equally weighted probability of a continued one year downturn in sales to the worst case scenario of a two year downturn in sales. The scenarios estimated a decline of 5% to 25% for 2022, and 0% to 10% for 2023, with sales returning to normalized levels thereafter with sales growth estimates used 2%. The terminal value growth rate is based on manage- ment's best estimate of the long-term growth rate for its CGUs after the forecast period, considering historic performance and future economic forecasts. Based on testing performed at December 31, 2022 and December 31, 2021 no impairment was determined to exist. ii) Recoverable Amount The recoverable amount of each CGU is sensitive to changes in the market conditions which could result in material changes. The Corporation does not believe there is a reasonable change in the key assumptions that would cause the recoverable amount of any CGU to break even or have an impairment. The table below shows the sensi- tivity of key assumptions to a reasonable change. 18 WE ARE DEPENDABLE. Recoverable Amount Change in Pre-tax Discount Rate Increase of 1% Change in Terminal Value Growth Rate Decrease of 1% December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Calgary Edmonton Vancouver 2* Vancouver 1 Victoria* UK n/a n/a n/a n/a n/a £50,261 n/a n/a $31,176 n/a $8,290 £53,083 n/a n/a n/a n/a n/a -£4,201 n/a n/a -$3,152 n/a -$770 -£4,915 n/a n/a n/a n/a n/a -£4,458 n/a n/a -$2,818 n/a -$834 -£4,988 * For the year ended December 31, 2021, these CGUs were tested using the VIU methodology. O U T LO O K The Corporation’s healthcare segment continues to outperform relative to historical levels, with a steady trend. For the hospitality segment, management expects a good level of activity with the easing of government-imposed restrictions on international border crossings, increasing business/leisure travel, and price increases will continue to support the strong recovery momentum in hospitality revenues experienced through 2022. The Corporation continues to pursue price increases to offset inflation-re- lated costs and anticipates that 2023 results will reflect the full impact of price increases secured in the later part of Q4 2022 and into Q2 2023. Within 2022, management has been focused on operational efficiencies and the transition of new AHS business, which was completed in early April 2022. Into 2023, management will continue to focus on optimizing plant efficiencies associated with the transition of new AHS business. From an input cost perspective, since early March 2022, particularly in the UK, the Corporation has faced significant volatility in energy costs due to current geopolitical issues. In April 2022, to mitigate this instability, the Corporation locked in natural gas supply rates in the UK until December 2024. Based on these locked in rates natural gas as a percent of revenue has increased approximately 2.5 percentage points from historical levels for 2022. As we move into 2023, we expect to mitigate these cost increases with price increases to our customers. The Corporation is also facing temporary labour ineffi- ciencies from unusually competitive labour markets. Management is focused on the retention of existing staff, in addition to implementing strategies to recruit and hire new staff. The Corporation has achieved some success in certain markets but is still focusing efforts on other markets. The Corporation is managing more challenging regional labour availability with complementary temporary foreign worker programs. Management is confident in their ability to return to 2019 margin levels, consistent with historical seasonal trends, once we gain efficiencies from the AHS transition which is anticipated to occur in the later half of 2023. However, this will also be dependent on our ability to attract and retain staff in each of the markets in which we operate. Management anticipates labour markets will stabilize, but the timing remains uncertain. With continued momentum in existing operations, manage- ment has refocused attention on strategic acquisitions, such as the recently announced acquisition of Paranet, to accel- erate growth in both North America and Europe, geogra- phies which remain highly fragmented. K-Bro will look to leverage its strong liquidity position, balance sheet and access to the capital markets to execute on these opportu- nities, should they arise. For further information about the impact of the COVID-19 pandemic on our business, see the “Summary of Interim Results, and Key Events” 19 2022 ANNUAL REPORT R E S U LT S O F O P E R AT I O N S 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: Three Months Ended December 31, ($ Thousands of CDN dollars, except percentages and per share amounts) Category Indicator Growth EBITDA(1) Revenue Distributable cash flow(2) Profitability EBITDA(1) EBITDA margin Net earnings (loss) Canadian Division 2022 UK Division 2022 -0.6% 13.3% -13.9% 14.5% 7,745 14.2% 822 981 6.0% (542) Stability Debt to total capital(3) Unutilized line of credit Cash on hand Payout ratio Dividends declared per share Cost containment Wages and benefits Utilities Delivery Expenses included in EBITDA 41.0% 6.8% 13.1% 85.8% 35.4% 14.3% 16.1% 94.0% Canadian Division 2021 UK Division 2021 -34.8% 7.8% 608.9% 144.9% 7,788 16.2% 2,043 1,140 8.0% (544) 39.9% 6.3% 11.4% 83.8% 37.9% 7.4% 18.0% 92.0% 2021 -23.9% 23.5% -4.2% 8,928 14.4% 1,499 17.0% 59,638 1,110 48.8% 0.300 39.5% 6.6% 12.9% 85.6% 2022 -2.3% 13.6% -54.2% 8,726 12.3% 280 20.6% 52,998 2,636 106.9% 0.300 39.7% 8.5% 13.8% 87.7% 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense, and depreciation and amortization). See “Terminology”. 2 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. 3 Debt to total capital is defined by management as the total long term debt (excludes lease liabilities) divided by the Corporation’s total capital. See “Terminology”. 20 ($ Thousands of CDN dollars, except percentages and per share amounts) Category Indicator Growth EBITDA(1) Revenue Distributable cash flow(2) Profitability EBITDA(1) EBITDA margin Net earnings (loss) Canadian Division 2022 UK Division 2022 -18.4% 15.8% 32.6% 57.8% 32,365 15.3% 6,042 4,127 6.4% (2,136) Stability Debt to total capital(3) Unutilized line of credit Cash on hand Payout ratio Dividends declared per share Cost containment Wages and benefits Utilities Delivery Expenses included in EBITDA 41.2% 6.4% 12.8% 84.7% 36.4% 15.7% 15.8% 93.6% Years Ended December 31, Canadian Division 2021 UK Division 2021 3.4% -2672.7% 36.8% 9.8% 39,678 21.7% 13,604 3,113 7.6% (4,912) 37.4% 5.7% 9.9% 78.3% 40.1% 7.8% 16.3% 92.4% 2021 11.9% 13.9% -12.1% 42,791 19.1% 8,692 17.0% 59,638 1,110 46.9% 1.200 37.9% 6.0% 11.0% 80.9% 2022 -14.7% 23.5% -28.8% 36,492 13.2% 3,906 20.6% 52,998 2,636 65.9% 1.200 40.1% 8.6% 13.5% 86.8% 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense, and depreciation and amortization). See “Terminology”. 2 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. 3 Debt to total capital is defined by management as the total long term debt (excludes lease liabilities) divided by the Corporation’s total capital. See “Terminology”. 21 2022 ANNUAL REPORT QUARTERLY FINANCIAL INFORMATION CONSOLIDATED Historically, the Corporation’s financial and operating results, particularly in respect of 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 expenditures, 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 management for the preceding eight quarters: Quarterly Financial Information - Consolidated ($ Thousands of CDN dollars, except percentages and per share amounts) 2022 2021 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) Depreciation and amortization Finance expense Earnings (loss) before income taxes Income tax recovery (expense) Net earnings (loss) Net earnings (loss) as a % of revenue Basic earnings (loss) per share Diluted earnings (loss) per share 43,963 26,708 70,671 61,945 8,726 12.3% 6,505 1,639 582 302 280 0.4% 0.026 0.026 42,683 43,523 30,945 27,367 73,628 70,890 43,237 18,197 61,434 62,607 61,207 11,021 9,683 15.0% 13.7% 54,372 7,062 11.5% 6,466 1,340 3,215 759 2,456 3.3% 0.230 0.228 6,570 1,001 2,112 496 1,616 2.3% 0.152 0.151 6,527 1,000 (465) (19) (446) -0.7% (0.042) (0.042) 41,554 20,656 62,210 53,282 8,928 14.4% 6,628 800 1,500 1 1,499 2.4% 0.141 0.140 39,227 22,266 61,493 42,712 43,058 9,963 4,556 52,675 47,614 49,896 11,597 18.9% 40,470 37,553 12,205 10,061 23.2% 21.1% 6,784 883 3,930 1,782 2,148 3.5% 0.202 0.201 6,710 901 4,594 1,183 3,411 6.5% 0.322 0.320 6,740 865 2,456 822 1,634 3.4% 0.154 0.153 Total assets Total long-term financial liabilities 325,760 105,744 321,527 329,677 325,041 99,302 100,408 106,327 332,519 330,494 326,157 316,101 97,582 100,306 89,343 102,617 Funds provided by operations Long-term debt (excludes lease liabilities) Dividends declared per share 1,049 45,166 0.300 11,530 3,838 39,141 45,224 0.300 0.300 9,713 36,615 0.300 7,743 37,973 0.300 12,543 38,270 0.300 3,047 8,542 40,696 36,811 0.300 0.300 1 EBITDA is defined as revenue less operating expenses (which equates to net earnings before income tax, finance expense, and depreciation and amortization). See “Terminology”. 22 QUARTERLY FINANCIAL INFORMATION - CANADIAN DIVISION The following table provides certain selected consolidated financial and operating data prepared by management for the preceding eight quarters: Quarterly Financial Information - Canadian Division ($ Thousands of CDN dollars, except percentages and per share amounts) Healthcare revenue Hospitality revenue Total revenue Expenses included in EBITDA EBITDA(1) EBITDA as a % of revenue (EBITDA margin) Net earnings Net earnings as a % of revenue Basic earnings per share Diluted earnings per share 2022 2021 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 42,419 12,032 54,451 46,707 7,745 14.2% 822 1.5% 0.077 0.076 41,197 13,870 55,067 41,936 11,347 53,283 41,687 7,547 49,234 46,037 9,030 16.4% 45,212 8,071 15.1% 41,715 7,519 15.3% 2,122 3.9% 0.199 0.197 1,669 3.1% 0.157 0.156 1,429 2.9% 0.134 0.134 39,835 8,211 48,046 40,258 7,788 16.2% 2,043 4.3% 0.192 0.191 37,564 8,605 46,169 41,107 3,049 44,156 36,659 9,510 20.6% 32,734 11,422 25.9% 2,944 6.4% 0.277 0.275 4,460 10.1% 0.421 0.418 41,432 3,270 44,702 33,744 10,958 24.5% 4,157 9.3% 0.392 0.390 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”. 23 2022 ANNUAL REPORT QUARTERLY FINANCIAL INFORMATION - UK DIVISION The following table provides certain selected consolidated financial and operating data prepared by management for the preceding eight quarters: Quarterly Financial Information - UK Division (in reporting currency Canadian $) ($ Thousands of CDN dollars, except percentages and per share amounts) 2022 2021 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) Net (loss) income Net (loss) income as a % of revenue Basic (loss) earnings per share Diluted (loss) earnings per share 1,544 14,676 16,220 15,239 981 6.0% (542) -3.3% (0.051) (0.050) 1,486 17,075 18,561 1,587 16,020 17,607 1,550 10,650 12,200 16,570 1,991 10.7% 15,995 1,612 9.2% 12,657 (457) -3.7% 334 1.8% 0.031 0.031 (53) -0.3% (0.005) (0.005) (1,875) -15.4% (0.176) (0.175) 1,719 12,445 14,164 13,024 1,140 8.0% (544) -3.8% (0.051) (0.051) 1,663 13,661 15,324 13,237 2,087 13.6% 1,605 6,914 8,519 1,626 1,286 2,912 7,736 783 9.2% 3,809 (897) -30.8% (796) -5.2% (0.075) (0.074) (1,049) -12.3% (0.099) (0.098) (2,523) -86.6% (0.238) (0.237) Quarterly Financial Information - UK Division (in local currency Sterling £) (Thousands, except percentages and per share amounts) 2022 2021 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) Net (loss) income Net (loss) income as a % of revenue Basic (loss) earnings per share Diluted (loss) earnings per share 967 9,200 10,167 9,553 614 6.0% (341) -3.3% (0.032) (0.032) 987 11,327 12,314 1,005 10,153 11,158 912 6,267 7,179 10,994 1,320 10.7% 10,134 1,024 9.2% 7,448 (269) -3.7% 1,011 7,325 8,336 7,665 671 8.0% 959 7,877 8,836 7,633 1,203 13.6% 935 4,028 4,963 931 737 1,668 4,505 458 9.2% 2,181 (513) -30.8% 221 1.8% 0.021 0.020 (32) -0.3% (0.003) (0.003) (1,103) -15.4% (0.104) (0.103) (321) -3.9% (0.030) (0.030) (458) -5.2% (0.043) (0.043) (610) -12.3% (0.058) (0.057) (1,444) -86.6% (0.136) (0.135) 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”. 24 WE ARE DEPENDABLE. REVENUE, EARNINGS & EBITDA OPERATING EXPENSES For the year ended December 31, 2022, K-Bro’s consoli- dated revenue increased by 23.5% to $276.6 million from $224.0 million in the comparative period. This increase was primarily a result of COVID-19 pandemic restrictions being eased, the completion of the AHS transition, healthcare practice changes due to the COVID-19 pandemic and price increases across various markets to offset inflation-related cost increases. In 2022, approximately 62.7% of K-Bro’s consolidated revenue was generated from healthcare institutions, which is lower compared to 74.4% in 2021, this is primarily related to the recovery of hospitality activity following the easing of COVID-19 pandemic restrictions. Consolidated EBITDA decreased in the year to $36.5 million from $42.8 million in 2021, which is a decrease of 14.7%. The consolidated EBITDA margin decreased to 13.2% in 2022 compared to 19.1% in 2021. The decrease in margin is primarily related to higher natural gas prices partic- ularly in the UK, the additional labour costs incurred due to temporary inefficiencies from unusually competitive labour markets in certain cities in which we operate, higher delivery costs related to higher diesel rates as well as the AHS transition, repricing of the Corporation’s existing business in Edmonton and Calgary with AHS which took effect on August 1, 2021 in advance of the business being fully transitioned and lower government assistance received in the Canadian division from $0.9 million received in 2021 to $0.0 million in 2022. Net earnings decreased by $4.8 million or 55.1% from $8.7 million in 2021 to $3.9 million in 2022, and net earnings as a percentage of revenue decreased by 2.5% to 1.4% in 2022 from 3.9% in 2021. The change in net earnings is primarily related to the flow through items in EBITDA discussed above, higher finance costs related to increased interest rates for the revolving credit facility, and lower income tax expense. Wages and benefits increased by $26.2 million to $111.0 million compared to $84.8 million in the comparative period of 2021, and as a percentage of revenue increased by 2.2 percentage points to 40.1%. The increase as a percentage of revenue is primarily related to a $-0.8 million decrease in government assistance received in the Canadian division, escalating minimum wage rates, temporary from unusually competitive labour markets in certain cities in which we operate and the transitioning of the new AHS business. inefficiencies Linen increased by $3.4 million to $31.3 million compared to $27.9 million in the comparative period of 2021, and as a percentage of revenue decreased by 1.2 percentage points to 11.3%. The decrease as a percentage of revenue is primarily related to the changes to the mix of linen and higher hospi- tality volumes processed compared to the prior year. Utilities increased by $10.3 million to $23.8 million compared to $13.5 million in the comparative period of 2021, and as a percentage of revenue increased by 2.6 percentage points to 8.6%. The increase as a percentage of revenue is primarily related to increased natural gas rates, particularly in the UK, as well as in British Columbia for the fourth quarter of 2022. Delivery increased by $12.6 million to $37.3 million compared to $24.7 million in the comparative period of 2021, and as a percentage of revenue increased by 2.5 percentage points to 13.5%. The increase as a percentage of revenue is primarily related to rising diesel prices and the costs associated with the new rural AHS business along with delivery route inefficiencies associated with the incre- mental hospitality volumes processed in the year as well as a decrease in government assistance received in the Canadian division. Occupancy costs increased by $0.6 million to $4.5 million compared to $3.9 million in the comparative period of 2021, and as a percentage of revenue remained relatively constant at 1.6%. The increase in spending is related to increased facility rent as well as increased facility repairs & maintenance. Materials and supplies increased by $1.8 million to $10.9 million compared to $9.1 million in the comparative period of 2021, and as a percentage of revenue remained relatively constant at 4.0%. The increase in spending is due to increased volume. 25 2022 ANNUAL REPORT Repairs and maintenance increased by $2.7 million to $10.4 million compared to $7.7 million in the comparative period of 2021, and as a percentage of revenue increased by 0.4 percentage points to 3.8%. The increase as a percentage of revenue is primarily related to related to one-time costs and increased prices. Corporate costs increased by $1.5 million to $11.0 million compared to $9.5 million in the comparative period of 2021, and as a percentage of revenue remained relatively constant at 4.0%. Depreciation of property, plant and equipment and amorti- zation of intangible assets represents the expense related to the appropriate matching of the Corporation’s long-term assets to the estimated useful life and period of economic benefit of those assets. 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. L I Q U I D I T Y & C A P I TA L R E S O U R C E S In 2022, cash generated by operating activities was $26.1 million with a debt to total capitalization of 20.6%. The change in cash from operations is primarily due to the change in working capital items driven mainly from the timing of cash receipts, prepaid expenses with suppliers and the timing of tax payments. The Corporation’s capital struc- ture includes working capital, a committed revolving credit facility and share capital. We continuously monitor actual and forecast cash flows and monitor the availability on our committed credit facility. Management believes the unuti- lized balance of $53.0 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 conserva- tive 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 2022, cash used in financing activities was $13.1 million compared to $22.7 million in 2021. Financing activities consisted of net repayment of the revolving credit facility, dividends paid to Shareholders and principal elements of lease payments. During 2022, cash used in investing activities was $11.4 million compared to $10.5 million in 2021. Investing activi- ties are primarily related to the purchase of plant equipment. 26 WE ARE DEPENDABLE. CONTRACTUAL OBLIGATIONS Payments due under contractual obligations for the next five years and thereafter are as follows: ($ Thousands of CDN dollars) Total 2023 Payments Due by Year 2024 to 2025 2026 to 2027 Subsequent Long-term debt Lease liabilities Utility commitments Linen purchase obligations Property, plant and equipment commitments 45,166 61,172 26,592 10,161 2,341 - 10,236 11,958 10,161 2,341 - 17,188 13,139 - - 45,166 12,799 1,495 - - - 20,949 - - - The lease liabilities are secured by automotive equipment and plants and are more fully described in the Corporation’s audited annual consolidated financial statements for the year ended December 31, 2022. The source of funds for these commitments will be from operating cash flow and, if neces- sary, the undrawn portion of the revolving credit facility. FINANCIAL POSITION Years Ended December 31, ($ Thousands, except percentages) 2022 2021 Cash and cash equivalents Long-term debt (excludes lease liabilities) Shareholders’ equity Total capital Debt to total capital (see Terminology for definition) (2,636) 45,166 (1,110) 37,973 176,542 219,072 20.6% 186,401 223,264 17.0% For the period ended December 31, 2022, the Corporation had a debt to total capital of 20.6%, unused revolving credit facility of $53.0 million and has not incurred any events of default under the terms of its credit facility. As at December 31, 2022, the Corporation had net working capital of $36.6 million compared to its working capital position of $30.3 million at December 31, 2021. The increase in working capital is primarily attributable to additional requirements driven mainly from increased client activity as a result of the COVID-19 pandemic, prepaid expenses with suppliers and the timing of tax payments. 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. 27 2022 ANNUAL REPORT D I V I D E N D S Fiscal Period Payment Date # of Shares Outstanding Amount Per Share 2022 Total Amount (1)(3)(5)(7) 2021 Amount Per Share Total Amount (2)(4)(6)(8) February 15 March 15 April 15 May 13 June 15 July 15 August 15 September 15 October 14 November 15 December 15 January 13 10,719,778 10,719,778 10,719,778 10,719,778 10,775,140 10,775,140 10,774,180 10,773,190 10,773,190 10,773,190 10,773,190 10,773,190 January February March Q1 April May June Q2 July August September Q3 October November December Q4 YTD 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 1,072 1,072 1,072 3,216 1,072 1,078 1,078 3,228 1,077 1,077 1,077 3,234 1,076 1,076 1,076 3,227 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 1,068 1,068 1,068 3,203 1,068 1,072 1,072 3,211 1,072 1,072 1,072 3,216 1,072 1,072 1,072 3,216 1.20000 12,905 1.20000 12,846 1 The total amount of dividends declared was $0.10000 per share for a total of $1,071,881 per month for January - March 2022; when rounded in thousands, $3,216 of dividends were declared in Q1 2022. 2 The total amount of dividends declared were $0.10000 per share for a total of $1,067,689 per month for January - March 2021; when rounded in thousands, $3,203 of dividends were declared in Q1 2021. 3 The total amount of dividends declared was $0.10000 per share for a total of $1,071,881 for April 2022, $1,077,514 for May 2022, and $1,077,514 for June 2022. When rounded in thousands, $3,228 of dividends were declared in Q2 2022. 4 The total amount of dividends declared was $0.10000 per share for a total of $1,067,689 for April 2021, $1,071,881 for May 2021, and $1,071,881 for June 2021. When rounded in thousands, $3,211 of dividends were declared in Q2 2021. 5 The total amount of dividends declared was $0.10000 per share for a total of $1,077,417 for July 2022, $1,077,318 for August 2022, and $1,077,318 for September 2022. When rounded in thousands, $3,234 of dividends were declared in Q3 2022. 6 The total amount of dividends declared were $0.10000 per share for a total of $1,071,881 per month for July - September 2021; when rounded in thousands, $3,216 of dividends were declared in Q3 2021. 7 The total amount of dividends declared was $0.10000 per share for a total of $1,077,319 per month for October - December 2022; when rounded in thousands, $3,227 of dividends were declared in Q4 2022. 8 The total amount of dividends declared was $0.10000 per share for a total of $1,067,689 per month for October - December 2021; when rounded in thousands, $3,216 of dividends were declared in Q4 2021. For the year ended December 31, 2022, the Corporation declared a $1.200 per Common Share dividend compared to $1.823 per Common Share of Distributable Cash Flow (see “Terminology”). The actual payout ratio was 65.9%. by the Board of Directors. All such dividends are discre- tionary. Dividends are declared payable each month in equal amounts to Shareholders on the last business day of each month and are paid by the 15th of the following month. The Corporation’s policy is to pay dividends to Shareholders from its available distributable cash flow while considering requirements for capital expenditures, working capital, growth capital and other reserves considered advisable The Corporation designates all dividends paid or deemed to be paid as Eligible Dividends for purposes of subsection 89(14) of the Income Tax Act (Canada), and similar provin- cial and territorial legislation, unless indicated otherwise. 28 WE ARE DEPENDABLE. D I S T R I B U TA B L E C A S H F LO W (see Terminology) (all amounts in this section in $000s except per share amounts and percentages) The Corporation’s source of cash for dividends is distributable cash flow provided by operating activities. Distributable cash flow, reconciled to cash provided by operating activities as calculated under IFRS, is presented as follows: ($ Thousands of CDN dollars, except percentages and per share amounts) 2022 2021 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Cash provided by operating activities 1,049 11,530 3,838 9,713 7,743 12,543 3,047 8,542 Deduct (add): Net changes in non-cash working capital items(1) Share-based compensation expense Maintenance capital expenditures(2) Principle elements of lease payments (4,994) 410 706 1,908 1,204 438 520 1,834 (4,929) 428 1,078 1,821 3,098 512 690 1,834 (1,358) 417 281 1,808 1,978 486 426 1,765 (7,022) 439 275 1,742 692 506 112 1,852 Distributable cash flow 3,019 7,534 5,440 3,579 6,595 7,888 7,613 5,380 Dividends declared Dividends declared per share Payout ratio(3) 3,227 0.300 106.9% 3,234 0.300 42.9% 3,228 0.300 59.3% 3,216 0.300 89.9% 3,216 0.300 48.8% 3,216 0.300 40.8% 3,211 0.300 42.2% 3,203 0.300 59.5% Weighted average shares outstanding during the period, basic Weighted average shares outstanding during the period, diluted Trailing-twelve months (“TTM”) Distributable cash flow Dividends Payout ratio(3) 10,675 10,659 10,650 10,641 10,622 10,611 10,603 10,597 10,751 10,750 10,716 10,703 10,701 10,700 10,673 10,663 19,572 12,905 65.9% 23,148 12,894 55.7% 23,502 12,875 54.8% 25,675 12,859 50.1% 27,476 12,846 46.8% 27,767 12,833 46.2% 30,929 30,575 12,820 12,805 41.9% 41.4% 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. 29 2022 ANNUAL REPORT O U T S TA N D I N G S H A R E S As at December 31, 2022, the Corporation had 10,773,190 Common Shares outstanding. Basic and diluted weighted average number of Common Shares outstanding for 2022 were 10,657,742 and 10,735,269, respectively (10,608,539 and 10,686,187, respectively, for the comparative 2021 periods). In accordance with the Corporation’s Long Term Incentive (“LTI”) plan and in conjunction with the performance of the Corporation in the 2021 fiscal year, on April 23, 2022 the Compensation, Nominating and Corporate Governance Committee approved LTI compensation of $1.8 million (2021 – $1.8 million) to be paid as Common Shares issued from treasury. As at December 31, 2022, the value of the Common Shares held by the LTI custodian was $1.9 million (December 31, 2021 – $2.7 million) which was comprised of 64,552 in unvested Common Shares (December 31, 2021 – 78,632) with a nil aggregate cost (December 31, 2021 – $nil). As at March 21, 2023 there were 10,773,190 Common Shares issued and outstanding including 64,552 Common Shares issued but held as unvested treasury shares. R E L AT E D PA R T Y T R A N S A C T I O N S The Corporation incurred expenses in the normal course of business for advisory consulting services provided by Mr. Matthew Hills, a member of the Board of Directors. The amounts charged are recorded at their exchange amounts and are on arm’s length terms. For the year ended December 31, 2022, the Corporation incurred fees totaling $72,000 (2021 – $138,000). difficult, subjective and complex judgments, and/or requiring estimates that are inherently uncertain and which may change in subsequent reporting periods. K-Bro has continuously refined and documented its management and internal reporting systems to ensure that accurate, timely, internal and external information is gathered and disseminated. Management also regularly evaluates these estimates and assumptions which are based on past experience and other factors that are deemed reasonable under the circumstances. K-Bro has hired individuals and consultants who have the skills required to make such estimates and ensures that individuals or departments with the most knowledge of the activity are responsible for the estimates. Furthermore, past estimates are reviewed and compared to actual results, and actual results are compared to budgets in order to make more informed decisions on future estimates. K-Bro’s leadership team’s mandate includes ongoing development of procedures, standards and systems to allow K-Bro staff to make the best decisions possible and ensuring those decisions are in compliance with the Corporation’s policies. Preparation of the Corporation’s consolidated financial statements requires management to make estimates and assumptions that affect: · volume rebates; · linen in service; · intangible assets; · goodwill; · income taxes; · provisions; and, C R I T I C A L A C C O U N T I N G E S T I M AT E S · allowance for doubtful accounts; · segment information; · property, plant and equipment; The Corporation’s summary of significant accounting policies are contained in Note 2 to the 2022 Audited Financial Statements. The 2022 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 of management, the Corporation’s most critical accounting estimates, being those that involve the most · right of use assets and lease liabilities; and, · lease terms. 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. 30 WE ARE DEPENDABLE. COVID-19 RISK & GEOPOLITICAL STABILITY 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 an adverse impact on the Corporation’s hospitality business. While government-imposed restric- tions eased significantly over the course of 2022, and vacci- nation rates continued to rise, the uncertainty regarding the ongoing COVID-19 pandemic remains a threat to the continued recovery in the Corporation’s hospitality business. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficien- cies in attracting, training and retaining employees. While the Corporation anticipates labour markets will stabilize, the timing remains uncertain. In addition to this, certain geopolitical events and other factors have resulted in rising and unstable commodity costs for key inputs such as natural gas, electricity and diesel. In the event these cost increases exceed price increase mechanisms this could have an adverse effect on our business prospects and results of operations. The Corporation’s Credit Facility is subject to floating interest rates and, therefore, is subject to fluctuations in interest rates which are beyond the Corporation’s control. Increases in interest rates, both domestically and interna- tionally, could negatively affect the Corporation’s cost of financing its operations and investments. The duration and full financial effects of the COVID-19 pandemic, geopolitical events and rising interest rates, continue to be uncertain at this time. The Corporation is managing ongoing risks through the Corporation’s business continuity plan and other mitigating measures. Any estimate of the length and severity of these developments is there- fore subject to significant uncertainty. Uncertainty about judgments, estimates and assump- tions made by management during the preparation of the Corporation’s consolidated financial statements related to potential impacts of the COVID-19 pandemic, geopolit- ical events and rising interest rates on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected. The following discusses the most significant accounting judgments and estimates that the Corporation has made in the preparation of the consolidated financial statements: AREAS OF SIGNIFICANT JUDGMENT RECOGNITION OF REBATE LIABILITIES In applying its accounting policy for volume rebates, the Corporation must determine whether the processing volume thresholds will be achieved. The most difficult and subjective area of judgment is whether a contract will generate satisfactory volume to achieve minimum levels. Management considers all appropriate facts and circumstances in making this assessment including historical experience, current volumetric run-rates, and expected future events. IMPAIRMENT OF GOODWILL & NON-FINANCIAL ASSETS Management reviews goodwill at least annually and other non-financial assets when there is any indication that the asset might be impaired. The assessment of impairment is based on management’s judgment of whether there are sufficient internal and external factors that would indicate that an asset is impaired. The Corporation applies judgment in: · · · assessing the likelihood of renewal of significant contracts included in the intangible assets described in Note 8 determining the appropriate discount rate and growth rate, and determining the appropriate comparable companies used in earnings multiple approach. SEGMENT IDENTIFICATION its reportable segments, When determining 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 environ- ment, if applicable. 31 2022 ANNUAL REPORT LEASE TERM PROVISIONS 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 termination 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. AREAS OF ESTIMATION UNCERTAINT Y INCREMENTAL BORROWING RATE In applying its accounting policy for leases management considers all appropriate facts and circumstances in the determination the lessee’s incremental borrowing rate being used and these rates are reviewed and update on an annual basis. AMORTIZATION OF PROPERTY, PLANT & EQUIPMENT, & INTANGIBLE ASSETS In applying its accounting policy for the amortization of property, plant and equipment, and intangible assets, management considers all appropriate facts and circum- stances in the determination of the appropriate rates and methodology to allocate costs over their estimated useful lives, 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. Corporation’s provision includes restructure costs and the restoration for premises of its leased plants. The Corporation determines restructure costs based off employment standards and legal consultation. For leased plants, a provision has been recognized for the present value of the estimated expenditure required to remove any leasehold improvements and installed equipment. Refer to Note 10 for more details about estimation for this provision. IMPAIRMENT OF GOODWILL & NON-FINANCIAL ASSETS During instances where indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Corporation estimates the recoverable amount of the cash generating unit to which the asset belongs. The recoverable value of CGUs require the use of estimates related to the future operating results and cash generating ability of the assets. The Corporation applies estimates in identifying the appropriate discount rate and growth rate used to estimate the recoverable value, identifying the CGUs to which intangible assets should be allocated to, and the CGU or group of CGUs at which goodwill is monitored for internal management purposes. 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. 32 WE ARE DEPENDABLE. T E R M I N O LO G Y EBITDA K-Bro reports EBITDA (Earnings before interest, taxes, depreciation and amortization) as a key measure used by management to evaluate performance. EBITDA is utilized to measure compliance with debt covenants and to make decisions related to dividends to Shareholders. We believe EBITDA assists investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations before taking into account management’s financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management’s estimate of their useful life. Accordingly, EBITDA comprises revenues less operating costs before financing costs, capital asset and intangible asset amortization, and income taxes. EBITDA is a 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. Three Months Ended December 31, Years Ended December 31, ($ Thousands of CDN dollars) 2022 2021 Net earnings Add: Income tax expense Finance expense Depreciation of property, plant and equipment Amortization of intangible assets EBITDA 280 302 1,639 6,120 385 8,726 1,499 1 800 5,958 670 8,928 2022 3,906 1,538 4,980 23,766 2,302 36,492 2021 8,692 3,788 3,449 23,625 3,237 42,791 NON-GA AP MEASURES DISTRIBUTABLE CASH FLOW Distributable cash flow is a measure used by manage- ment to evaluate the Corporation’s performance. While the closest IFRS measure is cash provided by operating activi- ties, distributable cash flow is considered relevant because it provides an indication of how much cash generated by operations is available after capital expenditures. It should be noted that although we consider this measure to be distrib- utable cash flow, financial and non-financial covenants in our credit facilities 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. 33 2022 ANNUAL REPORT DEBT TO TOTAL CAPITAL “Debt to total capital” is defined by management as the total longterm debt (excludes lease liabilities) 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, and debt to total capital are not calculations based on IFRS and are not considered an alternative to IFRS measures in measuring K-Bro’s performance. Distributable cash flow, and payout ratio do not have standardized meanings in IFRS and are therefore not likely to be comparable with similar measures used by other issuers. OFF BALANCE SHEET ARRANGEMENTS As at December 31, 2022, the Corporation has not entered into any off balance sheet arrangements. C H A N G E S I N A C C O U N T I N G P O L I C I E S Corporation has prepared its December 31, 2022 audited consolidated financial statements in accordance with IFRS. See Note 2 of the 2022 Audited Financial Statements for more information regarding the significant accounting principles used to prepare the 2022 Audited Financial Statements. R E C E N T A C C O U N T I N G PRONOUNCEMENTS New standards, interpretations, or amendments that have been issued, or are not yet effective, have not been further described or early adopted, where no material impact is expected on the Corporation's consolidated financial statements. The IASB has issued the following new standard and amendments to existing standards that will become effec- tive in future years. · Amendments to IAS 1, Presentation of Financial Statements - Disclosure of Accounting Policies, requiring entities to disclose material, instead of signif- icant, accounting policy information. · Amendments to IAS 1, Presentation of Financial Statements - Classification of Liabilities as Current or Noncurrent, clarifying requirements for the classifica- tion of liabilities as non-current. · Amendments to IAS 8, Accounting Policies - Changes in Accounting Estimates and Errors, clarifying the defini- tion of "accounting policies" and "accounting estimates". · Amendments to IAS 12, Deferred Tax related to Assets and Liabilities arising from a Single Transaction, that clarify how companies account for deferred tax on transactions such as leases and decommissioning obligations. The amendments are effective for annual periods beginning on or after January 1, 2023. The Corporation has not adopted any standard, inter- pretation or amendment that has been issued but is not yet effective and no material impact is expected on the financial statements. The Corporation’s consolidated Corporation will continue to assess the impacts, if any, the amendments to existing standards will have on our consol- idated financial statements, but we currently do not expect any material impacts. 34 F I N A N C I A L I N S T R U M E N T S 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. The Corporation classifies its financial assets in the following measurement categories: · those to be measured subsequently at fair value (either through other comprehensive income (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 subsequently 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. C R I T I C A L R I S K S & U N C E R TA I N T I E S As at December 31, 2022, there are no material changes in the Corporation’s risks or risk management activities since December 31, 2021. The Corporation’s results of operations, business prospects, financial condition, cash dividends to Shareholders and the trading price of the Common Shares are subject to a number of risks. These risk factors include: the adverse impact of the coronavirus (COVID-19) pandemic on the Corporation, which is significant, particularly to our hospitality segment; dependence on long-term contracts and the associated renewal risk thereof; the effects of market volatility and uncertainty; potential future tax changes; the Corporation’s competitive environment and increased competition; our ability to acquire and success- fully integrate and operate additional businesses; utility costs; the labour markets; the fact that our credit facility imposes numerous covenants and encumbers assets; and, environmental matters. The Corporation’s operating results may be subject to increased risk due to current geopolitical instability that could have an impact on key input prices, such as natural gas. This uncertainty has become more pronounced with the conflict in the Ukraine which began in late February 2022 and has resulted in significant volatility in natural gas supply rates. We expect to mitigate some of these cost increases with price increases to our customers through price escala- tion measures although there could be some lag. For a discussion of these risks and other risks associated with an investment in the Common Shares, see “Risk Factors – Risks Related to K-Bro and the Laundry and Linen Industry detailed in the Corporation’s Annual Information Form” that is available at www.sedar.com. C O N T R O L S & P R O C E D U R E S In order to ensure that information with regard to reports filed or submitted under securities legislation present fairly in all material respects the financial information of K-Bro, management, including the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), are responsible for establishing and maintaining disclosure controls and procedures, as well as internal control over financial reporting. 35 2022 ANNUAL REPORT 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, 2022, 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, 2022, 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, 2022, the CEO and CFO have concluded that these controls were operating effectively. A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instance of fraud, if any, have been detected. These inherent limitations include, amongst other items: (i) that managements’ assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; or, (ii) the impact of isolated errors. Additionally, controls may be circumvented by the unautho- rized acts of individuals, by collusion of two or more people, or by management override. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions. Additional information regarding K-Bro including required securities filings are available on our website at www.k-brolinen.com and on the Canadian Securities Administrators’ website at www.sedar.com; the System for Electronic Document Analysis and Retrieval (“SEDAR”). Vous pouvez obtenir des renseignements supplémentaires sur la Société, y compris les documents déposés auprès des autorités de réglementation, sur notre site Web, au www.k-brolinen.com et sur le site Web des autorités canadiennes en valeurs mobilières au www.sedar.com, le site Web du Système électronique de données, d’analyse et de recherche (« SEDAR »). 36 WE ARE DEPENDABLE. CONSOLIDATED F I N A N C I A L S TAT E M E N T S 39 44 45 46 47 48 76 I N D E P E N D E N T A U D I T O R ’ S R E P O R T C O N S O L I D AT E D S TAT E M E N T S O F F I N A N C I A L P O S I T I O N C O N S O L I D AT E D S TAT E M E N T S O F E A R N I N G S & C O M P R E H E N S I V E I N C O M E C O N S O L I D AT E D S TAT E M E N T S O F C H A N G E S I N E Q U I T Y C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O R P O R AT E I N F O R M AT I O N 37 2022 ANNUAL REPORT 38 WE ARE DEPENDABLE. 39 2022 ANNUAL REPORT 40 WE ARE DEPENDABLE. 41 2022 ANNUAL REPORT 42 WE ARE DEPENDABLE. 43 2022 ANNUAL REPORT C O N S O L I D AT E D S TAT E M E N T S O F F I N A N C I A L P O S I T I O N ($ Thousands of CDN dollars) ASSETS Current assets Cash and cash equivalents Accounts receivable Income tax receivable Prepaid expenses and deposits Linen in service (note 6) Assets classified as held for sale (note 7) Property, plant and equipment (note 7) Intangible assets (note 8) Goodwill (note 9) LIABILITIES Current liabilities Accounts payable and other liabilities Provisions (note 10) Contract liability Lease liabilities (note 13) Income taxes payable Dividends payable to shareholders Long-term debt (note 11) Lease liabilities (note 13) Provisions (note 10) Deferred income taxes (note 14) SHAREHOLDERS’ EQUITY Share capital Contributed surplus Deficit Accumulated other comprehensive (loss) income Contingencies and commitments (note 15) DECEMBER 31, 2022 DECEMBER 31, 2021 2,636 37,761 1,917 6,386 31,383 80,083 696 80,779 203,185 4,428 37,368 325,760 32,505 279 - 9,615 - 1,075 43,474 45,166 44,042 2,382 14,154 149,218 208,463 2,323 (32,232) 2,012 176,542 325,760 1,110 36,847 - 4,475 31,340 73,772 - 73,772 213,526 6,989 38,232 332,519 30,114 703 810 9,206 1,596 1,072 43,501 37,973 47,733 2,811 14,100 146,118 206,660 2,338 (23,233) 636 186,401 332,519 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors ELISE REES, DIRECTOR MATTHEW HILLS, DIRECTOR 44 WE ARE DEPENDABLE. C O N S O L I D AT E D S TAT E M E N T S O F E A R N I N G S & C O M P R E H E N S I V E I N C O M E Years Ended December 31, ($ Thousands of CDN dollars, except share and per share amounts) REVENUE Expenses Wages and benefits (note 27) Delivery (note 27) Linen (note 6) Utilities Corporate (note 27) Materials and supplies Repairs and maintenance Occupancy costs Remeasurement expense EBITDA Other expenses Depreciation of property, plant and equipment (note 7) Amortization of intangible assets (note 8) Finance expense (note 12) Earnings before income taxes Current income tax expense Deferred income tax expense Income tax expense (note 14) 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 17): Basic Diluted Weighted average number of shares outstanding: Basic Diluted 2022 276,623 110,957 37,326 31,337 23,754 11,014 10,936 10,419 4,535 (147) 240,131 36,492 23,766 2,302 4,980 31,048 5,444 1,441 97 1,538 3,906 (2,648) 1,258 0.37 0.36 2021 223,992 84,840 24,744 27,921 13,547 9,452 9,084 7,695 3,918 - 181,201 42,791 23,625 3,237 3,449 30,311 12,480 3,662 126 3,788 8,692 (797) 7,895 0.82 0.81 10,657,742 10,735,269 10,608,539 10,686,187 The accompanying notes are an integral part of these consolidated financial statements. 45 2022 ANNUAL REPORT C O N S O L I D AT E D S TAT E M E N T S O F C H A N G E S I N E Q U I T Y ($ Thousands of CDN dollars) Total Share Contributed Surplus Capital Accumulated Other Comprehensive Income (loss) Deficit As at December 31, 2021 Total comprehensive income (loss) Dividends declared (note 19) Employee share based compensation expense Shares forfeited during the year Shares vested during the year As at December 31, 2022 206,660 - - - (62) 1,865 208,463 2,338 - - 1,788 62 (1,865) 2,323 (23,233) 3,906 (12,905) - - - (32,232) 636 (2,648) - - - - (2,012) ($ Thousands of CDN dollars) Total Share Contributed Surplus Capital Accumulated Other Comprehensive Income (loss) Deficit As at December 31, 2020 Total comprehensive income (loss) Dividends declared (note 19) Employee share based compensation expense Shares vested during the year As at December 31, 2021 204,869 - - - 1,791 206,660 2,281 - - 1,848 (1,791) 2,338 (19,079) 8,692 (12,846) - - (23,233) 1,433 (797) - - - 636 The accompanying notes are an integral part of these Consolidated Financial Statements. Total Equity 186,401 1,258 (12,905) 1,788 - - 176,542 Total Equity 189,504 7,895 (12,846) 1,848 - 186,401 46 WE ARE DEPENDABLE. C O N S O L I D AT E D S TAT E M E N T S O F C A S H F LO W Years Ended December 31, ($ Thousands of CDN dollars) OPERATING ACTIVITIES Net earnings Depreciation of property, plant and equipment (note 7) Amortization of intangible assets (note 8) Accretion expense (note 10) Employee share based compensation expense Remeasurement expense Deferred income taxes Change in non-cash working capital items (note 20) Cash provided by operating activities FINANCING ACTIVITIES Net proceeds (repayment) from revolving debt (note 11) Principle elements of lease payments (note 13) Dividends paid to shareholders Cash used in financing activities INVESTING ACTIVITIES Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of intangible assets (note 8) Cash used in investing activities Change in cash and cash equivalents during the year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplementary cash flow information Interest paid Income taxes paid The accompanying notes are an integral part of these consolidated financial statements. 2022 3,906 23,766 2,302 39 1,788 (147) 97 31,751 (5,621) 26,130 7,193 (7,397) (12,903) (13,107) (11,370) 33 (88) (11,425) 1,598 (72) 1,110 2,636 4,600 4,962 2021 8,692 23,625 3,237 57 1,848 - 126 37,585 (5,710) 31,875 (2,684) (7,168) (12,842) (22,694) (10,132) - (360) (10,492) (1,311) 5 2,416 1,110 3,118 4,600 47 2022 ANNUAL REPORT N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (Thousands of Canadian dollars except share and per share amounts, Years ended December 31, 2022 and 2021) 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 21, 2023. 1. BASIS OF PRESENTATION The Consolidated Financial Statements of the Corporation in accordance with International have been prepared Financial Reporting Standards as published in the CPA Canada Handbook (IFRS). The preparation of financial state- ments in conformity with IFRS requires the use of certain critical accounting estimates. It also requires manage- ment to exercise its judgment in the process of applying the Corporation’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Consolidated Financial Statements are disclosed in Note 5. 2. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these Consolidated Financial Statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. A) BASIS OF MEASUREMENT The Consolidated Financial Statements have been prepared under the historical cost convention. B) PRINCIPLES OF CONSOLIDATION financial statements the The consolidated Corporation, its wholly owned subsidiaries, and the long-term incentive plan account (Note 2(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, and 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. 48 WE ARE DEPENDABLE. 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 associated 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 satis- fying 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 provi- sion 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. 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 49 2022 ANNUAL REPORT believes that volumes utilized for any estimates are reasonable and would not expect a material deviation to the balance of accrued liabilities or revenue. 5. Performance Obligations Satisfied Over Time 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. The Corporation presents its contract balances, on a contract-by-contract basis, in a net contract asset or liability position, separately from its trade receivables. Contract assets and trade receivables are both rights to receive consideration in exchange for goods or services that the Company has transferred to a customer, however the classification depends on whether such right is only conditional on the passage of time (trade receivables) or if it is also conditional on something else (contract assets), such as the satisfaction of further performance obligations under the contract. A contract liability is the cumulative amount received and contractually receivable by the Corporation that exceeds the right to consideration resulting from the Corporation’s performance under a given contract. 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 Consolidated Statements of Earnings and Comprehensive Income 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 capital- ized any borrowing costs during the year as there were no qualifying assets. Property, plant and equipment include right of use assets as disclosed under the Corporation’s leasing policy in note 2(r). Right of use assets arise from a lease that is initially measured on a present value basis, and are classified within the relevant property, plant and equipment catego- ries based on the type of asset. The major categories of property, plant and equipment are depreciated on a straight-line basis to allocate their cost over their estimated useful lives as follows: Asset Buildings Laundry equipment Office equipment Delivery equipment Rate 15 – 25 years 7 – 20 years 2 – 5 years 5 – 10 years Computer equipment 2 years Leasehold improvements Lease term 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. 50 WE ARE DEPENDABLE. H) IMPAIRMENT OF NON-FINANCIAL ASSETS J) BUSINESS COMBINATIONS 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 firstly to the recorded goodwill, then to the other assets in the CGU on a pro rata basis, as determined by the carrying amount of each asset in the CGU. The Corporation evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances warrant such consideration. I) INCOME TAXES The tax expense for the year comprises current and deferred tax. Tax is recognized in the Consolidated Statements of Earnings and Comprehensive Income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax provision is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date of the taxation authority where the Corporation operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes 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. 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 compen- sation 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. 51 2022 ANNUAL REPORT 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 recogni- tion, and; · Exchange gains that result from translation are recog- nized as a foreign currency translation difference in accumulated other comprehensive income (loss). 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) PROVISIONS 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-retirement benefits. Existing Equity-based Compensation Plan of the Corporation On June 16, 2011, the Shareholders of the Corporation approved a new Long-term Incentive Plan (“LTI”), which was amended and restated as of December 31, 2018. Under the LTI, awards are granted annually in respect of the prior fiscal year to the eligible participants based on a percentage of annual salary. The amount of the award (net of withholding obligations) is satisfied by issuing treasury shares or cash to be held in trust by the trustee pursuant to the terms of the LTI. All awards issued under the 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. 52 WE ARE DEPENDABLE. If a change of control occurs, all LTI Shares held by the Administrator in respect of unvested grants will vest immediately. LTI participants are entitled to receive dividends on all common shares granted under the LTI whether vested or unvested. In most circumstances, unvested common shares held by the LTI 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 partic- ipant is terminated without cause, retires or resigns on a basis which constitutes constructive dismissal, the partici- pant will be entitled to receive his or her unvested common shares on the regular vesting schedule under the LTI. 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 (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 21(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. 53 2022 ANNUAL REPORT R) THE CORPORATION’S LEASING ACTIVITIES · the amount of the initial measurement of lease liability, & 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. Leases are recognized as a right-of-use asset and a corre- sponding 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 · any lease payments made at or before the commence- ment date less any lease incentives received, · any initial direct costs, and · restoration costs. 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 & 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 opera- tional 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. · amounts expected to be payable by the lessee under residual value guarantees, and S) GOVERNMENT GRANTS · the exercise price of a purchase option if the lessee is reasonably certain to exercise that option. 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, e.g., term, country, currency and security. Right-of-use assets are measured at cost comprising the following: Government grants, including non-monetary grants at fair value, are only recognised when there is reasonable assur- ance that: (a) all conditions attaching to the Government grant will be complied with; (b) the value of the grant can be determined with reason- able certainty; and (c) the grant will be received. Government grants are recognised in the profit or loss over the periods in which the Corporation recognises related expenses. Where government grants relate to costs which have been capitalised as assets these are recognised as a reduction to the related asset in the consolidated state- ments of financial position and transferred to profit or loss over the useful lives of the related assets. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Corporation with no future related costs are recognised in profit or loss in the period in which they relate to. 54 WE ARE DEPENDABLE. 3. CHANGES & UPDATES IN ACCOUNTING POLICIES The Corporation adopted the following accounting standards and amendments that were effective for our interim and annual consolidated financial statements commencing January 1, 2021. These changes did not have a material impact on our financial results and are not expected to have a material impact in the future. Interest Rate Benchmark Reform – Phase 2 In August 2020, the IASB issued Interest Rate Benchmark Reform – Phase 2, which amends IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16 Leases. The amendments apply for annual periods beginning on or after January 1, 2021. The Phase 2 amendments address issues that might affect financial reporting during the reform of an interest rate benchmark, including the effects of changes to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate. There is significant uncertainty over the timing of when the replacements for IBORs will be effective and what those replacements will be. We will actively monitor the IBOR reform and consider circumstances as we renew or enter into new financial instruments. 4. NEW STANDARDS & INTERPRETATIONS NOT YET ADOPTED New standards, interpretations, or amendments that have been issued, or are not yet effective, have not been further described or early adopted, where no material impact is expected on the Corporation's consolidated financial statements. The IASB has issued the following new standard and amend- ments to existing standards that will become effective in future years. · Amendments to IAS 1, Presentation of Financial Statements - Disclosure of Accounting Policies, requiring entities to disclose material, instead of signif- icant, accounting policy information. · Amendments to IAS 1, Presentation of Financial Statements - Classification of Liabilities as Current or Noncurrent, clarifying requirements for the classifica- tion of liabilities as non-current. · Amendments to IAS 8, Accounting Policies - Changes in Accounting Estimates and Errors, clarifying the defini- tion of "accounting policies" and "accounting estimates". · Amendments to IAS 12, Deferred Tax related to Assets and Liabilities arising from a Single Transaction, that clarify how companies account for deferred tax on transactions such as leases and decommissioning obligations. The amendments are effective for annual periods beginning on or after January 1, 2023. The Corporation has not adopted any standard, interpretation or amendment that has been issued but is not yet effective and no material impact is expected on the Corporation’s consol- idated financial statements. The Corporation will continue to assess the impacts, if any, the amendments to existing standards will have on our consolidated financial statements, but we currently do not expect any material impacts. 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. COVID-19 Risk & Geopolitical Stability The ongoing COVID-19 pandemic has caused world governments 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 an adverse impact on the Corporation’s hospitality business. While govern- ment-imposed restrictions eased significantly over 55 2022 ANNUAL REPORT the course of 2022, and vaccination rates continued to rise, the uncertainty regarding the ongoing COVID-19 pandemic remains a threat to the continued recovery in the Corporation’s hospitality business. The COVID-19 pandemic has also contributed to unusually competi- tive labour markets, causing inefficiencies in attracting, training and retaining employees. While the Corporation anticipates labour markets will stabilize, the timing remains uncertain. In addition to this, certain geopolitical events and other factors have resulted in rising and unstable commodity costs for key inputs such as natural gas, electricity and diesel. In the event these cost increases exceed price increase mechanisms this could have an adverse effect on our business prospects and results of operations. The Corporation’s Credit Facility is subject to floating interest rates and, therefore, is subject to fluctuations in interest rates which are beyond the Corporation’s control. Increases in interest rates, both domestically and inter- nationally, could negatively affect the Corporation’s cost of financing its operations and investments. The duration and full financial effects of the COVID-19 pandemic, geopolitical events and rising interest rates, continue to be uncertain at this time. The Corporation is managing ongoing risks through the Corporation’s business continuity plan and other mitigating measures. Any estimate of the length and severity of these develop- ments is therefore subject to significant uncertainty. Uncertainty about judgments, estimates and assump- tions made by management during the preparation of the Corporation’s consolidated financial statements related to potential impacts of the COVID-19 pandemic, geopolitical events and rising interest rates on revenue, expenses, assets, liabilities, and note disclosures could result in a material adjustment to the carrying value of the asset or liability affected. The following discusses the most significant accounting judgments and estimates that the Corporation has made in the preparation of the consolidated financial statements: AREAS OF SIGNIFICANT JUDGMENT Recognition of Rebate Liabilities In applying its accounting policy for volume rebates, the Corporation must determine whether the processing volume thresholds will be achieved. The most difficult and subjective area of judgment is whether a contract will generate satisfactory volume to achieve minimum levels. Management considers all appropriate facts and circumstances in making this assessment including historical experience, current volumetric run-rates, and expected future events. Impairment of Goodwill & Non-Financial Assets Management reviews goodwill at least annually and other non-financial assets when there is any indication that the asset might be impaired. The assessment of impairment is based on management’s judgment of whether there are sufficient internal and external factors that would indicate that an asset is impaired. The Corporation applies judgment in: · · assessing the likelihood of renewal of significant contracts included in the intangible assets described in Note 8, identifying the CGUs to which intangible assets should be allocated to, and the CGU or group of CGUs at which goodwill is monitored for internal manage- ment purposes, and · determining the appropriate comparable companies used in earnings multiple approach. 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, identi- fied 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. 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 termination 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. 56 WE ARE DEPENDABLE. AREAS OF ESTIMATION UNCERTAINTY Incremental Borrowing Rate In applying its accounting policy for leases management considers all appropriate facts and circumstances in the determination the lessee’s incremental borrowing rate being used and these rates are reviewed and update on an annual basis. Amortization of Property, Plant & Equipment, & Intangible Assets In applying its accounting policy for the amortization of property, plant and equipment, and intangible assets, management considers all appropriate facts and circum- stances in the determination of the appropriate rates and methodology to allocate costs over their estimated useful lives, including historical experience, current volumetric run-rates, and expected future events. During instances where indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Corporation estimates the recov- erable amount of the cash generating unit to which the asset belongs. The recoverable value of CGUs require the use of estimates related to the future operating results and cash generating ability of the assets. 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. 6. LINEN IN SERVICE Linen in Service ($ Thousands of CDN dollars) 2022 2021 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. Provisions Balance, beginning of year Additions Amortization charge Effect of movement in exchange rates Balance, end of year 31,340 31,946 (31,337) (566) 31,549 27,878 (27,921) (166) 31,383 31,340 The Corporation’s provision includes restructure costs and the restoration for premises of its leased plants. The Corporation determines restructure costs based off employment standards and legal consultation. For 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 10 for more details about estimation for this provision. Impairment of Goodwill & Non-Financial Assets Management reviews goodwill at least annually and other non-financial assets when there is any indication that the asset might be impaired. As part of this review the Corporation use estimates to calculate the appropriate discount rate and growth rate which are used to estimate the recoverable value. 57 7. PROPERT Y, PL ANT & EQUIPMENT ($ Thousands of CDN dollars, except share and per share amounts) Laundry Land Buildings Equipment(1) Equipment Equipment Office Delivery Computer Equipment Leasehold Spare Improvements Parts Total Year Ended, December 31, 2021 Opening net book amount Additions(2)(3)(4) Depreciation charge Effect of movement in exchange rates Closing net book amount 4,062 - - (23) 4,039 47,214 16,849 (5,702) (151) 58,210 108,973 10,206 (10,901) (216) 108,062 230 115 (122) (1) 222 9,435 1,535 (2,982) (84) 7,904 380 176 (258) - 298 46 (3,660) (4) 36,663 1,703 208,660 28,970 43 (23,625) - (479) - 33,045 1,746 213,526 At December 31, 2021 Cost Accumulated impairment losses Accumulated depreciation Net book amount 4,039 - - 4,039 78,464 (207) (20,047) 58,210 199,337 (2,113) (89,162) 108,062 1,220 - (998) 222 17,738 (5) (9,829) 7,904 3,404 (14) (3,092) 298 60,188 1,746 366,136 - (2,339) - (27,143) - (150,271) 33,045 1,746 213,526 Year Ended, December 31, 2022 Opening net book amount Additions(2)(3)(4) Change in asset retirement obligation Disposals Transfers Assets classified as held for sale(5) Depreciation charge Effect of movement in exchange rates Closing net book amount 4,039 - - - - (652) - (75) 3,312 58,210 59 - - - (44) (5,977) (530) 51,718 108,062 10,357 - (13) 7 - (10,876) (652) 106,885 222 106 - - (7) - (93) (8) 220 7,904 8,477 - (3,473) - - (3,076) (214) 9,618 298 292 - - - - (267) - 323 128 (434) - - - (3,477) (16) 33,045 1,746 213,526 19,538 119 (434) - (3,486) - - - (696) - (23,766) - (1,497) (2) 29,246 1,863 203,185 At December 31, 2022 Cost Accumulated impairment losses Accumulated depreciation Net book amount 3,312 - - 3,312 77,804 (207) (25,879) 51,718 208,434 (2,113) (99,436) 106,885 1,303 - 22,322 (5) (1,083) (12,699) 9,618 220 3,688 (14) (3,351) 323 59,873 1,863 378,599 - (2,339) - (30,627) - (173,075) 29,246 1,863 203,185 1 Included in laundry equipment are assets under development in the amount of $181 (2021 - $4,616). These assets are not available for service and accordingly are not presently being depreciated. 2 Total property, plant and equipment additions are inclusive of amounts incurred in the period that are yet to be paid, with amounts remaining in accounts payable and accrued liabilities of $697 (2021 - $873). 3 Additions include amounts from the Canadian Division of $10,598 (2021 - $26,287) and from the UK Division of $8,940 (2021 - $2,683). 4 Includes ROUA additions from the Canadian Division of $1,691 (2021 - $16,135), comprised of buildings of $0 (2021 - $15,205) and vehicles of $1,691 (2021 - $930). From the UK Division, ROUA additions were $6,800 (2021 - $2,152), comprised of buildings of $0 (2021 - $1,594) and vehicles of $6,800 (2021 - $558). This has resulted in corresponding increases to the lease liabilities in the amount of $1,691 (2021 - $16,135) for the Canadian Division and $6,800 (2021 - $2,152) for the UK Division. 5 Assets classified as held for sale are comprised of land and a building in Cupar, Scotland. The asset is currently marketed for sale, and it is anticipated to be sold during fiscal 2023. 58 WE ARE DEPENDABLE. 8. INTANGIBLE ASSETS ($ Thousands of CDN dollars, except share and per share amounts) Healthcare Relationships Hospitality Relationships Computer Software Brand Total 77 - (39) - 38 19,200 (19,162) 38 38 - (36) - 2 19,200 (19,198) 2 Year Ended, December 31, 2021 5,558 - (3,181) (52) 2,325 - 360 (17) - 343 At December 31, 2021 22,859 (20,534) 2,325 1,287 (944) 343 Year Ended, December 31, 2022 2,325 - (2,181) (144) - 343 88 (85) - 346 At December 31, 2022 22,715 (22,715) - 1,375 (1,029) 346 4,345 - - (62) 4,283 4,283 - 4,283 4,283 - - (203) 4,080 4,080 - 4,080 9,980 360 (3,237) (114) 6,989 47,629 (40,640) 6,989 6,989 88 (2,302) (347) 4,428 47,370 (42,942) 4,428 Opening net book amount Additions Amortization charge Effect of movement in exchange rates Closing net book amount Cost Accumulated amortization Net book amount Opening net book amount Additions Amortization charge Effect of movement in exchange rates Closing net book amount Cost Accumulated amortization Net book amount 9. G OOD WILL Goodwill represents the excess of the acquisition-date fair value of consideration transferred over the fair value of the identifiable net assets acquired in a business combination. Goodwill is not amortized. Refer to Note 26 for the Corporation’s impairment testing disclosure. Goodwill has been allocated to the following CGUs: ($ Thousands of CDN dollars, except share and per share amounts) Calgary Edmonton Vancouver 2 Vancouver 1 Victoria Canadian Division UK Division Total Gross amount of goodwill Changes due to movement in exchange rates Accumulated impairment 8,082 - 4,346 - - - 3,413 - - 2,630 - 3,208 - 21,679 - 18,100 153 39,779 153 - 1,700 1,700 - 1,700 Balance at January 1, 2022 8,082 4,346 3,413 2,630 1,508 19,979 18,253 38,232 Changes due to movement in exchange rates Balance at December 31, 2022 - - - - - - (864) (864) 8,082 4,346 3,413 2,630 1,508 19,979 17,389 37,368 59 2022 ANNUAL REPORT 10. PROVISIONS The Corporation's provision includes a current provision of $279 (2021 - $703) to recognize restructuring costs, and a long-term provision of $2,382 (2021 - $2,811) that is comprised of lease provisions and obligations to restore leased premises of its leased plants. Management estimates the current provision based on consultation from legal and current employment standards. Estimates of the long-term provision, is based off informa- tion 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. A long-term 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, 2022 to be $3,203 (2021 - $3,032). Management has estimated the present value of this obligation at December 31, 2022 to be $2,382 (2021 - $2,811 ) using an inflation rate of 2.0% (2021 – 1.80%) and pre-tax weighted average risk-free interest rate of 3.30% to 4.07% (2021 - 0.91% to 1.66%) 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 2026 to 2039. As at December 31, 2022, if actual costs were to differ by 10% from management's estimate the obligation would be an estimated $266 (2021 - $351) higher or lower. It is possible the estimated costs could change and changes to these estimates could have a significant effect on the Corporation's consolidated financial statements. The Corporation recorded the following provision activity during the year: ($ Thousands of CDN dollars) Asset Retirement Obligations Restructuring Costs Other Total Balance, beginning of year Charges against provisions Adjustments/settlement Changes due to movement in exchange rates Balance, end of year Current portion Non-current portion Balance, beginning of year Charges against provisions Adjustments/settlement Changes due to movement in exchange rates Balance, end of year Current portion Non-current portion For Year Ended, December 31, 2022 703 - (424) - 279 279 - For Year Ended, December 31, 2021 884 - (181) - 703 703 - 2,811 39 (434) (34) 2,382 - 2,382 2,789 57 (26) (9) 2,811 - 2,811 - - - - - - - - - - - - - - 3,514 39 (858) (34) 2,661 279 2,382 3,673 57 (207) (9) 3,514 703 2,811 60 WE ARE DEPENDABLE. 11. LONG-TERM DEBT ($ Thousands of CDN dollars) Prime Rate Loan (1) At January 1, 2021 Net repayment of debt Closing balance at December 31, 2021 At January 1, 2022 Net proceeds from debt Closing balance at December 31, 2022 40,657 (2,684) 37,973 37,973 (7,193) 45,166 1 The revolving credit facility is collateralized by a general security agreement, bears interest at prime or the applicable banker’s acceptance rate, plus an interest margin dependent on certain financial ratios, with a monthly repayment of interest only, maturing on July 31, 2026. The addi- tional interest margin can range between 0.0% to 1.75% dependent upon the calculated Funded Debt / Credit Facility EBITDA financial ratio, with a range between 0 to 3.25x. The required calculated Funded Debt / Credit Facility EBITDA financial ratio is subject to change based off certain terms and conditions. As at December 31, 2022 the combined interest rate was 6.95% (December 31, 2021 – 2.70%). On July 18, 2022, the Corporation completed an amendment to its existing revolving credit facility, which extended the agreement from July 31, 2024 to July 31, 2026. 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, 2022 and December 31, 2021. The Corporation has a revolving credit facility of up to $100,000 plus a $25,000 accordion of which $47,002 is utilized (including letters of credit totaling $1,836) as at December 31, 2022. Interest payments only are due during the term of the facility. Drawings under the revolving credit facility are available by way of Bankers’ Acceptances, Canadian prime rate loans, Libor of UK pounds based loans, letters of credit or standby letters of guarantee. Drawings under the revolving credit facility bear interest at a floating rate, plus an applicable margin based on certain financial performance ratios. A general security agreement over all assets, a mortgage against all leasehold interests and real property, insurance policies and an assignment of material agreements have been pledged as collateral. The carrying value of borrowings approximate their fair value as the debt is based on a floating rate, the interest rate risk has not changed, and the impact of discounting is not significant. The Corporation has incurred no events of default under the terms of its credit facility agreement. 12. FINANCE EXPENSE ($ Thousands of CDN dollars) Interest on long-term debt Lease interest expense Accretion expense Other charges, net 2022 1,757 2,070 39 1,114 4,980 2021 818 2,144 57 430 3,449 61 2022 ANNUAL REPORT 13. LEA SES A) AMOUNTS RECOGNIZED IN THE BALANCE SHEET The balance sheet reflects the following amounts relating to leases: ($ Thousands of CDN dollars, except share and per share amounts) December 31, 2022 December 31, 2021 Right-of-use assets Buildings Equipment Lease liabilities Buildings Equipment Total lease liabilities Less, current portion of lease liabilities Long term lease liabilities Additions to the right-of-use assets during the financial year Buildings Equipment B) AMOUNTS RECOGNIZED IN THE STATEMENT OF EARNINGS The statement of earnings reflects the following amounts relating to leases: 37,348 9,429 46,777 43,992 9,665 53,657 (9,615) 44,042 - 8,491 8,491 42,632 7,731 50,363 48,865 8,074 56,939 (9,206) 47,733 16,799 1,488 18,287 ($ Thousands of CDN dollars, except share and per share amounts) December 31, 2022 December 31, 2021 Depreciation charge of right-of-use assets Buildings Equipment Interest expense (included in finance expense) 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 4,913 2,990 7,903 2,070 26 9,493 4,620 2,903 7,523 2,144 26 9,338 62 WE ARE DEPENDABLE. C) RECONCILIATION OF EXPECTED LEASE LIABILITIES ($ Thousands of CDN dollars, except share and per share amounts) December 31, 2022 December 31, 2021 Lease liabilities Balance at January 1, Right-of-use asset additions Right-of-use asset disposals Interest expense Cash payment of lease payments Effect of movement in exchange rates Total lease liabilities 14. INCOME TAXES 56,939 8,491 (3,679) 2,070 (9,467) (697) 53,657 A reconciliation of the expected income tax expense to the actual income tax expense is as follows: ($ Thousands of CDN dollars, except share and per share amounts) Current tax: Current tax expense on profits for the year Total current tax expense Deferred tax: Origination and reversal of temporary differences Impact of substantively enacted rates and other Total deferred tax expense 2022 1,441 1,441 144 (47) 97 46,003 18,287 - 2,144 (9,312) (183) 56,939 2021 3,662 3,662 150 (24) 126 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, except share and per share amounts) Earnings before income taxes Non-taxable items Income subject to tax Income tax at statutory rate of 25.39% (2021 - 25.48%) Difference between Canadian and foreign tax rates Impact of substantively enacted rates and other Income tax expense 2022 5,444 (933) 4,511 1,146 351 41 1,538 2021 12,480 (1,878) 10,602 2,702 524 562 3,788 63 2022 ANNUAL REPORT The analysis of the deferred tax assets and deferred tax liabilities is as follows: ($ Thousands of CDN dollars, except share and per share amounts) Deferred tax assets: Deferred tax asset to be recovered after more than 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 2022 (16,904) (16,904) 25,608 5,450 31,058 14,154 2021 (17,236) (17,236) 26,010 5,326 31,336 14,100 The movement of deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdictions, is as follows: ($ Thousands of CDN dollars, except share and per share amounts) Lease Liabilities Provisions Offering Costs & Other Total Deferred tax assets: At January 1, 2021 Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2021 Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2022 (10,825) (3,662) 42 (14,445) 716 154 (13,575) (548) (11) - (559) 57 - (502) (1,477) (779) 24 (2,232) (683) 88 (2,827) (12,850) (4,452) 66 (17,236) 90 242 (16,904) ($ Thousands of CDN dollars, except share and per share amounts) Linen in Service Property, Plant & Equipment Intangible Assets & Goodwill LTIP & Other Total Deferred tax liabilities: At January 1, 2021 Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2021 Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2022 5,636 (310) - 5,326 124 - 5,450 19,496 4,804 (66) 24,234 311 (198) 24,347 1,382 86 (24) 1,444 (428) (87) 929 334 (2) - 332 - - 332 26,848 4,578 (90) 31,336 7 (285) 31,058 The Company has $11,200 of UK trading loss carry-forwards the benefit of which has been reflected in these financial statements. For tax purposes, these losses are deductible against future UK profits. These losses do not expire. 64 WE ARE DEPENDABLE. 15. CONTINGENCIES & COMMITMENTS A) CONTINGENCIES The Corporation has standby letters of credit issued as part of normal business operations in the amount of $1,836 (December 31, 2021 – $2,389) which will remain outstanding for an indefinite period of time. Grievances for unspecified damages were lodged against the Corporation in relation to labor matters. The Corporation has disclaimed liability and is defending the actions. It is not practical to estimate the potential effect of these griev- ances, but legal advice indicates that it is not probable that a significant liability will arise. B) COMMITMENTS Utility Commitments The Corporation was committed to estimated natural gas and electricity commitments for the next five calendar years and thereafter as follows: Utility commitments ($ Thousands of CDN dollars) Linen Purchase Commitments At December 31, 2022, the Corporation was committed to linen expenditure obligations in the amount of $10,161 (December 31, 2021 – $12,075) to be incurred within the next year. Property, Plant & Equipment Commitments At December 31, 2022, the Corporation was committed to capital expenditure obligations in the amount of $2,341 (December 31, 2021 – $445) to be incurred within the next year. Trust Funds on Deposit The Corporation maintains funds in trust for a customer to facilitate both parties in achieving their shared objec- tives. These funds are not available for the Corporation’s general operating activities and, as such, have not been recorded in the accompanying Consolidated Statements of Financial Position. As at December 31, 2022, the Corporation held trust funds on deposit in the amount of $964 (2022 – $814). 11,958 10,781 2,358 1,495 - - 26,592 2023 2024 2025 2026 2027 Subsequent 16. SHARE CAPITAL A) AUTHORIZED The Corporation is authorized to issue an unlimited number of common shares and such number of shares of one class designated as preferred shares which number shall not exceed 1/3 of the common shares issued and outstanding from time to time. B) ISSUED ($ Thousands of CDN dollars, except share and per share amounts) Balance, beginning of year Common shares issued under LTI Common shares forfeited under LTI Balance, end of year 2022 10,719,778 55,362 (1,950) 10,773,190 2021 10,676,889 42,889 - 10,719,778 Unvested common shares held in trust for LTI 64,552 78,632 65 2022 ANNUAL REPORT 17. EARNINGS PER SHARE A) BASIC Basic earnings per share is calculated by dividing the net earnings attributable to equity holders of the Corporation by the weighted average number of ordinary shares in issue during the year. ($ Thousands of CDN dollars, except share and per share amounts) Net earnings Weighted average number of shares outstanding (thousands) Net earnings per share, basic 2022 3,906 10,658 0.37 2021 8,692 10,609 0.82 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 18. LONG-TERM INCENTIVE PL AN 2022 2021 10,657,742 77,527 10,735,269 10,608,539 77,648 10,686,187 3,906 10,735 0.36 8,692 10,686 0.81 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 consol- idated 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. ($ Thousands of CDN dollars) Balance, beginning of year Issued during year Forfeited during year Vested during year Balance, end of year 2022 Unvested 78,632 37,172 (1,950) (49,302) 64,552 2022 Vested 595,660 18,190 - 49,302 663,152 2021 Unvested 79,423 29,331 - (30,122) 78,632 2021 Vested 551,980 13,558 - 30,122 595,660 The cost of the 64,552 (2021 – 78,632) unvested Common shares held by the LTIP Account at December 31, 2022 was $0 (2021 - $0). 66 WE ARE DEPENDABLE. 19. DIVIDENDS TO SHAREHOLDERS During the year ended December 31, 2022, the Corporation declared total dividends to shareholders of $12,905 or $1.200 per share (2021 - $12,846 or $1.200 per share). The Corporation’s policy is to pay dividends to Shareholders of its available cash to the maximum extent possible consistent with good business practice considering requirements for capital expenditures, working capital, growth capital and other reserves considered advisable by the Directors of the Corporation. All such dividends are discretionary. Dividends are declared payable each month to the Shareholders on the last business day of each month and are paid by the 15th day of the following month. 20. NET CHANGE IN NON-CASH W ORKING CAPITAL ITEMS Years Ended, December 31, ($ Thousands of CDN dollars, except share and per share amounts) Accounts receivable Linen in service Prepaid expenses and deposits Accounts payable and other liabilities(1) Income taxes payable / receivable 2022 (1,248) (536) (2,037) 1,713 (3,513) (5,621) 2021 (8,819) (788) (284) 4,841 (660) 5,710 1 Accounts payable and other liabilities, include the net change of accounts payable, accrued liabilities, net change in the current provision (note 10) related to restructure costs for 2022 - ($424) and in 2021 - ($181), but exclude the net change in non-cash amounts related to the acquisition of property, plant and equipment that have been committed to and paid for during 2022 ($176) and 2021 $561. 21. FINANCIAL INSTRUMENTS C) PRICE RISK Currency Risk A) FAIR VALUE The Corporation’s financial instruments at December 31, 2022 and 2021 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 signifi- cantly 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 translation of the financial statements of subsid- iaries 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, 2022, a strengthening or weakening of $0.01 of the Canadian dollar to the U.S. dollar with all other variables 67 2022 ANNUAL REPORT held constant could have a favorable or unfavorable impact of approximately $1, respectively, on net earnings. Based on financial instrument balances as at December 31, 2022, 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 $93, respectively, on other comprehensive loss. Interest Rate Risk 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, there was no identi- fied impairment. The Corporation is subject to interest rate risk as its credit facility bears interest at rates that depend on certain financial ratios of the Corporation and vary in accordance with market interest rates. Based on the credit facility at year end, the sensitivity to a 100 basis point movement in interest rates would result in an impact of $452 (2021 - $380) to net earnings. Other Price Risk The Corporation’s exposure to other price risk is limited since there are no significant financial instruments which fluctuate as a result of changes in market prices. D) CREDIT RISK The Corporation has financial assets that are subject to the expected credit loss model. The Corporation’s financial assets that are exposed to credit risk consist of cash and cash equivalents and accounts receivable. The Corporation, in the normal course of business, is exposed to credit risk from its customers. Management believes that the risks associated with concen- trations of credit risk with respect to accounts receivable are limited due to the generally short payment terms, and Accounts Receivable The Corporation applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk charac- teristics and the days past due. The expected loss rates are based on the payment profiles of sales over a period of 60 months before December 31, 2022 or January 1, 2022 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Corporation has identified the GDP and the unemploy- ment rate of the countries in which it provides services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. On that basis, the loss allowance as at December 31, 2022 and 2021 was determined as follows for trade receivables: ($ Thousands of CDN dollars, except share and per share amounts) December 31, 2022 Current 1 to 60 days 61 to 90 days Greater than 90 days December 31, 2021 Current 1 to 60 days 61 to 90 days Greater than 90 days Gross Allowance 27,986 8,145 1,324 450 37,905 - - - 144 144 Gross Allowance 24,132 10,419 1,322 1,117 36,990 - - - 143 143 Net 27,986 8,145 1,324 306 37,761 Net 24,132 10,419 1,322 974 36,847 68 WE ARE DEPENDABLE. While the Corporation evaluates a customer’s credit worthiness before credit is extended, provisions for potential credit losses are also maintained. The change in allowance for doubtful accounts was as follows: ($ Thousands of CDN dollars, except share and per share amounts) Opening loss allowance at January 1, Adjustments made during the year Recoveries (Write-offs) Effect of movements in exchange rates Balance, end of year E) LIQUIDITY RISK Years Ended, December 31, 2022 2021 143 (10) 11 - 144 267 (87) (35) (2) 143 The Corporation’s accounts payable, dividend payable and other liabilities are due within one year. Payments due under contractual obligations on an undiscounted basis for the next five years and thereafter are as follows: ($ Thousands of CDN dollars) Total 2023 Payments Due by Year 2024 to 2025 2026 to 2027 Subsequent Long-term debt Lease liabilities Utility commitments Linen purchase obligations Property, plant and equipment commitments 45,166 61,172 26,592 10,161 2,341 - 10,236 11,958 10,161 2,341 - 17,188 13,139 - - 45,166 12,799 1,495 - - - 20,949 - - - The Corporation has a credit facility with a maturity date of July 31, 2026 (Note 11). The degree to which the Corporation is leveraged may reduce its ability to obtain additional financing for working capital and to finance investments to maintain and grow the current levels of cash flows from operations. The Corporation may be unable to extend the maturity date of the credit facility. The Corporation’s capital structure includes working capital, a committed revolving credit facility and share capital. The Corporation continuously monitors actual and forecast cash flows and monitors the availability on our committed credit facility to ensure sufficient liquidity is available. To reduce liquidity risk, management has historically renewed the terms of the credit facility in advance of its maturity dates and the Corporation has maintained financial ratios that management believes are conservative compared to financial covenants applicable to the credit facility. A significant portion of the available facility remains undrawn. Management measures liquidity risk through comparisons of current financial ratios with financial covenants contained in the credit facility. 22. CAPITAL MANAGEMENT The Corporation’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 share- holders, while taking a conservative approach towards financial leverage and management of financial 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 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. 69 2022 ANNUAL REPORT 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 11) 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. Years Ended, December 31, 2022 45,166 1,836 176,542 223,544 (2,636) 220,908 2021 37,973 2,389 186,401 226,763 (1,110) 225,653 During 2022 and 2021, remuneration to directors and key management personnel was as follows: ($ Thousands of CDN dollars) 2022 2021 Years Ended, December 31, Salaries and retainer fees Short-term bonus incentives Post-employment benefits Share-based payments 1,802 1,007 63 1,399 4,271 1,872 993 64 1,521 4,450 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, 2022, the Corporation incurred such fees totaling $72 (2021– $138). ($ Thousands of CDN dollars, except share and per share amounts) Long-term debt, including current portion Issued and outstanding letters of credit Shareholders’ equity Less: Cash and cash equivalents 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 acquisi- tions. 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. 23. REL ATED PART Y TRANSACTIONS The Corporation transacts with key individuals from manage- ment 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. 70 WE ARE DEPENDABLE. 24. EXPENSES BY NATURE ($ Thousands of CDN dollars) 2022 2021 Years Ended, December 31, Wages and benefits Linen Utilities Delivery Materials and supplies Occupancy costs Repairs and maintenance Other expenses 130,971 31,337 23,754 23,050 13,522 4,727 10,419 2,351 240,131 100,617 27,921 13,547 14,564 10,782 4,052 7,695 2,023 181,201 During the year ended December 31, 2022, wages and benefits reflected in the table above includes an offset of government grants recognized in the year of $0 (2021 - $3,746). 25. 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 pharmaceu- tical, through five sites which are located in Cupar, Perth, Newcastle, Livingston and Coatbridge. The aggregation assessment requires significant judgment by management. Economic indicators used by management to assess the economic characteristics are the gross margin and the growth rate of each division. The CEO primarily uses a measure of EBITDA to assess the performance of the operating segments. 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. Sales between segments are carried out at arm’s length and are eliminated on consolidation. The revenue from external parties is measured in the same manner as in the consoli- dated statements of earnings & comprehensive income. In Edmonton and Calgary, the Corporation is the significant supplier of laundry and linen services to the entity which manages all major healthcare facilities in the region and is contractually committed to July 31, 2032. In Vancouver the major customer is contractually committed to March 1, 2027, and in Saskatchewan the major customer is contractually committed to June 1, 2031. For the year ended December 31, 2022, from these three major customers the Corporation has recorded revenue of $130,360 (2021 – $116,865), repre- senting 47.1% (2021 – 52.2%) of total revenue. ($ Thousands of CDN dollars) 2022 2021 Healthcare Hospitality Canadian division Healthcare Hospitality UK division 167,239 44,796 212,035 6,167 58,421 64,588 60.4% 16.2% 76.6% 2.3% 21.1% 23.4% 159,938 23,135 183,073 6,613 34,306 40,919 71.4% 10.3% 81.7% 3.0% 15.3% 18.3% Total segment revenue 276,623 100.0% 223,992 100.0% 71 2022 ANNUAL REPORT Segment Net Earnings & 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. ($ Thousands of CDN dollars, except share and per share amounts) Canadian Division UK Division Total 2022 Net earnings (loss) EBITDA 2021 Net earnings (loss) EBITDA 6,042 32,365 (2,136) 4,127 Canadian Division UK Division 13,604 39,678 (4,912) 3,113 3,906 36,492 Total 8,692 42,791 The Canadian division net earnings includes non-cash employee share based compensation expense of $1,788 (2021 – $1,848). Segment Assets Segment assets are measured in the same way as in the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. The Corporation’s cash and cash equivalents are not considered to be segment assets but are managed by the treasury function. ($ Thousands of CDN dollars, except share and per share amounts) At December 31, 2022 Canadian Division UK Division Total assets Other: Cash and cash equivalents Total segment assets 249,604 (27) 249,577 76,156 (2,609) 73,547 At December 31, 2021 Canadian Division UK Division Total assets Other: Cash and cash equivalents Total segment assets 254,225 - 254,225 78,294 (1,110) 77,184 Total 325,760 (2,636) 323,124 Total 332,519 (1,110) 331,409 72 WE ARE DEPENDABLE. Segment Liabilities Segment liabilities are measured in the same way as in the financial statements. These liabilities are allocated based on the operations of the segment. The Corporation’s borrowings are not considered to be segment liabilities but are managed by the treasury function. ($ Thousands of CDN dollars except share and per share amounts) At December 31, 2022 Total liabilities Other: Long-term debt (note 11) Total segment liabilities At December 31, 2021 Total liabilities Other: Long-term debt (note 11) Total segment liabilities Canadian Division UK Division 127,038 (45,166) 81,872 22,180 - 22,180 Canadian Division UK Division 123,109 (37,973) 85,136 23,009 - 23,009 Total 149,218 (45,166) 104,052 Total 146,118 (37,973) 108,145 26. IMPAIRMENT OF ASSETS i) The Corporation performed its annual assessment for goodwill impairment for the Canadian division and for the UK division as at December 31, 2022 and December 31, 2021 in accordance with its policy described in Note 2(k) and Note 2(h). The Corporation also performed impair- ment assessments for CGUs where there could be a risk of impairment due to the presence of potential impair- ment indicators at the CGU level. For both periods, the recoverable amount for the CGUs was assessed using an earnings multiple approach. If the result of the earnings multiple approach indicated a higher level of sensitivity a probability weighted discounted cash flow approach was performed. The Corporation refer- ences Board approved budgets and cash flow forecasts, trailing twelve-month EBITDA, implied multiples and discount rates in the valuation calculations. Earnings multiple approach (FVLCD) The assumptions used are based on the Corporation’s board approved budgets, cash flow forecasts, trailing twelve-month EBITDA and the implied multiples. For both fiscal years, cash flows were projected based on actual results for the fiscal year tested as well as business forecasts for the immediate fiscal year following the testing period and then extrapolated for revenue growth and expected changes in the general economy and specific markets within which the CGU operates. The implied multiple is calculated by utilizing the average multiples of comparable public companies. The Corporation used an implied average forward multiple of 10.60 (2021 - 10.80) to calculate the recoverable amounts. Where a CGU has sufficient headroom a probability weighted discounted cash flow approach was not performed. Where a CGU shows sensitivity to the earnings multiple approach, particularly those CGUS with a strong hospi- tality base, higher uncertainty as a result of COVID-19 or higher uncertainty due to geopolitical events or unusu- ally competitive labour markets, a secondary test in performed based on a probability-weighted discounted cash flow approach. Probability weighted discounted cash flow (VIU) The recoverable amounts are determined using the value- in-use (“VIU”) approach which considers the probability weighted discounted future cash flows specific to each CGU tested. The assumptions used are based on the Corporation’s board approved budgets, cash flow forecasts, trailing twelve-month EBITDA, the pre-tax discount rate and terminal value growth rate. For both fiscal years, cash flows were projected based on actual results for the fiscal year tested as well as business forecasts for the immediate fiscal year following the testing period and then extrapolated for revenue growth and expected changes in the general economy and specific market within which the CGU operates. 73 2022 ANNUAL REPORT The discounted cash flows consider the specifics environment within which each of the CGUs operate. Estimating the specific cash flows requires judgments on both past and future performance as well as overall market expectations. The calculation of the recoverable amount using the discounted cash flow was based on the following key assumptions: Testing Methodology December 31, 2022 Pre-tax Discount Rate December 31, 2022 Terminal Value Growth Rate December 31, 2022 December 31, 2021 Calgary Edmonton Vancouver 2* Vancouver 1 Victoria* UK FVLCD FVLCD FVLCD FVLCD FVLCD VIU n/a n/a n/a n/a n/a 15.4% n/a n/a n/a n/a n/a 2.0% n/a n/a 2.0% n/a 2.0% 2.0% * For the year ended December 31, 2021, these CGUs were tested using the VIU methodology. For the December 31, 2022 impairment test, manage- ment’s probability weighted approach was evaluated based on an equally weighted probability of a continued one-year downturn in sales to the worst case scenario of a two year downturn in sales. The scenarios estimated a decline of 8% to 12 % for 2023, 7% for 2024 with sales returning to normalized levels thereafter with sales growth estimates used 2%. These represent the Corporation’s best estimate of cash flows over the forecast period. For the December 31, 2021 impairment test, manage- ment’s probability weighted approach was evaluated based on an equally weighted probability of a continued one year downturn in sales to the worst case scenario of a two year downturn in sales. The scenarios estimated a decline of 5% to 25% for 2022, and 0% to 10% for 2023, with sales returning to normalized levels thereafter with sales growth estimates used 2%. The terminal value growth rate is based on manage- ment's best estimate of the long-term growth rate for its CGUs after the forecast period, considering historic performance and future economic forecasts. Based on testing performed at December 31, 2022 and December 31, 2021 no impairment was determined to exist. ii) Recoverable Amount The recoverable amount of each CGU is sensitive to changes in the market conditions which could result in material changes. The Corporation does not believe there is a reasonable change in the key assumptions that would cause the recoverable amount of any CGU to break even or have an impairment. The table below shows the sensi- tivity of key assumptions to a reasonable change. Recoverable Amount Change in Pre-tax Discount Rate Increase of 1% Change in Terminal Value Growth Rate Decrease of 1% December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Calgary Edmonton Vancouver 2* Vancouver 1 Victoria* UK n/a n/a n/a n/a n/a £50,261 n/a n/a $31,176 n/a $8,290 £53,083 n/a n/a n/a n/a n/a -£4,201 n/a n/a -$3,152 n/a -$770 -£4,915 n/a n/a n/a n/a n/a -£4,458 n/a n/a -$2,818 n/a -$834 -£4,988 * For the year ended December 31, 2021, these CGUs were tested using the VIU methodology. 74 WE ARE DEPENDABLE. 27. G OVERNMENT GRANTS The Corporation received government assistance for both their Canadian and UK division, under the following govern- ment programs: CANADIAN DIVISION · The Canada Emergency Wage Subsidy (“CEWS”) program was introduced by the Government of Canada on March 27, 2020, reimbursing eligible employers who have experienced the required reduction in revenue for a portion of salaries paid out to employees during the pandemic. During the year ended December 31, 2022, the Corporation submitted claims of $0.0 (2021 - $921.0) under the CEWS program, with $0.0 (2021 - $0.0) outstanding in receivables on the Corporation’s Consolidated Statements of financial position at December 31, 2022. · During 2020, the Corporation received $2,788 of linen in service from the Ontario Ministry of Health in exchange for a contractual commitment to provide a deferred linen service credit of $1,665 to various Ontario hospitals allocated over the useful life of the linen. The difference between the fair value of linen in service received and the linen service credit is considered to be government assistance related to an asset that has been recorded as a reduction in the value of the linens and will recognized as a reduction of the linen amortization charge over the life of the linens in service. The deferred linen service credit of $0 (2021 - $810) is reflected as a contract liability on the Corporation’s Consolidated Statements of financial position at December 31, 2022. UK DIVISION · The Coronavirus Job Retention Scheme (“CJRS”) was introduced by the UK government on March 20, 2020 and provides eligible employers the ability to access support to continue paying part of their employees' salary for those employees that would otherwise have been laid off during the crisis. During the year ended December 31, 2022, the Corporation submitted claims of £0.0 ($0.0) (2021 - £1,627 ($2,826)) under the CJRS program with £0.0 ($0.0) (2021 - £0.0 ($0.0)) outstanding in receivables on the Corporation’s Consolidated Statements of finan- cial position at December 31, 2022. In accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, the government grants have been recognized on the Corporation’s consol- idated statements. During the Years ended December 31, 2022, $0 (2021 - $3,746) of government grants were offset to operating expenses which includes, wages and benefits of $0 (2021 - $2,633), delivery of $0 (2021 - $864), and corpo- rate costs of $0 (2021 - $249). During the year ended December 31, 2022, $810 (2021 – $855) of the deferred linen service credit was recognized in revenue such that the closing balance of $0 (2021 - $810) is reflected as a contract liability on the Corporation’s Consolidated Statements of financial position at December 31, 2022. 28. SUBSEQUENT EVENTS A) DIVIDENDS The Corporation’s Board of Directors declared an eligible dividend of $0.10 per Common share of the Corporation payable on each of February 15, March 15, and April 14, 2023 to Shareholders of record on January 31, February 28, and March 31, 2023, respectively. A) BUSINESS ACQUISITION The March 2, 2023, the Corporation announced the closing of a share purchase agreement to acquire all the assets of a private laundry and linen services company incorporated in Canada and operating in Quebec City, Quebec for total consideration of $11,500 and a potential earnout of $1,900. The acquisition will be accounted for using the acquisi- tion method, whereby the purchase consideration will be allocated to the net assets acquired. Paranet is a private laundry and linen services company for the Quebec City healthcare and hospitality markets. The purchase price will be satisfied by drawing down on the Corporation’s revolving credit facility. At the time the financial statements were authorized for issue, and due to the timing of the acquisi- tion, the Corporation has not yet completed the accounting for the acquisition of Paranet. 75 2022 ANNUAL REPORT CORPORATE I N F O R M AT I O N BOARD OF DIRECTORS ELISE REES Audit Committee Chair FCA, FCPA, ICD.D. MATTHEW HILLS, MBA STEVEN MATYAS, BSC Compensation Committee Chair LINDA MCCURDY, MBA President & CEO K-Bro Linen Systems Inc. MICHAEL PERCY, PHD Board Chair EXECUTIVE OFFICERS LINDA MCCURDY, MBA President & CEO SEAN CURTIS Senior VP & COO KRISTIE PLAQUIN, CPA, CA Chief Financial Officer TRANSFER AGENT & REGISTRAR TSX Trust Company Calgary, Alberta AUDITORS Pricewaterhouse Coopers LLP Edmonton, Alberta LEGAL COUNSEL Stikeman Elliott Toronto, Ontario PRINCIPAL BANK TD Bank Edmonton, Alberta STOCK EXCHANGE LISTING TSX: KBL CANADA LOCATIONS CORPORATE OFFICE P 780 453 5218 F 780 455 6676 14903 - 137 Ave Edmonton, AB T5V 1R9 VANCOUVER 1 KEVIN STEPHENSON General Manager P 604 420 2203 F 604 420 2313 #401 - 8340 Fraser Reach Court, Burnaby, BC V3N 0G2 CALGARY JEFF GANNON General Manager P 403 724 9001 F 403 720 2959 6969 – 55 St SE Calgary, AB T2C 4Y9 REGINA BARB LEWIS General Manager P 06 757 5276 F 306 757 5280 730 Dethridge Bay Regina, SK S4N 6H9 MONTRÉAL P 450 378 3187 F 450 378 8245 599, Rue Simonds Sud Granby, QC J2J 1C1 VICTORIA ANDREW MACKEEN General Manager P 250 474 5699 F 250 474 5680 861 Van Isle Way Victoria, BC V9B 5R8 VANCOUVER 2 RYO UTAHARA General Manager P 604 681 3291 F 604 685 1458 8035 Enterprise Street Burnaby, BC V5A 1V5 EDMONTON TREVOR RYE General Manager P 780 451 3131 F 780 452 2838 15223 – 121 A Ave Edmonton, AB T5V 1N1 TORONTO JAMES EWART General Manager QUÉBEC DIMITRI HAMM Directeur Général P 416 233 5555 F 416 233 4434 6045 Freemont Blvd Mississauga, ON L5R 4J3 P 418 661 6163 F 418 661 4000 367 Boulevard DesChutes, Québec City, QC G1E 3G1 UK LOCATIONS HEAD OFFICE P 01334654033 Edenfields, Cupar Trading Estate Cupar, Fife, KY154SX CUPAR JOE MCDONAGH General Manager P 01334655220 Prestonhall Industrial Estate, Cupar, Fife, KY154RD PERTH KELLY FOX General Manager P 01738210106 Inveralmond Industrial Estate, Ruthvenfield Avenue, Perth, PH13UF LIVINGSTON ALAN JOHNSTON General Manager P 01506426816 2 Gregory Road, Kirkton Campus, Livingston, EH547DR COATBRIDGE AMY LIDDELL General Manager P 01236449010 18 Palacraig Street, Coatbridge, ML54RY NEWCASTLE STEVE BRUMBILL General Manager P 01916053106 Unit L4, Intersect 19, High Flatworth, Tyne Tunnel Industrial Estate, North Shields, NE297UT INQUIRIES@K-BROLINEN.COM 76 WE ARE DEPENDABLE. K-BROLINEN.COM
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