K-Bro Linen
Annual Report 2023

Plain-text annual report

We are dependable. T A B L E O F C O N T E N T S 1 President’s Message 4 Chairman’s Message 5 Officers & Directors 7 Financial Highlights 9 Management’s Discussion & Analysis 36 Consolidated Financial Statements 1 P R E S I D E N T ’ S M E S S A G E 2023 was a key year for K-Bro, one in which we put the worst effects of the pandemic behind us. We realized significant increases in volume, revenue, EBITDA, and EPS. We were particularly pleased to see these operating and financial improvements in our Canadian and UK businesses, and we saw increases in our healthcare and hospitality businesses. In addition to the improvement in our operating results, we completed two strategic acquisitions to strengthen our businesses in Québec City and Montréal. Our balance sheet remains strong, with capacity to continue to finance growth opportunities. We financed both of our 2023 acquisitions with our credit line. We also began our NCIB share buyback program in May, and continued the buyback through to the end of the year and into 2024. Most importantly, we have entered 2024 expecting continued growth and profitability. In addition to organic growth opportunities, we are continuing to consider Canadian and UK acquisition growth opportunities that are strategically complementary and accretive to our existing businesses. We know the pandemic has been difficult for so many people, including our customer and employees. While our financial results came under pressure, our company is in a good position to continue our recovery and to grow, and we are appreciative of your continuing confidence and support. We will continue to work hard to provide excellent service to our many customers, a healthy and fulfilling career for our three thousand employees in Canada and the UK, and strong results for our shareholders. We wish you a good 2024. Our 2023 highlights included: · Revenue of $321mm, a 16% increase from 2022 · EBITDA of $56.8 mm, a 55.7% increase · EPS of $1.64, a 355.6%% increase Linda McCurdy 2023 Annual Report 2 We Are Dependable.3 2023 Annual Report4 C H A I R M A N ’ S M E S S A G E K-Bro turned a corner in 2023, with our financial and operating performance showing significant improvement after so many pandemic-related challenges. We had significant organic growth, and completed two important acquisitions in our existing Québec City and Montréal markets. We are pleased to have begun our share buyback efforts in May, while maintaining the ability to continue funding growth. Our balance sheet is strong, our cash flow generation is solid, and we enter 2024 with optimism about both our Canadian and UK markets. K-Bro never stops striving every day to provide the highest-quality service to our customers. On behalf of the K-Bro Board and all of our employees, we appreciate your confidence and never take it for granted. We will continue working hard to do what is best for our customers, employees and shareholders, and we look forward to a bright 2024 and beyond. Michael Percy We Are Dependable. 5 K-Bro is the largest healthcare & hospitality laundry & linen processor in Canada, & with the acquisition of Fishers we are now one of the largest in the UK & Europe. We operate 15 facilities and two distribution centers, including 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. 2023 Annual Report6 S E A N C U R T I S , K R I S T I E P L A Q U I N , M I C H A E L P E R C Y , E L I S E R E E S , S T E V E N M A T Y A S , M A T T H E W H I L L S , R Y O U T A H A R A , T R E V O R R Y E , S C O T T I N G L I S , M I C H A E L J O N E S , L U C Y R E N A U T , B E N O I T L A U R E N T , D I M I T R I H A M M , B A R B L E W I S , K E V I N S T E P H E N S O N , J A M E S E W A R T , A N D R E W M A C K E E N , J E F F G A N N O N , L I N D A M C C U R D Y We Are Dependable.7 Financial Highlights The following unaudited financial data has been derived from K-Bro’s consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP. The information set forth below should be read in conjunction with the Management’s Discussion & Analysis, Consolidated Financial Statements and Notes sections of this Annual Report. REVENUE UP 16.0% EBITDA UP 55.7% 325 300 275 250 225 200 175 56 52 48 44 40 36 32 28 24 ($) 2019 2020 2021 2022 2023 ($) 2019 2020 2021 2022 2023 (In millions of Canadian dollars) Years ended December 31 (In millions of Canadian dollars) Years ended December 31 1 The COVID-19 pandemic caused world governments to institute travel restrictions both in and out of and within Canada and the UK, which has had an adverse impact on the Corporation’s hospitality business. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing inefficiencies in attracting, training and retaining employees. In addition to this, certain geopolitical events and other factors resulted in rising and unstable commodity costs for key inputs such as natural gas, electricity and diesel. The combination of all these events has had a negative impact to consolidated EBITDA in 2020, 2021 and 2022. 2023 Annual Report8 Years ended December 31, 2023 2022 2021 2020 2019 Income Statement Data Revenue EBITDA EBITDA (%) Net earnings Net earnings per share (Diluted) Balance Sheet Data Working capital Long-term debt Other Financial Data Distributable cash per share Payout ratio (%) Price to earnings multiple (12 months trailing) Price to EBITDA multiple (12 months trailing) Return on shareholders’ equity (ROE)(%) Total shareholder return, YTD (%) Total shareholder return, 5 yrs (%) Market capitalization Share price: High Low Close 320,884 56,806 17.7 17,607 1.64 41,382 70,247 3.04 39.8 20.1 6.2 10.1 25.3 7.3 350,971 35.7 27.0 33.0 276,623 36,492 13.2 3,906 0.37 223,992 42,791 19.1 8,692 0.81 196,591 38,244 19.5 3,782 0.36 252,410 47,573 18.8 10,906 1.03 36,635 45,166 30,271 37,973 27,922 40,657 31,021 62,494 1.81 65.9 73.8 8.0 2.2 16.7 0.4 294,108 36.0 27.6 27.3 2.57 46.8 42.2 8.5 4.7 9.2 2.7 366,616 47.2 33.4 34.2 2.94 40.9 93.0 10.8 2.3 4.5 6.7 416,078 46.4 23.7 39.0 2.80 51.1 40.8 9.3 5.6 29.3 5.7 445,914 43.2 32.7 42.1 ($ Thousands of CDN dollars, except percentages and per share data) We Are Dependable. 9 M A N A G E M E N T ' S D I S C U S S I O N & A N A L Y S I S 12 Introduction 13 Strategy 14 Fourth Quarter Overview 14 Selected Annual Financial Information 15 Summary of Results & Key Events 20 Outlook 21 Results of Operations 27 Liquidity & Capital Resources 2023 Annual Report10 29 Dividends 30 Distributable Cash Flow 30 Outstanding Common Shares 31 Related Party Transaction 31 Critical Accounting Estimates 31 Terminology 33 New Accounting Pronouncements Adopted 33 Recent Accounting Pronouncements 34 Critical Risks & Uncertainties 35 Controls & Procedures We Are Dependable.11 Management’s Discussion & Analysis of Financial Condition & Results of Operations The following Management's Discussion and Analysis (“MD&A”) is supplemental to, and should be read in conjunc- tion with, the audited consolidated Financial Statements of K-Bro Linen Inc. (“the Corporation”) for the years ended December 31, 2023 and 2022 (the “2023 Audited Financial Statements”), as well as the unaudited interim condensed consolidated financial statements for the periods ended March 31, 2023, June 30, 2023 and September 30, 2023. The Corporation and its wholly owned subsidiaries, including K-Bro Linen Systems Inc., Para Net Buanderie & Nettoyage a Sec Inc., Buanderie Villeray Limitée, 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, 2024. 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 performance and are based on management’s estimates and assump- tions that are subject to risks and uncertainties, which could cause K-Bro’s actual performance and financial results in future periods to differ materially from the forward-looking information contained in this MD&A. These risks and uncer- tainties include, among other things: (i) risks associated with acquisitions, including (a) the possibility of undisclosed material liabilities, disputes or contingencies, (b) challenges or delays in achieving synergy and integration targets, (c) the diversion of management’s time and focus from other business concerns and (d) the use of resources that may be needed in other parts of our business; (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 and the risks associated with maintaining short term contracts; (v) (vi) increased capital expenditure requirements; reliance on key personnel; (vii) changing trends in govern- ment outsourcing; (viii) changes or proposed changes to minimum wage laws in Ontario, British Columbia, Alberta, Québec, Saskatchewan and the United Kingdom (the “UK”); (ix) the availability and terms of future financing; (x) textile demand; (xi) availability and access to labour; (xii) rising wage rates in all jurisdictions the Corporation operates and (xiii) interest rate and foreign currency risk. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking infor- mation 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; and (v) the level of capital expenditures. Although the forward-looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain state- ments regarding forward-looking included in this MD&A may be considered “financial outlook” for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this MD&A. Forward looking information included in this MD&A includes the expected annual healthcare revenues to be generated from the Corporation’s contracts with 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. information 2023 Annual Report12 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 Accounting Standards and, therefore, are considered non GAAP measures. These measures may not be comparable to similar measures presented by other issuers. Please see “Terminology” for further discussion. Introduction CORE BUSINESS The Corporation is the largest owner and operator of laundry and linen processing facilities in Canada and a market leader for laundry and textile rental services in Scotland and the North of England. K-Bro and its wholly owned subsidiaries operate across Canada and the UK, providing a range of linen services to healthcare institu- tions, hotels and other commercial accounts that include the processing, management and distribution of general linen and operating room linen. in Canada The Corporation’s operations include ten processing facilities and two distribution centres under two distinctive brands: K-Bro Linen Systems Inc. and Buanderie HMR. 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. 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. 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 industry. Service relationships are generally formalized through contracts in the healthcare sector that are typically long term (from five to ten years), while contracts in the hospitality sector usually range from two to five years. this We Are Dependable. 13 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. Strategy In 2023, K-Bro communicated its long-term sustainability strategy which prioritizes putting people first, supporting its partners and environmental stewardship. The strategy focuses on three pillars: People; Partners; and Planet, and builds on the Corporation’s vision of delivering indus- try-leading service while embracing its responsibilities to society as a good corporate citizen – supporting the commu- nities in which it operates, being a great place to work and a dependable partner for all its stakeholders. People - Foster a customer-centric culture, take care of people, embrace diversity, and ensure K-Bro is a great place to work. Partners - Be dependable, exemplify responsible business practices, support local communities, and anticipate evolving trends. Planet - Operate responsibly, prioritize energy efficiency, embrace best management practices, and support environ- mental stewardship across the supply chain. K-Bro maintains the following three part growth focus: Secure and Maintain Long-Term Contracts with Large Healthcare and Hospitality Customers – K-Bro's core service is providing high quality laundry and linen services at competitive prices to large healthcare and hospitality customers under long term contracts. K-Bro's contracts in the healthcare sector typically range from five to ten years in length. Contracts in the hospitality sector typically range from two to five years. Extend Core Services to New Markets – Management has demonstrated its ability to successfully expand K-Bro's business into new markets from its established bases. Since 2005, K-Bro has entered four new geographic markets across Canada, and in late 2017 entered into the UK market. These new markets have contributed signifi- cantly to K-Bro's growth. Management believes that new outsourcing opportunities will continue to arise in the near to medium term and that K-Bro is well positioned for continued growth, particularly as healthcare and hospitality institutions continue to increase their focus on core services and confront pressures for capital and cost savings. Management may in the future expand its core services to new markets either through acquisitions or by estab- lishing new facilities. Its choice of areas for expansion will depend on the availability of suitable acquisition candi- dates, the volume of healthcare and hospitality linen to be processed and the policies of applicable governments. Introduce Related Services – In addition to focusing on its core services, the Corporation also attempts to capitalize on attractive business opportunities by introducing closely related services that enable it to provide more complete solutions to K-Bro's healthcare and hospitality customers. These related service offerings include K-Bro Operating Room services and on site 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. 2023 Annual Report 14 Fourth Quarter Overview Net earnings for the fourth quarter of 2023 were $4.2 million or $0.40 per Common Share (basic). Cash flow from operating activities was $7.8 million and distributable cash flow was $7.2 million. Consolidated revenue for the fourth quarter of 2023 increased to $82.5 million or by 16.7% compared to 2022, primarily related to the impact of price increases implemented to offset inflation-related costs, as well as stronger hospitality client activity combined with the continued strength of healthcare revenues and the acquisi- tion of Paranet and Villeray during 2023 (see “Key Events”). EBITDA (see “Terminology”) increased in the fourth quarter 2023 to $14.3 million or by 63.6% compared to $8.7 million in 2022. On a consolidated basis, EBITDA margin increased to 17.3% in 2023 from 12.3% in 2022. Adjusted EBITDA (see “Terminology”) increased in the fourth quarter 2023 to $13.3 million or by 52.8% compared to $8.7 million in 2022. On a consolidated basis, adjusted EBITDA margin increased to 16.2% in 2023 from 12.3% in 2022. For the Canadian division, the EBITDA margin the fourth quarter increased to 18.6% in 2023 from 14.2% in 2022. The increase in margin is primarily related to the impact of stronger client activity, price increases across various markets serviced, labour efficiencies, and delivery route optimization combined with reduced fuel rates. The increase in EBITDA margin was also due to the gain on settlement of contingent consideration. This relates to the derecogni- tion of contingent consideration for the Paranet acquisition since it will not be paid out. This gain is a non-cash item outside of core operations. For the Canadian division, the Adjusted EBITDA margin the fourth quarter increased to 17.1% in 2023 from 14.2% in 2022. The increase in margin is primarily related to stronger client activity, the impact of price increases across various markets serviced, labour efficiencies, and delivery route optimization combined with reduced fuel rates. For the UK division, in the fourth quarter, the EBITDA margin increased to 13.2% in 2023 from 6.0% in 2022. The improve- ment in EBITDA margin is primarily related to the impact of stronger client activity, price increases, increased produc- tivity, and delivery cost efficiencies. Adjusted EBITDA was consistent with EBITDA in the UK for both 2023 and 2022. Selected Annual Financial Information Years Ended December 31, ($ Thousands of CDN dollars, except percentages and per share amounts) Canadian UK Division Division 2023 2023 Revenue EBITDA(1) Adjusted EBITDA(2) Net earnings (loss) 241,129 44,699 43,754 12,584 79,755 12,107 12,107 5,023 2023 320,884 56,806 55,861 17,607 Canadian UK Division Division 2022 2022 Canadian UK Division Division 2021 2021 212,035 32,365 32,365 6,042 64,588 4,127 4,127 (2,136) 2022 276,623 36,492 36,492 3,906 183,073 39,678 39,678 13,604 40,919 3,113 3,113 (4,912) 2021 223,992 42,791 42,791 8,692 Net earnings (loss) per share: Basic Diluted 1.180 1.172 0.471 0.468 1.651 1.640 0.567 0.563 (0.200) (0.199) 0.366 0.364 1.282 1.273 (0.463) (0.460) 0.819 0.813 Total assets Long-term debt (excludes lease liabilities) 364,716 70,247 325,760 45,166 332,519 37,973 Weighted average number of shares outstanding: Basic Diluted 10,663,949 10,733,256 10,657,742 10,735,269 10,608,539 10,686,187 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 Adjusted EBITDA (as defined below) is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See “Terminology” for a complete description of the adjusted items. We Are Dependable. 15 Summary of 2023 Results & Key Events KEY EVENTS IN OUR MARKETS ARE SUMMARIZED BELOW ACQUISITION OF BUANDERIE PARANET On March 1, 2023 the Corporation completed the acquisi- tion of 100% of the share capital of Buanderie Para-Net (“Paranet”) operating as Paranet (the “Paranet Acquisition”), a private laundry and linen services company operating in Québec City, Québec. The Paranet Acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, contracts and an employee base. The contracts acquired are in the Québec healthcare and hospitality sector, which complements the existing business of the Corporation. Based on the Corporation’s evaluation of the Paranet Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Paranet Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired. The Corporation financed the Paranet Acquisition and transaction costs from existing loan facilities. The purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows: ($ Thousands, except percentages) 2022 2023 Cash consideration Contingent consideration Total purchase price 11,074 945 12,019 Net earnings were $17.6 million or $1.65 per Common Share (basic). Cash flow from operating activities was $41.0 million and distributable cash flow was $32.4 million. Revenue increased in fiscal 2023 to $320.9 million or by 16.0% compared to 2022. Consolidated revenue for the fourth quarter of 2023 increased to $82.5 million or by 16.7% compared to 2022, primarily related to price increases implemented in 2023, as well as stronger hospitality client activity combined with the continued strength of healthcare revenues and the acquisition of Paranet and Villeray (see “Key Events”). EBITDA (see “Terminology”) increased in 2023 to $56.8 million or by 55.7% compared to $36.5 million in 2022. On a consolidated basis, EBITDA margin increased from 13.2% in 2022 to 17.7% in 2023. Adjusted EBITDA (see “Terminology”) increased in 2023 to $55.9 million or by 53.1% compared to $36.5 million in 2022. On a consolidated basis, EBITDA margin increased from 13.2% in 2022 to 17.4% in 2023. For the Canadian division, the EBITDA margin increased to 18.5% in 2023 from 15.3% in 2022. The increase in margin is primarily related to impact of price increases across various markets serviced, the completion of the AHS transi- tion, operating efficiencies, and lower delivery costs. The lower delivery costs are attributable to the optimization of high frequency routes combined with reduced fuel rates. The increase in EBITDA margin was also due to the gain on settlement of contingent consideration. This relates to the derecognition of contingent consideration for the Paranet acquisition since it will not be paid out. This gain is a non-cash item outside of core operations. For the Canadian division, the Adjusted EBITDA margin increased to 18.1% in 2023 from 15.3% in 2022. The increase in margin is primarily related to impact of price increases across various markets serviced, the completion of the AHS transition, operating efficiencies, and lower delivery costs. The lower delivery costs are attributable to the optimization of high frequency routes combined with reduced fuel rates. For the UK division, the EBITDA margin increased to 15.2% in 2023 from 6.4% in 2022. The increase in EBITDA margin is primarily related to the impact of price increases and increased productivity. In addition, the natural gas hedge put into place during 2022, lower fuel rates and delivery cost efficiencies contributed to the margin growth. Adjusted EBITDA was consistent with EBITDA in the UK for both 2023 and 2022. 2023 Annual Report 16 The assets and liabilities recognized as a result of the Paranet Acquisition are as follows: Acquisition Related Costs ($ Thousands, except percentages) 2022 2023 Net Assets Acquired: Accounts receivable Prepaid expenses and deposits Linen in service Accounts payable and accrued liabilities(2) Lease liabilities Deferred income taxes Property, plant and equipment(1,2) Intangible assets Net identifiable assets acquired Goodwill Net assets acquired 1,317 137 970 (1,552) (1,176) (1,474) 6,142 2,450 6,814 5,205 12,019 1 Includes ROUA from the Canadian Division of $1,176 comprised of buildings of $964 and ve- hicles of $212 2 Includes provision of $219 for asset retirement obligation The provisional intangible assets acquired are made up of $2,450 for the customer contracts along with related relationships and customer lists. The goodwill is attribut- able to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes. Contingent Consideration In the event that a certain EBITDA target was achieved by Paranet for the twelve month period ended August 31, 2023, additional undiscounted consideration of up to $1,890 would have been payable in cash during the fourth quarter of 2023. While performance was in-line with expectations, the target was not achieved; therefore, no payment was made. During the first three quarters of 2023, the estimated fair value of the possible payment was classified as contingent consideration. The fair value of the contingent consider- ation was estimated by considering the probability-adjusted future expected cash flows in regards to Paranet achieving the target that would result in consideration being paid. The impact of discounting these future cash flows was not considered because the impact would be nominal. Given that the EBITDA target was not achieved for the twelve month period ended August 31, 2023, the contingent consider- ation amount of $945 has been derecognized and a gain on settlement of contingent consideration has been recorded in Consolidated Statement of Earnings and Comprehensive Income for the twelve months ended December 31, 2023. For the twelve months ended December 31, 2023, $274 in professional fees associated with the Paranet Acquisition has been included in Corporate expenses. Revenue and Profit Information The acquired business contributed revenues of $7,819 to the Corporation for the period from March 1, 2023 to December 31, 2023. If the Paranet Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the period ended December 31, 2023 would have been $322,209. The acquired business contributed a net deficit of ($316) to the Corporation for the period from March 1, 2023 to December 31, 2023. If the Paranet Acquisition had occurred on January 1, 2023, consolidated pro-forma net income for the period ended December 31, 2023 would have been $17,591. These amounts have been calculated using Paranet’s results and adjusting them for differences in the accounting policies between the Corporation and Paranet as it pertains to property, plant and equipment. The Corporation follows the requirements of IFRS Accounting Standards whereas Paranet previously reported under Canadian Accounting Standards for Private Enterprises (ASPE), the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2023, together with the consequential tax effects. ACQUISITION OF VILLERAY On November 1, 2023, the Corporation completed the acquisition of 100% of the share capital of Buanderie Villeray and its affiliate Buanderie La Relance (the “Villeray Acquisition”), a private laundry and linen services company incorporated in Canada and operating in Montréal, Québec. The Villeray Acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, customer relationships and an employee base. Villeray operates in the hospitality and healthcare sector, which complements the existing business of the Corporation. As part of the transaction, the Corporation closed its Granby facility and consolidated existing volumes into Villeray. Based on the Corporation’s evaluation of the Villeray Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Villeray Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired. The Corporation financed the Villeray Acquisition and trans- action costs from existing loan facilities. We Are Dependable. 17 The purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows: ($ Thousands, except percentages) 2022 2023 Cash consideration Contingent consideration Total purchase price 11,204 500 11,704 The assets and liabilities recognized as a result of the Villeray Acquisition are as follows: ($ Thousands, except percentages) 2022 2023 Net Assets Acquired: Accounts receivable Prepaid expenses and deposits Income tax receivable Accounts payable and accrued liabilities(2) Lease liabilities Deferred income taxes Property, plant and equipment(1,2) Intangible assets Net identifiable assets acquired Goodwill Net assets acquired 1 Includes ROUA from the Canadian Division of $2,706 related to buildings 2 Includes provision of $97 for asset retirement obligation 907 187 69 (807) (2,706) (1,416) 7,161 2,530 5,925 5,779 11,704 The provisional intangible assets acquired are made up of $2,530 related to customer relationships. The goodwill is attributable to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes. Contingent Consideration The estimated fair value of payment has been classi- fied as contingent consideration by exercising significant judgment as to whether it should be classified as such, or as renumeration to the former owner, who will be employed subsequent to the close of the transaction. The Corporation has determined by considering all relevant factors included in the agreements as it pertains to employment terms, valuation of the business, and other relevant terms that the additional consideration is most appropriately reflected as contingent consideration. In the event that a certain EBITDA target is achieved by Villeray for the twelve month period ended October 31, 2024, additional undiscounted consideration ranging from $500 to $1,000 will be payable in cash during the first quarter of 2025. The potential undiscounted amount payable within the agreement will only be paid should the EBITDA target be achieved. Should the EBITDA target not be achieved, no payment will be made. The fair value of the contingent consideration of $500 was estimated by considering the probability-adjusted future expected cash flows in regards to Villeray achieving the target that would result in consideration being paid. The impact of discounting those future cash flows was not considered because the impact would be nominal. Since the estimated future cash flows and probability of achieving the EBITDA target are an unobservable input, the fair value of the contingent consideration is classified as a level 3 fair value measurement. Acquisition Related Costs For the year ended December 31, 2023, $414 in profes- sional fees associated with the Villeray Acquisition has been included in Corporate expenses. Revenue and Profit Information The acquired business contributed revenues of $1,602 to the Corporation for the period from November 1, 2023 to December 31, 2023. If the Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the year ended December 31, 2023 would have been $329,021. If both the Paranet Acquisition and Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the year ended December 31, 2023 would have been $330,346. The acquired business contributed a net deficit of ($201) to the Corporation for the period from November 1, 2023 to December 31, 2023, inclusive of Granby transition related costs. If the Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma net income for the period ended December 31, 2023 would have been $17,721. These amounts have been calculated using Villeray’s results and adjusting them for differences in the accounting policies between the Corporation and Villeray as it pertains to property, plant and equipment. The Corporation follows the requirements of IFRS Accounting Standards whereas Villeray previously reported under Canadian Accounting Standards for Private Enterprises (ASPE), the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2023, together with the consequential tax effects. 2023 Annual Report 18 NORMAL COURSE ISSUER BID ECONOMIC CONDITIONS On May 15, 2023, the Corporation announced its intention to proceed with a normal course issuer bid (NCIB) to purchase up to 881,481 of its common shares (“Shares”) through the TSX and / or alternative Canadian trading systems, repre- senting approximately 10% of the public float of 8,814,816 shares as at May 9, 2023, during the twelve-month period commencing May 18, 2023 and ending May 17, 2024. During the year ended December 31, 2023, the Corporation repurchased and cancelled 199,062 common shares (2022 – nil) for $6,496 under the NCIB, net of transaction costs of $1 which were recorded in share capital. The average share price was $32.63, with prices ranging from $30.48 to $35.53. The Corporation recorded a financial liability of $3,967 related to the NCIB due to the automatic share repurchase plan for purchases that could be made from January 1 to March 22, 2024. During the blackout period, no changes can be made as it pertains to the automated share repurchase plan. 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. REVOLVING CREDIT FACILITY On August 31, 2023, the Corporation completed an amend- ment to its existing revolving credit facility to extend the agreement from July 31, 2026 to July 31, 2027, as previ- ously amended on July 18, 2022. In addition, the agree- ment expanded the revolving credit facility from $100,000 to $125,000 plus a $25,000 accordion. The Corporation’s incremental borrowing rate under its existing credit facility is determined by the Canadian prime rate plus an appli- cable margin based on the ratio of Funded Debt to EBITDA as defined in the credit agreement. During fiscal 2022 and 2023, the Canadian prime rate increased from 3.70% in January 2022 to 6.95% in June 2023, and in July 2023 it increased to 7.20%. CAPITAL INVESTMENT PLAN For fiscal 2024, the Corporation’s planned capital spending is expected to be between $15.0 and $17.0 million on a consol- idated basis, including the expenditures associated with the Villeray acquisition. This guidance includes both strategic and maintenance capital requirements to support existing base business in both Canada and the UK. 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. Since 2020, due to changing government restrictions to mitigate the ongoing COVID-19 pandemic, supply chain disruption, geopolitical events impacting key inputs such as natural gas, electricity and diesel and inflationary impacts to labour and materials the Corporation has faced varying degrees of financial impact within Canada and the UK. The COVID-19 pandemic has also contributed to unusu- ally competitive labour markets, causing inefficiencies in attracting, training and retaining employees. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability. 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. 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. IMPAIRMENT OF ASSETS The Corporation performed its annual impairment assess- ment for goodwill for the Canadian division and for the UK division as at December 31, 2023 and December 31, 2022 in accordance with its policy described in Note 2(k) and Note 2(h). The Corporation also performed impairment indicator assess- ments where there was no goodwill allocated to the CGU. For both periods, the recoverable amount for the CGUs was assessed using an earnings multiple approach. For the year ended December 31, 2023, if the result of the earnings multiple approach indicated there was a possible impair- ment, a discounted cash flow was performed. Earnings multiple approach (Fair value less costs to dispose, “FVLCD”) For the years ended December 31, 2023 and 2022, the key assumption utilized was the implied multiple. The implied multiple is calculated by utilizing the average multiples of comparable public companies. The Corporation used an implied average forward multiple of 9.70 (2022 - 10.60) to calculate the recoverable amounts. The implied multiple was applied to the trailing twelve month EBITDA to deter- mine the recoverable amount of the CGU and compare it to the carrying value of the CGU. We Are Dependable.19 Based on the assessments performed for the year ended December 31, 2023, no CGU had a recoverable amount that was less than the carrying value of the CGU. A further assessment using a discounted cash flow to determine the value-in-use was not performed due to the headroom from FVLCD determined using an earnings multiple approach. Discounted cash flow (Value-in-use, “VIU”) Where the results of the FVLCD approach indicated there was a possible impairment, a further assessment using a discounted cash flow was performed to determine the VIU of each VGU identified. For the year ended December 31, 2022, the Corporation used probability weighted discounted cash flows and the assumptions for those cash flows were the Corporation’s board approved budgets, cash flow forecasts, trailing twelve-month EBITDA, the pre-tax discount rate and terminal value growth rate. The probability weighted approach used for the year ended December 31, 2022 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. The terminal value growth rate is based on management's best estimate of the long-term growth rate for its CGUs after the forecast period, considering historic performance and future economic forecasts. The calculation of the recoverable amount was based on the following key assumptions: Calgary Edmonton Vancouver 2 Vancouver 1 Victoria Paranet Villeray UK Testing Methodology December 31, 2022 Pre-tax Discount Rate December 31, 2022 Terminal Value Growth Rate December 31, 2022 FVLCD FVLCD FVLCD FVLCD FVLCD n/a n/a VIU n/a n/a n/a n/a n/a n/a n/a 15.4% n/a n/a n/a n/a n/a n/a n/a 2.0% Based on testing performed at December 31, 2023 and December 31, 2022, no impairment was determined to exist. Recoverable amount The recoverable amount of each CGU is sensitive to changes in market conditions which could result in material changes. For the year ended December 31, 2022, where further assessment using the probability weighted discounted cash flows was required the sensitivity of key assumptions to a reasonable change was assessed. 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 summarizes the results of the impact on key assumptions to a reasonable change. 2023 Annual Report Recoverable Amount December 31, 2022 Change in Pre-tax Discount Rate Increase of 1% December 31, 2022 Change in Terminal Value Growth Rate Decrease of 1% December 31, 2022 20 n/a n/a n/a n/a n/a n/a n/a £50,261 n/a n/a n/a n/a n/a n/a n/a -£4,201 n/a n/a n/a n/a n/a n/a n/a -£4,458 Calgary Edmonton Vancouver 2 Vancouver 1 Victoria Paranet Villeray UK Outlook The Corporation’s healthcare and hospitality segments continues to experience steady growth trends. For the healthcare segment, management expects activity levels to remain strong from continued focus on reducing wait times and enhancing patient care. For the hospitality segment, management expects solid activity levels from both business and leisure travel reflecting historical seasonal trends. The volatility we encountered from energy prices, local labour market shortages and cost inflation throughout the pandemic has stabilized. In early 2022, particularly in the UK, the Corporation faced significant volatility in energy costs due to geopolitical issues. In April 2022, to mitigate this instability, the Corporation locked in natural gas supply rates in the UK until December 2024. The Corporation also faced temporary labour inefficiencies from unusually competitive labour markets. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability. The Corporation is managing more challenging regional labour availability with complementary temporary foreign worker programs and has seen positive staffing support in this regard. Throughout 2023, EBITDA margins have benefited from stronger client activity, price increases that we have secured to offset inflation-related costs, the completion of the AHS transition, operating efficiencies, and lower delivery costs. Going forward, management expects EBITDA margins to follow historical seasonal trends. With continued momentum in existing operations, manage- ment has refocused attention on strategic acquisitions, such as the acquisitions of Villeray and 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 other economic factors on our business, see the “Summary of 2023 Results and Key Events”. We Are Dependable. 21 Results of Operations KEY PERFORMANCE DRIVERS K-Bro’s key performance drivers focus on growth, profitability, stability and cost containment in order to maintain dividends and maximize Shareholder value in the long term. The following outlines our results on a period-to-period comparative basis in each of these areas: Three Months Ended December 31, Canadian Division 2023 UK Division 2023 51.2% 39.0% 15.9% 161.7% 161.7% 19.4% 11,712 18.6% 10,767 17.1% 3,341 2,567 13.2% 2,567 13.2% 908 ($ Thousands of CDN dollars, except percentages and per share amounts) Category Indicator Growth Profitability Stability EBITDA(1) Adjusted EBITDA(2) Revenue Distributable cash flow(3) EBITDA(1) EBITDA margin Adjusted EBITDA(2) Adjusted EBITDA margin Net earnings (loss) Debt to total capital(4) Unutilized line of credit Cash on hand Payout ratio Dividends declared per share Cost containment Wages and benefits Utilities Delivery Expenses included in EBITDA 40.2% 6.0% 11.8% 81.4% 33.3% 12.6% 14.2% 86.8% Canadian Division 2022 UK Division 2022 -0.6% -0.6% 13.3% -13.9% -13.9% 14.5% 7,745 14.2% 7,745 14.2% 822 981 6.0% 981 6.0% (542) 41.0% 6.8% 13.1% 85.8% 35.4% 14.3% 16.1% 94.0% 2022 -2.3% -2.3% 13.6% -54.2% 8,726 12.3% 8,726 12.3% 280 20.6% 52,998 2,636 106.9% 0.300 39.7% 8.5% 13.8% 87.7% 2023 63.6% 52.8% 16.7% 138.7% 14,279 17.3% 13,334 16.2% 4,249 29.4% 52,884 5,857 44.4% 0.300 38.6% 7.5% 12.4% 82.7% 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 Adjusted EBITDA (as defined below) is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See “Terminology” for a complete description of the adjusted items. 3 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. 4 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”. 2023 Annual Report 22 Canadian Division 2023 UK Division 2023 38.1% 35.2% 13.7% 193.4% 193.4% 23.5% 44,699 18.5% 43,754 18.1% 12,584 12,107 15.2% 12,107 15.2% 5,023 ($ Thousands of CDN dollars, except percentages and per share amounts) Category Indicator Growth Profitability Stability EBITDA(1) Adjusted EBITDA(2) Revenue Distributable cash flow(3) EBITDA(1) EBITDA margin Adjusted EBITDA(2) Adjusted EBITDA margin Net earnings (loss) Debt to total capital(4) Unutilized line of credit Cash on hand Payout ratio Dividends declared per share Cost containment Wages and benefits Utilities Delivery Expenses included in EBITDA 40.2% 6.2% 11.5% 81.5% 33.3% 12.7% 13.8% 84.8% Year Ended December 31, Canadian Division 2022 UK Division 2022 -18.4% -18.4% 15.8% 32.6% 32.6% 57.8% 32,365 15.3% 32,365 15.3% 6,042 4,127 6.4% 4,127 6.4% (2,136) 41.2% 6.4% 12.8% 84.7% 36.4% 15.7% 15.8% 93.6% 2023 55.7% 53.1% 16.0% 65.4% 56,806 17.7% 55,861 17.4% 17,607 29.4% 52,884 5,857 39.8% 1.200 38.5% 7.8% 12.1% 82.3% 2022 -14.7% -14.7% 23.5% -28.8% 36,492 13.2% 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 Adjusted EBITDA (as defined below) is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See “Terminology” for a complete description of the adjusted items. 3 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. 4 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”. We Are Dependable. 23 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) 2023 2022 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) Adjusted EBITDA(2) Adjusted EBITDA as a % of revenue (Adjusted EBITDA margin) Depreciation and amortization Finance expense Earnings (loss) before income taxes Income tax expense (recovery) Net earnings (loss) Net earnings (loss) as a % of revenue Basic earnings (loss) per share Diluted earnings (loss) per share 48,451 34,013 82,464 68,185 14,279 17.3% 13,334 46,621 45,445 40,271 35,300 86,892 80,745 43,823 26,960 70,783 69,199 66,244 17,693 14,501 20.4% 18.0% 17,693 14,501 60,450 10,333 14.6% 10,333 43,963 26,708 70,671 61,945 8,726 12.3% 8,726 42,683 30,945 73,628 43,523 43,237 27,367 18,197 70,890 61,434 62,607 11,021 15.0% 11,021 61,207 54,372 9,683 7,062 13.7% 11.5% 7,062 9,683 16.2% 20.4% 18.0% 14.6% 12.3% 15.0% 13.7% 11.5% 7,298 1,732 5,249 1,000 4,249 5.2% 0.399 0.396 6,872 1,860 8,961 2,294 6,667 7.7% 0.627 0.622 6,803 1,584 6,114 1,423 4,691 5.8% 0.438 0.436 6,321 1,473 2,539 539 2,000 2.8% 0.187 0.186 6,505 1,639 582 302 280 0.4% 0.026 0.026 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) Total assets Total long-term financial liabilities 364,716 132,773 341,662 346,532 337,277 113,262 122,178 112,628 325,760 321,527 329,677 325,041 105,744 100,408 106,327 99,302 Funds provided by operations Long-term debt (excludes lease liabilities) Dividends declared per share 7,817 70,247 0.300 22,758 1,122 55,162 63,598 0.300 0.300 9,308 53,713 0.300 1,049 45,166 0.300 11,530 39,141 0.300 3,838 9,713 45,224 36,615 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”. 2 Adjusted EBITDA (as defined below) is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See “Terminology” for a complete description of the adjusted items 2023 Annual Report24 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) Adjusted EBITDA(2) Adjusted EBITDA as a % of revenue (Adjusted EBITDA margin) 2023 2022 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 46,952 16,138 63,090 51,378 11,712 18.6% 10,767 44,962 18,417 63,379 43,681 15,480 59,161 42,243 13,256 55,499 50,455 12,924 20.4% 12,924 48,456 10,705 18.1% 10,705 46,141 9,358 16.9% 9,358 42,419 12,032 54,451 46,707 7,745 14.2% 7,745 41,197 13,870 55,067 41,936 11,347 53,283 46,037 9,030 16.4% 9,030 45,212 8,071 15.1% 8,071 41,687 7,547 49,234 41,715 7,519 15.3% 7,519 17.1% 20.4% 18.1% 16.9% 14.2% 16.4% 15.1% 15.3% Net earnings Net earnings as a % of revenue Basic earnings per share Diluted earnings per share 3,341 5.3% 0.314 0.311 4,169 6.6% 0.392 0.389 2,829 4.8% 0.264 0.263 2,245 4.0% 0.210 0.209 822 1.5% 0.077 0.076 2,122 3.9% 0.199 0.197 1,669 3.1% 0.157 0.156 1,429 2.9% 0.134 0.134 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 Adjusted EBITDA (as defined below) is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See “Terminology” for a complete description of the adjusted items. We Are Dependable.25 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) 2023 2022 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) Adjusted EBITDA(2) Adjusted EBITDA as a % of revenue (Adjusted EBITDA margin) 1,499 17,875 19,374 16,807 2,567 13.2% 2,567 1,659 21,854 23,513 1,764 19,820 21,584 1,580 13,704 15,284 18,744 4,769 20.3% 4,769 17,788 3,796 17.6% 3,796 14,309 975 6.4% 975 1,544 14,676 16,220 15,239 981 6.0% 981 1,486 17,075 18,561 1,587 16,020 17,607 1,550 10,650 12,200 16,570 1,991 10.7% 1,991 15,995 1,612 9.2% 1,612 12,657 (457) -3.7% (457) 13.2% 20.3% 17.6% 6.4% 6.0% 10.7% 9.2% -3.7% Net income (loss) Net income (loss) as a % of revenue Basic earnings (loss) per share Diluted earnings (loss) per share 908 4.7% 0.085 0.085 2,498 10.6% 0.235 0.235 1,862 8.6% 0.174 0.173 (245) -1.6% (0.023) (0.023) (542) -3.3% (0.051) (0.050) 334 1.8% 0.031 0.031 (53) -0.3% (0.005) (0.005) (1,875) -15.4% (0.176) (0.175) Quarterly Financial Information - UK Division (in local currency Sterling £) (Thousands, except percentages and per share amounts) 2023 2022 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) Adjusted EBITDA(2) Adjusted EBITDA as a % of revenue (Adjusted EBITDA margin) 886 10,570 11,456 9,939 1,517 13.2% 1,517 977 12,877 13,854 1,049 11,787 12,836 11,042 2,812 20.3% 2,812 10,578 2,258 17.6% 2,258 962 8,341 9,303 8,711 592 6.4% 592 967 9,200 10,167 987 11,327 12,314 1,005 10,153 11,158 912 6,267 7,179 9,553 614 6.0% 614 10,994 1,320 10.7% 1,320 10,134 1,024 9.2% 1,024 7,448 (269) -3.7% (269) 13.2% 20.3% 17.6% 6.4% 6.0% 10.7% 9.2% -3.7% Net income (loss) Net income (loss) as a % of revenue Basic earnings (loss) per share Diluted earnings (loss) per share 536 4.7% 0.051 0.051 1,476 10.6% 0.139 0.138 1,108 8.6% 0.103 0.103 (151) -1.6% (0.014) (0.014) (341) -3.3% (0.032) (0.032) 221 1.8% 0.021 0.020 (32) -0.3% (0.003) (0.003) (1,103) -15.4% (0.104) (0.103) 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 Adjusted EBITDA (as defined below) is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. See “Terminology” for a complete description of the adjusted items. 2023 Annual Report26 REVENUE, EARNINGS & EBITDA OPERATING EXPENSES For the year ended December 31, 2023, K-Bro’s consolidated revenue increased by 16.0% to $320.9 million from $276.6 million in the comparative period. This increase was primarily due to increased client activity in the hospitality segment, the impact of price increases across various markets to offset inflation-related costs and the acquisitions of Paranet and Villeray. In 2023, approximately 57.5% of K-Bro’s consol- idated revenue was generated from healthcare institutions, which is lower compared to 62.7% in 2022. The change in revenue mix is primarily related to the increased activity in the hospitality segment due to an uptick in leisure travel and the business travel recovery in certain markets. Consolidated EBITDA increased in the year to $56.8 million from $36.5 million in 2022, which is a increase of 55.7%. The consolidated EBITDA margin increased to 17.7% in 2023 compared to 13.2% in 2022. The increase in margin is primarily related the impact of price increases imple- mented, as well as increased productivity and delivery route optimization coupled with lower fuel costs. The increase in EBITDA margin was also due to the gain on settlement of contingent consideration. This relates to the derecognition of contingent consideration for the Paranet acquisition since it will not be paid out. This gain is a non-cash item outside of core operations. Consolidated adjusted EBITDA increased in the year to $55.9 million from $36.5 million in 2022, which is a increase of 53.1%. The consolidated EBITDA margin increased to 17.4% in 2023 compared to 13.2% in 2022. The increase in margin is primarily related the impact of price increases imple- mented, as well as increased productivity and delivery route optimization coupled with lower fuel costs. Net earnings increased by $13.7 million or 350.8% from $3.9 million in 2022 to $17.6 million in 2023, and net earnings as a percentage of revenue increased by 4.1% to 5.5% in 2023 from 1.4% in 2022. The change in net earnings is primarily related to the flow through items in EBITDA discussed. In addition, the derecognition of contingent consideration for Paranet resulted in a non-recurring gain of $0.9 million. Wages and benefits increased by $12.4 million to $123.4 million compared to $111.0 million in the comparative period of 2022, and as a percentage of revenue decreased by 1.6 percentage points to 38.5%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured across various markets and labour efficiencies achieved. Linen increased by $1.7 million to $33.0 million compared to $31.3 million in the comparative period of 2022, and as a percentage of revenue decreased by 1.0 percentage points to 10.3%. The decrease as a percentage of revenue is primarily related to the changes to the mix of linen and higher hospitality volumes processed compared to the prior year. Utilities increased by $1.3 million to $25.1 million compared to $23.8 million in the comparative period of 2022, and as a percentage of revenue decreased by 0.8 percentage points to 7.8%. The decrease as a percentage of revenue is primarily related to the impact of price increases secured, the UK natural gas hedge which was put in place during Q2 2022. Delivery increased by $1.4 million to $38.7 million compared to $37.3 million in the comparative period of 2022, and as a percentage of revenue decreased by 1.4 percentage points to 12.1%. The decrease as a percentage of revenue is primarily related to the optimization of high-frequency routes, resulting in delivery cost efficien- cies as well as lower fuel prices. Occupancy costs increased by $0.9 million to $5.4 million compared to $4.5 million in the comparative period of 2022, and as a percentage of revenue remained relatively constant at 1.7%. The increase in spending is largely related to increased facility rent as well as costs associ- ated with the Granby facility transition to Villeray. We Are Dependable.27 Materials and supplies increased by $1.2 million to $12.1 million compared to $10.9 million in the comparative period of 2022, and as a percentage of revenue remained relatively constant at 3.8%. Repairs and maintenance increased by $2.4 million to $12.8 million compared to $10.4 million in the comparative period of 2022, and as a percentage of revenue remained relatively constant at 4.0%. Corporate costs increased by $3.4 million to $14.4 million compared to $11.0 million in the comparative period of 2022, and as a percentage of revenue increased by 0.5 percentage points to 4.5%. The increase as a percentage of revenue is primarily related to financing costs, compliance related advisory and professional fees along with acquisi- tion related costs for Villeray and Paranet. Gain on settlement of contingent consideration relates to the derecognition of the contingent consideration for Paranet since it will not be paid out. The derecognition of this liability resulted in a non-recurring gain which is non-cash in nature. 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. Liquidity & Capital Resources In 2023, cash generated by operating activities was $41.0 million with a debt to total capitalization of 29.4%. The change in cash from operations is primarily due to the change in working capital items driven from timing of business activity, including the timing of cash receipts from customers. includes working The Corporation’s capital structure 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 unutilized balance of $52.9 million with respect to its revolving credit facility is sufficient for the Corporation’s operations in the foresee- able future. However, management intends to continually assess its opportunities to maintain a conservative amount of leverage and balance sheet flexibility in the short and long term basis in order to ensure that sufficient capital is available for future growth needs. During 2023, cash used in financing activities was $3.7 million compared to $13.1 million in 2022. Financing activ- ities consisted of net proceeds from the revolving credit facility, dividends paid to Shareholders, principal elements of lease payments, and the repurchase of shares under the Normal Course Issuer Bid. During 2023, cash used in investing activities was $34.3 million compared to $11.4 million in 2022. The increase in investing activities is primarily related to the acquisitions of Villeray and Paranet. Investing activities are also related to the purchase of plant equipment. 2023 Annual Report28 CONTRACTUAL OBLIGATIONS Payments due under contractual obligations for the next five years and thereafter are as follows: ($ Thousands of CDN dollars) Total 2024 Payments Due by Year 2025 to 2026 2027 to 2028 Subsequent Long-term debt Lease liabilities Utility commitments Linen purchase obligations Property, plant and equipment commitments 70,247 58,914 15,599 9,434 9,396 - 11,811 11,278 9,434 9,396 - 18,104 4,321 - - 70,247 13,635 - - - - 15,364 - - - 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, 2023. 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) 2023 2022 Cash and cash equivalents Long-term debt (excludes lease liabilities) Shareholders’ equity Total capital Debt to total capital (see Terminology for definition) (5,857) 70,247 (2,636) 45,166 174,431 238,821 29.4% 176,542 219,072 20.6% For the period ended December 31, 2023, the Corporation had a debt to total capital of 29.4%, unused revolving credit facility of $52.9 million and has not incurred any events of default under the terms of its credit facility. As at December 31, 2023, the Corporation had net working capital of $41.4 million compared to its working capital position of $36.6 million at December 31, 2022. The increase in working capital is primarily attributable to the timing of cash receipts from customers and the timing of linen purchases, as well as the acquisition of Paranet and Villeray. 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. We Are Dependable. 29 Dividends Fiscal Period Payment Date # of Shares Outstanding Amount Per Share 2023 Total Amount (1)(3)(5)(7) 2022 Amount Per Share Total Amount (2)(4)(6)(8) February 15 March 15 April 14 May 15 June 15 July 14 August 15 September 15 October 14 November 15 December 15 January 13 10,773,190 10,773,190 10,773,190 10,773,190 10,820,662 10,781,779 10,768,585 10,761,089 10,731,707 10,701,629 10,669,747 10,635,473 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 1,077 1,077 1,077 3,231 1,077 1,082 1,078 3,237 1,078 1,077 1,073 3,228 1,070 1,067 1,063 3,200 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 1.20000 12,896 1.20000 12,905 1 The total amount of dividends declared was $0.10000 per share for a total of $1,077,319 per month for January - March 2023; when rounded in thousands, $3,231 of dividends were declared in Q1 2023. 2 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. 3 The total amount of dividends declared was $0.10000 per share for a total of $1,077,319 for April 2023, $1,082,066 for May 2023, and $1,078,178 for June 2023. When rounded in thousands, $3,237 of dividends were declared in Q2 2023. 4 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. 5 The total amount of dividends declared was $0.10000 per share for a total of $1,076,859 for July 2023, $1,076,109 for August 2023, and $1,073,171 for September 2023. When rounded in thousands, $3,228 of dividends were declared in Q3 2023. 6 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. 7 The total amount of dividends declared was $0.10000 per share for a total of $1,070,163 for October 2023, $1,066,975 for November 2023, and $1,063,547 for December 2023. When rounded in thousands, $3,201 of dividends were declared in Q4 2023. 8 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. For the year ended December 31, 2023, the Corporation declared a $1.200 per Common Share dividend compared to $3.037 per Common Share of Distributable Cash Flow (see “Terminology”). The actual payout ratio was 39.8%. 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. 2023 Annual Report 30 Distributable Cash Flow (see Terminology) (all amounts in this section in $000s except per share amounts and percentages) The Corporation’s source of cash for dividends is distributable cash flow provided by operating activities. Distributable cash flow, reconciled to cash provided by operating activities as calculated under IFRS Accounting Standards, is presented as follows: ($ Thousands of CDN dollars, except percentages and per share amounts) 2023 2022 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Cash provided by operating activities 7,817 22,758 1,122 9,308 1,049 11,530 3,838 9,713 Deduct (add): Net changes in non-cash working capital items(1) Share-based compensation expense Maintenance capital expenditures(2) Principle elements of lease payments (3,448) 410 1,103 2,547 8,344 (11,615) 443 1,143 2,340 438 379 2,360 606 505 936 2,144 (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 Distributable cash flow 7,205 11,237 8,811 5,117 3,019 7,534 5,440 3,579 Dividends declared Dividends declared per share Payout ratio(3) 3,200 0.300 44.4% 3,228 0.300 28.7% 3,237 0.300 36.7% 3,231 0.300 63.1% 3,227 0.300 106.9% 3,234 0.300 42.9% 3,228 0.300 59.3% 3,216 0.300 89.9% 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) 10,510 10,645 10,706 10,707 10,675 10,659 10,650 10,641 10,588 10,729 10,760 10,733 10,751 10,750 10,716 10,703 32,370 12,896 39.8% 28,184 12,923 45.9% 24,481 12,929 52.8% 21,110 12,920 61.2% 19,572 12,905 65.9% 23,148 12,894 55.7% 23,502 25,675 12,875 12,859 50.1% 54.8% 1 Net change 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. Outstanding Shares As at December 31, 2023, the Corporation had 10,635,473 Common Shares outstanding. Basic and diluted weighted average number of Common Shares outstanding for 2023 were 10,663,949 and 10,733,256, respectively (10,657,742 and 10,735,269, respectively, for the comparative 2022 periods). In accordance with the Corporation’s Long Term Incentive (“LTI”) plan and in conjunction with the performance of the Corporation in the 2022 fiscal year, on April 13, 2023 the Compensation, Nominating and Corporate Governance Committee approved LTI compensation of $1.8 million (2022 – $1.8 million) to be paid as Common Shares issued from We Are Dependable. 31 treasury. As at December 31, 2023, the value of the Common Shares held by the LTI custodian was $2.5 million (December 31, 2022 – $1.9 million) which was comprised of 76,900 in unvested Common Shares (December 31, 2022 – 64,552) with a nil aggregate cost (December 31, 2022 – $nil). As at March 21, 2024 there were 10,583,007 Common Shares issued and outstanding including 76,900 Common Shares issued but held as unvested treasury shares. Related Party Transactions 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, 2023, the Corporation incurred fees totaling $72,000 compared to $72,000 for the same period of fiscal 2022. Critical Accounting Estimates The preparation of the financial statements, in confor- mity with IFRS Accounting Standards, requires K-Bro to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contin- gent assets and liabilities at the date of the financial state- ments and the reported amounts of revenues and expenses during the reported period. Management regularly evalu- ates these estimates and assumptions which are based on past experience and other factors that are deemed reasonable under the circumstances. This involves varying judgment and uncertainty and, therefore, degrees of amounts currently reported in the financial statements could differ in the future. Further to those areas discussed in the Corporation’s 2022 audited financial statements and annual MD&A, determining the lease term and incremental borrowing rates under IFRS 16 requires critical judgments as well as assumptions that have been incorporated into any asset impairment testing models. ECONOMIC CONDITIONS Since 2020, due to changing government restrictions to mitigate the ongoing COVID-19 pandemic, supply chain disruption, geopolitical events impacting key inputs such as natural gas, electricity and diesel and inflationary impacts to labour and materials the Corporation has faced varying degrees of financial impact within Canada and the UK. The COVID-19 pandemic has also contributed to unusu- ally competitive labour markets, causing inefficiencies in attracting, training and retaining employees. While the Corporation anticipates labour markets will stabilize, the timing remains uncertain and until such time as labour markets stabilize the Corporation will continue to be impacted financially by these conditions. 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. Uncertainty about judgments, estimates and assumptions made by manage- ment during the preparation of the Corporation’s consol- idated 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. Terminology EBITDA K-Bro reports EBITDA (Earnings before interest, taxes, depreciation and amortization) as a key measure used by management to evaluate performance. EBITDA is utilized to measure compliance with debt covenants and to make decisions related to dividends to Shareholders. We believe EBITDA assists investors to assess our performance on a consistent basis as it is an indication of our capacity to generate income from operations before taking into account management’s financing decisions and costs of consuming tangible and intangible capital assets, which vary according to their vintage, technological currency and management’s estimate of their useful life. Accordingly, EBITDA comprises revenues less operating costs before financing costs, capital asset and intangible asset amortization, and income taxes. EBITDA is a sub total presented within the statement of earnings in accordance with the amendments made to IAS 1 which became effective January 1, 2016. EBITDA is not considered an alternative to net earnings in measuring K-Bro’s performance. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt changes and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. 2023 Annual Report32 Three Months Ended December 31, Years Ended December 31, 2023 4,249 1,000 1,732 7,043 255 14,279 2022 280 302 1,639 6,120 385 8,726 2023 17,607 5,256 6,649 26,669 625 56,806 2022 3,906 1,538 4,980 23,766 2,302 36,492 ($ Thousands of CDN dollars) Net earnings Add: Income tax expense Finance expense Depreciation of property, plant and equipment Amortization of intangible assets EBITDA NON-GA AP MEASURES ADJUSTED EBITDA Adjusted EBITDA is a measure which has been reported in order to assist in the comparison of historical EBITDA to current results. “Adjusted EBITDA” is defined as EBITDA (defined above) with the exclusion of certain material items that are unusual in nature, infrequently occurring or not considered part of our core operations. ($ Thousands of CDN dollars, except percentages and per share amounts) Three Months Ended December 31, Canadian Division 2023 UK Division 2023 Canadian Division 2022 UK Division 2022 2023 EBITDA Deduct non-recurring items: Gain on settlement of contingent consideration Adjusted EBITDA 11,712 2,567 14,279 (945) 10,767 - 2,567 (945) 13,334 7,745 - 7,745 981 - 981 ($ Thousands of CDN dollars, except percentages and per share amounts) Canadian Division 2023 UK Division 2023 Canadian Division 2022 UK Division 2022 2023 Years Ended December 31, 2022 8,726 - 8,726 2022 EBITDA Deduct non-recurring items: Gain on settlement of contingent consideration Adjusted EBITDA 44,699 12,107 56,806 32,365 4,127 36,492 (945) 43,754 - 12,107 (945) 55,861 - 32,365 - 4,127 - 36,492 We Are Dependable. 33 DISTRIBUTABLE CASH FLOW Distributable cash flow is a measure used by manage- ment to evaluate the Corporation’s performance. While the closest IFRS Accounting Standards measure is cash provided by operating activities, distributable cash flow is considered relevant because it provides an indication of how much cash generated by operations is available after capital expenditures. It should be noted that although we consider this measure to be distributable cash flow, financial and non financial covenants in our credit facilities and dealer agree- ments may restrict cash from being available for dividends, re-investment in the Corporation, potential acquisitions, or other purposes. Investors should be cautioned that distrib- utable cash flow may not actually be available for growth or distribution from the Corporation. Management refers to “Distributable cash flow” as to cash provided by (used in) operating activities with the addition of net changes in non cash working capital items, less share based compensation, maintenance capital expenditures and principal elements of lease payments. PAYOUT RATIO “Payout ratio” is defined by management as the actual cash dividend divided by distributable cash. This is a key measure used by investors to value K-Bro, assess its performance and provide an indication of the sustainability of dividends. The payout ratio depends on the distributable cash and the Corporation’s dividend policy. DEBT TO TOTAL CAPITAL “Debt to total capital” is defined by management as the total long term debt (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 Accounting Standards and are not considered an alternative to IFRS Accounting Standards measures in measuring K-Bro’s performance. Distributable cash flow, and payout ratio do not have standardized meanings in IFRS Accounting Standards and are therefore not likely to be comparable with similar measures used by other issuers. OFF BAL ANCE SHEET ARRANGEMENTS As at December 31, 2023, the Corporation has not entered into any off balance sheet arrangements. New Accounting Pronouncements Adopted The Corporation adopted the following accounting standards and amendments that were effective for our annual consol- idated financial statements commencing January 1, 2023. · 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. This change did not have an impact on our financial results and is not expected to have a material impact in the future. · Amendments to IAS 12, Accounting Policies, relates to a temporary exception to the requirements regarding deferred tax assets and liabilities related to pillar two income taxes. This change did not have an impact on our financial results and is not expected to have a material impact in the future. · Amendments to IAS 1, Presentation of Financial Statements – Disclosure of Accounting Policies, related to the disclosure of material rather than signif- icant accounting policies. This change was applied to accounting policy disclosure within Note 2. · Amendments to IAS 8, Accounting Policies – Changes in Accounting Estimates and Errors, related to the defini- tion of accounting estimates. This change did not have an impact on our financial results and is not expected to have a material impact in the future. Recent Accounting 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. 2023 Annual Report34 · 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 IFRS 16, Lease Liability in a Sale and Leaseback, clarifying the measurement of a lease liability by the seller in a sale and leaseback transaction. 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 Corporation’s consolidated financial statements. The 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. Critical Risks & Uncertainties As at December 31, 2023, there are no material changes in the Corporation’s risks or risk management activities since December 31, 2022. 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: 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 successfully integrate and operate additional businesses; utility costs; the labour markets; the fact that our credit facility imposes numerous covenants and encumbers assets; and, environmental matters. 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.sedarplus.ca. Controls & Procedures In order to ensure that information with regard to reports filed or submitted under securities legislation present fairly in all material respects the financial information of K-Bro, management, including the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), are responsible for establishing and maintaining disclosure controls and procedures, as well as internal control over financial reporting. DISCLOSURE CONTROLS & PROCEDURES The Corporation has established disclosure controls and procedures to ensure that information disclosed in this MD&A and the related financial statements of K-Bro was properly recorded, processed, summarized and reported to the Board of Directors and the Audit Committee. The Corporation’s CEO and CFO have evaluated the effective- ness of these disclosure controls and procedures for the period ended December 31, 2023, 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 period ended December 31, 2023, 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, 2023, 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. We Are Dependable.35 Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions. LIMITATION ON SCOPE OF DESIGN K-Bro has limited the scope of design of DCP and our Internal Controls over Financial Reporting (ICFR) to exclude controls, policies and procedures of Paranet acquired on March 1, 2023 and Villeray acquired on November 1, 2023. The scope limita- tion is in accordance with section 3.3(1)(b) of NI 52-109 which allows an issuer to limit its design of ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the end of the fiscal period. Paranet ($ Thousands, except percentages) As at December 31, 2023 Villeray ($ Thousands, except percentages) As at December 31, 2023 Current assets Non-current assets Current liabilities Non-current liabilities 2,774 13,115 1,094 2,869 Current assets Non-current assets Current liabilities Non-current liabilities 2,352 15,230 1,257 2,803 Paranet ($ Thousands, except percentages) As at December 31, 2023 Villeray ($ Thousands, except percentages) As at December 31, 2023 Revenue Expense Income from Operations 7,819 8,579 (760) Revenue Expense Income from Operations 1,602 1,902 (300) 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.sedarplus.ca; 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.sedarplus.ca, le site Web du Système électronique de données, d’analyse et de recherche (« SEDAR »). 2023 Annual Report 36 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 37 Independent Auditor’s Report 42 Consolidated Statements of Financial Position 43 Consolidated Statements of Earnings & Comprehensive Income 44 Consolidated Statements of Changes in Equity 45 Consolidated Statements of Cash Flow 46 Notes to the Consolidated Financial Statements 76 Corporate Information We Are Dependable.37 2023 Annual Report38 We Are Dependable.39 2023 Annual Report40 We Are Dependable.41 2023 Annual ReportConsolidated Statements of Financial Position 42 ($ 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) Share repurchase liability (note 16) 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 Share repurchase deficit Contributed surplus Deficit Accumulated other comprehensive loss Contingencies and commitments (note 15) December 31, 2023 December 31, 2022 5,857 50,306 - 7,443 35,288 98,894 718 99,612 206,798 9,406 48,900 364,716 38,166 206 3,967 12,023 2,086 1,064 57,512 70,247 41,275 2,964 18,287 190,285 206,453 (6,586) 2,252 (27,521) (167) 174,431 364,716 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 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors Elise Rees, Director Matthew Hills, Director We Are Dependable. 43 Consolidated Statements of Earnings & Comprehensive Income Years Ended December 31, ($ Thousands of CDN dollars, except share and per share amounts) REVENUE Expenses Wages and benefits Delivery Linen (note 6) Utilities Corporate Materials and supplies Repairs and maintenance Occupancy costs Gain on settlement of contingent consideration (note 27) Remeasurement expense (gain) 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 (loss) 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 The accompanying notes are an integral part of these consolidated financial statements. 2023 320,884 123,394 38,748 32,982 25,124 14,412 12,141 12,758 5,432 (945) 32 264,078 56,806 26,669 625 6,649 33,943 22,863 4,002 1,254 5,256 17,607 1,845 19,452 1.65 1.64 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 10,663,949 10,733,256 10,657,742 10,735,269 2023 Annual Report 44 Consolidated Statements of Changes in Equity ($ Thousands of CDN dollars) As at December 31, 2022 Total comprehensive income Dividends declared (note 19) Employee share based compensation expense (note 25) Repurchase of shares (note 16) Share repurchase liability (note 16) Shares vested during the year As at December 31, 2023 Total Share Capital Share Repurchase Deficit Contributed Surplus Accumulated Other Comprehensive Income (loss) Deficit 208,463 - - - (3,877) - 1,867 206,453 - - - - (2,619) (3,967) - (6,586) 2,323 - - 1,796 - - (1,867) 2,252 (32,232) 17,607 (12,896) - - - - (27,521) (2,012) 1,845 - - - - - (167) ($ Thousands of CDN dollars) As at December 31, 2021 Total comprehensive loss Dividends declared (note 19) Employee share based compensation expense (note 25) Shares forfeited during the year Shares vested during the year As at December 31, 2022 Total Share Capital Share Repurchase Deficit Contributed Surplus Accumulated Other Comprehensive Income (loss) Deficit 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) The accompanying notes are an integral part of these Consolidated Financial Statements. Total Equity 176,542 19,452 (12,896) 1,796 (6,496) (3,967) - 174,431 Total Equity 186,401 1,258 (12,905) 1,788 - - 176,542 We Are Dependable. 45 Consolidated Statements of Cash Flow 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 Gain on settlement of contingent consideration (note 27) Deferred income tax expense Change in non-cash working capital items (note 20) Cash provided by operating activities FINANCING ACTIVITIES Net proceeds from revolving debt (note 11) Repurchase of shares (note 16) Principle elements of lease payments 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) Acquisition of businesses, net of cash (note 27, 28) 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. 2023 17,607 26,669 625 80 1,796 32 (945) 1,254 47,118 (6,113) 41,005 25,081 (6,496) (9,391) (12,911) (3,717) (11,493) 1 (493) (22,278) (34,263) 3,025 196 2,636 5,857 6,318 - 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 2023 Annual Report Notes to the Consolidated Financial Statements (Thousands of Canadian dollars except share and per share amounts, Years ended December 31, 2023 and 2022) 46 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 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. in Canada The Corporation’s operations include ten processing facilities and two distribution centres under two distinctive brands, including K-Bro Linen Systems Inc. and Buanderie HMR, 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, healthcare, manufacturing and pharma- ceutical sectors. Fishers' client base includes major hotel chains and prestigious venues across Scotland and the North of England. The company operates in five cities in Scotland and the North 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, 2024. 1. BASIS OF PRESENTATION These Consolidated Financial Statements of the Corporation have been prepared in accordance with IFRS Accounting Standards as International Accounting Standards Board (IFRS Accounting Standards). The preparation of financial statements in conformity with issued by the IFRS Accounting Standards 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. MATERIAL 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. 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. We Are Dependable.47 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 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. 2023 Annual Report 48 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 categories 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. H) IMPAIRMENT OF NON-FINANCIAL ASSETS Property, plant and equipment and intangible assets are tested for impairment when events or changes in circum- stances indicate that the carrying amount may not be recov- erable. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating unit or “CGU”). The recoverable amount is the higher of an asset's fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount 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. We Are Dependable. 49 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. J) BUSINESS COMBINATIONS Business combinations are accounted for using the acqui- sition method. The acquired identifiable net assets are measured at their fair value at the date of acquisition. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price below the fair value of the net assets acquired is recorded as a gain in net earnings. Associated transaction costs are expensed when incurred. K) GOODWILL Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the identifiable assets acquired, less liabilities assumed, based on their estimated fair values at the acquisition date. Goodwill is allocated as of the date of the business combination. Goodwill is tested for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate a potential impairment. Goodwill acquired through a business combination is allocated to each CGU, or group of CGUs, that are expected to benefit from the related business combination. A CGU represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. L) EARNINGS PER SHARE Basic earnings per share (“EPS”) is calculated by dividing net earnings for the period attributable to Shareholders of the Corporation by the weighted average number of Common shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instru- ments. The number of common shares included within the weighted average is computed using the treasury stock method. The Corporation’s potentially dilutive Common shares are comprised of long-term incentive plan equity compen- sation granted to officers and key employees (Note 2(o)). M) FOREIGN CURRENCY TRANSLATION The consolidated financial statements are presented in in Canadian dollars. The Corporation's operations Canada have a functional currency of Canadian dollars. The Corporation's operations in the UK have a functional currency of pounds sterling. Translation of Foreign Entities The functional currency for each of the Corporation’s subsidiaries is the currency of the primary economic environment in which it operates. Operations with foreign functional currencies are translated into the Corporation’s presentation currency in the following manner: · Monetary and non-monetary assets and liabilities are translated at the spot exchange rate in effect at the reporting date; · Revenue and expense items (including depreciation and amortization) are translated at average rates of exchange prevailing during the period, which approxi- mate the exchange rates on the transaction dates; · Impairment of assets are translated at the prevailing rate of exchange on the date of the impairment 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: 2023 Annual Report50 · 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 amorti- zation, 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 provisions of the LTI are recorded as compensation expense over the relevant service period, being the year to which the LTI relates and the vesting period of the shares. The Amendment made on December 31, 2018 gave the Board of Directors the right to elect to satisfy the award in cash. The Corporation has determined that this change did not create an obligation to satisfy the award in cash and therefore the LTI continues to be treated as an equity settled share based payment. Subject to the discretion of the Compensation, Nominating and Corporate Governance Committee of the Board of Directors, one-quarter of a Participant’s grant will vest on the Determination Date (defined as the first May 15th following the date that the Directors of the Corporation approve the audited consolidated financial statements of the Corporation for the prior year). The remaining three-quar- ters of the Participant’s grant will vest on November 30th following the second anniversary of the Determination Date. If a change of control occurs, all LTI Shares held by the Administrator in respect of unvested grants will vest immedi- ately. LTI participants are entitled to receive dividends on all common shares granted under the LTI whether vested or unvested. In most circumstances, unvested common shares held by the LTI Administrator for a participant will be forfeited if the participant resigns or is terminated for cause prior to the applicable vesting date, and those common shares will be disposed of by the Administrator to K-Bro for no consideration and such Common shares shall thereupon be cancelled. If a participant is terminated without cause, retires or resigns on a basis which constitutes constructive dismissal, the participant 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. We Are Dependable.51 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. R) THE CORPORATION’S LEASING ACTIVITIES & HOW THESE ARE ACCOUNTED FOR The Corporation leases various buildings, vehicles and equipment. Rental contracts are typically made for fixed periods of one to fifteen years but may have extension options as described in Note 2(r)(ii) below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any financial covenants, but leased assets may not be used as security for borrowing purposes. 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 · amounts expected to be payable by the lessee under residual value guarantees, and · the exercise price of a purchase option if the lessee is reasonably certain to exercise that option. 2023 Annual Report52 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: · the amount of the initial measurement of lease liability, · any lease payments made at or before the commence- ment date less any lease incentives received, · any initial direct costs, and · restoration costs. 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. 3. CHANGES & UPDATES IN ACCOUNTING POLICIES The Corporation adopted the following accounting standards and amendments that were effective for our annual consoli- dated financial statements commencing January 1, 2023. · 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. This change did not have an impact on our financial results and is not expected to have a material impact in the future. · Amendments to IAS 12, Accounting Policies, relates to a temporary exception to the requirements regarding deferred tax assets and liabilities related to pillar two income taxes. This change did not have an impact on our financial results and is not expected to have a material impact in the future. · Amendments to IAS 1, Presentation of Financial Statements – Disclosure of Accounting Policies, related to the disclosure of material rather than signif- icant accounting policies. This change was applied to accounting policy disclosure within Note 2. · Amendments to IAS 8, Accounting Policies – Changes in Accounting Estimates and Errors, related to the defini- tion of accounting estimates. This change did not have an impact on our financial results and is not expected to have a material impact in the future. 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 - Classification of Liabilities as Current or Noncurrent, clarifying requirements for the classifica- tion of liabilities as non-current. · Amendments to IFRS 16, Lease Liability in a Sale and Leaseback, clarifying the measurement of a lease liability by the seller in a sale and leaseback transaction. We Are Dependable. 53 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 consolidated 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. 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: 5. CRITICAL ACCOUNTING ESTIMATES & JUDGMENTS The preparation of the Corporation’s consolidated financial statements, in conformity with IFRS Accounting Standards, 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 liabil- ities 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. 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. Economic Conditions The Corporation applies judgment in: Since 2020, due to changing government restrictions to mitigate the ongoing COVID-19 pandemic, supply chain disruption, geopolitical events impacting key inputs such as natural gas, electricity and diesel and inflationary impacts to labour and materials the Corporation has faced varying degrees of financial impact within Canada and the UK. The COVID-19 pandemic has also contributed to unusually competitive labour markets, causing ineffi- ciencies in attracting, training and retaining employees. While labour markets have been stabilizing, certain regional markets continue to experience constrained labour availability. 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. 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, · · 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. 2023 Annual Report  Lease Term Impairment of Goodwill & Non-Financial Assets 54 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. 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 ($ Thousands of CDN dollars) 2023 2022 Balance, beginning of year Additions Amortization charge Effect of movement in exchange rates Balance, end of year 31,383 36,547 (32,982) 340 31,340 31,946 (31,337 (566) 35,288 31,383 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 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. 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. Provisions 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. We Are Dependable. 55 7. PROPERTY, 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, 2022 Opening net book amount Additions(2)(3)(4) Change in asset retirement obligation Disposals Transfers Depreciation charge Assets classified as held for sale(5) Effect of movement in exchange rates Closing net book amount 4,039 - - - - - (652) (75) 3,312 58,210 59 - - - (5,977) (44) (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) - - - (23,766) - - (696) (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 Year Ended, December 31, 2023 Opening net book amount Additions(2)(3)(4) Change in asset retirement obligation Acquisition of businesses (note 27, 28) Disposals Depreciation charge Effect of movement in exchange rates Closing net book amount 3,312 - - - - - 26 3,338 51,718 549 - 3,671 - (6,573) 284 49,649 106,885 10,371 - 8,432 (41) (11,838) 418 114,227 220 63 - 24 - (100) 6 9,618 4,561 - 333 (204) (4,289) 202 213 10,221 323 320 - 42 - (380) - 305 9 171 801 - (3,489) 14 29,246 1,863 203,185 16,103 230 171 - 13,303 - (245) - (26,669) - 950 - 26,752 2,093 206,798 Cost Accumulated impairment losses Accumulated depreciation Net book amount 3,338 - - 3,338 82,314 (207) 226,667 (2,113) (32,458) (110,326) 114,228 49,649 1,381 - 27,268 (5) (1,169) (17,042) 212 10,221 3,969 (14) (3,650) 305 60,866 2,093 407,896 (2,339) - - (34,114) - (198,759) 26,752 2,093 206,798 At December 31, 2023 1 Included in laundry equipment are assets under development in the amount of $651 (2022 - $181). 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 $356 (2022 - $697). 3 Additions include amounts from the Canadian Division of $11,060 (2022 - $10,598) and from the UK Division of $5,043 (2022 - $8,940). 4 Includes ROUA additions from the Canadian Division of $2,012 (2022 - $1,691), comprised of buildings of $0 (2022 - $0) and vehicles of $2,012 (2022 - $1,691). From the UK Division, ROUA additions were $2,963 (2022 - $6,800), comprised of buildings of $551 (2022 - $0) and vehicles of $2,412 (2022 - $6,800). This has resulted in corresponding increases to the lease liabilities in the amount of $2,012 (2022 - $1,691) for the Canadian Division and $2,963 (2022 - $6,800) for the UK Division. 5 Assets classified as held for sale are comprised of land and a building in Cupar, Scotland. The asset is currently marketed for sale, and it is anticipated to be sold during fiscal 2024. 2023 Annual Report 8. INTANGIBLE ASSETS ($ Thousands of CDN dollars, except share and per share amounts) Healthcare Relationships Hospitality Relationships Computer Software Brand Total 56 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 Acquisition of businesses (note 27, 28) Amortization charge Effect of movement in exchange rates Closing net book amount Cost Accumulated amortization Net book amount 9. GOODWILL 38 - (36) - 2 19,200 (19,198) 2 2 - - (2) - - 19,200 (19,200) - 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 Year Ended, December 31, 2023 - - 4,980 (493) - 4,487 346 493 - (130) - 709 At December 31, 2023 27,695 (23,208) 4,487 1,868 (1,159) 709 4,283 - - (203) 4,080 4,080 - 4,080 4,080 - - - 130 4,210 4,210 - 4,210 6,989 88 (2,302) (347) 4,428 47,370 (42,942) 4,428 4,428 493 4,980 (625) 130 9,406 52,973 (43,567) 9,406 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) Gross amount of goodwill Changes due to movement in exchange rates Accumulated impairment Balance at January 1, 2023 Goodwill acquired (note 27, 28) Changes due to movement in exchange rates Balance at December 31, 2023 Calgary Edmonton Vancouver 2 Vancouver 1 Victoria Paranet Villeray Canadian Division UK Division Total 8,082 - 4,346 - 3,413 - 2,630 - 3,208 - - - - - (1,700) - - - - - - 21,679 - 18,100 (711) 39,779 (711) (1,700) - (1,700) 8,082 4,346 3,413 2,630 1,508 - - - - - - 5,205 - - 5,779 - 19,979 10,984 - 17,389 - 548 37,368 10,984 548 8,082 4,346 3,413 2,630 1,508 5,205 5,779 30,963 17,937 48,900 We Are Dependable. 57 10. PROVISIONS The Corporation's provision includes a current provision of $206 (2022 - $279) to recognize restructuring costs, and a long-term provision of $2,964 (2022 - $2,382) 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, 2023 to be $3,772 (2022 - $3,203). Management has estimated the present value of this obligation at December 31, 2023 to be $2,964 (2022 - $2,382 using an inflation rate of 2.51% (2022 – 2.00%) and pre-tax weighted average risk-free interest rate of 3.05% to 3.91% (2022 - 3.30% to 4.07%) 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 2028 to 2039. As at December 31, 2023, if actual costs were to differ by 10% from management's estimate the obligation would be an estimated $317 (2022 - $266) higher or lower. It is possible the estimated costs could change and changes to these estimates could have a significant effect on the Corporation's consolidated financial statements. The Corporation recorded the following provision activity during the year: ($ Thousands of CDN dollars) Asset Retirement Obligations Restructuring Costs Total Balance, beginning of year Acquisition of businesses (note 27, 28) 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, 2023 2,382 316 80 173 13 2,964 - 2,964 279 - - (73) - 206 206 - For Year Ended, December 31, 2022 2,811 39 (434) (34) 2,382 - 2,382 703 - (424) - 279 279 - 2,661 316 80 100 13 3,170 206 2,964 3,514 39 (858) (34) 2,661 279 2,382 2023 Annual Report58 11. LONG-TERM DEBT ($ Thousands of CDN dollars) Prime Rate Loan (1) At January 1, 2022 Net repayment of debt Closing balance at December 31, 2022 At January 1, 2023 Net proceeds from debt Closing balance at December 31, 2023 37,973 (7,193) 45,166 45,166 25,081 70,247 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, 2027. 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, 2023 the combined interest rate was 7.70% (December 31, 2022 – 6.95%). On August 31, 2023, the Corporation completed an amend- ment to its existing revolving credit facility to extend the agreement from July 31, 2026 to July 31, 2027, as previ- ously amended on July 18, 2022. In addition, the agreement expanded the revolving credit facility from $100,000 to $125,000 plus a $25,000 accordion. 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, 2023 and December 31, 2022. The Corporation has a revolving credit facility of up to $125,000 plus a $25,000 accordion of which $72,116 is utilized (including letters of credit totaling $1,869) as at December 31, 2023. Interest payments only are due during the term of the facility. Drawings under the revolving credit facility are available by way of Bankers’ Acceptances, Canadian prime rate loans, Libor of UK pounds based loans, letters of credit or standby letters of guarantee. Drawings under the revolving credit facility bear interest at a floating rate, plus an applicable margin based on certain financial performance ratios. A general security agreement over all assets, a mortgage against all leasehold interests and real property, insurance policies and an assignment of material agreements have been pledged as collateral. The carrying value of borrowings approximate their fair value as the debt is based on a floating rate, the interest rate risk has not changed, and the impact of discounting is not significant. The Corporation has incurred no events of default under the terms of its credit facility agreement. 12. FINANCE EXPENSE ($ Thousands of CDN dollars) Interest on long-term debt Lease interest expense Accretion expense Other charges, net 2023 4,230 2,068 80 271 6,649 2022 1,757 2,070 39 1,114 4,980 We Are Dependable. 59 13. LEASES 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, 2023 December 31, 2022 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 Acquisition of businesses (note 27, 28) Buildings Equipment 36,267 9,878 46,145 43,079 10,219 53,298 (12,023) 41,275 3,882 551 4,424 8,857 37,348 9,429 46,777 43,992 9,665 53,657 (9,615) 44,042 - - 8,491 8,491 B) AMOUNTS RECOGNIZED IN THE STATEMENT OF EARNINGS The statement of earnings reflects the following amounts relating to leases: ($ Thousands of CDN dollars, except share and per share amounts) December 31, 2023 December 31, 2022 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 5,492 4,181 9,673 2,068 15 11,474 4,913 2,990 7,903 2,070 26 9,493 2023 Annual Report C) RECONCILIATION OF EXPECTED LEASE LIABILITIES ($ Thousands of CDN dollars, except share and per share amounts) December 31, 2023 December 31, 2022 60 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 53,657 8,857 (213) 2,068 (11,459) 388 53,298 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 2023 4,002 4,002 1,336 (82) 1,254 56,939 8,491 (3,679) 2,070 (9,467) (697) 53,657 2022 1,441 1,441 144 (47) 97 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 25.46% (2022 - 25.39%) Difference between Canadian and foreign tax rates Impact of substantively enacted rates and other Income tax expense 2023 22,863 (1,774) 21,089 5,370 (217) 103 5,256 2022 5,444 (933) 4,511 1,146 351 41 1,538 We Are Dependable.61 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 2023 (15,596) (15,596) 28,091 5,792 33,883 18,287 2022 (16,904) (16,904) 25,608 5,450 31,058 14,154 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, 2022 Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2022 Acquisition of business Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2023 (14,445) 716 154 (13,575) - 164 (102) (13,513) (559) 57 - (502) - (145) - (647) (2,232) (683) 88 (2,827) (169) 1,643 (83) (1,436) (17,236) 90 242 (16,904) (169) 1,662 (185) (15,596) ($ 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, 2022 Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2022 Acquisition of business Charged (credited) to the statement of earnings Related to movements in exchange rates At December 31, 2023 5,326 124 - 5,450 194 148 - 5,792 24,234 311 (198) 24,347 1,638 (651) 137 25,471 1,444 (428) (87) 929 1,232 86 32 2,279 332 - - 332 - 9 - 341 31,336 7 (285) 31,058 3,064 (408) 169 33,883 The Company has $5,123 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. 2023 Annual Report 62 15. CONTINGENCIES & COMMITMENTS A) CONTINGENCIES The Corporation has standby letters of credit issued as part of normal business operations in the amount of $1,869 (December 31, 2022 – $1,836) which will remain outstanding for an indefinite period of time. Grievances for unspecified damages were lodged against the Corporation in relation to labor matters. The Corporation has disclaimed liability and is defending the actions. It is not practical to estimate the potential effect of these griev- ances, but legal advice indicates that it is not probable that a significant liability will arise. B) COMMITMENTS Utility Commitments The Corporation was committed to estimated natural gas and electricity commitments for the next five calendar years and thereafter as follows: Utility commitments ($ Thousands of CDN dollars) Linen Purchase Commitments At December 31, 2023, the Corporation was committed to linen expenditure obligations in the amount of $9,434 (December 31, 2022 – $10,161) to be incurred within the next year. Property, Plant & Equipment Commitments At December 31, 2023, the Corporation was committed to capital expenditure obligations in the amount of $9,396 (December 31, 2022 – $2,341) 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, 2023, the Corporation held trust funds on deposit in the amount of $966 (2022 – $964). 2024 2025 2026 2027 2028 Subsequent 16. SHARE CAPITAL A) AUTHORIZED 11,278 2,826 1,495 - - - 15,599 The Corporation is authorized to issue an unlimited number of common shares and such number of shares of one class designated as preferred shares which number shall not exceed 1/3 of the common shares issued and outstanding from time to time. B) ISSUED ($ Thousands of CDN dollars, except share and per share amounts) Balance, beginning of year Common shares issued under LTI Common shares forfeited under LTI Common shares repurchased Balance, end of year 2023 10,773,190 61,345 - (199,062) 10,635,473 2022 10,719,778 55,362 (1,950) - 10,773,190 Unvested common shares held in trust for LTI 76,900 64,552 We Are Dependable. 63 C) NORMAL COURSE ISSUER BID On May 15, 2023, the Corporation announced its intention to proceed with a normal course issuer bid (NCIB) to purchase up to 881,481 of its common shares (“Shares”) through the TSX and / or alternative Canadian trading systems, representing approximately 10% of the public float of 8,814,816 shares as at May 9, 2023, during the twelve-month period commencing May 18, 2023 and ending May 17, 2024. During the year ended December 31, 2023, the Corporation repurchased and cancelled 199,062 common shares (2022 – nil) for $6,496 under the NCIB, net of transaction costs of $1 which were recorded in share capital. The average share price was $32.63, with prices ranging from $30.48 to $35.53. The Corporation recorded a financial liability of $3,967 related to the NCIB due to the automatic share repurchase plan for purchases that could be made from January 1 to March 22, 2024. During the blackout period, no changes can be made as it pertains to the automated share repurchase plan. 17. EARNINGS PER SHARE A) BASIC Basic earnings per share is calculated by dividing the net earnings attributable to equity holders of the Corporation by the weighted average number of ordinary shares in issue during the year. ($ Thousands of CDN dollars, except share and per share amounts) Net earnings Weighted average number of shares outstanding (thousands) Net earnings per share, basic 2023 17,607 10,664 1.65 2022 3,906 10,658 0.37 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 2023 2022 10,663,949 69,307 10,733,256 10,657,742 77,527 10,735,269 17,607 10,733 1.64 3,906 10,735 0.36 2023 Annual Report 64 18. LONG-TERM INCENTIVE PL AN 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 2023 Unvested 64,552 41,680 - (29,332) 76,900 2023 Vested 663,152 19,665 - 29,332 712,149 2022 Unvested 78,632 37,172 (1,950) (49,302) 64,552 2022 Vested 595,660 18,190 - 49,302 663,152 The cost of the 76,900 (2022 – 64,552) unvested Common shares held by the LTIP Account at December 31, 2023 was $0 (2022 - $0). 19. DIVIDENDS TO SHAREHOLDERS During the year ended December 31, 2023, the Corporation declared total dividends to shareholders of $12,896 or $1.200 per share (2022 - $12,905 or $1.200 per share). The Corporation’s policy is to pay dividends to Shareholders of its available cash to the maximum extent possible consistent with good business practice considering requirements for capital expenditures, working capital, growth capital and other reserves considered advisable by the Directors of the Corporation. All such dividends are discretionary. Dividends are declared payable each month to the Shareholders on the last business day of each month and are paid by the 15th day of the following month. 20. NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS ($ 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 Years Ended, December 31, 2023 (9,978) (2,616) (632) 3,110 4,003 (6,113) 2022 (1,248) (536) (2,037) 1,713 (3,513) (5,621) 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 2023 - ($73) and in 2022 - ($424), 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 2023 ($341) and 2022 ($176). We Are Dependable. 65 21. FINANCIAL INSTRUMENTS A) FAIR VALUE The Corporation’s financial instruments at December 31, 2023 and 2022 consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabil- ities, lease liabilities, dividends payable to shareholders, and long term debt. The 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 approxi- mates the respective carrying amount due to the floating rate nature of the debt. B) FINANCIAL RISK MANAGEMENT The Corporation’s activities are exposed to a variety of financial risks: price risk, credit risk and liquidity risk. The Corporation’s overall risk management program focuses on the unpredictability of financial and economic markets and seeks to minimize potential adverse effects on the Corporation’s financial performance. Risk management is carried out by financial management in conjunction with overall corporate governance. C) PRICE RISK Currency Risk Foreign currency risk arises from the fluctuations in foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. The Corporation’s operations in Canada are not 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, 2023, a strengthening or weakening of $0.01 of the Canadian dollar to the U.S. dollar with all other variables held constant could have a favorable or unfavorable impact of approximately $3, respectively, on net earnings. Based on financial instrument balances as at December 31, 2023, a strengthening or weakening of $0.01 of the Canadian dollar to the Sterling pound (£), with all other variables held constant could have an unfavorable or favorable impact of approximately $110, respectively, on other comprehensive loss. Interest Rate Risk The Corporation is subject to interest rate risk as its credit facility bears interest at rates that depend on certain 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 $702 (2022 - $452) to net earnings. Other Price Risk The Corporation’s exposure to other price risk is limited since there are no significant financial instruments which fluctuate as a result of changes in market prices. D) CREDIT RISK The Corporation has financial assets that are subject to the expected credit loss model. The Corporation’s financial assets that are exposed to credit risk consist of cash and cash equivalents and accounts receivable. The Corporation, in the normal course of business, is exposed to credit risk from its customers. Management believes that the risks associated with concen- trations of credit risk with respect to accounts receivable are limited due to the generally short payment terms, and the nature of the customers, which are primarily publicly funded health care entities. The credit risk associated with cash and cash equivalents is minimized by ensuring these financial assets are held with Canadian chartered banks and Standard Chartered Bank United Kingdom. Cash & Cash Equivalents While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, there was no identi- fied impairment. 2023 Annual Report 66 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, 2023 or January 1, 2023 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, 2023 and 2022 was determined as follows for trade receivables: ($ Thousands of CDN dollars, except share and per share amounts) December 31, 2023 Current 1 to 60 days 61 to 90 days Greater than 90 days December 31, 2022 Current 1 to 60 days 61 to 90 days Greater than 90 days Gross Allowance 34,638 11,731 3,598 517 50,484 - - - 178 178 Gross Allowance 27,986 8,145 1,324 450 37,905 - - - 144 144 Net 34,638 11,731 3,598 339 50,306 Net 27,986 8,145 1,324 306 37,761 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 Acquisition of business (Write-offs) Recoveries Effect of movements in exchange rates Balance, end of year Years Ended, December 31, 2023 2022 144 16 29 (12) 1 178 143 (10) - 11 - 144 We Are Dependable. 67 E) LIQUIDITY RISK 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 2024 Payments Due by Year 2025 to 2026 2027 to 2028 Subsequent Long-term debt Lease liabilities Utility commitments Linen purchase obligations Property, plant and equipment commitments 70,247 58,914 15,599 9,434 9,396 - 11,811 11,278 9,434 9,396 - 18,104 4,321 - - 70,247 13,635 - - - - 15,364 - - - The Corporation has a credit facility with a maturity date of July 31, 2027 (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. · 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’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 finan- cial 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; The Corporation pays a dividend which reduces its ability to internally finance growth and expansion. However, the avail- ability of the Corporation’s revolving line of credit provides sufficient access to capital to allow K-Bro to take advantage of acquisition opportunities. The merits of the dividend are periodically evaluated by the Board. The 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 Accounting Standards. It is therefore unlikely to be compa- rable 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. 2023 Annual Report ($ 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 PARTY 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. During 2023 and 2022, remuneration to directors and key management personnel was as follows: 68 Years Ended, December 31, 2023 70,247 1,869 174,431 246,547 (5,857) 240,690 2022 45,166 1,836 176,542 223,544 (2,636) 220,908 ($ Thousands of CDN dollars) 2023 2022 Years Ended, December 31, Salaries and retainer fees Short-term bonus incentives Post-employment benefits Share-based payments 1,879 1,082 66 1,446 4,473 1,802 1,007 63 1,399 4,271 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 year ended December 31, 2023, the Corporation incurred such fees totaling $72 (2022– $72). 24. EXPENSES BY NATURE ($ Thousands of CDN dollars) 2023 2022 Years Ended, December 31, Wages and benefits Linen Utilities Delivery Materials and supplies Occupancy costs Repairs and maintenance Other expenses 145,535 32,982 25,124 23,083 16,263 5,624 12,758 2,709 264,078 130,971 31,337 23,754 23,050 13,522 4,727 10,419 2,351 240,131 We Are Dependable. 69 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 ten 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 four sites which are located in 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, 2023, from these three major customers the Corporation has recorded revenue of $135,736 (2022 – $130,360), repre- senting 42.3% (2022 – 47.1%) of total revenue. ($ Thousands of CDN dollars) 2023 2022 Healthcare Hospitality Canadian division Healthcare Hospitality UK division 177,838 63,291 241,129 6,502 73,253 79,755 55.4% 19.7% 75.1% 2.1% 22.8% 24.9% 167,239 44,796 212,035 6,167 58,421 64,588 60.5% 16.2% 76.7% 2.2% 21.1% 23.3% Total segment revenue 320,884 100.0% 276,623 100.0% 2023 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. 70 ($ Thousands of CDN dollars, except share and per share amounts) Canadian Division UK Division Total 2023 Net earnings EBITDA 2022 Net earnings (loss) EBITDA 12,584 44,699 5,023 12,107 Canadian Division UK Division 6,042 32,365 (2,136) 4,127 17,607 56,806 Total 3,906 36,492 The Canadian division net earnings includes non-cash employee share based compensation expense of $1,796 (2022 – $1,788). SEGMENT ASSETS Segment assets are measured in the same way as in the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. The Corporation’s cash and cash equivalents are not considered to be segment assets but are managed by the treasury function. ($ Thousands of CDN dollars, except share and per share amounts) At December 31, 2023 Canadian Division UK Division Total assets Other: Cash and cash equivalents Total segment assets 278,983 - 278,983 85,733 (5,857) 79,876 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 Total 364,716 (5,857) 358,859 Total 325,760 (2,636) 323,124 We Are Dependable. 71 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, 2023 Total liabilities Other: Long-term debt (note 11) Total segment liabilities At December 31, 2022 Total liabilities Other: Long-term debt (note 11) Total segment liabilities Canadian Division UK Division 165,348 (70,247) 95,101 24,937 - 24,937 Canadian Division UK Division 127,038 (45,166) 81,872 22,180 - 22,180 Total 190,285 (70,247) 120,038 Total 149,218 (45,166) 104,052 26. IMPAIRMENT OF ASSETS Earnings multiple approach (Fair value less costs to dispose, “FVLCD”) The Corporation performed its annual impairment assess- ment for goodwill for the Canadian division and for the UK division as at December 31, 2023 and December 31, 2022 in accordance with its policy described in Note 2(k) and Note 2(h). The Corporation also performed impairment indicator assess- ments where there was no goodwill allocated to the CGU. For both periods, the recoverable amount for the CGUs was assessed using an earnings multiple approach. If the results of the earnings multiple approach indicated a possible impairment, a further assessment using a discounted cash flow to determine the value-in use was performed. For the years ended December 31, 2023 and 2022, the key assumption utilized was the implied multiple. The implied multiple is calculated by utilizing the average multiples of comparable public companies. The Corporation used an implied average forward multiple of 9.70 (2022 - 10.60) to calculate the recoverable amounts. The implied multiple was applied to the trailing twelve month EBITDA to deter- mine the recoverable amount of the CGU and compare it to the carrying value of the CGU. Based on the assessments performed for the year ended December 31, 2023, no CGU had a recoverable amount that was less than the carrying value of the CGU. A further assessment using a discounted cash flow to determine the value-in-use was not performed due to the headroom from FVLCD determined using an earnings multiple approach. 2023 Annual Report 72 Discounted cash flow (Value-in-use, “VIU”) Where the results of the FVLCD approach indicated there was a possible impairment, a further assessment using a discounted cash flow was performed to determine the VIU of each VGU identified. For the year ended December 31, 2022, the Corporation used probability weighted discounted cash flows and the assump- tions for those cash flows were the Corporation’s board approved budgets, cash flow forecasts, trailing twelve-month EBITDA, the pre-tax discount rate and terminal value growth rate. The probability weighted approach used for the year ended December 31, 2022 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. The terminal value growth rate is based on management's best estimate of the long-term growth rate for its CGUs after the forecast period, considering historic performance and future economic forecasts. The calculation of the recoverable amount using the probability weighted discounted future cash flows 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 Calgary Edmonton Vancouver 2 Vancouver 1 Victoria Paranet Villeray UK FVLCD FVLCD FVLCD FVLCD FVLCD n/a n/a VIU n/a n/a n/a n/a n/a n/a n/a 15.4% n/a n/a n/a n/a n/a n/a n/a 2.0% Based on testing performed at December 31, 2023 and December 31, 2022, no impairment was determined to exist. Recoverable amount The recoverable amount of each CGU is sensitive to changes in market conditions which could result in material changes. For the year ended December 31, 2022, where further assessment using the probability weighted discounted cash flows was required the sensitivity of key assumptions to a reasonable change was assessed. The Corporation does not believe there is a reasonable change in the key assumptions that would cause the carrying value of the CGU to exceed its recover- able amount. The table below summarizes the results of the impact on key assumptions to a reasonable change. Recoverable Amount December 31, 2022 Change in Pre-tax Discount Rate Increase of 1% December 31, 2022 Change in Terminal Value Growth Rate Decrease of 1% December 31, 2022 Calgary Edmonton Vancouver 2 Vancouver 1 Victoria Paranet Villeray UK n/a n/a n/a n/a n/a n/a n/a £50,261 n/a n/a n/a n/a n/a n/a n/a -£4,201 n/a n/a n/a n/a n/a n/a n/a -£4,458 We Are Dependable. 73 27. BUSINESS ACQUISITION - PARANET On March 1, 2023 the Corporation completed the acquisi- tion of 100% of the share capital of Buanderie Para-Net (“Paranet”) operating as Paranet (the “Paranet Acquisition”), a private laundry and linen services company operating in Québec City, Québec. The Paranet Acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, contracts and an employee base. The contracts acquired are in the Québec healthcare and hospitality sector, which complements the existing business of the Corporation. Based on the Corporation’s evaluation of the Paranet Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Paranet Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired. The Corporation financed the Paranet Acquisition and transaction costs from existing loan facilities. The purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows: ($ Thousands, except percentages) 2022 2023 Cash consideration Contingent consideration Total purchase price 11,074 945 12,019 The assets and liabilities recognized as a result of the Paranet Acquisition are as follows: ($ Thousands, except percentages) 2022 2023 Net Assets Acquired: Accounts receivable Prepaid expenses and deposits Linen in service Accounts payable and accrued liabilities(2) Lease liabilities Deferred income taxes Property, plant and equipment(1,2) Intangible assets Net identifiable assets acquired Goodwill Net assets acquired 1,317 137 970 (1,552) (1,176) (1,474) 6,142 2,450 6,814 5,205 12,019 1 Includes ROUA from the Canadian Division of $1,176 comprised of buildings of $964 and vehi- cles of $212 2 Includes provision of $219 for asset retirement obligation The provisional intangible assets acquired are made up of $2,450 for the customer contracts along with related relationships and customer lists. The goodwill is attribut- able to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes. A) CONTINGENT CONSIDERATION In the event that a certain EBITDA target was achieved by Paranet for the twelve month period ended August 31, 2023, additional undiscounted consideration of up to $1,890 would have been payable in cash during the fourth quarter of 2023. While performance was in-line with expectations, the target was not achieved; therefore, no payment was made. During the first three quarters of 2023, the estimated fair value of the possible payment was classified as contingent consideration. The fair value of the contingent consider- ation was estimated by considering the probability-adjusted future expected cash flows in regards to Paranet achieving the target that would result in consideration being paid. The impact of discounting these future cash flows was not considered because the impact would be nominal. Given that the EBITDA target was not achieved for the twelve month period ended August 31, 2023, the contingent consider- ation amount of $945 has been derecognized and a gain on settlement of contingent consideration has been recorded in Consolidated Statement of Earnings and Comprehensive Income for the twelve months ended December 31, 2023. B) ACQUISITION RELATED COSTS For the twelve months ended December 31, 2023, $274 in professional fees associated with the Paranet Acquisition has been included in Corporate expenses. C) REVENUE & PROFIT INFORMATION The acquired business contributed revenues of $7,819 to the Corporation for the period from March 1, 2023 to December 31, 2023. If the Paranet Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the period ended December 31, 2023 would have been $322,209. The acquired business contributed a net deficit of ($316) to the Corporation for the period from March 1, 2023 to December 31, 2023. If the Paranet Acquisition had occurred on January 1, 2023, consolidated pro-forma net income for the period ended December 31, 2023 would have been $17,591. These amounts have been calculated using Paranet’s results and adjusting them for differences in the accounting policies between the Corporation and Paranet as it pertains to property, plant and equipment. The Corporation follows the requirements of IFRS Accounting Standards whereas Paranet previously reported under Canadian Accounting 2023 Annual Report Standards for Private Enterprises (ASPE), the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2023, together with the consequential tax effects. 28. BUSINESS ACQUISITION - VILLERAY On November 1, 2023, the Corporation completed the acquisition of 100% of the share capital of Buanderie Villeray and its affiliate Buanderie La Relance (the “Villeray Acquisition”), a private laundry and linen services company incorporated in Canada and operating in Montréal, Québec. The Villeray Acquisition was completed through a share purchase agreement consisting of existing working capital, fixed assets, customer relationships and an employee base. Villeray operates in the hospitality and healthcare sector, which complements the existing business of the Corporation. As part of the transaction, the Corporation closed its Granby facility and consolidated existing volumes into Villeray. Based on the Corporation’s evaluation of the Villeray Acquisition and the criteria in the identification of a business combination established in IFRS 3, the Villeray Acquisition has been accounted for using the acquisition method, whereby the purchase consideration is allocated to the fair values of the net assets acquired. The Corporation financed the Villeray Acquisition and trans- action costs from existing loan facilities. The purchase price allocated to the net assets acquired, based on their estimated fair values, is as follows: ($ Thousands, except percentages) 2022 2023 Cash consideration Contingent consideration Total purchase price 11,204 500 11,704 74 The assets and liabilities recognized as a result of the Villeray Acquisition are as follows: ($ Thousands, except percentages) 2022 2023 Net Assets Acquired: Accounts receivable Prepaid expenses and deposits Income tax receivable Accounts payable and accrued liabilities(2) Lease liabilities Deferred income taxes Property, plant and equipment(1,2) Intangible assets Net identifiable assets acquired Goodwill Net assets acquired 1 Includes ROUA from the Canadian Division of $2,706 related to buildings 2 Includes provision of $97 for asset retirement obligation 907 187 69 (807) (2,706) (1,416) 7,161 2,530 5,925 5,779 11,704 The provisional intangible assets acquired are made up of $2,530 related to customer relationships. The goodwill is attributable to the workforce, and the efficiencies and synergies created between the existing business of the Corporation and the acquired business. Goodwill will not be deductible for tax purposes. A) CONTINGENT CONSIDERATION The estimated fair value of payment has been classi- fied as contingent consideration by exercising significant judgment as to whether it should be classified as such, or as renumeration to the former owner, who will be employed subsequent to the close of the transaction. The Corporation has determined by considering all relevant factors included in the agreements as it pertains to employment terms, valuation of the business, and other relevant terms that the additional consideration is most appropriately reflected as contingent consideration. In the event that a certain EBITDA target is achieved by Villeray for the twelve month period ended October 31, 2024, additional undiscounted consideration ranging from $500 to $1,000 will be payable in cash during the first quarter of 2025. The potential undiscounted amount payable within the agreement will only be paid should the EBITDA target be achieved. Should the EBITDA target not be achieved, no payment will be made. We Are Dependable. 75 The fair value of the contingent consideration of $500 was estimated by considering the probability-adjusted future expected cash flows in regards to Villeray achieving the target that would result in consideration being paid. The impact of discounting those future cash flows was not considered because the impact would be nominal. Since the estimated future cash flows and probability of achieving the EBITDA target are an unobservable input, the fair value of the contingent consideration is classified as a level 3 fair value measurement. B) ACQUISITION RELATED COSTS For the year ended December 31, 2023, $414 in profes- sional fees associated with the Villeray Acquisition has been included in Corporate expenses. C) REVENUE & PROFIT INFORMATION The acquired business contributed revenues of $1,602 to the Corporation for the period from November 1, 2023 to December 31, 2023. If the Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the year ended December 31, 2023 would have been $329,021. If both the Paranet Acquisition and Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma revenue for the year ended December 31, 2023 would have been $330,346. The acquired business contributed a net deficit of ($201) to the Corporation for the period from November 1, 2023 to December 31, 2023, inclusive of Granby transition related costs. If the Villeray Acquisition had occurred on January 1, 2023, consolidated pro-forma net income for the period ended December 31, 2023 would have been $17,721. These amounts have been calculated using Villeray’s results and adjusting them for differences in the accounting policies between the Corporation and Villeray as it pertains to property, plant and equipment. The Corporation follows the requirements of IFRS Accounting Standards whereas Villeray previously reported under Canadian Accounting Standards for Private Enterprises (ASPE), the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had applied from January 1, 2023, together with the consequential tax effects. 29. SUBSEQUENT EVENTS A) DIVIDENDS The Corporation’s Board of Directors declared an eligible dividend of $0.10 per Common share of the Corporation payable on each of February 15, March 15, and April 15, 2024, to Shareholders of record on January 31, February 29, and March 31, 2024, respectively. 2023 Annual Report76 Corporate Information 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 VICTORIA Andrew MacKeen General Manager P 250 474 5699 F 250 474 5680 861 Van Isle Way Victoria, BC V9B 5R8 REGINA Barb Lewis General Manager P 306 757 5276 F 306 757 5280 730 Dethridge Bay Regina, SK S4N 6H9 VANCOUVER 1 Kevin Stephenson General Manager P 604 420 2203 F 604 420 2313 #401 - 8340 Fraser Reach Court, Burnaby, BC V3N 0G2 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 780 453 5218 F 780 455 6676 14903 - 137 Ave Edmonton, AB T5V 1R9 CALGARY Jeff Gannon General Manager P 403 724 9001 F 403 290 1599 6969 – 55 St SE Calgary, AB T2C 4Y9 TORONTO James Ewart General Manager MONTRÉAL Benoit Laurent Directeur Général QUÉBEC CITY Dimitri Hamm Directeur Général QUÉBEC CITY Dimitri Hamm Directeur Général P 416 233 5555 F 416 233 4434 6045 Freemont Blvd Mississauga, ON L5R 4J3 P 514 259 4531 F 450 378 8245 4740 Rue De Rouen Montréal, QC H1V 3T7 P 418 661 6163 F 418 661 4000 367, boulevard des Chutes Québec City, QC G1E 3G1 P 418 661 6163 F 418 661 4000 1105, Vincent-Massey Québec City, QC, G1N 1N2 UK LOCATIONS HEAD OFFICE P 01334 654033 Edenfields, Cupar Trading Estate Cupar, Fife, KY15 4SX PERTH Kelly fox General Manager P 01738210106 Inveralmond Industrial Estate, Ruthvenfield Avenue, Perth, PH1 3UF COATBRIDGE Amy Liddell General Manager P 01236 449010 18 Palacecraig Street, Coatbridge, ML5 4RY CUPAR Joe Mcdonagh General Manager P 01334 655220 Prestonhall Industrial Estate, Cupar, Fife, KY15 4RD LIVINGSTON Alan Johnston General Manager P 0150 6426816 Unit 2, Gregory Road, Kirkton Campus, Livingston, EH54 7DR NEWCASTLE Steve Brumbill General Manager P 0191 6053106 Unit L4, Intersect 19, High Flatworth, Tyne Tunnel Industrial Estate, North Shields, NE29 7UT INQUIRIES@K-BROLINEN.COM We Are Dependable. K-BROLINEN.COM 

Continue reading text version or see original annual report in PDF format above