Clearwater
Seafoods
Incorporated
annual
report
2012
Clearwater achieved Marine
Stewardship
Council
MSC
certification on its Arctic surf
clam and Nova Scotia snow
crab fisheries, completing
the certification of all seven of
its core species
highlights
2012
1| Page 2012...
in
Clearwater reported the highest revenues and
adjusted EBITDA in its history with $350.4 million of
revenue and adjusted EBITDA of $72.2 million
Clearwater achieved $17.1 million of free cash flows
in 2012 driven by growth in adjusted EBITDA of
18.1% higher from the prior year
Clearwater reduced its’ leverage to 2.9x adjusted
EBITDA driven by higher adjusted EBITDA and lower
net debt levels.
Clearwater made substantial improvements to its
capital structure by refinancing $264 million in new
term debt facilities.
An independent appraisal placed a value on
Clearwater’s quotas of $453 million - TriNav Fisheries
Consultants completed an independent appraisal
of Clearwater’s industry leading portfolio of quotas
confirming the inherent high value in the species for
which Clearwater has access.
dedicated to sustainable
seafood
excellence
2| Page innovation
at clearwater
3| Page One of Clearwater’s
core strategies is to
innovate and position
products to deliver
superior customer
satisfaction and value.
Clearwater leverages its strengths in
Significant innovations include:
innovation to compete in existing market
segments and to capture a growing
• Our patent-pending automatic
shucking technology for Canadian
scallops that allow us to catch more
share of the seafood value chain through
efficiently, reducing our environmental
the introduction of value-added new
products, in its core species.
In existing market segments, Clearwater
has sustained its competitive advantage
through its investment in research and
development in the areas of harvesting
and processing. In fact, Clearwater has
become an industry leader for pioneering
harvesting and processing technologies
and practices. Clearwater has a
long history of leading technological
innovation as we maintain the largest
and most modern fleet of factory freezer
vessels in Canada.
impact and reducing costs.
• Our patented scanning and biometric
testing of live lobster allows us to
guarantee high quality and low
storage and shipment mortality
• Our patented high pressure-shucking
process allows us to produce high
quality, raw, quick frozen lobster meat
that has become increasingly popular
in the high-end restaurant food
service and process food industry
• Our geographic information systems
and bottom imaging technology
was pioneered and shared with our
industry to continue to help us harvest
more efficiently. With such tools, we
can improve management of fishing
grounds and focus trips on zones
with higher catch rates to harvest the
product with more precision.
4| Page product
innovation
In addition, we continue to embrace a disciplined
approach to value added product development
through the adoption of a structured innovation
process that is supported through the development
of cross functional teams.
This process has enabled the development of
bacon-wrapped scallops and our scallops and
sauce format which are consistent with Clearwater’s
innovation strategy and allows us to differentiate
value to our growing markets, channels and
customers. Demand for our bacon wrapped
scallops continues to grow with the recent launch
of both private label and Clearwater branded
listings with retailers in North America. Our scallops
and sauce format has recently launched in North
America in both retail and foodservice formats.
5| Page value added
at clearwater
6| Page 5.6%
5.4%
5.1%
4.9%
sales growth
6.0
5.0
4.0
leverage
20 (thousands)
free cash flows
15
key performance indicators of
clearwater seafoods incorporated
3.0
2.0
10
5
4.6%
2012
2011
1.0
2012
2011
0
2012
2011
EBITDA as a % of sales
23%
21%
19%
17%
2012
2011
sales growth
5.6%
5.4%
5.1%
4.9%
4.6%
2012
2011
Profitability
Adjusted EBITDA*
15.0%
2012
2011
Target
14.0%
72,243
13.0%
61,188
N/A
12.0%
return on assets
Clearwater has experienced continued
growth in adjusted EBITDA as a percentage
of sales from strong sales prices and
volumes and by controlling costs and
improving productivity.
Adjusted EBITDA* as a % of sales
11.0%
2012
2011
Target
Sales
2012
2011
Target
10.0%
20.6%
9.0%
18.4%
18%
6.0
or greater
2012
2011
leverage
20 (thousands)
free cash flows
5.0
350,447
4.0
332,785
N/A
3.0
Sales growth of 5.3% came as a result of
higher volumes sold, improved sales prices
15
for most species and in particular strong
demand for coldwater shrimp.
10
Sales Growth
2012
2.0
Sales have grown in most markets. China
5
grew 29.4% during 2012 from strong
2012
demand for core species. This offset the
2011
2012
0
2011
decline in sales within Europe from the
economic slowdown.
5.3%
1.0
5.5%
5.0%
sales growth
leverage
20 (thousands)
free cash flows
2011
Target
4.6%
2012
2011
1.0
2012
sales growth
2011
sales growth
EBITDA as a % of sales
23%
return on assets
EBITDA as a % of sales
2012
2011
leverage
2012
2011
leverage
23%
15
10
21%
5
19%
0
6.0
17%
5.0
6.0
4.0
5.0
3.0
4.0
2.0
3.0
2011
2011
1.0
2.0
2012
2011
1.0
2012
2011
5.6%
5.4%
5.1%
4.9%
21%
19%
6.0
5.0
4.0
3.0
2.0
15.0%
14.0%
13.0%
12.0%
2012
11.0%
2012
10.0%
5.6%
5.6%
5.4%
5.4%
5.1%
5.1%
4.9%
4.9%
4.6%
4.6%
23%
23%
21%
21%
19%
19%
17%
2012
2011
17%
2012
2011
EBITDA as a % of sales
2012
9.0%
2011
EBITDA as a % of sales
15.0%
14.0%
15.0%
13.0%
14.0%
12.0%
13.0%
11.0%
12.0%
10.0%
11.0%
9.0%
10.0%
return on assets
return on assets
2012
2011
Returns
Return on assets*
2012
2011
Target
12.1%
10.7%
12.0%
or greater
Note: Refer to definitions
* Supplemental information provided for Target
Return on assets shows a continuning trend
of improvement and focused management
of investments.
17%
2012
2011
9.0%
2012
2011
return on assets
15.0%
14.0%
Financial Performance
Free cash flows
2012
2011
Target
17,053
13.0%
2,197
12.0%
N/A
11.0%
20 (thousands)
10.0%
free cash flows
The improvement in free cash flows was
driven by improvements in adjusted EBITDA
of 18.1%, lower capital expenditures and
reductions in 2012 year end inventory.
9.0%
2012
free cash flows
As of December 31, 2012 leverage improved
2011
to 2.9 versus 3.8 as at December 31, 2011.
Leverage*
20 (thousands)
15
2012
2011
15
10
Target
2.9
3.8
3.0
or lower
10
5
5
0
0
2012
2011
2012
2011
7| Page key performance indicators of
clearwater seafoods incorporated
Clearwater reported sales of $350.4
in the first half of 2013 as a result of
million and adjusted EBITDA1 of $72.2
seasonality as Clearwater’s operations
million for 2012 versus 2011 comparative
have a predictable pattern in which
figures of $332.8 million and $61.2 million
adjusted EBITDA is higher in the second
representing growth rates of 5.3% in
half of the year and capital expenditures
sales and 18.1% in adjusted EBITDA.
and investments in working capital are
higher in the first half of the year.
Growth in sales and adjusted EBITDA
came as a result of higher sales volumes,
Management is satisfied with the
particularly for coldwater shrimp, as well
progress made towards our financial
as higher sales prices for most species.
targets and expects that earnings and
The impact of the growth in sales on
free cash flow momentum will continue
adjusted EBITDA was partially offset by
through 2013. As a result, Management
weakness in the European market, a
is setting the following targets:
shift to lower margin species and higher
procurement costs in certain species.
• sales growth – 5% or greater,
Free cash flows grew in the fourth quarter
• adjusted EBITDA margins – 18% or
of 2012 to $37.8 million versus $15.9
million in 2011. Annual free cash flows
for 2012 improved to $17.1 million versus
$2.2 million in 2011. The improvements
to free cash flow were driven by growth
in adjusted EBITDA of 18.1%, lower capital
expenditures, and a reduction in working
capital. Reductions in working capital
were primarily a result of a decline in
inventory during the year.
Clearwater achieved leverage of 2.9x
as of December 31, 2012 as compared
to 3.8 at December 31, 2011, due to
growth in annual adjusted EBITDA and
a reduction in net debt of $17.8 million.
Management expects leverage to rise
greater,
• leverage - 3.0x; and
• return on assets - 12% or higher on a
sustained basis.
Management expects that the trend of
earnings growth will continue in 2013
however, lower available supply of
inventories as of December 31, 2012 and
poor weather conditions may limit growth
for the first quarter of 2013. However,
continued strong results in the second
half of the year will enable Clearwater to
continue the trend of growth in annual
results in 2013.
1 – Refer to definition of Adjusted EBITDA
8| Page Table of Contents
Letter from the Chairman
Letter from the Chief Executive Officer
Management’s Discussion and Analysis
Overview of Clearwater
Selected annual information
Mission, value proposition and strategies
Capability to deliver results
Explanation of annual 2012 earnings
Capital structure and liquidity management
Explanation of fourth quarter 2012 earnings
Outlook
Risks and uncertainties
Critical accounting policies
Summary of quarterly results
Definitions and reconciliations
Page #
10
11
13
14
14
18
21
33
42
53
54
58
61
63
Clearwater Seafoods Incorporated – fourth quarter 2012 financial statements
68
Quarterly and unit information
Selected annual information
Corporate Information
118
119
120
9| Page
Letter from the Chairman of Clearwater Seafoods Incorporated
To our Shareholders,
I am delighted to once again report another outstanding year for Clearwater Seafoods Incorporated
(“Clearwater”). Clearwater’s operations, spanning more than three continents, continue to strive and
reach new heights of success in sales growth, profitability and shareholder returns.
In 2012 and for the second year in a row, Clearwater’s financial performance placed it in the top
quartile of the seafood industry despite tough economic conditions in certain markets.
Looking at fundamentals of the seafood industry; Global demand for seafood is outstripping supply,
creating favorable market dynamics for vertically integrated producers such as Clearwater with strong
resource access. Demand has been driven by growing worldwide population, shifting consumer
tastes towards healthier diets, and rising purchasing power of middle class consumers in emerging
economies. The supply of wild seafood is limited and is expected to lag behind the growing global
demand. This supply-demand imbalance has created a market place in which purchasers of seafood
are increasingly willing to pay a premium to suppliers that can provide consistent quality and food
safety, wide diversity and reliable delivery of premium, wild, sustainably harvested seafood.
Clearwater is well positioned to take advantage of this opportunity because of its licenses, premium
product quality, diversity of species, global sales footprint, and year-round harvest and delivery
capability.
In addition, since our founding in 1976 our people have been at the forefront of our success, leading
the company through change and growth with character and competence and through a culture of
teamwork. They deserve our highest praise and continued appreciation.
At Clearwater we are focused in our commitment and in our mission to build the world’s most
extraordinary, wild seafood company, and believe that you, our shareholders, will continue to benefit
from both the ability to participate in this exciting sector of the food industry and in Clearwater’s
passionate pursuit of excellence.
Yours truly,
Colin MacDonald
Chairman
Clearwater Seafoods Incorporated
10| Page
Letter from the Chief Executive Officer of Clearwater Seafoods Incorporated
To our shareholders,
In 2012 Clearwater had the highest revenues and adjusted EBITDA in its history.
Our management team is pleased with the progress made towards our financial targets for creating
shareholder value and expects that earnings and free cash flow momentum will continue through
2013.
Building on the success achieved in 2012, we have set the following targets:
sales growth – 5% or greater,
adjusted EBITDA margins – 18% or greater,
leverage - 3.0x
return on assets - 12% or higher on a sustained basis.
The sales and adjusted EBITDA ratios are annual goals whereas the return on assets and leverage ratios will be accomplished
over time.
In addition, management has undertaken six initiatives to create shareholder value.
1. Growing adjusted EBITDA and sales sustainably - we have experienced continued growth in
adjusted EBITDA and sales by controlling costs and improving productivity, product mix and
prices. Sales growth in 2012 of 5.3% exceeded our 5% annual sales growth target. Annual
adjusted EBITDA as expressed as a percentage of sales continues to be strong at 20.6% and
exceeded 2011 rates of 18.4% by 12%.
We will continue to lever our vertical integration in existing segments to capture a growing
share of the seafood value chain through the introduction of value-added new products in
certain core species.
2. Generating strong free cash flows and improving leverage – we are focused on generating
increasing free cash flows and improving leverage on an annualized basis through generating
strong cash earnings, managing our working capital and carefully planning and managing our
capital expenditure program.
In 2012 free cash flows grew to $17.1 million versus $2.2 million in 2011. The improvements
to free cash flow in 2012 were driven by growth in adjusted EBITDA of 18.1%, lower capital
expenditures and a reduction in investment in working capital. Reductions in working capital
were primarily a result of a decline in inventory during the year.
Leverage improved to 2.9x versus 3.8x as at December 31, 2011. Strong free cash flows
were used to reduce debt during the fourth quarter of 2012.
3. Improving the capital structure - During the second quarter of 2012 we successfully completed
a series of capital market transactions that substantially improved our debt structure. The
financing enables Clearwater to reduce future interest costs by approximately $4.6 million
annually, strengthened our liquidity and provided the capital structure necessary to execute
growth plans while further reducing overall leverage. We are now focused on initiating an
11| Page
active communications plan with its investors to ensure continued access, when required, to all
sources of growth capital.
4. Focused management of foreign exchange - We have a focused and targeted foreign
exchange hedging program to reduce the impact of short-term volatility in exchange rates on
earnings. This, combined with stronger processes for price management reduces the impact of
exchange rate volatility on the business.
5. Building world class leadership, management, sales and marketing capabilities - We have
spent the past year implementing best in class programs for key account management, new
product development, sales and operations planning, recruitment and compensation practices.
In addition, over the past two years Clearwater has added a number of new people to its senior
management team and its’ Board of Directors.
6. Communicating underlying asset values - Clearwater has an industry-leading portfolio of
quotas that provide strong security of underlying value to lenders and investors. In the second
quarter of 2012 an independent appraisal of these quotas was completed by TriNav Fisheries
Consultants, which placed a value on the quotas of $453 million.
We believe that we have the correct strategies and focus to provide a sustainable competitive
advantage and create long-term growth. These strategies include:
1. Expanding access to supply;
2. Targeting profitable and growing markets, channels and customers;
3. Innovating and positioning our products to deliver superior customer satisfaction and value;
4. Increasing margins by improving price realization and cost management;
5. Preserving the long-term sustainability of our resources; and
6. Improving our organizational capability and capacity, talent, diversity and engagement
We also believe that we have the people, processes and financial resources to execute this strategy
to create value for our shareholders.
We look forward to a 2013 and the opportunities it will bring for Clearwater and its shareholders.
Sincerely,
Ian D. Smith
Chief Executive Officer
Clearwater Seafoods Incorporated
12| Page
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”) was prepared effective March
11, 2013.
The Audit Committee and the Board of Directors of Clearwater Seafoods Incorporated
(“Clearwater”) have reviewed and approved the contents of this MD&A, the financial
statements and the 2012 fourth quarter news release.
This MD&A should be read in conjunction with the 2012 annual financial statements and
the 2012 Annual Information Form, which are available on Sedar at www.sedar.com as
well as Clearwater’s website, www.clearwater.ca.
COMMENTARY REGARDING FORWARD-LOOKING STATEMENTS
This Report may contain forward-looking statements. Such statements involve known
and unknown risks, uncertainties, and other factors outside management’s control
including, but not limited to, total allowable catch levels, selling prices, weather,
exchange rates, fuel and other input costs that could cause actual results to differ
materially from those expressed in the forward-looking statements. Clearwater does not
undertake any obligation to publicly revise these forward-looking statements to reflect
subsequent events or circumstances other than as required under applicable securities
laws.
OVERVIEW OF CLEARWATER
Clearwater is recognized for its consistent quality, wide diversity, and reliable delivery of
premium, wild, eco-labeled seafood, including scallops, lobster, clams, coldwater
shrimp, crab and ground fish. Our key competitive advantages include ownership of
licences and quotas in key species, our innovations and intellectual property in
harvesting and processing technologies, and our vertical integration, which allows
Clearwater to manage harvesting, process, marketing, sales and distribution all in-
house. Since the founding of the business in 1976, Clearwater has invested in science,
people, technology, resource ownership and resource management to preserve and
grow its seafood resource. This commitment has allowed Clearwater to become a
leader in the global seafood market.
13| Page
SELECTED ANNUAL INFORMATION
(In 000’s except per share amounts)
For the year ended December 31
Sales
Gross Margin
Net earnings (loss)
Basic and diluted earnings per share
2011
2012
2010
$ 350,447 $ 332,785 $ 315,540
69,565 58,818
74,257
22,955 (15,278)
22,704
0.32 (0.38)
0.29
Adjusted EBITDA
Total assets *
Long-term debt *
72,243
61,188 50,695
412,150
253,791
387,392 322,152
247,100 203,433
* Total assets and long term debt for 2010 do not reflect the consolidation of an entity previously proportionately consolidated
CLEARWATER’S MISSION, VALUE PROPOSITION AND STRATEGIES
Mission
Clearwater’s mission is to build the world’s most extraordinary, wild seafood company,
dedicated to sustainable seafood excellence.
We define:
“extraordinary” as sustainable, profitable growth in revenue, margins, adjusted
EBITDA and the creation of long term shareholder value;
“wild seafood” as premium wild shellfish. Including our core species – (scallops,
lobster, clams and coldwater shrimp); and
“sustainable seafood excellence” as delivering best in class, quality, food
safety, traceability and certified sustainability.
We believe that the fulfillment of this mission will result in extraordinary value creation
for shareholders, customers, employees and for the communities in which we work and
live.
Over the last two years, Clearwater has made significant progress in all aspects of its
mission. Revenues have increased 11.1% since 2010 despite foreign exchange
volatility. Gross margins have increased more than 2.6 percentage points from 18.6% in
2010 to 21.2% in 2012. Adjusted EBITDA has grown at a 19.4% cumulative average
growth rate over the last two years.
With this improved performance Clearwater has been able to improve its capital
structure, increase shareholder value and reduce leverage to 2.9x adjusted EBITDA at
December 31, 2012 versus 3.8x at December 31, 2010.
14| Page
Value Proposition
At Clearwater, we have a passion for wild seafood and strive to deliver a highly
differentiated and competitively advantaged value proposition to a global customer
base. Key elements of Clearwater’s unique value proposition are:
Great tasting, nutritious, highest quality, frozen-at-sea, premium shellfish.
Expertise in premium shellfish science, harvesting, processing and logistics
technology ensuring quality and safety from “ocean to plate”.
Marine Stewardship Council (“MSC”) certification for sustainability of species
ensuring both the traceability and long term health of our wild resource.
Competitively advantaged global customer service with
local market
understanding and insight.
Scale in license and quota ownership guaranteeing exclusive and stable supply
to even the largest global retail and food service customers.
Strategies
Clearwater’s six core strategies are designed to strengthen a competitive and
differentiated value proposition. They are:
1. Expand access to supply of core species through procurement, acquisitions,
partnerships,
joint ventures, and yield-improving harvesting and processing
technology. At Clearwater, we strive to sell everything we catch at a premium. But,
being a sustainable harvester in a world of rapidly growing global demand and
limited supply of wild seafood means that we must act responsibly and with agility
and creativity to increase supply.
2. Target profitable and growing markets, channels and customers on the basis of
size, profitability, demand for sustainable seafood and Clearwater’s ability to win.
The increase in global demand for premium shellfish and per capita consumption
can be explained by general population growth, the shift to healthier eating choices
among aging boomers and by rising incomes and purchasing power of middle class
consumers in emerging economies –especially in Asia.
Clearwater’s worldwide distribution presence combined with local sales and
marketing teams creates a competitive advantage and positions Clearwater for
growth in both mature and emerging markets. Clearwater has sales offices in all
major geographies including the United States, Canada, Europe, as well as four
representative offices in China.
15| Page
3. Innovate and position products to deliver superior customer satisfaction and
value. The value of Clearwater’s premium seafood is primarily differentiated on the
dimensions of taste, nutrition, quality, safety and sustainability. Clearwater is best
known in the industry for pioneering innovative harvesting technologies and
processing practices that enhance this positioning.
Going forward, Clearwater will continue to lever these strengths and its vertical
integration to win in existing segments while capturing a growing share of the
seafood value chain through the introduction of value-added new products in core
species.
4. Increase margins by improving price realization and cost management,
exercising price influence to maximize revenue and profit while managing supply. In
addition Clearwater will continue to invest in R&D, introducing state-of-the-art
harvesting, processing, storage and delivery systems that minimize per pound cost,
reduce waste, increase yield and improve quality and reliability of supply.
5. Pursue and preserve the long term sustainability of resources on Land and
Sea. Our fishing licences and quotas are the cornerstone of Clearwater’s business.
From the beginning, Clearwater has invested in licences and quota in rights based
fisheries to guarantee access to supply, as well as to create a defensible position in
the market place. Clearwater’s licences and quotas provide not only the security of
supply, but also the scale needed to invest in leading edge science and innovative
harvesting, processing and marketing efforts.
Its strategy of investing in secure access to the resource depends on ensuring
sustainable harvesting through responsible resource management. Clearwater
works in partnership with the Department of Fisheries and Oceans (“DFO”) to lead
research and development of sustainable harvesting practices, ensuring long term
health of the resource and value for the licenses and total allowable catch (“TAC”).
6. Build organizational capability, capacity and engagement. To ensure the
fulfillment of its mission, value proposition and strategies, Clearwater must continue
to attract, develop, recognize, reward and retain the best global talent. Clearwater’s
investment into training and development of its employees is just one of the reasons
we were recognized again as one of the top 101 companies in Atlantic Canada.
Management’s commitment to creating shareholder value
Management has undertaken six initiatives to create shareholder value.
1. Growing adjusted EBITDA and sales sustainably - Clearwater has
experienced continued growth in adjusted EBITDA and sales by controlling
costs and improving productivity, product mix and prices.
16| Page
2. Generating strong free cash flows and improving leverage – Clearwater is
focused on generating increasing free cash flows and improving leverage on
an annualized basis through generating strong cash earnings, managing its
working capital and carefully planning and managing its capital expenditure
program. Clearwater’s operations have a predictable seasonal pattern in
which adjusted EBITDA is higher in the second half of the year and capital
expenditures and inventories are higher in the first half of the year. This
results in lower free cash flows, higher debt balances and higher leverage in
the first half of the year and higher free cash flows, lower debt balances and
lower leverage levels in the second half of the year.
3. Improving the capital structure - During the second quarter of 2012
Clearwater successfully completed a series of capital market transactions that
substantially improved its debt structure. The financing enables Clearwater to
reduce projected interest costs by approximately $4.6 million annually,
strengthens its liquidity and provides the capital structure necessary to execute
growth plans while further reducing overall leverage. Clearwater is now
focused on initiating an active communications plan with its investors to ensure
continued access, when required, to all sources of growth capital.
4. Focused management of foreign exchange - Clearwater has a focused and
targeted foreign exchange hedging program to reduce the impact of short-term
volatility in exchange rates on earnings. This, combined with stronger
processes for price management reduces the impact of exchange rate volatility
on the business.
5. Building world class leadership, management, sales and marketing
capabilities - Clearwater has begun implementing best in class programs for
key account management, new product development, sales and operations
planning, recruitment and compensation practices. In addition, over the past
two years Clearwater has added a number of new people to its senior
management team and its’ Board of Directors.
6. Communicating underlying asset values - Clearwater has an industry-
leading portfolio of quotas that provide strong security of underlying value to
lenders and investors. In the second quarter of 2012 an independent appraisal
of these quotas was completed by TriNav Fisheries Consultants, which placed
a value on the quotas of $453 million. Clearwater obtained further
independent support for the value in these licenses in the third quarter of 2012
when both the Arctic surf clam fishery and Nova Scotia snow crab fishery
received the Marine Stewardship Council (MSC) certification. These species
join the Clearwater family of MSC-certified offerings including Canadian sea
scallops, Argentine scallops, Canadian coldwater shrimp and Eastern
Canadian offshore lobster. Clearwater now boasts a total of seven species
certified by the MSC, completing the certification of all its core products, and
17| Page
giving the Company the widest selection of MSC-certified species of any
seafood harvester worldwide.
CAPABILITY TO DELIVER RESULTS
Clearwater's revenues and earnings are dependent primarily on its ability to harvest and
purchase shellfish. This in turn is dependent to a large extent on the annual total
allowable catch (“TAC”) for each species. The annual TAC is related to the health of the
stock of the particular species.
The primary shellfish stocks that Clearwater harvests are sea and Argentine scallops,
clams, lobster and coldwater shrimp, which are harvested in offshore fisheries that have
a limited number of participants. Clearwater harvests sea and Argentine scallops and
clams with its own vessels. Clearwater obtains its lobster and coldwater shrimp through
harvesting with its own vessels and through purchases from independent fishermen.
The sea scallop resource has been stable over the last number of years.
Clearwater lands virtually all its’ sea scallop quota each year and harvests quotas
for other industry participants under harvesting contracts to improve the
utilization of its fleet.
The Arctic surf clam resource is stable. Clearwater has the Banquereau Bank
and the Grand Banks quotas available for harvesting. Total annual landings are
currently based upon market demand.
The Argentine scallop resource is has stabilized after a period of growth and
expansion of the fishery. Argentina, is the first scallop fishery in the world to have
earned
independent
rigorous Marine Stewardship Council
certification. Clearwater lands virtually all its scallop quota each year
(“MSC”)
the
Coldwater shrimp - Clearwater expects the offshore Northern shrimp TAC to
decline slightly over the next several years from historically high levels.
Clearwater holds access to quotas directly through licences and through long
term harvesting agreements that exceed its harvesting capacity and will serve to
offset any mid to long term declines in the TAC for northern shrimp. Clearwater
does procure shrimp from the inshore for its cooked and peeled business and
supplements this with raw material from its offshore vessels
The offshore lobster resource is strong with a consistent offshore TAC and the
inshore resource is strong with abundant catches. Clearwater harvests virtually
all its lobster quota each year. During 2012, Clearwater purchased
approximately 80% of its total pounds from inshore lobster fishermen.
Clearwater maintains the largest, most modern, fleet of factory freezer vessels in
Canada together with vessels that are used to harvest Clearwater's offshore lobster and
complete research and development.
18| Page
The condition and operating capability of these vessels is paramount for Clearwater to
successfully operate in its fisheries. In the past three years Clearwater has invested
approximately $36.3 million on its fleet.
Clearwater typically replaces vessels as a result of its focus on innovation and the
adoption of new and leading edge technology. These additional investments typically
provide greater efficiencies, lower costs and, in some cases, create new product forms.
The following schedule sets out Clearwater’s capital expenditures and harvesting
license investments for the past three years and clearly shows that Clearwater is both
investing sufficiently to maintain its existing fleet and plants and is also investing for
growth:
(In 000’s)
For the years ended December 31
Vessels
Plants and other
Return on Investments
Maintenance capital
Maintenance capital
Repairs and maintenance
2012
11,780
4,794
16,574
$
2011
17,595
3,642
21,237
$
2010
6,931
2,488
9,419
$
TOTAL
36,306
10,924
47,230
$
2,774
13,800
16,574
$
6,850
14,387
21,237
$
1,194
8,225
9,419
$
10,818
36,412
47,230
$
13,800
13,374
27,174
$
14,387
14,466
28,853
$
8,225
13,500
21,725
$
36,412
41,339
77,751
$
Depreciation/Amortization
Maintenance spending as a % of depreciation
$
22,498
120.8%
$
19,503
147.9%
$
14,301
151.9%
$
56,302
138.1%
During 2012, Clearwater completed refits on its vessels of $11.8 million. Capital
expenditures for the year also included $2.0 million in relation to new vessel based
processing technologies.
In 2011, Clearwater completed a substantial refit program, of $11.4 million, on the
scallop, clam, shrimp and lobster factory vessels. Capital expenditures for the year also
included $2.1 million in relation to new vessel based processing technologies and $4.1
million on the purchase of the remaining 40% share in a scallop vessel.
In 2010 capital expenditures were minimal as the majority of Clearwater’s significant
projects were largely completed in 2008 and restrictions on capital expenditures from
senior lending agreements reduced funds available for capital expenditures. Capital
expenditures for 2010 primarily related to $5.9 million in vessel refits, $1.2 million in new
vessel based processing technologies, and $1.0 million on processing plant additions in
Argentina.
19| Page
In addition to the annual amounts capitalized above, Clearwater historically has spent
and expensed on average about $13.8 million a year on the maintenance of its fleet and
processing plants. This reflects Clearwater’s commitment to ensuring that the assets
are kept in top condition, enabling it to harvest and process its allowable catch efficiently
and providing sufficient capacity.
Clearwater’s largest fleet investments are in its ten factory vessels. These vessels are
used in the harvesting of Canadian scallops, Argentine scallops, shrimp and clams.
Of the ten factory vessels:
Two are used to harvest shrimp and are on average 19 years old. These
vessels have a capacity to harvest 14,000 to 18,000 metric tons of our 22,000
metric ton quota and all of our 1,900 metric ton turbot quota in a ready for
market form. One of the vessels was built in 1985 and will be due for
replacement or extensive refit within the next 5 years.
Two are used to harvest sea scallops and are on average 15 years old.
During 2012, Clearwater completed the conversion to automated processing
factories using technology developed by Clearwater. As a result of the
improvement in harvesting and processing capabilities, Clearwater has two
idle vessels. It plans to convert one of the idle vessels to harvest bay
Argentine scallops in 2013 and to sell the other surplus vessel.
Two of Clearwater’s vessels are used to harvest Argentine scallops and are
on average 32 years old. One vessel is expected to be replaced over the
next year by the transfer and conversion of an idle sea scallop vessel. The
second has about ten years of useful life available.
Two of Clearwater’s vessels are used to harvest clams and are on average
19 years old. Both of these vessels are harvesting at capacity. In 2013
Clearwater plans to upgrade the factories on these vessels to improve
efficiency of processing the catch. In addition, one of the vessels was built in
1985 and will be due for replacement within the next five years.
20| Page
EXPLANATION OF ANNUAL 2012 EARNINGS
Overview
The statements reflect the earnings of Clearwater for the years ended December 31,
2012 and 2011.
In 000's of Canadian dollars
Year ended December 31
Sales
Cost of goods sold
Gross margin
Administrative and selling
Finance costs
Other income
Research and development
Gain on settlement of Glitnir liabilities
Gain on change in control of joint venture
Earnings before income taxes
Income tax (recovery) expense
Earnings
Earnings attributable to:
Non-controlling interests
Shareholders of Clearwater
2012
2011
$
350,447
276,190
74,257
21.2%
$
332,785
263,220
69,565
20.9%
32,837
24,388
(2,412)
1,759
-
-
56,572
33,345
38,604
(5,893)
707
(12,445)
(11,571)
42,747
17,685
(5,019)
22,704
$
26,818
3,863
22,955
$
$
$
7,695
15,009
22,704
6,619
16,336
22,955
$
$
21| Page
Annual 2012 Earnings
Clearwater reported sales of $350.4 million and adjusted EBITDA1 of $72.2 million
versus 2011 comparative figures of $332.8 million and $61.2 million representing growth
rates of 5.3% in sales and 18.1% in adjusted EBITDA. This represents the fourth
consecutive year of improved results.
In 2012 earnings improved by $15.8 million as compared to 2011, excluding one-time
accounting gains in 2012 of $8.0 million related to a realized deferred income tax asset
and in 2011 of $11.6 million from the acquisition of an entity previously proportionally
consolidated and $12.4 million on the settlement of liabilities with Glitnir. Improvements
to net earnings in 2012 were largely due to higher gross margin and $8.9 million on
realized foreign exchange gains primarily on Euro and US forward exchange contracts
as the average spot rates were lower than average contract prices for both the Euro and
US dollar contracts.
Operational improvements from sales revenue growth of 5.3% and lower harvesting
costs resulted in improvements in gross margin of $4.7 million.
These improvements were supplemented by non-cash unrealized foreign exchange
gains on long term debt and foreign exchange contracts as well as lower interest
expense and were offset by higher debt settlement and refinancing fees related to debt
refinancing that was completed in June 2012.
In 000’s of Canadian dollars
Year ended December 31
2012
2011
Change
Net earnings
$
22,704
$
22,955
$
(251)
Explanation of changes in earnings:
Gain on settlement of Glitnir liabilities in 2011
Gain on change in control of joint venture in 2011
Higher realized foreign exchange income
Higher future income tax asset
Higher gross margin
Higher fees on settlement of debt
Higher unrealized foreign exchange income
Lower other income
Lower fair value adjustment on long term debt
Lower interest expense
All other
1 – Refer to definition of Adjusted EBITDA
(12,445)
(11,571)
8,970
8,010
4,692
(4,200)
4,121
(3,481)
2,819
2,506
328
(251)
$
22| Page
Sales by region
In 000's of Canadian dollars
Year ended December 31
China
Japan
Other Asia
Asia
Europe
United States
Canada
North America
Other
$
2012
59,624
46,366
17,693
123,683
$
2011
46,069
42,649
15,034
103,752
$
Change
13,555
3,717
2,659
19,931
122,884
54,157
47,553
101,710
126,697
55,457
44,332
99,789
(3,813)
(1,300)
3,221
1,921
2,170
350,447
$
2,547
332,785
$
(377)
17,662
$
%
29.4
8.7
17.7
19.2
(3.0)
(2.3)
7.3
1.9
(14.8)
5.3
Asia
During 2012, Asia, at 35.3% of annual
sales, surpassed Europe to become
Clearwater’s
regional market
primarily as a result of strong market
demand from China.
largest
China
China is a growing market for clams,
coldwater shrimp, lobster and turbot. In
2011, China surpassed Japan
to
become our largest market segment in
Asia.
Sales to customers in China increased
$13.6 million, or 29.4%, to $59.6 million
primarily as a result of an increase in
available supply of coldwater shrimp
due to a higher number of landings in
2012. In addition the increase in sales
was a result of strong market demand
for clams, turbot and lobster which in
turn supported strong selling prices.
Chinese sales are almost exclusively
transacted in US dollars. The US dollar
the Canadian
strengthened against
dollar during 2012 contributing to the
in sales as average
improvement
23| Page
foreign exchange rates2 for the US
dollar increased by 0.7% to 1.00 in 2012
from 0.99 in 2011.
A decline in sales volumes for lobster
partially offset the increase in sales for
the region.
Europe
Europe, at 35.1% of annual sales, is
Clearwater’s largest scallop market and
it is an important market for coldwater
shrimp and lobster products.
European sales declined $3.8 million to
$122.9 million in 2012, from $126.7
million for 2011 primarily as a result of
an economic slowdown within the region
that reduced sales volumes and prices
for Argentine scallops and lobster. This
decline was partially offset by an
for
demand
in market
increase
coldwater shrimp and sea scallops.
Finally, sales, which are primarily
transacted in the Euro and the UK
Pound, were negatively impacted during
the year as the Euro declined 7.1%
relative to the Canadian dollar from 1.38
in 2011 to 1.28 in 2012, while the UK
Pound improved 0.2% to 1.58 over the
same period.
Japan
Japan is an important market for clams,
lobster, coldwater shrimp and turbot.
Sales to customers in Japan increased
8.7%, or $3.7 million primarily as a
result of an increase in available supply
for coldwater shrimp. Strong sales
volumes and sales prices for clams also
contributed to the increase in sales.
This was partially offset by a reduction
in sales volumes for turbot as available
supply was allocated to regions with
higher margins.
Average foreign exchange rates for the
Yen improved during the quarter by
for 2012, partially
0.7%
contributing to the improvement in sales.
to 0.013
2 – Refer to risks and uncertainties
Other Asia
the other Asia region
Sales within
includes sales
to Korea, Taiwan,
Singapore and other Asian countries.
These Asian countries are an important
market for clams, shrimp and turbot.
Other Asian sales increased $2.7 million
or 17.7%
in 2012
to $17.7 million
primarily as a result of strong demand
for clams and
and sales prices
In addition an
coldwater shrimp.
for
supply
increase
coldwater shrimp contributed
the
to
increase in sales.
in available
24| Page
the Canadian
strengthened against
dollar. Average foreign exchange rates
for the US dollar increased by 0.7% to
1.00 in 2012 from 0.99 in 2011.
Canada
Canada is a large market for lobster,
scallops and coldwater shrimp.
Sales within Canada increased $3.2
million, or 7.3% primarily as a result of
an increase in sales volumes for crab
from higher available supply and an
increase in sales volumes and prices for
scallops.
This was partially offset by a decline in
sales prices that occurred due to a
change in product mix for lobsters.
is an
United States
The United States, at 15.4% of annual
for
sales,
scallops, coldwater shrimp, lobster and
clams. It is our most diverse market,
where a wide variety of products are
sold.
important market
Sales in the United States declined $1.3
million, or 2.3%, to $54.2 million as a
result of a reduction in supply for sea
scallops and shrimp as available supply
was sold
to other higher yielding
markets. Declines in sales prices from a
change
lobsters
in product mix
contributed to the decline in sales.
for
Increases in sales prices for scallops
and shrimp and an increase in sales
volumes for lobster partially offset the
decline in sales.
Sales were also positively impacted by
exchange rates as average
foreign
the US dollar
exchange
rates
for
25| Page
Sales by species
In 000's of Canadian dollars
Year ended December 31
Scallops*
Coldwater shrimp
Clams
Lobster
Crab
Ground fish and other
*Refer to risks and uncertainties
$
$
2012
109,899
77,497
71,894
61,458
15,628
14,071
350,447
2011
115,843
61,946
61,705
64,073
13,831
15,387
332,785
Change
(5,944)
15,551
10,189
(2,615)
1,797
(1,316)
17,662
$
%
(5.1)
25.1
16.5
(4.1)
13.0
(8.6)
5.3
$
$
Improvements in sales were as a result of an increase in sales volumes for coldwater
shrimp, clams and crab, as well as strong selling prices for clams, sea scallops, and
coldwater shrimp.
This increase in sales was partially offset by lower available supply volumes of both sea
scallops and turbot. Sales volumes for Argentine scallops declined during 2012 as a
result of the economic conditions within Europe. The decline was partially offset by
transferring available supply to higher yielding markets. Increases in sales price from a
change in product mix for lobsters partially offset the decline in sales volumes for
lobster.
26| Page
Cost of Goods Sold
In 000's of Canadian dollars
Year ended December 31
Harvesting and procurement
Manufacturing
Freight, customs and other transport
Depreciation
Administrative
$
$
$
2012
189,045
32,641
21,254
22,251
10,999
276,190
2011
181,162
31,057
21,179
18,983
10,839
263,220
Change
7,883
1,584
75
3,268
160
12,970
$
$
$
%
4.4
5.1
0.4
17.2
1.5
4.9
Cost of goods sold increased $13.0 million or 4.9% to $276.2 million primarily due to
an increase in per pound procurement costs, manufacturing costs and depreciation.
The increase in procurement costs related to an increase in raw material costs for
lobster and shrimp. The increase in manufacturing costs is a result of higher volumes
sold. In addition, higher depreciation charges resulted from an increase in capital
expenditures, particularly refits which are depreciated over three to four years.
Harvesting and procurement include all costs incurred in the operation of the vessels
including labour, fuel, repairs and maintenance, fishing gear supplies, and other costs
and fees plus procured raw material costs for species such as lobster, shrimp, scallops
and crab. Excluding the impact of higher volumes sold, harvesting costs declined in
2012 primarily as a result of improved catch rates in several species and the planned
delay in harvesting Canadian scallops in the first quarter. Higher fuel and inflation
particularly in Argentina partially offset this decline in harvesting costs. In addition,
procurement costs were higher as purchased volumes and purchase cost per pound for
lobster and shrimp increased.
Fuel costs for our vessels increased $0.3 million for 2012 to $23.9 million. This
increase was a result of higher average prices per litre of fuel of $0.08, partially offset by
a decline in volumes consumed on a per lbs basis due to higher catch rates. The sea
scallop fleet benefited from the installation of new shucking equipment, which increased
catch rates throughout 2012. As a result of the improved efficiencies management
made a decision to delay harvesting for sea scallops later in the first half of the year
contributing to the decline in consumption during the year. Clearwater’s vessels used
approximately 27.8 million litres of fuel in 2012. Based on 2012 fuel consumption, a
one-cent per litre change in the price of fuel would impact harvesting costs by
approximately $0.3 million.
Manufacturing includes labour costs related to the production of goods, plant utilities
and supplies. Labour costs increased for the year as a result of higher production levels
and scheduled increases in wages, salaries and benefits. Manufacturing costs also
increased during the year primarily as a result of an increase in the cost of plant utilities,
repairs and maintenance and storage.
27| Page
Depreciation expense from assets used in the harvesting and production of goods
increased $3.3 million to $22.3 million as a result of vessel refits and other additions that
were completed during 2012. Vessel refits are depreciated over a 3 to 4 year period.
Administrative overheads include salaries and benefits, professional and consulting
fees and management fees attributable to the harvesting and production of goods.
Refer to administrative and selling for further information.
Gross margin
Gross margin improved by $4.7 million, or 6.7% to $74.3 million versus $69.6 million in
2011. Gross margins were positively impacted by increases in sales prices in certain
species, the continuance of prior year price increases throughout 2012 for other species
and an increase in sales volumes for coldwater shrimp, and clams.
Lower volumes of Argentine scallops as well as higher fuel, procurement costs, direct
wages, indirect wages and salaries, partially offset the improvement in margins.
Margins were negatively impacted by lower average foreign exchange rates2 for the
Euro that resulted in a reduction in sales and gross margin of $5.9 million. Higher
average foreign exchange rates for the US dollar partially offset the decline in foreign
exchange. The net impact on sales from all foreign exchange volatility was a reduction
in sales and gross margins of $5.2 million.
Year ended December 31
2012
2011
Average
rate
Currency
% sales
realized % sales
US dollars
Euros
Japanese Yen
UK pounds
Canadian dollar and other
45.4%
22.1%
12.5%
3.3%
16.7%
100.0%
0.999
1.280
0.013
1.580
43.1%
24.7%
12.7%
4.3%
15.2%
100.0%
Average
rate
realized
Change
in rate
0.992
1.377
0.012
1.578
0.7%
-7.1%
0.7%
0.2%
2 – Refer to risks and uncertainties for further information
28| Page
Administration and selling
In 000's of Canadian dollars
Year ended December 31
Salaries and benefits
Share-based incentive compensation
Employee compensation
Consulting and professional fees
Other
Selling costs
Travel
Occupancy
Allocation to cost of goods sold
$
2012
26,196
2,331
28,527
$
2011
28,523
904
29,427
$
Change
(2,327)
1,427
(900)
5,069
4,913
1,871
2,036
1,412
(10,991)
32,837
$
4,316
4,485
2,602
1,981
1,317
(10,783)
33,345
$
753
428
(731)
55
95
(208)
(508)
$
%
(8.2)
157.9
(3.1)
17.4
9.5
(28.1)
2.8
7.2
1.9
(1.5)
Administration and selling costs declined $0.5 million, or 1.5%, to $32.8 million as
Clearwater incurred higher severance costs for salaried employees in 2011.
Share-based incentive compensation increased $1.4 million from 2011 as the cost of
Clearwater’s stock-based compensation performance incentive programs reflected
increases in our share price and additional units granted during 2012 for key executives
and directors.
Consulting and professional fees include legal, audit and accounting, insurance and
other specialized consulting services. Costs will vary year over year based upon
business requirements. The increase in costs in 2012 relates in part to recruiting costs,
legal fees, technology development and risk consulting fees.
Selling costs
trade shows, samples, product
development and bad debt expenses. The reduction in costs of $0.7 million to $1.9
million in 2012 relates primarily to recoveries of bad debts.
include advertising, marketing,
The allocation to cost of goods sold reflects costs that are attributable to the
production of goods and are allocated on a proportionate basis based on production
volumes.
29| Page
Finance costs
In 000’s of Canadian dollars
Year ended December 31
Interest and bank charges
Amortization of deferred financing charges
Interest on current and long term debt
Fair value adjustment on convertible debentures
Foreign exchange and derivative contracts
Debt settlement and refinancing fees
$
2012
20,347
1,158
21,505
2,898
(6,108)
6,093
24,388
$
$
2011
20,899
3,112
24,011
5,717
6,983
1,893
38,604
$
On June 6, 2012 Clearwater completed a $264 million refinancing of its debt facilities.
The refinancing was completed to further strengthen Clearwater’s liquidity position,
reduce cost of capital and provide a capital structure to allow management to continue
to create shareholder value. The refinancing reduced Clearwater’s cost of capital by
replacing higher cost debt facilities with lower cost facilities.
Interest declined $2.5 million for 2012 due to lower cash interest but primarily as a
result of a decline in the amortization of deferred financing charges. The lower cash
interest during 2012 was partially offset by an increase in debt due to higher levels of
working capital in 2012. In 2011 interest expense included amortization of deferred
financing charges for ISK denominated bonds and the term facilities that were
refinanced in the first quarter of 2011.
The fair value adjustment on the convertible debentures represents the change in
value of the convertible debentures and varies depending on market conditions and
interest rates. The reduction in the fair value adjustment for 2012 primarily relates to
the redemption of the Class C convertible debentures that occurred in July 2012. In
addition the convertible debentures have traded from below face value two years ago to
and above face value in 2012.
2 – Refer to risks and uncertainties for further information
30| Page
Foreign exchange and derivative contracts
In 000’s of Canadian dollars
Year ended December 31
Realized loss (income)
Foreign exchange contracts
Mark-to-market on interest and currency swaps
Working capital
Unrealized (gain) loss
Foreign exchange on long term debt and other assets
Mark-to-market on foreign exchange contracts
Mark-to-market on interest swap
2012
2011
$
(3,991)
-
1,359
(2,632)
$
2,578
1,048
2,712
6,338
(3,013)
(663)
200
(3,476)
932
(287)
-
645
$
(6,108)
$
6,983
Foreign exchange and derivative (gains) losses2 changed by $13.1 million from a
loss of $7.0 million in 2011 to a gain of $6.1 million in 2012. The foreign exchange gain
for 2012 was primarily a result of realized gains of $4.0 million on foreign exchange
contracts and $3.0 million of unrealized gains from the translation of the US dollar
denominated debt as the US dollar weakened against the Canadian dollar from $1.02 at
December 2011 to $0.995 at December 2012.
Realized foreign exchange gains on foreign exchange contracts of $4.0 million relate to
Euro and US forward exchange contracts settled within 2012 as average spot rates
used to settle contracts were 3.6% and 2.6% lower than the average contract price for
2012 for the Euro and the US dollar, respectively.
In addition, in 2011 there were realized losses incurred on mark to market adjustments
on interest rate and currency swaps that settled in the first quarter of 2012.
The gains in 2012 were partially offset by foreign exchange losses of $1.4 million from
translating net working capital assets denominated in foreign currencies to Canadian
dollars related to weakening foreign exchange rates against the Canadian dollar for the
US dollar and Euro.
During the last half of 2012, Clearwater entered into an interest rate swap that
effectively locks in the interest rate on Canadian $30 million of long term debt at an
effective interest rate of 6.29%, maturing May 31, 2017. Clearwater realized a mark-to-
market loss of $0.2 million for 2012 related to the interest rate swap.
Debt settlement and refinancing fees represent fees incurred for the settlement or
refinancing of long term debt and will vary year to year depending on refinancing
activities.
31| Page
The debt settlement costs of $6.1 million in 2012 include $3.1 million in refinancing fees
and early payment fees related to refinancing of debt facilities in June 2012 and $3.0
million of write-offs of deferred financing charges associated with the previously existing
revolving debt facility and second lien loan.
For 2011, debt settlement and refinancing fees include a gain of $1.8 million related to
the settlement of the ISK denominated bonds, $2.8 million in fees resulting from the
refinancing of the senior first lien loan debt facilities, and $1.0 million in other refinancing
and restructuring fees.
2 – Refer to risks and uncertainties
Other income
In 000's of Canadian dollars
Year ended December 31
Royalties, interest, and other fees
Other fees
Insurance claims
2012
2011
(1,443)
(645)
(324)
(2,412)
$
(2,415)
(1,749)
(1,729)
(5,893)
$
Royalties and fees and other includes income related to quota rental, commissions,
processing fees and other miscellaneous income and expense that vary based upon the
operations of the business. Other income declined $3.5 million from 2011 due primarily
to a decline in insurance claims during 2012. For 2011 insurance claims related
primarily to the repair of a building damaged by a fire that occurred at one of the plants
and repairs to one of our clam vessels.
Research and Development
Research and development relates to new technology and research into ocean habitats
and fishing grounds. Research and development can vary year to year depending on
the scope, timing and volume of research completed. Clearwater’s business plans call
for increased investment in research and development .
Gain on change in control of joint venture
As a result of changes made effective January 1, 2011 to the partnership agreement
that governs Clearwater’s frozen-at-sea shrimp and turbot harvesting operations,
Clearwater began to fully consolidate these operations, which resulted in a one-time
non-cash gain of $11.6 million related to recording the value of the fishing agreements
assigned to the partnership at market value as at January 1, 2011.
32| Page
Income taxes
Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the
United Kingdom and Canada. Lower earnings in Argentina contributed to lower income
cash taxes in 2012.
During 2012, Clearwater recorded a deferred tax asset of $8.0 million related to
deferred tax assets that are expected to be utilized based upon 2013 estimated taxable
earnings. Clearwater has unrecorded tax losses of approximately $48.7 million,
representing approximately $14.9 million in deferred tax asset as at December 31,
2012. The unrecorded asset can be utilized to the extent Clearwater realizes taxable
earnings in Canada in future periods.
Non-controlling interest
Non-controlling interest relates to earnings from Clearwater’s investment in subsidiaries
in Argentina, Nova Scotia and Newfoundland and Labrador.
Capital Structure
Clearwater’s capital structure includes a combination of equity and various types of debt
facilities. Clearwater’s objective when managing its capital structure is to obtain the
lowest cost of capital available, while maintaining flexibility and reducing exchange risk
by borrowing when appropriate in currencies other than the Canadian dollar.
Clearwater uses
subordinated debt to lower its cost of capital.
leverage,
in particular senior revolving and
term debt, and
The amount of debt available to Clearwater is a function of earnings that can be
impacted by known and unknown risks, uncertainties, and other factors outside
Clearwater’s control including, but not limited to, total allowable catch levels, selling
prices, weather, exchange rates, fuel and other input costs.
Clearwater maintains flexibility in its capital structure by regularly reviewing forecasts of
future results and making any required changes to its debt and equity facilities on a
proactive basis. These changes can include early repayment of debt, repurchasing
shares, issuing new debt or equity, utilizing surplus cash, extending the term of existing
debt facilities, selling assets to repay debt and if required, limiting debt paid.
Clearwater’s capital structure is as follows as at December 31, 2012 and December 31,
2011:
33| Page
In 000’s of Canadian dollars
As at December 31
Equity
Common shares
Retained earnings (deficit)
Cumulative translation account
Non-controlling interest
Long term debt
Subordinated debt
2013 convertible debentures
2014 convertible debentures
Senior debt, non-amortizing
Term loan, due in 2091
Second lien loan
Glitnir liability
Senior debt, amortizing
Term Loan A, due 2017
Term Loan B, due 2018 (including embedded derivative)
First lien loan
Revolving debt, due in 2017
Marine mortgage, due in 2017
Other loans
Total long term debt
Total capital structure
2012
2011
$
$
64,867
14,616
(3,866)
75,617
30,904
106,521
65,309
(835)
(3,122)
61,352
32,700
94,052
43,573
41,632
85,205
3,500
43,822
14,500
61,822
-
-
77,250
17,513
4,470
840
100,073
247,100
-
44,722
44,722
3,500
-
-
3,500
72,259
129,986
-
-
2,697
627
205,569
253,791
$
360,312
$
341,152
There are 50,948,698 shares outstanding as of December 31, 2012 (December 31,
2011 - 50,948,698).
On June 6, 2012 Clearwater completed a $264.0 million refinancing in order to further
strengthen its liquidity position, reduce its cost of capital and provide for a capital
structure to allow management to continue to build strong shareholder value. The
refinancing included the redemption/repayment of:
Canadian $43.4 million 10.5% convertible debentures, ("Debentures").
US $54.5 million of 12% second lien debt;
Canadian $74.2 million in existing senior term notes; and
34| Page
The remaining funds, after payment of expenses, were used to pay down the
balance on the existing asset based revolving credit facility to $16.3 million.
In 2012 Clearwater reached an agreement with Glitnir Banki Hf (“Glitnir”) that provided
for the settlement and release of all outstanding claims in exchange for a payment by
Clearwater of Canadian $14.5 million.
Long term debt consists of convertible debentures as well as non-amortizing and
amortizing senior debt.
The 2014 Convertible debentures which accrue interest at 7.25%, mature in March
2014 and are convertible at a price of $5.90 per share. They are redeemable by
Clearwater at face value plus accrued interest. These debentures are recorded at
estimated fair value. The principal amount outstanding as of December 31, 2012 was
$44.4 million (December 31, 2011 - $44.4 million).
To redeem the 2014 series of debentures, in whole or in part, Clearwater must issue a
notice of the redemption not more than 60 days and not less than 30 days prior to the
date of redemption. Any debenture holder that wishes to convert the Debentures held,
rather than to have them redeemed, must complete and deliver a Notice of Conversion
prior to the redemption date.
The convertible debentures are unsecured and subordinated to senior debt. The
debentures pay interest March 31 and September 30. Subject to regulatory approval,
Clearwater may satisfy its obligation to repay the principal amount of the debentures on
redemption or at maturity, in whole or in part, by delivering that number of shares equal
to the amount due divided by 95% of the market price of the shares at that time, plus
accrued interest in cash.
Clearwater has several amortizing senior debt facilities including:
Term loan A due June 2017,
Term loan B due June 2018,
Revolving loan due June 2017, and
A marine mortgage that matures in June 2017.
The term loan A has a principal balance of Canadian $74.1 million, is repayable in
quarterly instalments of $0.5 million to June 2015, $1.4 million from September 2015 to
June 2016 and $2.3 million from September 2016 to March 2017 with the balance due
at maturity in June 2017, and is recorded net of deferred financing charges of $1.8
million. The loan bears interest at an annual rate of banker’s acceptance plus 4.5%,
payable monthly. As of December 31, 2012 this resulted in a rate of 5.8%. The loan
contains an accordion provision that, subject to satisfaction of certain conditions, allows
Clearwater to expand the facility by up to Canadian $25 million. As of September
2012 Clearwater entered into an interest rate swap that effectively locks in the interest
rate on Canadian $30 million of this debt at an effective interest rate of 6.29%, maturing
35| Page
May 31, 2017. The amount outstanding under the swap reduces proportionately at the
same rate as the scheduled payments on the loan.
The term loan B has a principal balance of US dollars $133.3 million is repayable in
quarterly instalments of $0.3 million with the balance of $119.0 million due at maturity in
June 2018. The loan bears interest at an annual rate of US Libor plus 5.5% with a Libor
interest rate floor of 1.25% payable at periods from monthly to annually, depending on
the term selected. As of December 31, 2012 this resulted in an interest rate of 6.75%.
The loan contains an accordion provision that, subject to satisfaction of certain
conditions, allows Clearwater to expand the facility by up to US $50 million. Term loan
B contains an embedded derivative of $4.2 million related to the fair market value of the
Libor interest rate floor of 1.25%. As a result the net balance in Canadian dollars for the
loan is $130.0 million (per the capital structure table) net of deferred financing charges
financing charges of $2.6 million
Under a provision of its Term Loan A and B agreements, Clearwater is required to remit
a portion of “excess cash flows” (Adjusted EBITDA less certain fixed charges) that it
currently estimates to be approximately $11.3 million.
Both the term loan A and the term loan B are secured by a first charge on marine
vessels, licenses and quotas, Clearwater’s investments in certain subsidiaries and a
second charge on accounts receivable, inventory and cash and cash equivalents,
subject to certain limitations.
The revolving loan facility is due June 2017, and provides up to $65.0 million of credit
based on 90% of eligible receivables and up to 75% of eligible inventory and can be
denominated in both Canadian and US dollars. The revolving loan was undrawn as of
December 31, 2012. The Canadian balances bear interest at the banker’s acceptance
rate plus 2.5%. The US dollar balances bear interest rate at the US Libor rate plus
2.5%. As of December 31, 2012 this would result in rates of 4.5% for Canadian
balances and 4.7% for US dollar balances.
The revolving loan is secured by a first charge on accounts receivable, cash and cash
equivalents subject to certain limitations, and inventory as well as a second charge on
marine vessels,
in certain
subsidiaries. The loan has an accordion provision that subject to certain conditions
allows Clearwater to expand the facility by a maximum of Canadian $20.0 million.
licenses and quotas and Clearwater’s
investments
Clearwater’s debt facilities have covenants that include, but are not limited to, leverage
ratios (for which senior and unsubordinated debt is compared to EBITDA, excluding
most significant non-cash and non-recurring items) and fixed charge ratios that limit the
amount of dividends, capital expenditures, and loan repayments to amounts approved
by lenders. Clearwater is in compliance with all of the non-financial and financial
covenants associated with its debt facilities.
36| Page
Some public entities provide information on debt to equity ratios. We do not believe that
this ratio would provide useful information about Clearwater and its capital structure
because a significant amount of assets (harvesting licenses and quotas in particular)
are recorded at historical cost rather than at fair value. Instead, we believe that
leverage measured in relation to adjusted EBITDA is a better measure to evaluate our
capital structure and we have provided that information in the liquidity section.
Liquidity Management
Over the past several years Clearwater has formalized a number of its treasury
management policies and goals so as to promote strong liquidity and continued access
to capital to fund its growth plan.
These include policies and strategies with respect to liquidity, leverage, foreign
exchange management and free cash flows.
Management continuously evaluates its capital structure in light of these policies and
strategies and a summary of the results of its most recent evaluation is as follows:
Liquidity2 - As of December 31, 2012 Clearwater had $41.7 million in cash, and
an undrawn $65 million revolving asset backed loan. The cash balance, together
with available credit on the revolving loan, is used to manage seasonal working
capital demands, capital expenditures, and other commitments. Due to the
seasonality in Clearwater’s business, sales and gross profit are typically higher in
the second half of the calendar year than in the first half of the year and capital
expenditures are typically higher in the first half of the year. This typically results
in Clearwater having higher liquidity in the second half of the year in the form of
higher cash balances and lower balances on revolving debt facilities. Some of
this higher liquidity will be used to repay a portion of term loans during the first
quarter of 2013. Under a provision of its loan agreements, Clearwater is required
to remit a portion of “excess cash flows” (Adjusted EBITDA less certain fixed
charges) that it currently estimates to be approximately $11.3 million.
Free cash flows - Clearwater has a goal to generate strong cash flows from
operations in order to fund interest, scheduled loan payments and capital
expenditures and in turn to use this free cash flow to reduce debt, invest in
growth investments. Clearwater’s goal is to grow free cash flows such that it can
reduce debt and pay a sustainable dividend to its shareholders.
37| Page
2 – Refer to risks and uncertainties
Free cash flows
Adjusted EBITDA
Less:
Cash interest
Cash taxes
Other income and expense items
Operating cash flow before changes in working capital
Change in working capital
Cash flows from operating activities
Uses of cash:
Purchase of property, plant, equipment, quota and other assets
Less: Designated borrowings
Scheduled payments on long-term debt
Distributions to non-controlling interests
Other debt borrowings and repayments
Free cash flows
Add/(less):
13 weeks ended
Year Ended
December 31,
2012
December
31, 2011
December 31,
2012
December 31,
2011
18,812
16,115
72,243
61,188
(4,471)
(399)
5,539
19,481
26,948
46,429
(4,219)
-
(1,629)
(2,780)
(5,257)
(1,053)
(4,826)
4,979
14,605
19,584
(2,104)
-
(14)
(2,327)
718
(20,347)
(2,154)
(1,601)
48,141
(741)
47,400
(16,574)
2,056
(6,338)
(9,491)
(20,995)
(4,833)
(8,223)
27,137
(9,258)
17,879
(21,237)
19,223
(4,467)
(7,537)
(1,664)
37,801
15,857
17,053
2,197
Other debt borrowings (repayments) of debt
Other investing activities
Other financing activities
Change in cash flows for the period per statement of cash flows
(10,597)
(459)
-
26,745
(13,862)
(1,152)
(748)
95
13,593
1,360
-
32,006
5,883
(2,429)
(1,197)
4,454
1 - Refer to definitions for free cash flows
Cash flows generated by Clearwater’s operations along with cash on deposit and
available credit on the revolving asset-backed loan are used to fund current operations,
seasonal working capital demands, capital expenditures, and other commitments.
Clearwater’s operations have a predictable seasonal pattern in which adjusted EBITDA
is higher in the second half of the year and capital expenditures and working capital
requirements are higher in the first half of the year. This typically results in lower free
cash flow, higher debt balances and higher leverage in the first half of the year.
The strong growth in free cash flows in the fourth quarter and the year were due to
strong operating results that improved adjusted EBITDA, lower investment in capital
assets as well as a reduction in working capital during the fourth quarter.
As a result of the predictable seasonal pattern previously noted, Clearwater expects that
earnings and cash flows will be lower in the first half of 2013 and higher in the second
half. Refer to Outlook section for further information.
38| Page
Changes in working capital
In 000's of Canadian dollars
Decreases (increases) in inventory
Increases in accounts payable
Decreases (increases) in accounts receivable
Decreases (increases) in prepaids
Decreases in income taxes payable
(Increases) decreases in deferred income tax assets
13 weeks ended
Year Ended
December 31 December 31
2011
(81)
6,274
8,277
(226)
(100)
461
14,605
2012
16,231
12,365
4,386
1,386
(105)
(7,315)
26,948
$
$
December 31 December 31
2011
(11,936)
4,935
(1,515)
679
(451)
(970)
(9,258)
2012
9,581
3,214
(2,273)
(1,695)
(2,461)
(7,107)
(741)
$
$
The net investment in working capital declined $8.5 million during the year as
Clearwater realized the benefit of its planned investment in inventory as inventory levels
declined $9.5 million for the year. The timing of payments on accounts payable also
reduced the net investment in working capital during the year.
Receivable balances declined during the fourth quarter of 2012 by $4.4 million as a
result of collections on sales.
Investments in capital expenditures of $16.6 million for the year primarily resulted from
planned vessel refits.
From free cash flows Clearwater makes a number of discretionary payments/creates
additional cash flows including repayments and draws on its revolving debt facility and
discretionary financing and investing activities (such as payments under normal course
issuer bids, sales of non-core assets, etc).
Clearwater is focused on managing its free cash flows through:
Managing working capital - Clearwater manages its investment in trade
receivables through a combination of tight collection terms and when appropriate,
discounting. Clearwater limits its investment in inventories through tight review of
any slow moving items, regular review and through continuous improvements in
the integration of its fleet and sales force.
Capital spending - Clearwater grades investments in property, plant, equipment
and licences as either return on investment (“ROI”) or maintenance capital and
tracks each project. Significant expenditures that are expected to have a return in
excess of the cost of capital are classified as ROI, and expenditures that have
less than the average cost of capital are classified as maintenance as are all
refits.
On average, Clearwater expects to invest $15-20 million a year in maintaining its
fixed assets with a further $10-15 million of repairs and maintenance expensed
and included in the cost of goods sold. In 2013 it expects to invest approximately
39| Page
$28.0 million in capital assets excluding repairs and maintenance, of which $22.0
million relates
investments and $5.8 million of
investments to improve efficiencies. In addition, Clearwater has and will continue
to review and liquidate underperforming and non-core assets.
to maintenance capital
Leverage - As part of its continuing review of leverage levels Clearwater
benchmarked itself versus a number of seafood and food companies and
concluded that it should target to reduce its leverage of approximately 3.0x.
Clearwater achieved leverage of 2.9x adjusted EBITDA as of December 31, 2012
as compared to 3.8 at December 31, 2011, as a result of the growth in annual
adjusted EBITDA and reductions in net debt of $17.8 million. Clearwater’s
leverage target is to achieve leverage of 3.0x or lower throughout the fiscal year.
In 000's of Canadian dollars
As at December 31
Adjusted EBITDA1
Debt* (net of deferred financing charges
of $4.4 million (2011 - $2.0 million)
Less cash
Net debt
Net debt
Net debt leverage
* Debt was adjusted to include deferred financing charges during 2012
1 – Refer to the definition of adjusted EBITDA and leverage
2012
72,243
$
2011
61,188
$
253,791
(41,731)
212,060
212,060
2.9
247,100
(14,725)
232,375
232,375
3.8
Foreign Exchange Management – Weakening exchange rates for the Euro
against the Canadian dollar resulted in a reduction in sales and gross margin of
$5.9 million for the year. Higher average foreign exchange rates for the US dollar
partially offset the decline in foreign exchange. The net impact from foreign
exchange was a decline of sales and gross margin of $5.2 million for the year.
Clearwater’s response to foreign exchange risk is as follows:
(1) Diversify sales geographically, which reduces the impact of any country-
specific economic risks on its business.
(2) Execute on pricing strategies so as to offset the impact of exchange rates
(3) Limit the amount of long-term sales contracts – Clearwater has very few long-
term sales contracts with any customers. Contracts are typically less than 6
months and are based on list prices that provide a margin for exchange rate
fluctuations.
40| Page
(4) Use conservative exchange estimates in business plans – Clearwater
regularly reviews economist estimates of future exchange rates and uses
conservative estimates when preparing its’ business plans.
(5) Foreign exchange hedging program - Clearwater has a targeted foreign
exchange program. This program focuses on using forward contracts to lock
in exchange rates up to 18 months for key sales currencies (the US dollar,
Euro, Yen and Sterling) thereby lowering the potential volatility in cash flows
from derivative contracts.
At of March 11, 2013 Clearwater had forward exchange contracts to be
settled in 2013 of:
US dollar $116.0 million at an average rate of 0.987;
2.5 billion Yen at an average rate of .013; and
51.9 million Euro at an average rate of 1.27.
The US dollar forwards include US dollars $70.5 million of participating
forwards which provide that to the extent spot rates are higher than the
contracted rates, the contract rate will be adjusted by approximately 41.7% of
the excess.
As a result of its continued focus on increasing gross margin and managing its
investments in working capital and capital assets, Clearwater believes that it has
sufficient financial resources to execute on its strategy and business plan.
41| Page
EXPLANATION OF FOURTH QUARTER EARNINGS
Overview
The statements of earnings reflect the earnings of Clearwater for the 13 weeks ended
December 31, 2012 and 2011.
In 000's of Canadian dollars
13 weeks ended December 31
Sales
Cost of goods sold
Gross margin
Administrative and selling
Finance costs
Other income
Research and development
Gain on settlement of Glitnir transaction
Earnings before income taxes
Income tax (recovery) expense
Earnings
Earnings attributable to:
Non-controlling interests
Shareholders of Clearwater
2012
2011
$
92,957
74,527
18,430
19.8%
$
87,140
67,308
19,832
22.8%
9,822
5,500
(1,318)
824
-
14,828
10,377
4,168
(687)
510
(12,445)
1,923
3,602
(6,916)
10,518
$
17,909
1,515
16,394
$
$
$
2,038
8,480
10,518
2,099
14,295
16,394
$
$
42| Page
Fourth Quarter Earnings
Fourth quarter 2012 sales were $93.0 million and adjusted EBITDA1 was $18.8 million
versus 2011 comparative figures of $87.1 million and $16.1 million representing growth
rates of 6.7% in sales and 16.7% in adjusted EBITDA.
Earnings increased by $6.6 million compared to 2011, excluding a one time accounting
gain of $12.4 million related to the settlement of Glitnir liabilities. Improvements to net
earnings in the fourth quarter of 2012 were primarily due to a realized income tax asset
of $8.0 million, and $5.2 million on realized foreign exchange2 gains primarily on Yen
and US forward exchange contracts as the Canadian dollar strengthened against the
Yen and the US dollar during the fourth quarter of 2012.
Higher procurement costs for raw materials including lobster and shrimp and lower
average foreign exchange rates reduced gross margins for the quarter. Unrealized
foreign exchange losses from the translation of the US dollar denominated debt in 2012
partially offset the improvement in earnings for the fourth quarter of 2012.
In 000’s of Canadian dollars
13 weeks ended December 31
2012
2011
Change
Net earnings
$
10,518
$
16,394
$
(5,876)
Explanation of changes in earnings:
Gain on settlement of Glitnir liabilities in 2011
Higher future income tax asset
Higher unrealized foreign exchange loss
Higher realized foreign exchange income
Lower gross margin
Lower interest expense
Higher other income
Lower fees on settlement of debt
Lower fair value adjustment on long term debt
All other
(12,445)
8,010
(7,586)
5,197
(1,402)
845
631
57
155
662
(5,876)
$
The 16.7% growth in the fourth quarter adjusted EBITDA came as a result of higher
realized foreign exchange income and lower selling, general and administration costs.
Management is satisfied with the progress made towards our targets and expects that
earnings and free cash flow momentum will continue through 2013. As a result,
Management is resetting its targets for 2013 as follows:
Sales growth – 5% or greater,
adjusted EBITDA margins – 18% or greater,
43| Page
leverage - 3.0x; and
return on assets - 12% or higher on a sustained basis.
1 – Refer to definition of adjusted EBITDA
2 – Refer to risks and uncertainties for further information
Sales by region
In 000's of Canadian dollars
13 weeks ended December 31
China
Japan
Other Asia
Asia
Europe
United States
Canada
North America
Other
$
2012
20,573
10,355
4,391
35,319
$
2011
13,576
9,553
5,480
28,609
$
Change
6,997
802
(1,089)
6,710
35,478
10,914
10,752
21,666
33,852
13,909
10,271
24,180
1,626
(2,995)
481
(2,514)
494
92,957
$
499
87,140
$
(5)
5,817
$
%
51.5
8.4
(19.9)
23.5
4.8
(21.5)
4.7
(10.4)
(1.0)
6.7
Europe
Europe is Clearwater’s largest scallop
region and it is an important market for
coldwater shrimp and lobster products.
European sales increased $1.6 million
from higher sales volumes of sea
scallops as available supply was higher
in the last half of the year due to
Management’s
delay
harvesting from the first quarter of 2012.
decision
to
44| Page
Sales were also higher due to higher
prices that resulted from a change in
mix weighted
towards higher value
products.
The increase in sales was partially offset
by a reduction in available supply for
cooked and peeled shrimp as timing of
sales were delayed into the first quarter
of 2013. In addition the continued
economic slowdown within the region
reduced sales volumes and prices for
Argentine scallops.
Foreign exchange rates2 for sales to
Europe, which are primarily transacted
in Euros and UK Pounds, decreased
during the quarter as the Euro declined
6.1% relative to the Canadian dollar
from 1.37 in 2011 to 1.29 in 2012, while
the UK Pound improved 1.2% from 1.57
to 1.59 over the same period.
2 – Refer to risks and uncertainties for further information
Asia
China
China is a growing market for clams,
coldwater shrimp, lobster and turbot.
Sales to China increased $7.0 million, or
51.5%, to $20.6 million for the quarter
as a result of an increase in available
supply of turbot as harvesting for turbot
occurred in the latter half of 2012.
Higher sales volumes for clams and
shrimp increased sales despite lower
available supply volumes for shrimp
during the fourth quarter.
Chinese sales are almost exclusively
transacted in US dollars. The US dollar
weakened against the Canadian dollar
partially offsetting the increase in sales.
Average foreign exchange rates for the
US dollar declined by 3.2% from 1.02 in
2011 to 0.991 in 2012.
Japan
Japan is an important market for clams,
lobster, coldwater shrimp and turbot.
Sales to Japan increased 8.4% or by
$0.8 million, to $10.4 million as a result
of an increase in available supply of
turbot, clams and lobster.
This was partially offset by a reduction
in sales volumes for shrimp as available
supply was sold to other higher yielding
markets.
foreign
exchange
Average
rates
reduced sales for the fourth quarter as
strengthened
the Canadian dollar
against the Yen by 8.5% to an average
rate of 0.012 for 2012
Other Asia
sales
the other Asia region
Sales within
include
to Korea, Taiwan,
Singapore and other Asian countries.
These Asian countries are an important
market for clams, shrimp and turbot.
Sales within the other Asian countries
declined $1.1 million to $4.4 million for
the fourth quarter as a result of a
reduction in sales volumes for shrimp as
45| Page
available supply was sold
higher yielding markets during
quarter.
to other
the
is an
United States
The United States
important
market for scallops, coldwater shrimp,
lobster and clams. It is our most diverse
market, where a wide variety of products
are sold.
Sales in the United States decreased by
$3.0 million, to $10.9 million in the fourth
quarter primarily as a result of a
for sea
in sales volumes
reduction
scallops, lobster and shrimp. Available
to other
supply volumes were sold
higher yielding markets during
the
quarter.
lobster were weighted
Changes in product mix for sea scallops
and
towards
products with higher value, and an
increase in sales volumes for clams,
partially offset
in sales
during the quarter.
the decline
For the quarter, the US dollar weakened
against the Canadian dollar. Average
foreign exchange rates for the US dollar
declined by 3.2% from 1.02 in 2011 to
0.991 in 2012.
46| Page
Sales by species
In 000's of Canadian dollars
13 weeks ended December 31
Scallops*
Coldwater shrimp
Clams
Lobster
Ground fish and other
Crab
*Refer to risks and uncertainties
$
$
2012
33,967
19,460
18,949
13,542
7,039
-
92,957
2011
28,400
24,346
16,514
15,116
382
2,382
87,140
Change
5,567
(4,886)
2,435
(1,574)
6,657
(2,382)
5,817
$
%
19.6
(20.1)
14.7
(10.4)
1,742.7
(100.0)
6.7
$
$
Improvements in sales were a result of increases in sales volumes for sea scallops and
turbot. In addition increased market demand for sea scallops and clams led to
improved sales prices.
This increase in sales was partially offset by lower available supply volumes for shrimp
and snow crab and slower economic conditions within Europe for Argentine scallops,
which impacted prices and sales volumes.
47| Page
Cost of Goods Sold
In 000's of Canadian dollars
13 weeks ended December 31
Harvesting and procurement
Manufacturing
Freight, customs and other transport
Depreciation
Administrative
$
$
$
2012
51,920
7,657
5,442
6,348
3,160
74,527
2011
45,919
7,623
5,684
5,221
2,861
67,308
Change
6,001
34
(242)
1,127
299
7,219
$
$
$
%
13.1
0.4
(4.3)
21.6
10.5
10.7
Cost of goods sold increased $7.2 million or 10.7% to $74.5 million primarily due to
higher sales volumes for sea scallops and clams, an increase in raw material
procurement costs for lobster and shrimp and higher depreciation charges.
Harvesting and procurement include all costs incurred in the operation of the vessels
including labour, fuel, repairs and maintenance, fishing gear supplies, and other costs
and fees plus procured raw material costs for species such as lobster, shrimp, scallops
and crab. Excluding the impact of higher sales volumes, harvesting costs declined in
the fourth quarter as a result of a mix of products weighted towards lower cost primarily
coldwater shrimp and lower fuel consumption. Higher procurement costs for lobster and
shrimp offset the decline.
Fuel costs for our vessels declined $0.1 million from $6.8 million in the fourth quarter of
2011 to $6.6 million in 2012. This decline was a result of a reduction in the litres
consumed. The decline was partially offset by an increase in the average price per litre
of fuel of 0.03 in comparison to the fourth quarter of 2011.
Depreciation expense from assets used in the harvesting and production of goods
increased $1.1 million to $6.3 million as a result of vessel refits and other additions that
were completed at the end of 2011 and depreciated after completion.
Administrative overheads include salaries and benefits, professional and consulting
fees and management fees attributable to the harvesting and production of goods.
Refer to Administrative and selling for further information.
48| Page
Gross margin
Gross margin declined by $1.4 million, or 2.9% basis points to $18.4 million is a result of
lower available supply volumes for coldwater shrimp, due to the timing of landings.
Gross margins were also impacted by lower average sales prices for Argentine scallops
due in part to the economic slowdown within Europe and a negative impact from foreign
exchange rates. Gross margins also declined as a result of higher raw material costs for
lobster and cooked and peeled shrimp.
Lower average foreign exchange rates2, primarily for the Euro and the US dollar,
negatively impacted sales and gross margin by $3.9 million.
13 weeks ended December 31
2012
2011
Average
rate
Currency
% sales
realized % sales
US dollars
Euros
Japanese Yen
UK pounds
Canadian dollar and other
43.0%
24.5%
9.8%
4.8%
17.9%
100.0%
0.991
1.286
0.012
1.592
47.8%
20.1%
12.7%
5.8%
13.6%
100.0%
Average
rate
realized
Change
in rate
1.024
1.369
0.013
1.572
-3.2%
-6.1%
-8.5%
1.2%
Excluding the affect of foreign exchange, gross margin was positively impacted by
increases in sales prices for clams and sea scallops and an increase in sales volumes
for turbot and sea scallops.
2 – Refer to risks and uncertainties for further information
49| Page
Administration and selling
In 000's of Canadian dollars
13 weeks ended December 31
Salaries and benefits
Share-based incentive compensation
Employee compensation
Consulting and professional fees
Other
Selling costs
Travel
Occupancy
Allocation to cost of goods sold
$
2012
6,418
1,517
7,935
$
2011
8,039
645
8,684
$
Change
(1,621)
872
(749)
1,258
1,742
586
604
385
(2,688)
9,822
$
1,221
1,228
1,263
606
315
(2,940)
10,377
$
37
514
(677)
(2)
70
252
(555)
$
%
(20.2)
135.2
115
3.0
41.9
(53.6)
(0.3)
22.2
(8.6)
(5.3)
Administration and selling costs declined $0.6 million, or 5.3%, to $9.8 million in
2012. This was due to higher employee compensation costs that Clearwater incurred
from higher severance and bonus costs for salaried employees in the fourth quarter of
2011.
Share-based incentive compensation increased $0.9 million from 2011 as the cost of
Clearwater’s stock-based compensation performance incentive programs reflected
increases in our share price and additional units granted during 2012 for key executives
and directors.
Selling costs
trade shows, samples, product
development and bad debt expenses. The reduction in costs of $0.7 million to $0.6
million in 2012 relates to recoveries of bad debts.
include advertising, marketing,
The allocation to cost of goods sold reflects costs that are attributable to the
production and sale of goods and are allocated based on production volumes.
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Finance costs
In 000’s of Canadian dollars
13 weeks ended December 31
Interest and bank charges
Amortization of deferred financing charges
Interest on current and long term debt
Fair value adjustment on convertible debentures
Foreign exchange and derivative contracts
Debt settlement and refinancing fees
$
2012
4,471
357
4,828
(128)
905
(105)
5,500
$
$
2011
5,257
416
5,673
27
(1,484)
(48)
4,168
$
Interest declined $0.9 million for the fourth quarter as a result of lower average interest
rates on debt facilities and lower average balances outstanding.
Foreign exchange and derivative contracts
In 000’s of Canadian dollars
13 weeks ended December 31
Realized loss (income)
Foreign exchange contracts
Working capital
Unrealized (gain) loss
Foreign exchange on long term debt and other assets
Mark-to-market on foreign exchange contracts
Mark-to-market on interest swap
2012
2011
$
(1,416)
(808)
(2,224)
$
809
2,164
2,973
1,626
1,303
200
3,129
(920)
(3,537)
-
(4,457)
$
905
$
(1,484)
Foreign exchange and derivative contracts2 changed by $2.4 million from a gain of
$1.5 million in the fourth quarter of 2011 to a loss of $0.9 million in 2012. The foreign
exchange loss for the fourth quarter of 2012 was primarily a result of $1.6 million in
unrealized foreign exchange from the translation of the US dollar denominated debt in
2012 as the US dollar strengthened against the Canadian dollar. In addition, unrealized
losses of $1.3 million on the mark-to-market on foreign exchange contracts primarily
from strengthening current market rates on the US dollar and the Euro against the
Canadian dollar, contributed to the increase in unrealized losses for the fourth quarter of
2012.
Realized foreign exchange gains of $1.4 million related primarily to Yen and US forward
exchange contracts settled within 2012 as average spot rates were 7.1% and 3.6%
lower than the average strike price for 2012 for the Yen and the US dollar, respectively.
2 – Refer to risks and uncertainties for further information
51| Page
Other income
In 000's of Canadian dollars
13 weeks ended December 31
Royalties, interest, and other fees
Other fees
2012
2011
(755)
(563)
(1,318)
$
(316)
(371)
(687)
$
Royalties and fees and other includes income related to quota rental, commissions,
processing fees and other miscellaneous income and expense that varies based upon
the operations of the business.
Research and Development
Research and development relates to new technology and research into ocean habitats
and fishing grounds. Research and development can vary year to year depending on
the scope, timing and volume of research completed. Clearwater’s business plans call
for increased investment in research and development in 2012 and subsequent years.
Income taxes
Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the
United Kingdom and Canada. Lower earnings in Argentina contributed to lower income
taxes in 2012.
During 2012, Clearwater recorded a deferred tax asset of $8.0 million related to
deferred tax assets that are expected to be utilized based upon 2013 estimated taxable
earnings. Clearwater has unrecorded tax losses of approximately $48.7 million,
representing approximately $14.9 million in deferred tax asset as at December 31,
2012. The unrecorded asset can be utilized to the extent Clearwater realizes taxable
earnings in Canada in future periods.
Non-controlling interest
Non-controlling interest relates to earnings from Clearwater’s investment in subsidiaries
in Argentina, Nova Scotia and Newfoundland and Labrador.
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OUTLOOK
Management expects the seasonality of Clearwater’s operations, lower available supply
of inventories at December 31, 2012 and poor weather conditions may limit growth in
the first quarter of 2013. However continued strong results in the second half of the
year will enable Clearwater to continue the trend of growth in annual results in 2013.
Looking forward, Clearwater’s operations have a predictable seasonal pattern in which
adjusted EBITDA is higher in the second half of the year and capital expenditures and
investments in working capital is higher in the first half of the year. As a result it expects
leverage to rise in the first half of 2013 after which it will decline.
Global demand for seafood is outstripping supply, creating favorable market dynamics
for vertically integrated producers such as Clearwater with strong resource access.
Demand has been driven by growing worldwide population, shifting consumer tastes
towards healthier diets, and rising purchasing power of middle class consumers in
emerging economies.
The supply of wild seafood is limited and is expected to lag behind the growing global
demand. This supply-demand imbalance has created a market place in which
purchasers of seafood are increasingly willing to pay a premium to suppliers that can
provide consistent quality and food safety, wide diversity and reliable delivery of
premium, wild, sustainably harvested seafood.
Clearwater, like other vertically integrated seafood companies, is well positioned to take
advantage of this opportunity because of its licenses, premium product quality, diversity
of species, global sales footprint, and year-round harvest and delivery capability.
Ian Smith, Chief Executive Officer, commented, “In 2012 the company had the highest
revenues and adjusted EBITDA in its history. Management is pleased with the progress
made towards our financial targets for creating shareholder value and expects that
earnings and free cash flow momentum will continue through 2013.”
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RISKS AND UNCERTAINTIES
The performance of Clearwater’s business is susceptible to a number of risks which
affect income, liquidity and cash flow, including risks related to resource supply, food
processing and product liability, suppliers, customers, competition and foreign exchange
exposure and lawsuits in the normal course of business. For further disclosure of
additional risk factors please refer to the Annual Information Form.
Foreign exchange risk
Our financial results are subject to volatility as a result of foreign exchange rate
fluctuations.
The majority of Clearwater’s sales are to locations outside Canada and are transacted
in currencies other than the Canadian dollar whereas the majority of our expenses are
in Canadian dollars. As a result, fluctuations in the foreign exchange rates of these
currencies can have a material impact on our financial condition and operating results.
In addition Clearwater has a subsidiary which operates in the offshore scallop fishery in
Argentina which exposes Clearwater to changes in the value of the Argentine Peso.
Risks associated with foreign exchange are partially mitigated by the following
strategies:
(1) Diversify sales internationally which reduces the impact of any country-
specific economic risks.
(2) Execute on pricing strategies so as to offset the impact of exchange rates.
(3) Limit the amount of long-term sales contracts – Clearwater has very few long-
term sales contracts with any customers. Contracts are typically less than 6
months and are based on list prices that provide a margin for exchange rate
fluctuations.
(4) Plan conservatively - Clearwater regularly reviews economist estimates of
future exchange rates and uses conservative estimates when preparing its’
business plans, and
(5) Foreign exchange hedging program - that focuses on using forward contracts
to enable Clearwater to lock in exchange rates up to 18 months for key sales
currencies (the US dollar, Euro, Yen and Sterling) thereby lowering the
potential volatility in cash flows through derivative contracts.
In 2012 approximately 45.4% of Clearwater’s sales were denominated in US dollars.
Based on 2012 sales, a change of 0.01 in the U.S. dollar rate converted to Canadian
dollars would result in a $1.6 million change in sales and gross profit. Approximately
22.1% of 2012 sales were denominated in Euros, based on 2012 sales, a change of
54| Page
0.01 in the Euro rate as converted to Canadian dollars would result in a $0.6 million
change in sales and gross profit. Also, 12.5% of sales in 2012 were denominated in
Japanese Yen, based on 2012 annual sales, a change of 0.0001 in the Yen rate as
converted to Canadian dollars would result in a change of $0.4 million in sales and
gross profit.
At the end of December 2012 Clearwater had approximately 74% of its US Dollar, Euro
and Yen exposures for 2013 hedged at rates of 0.988, 1.27 and 0.013 respectively.
A foreign exchange hedging program provides short-term risk management for foreign
exchange risk. Further strengthening of the Canadian dollar relative to the currencies of
our sales markets will result in lower sales prices and receipts when converted into
Canadian dollars and will have an adverse impact on our profitability to the extent we
are not able to adjust prices and costs to offset this risk.
Political risk
including
Our Argentine and other international operations are subject to economic and political
risks, which could materially and adversely affect our business.
Our Argentine and other foreign operations and investments are subject to numerous
foreign currency, exchange rates and controls,
risks,
expropriation of our assets, nationalization,
forced divestiture,
modification or nullification of our contracts and changes in Argentine or other foreign
laws or other regulatory policies of foreign governments and having to submit to the
jurisdiction of a foreign court or arbitration panel or having to enforce the judgment of a
foreign court or arbitration panel against a sovereign nation within its own territory.
renegotiation,
fluctuations
in
During 2012 and as a result of economic pressures within Argentina, the Argentine
Government withheld approvals on the ability of companies to transfer cash outside of
Argentina, restricting Clearwater’s ability to payout dividends. However, Clearwater did
receive approvals to pay approximately $2.2 million in dividends in the first half of 2012
and in December 2012 it received further approvals to pay dividends of approximately
$2.8 million Canadian. There can be no assurance that the Argentine government will
continue to provide approvals to pay dividends in 2013 and as of March 11, 2013 they
have not provided approvals for payment of dividends in 2013.
To compensate for the restriction on dividend payouts Clearwater transferred receivable
balances that enabled a flow of funds of approximately $2.9 million in 2012. In addition,
Clearwater is reviewing options for the scheduled replacement of one of its two fishing
vessels in Argentina in 2013. The replacement of this vessel will be funded with loan
financing and it in turn will necessitate that funds be maintained in Argentina to fund the
related loan payments, thus alleviating the need for any material dividend payments
over the next several years.
Our operations in Argentina and elsewhere may be negatively affected by both foreign
exchange and expropriation losses as well as the increased cost and risks of doing
business in developing markets.
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We mitigate this risk through maintaining a policy of repatriating our share of the
earnings from Argentina through dividends and we do not maintain any material
financial assets that are surplus to our needs to operate the business outside of
Canada. We do not carry financial assets in Pesos to mitigate exchange risk. In
addition we have structured our operations in Argentina with an Argentine partner who
owns 20% of the Argentine business and who is resident in Argentina and is actively
managing the business.
No assurance can be given that our operations will not be adversely impacted as a
result of existing or future legislation.
Resource supply risk
A material change in the population and biomass of scallop, lobster, clam, or coldwater
shrimp stocks in the fisheries in which we operate would materially and adversely affect
our business.
Clearwater's business is dependent on our allocated quotas of the annual Total
Allowable Catch (TAC) for the species of seafood we harvest. The annual TAC is
generally related to the health of the stock of the particular species as measured by a
scientific survey of the resource. The population and biomass of shellfish stocks are
subject to natural fluctuations some of which are beyond our control and which may be
exacerbated by factors such as water temperatures, food availability, the presence of
predators, disease, disruption in the food chain, reproductive problems or other
biological issues. We are unable to fully predict the timing and extent of fluctuations in
the population and biomass of the shellfish stocks we harvest and process, and we
therefore may not be able to engage in effective measures to alleviate the adverse
effects of these fluctuations. In addition, the population models utilized by scientists
evaluating the fisheries in which we operate are constantly evolving. Certain changes in
the population models could negatively impact future biomass estimates. Any material
reduction in the population and biomass or TAC of the stocks from which we source
seafood would materially and adversely affect our business. Any material increase in
the population and biomass or TAC could dramatically reduce the market price of any of
our products.
The governments of Canada and Argentina set the annual TAC for each species by
reviewing scientific studies of the resource and then consulting with key stakeholders
including us and our competitors to determine acceptable catch levels. The potentially
differing interests of our competitors may result in conflicting opinions on issues around
resource management, including the establishment of TACs and other management
measures potentially limiting our ability to grow, to fully capitalize on our investments in
harvesting capacity, or to achieve targeted yields from the resource, which may
adversely affect our financial condition and results of operations.
Resource supply risk is managed through adherence with government policies and
regulations related to fishing in Canada and Argentina and Clearwater’s investment in
56| Page
science and technology, which enables Clearwater to understand the species that it
harvests. Clearwater has invested in projects with the scientific community, such as
ocean floor mapping and the resource assessment surveys to ensure access to the best
available science information. Resource management plans, developed by DFO, are
developed through an open and transparent process with strong input from industry
participants. Clearwater engages in these processes to promote best in class, robust,
and sustainable management of the resource. The Marine Stewardship Council
certification of all of our core species demonstrates that the resources that Clearwater
harvests meet the leading global standard for sustainable fisheries management
practice. Clearwater further mitigates the risk associated with resource supply and
competition through the diversification across species.
Capital availability and liquidity risk
There are risks associated with capital availability and liquidity including:
1. The ability of Clearwater to obtain sufficient financing for working capital, capital
expenditures or acquisitions in the future or to repay loans as they become due;
2. Certain borrowings are at variable rates of interest, which exposes Clearwater to
the risk of increased interest rates; and
3. Clearwater may be more vulnerable to economic downturns and be limited in its
ability to withstand competitive pressures if it has high leverage, debt coverage
and limited liquidity.
Clearwater’s ability to make scheduled payments of principal and interest on, or to
refinance, its indebtedness will depend on its future operating performance and cash
flow, which are subject to prevailing economic conditions, prevailing interest rate levels,
and financial, competitive, business and other factors, many of which are beyond its
control.
Clearwater’s credit facilities contain restrictive covenants of a customary nature,
including covenants that limit the discretion of management with respect to certain
business matters. These covenants place restrictions on, among other things, the
ability of Clearwater to incur additional indebtedness, to pay dividends or make certain
payments and to sell or otherwise dispose of assets. In addition, they contain a number
of financial covenants that require Clearwater to meet certain financial ratios and
financial condition tests. A failure to comply with the covenants could result in an event
of default, which, if not cured or waived, could permit acceleration of the relevant
indebtedness. If indebtedness under the credit facilities were to be accelerated, there
can be no assurance that the assets of Clearwater would be sufficient to repay in full
that indebtedness. There can also be no assurance that the credit facilities would be
able to be refinanced. As of March 11, 2013 Clearwater is not in violation of the
restrictive covenants.
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Clearwater mitigates capital availability and liquidity risk through a number of its
treasury management policies and goals which promote strong liquidity and continued
access to capital to fund its business. These include policies and goals with respect to
leverage, foreign exchange, lending arrangements and free cash flows. See the Capital
structure and liquidity management section for further information.
Other risks
For further disclosure of additional risk factors please refer to the Annual Information
Form.
CRITICAL ACCOUNTING POLICIES
Clearwater’s critical accounting policies are those that are important to the portrayal of
Clearwater’s financial position and operations and may require management to make
judgments based on underlying estimates and assumptions about future events and
their effects. These estimates can include but are not limited to estimates regarding
inventory valuation, accounts receivable valuation allowances, estimates of expected
useful lives of vessels and plant facilities, and estimates of future cash flows for
impairment tests. Underlying estimates and assumptions are based on historical
experience and other factors that are believed by management to be reasonable under
the circumstances. These estimates and assumptions are subject to change as new
events occur, as more experience is acquired, as additional information is obtained, and
as the operating environment changes. Clearwater has considered recent market
conditions including changes to its cost of capital in making these estimates. Refer to
the notes to the annual financial statements for a complete listing of critical accounting
policies and estimates used in the preparation of the consolidated financial statements.
Financial Reporting Controls and Procedures
Clearwater has established and maintains disclosure controls and procedures over
financial reporting, as defined under the rules adopted by the Canadian Securities
Regulators in instrument 52-109. The Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”) have evaluated the design and effectiveness of Clearwater’s
disclosure controls and procedures as of December 31, 2012 and have concluded that
such procedures are adequate and effective to provide reasonable assurance that
material information relating to Clearwater and its consolidated subsidiaries would be
made known to them by others within those entities to allow for accurate and complete
disclosures in annual filings.
The Management of Clearwater, with the participation of the CEO and the CFO
(collectively “Management”), is responsible for establishing and maintaining adequate
internal controls over financial reporting. Clearwater’s internal controls over financial
reporting are designed to provide reasonable assurance regarding the reliability of
58| Page
financial reporting and preparation of
International Financial Reporting Standards (“IFRS”).
financial statements
in accordance with
Management evaluated the design and effectiveness of Clearwater’s internal controls
over financial reporting as at December 31, 2012. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in its report “Internal Control – Integrated Framework
(1992)”. This evaluation included reviewing controls in key risk areas, assessing the
design of these controls, testing these controls to determine their effectiveness,
reviewing the results and then developing an overall conclusion. Based on
management’s evaluation, the CEO and the CFO have concluded that, as at December
31, 2012, Clearwater’s internal controls over financial reporting are effective in providing
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements in accordance with IFRS.
There have been no significant changes in Clearwater’s internal controls over financial
reporting or other factors that occurred during the period from September 30, 2012 to
December 31, 2012, that have materially affected, or are reasonably likely to materially
affect the Company’s internal controls over financial reporting.
Adoption of new and revised standards
The following IFRS standards have been recently issued by the IASB: IFRS 9 Financial
Instruments, IFRS 13 Fair Value Measurement Arrangements, IFRS 10 Consolidated
Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests
in Other Entities.
Clearwater expects that the adoption of IFRS 11 Joint Arrangements will impact its
balance sheet and income statement commencing in 2013 but will not have an adjusted
EBITDA levels.
The following table provides the expected impact to the 2012 comparative amounts for
the 2013 statement of financial position as follows:
59| Page
In 000's of Canadian dollars
Year ended December 31, 2012 comparatives for the
2013 financials
ASSETS
Consolidated
Reported
Statement of
financial position
Entity
previously
proptionately
consolidated
Entity to be
recorded using
equity method as of
January 1, 2013
Consolidated
Reported
Comparatives
Current assets
Non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Non-current liabilities
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES
148,758
263,392
$
412,150
(1,146)
(4,103)
(5,248)
64,169
(148)
241,460
(1,232)
$
412,150
(1,380)
-
3,868
3,868
-
-
-
147,612
263,158
410,770
64,021
240,228
410,770
The following table provides the expected impact to the 2012 comparative amounts in
for the 2013 statement of profit and loss as follows:
In 000's of Canadian dollars
Year ended December 31, 2012 comparatives
for the 2013 financials
Consolidated
Reported
Statement of profit
and loss
Entity previously
proptionately
consolidated
Entity to be
recorded using
equity method as of
January 1, 2013
Consolidated
Reported
Comparatives
Sales
Cost of goods sold
Administrative and selling
Research and development
Other income
Finance costs
Earnings (loss) before income taxes
Income taxes
$
350,447
276,190
74,257
32,837
1,759
(2,412)
24,388
56,572
17,685
(5,019)
(145)
1,611
(1,756)
(258)
(258)
(1,498)
(443)
$
350,302
277,801
72,501
-
(1,056)
(1,056)
1,056
32,579
1,759
(3,468)
24,388
55,259
17,242
(5,462)
Earnings (loss) for the year
$
22,704
$
(1,056)
$
1,056
$
22,704
Clearwater is assessing the impact of the other new standards, but does not expect
them to have a significant effect on its consolidated financial statements.
60| Page
SUMMARY OF QUARTERLY RESULTS
The following table provides historical data for the twelve most recently completed
quarters.
In 000's of Canadian dollars
Fiscal 2012
Sales
Earnings (loss)
Earnings per share ("EPS")
Diluted earnings per share2
Fiscal 2011
Sales
Earnings (loss)
Earnings per share ("EPS")1
Diluted earnings per share2
Fiscal 20103
Sales
Earnings (loss)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
70,884
(2,927)
(0.09)
(0.09)
$
84,966
(2,505)
(0.08)
(0.08)
$
101,640
17,618
0.30
0.27
$
92,957
10,518
0.17
0.15
$
69,235
1,832
0.01
0.01
$
78,820
(327)
(0.02)
(0.02)
$
97,590
5,058
0.05
0.05
$
87,140
16,390
0.28
0.23
$
69,262
(9,583)
$
70,844
(4,990)
$
91,633
4,260
$
83,801
(4,968)
1 – On October 2, 2011, Clearwater Seafoods Income Fund (“the Fund”) was reorganized into a publicly traded corporation, “Clearwater Seafoods
Incorporated”, (“Clearwater”). The 2011 comparative results have been adjusted to reflect the conversion of the Fund to the corporation to provide a
meaningful comparison to 2012. Earnings per share (“EPS”) for 2011 was calculated using these comparatives.
2 - Diluted earnings (loss) per share are anti-dilutive for all periods except September 29, 2012, December 31, 2011 and December 31, 2012.
3 – Earnings and diluted earnings per share were not calculated for 2010 results.
For a more detailed analysis of each quarter’s results, please refer to our quarterly
reports and our annual reports.
In general, sales increased with each successive quarter with the largest increase in the
third quarter of each year. The third quarter has the highest sales revenue each year.
In addition, volatility in exchange rates can have a significant impact on earnings. The
volatility is partially offset by Clearwater’s foreign exchange management program.
In addition, earnings for the fourth quarter of 2012 included an $8 million future tax
recovery.
Changes made effective January 1, 2011, to the management agreement that governs
Clearwater’s frozen-at-sea shrimp and turbot harvesting operations, resulted in
61| Page
Clearwater fully consolidating these operations in 2011 incurring a non-cash gain of
$11.6 million in the first quarter of 2011.
The settlement of the Glitnir transaction during the fourth quarter of 2011 resulted in a
non-cash gain of $12.4 million.
62| Page
DEFINITIONS AND RECONCILIATIONS
Gross margin
Gross margin consists of sales less harvesting, distribution, direct manufacturing costs,
manufacturing overhead, certain administration expenses and depreciation related to
manufacturing operations.
Adjusted earnings before interest, tax, depreciation and amortization (“adjusted
EBITDA”)
Adjusted earnings before interest, tax, depreciation and amortization (“adjusted
EBITDA”) is not a recognized measure under IFRS, and therefore is unlikely to be
comparable to similar measures presented by other companies. Management believes
that in addition to net earnings and cash provided by operating activities, adjusted
EBITDA is a useful supplemental measure from which to determine Clearwater’s ability
to generate cash available for debt service, working capital, capital expenditures,
income taxes and dividends. In addition, as adjusted EBITDA is a measure frequently
analyzed for public companies, Clearwater has calculated adjusted EBITDA in order to
assist readers in this review. Adjusted EBITDA should not be construed as an
alternative to net earnings determined in accordance with IFRS as a measure of
liquidity, or as a measure of cash.
Adjusted EBITDA is defined as EBITDA excluding one-time non-recurring items such as
severance charges, gains or losses on property, plant and equipment, gains or losses
on quota sales, refinancing and reorganization costs. In addition recurring accounting
gains and losses on foreign exchange (other than realized gains and losses on forward
exchange contracts), and adjustments to stock based compensation, have been
excluded from the calculation of adjusted EBITDA due to the variability in these gains
and losses.
In the fourth quarter of 2012 Clearwater began to exclude amounts related to stock
based compensation from the calculation of adjusted EBITDA due to the variability in
these gains and losses in the liability related to its cash settled share-based payment
programs. It has restated all prior periods for this change.
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Reconciliation of Net Earnings to Adjusted EBITDA for the 13 weeks ended, and the
years ended December 31, 2012 and 2011.
Net earnings
Add (deduct):
Income taxes
Depreciation and amortization
Interest on long-term debt and bank charges
Add (deduct) other non-routine items:
Foreign exchange and derivative income unrealized
Fair market value on convertible debentures
Realized foreign exchange on working capital
Restructing and refinancing costs
Deferred retirement obligations
Gain on sale of quota
Gain on settlement of debt
Loss on disposal of investment
Gain on change in ownership of joint venture
Gain on insurance claim
Stock appreciation rights
Adjusted EBITDA
Adjusted EBITDA attributable to:
Non-controlling interests
Shareholders of Clearwater
13 weeks ended
Year to date
December 31
December 31
December 31
December 31
2012
2011
2012
2011
$
10,518
$
16,394
$
22,704
$
22,955
(6,916)
6,587
4,829
15,018
3,129
(128)
(808)
84
1,517
-
-
-
-
-
-
18,812
1,515
5,350
5,674
28,933
(5,019)
22,976
21,506
62,167
3,863
19,503
26,840
73,161
(4,458)
1,206
2,164
70
645
-
(12,445)
-
-
-
-
16,115
$
(3,476)
2,898
1,359
6,964
2,331
-
-
-
-
-
-
72,243
$
1,525
7,061
2,713
3,737
904
(672)
(14,242)
267
(11,571)
(1,695)
-
61,188
$
$
$
$
$
$
3,346
15,466
18,812
3,836
12,279
16,115
12,693
59,550
72,243
13,495
47,693
61,188
$
$
$
$
64| Page
Leverage
Leverage is not a recognized measure under IFRS, and therefore is unlikely to be
comparable to similar measures presented by other companies. Management believes
leverage to be a useful term when discussing liquidity and does monitor and manage
leverage. In addition, as leverage is a measure frequently analyzed for public
companies, Clearwater has calculated the amount in order to assist readers in this
review. Leverage should not be construed as a measure of liquidity or as a measure of
cash flows.
Leverage is calculated by dividing the current and preceding annual adjusted EBITDA
by the total debt on the balance sheet adjusted for cash reserves.
Leverage for banking purposes differs from the above calculations as agreements
require the exclusion of cash from the calculation. Clearwater is in compliance with all
of the non-financial and financial covenants associated with its debt facilities.
In 000's of Canadian dollars
As at December 31
Adjusted EBITDA1
Debt* (net of deferred financing charges
of $4.4 million (2011 - $2.0 million)
Less cash
Net debt
Net debt
Net debt leverage
* Debt was adjusted to include deferred financing charges during 2012
2012
72,243
$
2011
61,188
$
253,791
(41,731)
212,060
212,060
2.9
247,100
(14,725)
232,375
232,375
3.8
65| Page
Free cash flows
Free cash flow is not a recognized measure under IFRS, and therefore is unlikely to be
comparable to similar measures presented by other companies. Management believes
that in addition to net earnings and cash provided by operating activities, free cash flow
is a useful supplemental measure from which to determine Clearwater’s ability to
generate cash available for debt service, working capital, capital expenditures and
distributions. Free cash flow should not be construed as an alternative to net earnings
determined in accordance with IFRS, as a measure of liquidity, or as a measure of cash
flows.
Free cash flow is defined as cash flows from operating activities, less planned capital
expenditures (net of any borrowings of debt designated to fund such expenditures),
scheduled payments on long term debt and distributions to non-controlling interests.
Items excluded from the free cash flow include discretionary items such as debt
refinancing and repayments changes in the asset backed loan and discretionary
financing and investing activities.
Reconciliation for the 13 weeks ended and the year ended December 31, 2012 and
2011 is as follows:
Free cash flows
Adjusted EBITDA
Less:
Cash interest
Cash taxes
Other income and expense items
Operating cash flow before changes in working capital
Change in working capital
Cash flows from operating activities
Uses of cash:
Purchase of property, plant, equipment, quota and other assets
Less: Designated borrowings
Scheduled payments on long-term debt
Distributions to non-controlling interests
Other debt borrowings and repayments
Free cash flows
Add/(less):
13 weeks ended
Year Ended
December 31,
2012
December
31, 2011
December 31,
2012
December 31,
2011
18,812
16,115
72,243
61,188
(4,471)
(399)
5,539
19,481
26,948
46,429
(4,219)
-
(1,629)
(2,780)
(5,257)
(1,053)
(4,826)
4,979
14,605
19,584
(2,104)
-
(14)
(2,327)
718
(20,347)
(2,154)
(1,601)
48,141
(741)
47,400
(16,574)
2,056
(6,338)
(9,491)
(20,995)
(4,833)
(8,223)
27,137
(9,258)
17,879
(21,237)
19,223
(4,467)
(7,537)
(1,664)
37,801
15,857
17,053
2,197
Other debt borrowings (repayments) of debt
Other investing activities
Other financing activities
Change in cash flows for the period per statement of cash flows
(10,597)
(459)
-
26,745
(13,862)
(1,152)
(748)
95
13,593
1,360
-
32,006
5,883
(2,429)
(1,197)
4,454
66| Page
Return on Assets
Return on assets is not a recognized measure under IFRS, and therefore is unlikely to
be comparable to similar measures presented by other companies. Management
believes that return on assets measures the efficiency of the use of total assets to
generate income. Return on assets should not be construed as an alternative to net
earnings determined in accordance with IFRS.
Return on assets is defined as the ratio of earnings before interest and taxes (“EBIT”) to
average total assets including all working capital assets.
In (000's) of Canadian dollars
Year ended December 31
Return on Assets
Earnings before interest and taxes
Total Assets
2012
49,746
412,150
12.1%
2011
41,685
387,892
10.7%
67| Page
KPMG LLP
1959 Upper Water Street
Suite 1500
Purdy’s Wharf Tower 1
Halifax NS
B3J 3N2
Telephone (902) 492-6000
Fax (902) 429-1307
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Clearwater Seafoods Incorporated
We have audited the accompanying consolidated financial statements of Clearwater Seafoods
Incorporated, which comprise the consolidated statements of financial position as at December 31,
2012 and December 31, 2011, the consolidated statements of earnings, comprehensive income,
shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of
significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on our
judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, we consider
internal control relevant to the entity’s preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit
also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Clearwater Seafoods Incorporated as at December 31, 2012 and
December 31, 2011, and its consolidated financial performance and its consolidated cash flows for
the years then ended in accordance with International Financial Reporting Standards.
Chartered Accountants
March 11, 2013
Halifax, Canada
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to
KPMG LLP.
KPMG Confidential
68| Page
Clearwater Seafoods Incorporated
Management’s Statement of Responsibility for Financial Reporting
The consolidated financial statements and all related financial information contained in this annual report,
including Management’s Discussion and Analysis, are the responsibility of the Management of Clearwater
Seafoods Incorporated. They have been prepared in accordance with generally accepted accounting
principles, using management's best estimates and judgments, where appropriate.
Management is responsible for the reliability and integrity of the consolidated financial statements, the
notes to the consolidated financial statements, and other financial information contained in this report. In
the preparation of these statements, estimates are sometimes necessary because a precise determination of
certain assets and liabilities is dependent on future events. Management believes such estimates have been
based on careful judgments and have been properly reflected in the accompanying consolidated financial
statements.
Management is also responsible for maintaining a system of internal control designed to provide
reasonable assurance that assets are safeguarded and that accounting systems provide timely, accurate and
reliable financial information.
The Board of Directors of Clearwater Seafoods Incorporated is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal control. The Board is assisted in exercising its
responsibilities through the Audit Committee of the Board, which is composed of non-management
directors. The Committee meets periodically with management and the auditors to satisfy itself that
management's responsibilities are properly discharged, to review the consolidated financial statements and
to recommend approval of the consolidated financial statements to the Board.
KPMG LLP, the independent auditors appointed by the Board, have audited Clearwater Seafoods
Incorporated’s consolidated financial statements in accordance with generally accepted auditing standards
and their report follows. The independent auditors have full and unrestricted access to the Audit committee
to discuss their audit and their related findings as to the integrity of the financial reporting process.
March 11, 2013
Ian Smith
Chief Executive Officer
Robert Wight
Vice-President, Finance and Chief Financial Officer
69| Page
CLEARWATER SEAFOODS INCORPORATED
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
ASSETS
Current assets
Cash
Trade and other receivables (Note 6)
Inventories (Note 7)
Prepaids and other (Note 8)
Derivative financial instruments (Note 14)
Non-current assets
Long term receivables (Note 9)
Other assets (Note 10)
Property, plant and equipment (Note 11)
Licences and fishing rights (Note 12)
Goodwill (Note 12)
Deferred tax assets (Note 19)
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade and other payables
Income tax payable (Note 19)
Current portion of long-term debt (Note 13)
Derivative financial instruments (Note 14)
Non-current liabilities
Long-term debt (Note 13)
Deferred tax liabilities (Note 19)
SHAREHOLDERS' EQUITY
Share capital (Note 15)
Retained earnings (deficit)
Cumulative translation account
Non-controlling interest
December 31, December 31,
2011
2012
$
41,731
43,204
51,909
7,729
4,185
148,758
$
9,725
41,719
61,755
11,549
1,075
125,823
10,647
1,245
126,707
108,543
7,043
9,207
263,392
10,293
2,066
129,373
111,700
7,043
1,594
262,069
$
412,150
$
387,892
$
44,633
370
15,527
3,639
64,169
$
40,767
1,984
42,766
1,097
86,614
238,264
3,196
241,460
64,867
14,616
(3,866)
75,617
30,904
106,521
204,334
2,892
207,226
65,309
(835)
(3,122)
61,352
32,700
94,052
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES
$
412,150
$
387,892
See accompanying notes to consolidated financial statements
Approved by the Board:
John Risley
Director
Colin MacDonald
Chairman
70| Page
CLEARWATER SEAFOODS INCORPORATED
Consolidated Statements of Earnings
(In thousands of Canadian dollars)
Year ended December 31
2012
2011
Sales
Cost of goods sold
Administrative and selling
Net finance costs (Note 16)
Other income (Note 17)
Research and development
Gain on settlement of Glitnir transaction (Note 13(f))
Gain on change in control of joint venture (Note 4)
Earnings before income taxes
Income tax (recovery) expense (Note 19)
$
350,447
276,190
74,257
$
332,785
263,220
69,565
32,837
24,388
(2,412)
1,759
-
-
56,572
17,685
(5,019)
33,345
38,604
(5,893)
707
(12,445)
(11,571)
42,747
26,818
3,863
Earnings for the year
$
22,704
$
22,955
Earnings attributable to:
Non-controlling interest
Shareholders of Clearwater
$
$
7,695
15,009
22,704
6,619
16,336
22,955
$
$
Basic earnings per share (Note 18)
Diluted earnings per share (Note 18)
$
$
0.29
0.29
$
$
0.32
0.32
See accompanying notes to consolidated financial statements
71| Page
CLEARWATER SEAFOODS INCORPORATED
Consolidated Statements of Comprehensive Income
(In thousands of Canadian dollars)
Year ended December 31
2012
2011
Earnings for the year
$
22,704
$
22,955
Other comprehensive income - foreign currency translation
differences of foreign operations
(744)
(1,686)
Total comprehensive income
$
21,960
$
21,269
Total comprehensive income attributable to:
Non-controlling interest
Shareholders of Clearwater
$
$
7,695
14,265
21,960
6,619
14,650
21,269
$
$
See accompanying notes to consolidated financial statements
72| Page
CLEARWATER SEAFOODS INCORPORATED
Consolidated Statement of Shareholders' Equity
(In thousands of Canadian dollars)
Trust Units
Common
Shares
Shareholders' Equity
Retained
earnings
(deficit)
Contributed
Surplus
Cumulative
Translation
Account
Non-
controlling
interest
Total
Balance at January 1, 2011
$
162,517
$
-
$
(115,551)
$
1,816
$
(1,436)
$
4,018
$
51,364
Total comprehensive income for the year
Transactions recorded directly in equity
Distributions to non-controlling interest
Purchase and cancellation of shares
Change in control on acquisition of joint venture
Total transactions with unitholders
-
-
(571)
-
(571)
-
-
-
-
-
16,336
-
-
(73)
(73)
-
-
-
-
-
Trust conversion, October 2, 2011 (Note 2(a))
(161,946)
65,309
98,453
(1,816)
(1,686)
6,619
21,269
-
-
-
-
-
(7,537)
-
29,600
22,063
(7,537)
(571)
29,527
21,419
-
-
Balance at December 31, 2011
$
-
$
65,309
$
(835)
$
-
$
(3,122)
$
32,700
$
94,052
Total comprehensive income for the year
Transactions recorded directly in equity
Distributions to non-controlling interest
Redemption of 2013 convertible debentures (Note 15)
Total transactions with shareholders
-
-
-
-
-
15,009
-
(744)
7,695
21,960
-
(442)
(442)
-
442
442
-
-
-
-
-
-
(9,491)
-
(9,491)
(9,491)
-
(9,491)
Balance at December 31, 2012
$
-
$
64,867
$
14,616
$
-
$
(3,866)
$
30,904
$
106,521
See accompanying notes to consolidated financial statements
73| Page
CLEARWATER SEAFOODS INCORPORATED
Consolidated Statement of Cash Flows
(In thousands of Canadian dollars)
Year ended December 31
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES:
Operating
Earnings for the year
Items not involving cash:
Depreciation and amortization
Gain on acquisition of joint venture
Gain on settlement of Glitnir Transaction
Net finance costs
Impairment of property, plant and equipment and other assets
Gain on disposal of licenses, property, plant and equipment, and quota
Other
Change in operating working capital (Note 25)
Interest expense
Interest paid
Income tax (recovery) expense
Income tax paid
Financing
Repayment of long-term debt
Proceeds from long-term debt
Repayment of asset based revolving credit facility
Cash received on change in control of joint venture
Distributions to non-controlling interest
Amounts paid to purchase and cancel units
Investing
Purchase of property, plant, equipment, quota and other
Proceeds on disposal of property, plant, equipment, quota and other
Net receipts in other assets
Net receipts (advances) in long term receivables
INCREASE IN CASH
CASH, BEGINNING OF YEAR
CASH, END OF YEAR
2012
2011
$
22,704
$
22,955
22,498
-
-
3,367
-
(479)
51
48,141
5,723
20,347
(17,137)
(5,019)
(4,655)
47,400
$
20,603
(11,571)
(12,445)
8,726
552
(554)
(1,129)
27,137
(6,096)
20,899
(22,654)
3,863
(5,270)
17,879
$
$
$
(189,259)
216,084
(17,513)
-
(9,491)
-
(179)
$
$
$
$
(16,574)
509
-
850
(15,215)
32,006
9,725
41,731
$
$
$
$
$
$
(96,715)
122,094
(9,740)
2,646
(7,537)
(508)
10,240
(21,237)
841
152
(3,421)
(23,665)
4,454
5,271
9,725
See accompanying notes to consolidated financial statements
74| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
1. DESCRIPTION OF THE BUSINESS
Clearwater Seafoods Incorporated (“Clearwater”) was incorporated on July 7, 2011 under the
provisions of the Canada Business Corporations Act to facilitate the reorganization of Clearwater
Seafoods Income Fund (the “Fund") from an income trust to a corporate structure (the
“Conversion”).
Clearwater’s sole investment is the ownership of 100% of the units of Clearwater Seafoods Limited
Partnership (“CSLP”).
Clearwater is domiciled at 757 Bedford Highway, Bedford, Nova Scotia, Canada. The consolidated
financial statements of Clearwater as at and for the years ended December 31, 2012 and 2011
comprise the company, its subsidiaries and jointly control entity. Clearwater’s business includes the
ownership and operation of assets and property in connection with the harvesting, processing,
distribution and marketing of seafood.
2. BASIS OF PREPARATION
(a) Conversion to a Corporation
Effective October 2, 2011 the Fund was reorganized from an income trust structure into a public
corporation named “Clearwater Seafoods Incorporated”.
The business of the Fund has been carried on by Clearwater and the underlying seafood business
operated by CSLP remains unchanged.
Under the reorganization, unitholders of the Fund received one common share of Clearwater, for
each trust unit of the Fund held. As a result, as of October 2, 2011, Clearwater had 50,947,160
common shares issued and outstanding, representing one common share for each of the
27,565,943 Fund Units and the 23,381,217 Special Trust Units of the Fund that were outstanding
immediately prior to the reorganization.
7914091 Canada Inc., a newly formed holding company owned by Clearwater Fine Foods
Incorporated (“CFFI”) and a major shareholder (related to the Chairman of Clearwater)
consolidated their shareholdings in the Fund such that upon conversion of the Fund units into
common shares, it owned 29,636,076 or 58% of the issued and outstanding common shares of
Clearwater.
As a result of the Conversion, Clearwater controls CSLP with a 100% ownership and Clearwater
began consolidating CSLP.
As the original owners of the Fund and CSLP have the same proportionate interest in the same
underlying assets and liabilities, albeit through a different legal structure, the Conversion has
been accounted for as a combination of entities under common control using the book values of
the assets and liabilities as recorded in CSLP.
Therefore, the carrying amounts recorded as at October 2, 2011 are those of CSLP rather than
those of the Fund.
75| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
As Clearwater and CSLP were subject to common control for all periods included in the
consolidated financial statements, the comparative financial information as at and for the year
ended December 31, 2011 are represented on a consolidated basis. Consequently, any
references to trust units, unitholders, and per unit amounts relate to periods prior to the
conversion October 2, 2011 and any references to common shares, shareholders, and per share
amounts relate to periods subsequent to October 2, 2011.
(b) Statement of Compliance
The consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards
Board.
The financial statements were authorized for issue by Clearwater’s Board of Directors on March
11, 2013.
(c) Basis of Measurement
The consolidated financial statements have been prepared on the historical cost basis except for
the following material items measured at fair value through profit or loss:
Derivative financial instruments
Financial instruments
Liabilities for cash settled share-based compensation arrangements
The fair value measurements have been described in the notes.
(d) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is Clearwater’s
functional currency. All financial information presented in Canadian dollars has been rounded
to the nearest thousand except as otherwise noted.
76| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(e) Critical judgments and estimates in applying accounting policies
The preparation of financial statements requires management to make estimates, judgments and
assumptions that materially affect the amounts reported in the consolidated financial statements
and accompanying notes. Management bases assumptions, estimates and judgments on
historical experience, current trends and events, and all available information that management
believes is relevant at the time it prepares the financial statements. Actual results could
ultimately differ materially from these estimates.
The following are the most important accounting policies subject to such judgment and sources
of key estimation uncertainty that Clearwater believes they could have the most significant
impact on the reported results and financial position:
The information in this note is grouped by accounting policy to include:
Key sources of estimation uncertainty
Judgments management made in the process of applying Clearwater’s accounting
policies
i.
Income taxes
Key sources of estimation uncertainty
Accounting for income taxes is based upon evaluation of income tax rules in all jurisdictions
where Clearwater performs activities. In determining the provision for current and deferred
income taxes, Clearwater makes assumptions about temporary and permanent differences
between accounting and taxable income, and substantively enacted income tax rates.
Changes in tax law, the level and geographical mix of earnings impact the effective tax rate.
With respect to deferred taxes, Clearwater makes assumptions about when deferred tax
assets are likely to reverse, the extent to which it is probable that temporary differences will
reverse and whether or not there will be sufficient taxable profits available to offset the tax
assets when they do reverse. Clearwater recognizes deferred tax assets only to the extent that
it considers it probable that those assets will be recoverable.
For further discussion on deferred income taxes refer to note 19.
ii. Goodwill and intangible assets
Key sources of estimation uncertainty
Clearwater conducts impairment testing on its goodwill and intangible assets annually in the
third quarter and whenever events or changes in circumstances indicate that carrying value
may not be recoverable. Clearwater determines the recoverable amount of the goodwill and
intangible assets using the value in use method, which estimates fair value using a
discounted five-year forecasted cash flow estimate with a terminal value. The determination
of the recoverable amount involves estimates and assumptions for future sales, product
margins, market conditions, allowable catch rates, foreign exchange rates, and appropriate
discount rates.
77| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
Judgments made in relation to accounting policies applied
In performing its impairment testing, Clearwater makes judgments in determining its cash
generating units, and the allocation of working capital assets and liabilities and corporate
assets to the cash generating units.
For further discussion on goodwill and intangible assets, refer to note 12.
iii.
Share-based compensation
Key sources of estimation uncertainty
Clearwater determines costs for share-based compensation using market-based valuation
techniques. Clearwater determines the fair value of the market-based and performance-based
non-vested share awards at the date of grant using generally accepted valuation techniques.
Certain performance-based share awards require Management to make estimates on the
likelihood of achieving company and corporate peer group performance goals.
Clearwater makes assumptions in applying valuation techniques including estimating the
future volatility of the stock price, expected dividend yield, future employee turnover rates
and future employee shared based plan option exercise behaviors and corporate
performance. Such assumptions are inherently uncertain. Changes in these assumptions
affect the fair value estimates.
For further discussion on share-based compensation, refer to note 24.
iv. Derivative financial instruments
Key sources of estimation uncertainty
Clearwater records the fair value of certain financial liabilities using appropriate valuation
models where the fair value cannot be determined in active markets.
The inputs used in the fair value models contain inherent uncertainties, estimates and use of
judgment. Fair value is taken from observable markets where possible and estimated as
necessary. Assumptions underlying the valuations require estimation of costs and prices over
time, discount rates, inflation rates, defaults and other relevant variables such as foreign
exchange volatility.
For further discussion on derivative financial instruments, refer to note 14.
78| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
3. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies set out below have been applied consistently to all periods
presented in these consolidated financial statements.
(a) Basis of consolidation
i) Business Combinations
Clearwater measures goodwill as the excess of the fair value of the consideration
transferred, the amount of any non-controlling interest in the acquiree, less the net
recognized amount (generally fair value) of the identifiable assets acquired and liabilities
assumed, all measured as of the acquisition date. When the excess is negative, a bargain
purchase gain is recognized immediately in profit or loss.
Clearwater elects on a transaction-by-transaction basis whether to measure non-controlling
interest at its fair value, or at its proportionate share of the recognized amount of the
identifiable net assets, at the acquisition date.
Transaction costs, other than those associated with the issue of debt or equity securities,
that Clearwater incurs in connection with a business combination are expensed as incurred.
ii) Subsidiaries
Subsidiaries are entities controlled by Clearwater. The financial statements of subsidiaries
are included in the consolidated financial statements from the date that control commences
until the date that control ceases.
iii) Jointly controlled entity
A joint venture is an entity over whose activities Clearwater has joint control, established
by contractual agreement. The consolidated financial statements include Clearwater’s
proportionate share of the entity’s assets, liabilities, revenue and expenses from the date
that control commences until the date that control ceases.
iv) Transactions eliminated on consolidation
Intercompany balances and transactions, and any unrealized income and expenses arising
from intercompany transactions, are eliminated in preparing the consolidated financial
statements. Unrealized losses are eliminated in the same way as unrealized gains, but only
to the extent that there is no evidence of impairment.
79| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(b) Inventories
Inventories consist primarily of finished goods and are stated at the lower of cost and net
realizable value. Cost includes the cost of materials plus direct labour applied to the product
and the applicable share of manufacturing overheads, administration and depreciation,
determined on a first-in, first-out basis. Net realizable value is estimated selling price in the
ordinary course of business, less estimated costs of completion and selling expenses.
(c) Property, plant and equipment
Property, plant and equipment is measured at cost, less government assistance received,
accumulated depreciation and accumulated impairment losses. Cost includes expenditures that
are directly attributable to the acquisition of the asset. The cost of self-constructed assets
includes the cost of materials and direct labour, any other costs directly attributable to bringing
the assets to a working condition for their intended use and location, and borrowing costs.
Additions are depreciated commencing in the month that they are available for use. Vessel
refits are capitalized when incurred and amortized over the period between scheduled refits.
Construction in progress assets are capitalized during the construction period and depreciation
commences when the asset is available for use.
Depreciation is provided on a straight line basis to depreciate the cost of each of the
components of an item of property, plant and equipment over their estimated useful lives. When
parts of an item of property, plant and equipment have different useful lives, they are accounted
for as separate items (major components) of property, plant and equipment. Estimated useful
lives are the following:
Asset Component
Buildings and wharves
Plant equipment
Vessels
Vessel equipment
Rate
10 to 40 years
3 to 20 years
15 to 30 years
1 to 7 years
The cost of replacing a part of an item of property, plant and equipment is recognized in the
carrying amount of the item if it is probable that the future economic benefits embodied within
the part will flow to Clearwater and its cost can be measured reliably. The carrying amount of
the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and
equipment are recognized in profit or loss as incurred.
Gains and losses on disposal of an item of property, plant and equipment are determined as the
difference between the proceeds from disposal and the carrying amount of property, plant and
equipment, and are recognized net within other income in profit or loss.
Depreciation methods, useful lives and residual values are reviewed at each financial year end
and adjusted prospectively if appropriate.
80| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(d) Intangible assets
i) Goodwill
Goodwill is the residual amount that results when the purchase of a business exceeds the
sum of the amounts allocated to the net assets acquired based on their fair values. Goodwill
is allocated to Clearwater’s cash generating units that are expected to benefit from the
acquisition synergies.
Goodwill is measured at cost less impairment losses.
ii) Licenses and fishing rights
Licenses represent intangible assets acquired directly or in a business combination that
meet the specified criteria for recognition apart from goodwill and are recorded at their fair
value at the date of acquisition and are subsequently carried at cost.
Licenses that have indefinite lives are not amortized and are tested for impairment annually
or more frequently if events or changes in circumstances indicate that the asset may be
impaired.
Fishing rights arise from contractual rights to fish quotas, have definite lives and are
amortized over the term of the related operating agreement.
(e) Revenue recognition
Clearwater sells seafood in a fresh or frozen state to customers. These sales are evidenced by
purchase orders/invoices, which set out the terms of the sale, including pricing and shipping
terms. Revenue is recognized when persuasive evidence exists that the significant risks and
rewards of ownership have been transferred to the customer, recovery of the consideration is
probable, the associated costs and possible return of the goods can be estimated reliably, there
is no continuing managerial involvement with the goods, and the amount of revenue can be
measured reliably. Revenue is measured at the fair value of the consideration received or
receivable, net of returns and discounts.
(f) Government assistance
Government assistance received by Clearwater relates to items of property, plant and
equipment.
Government assistance is deducted from the carrying amount of the related asset and amortized
over the same estimated useful life of the particular asset to which it relates.
Clearwater does not have any government assistance that could potentially be required to be
repaid, nor are there any forgivable loans.
81| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(g) Financial instruments
Clearwater has the following non-derivative and derivative financial assets and liabilities that
are classified into the following categories:
Financial instrument
Cash
Trade and other receivables
Long term accounts receivable
Trade and other payables
Long-term debt
Category
Loans and receivables
Loans and receivables
Loans and receivables
Non-derivative financial liabilities
Non-derivative financial liabilities
Convertible debentures
Forward foreign exchange contracts
Embedded derivative
Interest rate swaps
Derivative financial instruments
Derivative financial instruments
Derivative financial instruments
Derivative financial instruments
Measurement Method
Initial: Fair value
Subsequent: Amortized
cost through profit or loss
Fair value through profit
or loss
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. Loans and receivables are initially recognized at their
fair values plus any attributable transaction costs, and are subsequently measured at amortized
cost using the effective interest rate method, with gains and losses recognized in profit or loss
in the period in which they arise.
Non-derivative liabilities
Non-derivative liabilities are debt securities and subordinated liabilities that are initially
measured at fair value plus attributable transaction costs, and subsequently measured at
amortized cost, with gains and losses recognized in profit or loss in the period in which they
arise.
Compound instruments
Clearwater has compound financial instruments in the form of convertible debentures.
At the time of the Conversion, as described in note 2(a), the convertible debentures were
amended to provide the conversion of the debentures into common shares of Clearwater rather
than Trust Units. This was not determined to be a substantial modification of the instrument.
Following the Conversion, the convertible debentures were determined to be a compound
financial instrument with the conversion option recorded in equity. The debt component of the
convertible debenture continues to be recorded at fair value through profit or loss following the
Conversion as the original instrument was accounted for in its entirety at fair value with the
changes being recorded in the consolidated statements of earnings and comprehensive income.
82| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
Derivative financial instruments
Clearwater enters into a variety of derivative financial instruments to manage its exposure to
foreign exchange and interest rate risks, including foreign exchange forward contracts, interest
rate swaps and floors.
Embedded derivatives are contained in non-derivative host contracts and are treated as separate
derivatives when they meet the definition of a derivative, and their risks and characteristics are
not closely related to those of the host contracts.
Derivative financial instruments are recorded at fair value with mark to market adjustments
recorded in profit or loss.
(h) Impairment
i) Financial assets
Financial assets are assessed at each reporting date to determine whether there is objective
evidence that of impairment. A financial asset is impaired if objective evidence indicates
that a loss event has occurred after the initial recognition of the asset, and that the loss event
had a negative effect on the estimated future cash flows of that asset that can be estimated
reliably. Objective evidence that financial assets are impaired can include default or
delinquency by a debtor, restructuring of an amount due to Clearwater on terms that
Clearwater would not consider otherwise or indications that a debtor will enter bankruptcy.
Clearwater considers evidence of impairment for receivables on a customer specific basis.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as
the difference between its carrying amount and the present value of the estimated future cash
flows discounted at the asset’s original effective interest rate. Losses are recognized in profit
or loss and reflected in an allowance account against receivables. When a subsequent event
causes the amount of impairment loss to decrease, the decrease in impairment loss is
reversed through profit or loss.
ii) Non-financial assets
Clearwater reviews non-financial assets each reporting date to determine whether there is
any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated. In addition, for goodwill and intangible assets that have indefinite
useful lives an annual impairment test is performed. .
The recoverable amount of an asset or cash-generating unit is the greater of its value in use
and its fair value less costs to sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset.
For the purpose of impairment testing, assets that cannot be tested individually are grouped
together into the smallest group of assets that generate cash inflows from continuing use that
83| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
are largely independent of the cash inflows of other assets or groups of assets (the “cash-
generating unit” or “CGU”). Goodwill and the intangible assets acquired in a business
combination are allocated to the CGU, or the group of CGUs, that are expected to benefit
from the synergies of the combination. This allocation is subject to an operating segment
ceiling test and reflects the lowest level at which that asset is monitored for internal
reporting purposes.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its
estimated recoverable amount. Impairment losses are recognized in profit or loss.
Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying
amount of any goodwill allocated to the CGUs, and then to reduce the carrying amounts of
the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets,
impairment losses recognized in prior periods are assessed at each reporting date for any
indications that the loss has decreased or no longer exists. An impairment loss is reversed if
there has been a change in the estimates and assumptions used to determine the recoverable
amount. An impairment loss is reversed only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined, net of depreciation
or amortization, if no impairment loss had been recognized.
(i) Translation of foreign currency
i) Foreign currency transactions
Transactions in foreign currencies are translated to an entity’s functional currency at the
exchange rate at the date of the transactions. Monetary assets and liabilities denominated in
foreign currencies at the reporting date are retranslated to the entity’s functional currency at
the exchange rate at that date.
Non-monetary items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rate at the date of the transaction.
ii) Foreign operations
The assets and liabilities of foreign operations, including goodwill, other intangible assets
and fair value adjustments arising on acquisition, are translated to Canadian dollars at
exchange rates at the reporting date. The income and expenses of foreign operations are
translated to Canadian dollars at average exchange rates.
Foreign currency differences are recognized in other comprehensive income in the
cumulative translation account.
When a foreign operation is disposed of, all relevant amounts in the cumulative translation
account are transferred to profit or loss as part of the profit or loss on disposal. On the partial
disposal of a subsidiary that does not result in loss of control the relevant proportion of such
cumulative translation account is reattributed to non-controlling interest and not recognized
in profit or loss.
84| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(j) Income taxes
Prior to the Conversion (as described in Note 2(a)) the portion of Clearwater’s income earned
through a partnership was not subject to tax. As a corporation, all of Clearwater’s income is
subject to tax.
Income tax expense is comprised of current and deferred income tax. Current tax and deferred
income tax are recognized in profit or loss except to the extent that it relates to a business
combination, or items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the
period, using tax rates enacted or substantively enacted at the reporting date, and any
adjustments to tax payable in respect of previous years. Taxable earnings differs from earnings
as reported in the consolidated income statement because of items of income or expense that
are taxable or deductible in years other than the current reporting period or items that are never
taxable or deductible.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes. Deferred tax is not recognized for the following temporary differences: differences
relating to investments in subsidiaries and jointly controlled entities to the extent that it is
probable that they will not reverse in the foreseeable future. In addition, deferred tax is not
recognized for taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to temporary
differences when they reverse, based on the laws that have been enacted or substantively
enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally
enforceable right to offset current tax liabilities and assets, and they relate to income taxes
levied by the same tax authority on the same taxable entity, or on different tax entities, but they
intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities
will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, and deductible temporary differences,
to the extent that it is probable that future taxable profits will be available against which they
can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the
extent that it is no longer probable that the related tax benefit will be realized.
(k) Borrowing costs
Clearwater capitalizes borrowing costs attributable to the acquisition, or construction of its
qualifying assets, which are assets that necessarily take a substantial period of time to ready for
their intended use, as they are being constructed. Other borrowing costs are recognized as an
expense of the period in which they are incurred.
(l) Finance costs
Finance costs comprise interest expense on borrowings, changes in the fair value of financial
assets and liabilities at fair value through profit or loss, impairment losses recognized on
derivative financial assets and liabilities, gains and losses on financial instruments that are
85| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
recognized in profit or loss. Borrowing costs determined to be period costs, or the amortization
of such costs are recorded through profit or loss.
Foreign currency gains and losses are reported on a net basis.
(m) Share-based compensation
Clearwater has a phantom share plan that provides for the granting of share appreciation rights
(“SARs”). SARs provide the holder a cash payment equal to the fair market value of
Clearwater’s shares less the grant price. SARs vest over a three year period and have no expiry.
During 2012 Clearwater implemented deferred share unit plans (“DSU”) and a performance
share unit plan (“PSU”).
The DSU plans provide the holder a cash payment equal to the fair market value of
Clearwater’s shares on the date of settlement. For the retirement DSU plan the awards vest
once the holder reaches the age of 65 with continued employment by Clearwater, or death.
For the director DSU plan the awards vest immediately.
The PSU plan provides the holder with the opportunity to receive a cash payment based upon
the relative performance of Clearwater shares to its pre-defined peer group. Performance is
measured by comparing the relative total shareholder return. The PSU’s vest over a three year
performance period at the end of which there is a cash settlement based on the relative
performance of Clearwater’s shares to the peer group.
The cash settled plans are recorded as liabilities at fair market value at each reporting period
with changes in fair value recorded to profit and loss. The fair value of the SAR and DSU
plans are calculated using a black-scholes valuation model and the PSU plan a Monte Carlo
simulation model to estimate performance. Compensation expense is recognized based on the
fair value of the awards that are expected to vest and remain outstanding at the end of the
reporting period.
The share-based compensation liability is included in trade and other payables in the
consolidated statement of financial position and the related compensation expense in
administrative expense in the statement of earnings.
(n) Earnings per share
Basic earnings per share is calculated by dividing earnings for the year attributable to the
shareholders of Clearwater by the weighted average number of common shares outstanding
during the year.
Diluted earnings per share is calculated by dividing earnings for the year attributable to the
shareholders of Clearwater by the weighted average number of common shares outstanding and
the voting rights attributable to the outstanding convertible debentures during the year. The
calculation of the potential dilutive common shares assumes the exercise of all convertible
debentures outstanding.
86| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(o) New accounting standards and interpretations
The IASB and International Financial Reporting Interpretations Committee (IFRIC) have
issued the following standards that have not been applied in preparing these consolidated
financial statements as their effective dates fall within annual periods beginning subsequent to
the current reporting period.
Effective date (i) Proposed standards
2013
January 1, 2013
Description
IFRS 10 - Consolidated
Financial Statements
IFRS 12 – Disclosure of
Interests in Other Entities
IFRS 11 – Joint Arrangements Focuses on the rights and obligations of an
arrangement rather than its legal form and
requires a single method to account for interests
in jointly controlled entities.
A new standard detailing disclosure requirements
for all forms of interests in other entities, including
subsidiaries, joint arrangements, associates, and/or
unconsolidated structured entities.
Builds on the existing principles of control and
elaborates on the definition of control when
determining whether an entity should be
consolidated or not.
Sets out a single source of guidance for fair value
measurements and disclosure requirements
surrounding the inputs and assumptions used in
determining fair value.
IFRS 7 - Requires entities to disclose information
about rights of offset and related arrangements.
IFRS 13 – Fair Value
Measurement
Amendments to IFRS 7 –
Offsetting Financial Assets
and Financial Liabilities and
related disclosures
Annual improvement to IFRS -
Issued in May 2012
Previous standard
IAS 31 – Interests in
Joint Ventures
Various - no direct
replacement
IAS 27 – Consolidated
and Separate Financial
Statements
Various - no direct
replacement
Various - no direct
replacement
Various - no direct
replacement
IAS 16 - Property, Plant and Equipment - Clarifies
that spare parts, stand-by equipment and servicing
equipment should be classified as property, plant
and equipment when they meet the definition of
property, plant and equipment.
IAS 32 - Clarifies that income tax relating to
distributions to holders of equity instruments and
transaction costs of an equity transaction should be
accounted for in accordance with IAS 12 Income
Taxes.
January 1, 2013
January 1, 2013
January 1, 2013
January 1, 2013
January 1, 2013
2014
January 1, 2014
Amendments to IAS 32 –
Offsetting Financial Assets
and Financial Liabilities and
related disclosures
IAS 32 - Clarifies existing application issues
relating to the offset of financial assets and
financial liabilities requirements.
Various - no direct
replacement
87| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
Description
Previous standard
Effective date (i) Proposed standards
2015
January 1, 2015
IFRS 9 – Financial Instruments Initially issued in November 2009 to address the
classification and measurement of financial
assets. Additional guidance issued in October
2010 on the classification and measurement of
financial liabilities.
(i) Effective for annual periods on or after the stated date
IFRS 11 Joint Arrangements
IAS 39 – Financial
Instruments: Recognition
and Measurement
Clearwater anticipates that the application of IFRS 11 - Joint Arrangements will have an
impact on amounts reported in respect of the assets, liabilities and presentation of earnings. The
application of this Standard will change the classification and subsequent accounting for
Clearwater’s investment in an entity proportionately consolidated which is classified as a
jointly controlled entity under IAS 31. Under IFRS 11 the entity will be classified as a joint
venture and accounted for using the equity method resulting in the aggregation of Clearwater’s
proportionate share of the entity’s net assets and items of profit or loss into single line items
which will be presented in the consolidated statement of financial position and in the
consolidated statement of earnings, respectively.
Impact of application of IFRS 11 on Consolidated Statement of Financial Position
In 000's of Canadian dollars
Year ended December 31, 2012
ASSETS
Current assets
Non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Non-current liabilities
SHAREHOLDERS' EQUITY
Non-controlling interest
Consolidated
Statement of financial
position
Carrying values
of entity
proptionately
consolidated
Presentation of
proptionately
consolidated entity
using equity method
as of January 1, 2013
Consolidated
Statement of
financial position
Transitioned to
IFRS 11
148,758
263,392
$
412,150
64,169
241,460
75,617
30,904
106,521
(1,146)
(4,102)
(5,248)
(148)
(1,232)
-
-
-
3,868
147,612
263,158
3,868
$
410,770
-
-
-
-
-
64,021
240,228
75,617
30,904
106,521
$
410,770
TOTAL SHAREHOLDERS' EQUITY AND
LIABILITIES
$
412,150
(1,380)
Impact of application of IFRS 11 on Consolidated Statement of Earnings
The impact of the application of IFRS 11 on the consolidated statement of earnings for the
jointly controlled entity is the aggregation of Clearwater’s share of earnings into a single line
item that will be included in other income. For December 31, 2012 the reclassified amount is
$1.0 million.
88| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
For the IFRS standards effective for annual periods beginning on or after January 1, 2013
management has evaluated the potential qualitative and quantitative impact of these new
standards on Clearwater’s financial statement measurements and disclosures and does not
anticipate that the application of these new Standards will affect amounts reported in the
financial statements beyond more extensive note disclosures.
For the IFRS standards effective for annual periods beginning after 2013 management
continues to evaluate the potential qualitative and quantitative impact of these new standards
on Clearwater’s financial statement measurements and disclosure. Management does not
anticipate early adopting these standards at this time.
4. ACQUISITION OF SUBSIDAIRY AND NON-CONTROLLING INTERESTS
Business combination
Effective January 1, 2011 Clearwater obtained control of a joint venture, Clearwater Ocean Prawns
Venture, that operates its frozen-at-sea shrimp and turbot harvesting operations in which it has a
53.66% interest. Clearwater obtained control as a result of changes in the partnership agreement that
provide Clearwater the power to govern the financial and operating policies of the entity. As a result,
Clearwater accounted for this transaction as an acquisition by contract alone and effective January 1,
2011 began to fully consolidate the results.
For the year ending December 31, 2011 consolidating this business increased revenue by $28.1
million and net earnings by $4.9 million.
Identifiable assets acquired and liabilities assumed
(in thousands of dollars)
Cash
Receivables
Inventories
Prepaids
Property, plant and equipment
Fishing rights
Trade payables
Long-term debt
Non-controlling interest in net assets
Total identifiable assets
$
5,710
6,749
4,966
1,466
31,512
24,094
(4,356)
(5,843)
(29,600)
34,698
$
The receivables comprise gross contractual amounts of $6.7 million and no amounts were
determined to be uncollectible subsequent to the acquisition date.
No cash consideration was transferred as part of this transaction.
The carrying value of Clearwater’s previous net investment in this operation was $22.9 million.
89| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
The difference between the carrying value of Clearwater’s net investment and the fair value of the
net assets assumed, being $11.6 million, was recorded as a gain on change in control of joint
venture. Non-controlling interest has been measured at its proportionate share of the fair value of the
net assets acquired.
Fair value for the fishing rights was measured through a value in use approach by determining
discounted future cash flows generated from the earnings from operations of the related fishing
rights. The cash flows from operations were based on a combination of past experience for royalty
fees and discount rates of 7.25% representing the weighted average cost of capital. Fair values for
all other assets were based upon carrying values.
5. EMPLOYEE COMPENSATION
Employee compensation is classified in the consolidated statement of earnings based on the related
nature of the service performed. The following table reconciles Clearwater's compensation expense
items to where the amounts are presented on the consolidated statement of earnings:
Year ended December 31
Salaries and benefits
Share-based compensation
Cost of goods sold
Administrative and selling
6. TRADE AND OTHER RECEIVABLES
Trade receivables
Other receivables
2012
88,063
2,331
90,394
$
$
$
$
64,360
26,034
90,394
2011
93,700
904
94,604
69,902
24,702
94,604
$
$
$
$
$
December 31 December 31
2011
32,480
9,239
41,719
2012
35,453
7,751
43,204
$
$
$
Included in other receivables is $5.5 million of input tax receivables and $2.3 million of other
receivables
90| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
7. INVENTORIES
Goods for resale
Supplies and other
$
December 31 December 31
2011
53,189
8,566
61,755
2012
41,960
9,949
51,909
$
$
$
In 2012 inventory costs of $257.5 million (2011 - $243.1 million) were recognized in cost of goods
sold. Clearwater incurred $0.7 million (2011 - $1.7 million) in inventory write-downs included in
cost of goods sold. Refer to note 13 for assets pledged as security for long term debt.
8. PREPAIDS AND OTHER
Prepaids
Due from related parties (Note 21(c))
Restricted funds on deposit
9. LONG TERM RECEIVABLES
$
December 31 December 31
2011
4,438
2,111
5,000
11,549
2012
6,133
1,596
-
7,729
$
$
$
December 31 December 31
2011
Notes receivable from non-controlling interest holder in subsidiary $ 4,630 $ 3,514
3,022 4,802
Advances to non-controlling interest holder in subsidiary
2,995 1,977
Advances to fishermen
$ 10,647 $ 10,293
2012
Notes receivable and advances to non-controlling interest consists of funds that are advanced to a
shareholder in an incorporated subsidiary. The advances are unsecured and have a value of $3.0
million at December 31, 2012 (2011 - $4.8 million).
The notes bear interest at 10% - 12% (2011 – 12%) and are secured by shares held by the non-
controlling interest in an incorporated subsidiary. The notes had a value of $4.6 million at December
31, 2012 (2011 – $3.5 million) and have no set terms of repayment.
Advances to fishermen are payable from proceeds of the related catches. Certain of the advances
bear interest at prime plus 2% - 3% (2011- 3%), are due on demand, and are secured by an
assignment of catch, a marine mortgage on the related vessels, equipment and licenses. They are
presented as non-current as the entire balances are not expected to be repaid in the current year and it
is not Clearwater’s intention to demand payment unless the terms of the advance agreements are not
met.
91| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
10. OTHER ASSETS
Income taxes receivable
Other
Deferred transaction costs on revolving debt
Restricted funds on deposit
December 31 December 31
2011
2012
$
847
$ -
398
525
- 1,448
- 93
$ 2,066
$ 1,245
92| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
11. PROPERTY, PLANT AND EQUIPMENT (“PPE”)
Building and
wharves
Land
Equipment
Vessels
Construction
in progress
Total
PPE
Deferred Gov't
Assistance
Total
Cost
$ 2,803 $ 63,698 $ 75,238 $ 203,858 $ 4,129 $ 349,726 $ (9,667) $340,059
Balance at January 1, 2012
$ 16,574
-
20 94
Additions
$ (7,407)
Disposals
- - (439) (6,948) (20) (7,407) -
$ 1,861
Reclassifications and replacement assets - 2,389 2,406 9,457 (12,391) 1,861 -
(2) (7) (32) (453) (205) (699) -
Effect of movements in exchange rates
$ (699)
$ 2,821 $ 66,174 $ 77,949 $ 207,280 $ 5,831 $ 360,055 $ (9,667) $350,388
Balance at December 31, 2012
776 1,366 14,318 16,574
Depreciation and impairment losses
Balance at January 1, 2012
Depreciation for the year
Disposals
Other adjustments
Effect of movements in exchange rates
Balance at December 31, 2012
Carrying amounts
At January 1, 2012
At December 31, 2012
$ 987 $ 47,897 $ 67,956 $ 100,728 $ - $ 217,568 $ (6,882) $210,686
(406) 20,646
11 1,547 1,863 17,631
(7,387)
- - (439) (6,948) - (7,387) -
-
- - - - - - -
- (3) (7) (254) - (264) -
(264)
$ 998 $ 49,441 $ 69,373 $ 111,157 $ - $ 230,969 $ (7,288) $223,681
- 21,052
$ 1,816 $ 15,801 $ 7,282
$ 1,823 $ 16,733 $ 8,576
$ 103,130 $ 4,129 $ 132,158 $ (2,785) $129,373
$ 96,123 $ 5,831 $ 129,086 $ (2,379) $126,707
Building and
wharves
Land
Equipment
Vessels
Construction
in progress
Total
PPE
Deferred Gov't
Assistance
Total
Cost
$ 314,457 $ (9,667) $304,790
Balance at January 1, 2011
21,237
21,237
-
Additions
(8,147)
(8,147) -
Disposals
23,748
23,748
-
Change in control of a subsidary
(72)
(72) -
Other adjustments
Effect of movements in exchange rates (5) (16) (45) (1,149) (282) (1,497) -
(1,497)
$ 2,803 $ 63,698 $ 75,238 $ 203,858 $ 4,129 $ 349,726 $ (9,667) $340,059
Balance at December 31, 2011
$ 2,870 $ 64,481 $ 74,261 $ 170,277
- 334 1,385 17,675
- (847) (439) (6,861)
- - 305 23,443
(62) (254) (229) 473
2,568
1,843
-
-
-
$
Depreciation and impairment losses
Balance at January 1, 2011
$ 976 $ 46,818 $ 66,383 $ 83,336 $ - $ 197,513 $ (6,473) $191,040
Depreciation for the year
(409) 18,748
11 1,558 1,785 15,803
Disposals
(7,887)
- (621) (405) (6,861) - (7,887) -
9,145
Change in control of a subsidary
- - 184 8,961 - 9,145 -
451
277 - 451 -
Other adjustments
- 148 26
Effect of movements in exchange rates - (6) (17) (788) - (811) -
(811)
$ 987 $ 47,897 $ 67,956 $ 100,728 $ - $ 217,568 $ (6,882) $210,686
Balance at December 31, 2011
- 19,157
Carrying amounts
At January 1, 2011
At December 31, 2011
$ 1,894 $ 17,663 $ 7,878
$ 1,816 $ 15,801 $ 7,282
$ 86,941 $ 2,568 $ 116,944 $ (3,194) $113,750
$ 103,130 $ 4,129 $ 132,158 $ (2,785) $129,373
Total depreciation and amortization expense related to property, plant and equipment and definite-
life intangible assets for 2012 was $22.5 million (2011 - $20.6 million). In 2012 $21.8 million (2011
- $20.1 million) of depreciation and amortization expense for assets used in the harvesting and
production of goods was classified as cost of goods sold and $0.7 million (2011 – $0.5 million) was
recorded in administrative and selling for assets used in administrative activities. Refer to note 13
for assets pledged as security for long term debt.
93| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
12. INTANGIBLE ASSETS AND GOODWILL
Cost
Balance at January 1, 2011
Change in ownership on change in control
Foreign currency exchange translation
Balance at December 31, 2011
Disposal
Foreign currency exchange translation
Balance at December 31, 2012
Accumulated amortization
Balance at January 1, 2011
Amortization expense
Change in ownership on change in control
Balance at December 31, 2011
Amortization expense
Balance at December 31, 2012
Carrying amounts
As at December 31, 2011
As at December 31, 2012
Indefinite life
Goodwill
licenses Fishing rights
Total
$ 7,043 $ 90,303 $ 7,285
- - 16,809
- (948) -
$
104,631
16,809
(948)
7,043 89,355 24,094 120,492
- (910) -
(910)
- (445) -
(445)
$ 7,043 $ 88,000 $ 24,094 $ 119,137
$ -
$ 2,459
$ -
- - 1,802
- - (2,512)
$
2,459
1,802
(2,512)
- - 1,749 1,749
- - 1,802
1,802
$ 3,551 $ 3,551
$ -
$ -
$ 7,043 $ 89,355 $ 22,345 $ 118,743
$ 7,043 $ 88,000 $ 20,543 $ 115,586
Clearwater maintains fishing licenses and rights to ensure continued access to the underlying
resource. Except for fishing rights, licenses have an indefinite life as they have nominal annual
renewal fees, which are expensed as incurred, and the underlying species are healthy. The licenses
and goodwill are tested for impairment annually and when circumstances indicate the carrying value
may be impaired.
Indefinite life licenses and Goodwill
Annual impairment testing for each cash generating unit (“CGU”) is performed using a value in use
approach as of September 29, 2012. The recoverable amounts for all CGU’s were determined to be
higher than their carrying amounts and no impairments were recorded during 2012 or 2011. The
value in use approach was determined by discounting the future cash flows generated from the
continuing earnings from operations for the applicable CGU. Unless otherwise indicated, the
assumptions used in the value in use approach for 2012 were determined similarly to 2011.
94| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
The carrying value of the intangible assets and goodwill by CGU was as follows:
Scallops
All other CGU's individually without significant carrying value
December 31, December 31,
2011
62,219
34,179
96,398
2012
61,824
33,219
95,043
The discounted cash flows used in determining the recoverable amounts for the Scallops and other
CGU’s were based on the following key assumptions:
i) Cash flows from operations were projected for a period of five years based on a combination
of past experience, actual operating results and Board approved 2013 forecasted earnings.
Terminal values and forecasts for future periods were extrapolated using inflation rates of
1.0% (2011: 1.0%). Gross margins for all future periods were determined using forecasted
rates for 2013.
ii) Pre-tax discount rates ranging from 12% - 17% (2011: 11% - 17%) were applied in
determining the recoverable amount of the CGU’s. The discount rates were estimated based
upon weighted average cost of capital, and associated risk for the CGU.
iii) Free cash flow adjustments for capital expenditures were based upon 2013 sustaining capital
expenditures, and required refits over the period of the fishing license.
The values assigned to the key assumptions represent management’s assessment of future trends in
the industry and the global market and are based on both internal and external sources.
For 2012 the recoverable amount for the cooked and peeled CGU exceeds the carrying value by
approximately $4.3 million. If expected annual cash flow used in the calculation of the discounted
terminal amount declines by more than 28% the CGU’s recoverable amount will approximate the
carrying value.
Definite life fishing rights and licenses
Amortization of licenses relates to fishing rights. Amortization is allocated to the cost of inventory
and is recognized in cost of goods sold as inventory is sold.
In 2012 Clearwater disposed of non-core groundfish and snow crab fishing quotas with a net book
value of $0.9 million for proceeds of $2.0 million resulting in a gain of $1.1 million. In 2011
Clearwater did not dispose of any fishing quotas. There were no additions to licenses during 2012 or
2011.
Refer to note 13 for assets pledged as security for long term debt.
95| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
13. LONG-TERM DEBT
Revolving loan, due in 2017 (a)
Term loans (b)
Term loan A, due 2017
Term loan B, due 2018
Term loan B, embedded derivative
Senior first lien loan - repaid in June 2012
Senior second lien loan - repaid in June 2012
2013 Convertible Debentures (c)
2014 Convertible Debentures (c)
Marine mortgage, due in 2017 (d)
Term loan, due in 2091 (e)
Glitnir payable (f)
Other loans
Less: current portion
December 31, December 31,
2011
$ - $ 17,513
2012
72,259 -
125,781 -
4,205 -
77,250
-
43,822
-
-
43,573
44,722
41,632
2,697 4,470
3,500 3,500
-
14,500
627 840
253,791 247,100
(15,527) (42,766)
$ 238,264 $ 204,334
(a) The revolving loan is limited to 90% of eligible receivables and up to 75% of eligible inventory
to a maximum of $65.0 million, denominated in both CDN of $ nil million at December 31,
2012 ($2.9 million CDN at December 31, 2011) and USD of $ nil million at December 31, 2012
($14.4 million USD at December 31, 2011) and maturing in June 2017. The CDN balances bear
interest at the banker’s acceptance rate plus 2.5%. The USD balances bear interest at the US
Libor rate plus 2.5%. As of December 31, 2012 this results in effective rates of 4.5% for CDN
balances and 4.7% for USD balances. The loan is secured by a first charge on accounts
receivable, cash and cash equivalents subject to certain limitations, and inventory as well as a
second charge on marine vessels, licenses and quotas and Clearwater’s investments in certain
subsidiaries. The full amount of this loan would be included in the current portion of long-term
debt as it would be typically drawn using short-term instruments that mature within 1-3 months.
The loan has an accordion provision that, subject to certain conditions, allows Clearwater to
expand the facility by a maximum of CDN $20.0 million.
(b) Term loans consist of a CDN $75.0 million Term Loan A facility and a USD $134.0 million
Term Loan B facility.
Term Loan A - The principal outstanding on December 31, 2012 is CDN $74.1 million. The
balance is shown net of deferred financing charges of CDN $1.8 million. The loan is repayable
in quarterly installments of $0.5 million to June 2015, $1.4 million from September 2015 to June
96| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
2016 and $2.3 million from September 2016 to March 2017 with the balance of $52.7 million
due at maturity in June 2017. Bears interest payable monthly at an annual rate of banker’s
acceptance plus 4.5%. As of December 31, 2012 this resulted in an effective rate of 5.8%. The
loan is secured by a second charge on accounts receivable, cash and cash equivalents subject to
certain limitations, and inventory as well as a first charge on marine vessels, licenses and quotas
and Clearwater’s investments in certain subsidiaries. The loan has an accordion provision that
subject to certain conditions allows Clearwater to expand the facility by a maximum of CDN
$25.0 million.
As required by the Term Loan A agreement Clearwater entered into an interest rate swap to
effectively swap the variable interest rate for a fixed rate for 40% or $30 million of the
outstanding Term Loan A debt facility. This interest rate swap effectively locks in the interest
rate on $30 million of the Term Loan A facility at an effective interest rate of 6.29%. As
principal balances for the Term Loan A decline due to scheduled repayments, the balance of the
swap will also decline proportionately.
Term loan B - The principal outstanding on December 31, 2012 is USD $133.3 million. The
balance is shown net of deferred financing charges of USD $2.6 million. The loan is repayable
in quarterly installments of USD $0.3 million with the balance of USD $119.0 million due at
maturity in June 2018. Bears interest payable monthly at an annual rate of US Libor plus 5.5%
with a Libor interest rate floor of 1.2%. As of December 31, 2012 this resulted in an effective
rate of 6.75%. The loan is secured by a second charge on accounts receivable, cash and cash
equivalents subject to certain limitations, and inventory as well as a first charge on marine
vessels, licenses and quotas and Clearwater’s investments in certain subsidiaries. The loan has
an accordion provision that, subject to certain conditions allows Clearwater to expand the
facility by a maximum of USD $50.0 million. The embedded derivative represents the fair
market value of the Libor interest rate floor of 1.2%. The change in fair market value of the
embedded derivative is recorded through profit or loss.
In addition to the minimum principal payments for Term Loan A and B, the loan agreement
requires between 25% and 50% of excess cash flow (as defined in the loan agreement) to be
repaid based on the previous fiscal year’s results upon approval of the annual financial
statements. Payments are allocated on a pro rata basis. Based on the terms of the agreement, in
2013, Clearwater is required to repay approximately $11.3 million of its principal outstanding
balance.
(c) The 2014 Convertible debentures accrue interest at 7.25%, mature in March 2014 and are
convertible at a price of $5.90 per share at the option of the holder. They are redeemable by
Clearwater at face value plus accrued interest. The debt component of the debentures is recorded
at estimated fair value through profit or loss, the equity component is recorded in share capital.
The principal amount outstanding as of December 31, 2012 was $44.4 million (December 31,
2011 - $44.4 million).
To redeem the debentures, in whole or in part, Clearwater must issue a notice of the redemption
not more than 60 days and not less than 30 days prior to the date of redemption. Any debenture
holder that wishes to convert the debentures held, rather than to have them redeemed, must
complete and deliver a Notice of Conversion prior to the redemption date.
97| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
The convertible debentures are unsecured and subordinated. The 2014 debentures pay interest
semi-annually in arrears on March 31 and September 30. Subject to regulatory approval,
Clearwater may satisfy its obligation to repay the principal amount of the debentures on
redemption or at maturity, in whole or in part, by delivering that number of shares equal to the
amount due divided by 95.0% of the market price of the shares at that time, plus accrued interest
in cash.
The 2013 Convertible debentures accrued interest at 10.5% and were convertible at a price of
$3.25 per share at the option of the holder. The debentures paid interest semi annually in arrears
on June 30 and December 31. The outstanding principal balance of $43.4 million for the
debentures was redeemed on July 10, 2012.
(d) Marine mortgage - The mortgage is payable in the principal amount of:
YEN
DKK
CDN
December 31, December 31,
2011
158,758
8,131
929
2012
128,991
6,044
154
The mortgage bears interest at UNIBOR plus 1% payable semi-annually. Principal payments are
required annually as follows:
YEN
DKK
CDN
2013
29,767
2,087
154
2014
29,767
2,087
-
2015
29,767
1,870
-
2016
29,767
-
-
2017
9,922
-
-
The loan matures in 2017 and is secured by a first mortgage over the related vessel.
(e) Term loan, payable in 2091. In connection with this loan, Clearwater makes a royalty payment
of $0.3 million per annum in lieu of interest. This equates to an effective interest rate of
approximately 8.0%. This loan is measured at amortized cost.
(f) Glitnir payable. On February 28, 2012 Clearwater reported that it had reached an agreement with
Glitnir. The agreement reached with Glitnir provided for the settlement and release of all
outstanding claims for CSLP, the Fund and its successor, Clearwater, and Glitnir in exchange for
an immediate cash payment by Clearwater of $14.5 million.
The Icelandic Financial Services Authority took control of Glitnir and subsequently placed it
into receivership on October 7, 2008. Prior to Glitnir’s receivership, CSLP had derivative
contracts with Glitnir including foreign exchange contracts and cross currency and interest rate
swaps. During the course of refinancing debt facilities in June 2009, CSLP and Glitnir reached
an agreement whereby all outstanding foreign exchange contracts were closed and the potential
liability under those contracts was capped at $14.0 million plus interest.
98| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
14. FINANCIAL INSTRUMENTS
Summary of derivative financial instrument position
Derivative financial assets
Forward foreign exchange contracts
Derivative financial liabilities
Forward foreign exchange contracts
Interest rate swap contracts
December 31 December 31
2011
2012
$ 4,185
$ 1,075
(3,439) (1,097)
(200) -
$ (3,639) $ (1,097)
(a) At December 31, 2012 Clearwater had outstanding forward contracts as follows:
Currency
Notional Amount (in 000's)
Amount Maturity
Average
Contract
Exchange
Fair Value
Asset
(Liability)
Yen
2,705,000
0.013
2013
$
4,185
USD
Euro
82,500
56,100
0.988
1.270
2013 $ (640)
2013 (2,799)
$ (3,439)
At December 31, 2011, Clearwater had outstanding forward contracts as follows:
Average
Contract
Exchange
Notional Amount (in 000's)
Amount Maturity
Fair Value
Asset
(Liability)
15,200
1,095,000
1.394
0.012
2012 $ 1,075
2012 $ (1,097)
Currency
Euro
Yen
99| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(b) At December 31, 2012 Clearwater had an interest rate swap contract outstanding as follows:
Average
contracted
fixed interest
rate
Notional
Amount (in
000's)
Fair
Value
Asset
(Liability)
Term Loan A - Interest rate swap
6.29% 30,000 $ (200)
The interest rate swap declines proportionately with scheduled principal repayments of Term
Loan A (Note 13 (b)). The outstanding balance of the swap is due upon maturity in May 2017.
(c) Foreign exchange and derivative contract gains and losses:
Year ended December 31
2012
2011
Realized loss (income)
Foreign exchange contracts
Realized gain on interest and currency swaps
Working capital
Unrealized (gain) loss
Foreign exchange on long term debt and other assets
Mark-to-market on foreign exchange contracts
Mark-to-market on interest rate swap
(Note 16)
(d) Credit risk:
$
(3,991)
-
1,359
(2,632)
$
2,578
1,048
2,712
6,338
(3,013)
(663)
200
(3,476)
932
(287)
-
645
$
(6,108)
$
6,983
Credit risk refers to the risk of losses due to failure of Clearwater’s customers or other
counterparties to meet their contractual obligations. Clearwater is exposed to credit risk in the
event of non-performance by counter parties to its derivative financial instruments but does not
anticipate non-performance of any of the counter parties as Clearwater only deals with highly
rated financial institutions.
Clearwater has significant accounts receivable from customers operating in Canada, United
States, Europe and Asia. Significant portions of Clearwater’s customers from a sales dollar
perspective have been transacting with Clearwater in excess of five years and bad debt losses
have been minimal. Clearwater has a policy of utilizing a combination of credit reporting
agencies, credit insurance, letters of credit and secured forms of payment to mitigate customer
specific credit risk and country specific credit risk. As a result Clearwater does not have any
significant concentration of credit risk.
As at December 31, 2012, Clearwater’s trade accounts receivable aging based on the invoice due
date is as follows: 99.0% 0-30 days, 0.2% 31-60 days, and 0.8% over 60 days. As at December
100| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
31, 2011, Clearwater’s trade accounts receivable aging based on the invoice due date is as
follows: 98.2% 0-30 days, 0.5% 31-60 days, and 1.3% over 60 days.
The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts of
$0.5 million (2011 - $0.8 million). Clearwater reviews accounts past due on a regular basis and
provides an allowance on a specific account basis. Accounts are only written off completely
when it becomes virtually certain that collection will not occur. Changes in the allowance for
doubtful accounts are summarized in the table below:
December 31
Balance at January 1
Allowance recognized
Amounts recovered
Amounts written off as uncollectible
Foreign exchange revaluation
Foreign exchange translation
Balance at December 31
(e) Foreign currency exchange rate risk
2012
2011
$
838
$
521
381
(728)
(15)
(10)
(7)
459
$
510
(133)
(79)
(9)
28
838
$
Foreign exchange risk refers to the risk that the value of financial instruments or cash flows
associated with the instruments will fluctuate due to changes in foreign exchange rates.
Approximately 80% of Clearwater's sales are in currencies other than Canadian dollars, whereas
the majority of expenses are in Canadian dollars. As a result fluctuations in foreign exchange
rates may have a material impact on Clearwater's financial results.
Risks associated with foreign exchange are partially mitigated by the fact that Clearwater
operates internationally which reduces the impact of any country-specific economic risks on its
business.
The carrying amounts of Clearwater’s foreign currency denominated monetary assets and
monetary liabilities (excluding derivative financial instruments) as at December 31, 2012 and
December 31, 2011 was as follows (as converted to Canadian dollars):
December 31
Cash
Accounts receivable
Other accounts receivable
Property, plant and equipment
Long term accounts receivable
Accounts payable and accrued liabilities
Long-term debt
Net balance sheet exposure
2012
2011
$ 17,596 $ 9,780
28,831
3,984
6,465
7,841
(11,617)
(56,898)
$ (84,372) $ (11,614)
30,770
4,944
6,691
7,577
(19,421)
(132,529)
101| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
The components of this net exposure by currency are as follows (in local currency ‘000’s) at
December 31, 2012:
December 31, 2012
GBP
USD
Yen
Euros
RMB
DKK
Argentine
Peso
Cash
Accounts receivable
Other accounts receivable
Property, plant and equipment
Long term accounts receivable
Accounts payable and accrued liabilities
Long-term debt
Net balance sheet exposure
86 11,058 48,445 157 343 31,958 92
- 12,404 24
679 13,138 249,273 8,728
(76) 159 - 2,028
8,743
- 2,594
107 88 - - - - 31,786
- - - - 14,798
- 4,606
(149) (3,549) (204) (1,132) - (2,245) (67,960)
- (130,652) (128,991) - - (6,044) -
343 38,667 (12,517)
647 (105,152) 168,523 9,781
The components of this net exposure by currency are as follows (in local currency ‘000’s) at
December 31, 2011:
December 31, 2011
GBP
USD
Yen
Euros
RMB
DKK
Argentine
Peso
Cash
Accounts receivable
Other accounts receivable
Property, plant and equipment
Long term accounts receivable
Accounts payable and accrued liabilities
Long-term debt
Net balance sheet exposure
233 168 458 17,630 48
168 5,973
312 3,479
20
1,236
13,171 206,566 7,604
- (52) 4,569
(150) 159 - 2,330
117 - - - - 29,525
2
- 3,390
- - - - 20,453
(168) (1,717) (362) (748) - (3,267) (37,383)
- (52,465) (158,758) - - (8,131) -
17,232
1,088
(31,372) 47,679 9,354
770 9,659
The following table details Clearwater’s sensitivity to a 10% change in the exchange rates
against the Canadian dollar. The sensitivity analysis includes outstanding foreign currency
denominated monetary items and adjusts their translation at the period end for a 10% change in
foreign currency rates. The change below is calculated based on the net balance sheet exposure.
GBP
USD
Yen
Euros
RMB
DKK
Argentine Peso
(f) Interest rate risk
2012
105
(10,462)
193
1,283
5
680
(253)
2011
172
(3,191)
63
1,234
12
171
370
Interest rate risk refers to the risk that the value of a financial instrument or cash flow associated
with the instrument fluctuate due to changes in market interest rates. Clearwater’s interest rate
risk arises from long term borrowings issued at fixed rates that create fair value interest rate risk
and variable rate borrowings that create cash flow interest rate risk. Clearwater’s debt is carried
102| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
at amortized cost with the exception of the convertible debentures. The convertible debentures
are recorded at fair market value through profit and loss.
Clearwater manages its interest rate risk exposure by using a mix of fixed and variable rate debt.
At December 31, 2012, excluding the interest rate swap approximately 19.0% (2011 – 58.9%) of
the $253.8 million (2011 - $247.1 million) of Clearwater’s debt was fixed rate debt with a
weighted average interest rate of 6.5% (2011 – 9.5%)
A 1% change in interest rates for variable rate borrowings would result in $2.0 million increase
(or decrease) in interest expense.
As required by the Term Loan A agreement Clearwater entered into an interest rate swap to
effectively swap the variable interest rate for a fixed rate for 40% or $30 million of the
outstanding Term Loan A debt facility. This interest rate swap effectively locks in the interest
rate on $30 million of the Term Loan A facility at an effective interest rate of 6.29%. As
principal balances for the Term Loan A decline due to scheduled repayments the balance of the
swap will also decline proportionately.
The fair value of interest rate swap at the end of the reporting period is determined by
discounting the future cash flows using the yield curves at the end of the reporting period.
(g) Liquidity risk
Liquidity risk is the risk that Clearwater will encounter difficulty in meeting obligations
associated with financial liabilities. Clearwater manages liquidity risk by monitoring forecasted
and actual cash flows, minimizing reliance on any single source of credit, maintaining sufficient
undrawn committed credit facilities and matching the maturity profiles of financial assets and
financial liabilities.
The following are the contractual maturities of non-derivative financial liabilities, derivative
financial instruments, and operating lease commitments. The table includes undiscounted cash
flows of financial liabilities, operating lease commitments, interest and principal cash flows
based on the earliest date on which Clearwater is required to pay.
December 31, 2012
Carrying
Amount
Contractual
Cash Flow
2013
2014
2015
2016
>2017
Interest - Long Term Debt
Principal repayments - Long-Term debt
Total Long-Term debt
253,791
88,079
258,209
346,288
16,185
15,527
31,712
13,363
48,728
62,091
12,330
5,817
18,147
11,934
9,230
21,164
34,267
178,907
213,174
Trade and Other Payables
44,633
44,633
44,633
-
-
-
-
Operating Leases
-
18,199
3,612
3,131
1,843
1,432
8,181
Derivative financial instruments - asset
(4,185)
(4,185)
(4,185)
Derivative financial instruments - liability
3,639
3,639
3,639
-
-
-
-
-
-
-
-
$
297,878
$
408,574
$
79,411
$
65,222
$
19,990
$
22,596
$
221,355
Included in the above commitments for operating leases are amounts that Clearwater is
committed directly and indirectly through its joint venture for various licenses and lease
103| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
agreements, office, machinery and vehicle leases. These commitments require approximate
minimum annual payments in each of the next five years as shown above.
Also included in commitments for operating leases are amounts to be paid to a company
controlled by a director of Clearwater over a period of years ending in 2013 for vehicle leases,
which aggregate approximately $0.04 million (2011 - $0.2 million).
(h) Fair Value Hierarchy
Assets and liabilities carried at fair value must be classified using a three-level hierarchy that
reflects the significance of the inputs used in making the fair value measurements. The different
levels are defined as follows:
Level 1: Fair value measurements are those derived from quoted prices (unadjusted)
in active markets for identical assets or liabilities
Level 2: Fair value measurements are those derived from inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3: Fair value measurements are those derived from valuation techniques that
include inputs for the asset or liability that are not based on observable market data
(unobservable inputs)
The table below sets out fair value measurements of financial instruments using the fair value
hierarchy:
December 31, 2012
Financial Assets:
Derivative financial instruments
Financial Liabilities:
Derivative financial instruments
Convertible debentures
Embedded derivative
Interest rate swap
December 31, 2011
Financial Assets:
Derivative financial instruments
Financial Liabilities:
Derivative financial instruments
Convertible debentures
Level 1
Level 2
Level 3
-
$
-
4,185
4,185
$
-
$
-
-
44,722
-
-
44,722
$
3,439
-
4,205
200
7,844
$
-
-
-
-
$
-
Level 1
Level 2
Level 3
-
$
-
1,075
1,075
$
-
$
-
-
85,205
85,205
$
1,097
-
1,097
$
-
-
$
-
There were no transfers between levels during the years ended December 31, 2012 and 2011.
104| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
Fair value of financial instruments carried at amortized cost.
Except as detailed below Clearwater considers that the carrying amounts of financial assets and
financial liabilities recognized in the consolidated financial statements materially approximate
their fair values:
At December 31, 2012 the estimated fair value of Clearwater’s financial liabilities whose
carrying value does not approximate fair value is $7.2 million and the carrying value is $6.6
million.
15. SHARE CAPITAL
Authorized:
Clearwater is authorized to issue an unlimited number of common shares.
Share capital movement:
Share capital:
Balance at January 1
Shares issued pursuant to the conversion arrangement
Conversion option embedded in convertible debentures
Issuance of shares on redemption of convertible debentures
Redemption of 2013 convertible debentures
Balance at December 31
December 31, 2012
December 31, 2011
#
50,948,698
-
-
-
-
50,948,698
$
65,309
-
-
-
(442)
64,867
#
-
50,947,160
-
1,538
-
50,948,698
$
-
64,780
529
-
-
65,309
Trust units and special trust units:
Balance at January 1
Purchase of units for cancellation
Trust units cancelled on conversion
Balance at October 2
December 31, 2011
#
51,126,912
(179,752)
(50,947,160)
-
$
162,517
(571)
(161,946)
-
The conversion option on the 2013 convertible debentures remained unexercised on redemption in
July 2012 and the balance of $ 0.4 million was transferred from share capital to retained earnings.
Included in share capital as at December 31, 2012 is $0.09 million related to the equity component
of the 2014 convertible debentures
105| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
16. FINANCE COSTS
Year ended December 31
Interest expense on financial liabilities measured at amortized cost
Amortization of deferred financing charges
2012
2011
$ 20,347 $ 20,899
1,158 3,112
21,505
24,011
Fair value adjustment on convertible debentures and embedded derivative
Foreign exchange and derivative contracts (Note 14(c))
Debt settlement and refinancing fees
Finance costs
2,898 5,717
6,983
(6,108)
6,093 1,893
$ 24,388 $ 38,604
17. OTHER INCOME
Year ended December 31
2012
2011
Royalties, interest, and other fees
Other fees
Insurance claims
Other income
18. EARNINGS PER SHARE
(1,443) (2,415)
(645) (1,749)
(324) (1,729)
$ (2,412) $ (5,893)
The computations for earnings per share are as follows (in thousands except per share data):
2012
2011
Basic
Earnings for the period
Weighted average number of shares outstanding
Earnings per share
Diluted
Earnings for the period
Weighted average number of shares oustanding
Earnings per share
$
15,009
50,948,698
0.29
$
$
15,009
50,948,698
0.29
$
$
16,336
51,064,503
0.32
$
$
16,336
51,064,503
0.32
$
The interest on the 2013 and 2014 convertible debentures results in anti-dilutive earnings per share
for December 31, 2012 and 2011. As a result, for the year ended December 31, 2012, 7,523,559
options (2011- 20,882,942) were not included in the calculation of dilutive potential shares.
106| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
19. INCOME TAXES
The 2011 disclosures for income taxes are reflective of Clearwater after the conversion as
described in Note 2(a).
(a) Reconciliation of current income tax
The effective rate on Clearwater's earnings before income taxes differs from the expected
amount that would arise using the combined Canadian federal and provincial statutory income
tax rates. The reduction in the 2012 combined rate is a result of a reduction in the federal
statutory income tax rate.
A reconciliation of the difference is as follows:
Year ended December 31
Earnings before income taxes
Combined tax rates
Income tax provision at statutory rates
Add (deduct):
Income of Partnership distributed directly to partners
Permanent differences
Recognition of previously unrecorded deferred tax assets
Income of foreign subsidiary not subject to tax
Other
Actual provision
2012
17,685
30.5%
5,394
(2,085)
766
(8,498)
(1,779)
1,183
(5,019)
%
31%
-12%
4%
-48%
-10%
7%
-28.4%
2011
26,818
32.0%
8,582
(1,642)
3,332
(4,174)
(3,302)
1,067
3,863
%
32.0%
-6%
12%
-16%
-12%
4%
14.4%
(b) Income tax expense
The components of the income tax expense for the year are as follows:
Year ended December 31
2012
2011
Current
Deferred recovery
$
$
2,155
(7,174)
(5,019)
4,833
(970)
3,863
$
$
107| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(c) Deferred tax assets and liabilities
Breakdown of recognized temporary differences:
Deferred income tax asset:
Loss carry-forwards and future deductible expenses of subsidiaries
9,207
$
1,594
December 31
2012
December 31
2011
Deferred income tax liabilities:
Licenses
Property, plant and equipment
Other
2,674
403
119
3,196
$
2,763
8
121
2,892
$
The net change in deferred income taxes is reflected in deferred income tax recovery of $7.2
million (2011 - $1.0 million) plus the foreign exchange effect of deferred taxes of foreign
subsidiaries totaling $0.1 million (2011 - $0.2 million), the effect of which was recorded
through foreign exchange.
Recognized deferred tax assets
During 2012 Clearwater recognized previously unrecognized deferred tax assets of $8.0
million relating to its loss carry-forward balances. These deferred tax assets are recognized
based on Clearwater's estimate that it will earn sufficient taxable profits to utilize these losses.
108| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
Clearwater has the following temporary differences and unused tax losses:
Deductible temporary differences
Non-capital loss carryforwards
Financing fees and long-term debt
Donations
Property, plant and equipment
Licences
Foreign exchange
Taxable Temporary differences:
Refit Accrual
Inventory
Foreign exchange
December 31
2012
December 31
2011
$
48,705
7,223
961
802
75
-
57,766
$
73,234
3,436
505
5,637
5,380
22
88,214
(5,669)
(2,889)
(547)
(9,105)
(6,377)
(2,516)
-
(8,893)
Net Deductible Temporary differences
$
48,661
$
79,321
(d) Losses and Investment Tax Credits
Clearwater, along with its subsidiary corporations have non-capital losses and investment tax
credits available as follows:
Non-capital losses
Investment tax credits
Clearwater
Seafoods Inc
67,190
$
3,460
Subsidiary
Corporations
7,777
1,866
$
Total
$
74,967
5,326
The non-capital losses in Clearwater will expire from 2026 to 2032. The non-capital losses in
the subsidiary corporations will expire from 2014 to 2032.
The investment tax credits will expire from 2023 to 2032.
(e) Temporary differences associated with investments in subsidiaries
The aggregate temporary difference associated with investments in subsidiaries for which no
deferred tax liabilities have been recorded is $ 68.0 million. It is not expected that the aggregate
temporary difference will reverse in the foreseeable future.
109| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
20. SEGMENTED INFORMATION
Clearwater has one reportable segment which includes its’ integrated operations for harvesting,
processing and distribution of seafood products.
(a) Sales by Species
Year ended December 31
Scallops
Coldwater shrimp
Clams
Lobster
Crab
Ground fish and other
(b) Sales by Geographic Region
Year ended December 31
China
Japan
Other
Asia
United States
Canada
North America
France
UK
Russia
Other
Europe
Other
$
$
2012
109,899
77,497
71,894
61,458
15,628
14,071
350,447
2011
115,843
61,946
61,705
64,073
13,831
15,387
332,785
$
$
$
2012
59,624
46,366
17,693
123,683
$
2011
46,069
42,649
15,034
103,752
54,157
47,553
101,710
41,363
16,631
11,759
53,131
122,884
55,457
44,332
99,789
47,958
17,751
14,067
46,921
126,697
2,170
350,447
$
$
2,547
332,785
110| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(c) Non-current Assets by Geographic Region
December 31, December 31,
2011
2012
Property, plant and equipment, licences, fishing rights and goodwill
Canada
Argentina
Other
$
229,150
12,886
257
242,293
$
234,805
13,190
121
248,116
$
$
21. RELATED PARTY TRANSACTIONS
(a) Subsidiaries, partnerships, and joint venture
Clearwater’s consolidated financial statements include the accounts of the Corporation and its
subsidiaries, partnerships and joint ventures, as follows:
Entity
Clearwater Seafoods Limited Partnership
Clearwater Ocean Prawns Venture
St. Anthony Seafoods Limited Partnership
Adams and Knickle Limited
Clearwater Seafoods Holdings Incorporated
Clearwater Fine Foods Europe Limited
Clearwater Fine Foods USA Incorporated
Glaciar Pesquera S.A.
(b) Key management personnel
Accounts
Consolidated
Consolidated
Consolidated
Proportionately consolidated
Consolidated
Consolidated
Consolidated
Consolidated
Clearwater has defined key management personnel as senior executive officers, as well as the
Board of Directors, as they have the collective authority and responsibility for planning, directing
and controlling the activities of the Corporation. The following table outlines the total
compensation expense for key management personnel for the years ended December 31, 2012
and 2011.
Year ended December 31
Wages and Salaries
Share-based compensation
Bonuses
Other Benefits
$
$
2012
3,023
2,331
1,380
371
7,105
2011
2,771
904
1,029
587
5,291
$
$
111| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(c) Transactions with other related parties
Clearwater rents office space to CFFI (the controlling shareholder of Clearwater) and provides
computer network support services to CFFI. CFFI charges management fees to Clearwater for
legal, finance, and administration services provided to Clearwater by certain CFFI staff. These fees
apportion the salaries of the individuals providing the services based on estimated time spent. CFFI
charges Clearwater for its use of CFFI aircraft at market rates per hour of use.
Clearwater had the following transactions and balances with CFFI, for the year ended December
31, 2012 and December 31, 2011:
Opening balance due from CFFI
Management fees charged to Clearwater
Rent and IT service fees charged to CFFI
Interest on intercompany account
Guarantee fee
Aircraft charges to Clearwater
Payments from CFFI
Advances to CFFI
Other charges to CFFI
Purchase of partner note receivable from CFFI
$
$
December 31, December 31,
2011
1,778
(342)
184
-
-
(41)
-
953
74
(495)
2,111
2012
2,111
(198)
184
103
(62)
(38)
(925)
166
255
-
1,596
$
$
The amount due from CFFI is unsecured and has no set terms of repayment. CFFI has undertaken
to pay the balance of the account in 2013 and the account has been classified as a current asset
included in trade and other receivables. No interest was charged for the periods prior to December
31, 2011; however, beginning in January 2012 the intercompany loan account is bearing interest at
a rate of 5%. No guarantee fees were charged by CFFI to Clearwater for periods prior to December
31, 2011; however, beginning in January 2012 fees amounting to 1% of the guarantees were being
charged to Clearwater. With the debt refinancing on June 6, 2012 CFFI no longer provides a
guarantee on the senior debt facilities for Clearwater.
In addition Clearwater expensed approximately $0.11 million for vehicle leases in 2012 (2011 -
$0.01 million) and approximately $0.17 million for other services in 2012 (2011 - $0.1 million) by
a company related to its parent. The transactions are recorded at the exchange amount and the
balance due to this company was $0.02 million in 2012 ($0.01 million - 2011)
At December 31, 2012 Clearwater had a long-term receivable of $7.7 million (December 31, 2011 -
$8.3 million), included in other receivables, for advances and loans made to a non-controlling
interest shareholder in a subsidiary (refer to Note 9).
22. JOINT VENTURES
The financial statements include Clearwater’s proportionate share of the assets, liabilities, sales and
expenses of a joint venture, the material elements of which are as follows:
112| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
(a) Proportionate share of assets, liabilities, sales, expenses and earnings before taxes as at
December 31:
Year ended December 31
Current assets
Property, plant, equipment and other long-term assets
Current liabilities
Long-term liabilities
Sales
Commissions
Expenses
Earnings before taxes
2012
2011
2,073
$ 1,146
2,533
2,512
367
113
203
206
144
145
2,777
2,155
(803) (890)
2,031
1,497
(b) Transactions with joint venture partners as at December 31:
The following is a summary of the transactions included in the financial statements as at
December 31:
Year ended December 31
2012
2011
Commissions paid to joint ventures
$ 2,155
$ 2,777
The following is a summary of the cash flows from operating, financing and investing for the
year ended December 31:
Year ended December 31
Cash flow from operating activities
Cash flow used in financing activities
Cash flow used in investing activities
2012
2011
$ 1,470
$ 1,333
(1,750) (1,000)
(2) (29)
$ (282) $ 304
23. CAPITAL MANAGEMENT
Clearwater’s objectives when managing capital are as follows:
Ensure liquidity
Minimize cost of capital
Support business functions and corporate strategy
Clearwater’s capital structure includes a combination of equity and various classes of long-term
debt. Clearwater’s objective when managing its capital structure is to obtain the lowest cost of
capital available, while maintaining flexibility and reducing exchange risk and refinancing risk as
appropriate.
113| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
Clearwater uses leverage, in particular senior revolving and term debt, to lower its cost of capital.
The amount of senior debt available to Clearwater is a function of earnings that can be impacted by
known and unknown risks, uncertainties, and other factors outside Clearwater’s control including,
but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and
other input costs. Clearwater maintains flexibility in its capital structure by regularly reviewing
forecasts of future results and making any required changes on a timely basis. These changes can
include early repayment of debt, repurchasing shares, issuing new debt or equity, extending the
term of existing debt, selling assets to repay debt and if required, limiting dividends paid.
The capital structure is as follows:
In 000’s of Canadian dollars
As at December 31
Equity
Common shares
Retained earnings (deficit)
Cumulative translation account
Non-controlling interest
Long term debt
Subordinated debt
2013 convertible debentures
2014 convertible debentures
Senior debt, non-amortizing
Term loan, due in 2091
Second lien loan
Glitnir liability
Senior debt, amortizing
Term Loan A, due 2017
Term Loan B, due 2018
First lien loan
Revolving debt, due in 2017
Marine mortgage, due in 2017
Other loans
Total long term debt
Total capital structure
2012
2011
$
64,867
14,616
(3,866)
75,617
30,904
106,521
$
65,309
(835)
(3,122)
61,352
32,700
94,052
-
44,722
44,722
3,500
-
-
3,500
72,259
129,986
-
-
2,697
627
205,569
253,791
43,573
41,632
85,205
3,500
43,822
14,500
61,822
-
-
77,250
17,513
4,470
840
100,073
247,100
$
360,312
$
341,152
114| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
24. SHARE-BASED COMPENSATION
Clearwater’s share-based compensation plans are detailed in Note 3(m).
The number of share-based awards outstanding and vested as of December 31, 2012 and December
31, 2011 were as follows:
Exercise
price
0.01
0.80
1.00
0.00
0.00
0.00
SARS
PSU
DSU
Total
Exercise
price
0.01
0.80
1.00
SARS
Total
As at December 31, 2012
In thousands
Number
vested
255
167
133
Number
outstanding
255
250
200
Grant
Date
May 2010
May 2010
May 2010
May 2012
423
375
26
1,529
-
100
September 2012
26 June - December 2012
681
As at December 31, 2011
In thousands
Number
vested
255
83
67
405
Number
outstanding
255
250
200
705
Grant
Date
May 2010
May 2010
May 2010
There is no limit to the number of awards that can be issued as awards are expected to be cash
settled.
Fair value of share based plans
Measurement inputs include share price on measurement date, exercise price of the instrument,
expected volatility (based on weighted average historic volatility adjusted for changes expected due
to publicly available information), weighted average expected life of the instruments (based on
historical experience and general option holder behaviour), expected dividends, and the risk-free
interest rate (based on government bonds). Service and non-market performance conditions
attached to the transactions are not taken into account in determining fair value.
2012
Weighted average fair value per option
Weighted average risk-free interest rate
Weighted average expected volatility
Expected life of options (years)
Weighted average dividend yield
Weighted average share price
Weighted average exercise price
$
$
SARS
3.68
DSU
PSU
4.00
5.22
1.59% 0.37% - 2.65% 1.32% - 1.50%
69.99% 31.5% - 67.9% 50.79% - 83.70%
4.3 - 6.8
Nil
$
4.00
$
-
2
Nil
$
5.22
$
-
0.5
Nil
4.00
0.57
$
$
$
115| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
2011
Weighted average fair value per option
Weighted average risk-free interest rate
Weighted average expected volatility
Weighted average dividend yield
Weighted average share price
Weighted average exercise price
SARS
2.12
1.73%
64.98%
Nil
2.39
0.57
$
$
$
PSU
-
-
-
-
-
-
DSU
-
-
-
-
-
-
The following reconciles the share based awards outstanding at the beginning and end of the year:
In thousands
Balance at January 1
Granted
Balance at December 31
Vested at January 1
Vested
Vested at December 31
2012
705
824
1,529
405
276
681
2011
705
-
705
255
150
405
Share-based compensation expense included in the income statement for the year ended December
31, 2012 is $2.3 million (December 31, 2011 - $0.9 million).
The liability for share based compensation is $3.6 million at December 31, 2012 (December 31,
2011 - $1.3 million). The vested portion of the liability for share based compensation is $2.5
million at December 31, 2012 (December 31, 2011 – $0.7 million)
25. ADDITIONAL CASH FLOW INFORMATION
Changes in operating working capital
Decreases (increases) in inventory
Increases in accounts payable
Increases in accounts receivable
(Increases) decreases in prepaids
Increases (decreases) in income taxes payable
Increase in deferred income taxes
December 31
2012
9,581
4
(2,273)
(1,695)
39
67
5,723
$
December 31
2011
(11,936)
6,690
(1,515)
679
(14)
-
(6,096)
$
116| Page
CLEARWATER SEAFOODS INCORPORATED
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars)
26. CONTINGENT LIABILITIES
From time to time, Clearwater is subject to claims and lawsuits arising in the ordinary course of
operations. In the opinion of management, the ultimate resolution of such pending legal
proceedings will not have a material effect on Clearwater’s consolidated financial position.
117| Page
Quarterly and share (unit) information
Clearwater Seafoods Incorporated ($000's except per share (unit) amounts)
Sales
Net earnings (loss)
Per share (unit) data
Basic net earnings (loss)
Diluted net earnings (loss)
Trading information, Clearwater Seafoods Incorporated, symbol CLR
Trading price range of shares (units) (board lots)
High
Low
Close
Tranding volumes (000's)
Total
Average daily
Shares (Units) outstanding at end of quarter
Units/Shares
Special
Total
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2012
2011
92,957
10,518
101,640
17,618
84,966
(2,505)
70,884
(2,927)
0.17
0.15
0.30
0.27
(0.08)
(0.08)
(0.09)
(0.09)
87,140
16,390
0.28
0.23
97,590
5,058
0.05
0.05
78,820
(327)
69,235
1,832
(0.02)
(0.02)
0.01
0.01
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
4.15
2.50
4.00
1,906
31
2.90
2.36
2.50
1,265
21
2.70
2.02
2.48
1,350
22
2.40
1.85
2.27
1,089
18
2.85
2.10
2.39
831
13
3.32
1.31
2.35
3,907
63
1.73
1.35
1.47
1,544
26
1.58
0.99
1.52
2,669
44
50,948,698
-
50,948,698
50,948,698
-
50,948,698
50,948,698
-
50,948,698
50,948,698
-
50,948,698
50,948,698
-
50,948,698
27,565,943
23,381,217
50,947,160
27,745,695
23,381,217
51,126,912
27,745,695
23,381,217
51,126,912
118| Page
Selected Annual Information
2012
(Audited)
2011
(Audited)*
2010
(Audited)*
2009
(Audited)
2008
(Audited)
Sales
Cost of goods sold
Gross margin
$
350,447
276,190
$
332,785
263,220
$
291,116
234,854
$
284,066
240,215
$
301,204
261,443
74,257
69,565
56,262
43,851
39,761
Administrative and selling
Research and development
Gain on settlement of Glitnir transaction
Gain on change in control of joint venture
Other income
Finance costs
Foreign exchange loss (income)
Interest on long-term debt and bank charges
Bank interest and charges
Interest on long-term debt
Depreciation and amortization
Reduction in foreign currency translation account
32,837
1,759
-
-
(2,412)
24,388
-
-
-
-
-
-
56,572
33,345
707
(12,445)
(11,571)
(5,893)
38,604
-
-
-
-
42,747
28,557
1,623
-
-
(2,477)
42,482
-
-
-
-
70,185
25,724
-
-
-
(6,567)
-
(30,642)
25,342
627
24,715
236
703
14,796
25,926
-
-
-
8,858
-
80,210
19,113
838
18,275
586
-
134,693
Earnings (loss) before income taxes
17,685
26,818
(13,923)
29,055
(94,932)
Income taxes
(5,019)
3,863
3,564
1,868
4,595
Earnings (loss) before non-controlling interest
22,704
22,955
(17,487)
27,187
(99,527)
Non-controlling interest
7,695
6,619
1,704
1,039
2,878
Earnings (loss) attributable to shareholders
$
15,009
$
16,336
$
(19,191)
$
26,148
$
(102,405)
* 2011 and 2010 results have been adjusted to reflect International Financial Reporting Standards ("IFRS") and the conversion to a Corporation.
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CORPORATE INFORMATION
DIRECTORS OF CLEARWATER SEAFOODS INCORPORATED
EXECUTIVE OF CLEARWATER SEAFODS INCORPORATED
Colin E. MacDonald, Chairman of the Board
Ian Smith
Chief Executive Officer
John C. Risley
President, Clearwater Fine Foods Inc.
Eric R. Roe
Vice-President, Chief Operating Officer
Harold Giles, Chair of Corporate Governance and
Compensation Committee
Independent Consultant
Larry Hood, Chair of Audit Committee
Director, Former Partner, KPMG
Thomas D. Traves
President and Vice-Chancellor, Dalhousie University
Mickey MacDonald
President, Micco Companies
Robert D. Wight
Vice-President, Finance and Chief Financial Officer
Michael D. Pittman
Vice-President, Fleet
Greg Morency
Chief Commercial Officer & Executive Vice-President
David Rathbun
Vice-President, Chief Talent Officer
Brendan Paddick
Chief Executive Officer, Columbus Communications Inc.
Christine Penney
Vice-President, Sustainability & Public Affairs
Stan Spavold
Executive Vice President, Clearwater Fine Foods Inc.
Rob O’Sullivan
Vice-President Sales – Americas
Jim Dickson
Partner, Stewart McKelvey
Paul Broderick
Vice-President of International Sales
David Kavanagh
Vice-President and General Counsel
John Burwash
Vice-President, Chief Information Officer
INVESTOR RELATIONS
Tyrone D. Cotie, CA
Treasurer
(902) 457-8181
tcotie@clearwater.ca
AUDITORS
KPMG LLP
Halifax, Nova Scotia
SHARES LISTED
Toronto Stock Exchange
SHARE Symbol CLR
Convertible Debenture symbol: CLR.DB.A
TRANSFER AGENT
Computershare Investor Services Inc.
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Clearwater Seafoods Incorporated
757 Bedford Highway, Bedford, Nova Scotia, Canada, B4A 3Z7
Tel. (902) 443-0550 Fax. (902) 443-7797 www.clearwater.ca