Our
Growth
Story
Our Growth Story
Clearwater SeafoodS InCorporated 2014 annual report
About Clearwater
Clearwater is one of North America’s largest vertically
integrated seafood companies and the largest holder of
shellfish licenses and quotas in Canada. It is recognized
globally for its superior quality, food safety, diversity of
species and reliable worldwide delivery of premium wild,
eco-certified seafood, including scallops, lobster, clams,
coldwater shrimp, crab and groundfish.
Since its founding in 1976, Clearwater has invested in
science, people and technological innovation as well
as resource ownership and management to sustain
and grow its seafood resource. This commitment has
allowed it to remain a leader in the global seafood
market and in sustainable seafood excellence.
In 2014 Clearwater sold 81 million pounds of premium, wild, eco-labelled
seafood, including scallops, lobster, clams, coldwater shrimp, crab and
groundfish to over 30 different countries.
Clearwater head office
Bedford, NS, Canada
Clearwater sales offices
Shanghai, China
Beijing, China
Guangzhou, China
Tokyo, Japan
Windsor, United Kingdom
Leesburg, VA, USA
Toronto, ON, Canada
Clearwater divisions
Fleet operations – Lunenburg, NS
Grand Bank Seafoods – Grand Bank, NL
Highland Fisheries – Glace Bay, NS
Louisville – Louisville, Kentucky
Pierce Fisheries – Lockeport, NS
St. Anthony Seafood – St. Anthony, NL
Ushuaia, Argentina
Clearwater harvesting
operations
Argentina
East coast of Canada
Clearwater Overview
Leading Global Provider of Wild-Caught Shellfish
Clearwater is North America’s largest vertically integrated harvester, processor and distributor of premium
shellfish. Clearwater is recognized for its consistent quality, wide diversity, and reliable delivery of premium, wild,
eco-labelled seafood, including scallops, lobster, clams, coldwater shrimp, crab and groundfish, with more than
81 million pounds sold in 2014.
Powerful Industry Fundamentals
Global demand for premium wild-caught seafood among aging boomers and a rising middle class in the Asia-
Pacific region is outpacing resource supply. This in combination with conservatively managing wild seafood
fisheries to protect the long-term health of the industry is creating new opportunities from the rising demand for
high-quality sustainable seafood.
Clearwater’s Vertical Integration Creates Barriers to Entry and Sustainable Competitive Advantage
Clearwater is the largest holder of shellfish quotas and licenses within Canada and maintains the widest
selection of MSC-certified species of any shellfish harvester worldwide. These quotas are a key barrier to entry
as regulatory authorities strictly control access and rarely grant new licenses. In addition, the financial resources
required to acquire and, harvest fishing quotas create barriers to entry.
Clearwater has a number of other competitive advantages such as state-of-the-art factory vessels and advanced
onshore processing, storage and distribution capabilities.
In addition, Clearwater maintains a global, direct sales force that is capable of interacting with and selling directly
to diverse markets worldwide. Our channel mix in food service, retail and other food industries ensures a diverse
community of customers and, in addition, we have a diverse customer mix with no single customer representing
more than 6% of total sales.
Proven and Experienced Leadership Team
Clearwater continues to build upon our world-class leadership with best-in-class programs for quality control
and food safety, operations and new product development. In addition over the past few years Clearwater has
added a number of key personnel to complement its existing team to continue to support strong financial and
operational growth.
More than
81
million
pounds
of premium
shellfish sold
Sold to more than
30
different
countries
in 2014
Seven
MSC-
Certified
Species
Clearwater holds
the widest selection
of MSC-certified
species of any shellfish
harvester worldwide
Clearwater Seafoods Incorporated 2014 Annual Report
1
Highlights in 2014
Record Sales and Adjusted EBITDA
Strong Financial Position
Record sales of $445 million and
adjusted EBITDA of $87 million,
Improved free cash flow by 18% to
$31 million driven by improvements in
growth of 14% and 10%, respectively
adjusted EBITDA and working capital
Growth in
sales
14%
Growth in
adjusted EBITDA
10%
Growth in Innovation
Completed a record investment of
$83 million in our vessels and
other assets in 2014
$83
million
$31
million
Growth for Investors
Increased the annual dividend by 60%
to $0.16 per share, payable in quarterly
installments of $0.04 per share
60%
increase
Capital Expansion and Innovation
Began conversion of a third vessel for the clam
business to expand access to supply by up to
60%; harvesting to begin in late 2015 with full
operations in 2016
2
Clearwater Seafoods Incorporated 2014 Annual Report
Progress on
Strategic Operating Plan
The Company is on track to achieve
its five year plan of $100 million in
adjusted EBITDA at the end of the
five years ending in 2016 or earlier
Diversified Products
Improvements in Productivity
Successfully
began launch
of a new clam
species in Japan,
China and North
America
and Efficiencies
Launched a converted scallop vessel
with harvesting to begin early in the
first quarter of 2015 in Argentina. The
vessel will modernize our operation,
improving productivity and quality
Recognition
Received 2014
Rabobank Innovation
Award for dedication
to innovation
Best New Products
Scallops & Sauce was named
best new Deli, Egg, Meat &
Seafood Product of the Year at
the 21st Canadian Grand Prix
New Product Awards
Clearwater Seafoods Incorporated 2014 Annual Report
3
5
Years of Growth
SALES
(in millions)
ADJUSTED EBITDA1
(in millions)
445
87
79
72
389
350
61
51
333
316
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Over the past five years, Clearwater’s annual sales and adjusted
EBITDA has grown at cumulative average growth rates of 9% and 15%,
respectively, primarily as a result of stronger sales price and volumes.
450
In 2014 Clearwater
reported record sales
of $445 million and
adjusted EBITDA
of $87 million versus
2013 comparative
figures of $389 million
and $79 million.
400
350
300
250
'2010
'2011
The growth of 14% in sales and 10% in adjusted EBITDA1 was driven by
strong market demand that provided higher sales prices for the majority
of species, as well as strengthening foreign exchange rates which had a
$20.7 million positive impact on sales and adjusted EBITDA.
100
Free cash flow1 improved by $5 million to $31 million due to higher adjusted
EBITDA and a positive contribution from working capital partially offset by
80
higher capital expenditures from scheduled refits and vessel conversions
(net of designated borrowings), and payments to minority interest partners.
60
Over the past five years, Clearwater’s annual sales and adjusted EBITDA
40
have grown at cumulative average growth rates of 9% and 15%,
respectively, primarily as a result of stronger sales prices and volumes.
20
Sales prices increased for the majority of species and in particular for sea
'2012
and bay scallops and shrimp. Growth in volumes for sea scallops, clams
'2014
'2013
'2011
'2014
'2010
'2013
'2012
0
and shrimp have also contributed to the growth, while foreign exchange
rates have had a $2 million net negative impact on sales and adjusted
EBITDA over the same five year period.
1 Refer to discussion on non-IFRS measures, definitions and reconciliations
4
Clearwater Seafoods Incorporated 2014 Annual Report
'2010 316
'2011 333
'2012 350
'2013 389
'2014 445
'2010 51
'2011 61
'2012 72
'2013 79
'2014 87
FREE CASH FLOWS1
(in millions)
LEVERAGE1
RETURN ON ASSETS1
31
26
17
3.9
3.8
2.9
2.7
2.6
13.4%
13.7%
12.1%
11.4%
10.8%
4
(2)
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Free cash flow has grown
concurrently with the increase
in adjusted EBITDA
Both leverage and return on assets have also improved over the last five years.
Clearwater continues to have a long-term leverage target of 3.0x or lower of
net debt to adjusted EBITDA and a target of over 12% for return on assets.
“ Clearwater continued to make remarkable progress in 2014 achieving its fifth consecutive year
of revenue growth and increased profits. Since 2009, we’ve increased sales revenue by over
$138 million and adjusted EBITDA by over $48 million. Over the same period, with a disciplined
and rigorous approach to capital allocation, we’ve invested over $150 million in our fleet, plants,
information systems and people.” Ian Smith, Chief Executive Officer
As a result of these operational improvements to sales
due to seasonality, but over time Clearwater intends
and adjusted EBITDA, free cash flow has increased
4.0
from a use in cash of $2 million in 2010 to positive
3.5
to manage to this ratio (refer to non-IFRS measures,
15
definitions and reconciliations for changes in the
12
free cash flow of $31 million in 2014, even with record
3.0
leverage calculation for 2014 and the 2013
capital expenditures of $83 million ($20 million net of
2.5
comparative period).
9
designated borrowings) in the current year.
2.0
Both leverage1 and return on assets1 have also
1.5
improved over the last five years. Clearwater continues
1.0
to have a long-term leverage target of 3.0x or lower
0.5
The improvement to earnings, cash flows, leverage
and return on assets over the past five years provides
6
Clearwater with the capability to deliver and improve
results through innovation and through opportunities to
3
of net debt to adjusted EBITDA. Periodically, the ratio
0.0
'2010
'2011
'2012
increase access to supply.
'2013
'2010
'2014
0
'2011
'2012
'2013
'2014
may be higher due to planned investments, or lower
'2010
'2014
'2013
'2011
'2012
'2010 -2416
'2011 3855
'2012 17347
'2013 26122
'2014 30857
'2010 3.9
'2011 3.8
'2012 2.9
'2013 2.7
'2014 2.6
Clearwater Seafoods Incorporated 2014 Annual Report
'2010 11.4
'2011 10.8
'2012 12.1
'2013 13.3
5
'2014 13.7
35000
30000
25000
20000
15000
10000
5000
0
-5000
In 2015 Clearwater will continue to realize on its investments in technology
and innovation. The first of planned vessel innovations for 2015 will be
the addition of a recently converted scallop vessel in Argentina, which
will modernize operations and improve efficiency and quality. The
replacement vessel will begin harvesting in the first quarter of 2015
setting a new standard for the Argentine operations moving forward.
In addition, Clearwater will add a third vessel to our clam fleet in the
second half of 2015 and expand our clam harvest capacity by up to
60% with harvesting to begin late in 2015 with full operations in 2016.
Other initiatives will include increasing available supply of lobster and
other procured species and the implementation of a new enterprise
resource planning system (“ERP”) which is expected to be implemented
in late 2015.
Clearwater will take advantage of the strengthening US economy and
expanding global demand in 2015. The possibility of gains from lower
input costs such as oil and a more positive foreign exchange environment
will provide Clearwater with the ability to manage costs, improve gross
margins and create growth. Finally, Clearwater is well positioned to
benefit from the addition of new and future trade agreements such as the
CETA trade initiative between Canada and the European Union and other
agreements such as the agreement recently completed with the Republic
“ We begin 2015 with
the expectation
that the five-year
strategic goals
that we set out to
accomplish at the
beginning of 2012
are now within our
reach. 2015 will
also be the year
in which we lay
of Korea.
the foundation for
our next five-year
strategic plan.”
Ian Smith,
Chief Executive Officer
6
Clearwater Seafoods Incorporated 2014 Annual Report
“ Over the span of our 20-year relationship, Ebisho has grown into the company it
is today due in part to Clearwater’s consistent and thorough approach to product
quality, food safety and customer satisfaction. It is no exaggeration to say that the
popularity of Canadian Lobster in Japan today can be attributed to Clearwater’s
commitment to the market and their forward-looking approach.”
– Takashi Usami, President and Chief Executive Officer, EBISHO Corp
“ Clearwater isn’t just a supplier to The Keg – they’re a partner. Be it through
their support of The Keg Foundation or their ability to help us flawlessly
execute our wildly popular and successful annual lobster promotion. Time and
time again, we’re able to rely on Clearwater’s expertise and their high-quality
and sustainably sourced products.”
– Craig Davies, Director of Corporate Services, The Keg Steakhouse + Bar
“ At Wannebo, we couldn’t be more proud of our decade-long partnership in
Scandinavia with Clearwater. Their consistently outstanding product quality,
commitment to food safety and strong sustainability credentials have enabled
us to build the Clearwater brand into the preferred brand by Chefs across
Scandinavia. 2014 was a record year for Clearwater sales at Wannebo and we
look forward to continued growth in the years to come.”
– Edvard Tanche-Bergh, Managing Director, Wannebo International AS
Clearwater Seafoods Incorporated 2014 Annual Report
7
Letter from the
Chairman of
Clearwater Seafoods
Incorporated
Achieved
record
sales and
adjusted
EBITDA
To our shareholders,
I am happy to report yet another outstanding year for Clearwater Seafoods
Incorporated.
The Board is very pleased with the record sales of $445 million and adjusted
EBITDA of $87 million achieved in 2014. These equate to strong growth of
14% in sales and 10% in adjusted EBITDA. At the same time the company
did not lose focus on the importance of cash flows and shareholder returns
and delivered 18% growth in free cash flows and increased the dividend by
60% in 2014.
We believe this strong performance positions the company in the top
quartile versus our seafood industry peers for the fourth year in a row.
As Chairman, I am also very pleased with the work of your Directors over
the past year and how focused they were on the goal of creating sustainable
long-term value for our shareholders. The following will give you a fuller
appreciation of some of the areas our four Board Committees have worked
on in 2014:
Governance
Chaired by Jim Dickson with members Larry Hood, Tom Traves and Stan
Spavold. This committee was very active in 2014 and began the year early
by conducting a survey of Board members so as to promote best practices
in Board effectiveness. After that, it identified external and internal education
opportunities for the Board, reviewed and reported on TSX rules on majority
voting, reviewed the adequacy of director competencies and compensation,
reviewed the mandates of the various Board committees, formalized the
process by which the satisfaction of the mandates is evidenced, reviewed
new rules regarding Disclosure of Corporate Governance Practices and
finally it reviewed and updated the company’s share ownership policy. All in
8
Clearwater Seafoods Incorporated 2014 Annual Report
all, a very busy year in which the committee focused
Human Resources Development and
on implementing the best practice governance policies
Compensation
that it put in place in 2013.
Finance
Chaired by Stan Spavold with members John Risley,
Jim Dickson and Brendan Paddick. This committee had
another busy year and spent a lot of its time reviewing
the status of some significant investments, including a
new clam vessel, a new information system and several
other potential investments in plants and vessels
as well as working with management in reviewing
numerous external development opportunities.
In addition, the committee members received and
reviewed reports on foreign exchange management,
interest rate management, liquidity targets, rating
agencies, debriefs of the returns on capital projects
Chaired by Harold Giles with members Tom Traves,
Mickey MacDonald and Brendan Paddick. This
committee spent a lot of time over the past year working
with the CEO on proposed changes to the executive
leadership team to ensure the company’s growth
and efficiency initiatives are adequately resourced,
including the addition of a newly created position –
President Global Supply Chain. The committee also
continued to work to ensure there are well developed
talent management and development plans for key
positions. Finally, they have worked to ensure that our
compensation practices are aligned with shareholder
interests by linking annual and long-term incentive
plans to the creation of shareholder value.
as well as regular updates on debt and equity market
It is through this focused approach that Clearwater’s
conditions. It also worked with management to
management group with the support and direction from
develop free cash flow targets, review and set dividend
very active Board members are able to excel in creating
levels, review the cost of capital of the organization and
sustainable long-term value for our shareholders.
finally early in 2014 it reviewed and recommended an
equity offering. The work of this committee continues
to be invaluable in ensuring Clearwater has a sound
capital structure that helps to position the company
for further growth.
Audit
Looking forward, global demand for seafood is
outpacing supply, creating favourable market dynamics
for vertically integrated producers such as Clearwater
which have strong resource access.
Clearwater, as a vertically integrated seafood company,
is well positioned to take advantage of this opportunity
Chaired by Larry Hood with members Tom Traves,
because of its licenses, premium product quality,
Stan Spavold and Jim Dickson. In 2014 the committee’s
diversity of species, global sales footprint, and year-
focus continued to be on investing time to understand
round harvest and delivery capability.
and ensure the key risks and opportunities are clearly
communicated to investors in disclosure documents.
During the past year they used a self assessment tool,
reviewed their mandate and reviewed the quality of the
work of the external auditors so as to promote best
practices. They also took the initiative in organizing
Board education sessions that included business
In closing, we remain focused on our commitment and
on our mission to build the world’s most extraordinary,
wild seafood company, and we are pleased to offer
our shareholders the opportunity to participate in this
exciting sector of the food industry and in Clearwater’s
passionate pursuit of excellence.
reviews, securities laws, certification and certain
Yours truly,
technical accounting issues. Finally, they received and
reviewed regular reports on key estimates and areas
of judgment and finance resources. In summary, the
committee did a great job to ensure that our investors
get a full and balanced view of the financial results,
risks, opportunities and future prospects of the
C o lIn M aC do n a l d
Chairman
business in each and every disclosure document.
Clearwater Seafoods Incorporated
Clearwater Seafoods Incorporated 2014 Annual Report
9
Letter from the
Chief Executive Officer
of Clearwater
Seafoods Incorporated
What an extraordinary
year! I am very
pleased to report that
Clearwater continued
to make remarkable
progress in 2014
achieving its fifth
consecutive year of
revenue growth and
increased profits.
To our shareholders,
Since 2009, we’ve increased sales revenue by over $138 million and
adjusted EBITDA by over $48 million. Over the same period, with a
disciplined and rigorous approach to capital allocation, we’ve invested
over $150 million in our fleet, plants, information systems and people,
increasing our return on assets from 7.5% to 13.7%.
We begin 2015 with the expectation that the five-year strategic plan goals
we set out to accomplish at the beginning of 2012 are now within our
reach – one full year ahead of our original timetable! 2015 will also be the
year in which we lay the foundation for our next five-year strategic plan
(2016–2020) which will continue to focus on executing with excellence
against our six core strategies:
Expand Access to Supply
In 2015, we will welcome a third vessel to our clam fleet and expand our
harvest capacity up to an incredible 60%. We will also continue to actively
invest in access to supply, including acquisitions and joint ventures, as
well as harvesting and royalty contracts.
Target Profitable & Growing Markets, Channels & Customers
We continue to benefit from strong and increasing global demand for
sustainably harvested, safe, traceable and premium wild seafood. In 2015,
we will continue to advance our go-to-market approach in both traditional
and new markets. This two-pronged approach takes advantage of our “on
trend” health, sustainability, traceability, quality and food safety credentials
in developed markets as well as the rapid urbanization, rising incomes
and increased seafood consumption of emerging markets to literally
“supercharge” our growth.
10
Clearwater Seafoods Incorporated 2014 Annual Report
Increase Margins by Improving Price Realization and Cost
Management
In 2015, we will fully implement our first “ocean-to-shelf” global
supply chain. We have ambitious expectations to drive top and bottom
line growth, capturing savings in global supply chain efficiencies and
improved productivity.
Pursue and Preserve the Long-term Sustainability of
Resources on Land and Sea
As a leading global supplier of wild-harvested seafood – sustainability
remains at the core of our business and our mission. Investing in the
long-term health and responsible harvesting of the oceans and their
bounty – is every harvester’s responsibility and the only proven way to
ensure access to a reliable, stable and long-term supply of seafood.
Sustainability is not just good business; like innovation, it’s in our DNA.
That’s why Clearwater has been recognized by the Marine Stewardship
Council (MSC) and WWF as a leader in sustainable harvesting for wild
fisheries and also how Clearwater can offer the widest selection of
sustainably certified species of any seafood harvester worldwide.
Build Organizational Capability, Capacity & Engagement
This level of performance can only be achieved by a talented and engaged
global workforce at sea and on land, employing well-communicated
strategies and plans with measurable objectives. It also requires an enduring
commitment to invest in our people.
In closing, there are two special groups I wish to thank. Our customers
around the world who share our commitment to quality and sustainability
and without whose loyalty and support we could never hope to succeed.
Finally, our Clearwater employees, for their hard work, dedication and focus.
They are truly our greatest asset, the reason why we are all excited about the
future of our company and why we believe that the best is yet to come!
Sincerely,
I a n d. SM It h
Chief Executive Officer
Clearwater Seafoods Incorporated
2015
priorities
• Expand access
to supply
• Implement our
first ocean-to-
shelf global
supply chain
organization
and enterprise
resource
planning system
• Continue
to invest in
technology
and innovation
on land and
at sea to drive
sustainable
profitable growth
• Continue to
build our global
workforce
Clearwater Seafoods Incorporated 2014 Annual Report
11
Growth Report: Progress on
Our Strategic Operating Plan
Innovation has been the cornerstone of our strategic operating plan
and will provide us the opportunity to achieve $100 million in adjusted
EBITDA by 2015. As we begin 2015, the five year strategic goals that
we set out to accomplish at the beginning of 2012 are now within
our reach.
2015 will also be the year in which we lay the foundation for our next
five-year strategic plan which will continue to focus on executing
with excellence against our core strategies including expanding
access to supply, targeting growing and profitable markets, channels
and customers, increasing margins by improving price and cost
management, pursing and preserving the long-term sustainability of
resources on land and at sea, and building organizational capability
and capacity.
Species Innovation
The introduction of a clam species that
has improved catch rates and created new
opportunities, primarily in the Asian market.
The introduction of our new clam vessel
in the second half of 2015 will provide a
significant opportunity to increase harvest
and sales volumes by up to 60%.
New Product Development
Continued growth of our value-added products
achieved through expanded distribution to
new geographies, like
Australia, and through
innovative new products, like
Shrimp & Sauce, utilizing
Clearwater’s unique
enrobing technology.
12
Clearwater Seafoods Incorporated 2014 Annual Report
Modernizing Our Fleet
Our newest vessel, the Capesante, began sailing the seas in
2015. This vessel will modernize our operation and set a new
standard for our Argentine scallop business moving forward.
Operational Efficiencies
For the 2014 season, Clearwater
implemented a state-of-the-art
cooking system for cooked and
peeled shrimp that circulates a
steam and air mixture through the product at
controlled temperatures. The new process was
successful in increasing yield and improving
quality while reducing energy consumption.
Food Safety
Our Grand Bank facility
was the third Clearwater
plant to receive the
industry-leading British
Retail Consortium
(BRC) certification –
obtaining an A grade
in the process.
GRADE
A
Growing Globally: China
Clearwater continues to see strong growth and
success in China as their emergent middle class
continues to fuel discretionary spending and
demand for foreign brands.
Clearwater Seafoods Incorporated 2014 Annual Report
13
Growth Report: Progress on
Our Strategic Operating Plan
Looking forward, in order to achieve our 2015 goals and set the course
for the next five year strategic plan, we will embrace more change as
we continue to innovate what we do and how we do it. As a result,
2015 will be another year of unprecedented investment in our people
and innovation.
Procurement
In 2015 Clearwater plans to continue to
expand procurement including inshore
lobster, crab and shrimp.
Launching Scallop Selects
Ready for the global market
in 2015 is an exciting
launch of formed scallops
that serve as a platform to
deliver taste and value to consumers
as well as an incremental supply to
customers seeking high-quality
substitutes for regular sea scallops.
Investing in Science
Clearwater continues to be one of a few harvesters
committed to maintaining a survey vessel for scientific
purposes. In early 2015 we will renew this commitment
with the conversion of a newly purchased vessel featuring
a state-of-the-art survey platform.
14
Clearwater Seafoods Incorporated 2014 Annual Report
Commitment to Sustainable Harvest and to MSC
In 2015 Clearwater will continue to research and develop
new processes for the lobster fishery that are more
environmentally sustainable as we continue to be conscious
of our commitment to our MSC certification.
Culinary Achievements
Our industry-leading culinary team offered value to
our foodservice partners globally through customer
visits and custom ideation
sessions in 2014. We also
increased our trade show
presence in Asia, Europe
and North America helping
to build awareness and
develop relationships with
customers around the world.
Channels & Consumers
We’re readying expansion of more of
our top-selling North American products
to customers in Europe and continuing
to partner with
North American
customers to
create attractive
private label
offerings.
Growing Globally: Japan
Clearwater celebrated significant growth in
the Japanese market with increased clam and
lobster sales. Growth in both the Kaiten sushi and
foodservice catering sectors, coupled with decades
long relationships with key Japanese customers,
contributed to Clearwater’s success in this market.
Clearwater Seafoods Incorporated 2014 Annual Report
15
Management’s Discussion and Analysis
Table of contents
Management discussion and analysis
Selected annual information
Mission, value proposition and strategies
Capability to deliver results
Key performance indicators
Explanation of 2014 results
Capital structure
Liquidity
Explanation of fourth quarter 2014 results
Outlook
Risks and uncertainties
Critical accounting policies
Related party transactions
Commitments
Summary of quarterly results
Defi nitions and reconciliations
Clearwater Seafoods Incorporated – 2014 fi nancial statements
Quarterly and share information
Selected annual information
Corporate information
17
17
18
20
20
28
30
35
42
43
45
47
48
49
50
57
95
96
inside back cover
This Management’s Discussion and Analysis (“MD&A”) was prepared effective February 25, 2015.
The Audit Committee and the Board of Directors of Clearwater Seafoods Incorporated (“Clearwater”) have reviewed and
approved the contents of this MD&A, the fi nancial statements and the 2014 fourth quarter news release. All fi gures within the
MD&A are in thousands of Canadian dollars unless otherwise stated.
This MD&A should be read in conjunction with the 2014 annual fi nancial statements and the 2014 Annual Information Form,
which are available on Sedar at www.sedar.com as well as Clearwater’s website, www.clearwater.ca.
C O M M E N TA RY R E G A R D I N G F O R WA R D - L O O K I N G S TAT E M E N T S
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 refl ect
subsequent events or circumstances other than as required under applicable securities laws.
N O N - I F R S M E A S U R E S
This MD&A makes reference to several non-IFRS measures to supplement the analysis of Clearwater’s results. These measures
are provided to enhance the reader’s understanding of our current fi nancial performance. They are included to provide investors
and management with an alternative method for assessing our operating results in a manner that is focused on the performance
of our ongoing operations and to provide a consistent basis for comparison between periods. These non-IFRS measures are
not recognized measures under IFRS, and therefore they are unlikely to be comparable to similar measures presented by other
companies.
Management believes that in addition to sales, net earnings and cash provided by operating activities, these non-IFRS measures
are useful terms from which to determine Clearwater’s ability to generate cash for investment in working capital, capital
expenditures, debt service, income tax and dividends.
These non-IFRS measures include gross margin, adjusted EBITDA, free cash fl ows, leverage, adjusted earnings and return on
assets. Refer to non-IFRS measures, defi nitions and reconciliations for further information.
16
Clearwater Seafoods Incorporated 2014 Annual Report
S E L E C T E D A N N U A L I N F O R M AT I O N
(In 000’s except per share amounts)
For the year ended December 31
Sales
Gross margin
Net earnings
Basic and diluted earnings per share
Adjusted EBITDA1
Total assets
Long-term debt
$
2014
444,742
102,834
9,797
(0.05)
$
2013
388,659
87,368
15,298
0.12
$
2012
350,302
72,525
22,704
0.29
87,368
79,103
72,243
464,397
273,041
410,796
257,325
410,789
253,791
C L E A R WAT E R ’ S M I S S I O N , VA L U E P R O P O S I T I O N A N D S T R AT E G I E S
Mission
Clearwater’s mission is to build the world’s most extraordinary, wild seafood company, dedicated to sustainable seafood
excellence.
We defi ne:
• “extraordinary” as sustainable, profi table growth in revenue, margins, adjusted EBITDA, free cash fl ows and the creation of
long term shareholder value;
• “wild seafood” as premium wild shellfi sh. Including our core species – (scallops, lobster, clams and coldwater shrimp); and
• “sustainable seafood excellence” as delivering best-in-class, quality, food safety, traceability and certifi ed sustainability.
We believe that the fulfi llment 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 three years, Clearwater has made signifi cant progress in all aspects of its mission. Revenues have increased 27%
since 2012 despite a challenging global economy. Gross margins have increased more than 2.4 percentage points from 20.7%
in 2012 to 23.1% in 2014. Adjusted EBITDA1 has grown at a 20.9% cumulative average growth rate over the last three years.
With this improved performance Clearwater has been able to improve its capital structure, increase shareholder value and reduce
leverage1 to 2.6x adjusted EBITDA at December 31, 2014 versus 2.9x at December 31, 2012.
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 shellfi sh.
• Expertise in premium shellfi sh science, harvesting, processing and logistics technology to ensure quality and safety from
“ocean to plate”.
• Marine Stewardship Council (“MSC”) certifi cation for sustainability of species to ensure 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 service even the largest global retail and
food service customers.
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
Clearwater Seafoods Incorporated 2014 Annual Report
17
Management’s Discussion and Analysis
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. Being a
sustainable harvester in a world of rapidly growing global demand and limited supply of wild seafood means that we must
act responsibly, with agility and creativity to increase supply.
2. Target profi table and growing markets, channels and customers on the basis of size, profi tability, demand for sustainable
seafood and Clearwater’s ability to win.
The increase in global demand for premium shellfi sh and per capita consumption can be explained by general population
growth, the shift to healthier eating choices among aging boomers and by rising income 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 offi ces in all
major geographies including the United States, Canada, Europe, as well as four representative offi ces in China.
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 also
well known in the industry for pioneering innovative harvesting technologies and processing practices that further 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 infl uence to maximize revenue
and profi t while managing supply. In addition Clearwater will continue to invest in research and development, 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 fi shing licences and quotas are the
cornerstone of Clearwater’s business. From the beginning, Clearwater has invested in licences and quota in rights based
fi sheries 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.
Our 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 the 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 fulfi llment of its mission, value proposition and
strategies, Clearwater will continue to attract, develop, recognize, reward and retain the best global talent.
C A PA B I L I T Y T O D E L I V E R R E S U LT S
Clearwater’s revenues and earnings are dependent primarily on its ability to harvest, purchase, and market shellfi sh. Supply
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 as determined by the relevant government fi shery management organizations. All
stocks are managed sustainably providing assurance of the long term availability of the resource, however annual fl uctuations
in supply of a natural resource are normal. Short term impacts of such fl uctuations can normally be offset within Clearwater’s
species portfolio and/or by making adjustments within each business unit.
The primary shellfi sh stocks that Clearwater harvests are Canadian sea and Argentine scallops, clams, lobster and coldwater
shrimp, which are harvested in offshore fi sheries 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 fi shermen.
18
Clearwater Seafoods Incorporated 2014 Annual Report
• The sea scallop resource typically fl uctuates within a stable range. Clearwater anticipates TACs within the normal range in
upcoming years. Clearwater lands virtually all its sea scallop quota each year and may from time to time harvest quotas for
other industry participants or purchase raw material supply from other industry participants.
• The Arctic surf clam resource is stable. Clearwater has quota allocations on both Banquereau Bank and the Grand Banks.
Total annual landings are currently based upon the harvesting capacity of our two vessels. Clearwater’s new vessel will enter
the fl eet in 2015 and will increase clam landing volumes.
• The Argentine scallop resource has stabilized after a period of growth and expansion of the fi shery. Volumes in 2015 are
expected to be down slightly from recent years. Argentina is the fi rst scallop fi shery in the world to have earned the rigorous
Marine Stewardship Council (MSC) independent certifi cation. Clearwater lands virtually all its scallop quota each year.
• Coldwater shrimp – The Northern shrimp TAC has declined from historic highs over the last fi ve years and is expected to
continue to decline at a similar rate over the next fi ve years. Clearwater holds access to quotas directly through licences and
through long term harvesting agreements. Clearwater procures 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 healthy with a consistent offshore TAC and the inshore resource continues to support abundant
catches. Clearwater harvests virtually all its lobster quota each year. During 2014, Clearwater purchased approximately 80%
of its lobster from inshore lobster fi shermen.
Clearwater maintains the largest, most modern fl eet of factory freezer vessels in Canada together with vessels that are used to
harvest Clearwater’s offshore lobster and to complete research and development.
(In 000’s)
For the year ended December 31
Vessels
Plants and other
Return on investments capital
Maintenance capital
Maintenance capital
Repairs and maintenance
Depreciation/ amortization
Maintenance spending as a % of depreciation
$
$
$
$
$
$
$
2014
72,700
10,609
83,309
60,417
22,892
$
$
$
2013
17,025
6,788
23,813
6,346
17,467
83,309
$
23,813
22,892
14,149
$
17,467
13,144
37,041
$
30,611
23,753
155.9%
$
24,167
126.7%
$
$
$
$
$
$
$
2012
Total
11,780
4,792
$
101,505
22,189
16,572
$
123,694
2,772
13,800
$
69,535
54,159
16,572
$
123,694
13,800
12,837
26,637
22,475
118.5%
$
$
$
54,159
40,130
94,289
70,395
133.9%
In 2014 Clearwater had a record investment in capital expenditures of $83.3 million. Capital expenditures included $36.4 million
related to the construction of the new clam harvesting vessel which will have a total cost of approximately $60 million and is
expected to be operating late in 2015.
This investment in a new clam harvesting vessel will drive growth in Clearwater’s clam business by expanding access to clam
supply by approximately 60% when the customer distribution chain is fully in place by 2017.
In 2014 Clearwater invested $16.7 million to complete the conversion of an Argentine scallop vessel which will begin harvesting
early in the fi rst quarter of 2015. Additional investments in 2014 included $7.3 million for an enterprise resource planning system
(“ERP”) which is expected to be completed late 2015, $18.2 million on refi ts including $12.5 million for a life extending refi t of
a shrimp vessel and $4.7 million on other planned maintenance.
In 2013, Clearwater completed refi ts on its vessels of approximately $9.3 million. Additional vessel conversion costs included
$2.7 million on a new clam vessel and $5.0 million related to a scallop vessel.
In 2012, Clearwater completed refi ts on its vessels of $11.8 million. Capital expenditures for the year also included $2.0 million
related to new vessel based processing technologies.
Clearwater Seafoods Incorporated 2014 Annual Report
19
Management’s Discussion and Analysis
In addition to the annual amounts capitalized above, Clearwater historically has spent and expensed on average about
$13.4 million a year over the past three years on the maintenance of its fl eet and processing plants. This refl ects Clearwater’s
commitment to ensuring that the assets are kept in top condition, enabling it to harvest and process its allowable catch effi ciently
and providing suffi cient capacity.
Clearwater’s largest fl eet investments are in its eight factory vessels. These vessels are used in the harvesting of Canadian
scallops, Argentine scallops, shrimp and clams.
Of the eight factory vessels:
• Two are used to harvest shrimp and are on average 21 years old. These vessels have a capacity to harvest 14,000 to
18,000 metric tons of our 22,000 metric ton quota and our entire 1,900 metric ton turbot quota in a ready for market form. One
of the vessels was built in 1985 and in 2014 Clearwater invested $12.5 million in a late-life refi t, thereby extending its useful life.
• Four are used to harvest sea and bay scallops with the sea scallop vessels being on average 17 years old and the bay scallop
vessels being on average 19 years old. In 2012, Clearwater completed the conversion to automated processing factories on
its sea scallop vessels using proprietary technology and as result of the related improvement in harvesting and processing
capabilities, had two idle sea scallop vessels. In 2014, one of the idle vessels was converted from harvesting sea scallops
to harvesting bay scallops and will begin operations in early 2015.
• Two of Clearwater’s vessels are used to harvest clams and are on average 21 years old. Both of these vessels are harvesting at
capacity. In 2013, Clearwater began the construction of a new clam harvesting vessel which will increase access to available
supply in 2015.
In 2015 Clearwater expects to make signifi cant growth investments of approximately $56 million in capital assets, of which
$19 million relates to the construction of the third clam vessel, $6 million for the purchase and conversion of a research vessel.
$13 million related to maintenance capital investments and $18 million to improve operational effi ciencies in our plants and
information systems.
E X P L A N AT I O N O F 2 0 1 4 A N N U A L E A R N I N G S
Overview
The following statements refl ect the results of Clearwater for the years ended December 31, 2014 and 2013:
In 000’s of Canadian dollars
Year ended December 31
Sales
Cost of goods sold
Gross margin
Administrative and selling
Finance costs
Foreign exchange loss on forward contracts
Other income
Research and development
Earnings before income taxes
Income tax expense (recovery)
Earnings
Earnings attributable to:
Non-controlling interest
Shareholders of Clearwater
20
Clearwater Seafoods Incorporated 2014 Annual Report
2014
2013
$
444,742
341,908
$
388,659
301,291
102,834
23.1%
48,252
37,829
4,047
(5,031)
1,991
87,088
15,746
5,949
87,368
22.5%
39,005
33,935
8,812
(3,240)
1,659
80,171
7,197
(8,101)
$
$
$
9,797
$
15,298
12,702
(2,905)
$
8,965
6,333
9,797
$
15,298
2014 annual earnings
Clearwater reported strong sales for 2014 of $444.7 million and adjusted EBITDA1 of $87.4 million, versus 2013 comparative
fi gures of $388.7 million and $79.1 million, respectively.
The 14.4% and 10.4% growth in sales and adjusted EBITDA, respectively was driven by strong market demand that provided
higher sales prices for the majority of species as well as strengthening foreign exchange rates for the US dollar and the Euro
against the Canadian dollar. These higher foreign exchange rates had a $20.7 million positive impact on sales and gross margin
in 2014.
In addition higher catch rates for clams and a higher total allowable catch (“TAC”) for sea scallops increased supply which also
contributed to the increase in gross margin.
This increase was partially offset by higher per pound harvesting and procurement costs as well as higher administrative and
selling costs.
Harvesting and procurement costs were higher due to an increase in harvest costs for scallops and shrimp and higher purchase
prices for procured scallops, inshore shrimp, lobster and snow crab.
Administrative and selling costs, increased $9.2 million as a result of an increase in non-cash adjustments of $3.1 million
related to share-based incentive compensation and $1.4 million for a write down on goodwill related to non-core species. In
addition, higher reorganizational costs associated with a senior executive as well as increases in salaries and benefi ts increased
administrative costs.
Free cash fl ow1 improved by $4.7 million to $30.9 million in 2014 due to higher adjusted EBITDA and a $8.9 million improvement
in working capital, partially offset by higher capital expenditures from scheduled refi ts and vessel conversions (net of designated
fi nancing), and the timing of payments to minority interest partners.
Earnings for 2014 were $5.5 million lower than 2013 primarily as a result of an increase in deferred income tax expense and non-
cash unrealized foreign exchange losses from the translation of the US dollar denominated debt as the US dollar strengthened
against the Canadian dollar. These non-operational losses were partially offset by reductions in debt arrangement costs.
2014
2013
Change
$
9,797
$
15,298
$
(5,501)
In 000’s of Canadian dollars
Year ended December 31
Earnings (loss)
Changes due to operational items:
Higher gross margin
Higher administrative and selling
Lower interest expense
Higher realized foreign exchange losses
Changes due to non-operational items:
Lower debt arrangement costs
Higher unrealized foreign exchange losses on debt and working capital
Higher deferred income tax expense
Fair value adjustments on convertible debentures and embedded derivative
All other
15,466
(9,247)
1,594
(3,663)
4,150
9,216
(5,795)
(13,277)
(481)
(10,337)
686
$
(5,501)
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
Clearwater Seafoods Incorporated 2014 Annual Report
21
Management’s Discussion and Analysis
Sales by region
(In 000’s of Canadian dollars)
Year ended December 31
Europe
United States
Canada
North America
China
Japan
Other Asia
Asia
Other
Europe
2014
2013
Change
%
$
149,616
$
131,771
$
17,845
84,943
61,668
76,945
55,838
146,611
132,783
73,308
57,496
15,494
66,212
41,639
14,438
146,298
122,289
2,217
1,816
7,998
5,830
13,828
7,096
15,857
1,056
24,009
401
$
444,742
$
388,659
$
56,083
13.5%
10.4%
10.4%
10.4%
10.7%
38.1%
7.3%
19.6%
22.1%
14.4%
Europe is Clearwater’s largest scallop market and it is an important market for coldwater shrimp and lobster products.
European sales increased $17.8 million to $149.6 million for 2014 as compared to 2013, primarily as a result of strong market
demand that increased sales volumes and prices for sea scallops as a higher total allowable catch increased available supply
for sea scallops. Strengthening foreign exchange rates1 against the Canadian dollar and higher sales prices for shrimp also
contributed to the increase in sales.
This was partially offset by lower available supply of shrimp and Argentine scallops as available supply of shrimp was sold in
higher yielding markets and we experienced lower catch rates for Argentine scallops.
Sales, which were primarily transacted in the Euro1, GBP, the US dollar and DKK during 2014 were positively impacted by
$8.9 million due to higher foreign exchange rates. The Euro improved 5.6% relative to the Canadian dollar from 1.383 in 2013
to 1.460 in 2014 and the UK pound improved 11.6% relative to the Canadian dollar from 1.627 in 2013 to 1.815 in 2014.
United States
The United States is an 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 increased $8.0 million, or 10.4% to $84.9 million primarily as a result of stronger foreign exchange
rates1 and an increase in sales volumes and price for sea scallops.
Stronger market demand, which was partially impacted by a lower supply of scallops harvested by US based companies,
resulted in increased sales prices.
This was partially offset by lower sales volumes for snow crab due to a shift in sales to higher yielding markets and lower catch
rates for Argentine scallops that reduced available supply for 2014.
Sales were also positively impacted by $5.4 million in 2014 due to stronger foreign exchange rates as average rates for the US dollar
strengthened against the Canadian dollar. Average foreign exchange rates for the US dollar increased by 6.8% to 1.103 in 2014.
Canada
Canada is a large market for lobster, scallops and coldwater shrimp.
Sales in Canada increased $5.8 million, or 10.4% primarily as a result of higher sales volumes for snow crab, lobster and clams.
Strong market demand for snow crab and lobster increased sales prices and changes in product mix for clams also contributed
to the increase in sales.
Strong catch rates in 2014 increased available supply for clams. Sales were partially offset by a reduction in sales volumes for
sea scallops as available supply was sold to higher yielding markets.
1 Refer to discussion on risks and uncertainties
22
Clearwater Seafoods Incorporated 2014 Annual Report
China
China is an important market for clams, coldwater shrimp, lobster, turbot and scallops.
Sales to customers in China increased $7.1 million or 10.7%, to $73.3 million due to higher foreign exchange rates and strong
market demand that increased both sales volumes and price for clams.
Higher catch rates for clams, an increase in total allowable catch for sea scallops and an increase in sales price for lobster and
sea scallops also contributed to the increase in sales for the year.
Sales volumes for shrimp declined for the year partially offsetting the increase in sales as a result of timing in landings as one
vessel was on refi t in the second and third quarter of 2014.
Chinese sales are almost exclusively transacted in US dollars. The US dollar strengthened against the Canadian dollar in 2014
contributing to the increase in sales by $4.6 million as average foreign exchange rates1 for the US dollar strengthened against
the Canadian dollar by 6.8% to 1.103 in 2014.
Japan
Japan is an important market for clams, lobster, coldwater shrimp and turbot.
Sales to customers in Japan increased $15.9 million or 38.1%, to $57.5 million in 2014 primarily as a result of strong market
demand that increased sales volumes for shrimp, clams, turbot and lobster. Higher available supply from an increase in catch
rates for clams and an increase in sales prices for shrimp contributed to the increase in sales for the year.
Changes in sales mix for clams and lobster partially offset the increase in sales.
Sales by species1
(In 000’s of Canadian dollars)
Year ended December 31
Scallops
Coldwater shrimp
Lobster
Clams
Crab
Ground fi sh and other
$
2014
163,705
93,742
78,186
72,774
20,985
15,350
$
2013
147,637
81,592
66,452
60,780
18,271
13,927
$
Change
16,068
12,150
11,734
11,994
2,714
1,423
$
444,742
$
388,659
$
56,083
%
10.9
14.9
17.7
19.7
14.9
10.2
14.4
Sales increased $56.1 million, or 14.4%, for 2014 as a result of higher exchange rates and strong market demand that increased
sales prices for the majority of species and in particular for sea scallops and shrimp. Higher total allowable catch for scallops
and catch rates for clams also contributed to the increase in sales.
The increase in sales was partially offset by lower catch rates for Argentine scallops and lower landings for shrimp as one vessel
was on refi t.
Cost of goods sold
(In 000’s of Canadian dollars)
Year ended December 31
Harvesting and procurement
Manufacturing
Depreciation
Transportation
Administration
1 Refer to discussion on risks and uncertainties
$
2014
245,724
36,690
24,139
22,720
12,635
$
2013
207,057
35,275
23,733
22,826
12,400
$
Change
38,667
1,415
406
(106)
235
$
341,908
$
301,291
$
40,617
%
18.7
4.0
1.7
(0.5)
1.9
13.5
Clearwater Seafoods Incorporated 2014 Annual Report
23
Management’s Discussion and Analysis
Cost of goods sold increased $40.6 million or 13.5% to $341.9 million primarily as a result of an increase in harvesting and
procurement costs.
Harvesting and procurement include all costs incurred in the operation of the vessels including labour, fuel, repairs and
maintenance, fi shing gear supplies, other costs and fees plus procured raw material costs for lobster, shrimp, scallops and crab.
Excluding the increase in costs from higher sales volumes, harvesting and procurement costs were higher due to higher harvesting
costs per pound for scallops and shrimp and higher procurement costs for lobster, sea scallops, shrimp and snow crab.
This was partially offset by changes in sales mix weighted towards products with lower harvesting costs such as clams.
Fuel costs for our vessels declined $0.3 million in 2014 to $25.1 million as a result of a reduction in litres consumed by the clam
and shrimp vessels. Scheduled refi ts reduced our fi shing effort for shrimp and improved catch rates for clams reduced the
number of seadays in 2014. The decline in fuel volume was partially offset by an increase in average price per litre of fuel of $0.04
to an average of $0.88 per litre in 2014. Clearwater’s vessels used approximately 28.4 million litres of fuel in 2014. Based on 2014
fuel consumption, a one-cent per litre change in the price of fuel would impact harvesting costs by approximately $0.2 million.
Clearwater uses Marine Diesel in its harvesting operations, the price of which does not correlate closely to publically available
measures such the price of a barrel of oil. This is due to a number of factors including but not limited to the nature of the fuel
used, the geographic locations in which Clearwater purchases fuel and the currency in which Clearwater purchases fuel.
Manufacturing includes labour costs related to the production and selling of goods, plant utilities and supplies. Labour costs
increased as a result of rising wages, salaries and benefi ts and increased production of certain species.
Depreciation costs increased in 2014 as a result of large investments made to our fl eet.
Transportation costs include freight, customs and duties related to the transfer of goods to market.
Administrative overheads include salaries and benefi ts, professional and consulting fees and management fees attributable to
the harvesting and production of goods. Refer to administrative and selling section for further information.
Gross margin
Gross margin as a percentage of sales improved from 22.5% in 2013 to 23.1% for 2014, due to higher sales prices and
favourable exchange1 rates. Strong demand provided higher sales prices for the majority of species and strengthening foreign
exchange1 rates for the US dollar and the Euro against the Canadian dollar impacted positively on margins. Higher catch rates
for clams and higher total allowable catch for sea scallops, increased available supply which also contributed to the increase
in gross margin.
Higher harvesting costs per pound for scallops and shrimp and higher shore prices per pound for shrimp, sea scallops, lobster
and snow crab partially offset the increase in margins. In addition lower catch rates for Argentine scallops and a reduction in
landings for shrimp partially offset the improvement in gross margin.
The net impact on sales from foreign exchange volatility was an increase in sales of $20.7 million.
Year ended December 31
Currency
US dollars
Euros
Japanese Yen
Danish Kroner
UK pounds
Canadian dollar and other
2014
Average
rate realized
1.103
1.460
0.010
0.196
1.815
% sales
46.5%
20.5%
9.8%
3.7%
4.4%
15.1%
100.0%
% sales
49.1%
21.5%
8.0%
3.5%
3.1%
14.8%
100.0%
2013
Average
rate realized
1.033
1.383
0.011
0.182
1.627
Change
in rate
6.8%
5.6%
-9.1%
7.7%
11.6%
0.0%
0.0%
1 Refer to discussion on risks and uncertainties
24
Clearwater Seafoods Incorporated 2014 Annual Report
Administrative and selling
In 000’s of Canadian dollars
Year ended December 31
Salaries and benefi ts
Share-based incentive compensation
Employee compensation
Consulting and professional fees
Reorganizational costs
Other
Selling costs
Travel
Occupancy
Allocation to cost of goods sold
$
$
2014
30,141
8,948
39,089
6,790
3,818
3,825
3,105
2,384
1,416
(12,175)
$
2013
28,708
5,861
34,569
5,549
74
4,368
2,893
2,274
1,385
(12,107)
`
Change
1,433
3,087
4,520
1,241
3,744
(543)
212
110
31
(68)
$
48,252
$
39,005
$
9,247
%
5.0
52.7
13.1
22.4
5,059.5
(12.4)
7.3
4.8
2.2
0.6
23.7
Administrative and selling increased $9.2 million, or 23.7%, to $48.3 million for 2014 primarily as a result of increases in share-
based incentive compensation and reorganizational costs.
Salaries and benefi ts increased $1.4 million primarily as a result of an increase in senior management staff as well as general
infl ation increases to salaries.
Share-based incentive compensation is primarily driven by changes in Clearwater’s share price, performance against
Clearwater’s peer group and the number of outstanding share based awards outstanding. Compensation expense increased
$ 3.1 million primarily as a result of an increase in Clearwater’s share price during 2014 and to a lesser extent an increase in the
number of share based compensation awards granted.
Consulting and professional fees include operations management, legal, audit and accounting, insurance and other specialized
consulting services. Costs vary year over year based upon business requirements. The increase of $1.2 million primarily relates
to consulting fees for an Enterprise resource planning system conversion that is to be completed in late 2015.
Reorganizational costs include non-routine administrative expenses, gains and losses on write-down of assets, all of which
will vary from year to year. The largest portion of the expenditures in 2014 relate to severance and a write down on goodwill
related to a non-core species.
Other includes a variety of administrative expenses such as communication, other service fees and depreciation, all of which
will vary from year to year.
Selling costs include advertising, marketing, trade shows, samples, product development and bad debt expenses.
The allocation to cost of goods sold refl ects costs that are attributable to the production of goods and are allocated on a
proportionate basis based on production volumes.
Finance costs
In 000’s of Canadian dollars
Year ended December 31
Interest and bank charges
Amortization of deferred fi nancing charges and accretion
Interest
Fair value adjustment on convertible debentures and embedded derivative
Foreign exchange on debt and working capital
Debt settlement and refi nancing fees
$
2014
14,938
778
15,716
(1,229)
23,242
100
$
2013
16,317
993
17,310
(1,710)
9,019
9,316
$
37,829
$
33,935
Clearwater Seafoods Incorporated 2014 Annual Report
25
Management’s Discussion and Analysis
Finance costs increased by $3.9 million due to higher non-cash losses on foreign exchange, offset partially by lower debt
settlement and refi nancing fees and lower interest costs.
Interest declined $1.6 million in 2014 due to lower average interest rates on Clearwater’s debt facilities.
The fair value adjustment on the convertible debentures and embedded derivatives on the Term Loan B represents the
change in the estimated fair values of these instruments. The convertible debentures were paid out in July 2013 and replaced
with Term Loan B debt.
Foreign exchange on fi nancing and work ing capital
In 000’s of Canadian dollars
Year ended December 31
Realized loss (gain)
Working capital and other
Unrealized loss (gain)
Foreign exchange on long term debt and working capital
Mark-to-market on interest swaps and caps
2014
2013
$
1,172
$
3,586
1,172
3,586
19,481
2,589
22,070
5,427
6
5,433
$
23,242
$
9,019
Foreign exchange losses1 on fi nancing and working capital increased by $14.2 million to $23.2 million in 2014. The increase
was a result of higher unrealized foreign exchange losses on the translation of the $196.8 million US dollar denominated debt
as foreign exchange rates strengthened 9.0% against the Canadian dollar compared to 2013.
Mark-to-market losses on interest swaps and caps increased in 2014 as a result of non-cash mark to market losses on
$100 million US dollar denominated interest rate swaps/caps that were entered into during the year. These arrangements are
marked-to-market through profi t and loss.
Losses on forward contracts
In 000’s of Canadian dollars
Year ended December 31
Losses (Gains) on forward contract derivatives
Realized loss
Changes in unrealized (gain) loss
2014
2013
$
$
8,829
(4,782)
$
2,752
6,060
4,047
$
8,812
Losses1 on forward contracts declined $4.8 million to $4.0 million in 2014 due to higher unrealized foreign exchange gains
offset partially by higher realized losses.
The increase in unrealized gains on forward contracts of $10.8 million to a gain of $4.8 million in 2014 relates primarily to forward
contacts with the largest driver in 2014 being Euro contracts for which the contract rate was greater than the spot rate. This
was partially offset by unrealized foreign exchange losses of $3.9 million on US dollar.
This increase in unrealized gains was offset by a $6.1 million increase in the realized loss on the settlement of forward contracts.
This loss was a result of spot rates that were higher than contracted rates for the US dollar and Euro contracts that were closed
out in 2014. The losses were more than offset by the positive impact of higher exchange rates on sales and margins.
1 Refer to discussion on risks and uncertainties
26
Clearwater Seafoods Incorporated 2014 Annual Report
Clearwater’s hedging program is designed to enable Clearwater to remove uncertainty regarding exchange rates on sales
receipts by locking in up to 75% of annual net foreign exchange exposure. Clearwater does this by entering into a series of
foreign exchange contracts that mature throughout the fi scal year and that provide for a fi xed exchange rate on a portion of sales
receipts. In a rising exchange rate environment such as the one we are currently in where spot rates are higher than contract
rates, Clearwater realizes higher exchange rates on sales but it is required to remit the excess of the spot rate received on sales
receipts over the contract rate to the counterparty on the portion of sales that it has hedged.
Should the current environment of a stronger US dollar and Euro versus the Canadian dollar persist it would have a positive
impact on 2015 sales but the hedging program would offset a portion of those gains and reduce the positive impact on adjusted
EBITDA. However, looking forward to 2015, Clearwater would realize the benefi t of such higher rates as hedging contracts that
it is entering into now are at rates closer to current spot rates.
Debt settlement and refi nancing fees represent fees incurred for the settlement or refi nancing of long term debt and will vary
year to year depending on refi nancing activities. Debt settlement and refi nancing fees in 2013 included a $5.1 million non-cash
charge related to a write-off of previously deferred fi nancing charges as well as $4.2 million in refi nancing fees incurred in 2013.
Clearwater does not have any material near term maturing debt facilities and believes the current facilities are suffi cient to
execute its strategic plan.
Other income
In 000’s of Canadian dollars
Year ended December 31
Share of earnings of equity-accounted investee
Royalties, interest and other fees
Other fees
$
2014
(2,987)
(844)
(1,200)
$
2013
(2,082)
92
(1,250)
$
(5,031)
$
(3,240)
The share of earnings from an equity accounted investee increased $0.9 million in 2014. This equity investee is involved in the
Canadian scallop business and its’ earnings increased as a result of an increase in market demand and price for scallops in 2014.
Royalties, interest and other fees includes income related to quota rental, commissions, processing fees and other miscellaneous
income and expense that vary based upon the operations of the business.
Research and development
Research and development relates to new technology and research into ocean habitats and fi shing grounds. Research and
development can vary year to year depending on the scope, timing and volume of research completed. Clearwater’s business
plans expect an increase in investment in research and development.
Income taxes
Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the United Kingdom and Canada.
Deferred tax assets have been recognized based on management’s estimate that it is more likely than not that Clearwater will
earn suffi cient taxable profi t to utilize these losses.
During 2013 substantial tax assets that had been previously unrecorded were recognized as an asset. In 2014 an expense was
recorded to refl ect the usage of a portion of that asset.
Clearwater Seafoods Incorporated 2014 Annual Report
27
Management’s Discussion and Analysis
Earnings attributable to non-controlling interest
Non-controlling interest relates to minority share of earnings from Clearwater’s majority investments in subsidiaries in Argentina,
Nova Scotia and Newfoundland and Labrador.
The increase in earnings attributable to non-controlling interest of $3.7 million for 2014 relates primarily to strong market demand
that increased sales prices for turbot and shrimp.
It is important to note that the earnings attributable to non-controlling interest relates to Clearwater’s interest in a partnership
and as such taxes are included in earnings attributable to shareholders, whereas the earnings attributable to non-controlling
interest are not tax effected.
For those readers that would like to understand the breakdown of adjusted EBITDA attributable to non-controlling interest and
shareholders please refer to the reconciliation of adjusted EBITDA within the non-IFRS measures, defi nitions and reconciliations
section of the MD&A.
Earnings attributable to shareholders
Earnings attributable to shareholders of Clearwater declined $9.2 million from income of $6.3 million in 2013 to a loss of
$2.9 million in 2014 primarily as a result of an increase in non-cash adjustments related to deferred income tax expense
and unrealized foreign exchange expense. In 2013 Clearwater recorded an additional deferred tax asset of approximately
$15.8 million related to the benefi t of unrecognized tax losses. In 2014 Clearwater utilized a portion of the deferred tax asset.
Adjusted earnings attributable to shareholders
To assist readers in estimating our earnings we have included a calculation of adjusted earnings. Management believes that in
addition to earnings and cash provided by operating activities, adjusted earnings is a useful supplemental measure from which
to determine Clearwater’s earnings from operations and ability to generate cash available for debt service, working capital,
capital expenditures, income taxes and dividends.
For those readers that would like to understand the calculation of adjusted earnings please refer to the reconciliation of adjusted
earnings within the non-IFRS measures, defi nitions and reconciliations section of the MD&A.
In 2014, adjusted earnings attributable to Clearwater’s shareholders increased $6.9 million, or 44% to $22.6 million primarily
as a result of improvements in gross margin of $15.5 million and lower interest expense of $1.6 million. The improvements in
adjusted earnings were partially offset by an increase in selling and administrative expenses and realized foreign exchange
losses on working capital and foreign exchange contracts.
In 2014, adjusted earnings per share increased to $0.41 per share from $0.31 per share in 2013. This increase was due to an
improvement in adjusted earnings that was partially offset by an increase in the number of outstanding shares due to a share
issue completed early in 2014.
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 fl exibility and reducing exchange
risk by borrowing when appropriate in currencies other than the Canadian dollar.
Clearwater uses leverage, in particular revolving and term debt to lower its cost of capital.
The amount of debt available to Clearwater is a function of adjusted EBITDA less net earnings attributable to minority interest.
Adjusted EBITDA 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 fl exibility in its capital structure by regularly reviewing forecasts and multi-year business plans and making
any required changes to its debt and equity facilities on a proactive basis. These changes can include early repayment of debt,
issuing or repurchasing shares, issuing new debt or equity, utilizing surplus cash, extending the term of existing debt facilities
and, selling surplus assets to repay debt.
28
Clearwater Seafoods Incorporated 2014 Annual Report
Clearwater’s capital structure was as follows as at December 31, 2014 and 2013:
In 000’s of Canadian dollars
As at December 31
Equity
Common shares
Retained earnings
Cumulative translation account
Non-controlling interest
Long term debt
Senior debt, non-amortizing
Term loan, due in 2015
Term loan, due in 2091
Senior debt, amortization
Term Loan A, due 2018
Delayed Draw term Loan A, due 2018 (net of deferred fi nancing charges of $0.6 million)
Term Loan B, due 2019 (including the embedded derivative)
Marine mortgage, due in 2017
Multi-currency revolving facility
Other loans
Total long term debt
Total capital
2014
2013
$
97,267
11,084
(5,326)
103,025
24,962
$
64,780
19,762
(5,470)
79,072
24,669
127,987
103,741
11,595
3,500
15,095
28,950
(608)
228,211
1,030
21
342
10,642
3,500
14,142
29,700
(608)
211,901
1,785
—
405
257,946
243,183
273,041
257,325
$
401,028
$
361,066
There are 54,978,098 shares outstanding as of December 31, 2014 (December 31, 2013 – 50,948,698 ).
On February 4, 2014, Clearwater completed the issuance of 4,029,400 common shares. The shares were issued at a price of
$8.50 per share, for gross proceeds to Clearwater of approximately $34 million.
Long term debt consists of non-amortizing and amortizing senior debt:
The revolving loan allows Clearwater to borrow a maximum of CDN $75.0 million (denominated in either Canadian or the
US dollar equivalent) and it matures in June 2018. The balance was $nil at December 31, 2014 (December 31, 2013 – $nil).
The CDN balances bear interest at the banker’s acceptance rate plus 3.25%. The USD balances bear interest at the US Libor rate
plus 3.25%. The loan has a provision that, subject to certain conditions, allows Clearwater to expand the facility by a maximum
of CDN $25.0 million. The availability on this loan is reduced by the amount outstanding on a US $10 million non-amortizing
term loan and as such the availability as at December 31, 2014 was $63.4 million (December 31, 2013 – $64.4 million).
The term loan A has principal outstanding as at December 31, 2014 of CDN $29.0 million (December 31, 2013 – CDN $29.7 million).
The loan is repayable in quarterly instalments of $0.2 million to June 2015, $0.4 million from September 2015 to June 2017, and
$0.8 million from September 2017 to March 2018 with the balance due at maturity in June 2018. It bears interest at the applicable
banker’s acceptance rate plus 3.25%. As at December 31, 2014 this resulted in an effective rate of approximately 4.51%.
Clearwater Seafoods Incorporated 2014 Annual Report
29
Management’s Discussion and Analysis
Clearwater has entered into interest rate swap arrangements whereby:
• CDN $12 million of this loan is effectively subject to a fi xed interest rate of 5.38% until December 31, 2015 after which it is
subject to an interest rate that is the lessor of the fl oating rate of interest on the loan or a maximum fi xed rate of interest of
6.25%.
• CDN $12 million of this loan is subject to a rate cap to December 31, 2015 of 4.5% and then after which the rate is fi xed at
5.85% to June 2018.
Clearwater accounts for all interest rate swap arrangements and the related change in market value through profi t and loss.
The delayed draw term loan A has a principal outstanding as at December 31, 2014 of CDN $nil (December 31, 2013 – $nil) and
can be drawn upon any time up to June 30, 2015. The balance is shown net of deferred fi nancing charges of CDN $0.6 million.
The loan is repayable in quarterly instalments of 1.25% of the principal amount drawn under the facility with repayment to begin
in the fi rst quarter after the facility is fully drawn or closed out. The facility matures in June 2018 and bears interest payable
monthly at the banker’s acceptance rate plus 3.25%.
The term loan B has principal outstanding as at December 31, 2014 of USD $196.8 million (December 31, 2013 –
USD $199.0 million). The loan is repayable in quarterly instalments of USD $0.5 million with the balance due at maturity in June 2019.
It bears interest payable monthly at US Libor plus 3.5% with a Libor interest rate fl oor of 1.25%. As of December 31, 2014 this
resulted in an effective rate of 4.75%. The loan has a provision that, subject to certain conditions allows Clearwater to expand
the facility by a maximum of USD $100.0 million (or the equivalent amount in Canadian dollars). The Libor interest rate fl oor of
1.25% is accounted for separately as an embedded derivative and is recorded at the estimated fair market value. The change in
fair market value of the embedded derivative is recorded through profi t or loss. Clearwater has entered into swap arrangements
whereby USD $50 million of the debt is capped to December 31, 2015 at an interest rate of 4.75% and then the rate is fi xed
at 6.15% to June 2019 and a further USD $50 million is capped to June 2016 at an interest rate of 4.75% and then the rate
is fi xed it at 6.49% to June 2019. Clearwater accounts for these swap arrangements and the change in market value through
profi t and loss.
During the third quarter of 2013 Clearwater’s Argentine subsidiary borrowed USD $10.0 million to fund conversion of a vessel for
use in the Argentine scallop fi shery. In 2014 this loan was renewed and as a result it bears interest at 7% per year with interest
payable monthly and the principal is due at maturity in June 25, 2015.
On April 29, 2014, Clearwater entered into a multi-currency revolving facility agreement that allows Clearwater to borrow a
maximum of DKK 53.0 million which can be denominated in either DKK, Canadian and US dollar equivalents. The principal
availability reduces by the equivalent of DKK 10.6 million on June 30, 2015 and each anniversary thereafter until the loan is fully
reduced. As at December 31, 2014 the balance of the revolving facility is DKK 0.1 million (Canadian equivalent is $0.02 million).
The facility bears interest in the same currency as the currency in which the principal balance is denominated. The interest is
payable on the last day of each fi scal quarter at the N-bor rate applicable to the currency of the facility plus 1.875%.
The revolver, term loan A, delayed draw and term loan B are secured by a fi rst charge on cash and cash equivalents, accounts
receivable, inventory, marine vessels, licenses and quotas, and Clearwater’s investments in certain subsidiaries.
Clearwater’s debt facilities have covenants that are subject to certain fi nancial and non-fi nancial covenants. Clearwater is in
compliance with all covenants associated with its debt facilities.
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 signifi cant 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
Clearwater has a number of treasury management policies and goals to promote strong liquidity and continued access to capital
to fund its growth.
These include policies and strategies with respect to liquidity, leverage, foreign exchange management, free cash fl ows
and dividends.
30
Clearwater Seafoods Incorporated 2014 Annual Report
Management continuously evaluates its capital structure in light of these policies and strategies:
• Liquidity – As of December 31, 2014 Clearwater had $47.6 million in cash, and a $75 million revolving loan, of which
$63.4 million was available. The cash balance, together with available credit on the revolving loan, is used to manage seasonal
working capital demands, capital expenditures, and other commitments. In addition, Clearwater can draw up to $39 million
on its’ delayed draw term loan A.
Clearwater’s operations experience a predictable seasonal pattern in which sales, margins and adjusted EBITDA are higher in
the second half of the year whereas investments in capital expenditures and working capital are lower, resulting in higher free
cash fl ows and lower leverage in the second half of the year. This typically results in lower free cash fl ow, higher debt balances
and higher leverage in the fi rst half of the year. Clearwater is satisfi ed that it has ample liquidity to execute its business plan.
• Leverage1 – Clearwater has a long-term leverage target of 3.0x or lower of net debt to adjusted EBITDA. Periodically, the
ratio may be higher due to planned investments, or lower due to seasonality but over time Clearwater intends to manage to
this ratio. As of December 31, 2014 leverage improved to 2.6x adjusted EBITDA from 2.7x as of December 31, 2013 due to
higher cash fl ows from operations partially offset by substantial capital expenditures completed in the fi rst three quarters of
the year.
In 000’s of Canadian dollars
As at December 31
Adjusted EBITDA1
Debt (net of deferred fi nancing charges of $0.6 million
(December 31, 2013 – $0.6 million))
Less cash
Net debt
Leverage
2014
2013
2012
$
87,368
$
79,103
$
72,243
273,041
(47,598)
257,325
(46,793)
253,791
(41,504)
$
225,443
$
210,532
$
212,287
2.6
2.7
2.9
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 fl ows.
We have provided leverage calculations in the past to assist readers in comparing our leverage levels to our peers. Given that
our leverage levels are in-line or below our peers we do not feel this measure is as critical to disclose. However, we understand
that readers may wish to have leverage measures to assist them in their assessment of our liquidity. As a result, we will include
a revised leverage measure going forward that is more appropriate for this purpose – one that is based on Clearwater’s share
of adjusted EBITDA, debt and cash balances.
The revised calculation excludes the minority share of our cash and adjusted EBITDA and is calculated as follows:
In 000’s of Canadian dollars
As at December 31
Adjusted EBITDA1
Debt (net of deferred fi nancing charges of $0.6 million
(December 31, 2013 – $0.6 million))2
Less cash3
Net debt
Leverage
2014
2013
$
71,073
$
65,082
272,554
(40,712)
256,498
(38,510)
$
231,842
$
217,988
3.3
3.3
2 Debt was reduced by the share attributable to non-controlling shareholders for which Clearwater does not provide a guarantee. This included
$0.5 million in 2014 and $0.8 million in 2013.
3 Cash was reduced by the share attributable to non-controlling shareholders of $6.9 million in 2014 and $8.3 million in 2013.
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
Clearwater Seafoods Incorporated 2014 Annual Report
31
Management’s Discussion and Analysis
• Foreign Exchange Management –
Clearwater’s plan to mitigate foreign exchange risk is as follows:
(1) Diversify sales geographically, which reduces the impact of any country-specifi c 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.
(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 sales currencies (the US dollar, Euro, Yen and Sterling)
thereby lowering the potential volatility in cash fl ows from changes in exchange rates.
As of February 25, 2015 Clearwater had forward exchange contracts to be settled in 2015 of:
• US dollar $103.6 million at an average rate of 1.10;
• 3.2 billion Yen at an average rate of .010; and
• 47.6 million Euro at an average rate of 1.46.
The 2015 US dollar forwards include US dollars $35.6 million of participating forwards which provide that to the extent spot
rates are higher than the contracted rates of approximately 1.10, the contract rate will be adjusted by approximately 50.0% of
the excess.
The purpose of these contracts is to give certainty to Clearwater on the exchange rates that it expects to receive on a portion of
our foreign currency sales. The foreign exchange contracts effectively adjust the cash proceeds received on sales receipts to the
rates that Clearwater planned for and contracted for as part of this annual planning cycle and its foreign exchange management
program. When spot exchanges rates are above contract rates at the date of maturity of the contracts Clearwater realizes a loss
and conversely, when spot exchange rates are lower, it realizes a gain. At the same time, given that Clearwater only hedges to
75% of its net exposures and that higher or lower spot exchange rates are refl ected in sales, any losses or gains on contracts
are more than offset by the impact on sales.
Free cash fl ows1 – Clearwater has a goal to generate strong cash fl ows from operations in order to fund, scheduled loan
payments and capital expenditures and in turn to use this free cash fl ow to invest in growth investments. Clearwater’s goal is
to grow free cash fl ows such that it can fund growth, maintain leverage of around 3x adjusted EBITDA and pay a sustainable
dividend to its shareholders.
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
32
Clearwater Seafoods Incorporated 2014 Annual Report
13 weeks ended
December 31
Year ended
December 31
2014
2013
2014
2013
2012
$
25,861
$
22,347
$
87,368
$
79,103
$
72,243
(4,288)
(375)
(789)
(3,657)
(270)
514
(14,938)
(2,585)
(5,295)
(16,317)
(1,812)
(863)
(20,346)
(1,693)
(12,448)
Adjusted EBITDA1
Less:
Cash Interest
Cash taxes
Other income and expense items
Operating cash fl ow before changes
in working capital
20,409
18,934
64,550
60,111
37,756
Changes in working capital
from operating activities
27,571
Cash fl ows from operating activities
47,980
Other sources (uses) of cash:
Purchase of property, plant, equipment,
quota and other assets
Proceeds on disposal of fi xed assets
Designated borrowingsA
Scheduled payments on long-term debt
Dividends received from joint venture
Distribution to non-controlling interests
(12,802)
—
11,017
(6,205)
—
(2,780)
29,816
48,750
3,476
68,026
(5,448)
54,663
8,184
45,940
(11,182)
—
6,231
(1,366)
—
(3,707)
(83,309)
5
63,431
(8,360)
1,490
(10,427)
(23,813)
978
7,700
(3,233)
1,240
(11,414)
(16,572)
—
2,056
(6,327)
1,740
(9,491)
Free cash fl ow1
$
37,210
$
38,726
$
30,856
$
26,121
$
17,346
Add/(less):
Other debt borrowings (repayments)
of debt, use of cashB
Issuance of equity
Other investing activities
Other fi nancing activities
(11,054)
—
(482)
(1,649)
(7,505)
—
(386)
—
(60,398)
32,487
1,805
(4,397)
(20,759)
—
(717)
—
13,584
—
1,358
—
Change in cash fl ows for the period
$
24,025
$
30,835
$
353
$
4,645
$
32,288
A Designated borrowings relate to capital projects for which there is long-term fi nancing and therefore they will not be fi nanced with operating cash
fl ows. For 2014, this includes a conversion of a vessel for Argentina, the addition of a third clam vessel and a late life refi t on a shrimp vessel. For
the purpose of free cash fl ow calculations the amount invested (up to the total amount of the related fi nancing) during the period on these projects is
backed out of the calculation of free cash fl ows irrespective of the timing of the related borrowing.
B Other debt borrowings (repayments) of debt, use of cash for year to date 2014 includes $63.4 million of cash invested in designated capital projects.
Cash fl ow generated by Clearwater’s operations along with cash on deposit and available credit on the revolving loan are used
to fund current operations, seasonal working capital demands, capital expenditures, and other commitments.
Free cash fl ow for 2014 improved $4.7 million to $ $30.9 million due to the higher adjusted EBITDA and a positive contribution
from working capital offset by higher capital expenditures (net of designated borrowings) from scheduled refi ts and vessel
conversions, and the timing of payments to minority interest partners.
Certain large investments in longer term assets, for example vessel conversion/acquisitions, are funded with long term capital
such as amortizing term loans. As a result Clearwater adds back the funding on those capital expenditures in the determination
of free cash fl ows and deducts the related debt payments.
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
Clearwater Seafoods Incorporated 2014 Annual Report
33
Management’s Discussion and Analysis
Changes in working capital
In 000’s of Canadian dollars
Decrease in inventory
(Decrease) increase in accounts payable
Decrease (increase) in account s receivable
(Increase) decrease in prepaids
13 weeks ended
December 31
Year ended
December 31
$
2014
13,016
(5,414)
21,933
(1,964)
$
2013
18,056
(3,550)
16,376
(1,066)
$
2014
6,237
2,557
(4,605)
(713)
$
2013
2,745
(8,342)
(470)
619
$
27,571
$
29,816
$
3,476
$
(5,448)
Working capital in 2014 improved $8.9 million from a use in working capital of $5.4 million in 2013 to proceeds of $3.5 million in
2014. The improvement in cash was primarily a result of an increase in sales volumes for sea scallops and timing of payments
of accounts payable. Timing of accounts receivable collections partially offset the improvement.
In 2014 Clearwater had a record investment in capital expenditures of $83.3 million. Capital expenditures included $36.4 million
related to the construction of the new clam harvesting vessel that is to have a total cost of approximately $60 million and is
expected to be operating late in 2015.
In 2014 Clearwater invested $16.7 million to complete the conversion of an Argentine scallop vessel which will begin harvesting
early in the fi rst quarter of 2015. Additional investments in 2014 included $7.3 million for an enterprise resource planning system
(“ERP”) which is expected to be completed late 2015, $18.2 million on refi ts including $12.5 million for a life extending refi t for
a shrimp vessel and $4.7 million on other planned maintenance.
Clearwater is focused on managing its free cash fl ows 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 supply and
production plans versus sales forecasts, and through continuous improvements in the integration of its fl eet and sales plans.
• Capital spending – Clearwater grades investments in property, plant, equipment and licences as either return on investment
(“ROI”) or maintenance capital and tracks each project. Signifi cant expenditures that are expected to have a return in excess
of the cost of capital are classifi ed as ROI, and all refi ts and expenditures that are expected to return less than the average
cost of capital are classifi ed as maintenance.
On average, Clearwater expects to invest $15-20 million a year in maintaining its fi xed assets with a further $10–15 million of
repairs and maintenance expensed and included in the cost of goods sold.
In June 2013 the Company announced the planned investment in a third vessel for its clam business. Clearwater plans to invest
up to $60 million (including interest) on the project. Management expects to complete conversion work and enter the new vessel
into service in late 2015.
This investment in a new clam harvesting vessel will drive growth in Clearwater’s clam business by expanding access to clam
supply by approximately 60% when the customer distribution chain is fully in place by 2017.
In 2015 Clearwater expects signifi cant growth investments of approximately $56 million in capital assets, of which $19 million
relates to the construction of the third clam vessel, $6 million for the purchase and conversion of a research vessel. $13 million
related to maintenance capital investments and $18 million to improve operational effi ciencies in our plants and information
systems.
• Dividends – On November 1, 2013 Clearwater announced the initiation of an annual dividend of $0.10 per share, payable in
quarterly instalments of $0.025 per share and on December 13, 2013 it made the fi rst quarterly dividend payment.
On February 25, 2014 the Board of Directors announced a 33% increase in the dividend and declared a quarterly dividend
of CAD$0.04 per share, payable on March 24, 2015 to shareholders of record as of March 10, 2015.
34
Clearwater Seafoods Incorporated 2014 Annual Report
In making the determination of dividend levels Clearwater’s Board gives consideration to a number of key principles including:
• the expected future earnings;
• the amount of free cash fl ows that should be retained to reinvest in the business;
• the assurance that all obligations can be met with respect to existing loan agreements; and
• the desire to provide room for the dividend to increase in the future as the business continues to grow and expand.
The Board reviews dividends quarterly with a view to revisiting the appropriate dividend amount on an annual basis.
The increase in February 2015 refl ects the extraordinary results achieved in 2014. Going forward the Board will review the policy
on a regular basis to ensure the dividend level remains consistent with Clearwater’s long term dividend policy.
These dividends are eligible dividends as defi ned for the purposes of the Income Tax Act (Canada) and applicable provincial
legislation and, therefore, qualify for the favourable tax treatment applicable to such dividends.
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 suffi cient liquidity and fi nancial resources to execute on its strategy and business plan.
E X P L A N AT I O N O F F O U R T H Q U A R T E R 2 0 1 4 R E S U LT S
Overview
The following statements refl ect the results of Clearwater for the 13 weeks ended December 31, 2014 and 2013:
In 000’s of Canadian dollars
13 weeks ended December 31
Sales
Cost of goods sold
Gross margin
Administrative and selling
Finance costs
Foreign exchange loss on forward contracts
Other income
Research and development
Earnings before income taxes
Income tax expense
(Loss) earnings
(Loss) earnings attributable to:
Non-controlling interest
Shareholders of Clearwater
2014
2013
$
119,498
89,647
$
111,012
85,384
29,851
25.0%
13,004
14,149
2,174
(1,622)
615
28,320
1,531
1,401
25,628
23.1%
13,295
8,298
4,380
(1,664)
630
24,939
689
987
$
$
$
130
$
(298)
4,117
(3,987)
$
2,804
(3,102)
130
$
(298)
Clearwater Seafoods Incorporated 2014 Annual Report
35
Management’s Discussion and Analysis
Fourth quarter 2014 results
Clearwater reported sales of $119.5 million and adjusted EBITDA1 of $25.9 million for the fourth quarter of 2014 versus
2013 comparative fi gures of $111.0 million and $22.3 million, refl ecting growth of 7.6% in sales and 15.7% in adjusted EBITDA.
For the fourth quarter of 2014, gross margin improved by $4.2 million. Gross margin as a percentage of sales improved from 23.1%
in the fourth quarter of 2013 to 25.0% for the same period of 2014, due to higher sales prices and favourable exchange rates.
The growth in sales and adjusted EBITDA was driven by strong market demand that increased sales prices for the majority of
species as well as a $2.9 million positive foreign exchange impact as the US dollar strengthened against the Canadian dollar
in the fourth quarter of 2014.
Free cash fl ow1 was $37.2 million for the fourth quarter of 2014 versus $38.7 million for the same period of 2013, a decline of
$1.5 million, due primarily to the timing of scheduled debt repayments in 2014.
2014
2013
Change
$
130
$
(298)
$
428
In 000’s of Canadian dollars
13 weeks ended December 31
(Loss) earnings
Higher gross margin
Higher administrative and selling
Higher interest expense
Higher realized foreign exchange losses
$
4,223
291
(639)
(2,778)
1,097
330
(310)
(558)
(538)
(131)
428
%
0.6
11.9
33.3
23.7
10.8
(4.5)
(32.6)
7.6
Explanation of changes in earnings related to non-operational items:
Higher unrealized foreign exchange losses on debt and working capital
Higher deferred income tax expense
Fair value adjustments on convertible debentures and embedded derivative
All other
Sales by region
(In 000’s of Canadian dollars)
13 weeks ended December 31
Europe
China
Japan
Other Asia
Asia
United States
Canada
North America
Other
2014
2013
Change
$
45,217
44,951
$
266
21,202
15,712
5,100
42,014
19,247
12,595
31,842
425
18,952
11,788
4,123
34,863
17,373
13,194
30,567
631
2,250
3,924
977
7,151
1,874
(599)
1,275
(206)
$
119,498
$
111,012
$
8,486
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
36
Clearwater Seafoods Incorporated 2014 Annual Report
Europe
Europe is Clearwater’s largest scallop market and an important market for coldwater shrimp and lobster products.
European sales remained consistent for the fourth quarter of 2014 in comparison to the same period of 2013.
Increases in sales prices for Argentine scallops and shrimp were offset by a decrease in catch rates for Argentine scallops that
reduced available supply in the fourth quarter of 2014.
China
China is an important market for clams, coldwater shrimp, lobster, turbot and scallops.
Sales in China increased $2.3 million to $21.2 million in 2014 as a result of an increase in sales price, sales volumes for clams
and a $1.6 million positive impact from foreign exchange rates as the US dollar strengthened against the Canadian dollar.
This was partially offset by lower available supply for shrimp due to timing of landings.
Japan
Japan is an important market for clams, lobster, coldwater shrimp and turbot.
Sales to customers in Japan increased $3.9 million to $15.7 million primarily as a result of an increase in sales volumes for
clams from higher catch rates. Increases in sales volumes for lobster from an increase in procurement directed to this market
also contributed to the increase in sales.
This was partially offset by lower available supply for shrimp due to timing of landings. In addition changes in sales mix for clams
and lobster to products with lower average sales prices partially offset the increase in sales.
Average foreign exchange rates for the Yen for the fourth quarter of 2014 were 0.010 which were consistent in the same period
in 2013.
United States
The United States is an 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 increased $1.9 million, or 10.8%, to $19.2 million in the fourth quarter of 2014 primarily as a result of
an increase in sales volumes for sea scallops and higher foreign exchange rates for the US dollar. Increases in sales prices for
clams, sea scallops and lobster contributed to the increase in sales.
Reductions in available supply for inshore shrimp partially offset the increase in sales.
Sales were positively impacted by $1.5 million in the fourth quarter of 2014 as a result of foreign exchange rates as average
rates for the US dollar strengthened against the Canadian dollar. Average foreign exchange rates for the US dollar increased by
8.4% to 1.138 in the fourth quarter of 2014.
Canada
Canada is a large market for lobster, scallops and coldwater shrimp.
Sales within Canada decreased $0.6 million, or 4.5%, primarily as a result of reductions in available supply for scallops, as
product was sold to other higher yielding markets. Lower catch rates for Argentine scallops also contributed to the decrease
in sales.
Strong market demand increased sales volumes for clams and sales prices for scallops, clams and lobster partially offsetting
the decline in sales.
1 Refer to discussion on risks and uncertainties
Clearwater Seafoods Incorporated 2014 Annual Report
37
Management’s Discussion and Analysis
Sales by species1
In 000’s of Canadian dollars
13 weeks ended December 31
Scallops
Coldwater shrimp
Clams
Lobster
Ground fi sh and other
Crab
$
2014
41,285
31,448
26,156
20,169
440
—
$
2013
45,998
27,653
18,805
18,102
436
18
$
Change
(4,713)
3,795
7,351
2,067
4
(18)
$
119,498
$
111,012
$
8,486
%
(10.2)
13.7
39.1
11.4
0.9
(100.0)
7.6
Sales increased $8.5 million, or 7.6%, for the fourth quarter of 2014 as a result of strong market demand that increased sales
prices for of the majority of species, in particular scallops, clams and shrimp. An increase in sales volumes for clams from higher
catch rates also contributed to the increase in sales.
This was partially offset by lower volumes of Argentine scallops due to lower catch rates and changes in sales mix for clams to
products with lower average sales prices.
Cost of goods sold
In 000’s of Canadian dollars
13 weeks ended December 31
Harvesting and procurement
Manufacturing
Transportation
Depreciation
Administration
$
2014
64,822
9,118
5,598
6,483
3,626
$
2013
60,419
8,267
5,548
7,161
3,989
$
Change
4,403
851
50
(678)
(363)
$
89,647
$
85,384
$
4,263
%
7.3
10.3
0.9
(9.5)
(9.1)
5.0
Cost of goods sold increased $4.3 million or 5.0% to $89.6 million primarily as a result of an increase in harvesting and
procurements costs.
Harvesting and procurement include all costs incurred in the operation of the vessels including labour, fuel, repairs and
maintenance, fi shing gear supplies, other costs and fees plus procured raw material costs for lobster, shrimp, scallops and
crab. Excluding the increase in costs due to higher sales volumes, higher harvesting costs per pound for scallops and higher
shore prices per pound for lobster and cooked and peeled shrimp increased the harvesting and procurement costs for the
fourth quarter of 2014.
This was partially offset by lower harvesting costs for clams as a result of higher catch rates and changes in sales mix for
products with lower costs.
Fuel costs for our vessels remained consistent for the fourth quarter of 2014. Average fuel prices for the fourth quarter of 2014
were $0.87 per litre. Clearwater’s vessels used approximately 28.4 million litres of fuel in 2014. Based on 2014 fuel consumption,
a one-cent per litre change in the price of fuel would impact harvesting costs by approximately $0.2 million.
Please note that Clearwater uses Marine Diesel in its harvesting operations, the price of which does not correlate closely to
publically available measures such the price of a barrel of oil. This is due to a number of factors including but not limited to
the nature of the fuel used, the geographic locations in which Clearwater purchases fuel and the currency in which Clearwater
purchases fuel.
Administrative overheads include salaries and benefi ts, professional and consulting fees and management fees attributable to
the harvesting and production of goods. Refer to administrative and selling section for further information.
1 Refer to discussion on risks and uncertainties
38
Clearwater Seafoods Incorporated 2014 Annual Report
Gross margin
Gross margin as a percentage of sales improved from 23.1% in the fourth quarter of 2013 to 25.0% for the same period of 2014,
primarily as a result of strong demand that provided higher sales prices for the majority of species and higher catch rates for
clams also impacted margins positively.
Gross margin was also positively impacted by higher average foreign exchange primarily due to the strengthening of the
US dollar against the Canadian dollar. The net impact on sales from all foreign exchange volatility was an increase in sales and
gross margins of $2.9 million.
13 weeks ended December 31
2014
Average
rate realized
1.138
1.419
0.010
0.191
1.799
% sales
39.1%
22.0%
9.9%
4.5%
5.3%
19.2%
100.0%
% sales
44.0%
25.8%
8.3%
2.8%
3.3%
15.8%
100.0%
2013
Average
rate realized
1.050
1.443
0.010
0.192
1.710
Currency
US dollars
Euros
Japanese Yen
Danish Kroner
UK pounds
Canadian dollar and other
Administrative and selling
In 000’s of Canadian dollars
13 weeks ended December 31
Salaries and benefi ts
Share-based incentive compensation
$
2014
8,026
2,928
$
2013
8,151
2,913
$
Employee compensation
10,954
11,064
Consulting and professional fees
Other
Selling costs
Travel
Reorganization costs
Occupancy
Allocation to cost of goods sold
2,089
1,041
764
719
133
409
(3,105)
1,526
1,619
1,111
665
0
363
(3,053)
$
13,004
$
13,295
$
Change
(125)
15
(110)
563
(578)
(347)
54
133
46
(52)
(291)
Administrative and selling remained consistent with the fourth quarter of 2013.
Share-based incentive compensation is primarily driven by changes in Clearwater’s share price, performance against
Clearwater’s peer group and the number of share based grants outstanding. Although there were more grants outstanding in
2014, this was offset by a lower change in the share price in the fourth quarter of 2014 as compared to the fourth quarter of 2013.
Consulting and professional fees include operations management, legal, audit and accounting, insurance and other specialized
consulting services. Costs vary period to period based upon business requirements.
Other includes a variety of administrative expenses such as communication, service fees, depreciation, gains or losses, all of
which will vary from year to year. The largest portion of the expenditures in 2014 relates to a write down on goodwill related to
non-core species.
Selling costs include advertising, marketing, trade shows, samples, product development and bad debt expenses.
The allocation to cost of goods sold refl ects costs that are attributable to the production of goods and are allocated on a
proportionate basis based on production volumes.
Clearwater Seafoods Incorporated 2014 Annual Report
39
Change
in rate
8.4%
-1.7%
0.0%
-0.5%
5.2%
%
(1.5)
0.5
(1.0)
36.9
(35.7)
(31.2)
8.1
0.0
12.7
1.7
(2.2)
Management’s Discussion and Analysis
Finance costs
In 000’s of Canadian dollars
13 weeks ended December 31
Interest and bank charges
Amortization of deferred fi nancing charges and accretion
Interest
Fair value adjustment on convertible debentures and embedded derivative
Foreign exchange on debt and working capital
$
$
2014
4,288
203
4,491
(451)
10,109
2013
3,657
195
3,852
(1,009)
5,455
$
14,149
$
8,298
Interest increased during the fourth quarter of 2014 due to higher average balances outstanding, in part due to higher exchange
rates on U.S. denominated debt.
The fair value adjustment on the convertible debentures and embedded derivatives represents the change in the estimated
fair values of these instruments.
Foreign exchange1 on long term debt and working capital
In 000’s of Canadian dollars
13 weeks ended December 31
Realized loss (gain)
Working capital and other
Unrealized loss (gain)
Foreign exchange on long term debt and working capital
Mark-to-market on interest swaps and caps
2014
2013
$
(134)
$
(2,449)
(134)
(2,449)
8,894
1,349
10,243
7,898
6
7,904
$
10,109
$
5,455
Foreign exchange losses1 increased by $4.7 million from a loss of $5.5 million in the fourth quarter of 2013 to a loss of
$10.1 million for the same period in 2014. The increase was primarily a result of non-cash unrealized gains on the translation
of the $196.8 million US dollar denominated debt as the US dollar strengthened against the Canadian dollar during the fourth
quarter of 2014 and an increase in non-cash mark to market losses on $100 million US dollar of interest rate swaps/caps that
were entered into during the year. These arrangements are marked-to-market through profi t and loss.
Losses1 on forward contracts
In 000’s of Canadian dollars
13 weeks ended December 31
Losses (gains) on forward contract derivatives
Realized loss
Unrealized (gain)
2014
2013
$
$
1,894
280
$
1,431
2,949
2,174
$
4,380
Losses on forward contracts1 declined $2.2 million to $2.2 million primarily as a result of a reduction in unrealized losses on
forward exchange contracts outstanding at the end of the quarter.
Clearwater’s hedging program is designed to enable Clearwater to remove uncertainty regarding exchange rates on sales
receipts by locking in up to 75% of annual net foreign exchange exposure. Clearwater does this by entering into a series of
foreign exchange contracts that mature throughout the fi scal year and that provide for a fi xed exchange rate on a portion of sales
1 Refer to discussion on risks and uncertainties
40
Clearwater Seafoods Incorporated 2014 Annual Report
receipts. In a rising exchange rate environment such as the one we are currently in where spot rates are higher than contract
rates, Clearwater realizes higher exchange rates on sales but it is required to remit the excess of the spot rate received on sales
receipts over the contract rate to the counterparty on the portion of sales that it has hedged.
Should the current environment of a stronger US dollar and Euro versus the Canadian dollar persist it would have a positive
impact on 2015 sales but the hedging program would offset a portion of those gains and reduce the positive impact on adjusted
EBITDA. However, looking forward to 2015, Clearwater would realize the benefi t of such higher rates as hedging contracts that
it is entering now are at rates closer to current spot rates.
Other income
In 000’s of Canadian dollars
13 weeks ended December 31
Share of earnings of equity-accounted investee
Royalties, interest and other fees
Other fees
$
2014
(615)
(166)
(841)
$
2013
(528)
(226)
(910)
$
(1,622)
$
(1,664)
Royalties, interest and other fees includes income related to quota rental, commissions, processing fees and other miscellaneous
income and expense that vary based upon the operations of the business.
Research and development
Research and development relates to new technology and research into ocean habitats and fi shing grounds. Research and
development can vary year to year depending on the scope, timing and volume of research completed. Clearwater’s business
plans expect an increase in investment in research and development.
Income taxes
Income taxes primarily relate to taxable subsidiaries.
In the fourth quarter of 2014 Clearwater’s utilized $0.8 million of its deferred tax asset by utilizing loss carryforwards to reduce
income that would have otherwise been subject to tax.
Earnings attributable to non-controlling interest
Non-controlling interest relates to minority share of earnings from Clearwater’s majority investments in subsidiaries in Argentina,
Nova Scotia and Newfoundland and Labrador.
The increase in earnings attributable to non-controlling interest of $1.3 million for the fourth quarter of 2014 relates primarily to
strong market demand that increased sales prices for turbot and shrimp.
It is important to note that the earnings attributable to non-controlling interest relates to Clearwater’s interest in a partnership
and as such taxes are included in earnings attributable to shareholders, whereas the earnings attributable to non-controlling
interest are not tax effected.
For those investors that would like to understand the breakdown of adjusted EBITDA attributable to non-controlling interest and
shareholders please refer to the reconciliation of adjusted EBITDA within the non-IFRS measures, defi nitions and reconciliations
section of the MD&A.
Earnings attributable to shareholders
Earnings attributable to shareholders of Clearwater declined $0.9 million to a loss of $4.0 million for the fourth quarter of 2014
primarily as a result of an increase in non-cash losses from the translation of the US dollar denominated debt as the US dollar
strengthened against the Canadian dollar and higher deferred tax expense.
Adjusted earnings attributable to shareholders
To assist readers in estimating our earnings we have included a calculation of adjusted earnings. Management believes that in
addition to earnings and cash provided by operating activities, adjusted earnings is a useful supplemental measure from which
to determine Clearwater’s earnings from operations and ability to generate cash available for debt service, working capital,
capital expenditures, income taxes and dividends.
Clearwater Seafoods Incorporated 2014 Annual Report
41
Management’s Discussion and Analysis
For those readers that would like to understand the calculation of adjusted earnings please refer to the reconciliation of adjusted
earnings within the non-IFRS measures, defi nitions and reconciliations section of the MD&A.
In 2014 adjusted earnings attributable to shareholders increased $0.1 million, to $9.6 million primarily as a result of improvements
in gross margin of $4.2 million. The improvements in adjusted earnings were partially offset by an increase realized foreign
exchange losses on working capital and foreign exchange contracts.
In 2014 adjusted earnings per share decreased from $0.19 per share in the fourth quarter of 2013 to $0.17 per share in the
same period of 2014. The decrease in earnings per share was a result of an increase in the number of outstanding share due
to a share issue completed early in 2014, partially offset by an improvement in adjusted earnings.
O U T L O O K
Global demand for seafood is outpacing supply, creating favorable market dynamics for vertically integrated producers such
as Clearwater which have 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 continue to lag behind the growing global demand. This supply-demand
imbalance has created a marketplace 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.
We begin 2015 with the expectation that the fi ve-year strategic plan goals we set out to accomplish at the beginning of 2012 are
now within our reach – 1 full year ahead of our original timetable! 2015 will also be the year in which we lay the foundation for our
next fi ve year strategic plan (2016–2020) which will continue to focus on executing with excellence against our six core strategies.
Our six core strategies are:
• Expanding Access to Supply – In 2015, we will welcome a third vessel to our clam fl eet and expand our harvest capacity
by an incredible 60%. We will also continue to actively invest in access to supply including; acquisitions, joint ventures, as
well as harvesting and royalty contracts.
• Target Profi table and Growing Markets, Channels and Customers – We continue to benefi t from strong and increasing
global demand for sustainably harvested, safe, traceable and premium wild seafood. In 2015, we will continue to advance
our go-to-market approach in both traditional and new markets. This two—pronged approach takes advantage of our “on
trend” health, sustainability, traceability, quality credentials in developed markets as well as the rapid urbanization, rising
incomes and increased seafood consumption of emerging markets to literally “supercharge” our growth.
• Increase Margins by Improving Price Realization and Cost Management – In 2015 we will fully implement our fi rst “ocean
to shelf” global supply chain. We have ambitious expectations to drive top and bottom line growth, capturing savings in
global supply chain effi ciencies and improved productivity.
• Pursue and Preserve the Long Term Sustainability of Resources on Land and Sea – As a leading global supplier of wild-
harvested seafood – sustainability remains at the core of our business and our mission. Investing in the long-term health
and the responsible harvesting of the oceans and there bounty is every harvester’s responsibility and the only proven way to
ensure access to a reliable, stable and long-term supply of seafood. Sustainability is not just good business, like innovation
it’s in our DNA. That’s why Clearwater has been recognized by the Marine Stewardship council (MSC) and WWF as a leader
in sustainable harvesting for wild fi sheries and how Clearwater can offer the widest selection of sustainably-certifi ed species
of any seafood harvester worldwide.
• Build Organizational Capability, Capacity and Engagement – This level of performance can only be achieved by a talented
and engaged global workforce at sea and on land, employing well communicated strategies and plans with measurable
objectives. It also requires an enduring commitment to invest in our people.
Looking forward, we will no longer disclose future targets for sales growth, free cash fl ow growth, return on assets and leverage
as we believe the track record we have achieved on these measures over the past four years provides a reasonable base for
users of our fi nancial reports to form educated estimates of possible future performance.
42
Clearwater Seafoods Incorporated 2014 Annual Report
R I S K S A N D U N C E R TA I N T I E S
The performance of Clearwater’s business is susceptible to a number of risks which affect income, liquidity and cash fl ow,
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, which is available on Sedar at www.sedar.com as well as Clearwater’s website at
www.clearwater.ca.
Foreign exchange risk
Our fi nancial results are subject to volatility as a result of foreign exchange rate fl uctuations.
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, fl uctuations in the foreign exchange rates
of these currencies can have a material impact on our fi nancial condition and operating results. In addition Clearwater has a
subsidiary which operates in the offshore scallop fi shery 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-specifi c 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 fl uctuations.
(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 fl ows through derivative contracts.
In 2014 approximately 46.5% of Clearwater’s sales were denominated in US dollars.
Based on 2014 sales and excluding the impact of its’ hedging program,
• a change of 0.01 in the U.S. dollar rate converted to Canadian dollars would result in a $1.9 million change in sales and
gross profi t.
• a change of 0.01 in the Euro rate as converted to Canadian dollars would result in a $0.6 million change in sales and
gross profi t.
• A change of 0.001 in the Yen rate as converted to Canadian dollars would result in a change of $4.2 million in sales and
gross profi t.
As of February 25, 2015 Clearwater had forward exchange contracts to be settled in 2015 of:
• US dollar $103.6 million at an average rate of 1.10;
• 3.2 billion Yen at an average rate of .010; and
• 47.6 million Euro at an average rate of 1.46.
The 2015 US dollar forwards include US dollars $35.6 million of participating forwards which provide that to the extent spot
rates are higher than the contracted rates of approximately 1.10, the contract rate will be adjusted by approximately to 50.0%
of the excess.
The purpose of these contracts is to give certainty to Clearwater on the exchange rates that it expects to receive on a portion of
our foreign currency sales. The foreign exchange contracts effectively adjust the cash proceeds received on sales receipts to the
rates that Clearwater planned for and contracted for as part of this annual planning cycle and its foreign exchange management
program. When spot exchange rates are above contract rates at the date of maturity of the contracts Clearwater realizes a loss
and conversely, when spot exchange rates are lower it realizes a gain. At the same time, given that Clearwater only hedges to
75% of its net exposures and that higher or lower spot exchange rates are refl ected in sales, any losses or gains on contracts
are more than offset by the impact on sales.
Clearwater Seafoods Incorporated 2014 Annual Report
43
Management’s Discussion and Analysis
Political risk
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 risks, including fl uctuations in foreign
currency, exchange rates and controls, expropriation of our assets, nationalization, renegotiation, forced divestiture, modifi cation
or nullifi cation 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.
For a period of time during 2012 Clearwater was unable to repatriate dividends from Argentina. However, Clearwater received
approvals and paid approximately $12.0 million Canadian in 2013. Clearwater did not request for dividends to be paid in 2014
as it was in the process of converting a vessel for use in its’ Argentine operations. There can be no assurances that Clearwater
will continue to be able to repatriate dividends from Argentina in the future.
To compensate for the potential restriction on dividend payouts Clearwater put in place domestic loan fi nancing in Argentina
related to the purchase of a replacement vessel. The replacement of this vessel will necessitate that some funds be used for the
related domestic loan payments, thus alleviating the need for any material dividend payments for the short term.
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.
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 fi nancial assets that are surplus to our needs to operate the business outside of Canada.
We do not carry fi nancial 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.
Contingent liability
Clearwater has received a claim regarding alleged rights to certain intellectual property in the amount of $6 million. Clearwater
has agreed to arbitration; however, Clearwater does not believe there to be a material liability relating to the dispute.
In addition, 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 fi nancial position.
Resource supply risk
A material change in the population and biomass of scallop, lobster, clam, or coldwater shrimp stocks in the fi sheries 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 scientifi c
survey of the resource. The population and biomass of shellfi sh stocks are subject to natural fl uctuations 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 fl uctuations in the population and biomass of the shellfi sh stocks we harvest and process, and we
therefore may not be able to engage in effective measures to alleviate the adverse effects of these fl uctuations. In addition, the
population models utilized by scientists evaluating the fi sheries 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.
44
Clearwater Seafoods Incorporated 2014 Annual Report
The source of all Clearwater’s supply of products comes from fi sheries in Canada and Argentina. The governments of Canada
and Argentina set the annual TAC for each species by reviewing scientifi c 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 confl icting positions 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 fi nancial condition and results of operations.
Resource supply risk is managed through adherence with government policies and regulations related to fi shing in Canada and
Argentina and Clearwater’s investment in science and technology, which enables Clearwater to understand the species that
it harvests. Clearwater has invested in projects with the scientifi c community, such as ocean fl oor 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 certifi cation of all of our core species demonstrates that the resources that Clearwater harvests meet the leading global
standard for sustainable fi sheries management practice. Clearwater further mitigates the risk associated with resource supply
and competition through the diversifi cation across species.
Other risks
Clearwater is implementing a new enterprise resource planning system (“ERP”) to support improved decision making capabilities.
We recognize that the integrity and reliability of information in all its forms are critical. Inaccurate, incomplete or unavailable
information could lead to incorrect fi nancial reporting, and poor decision making. The implementation of the ERP and all major
information technology projects are managed by a change management and governance process. Clearwater has an ERP
team staffed with knowledgeable internal and external resources that is responsible for implementing the various key initiatives.
For further disclosure of additional risk factors please refer to the Annual Information Form.
C R I T I C A L A C C O U N T I N G P O L I C I E S
Clearwater’s critical accounting policies are those that are important to the portrayal of Clearwater’s fi nancial 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
fl ows 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 fi nancial statements for a complete listing of critical accounting policies and estimates used in
the preparation of the consolidated fi nancial statements.
Financial reporting controls and procedures
Clearwater has established and maintains disclosure controls and procedures over fi nancial reporting, as defi ned under the rules
adopted by the Canadian Securities Regulators in instrument 52-109. The Chief Executive Offi cer (“CEO”) and Chief Financial
Offi cer (“CFO”) have evaluated the design and effectiveness of Clearwater’s disclosure controls and procedures as of December 31,
2014 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 fi lings.
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 fi nancial reporting. Clearwater’s internal controls over fi nancial
reporting are designed to provide reasonable assurance regarding the reliability of fi nancial reporting and preparation of fi nancial
statements in accordance with International Financial Reporting Standards (“IFRS”).
Clearwater Seafoods Incorporated 2014 Annual Report
45
Management’s Discussion and Analysis
Management evaluated the design and effectiveness of Clearwater’s internal controls over fi nancial reporting as at December 31,
2014. 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 (2013)”. 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, 2014, Clearwater’s internal controls over fi nancial reporting are effective in providing reasonable
assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements in accordance with IFRS.
There have been no signifi cant changes in Clearwater’s internal controls over fi nancial reporting or other factors that occurred
during the period from September 28, 2014 to December 31, 2014, that have materially affected, or are reasonably likely to
materially affect the Company’s internal controls over fi nancial reporting.
Adoption of new and revised standards
The following IFRS standards have been recently issued by the IASB: Offsetting Financial Assets and Financial Liabilities –
Amendments to IAS 32, Recoverable Amount Disclosures for Non-Financial Assets – Amendments to IAS 36 and
IFRIC 21 – Levies.
Clearwater has adopted the following new and revised standards, along with any consequential amendments, effective January 1,
2014. These changes were made in accordance with the applicable transitional provisions.
Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities. These amendments clarify the meaning of ‘currently
has a legally enforceable right to set-off’ and the criteria for non-simultaneous settlement to qualify for offsetting. These
amendments had no impact on Clearwater.
Amendments to IAS 36 – Recoverable Amount Disclosures for Non-Financial Assets. These amendments remove the unintended
consequences of IFRS 13 Fair Value Measurement on the disclosures required under IAS 36 Impairment of Assets. In addition,
these amendments require disclosure of the recoverable amounts for the assets or cash-generating units (CGUs) for which an
impairment loss has been recognized or reversed during the period. These amendments have resulted in additional disclosures
relating to an impairment loss recognized during the year ended December 31, 2014. Refer to Note 10 in the condensed
consolidated interim fi nancial statements for additional disclosure.
IFRIC 21 – Levies. This Interpretation addresses the accounting for a liability to pay a levy if that liability is within the scope of
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. It also addresses the accounting for a liability to pay a levy
whose timing and amount is certain. There was no impact on Clearwater.
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 fi nancial statements as their effective dates fall within annual periods
beginning subsequent to the current reporting period.
Annual Improvements to IFRS (2010–2012) and (2011–2013) cycles
On December 12, 2013 the IASB issued narrow-scope amendments to a total of nine standards as part of its annual improvements
process. The IASB uses the annual improvements process to make non-urgent but necessary amendments to IFRS.
The Company intends to adopt these amendments in its fi nancial statements for the annual period beginning on January 1,
2015. The extent of the impact of adoption of the amendments has not yet been determined.
Business combination accounting for interests in a joint operation
(Amendments to IFRS 11)
The amendments require business combination accounting to be applied to acquisitions of interests in a joint operation that
constitute a business. The Company intends to adopt the amendments to IFRS 11 in its fi nancial statements for the annual
period beginning on January 1, 2016. The extent of the impact of adoption of the amendments has not yet been determined.
46
Clearwater Seafoods Incorporated 2014 Annual Report
IFRS 15 – Revenue from Contracts with Customers
The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at
a point in time or over time. The model features a contract-based fi ve-step analysis of transactions to determine whether, how
much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the
amount and/or timing of revenue recognized. The Company intends to adopt IFRS 15 in its fi nancial statements for the annual
period beginning on January 1, 2017. The extent of the impact of adoption of the standard has not yet been determined.
IFRS 9 Financial Instruments
IFRS 9 (2014) introduces new requirements for the classifi cation and measurement of fi nancial assets. Under IFRS 9 (2014),
fi nancial assets are classifi ed and measured based on the business model in which they are held and the characteristics of their
contractual cash fl ows. The standard introduces additional changes relating to fi nancial liabilities. It also amends the impairment
model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general
hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not
fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however
it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more
judgment to assess the effectiveness of a hedging relationship.
Special transitional requirements have been set for the application of the new general hedging model.
The Company intends to adopt IFRS 9 (2014) in its fi nancial statements for the annual period beginning on January 1, 2018.
The extent of the impact of adoption of the standard has not yet been determined.
Transfer of assets between an investor and its associate or joint venture
The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011),
in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The Company intends
to adopt these amendments in its fi nancial statements for the annual period beginning on January 1, 2016. The extent of the
impact of adoption of the amendments has not yet been determined.
Annual Improvements to IFRS (2012 –2014) cycle
On September 25, 2014 the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements
process. The Company intends to adopt these amendments in its fi nancial statements for the annual period beginning on
January 1, 2016. The extent of the impact of adoption of the amendments has not yet been determined.
Disclosure Initiative
On December 18, 2014 the IASB issued amendments to IAS 1 Presentation of Financial Statements as part of its major initiative
to improve presentation and disclosure in fi nancial reports. These amendments will not require any signifi cant change to current
practice, but should facilitate improved fi nancial statement disclosures. The Company intends to adopt these amendments
in its fi nancial statements for the annual period beginning on January 1, 2016. The extent of the impact of adoption of the
amendments has not yet been determined.
Related party transactions
Clearwater often transacts in the normal course of business with other related parties. The details are as follows for the year
ended December 31, 2014 and 2013:
Transactions with other related parties
Clearwater rents offi ce space to Clearwater Fine Foods Incorporated (“CFFI”) (the controlling shareholder of Clearwater) and
provides computer network support services to CFFI. Clearwater charges CFFI management and other fees for fi nance and
administration services provided to CFFI by certain Clearwater staff. These fees apportion the salaries and benefi t costs of the
individuals providing the services based on estimated time spent.
Clearwater Seafoods Incorporated 2014 Annual Report
47
Management’s Discussion and Analysis
Clearwater had the following transactions and balances with CFFI, for the period ended December 31, 2014 and December 31, 2013:
Opening balance due from CFFI
Management and other fees charged to CFFI
Rent and IT service fees charged to CFFI
Interest on intercompany account
Payments from CFFI
Other charges to (from) CFFI
$
Year ended
December
December
$
2014
1,524
—
184
56
(1,783)
50
2013
1,596
122
184
78
(466)
10
$
31
$
1,524
The amount due from CFFI is unsecured and due on demand. As such the account has been classifi ed as a current asset
included in prepaids and other. The balance bears interest at a rate of 5%.
In addition, Clearwater expensed approximately $0.04 million for vehicle leases for the year ended December 31, 2014
(December 31, 2013 – $0.07 million) and approximately $0.13 million for other services for the year ended December 31, 2014
(December 31, 2013 – $0.11 million) by companies related to its parent. The transactions are recorded at the exchange amount
and the balance due to these companies was $nil million as at December 31, 2014 (December 31, 2013 – $0.01 million).
Clearwater recorded sales, sales commissions and storage fees to a non-controlling interest holder in a consolidated partnership.
These sales, sales commissions and storage fees are at negotiated prices and are settled on normal trade terms. Sales for the
year ended December 31, 2014 are $6.7 million (December 31, 2013 – $1.2 million). Sales commissions for the year ended
December 31, 2014 are $2.4 million (December 31, 2013 – $2.0 million). Storage fees for the year ended December 31, 2014
are $1.4 million (December 31, 2013 – $1.7 million).
At December 31, 2014 Clearwater had a balance of $1.0 million (December 31, 2013 – $5.0 million), included in long term
receivables, for interest bearing loans made to a non-controlling interest shareholder in a subsidiary. In the fi rst quarter of
2014, Clearwater changed its presentation of advances to a non-controlling interest shareholder in a subsidiary. Advances as
at December 31, 2014 of $4.4 million (December 31, 2013 – $3.8 million) were rec lassifi ed from long term receivables to non-
controlling interest. These advances are now recorded as distributions to and repayments from a non-controlling shareholder
in a subsidiary.
During the year ended December 31, 2014, Clearwater incurred $0.02 million, in legal fees paid to a law fi rm in which a Director
of Clearwater is a partner (year ended December 31, 2013 – $0.03 million).
Commitments
In the normal course of business, Clearwater is obligated to make future payments, including contractual obligations for non-
derivative and derivative fi nancial instruments, operating leases and other commitments. The table includes undiscounted cash
fl ows of fi nancial liabilities, operating lease and other commitments, interest and principal cash fl ows based on the earliest date
on which Clearwater is required to pay. Since December 31, 2014, there have been no material changes to amounts presented
or expectations in the commitment schedule included in the 2014 annual MD&A.
48
Clearwater Seafoods Incorporated 2014 Annual Report
December 31, 2014
Interest – long-term debt
Principal repayments –
long-term debt
Total long-term debt
Trade and other payables
Operating leases and other
Derivative fi nancial
instruments – asset1
Derivative fi nancial
instruments – liability
Carrying
Amount
Total
Contractual
Cash Flow
2015
2016
2017
2018
2019
>2020
75,465
13,097
12,585
12,449
11,776
5,758
19,800
274,562
22,847
4,165
3,972
26,619 212,780
4,179
273,041
52,308
—
350,027
52,308
37,053
35,944
52,308
27,247
16,750
—
2,292
16,421
—
2,221
38,395 218,538
—
1,726
—
1,876
23,979
—
1,691
(5,312)
(5,312)
(5,312)
8,691
8,691
8,691
—
—
—
—
—
—
—
—
—
—
$
328,728 $
442,767 $
118,878 $ 19,042 $ 18,642 $ 40,271 $ 220,264 $ 25,670
S U M M A RY O F Q U A R T E R LY R E S U LT S
The following table provides historical data for the nine most recently completed quarters.
In 000’s of Canadian dollars
Fiscal 2014
Sales
Earnings (loss)
Earnings (loss) per share (“EPS”)
Diluted earnings (loss) per share1
Fiscal 2013
Sales
Earnings (loss)
Earnings (loss) per share (“EPS”)
Diluted earnings (loss) per share1
Fiscal 2012
Sales
Earnings (loss)
Earnings (loss) per share (“EPS”)
Diluted earnings (loss) per share1
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
77,771
(12,144)
(0.27)
(0.27)
68,297
(1,762)
(0.06)
(0.06)
70,878
(2,927)
(0.09)
(0.09)
$
$
$
113,403
18,850
0.30
0.30
95,368
(9,866)
(0.24)
(0.24)
84,926
(2,505)
(0.08)
(0.08)
$
$
$
134,069
2,959
(0.02)
(0.02)
113,982
27,224
0.48
0.47
101,553
17,618
0.30
0.27
$
$
$
119,498
130
(0.07)
(0.07)
111,012
(298)
(0.06)
(0.06)
92,945
10,518
0.17
0.15
1 Diluted earnings (loss) per share are anti-dilutive for all periods prior to 2014 except for September 28, 2013, September 29, 2012, and December 31,
2012. In the third quarter of 2013, the outstanding convertible debentures were redeemed.
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 highest revenues in the third quarter of each year.
Earnings for the second quarter of 2013 include $3.3 million in future tax recovery and $9.2 million in debt settlement fees and
write-downs of deferred fi nancing charges related to the June 2013 refi nancing.
Earnings for the fourth quarter of 2012 included an $8 million future tax recovery.
Clearwater Seafoods Incorporated 2014 Annual Report
49
Management’s Discussion and Analysis
N O N - I F R S M E A S U R E S , D E F I N I T I O N S A N D R E C O N C I L I AT I O N S
Gross margin
Gross margin consists of sales less cost of goods sold which includes 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 fl ows.
Adjusted EBITDA is defi ned as EBITDA excluding items such as severance charges, gains or losses on property, plant and
equipment, gains or losses on quota sales, refi nancing and reorganization costs. In addition recurring accounting gains and
losses on foreign exchange (other than realized gains and losses on forward exchange contracts), have been excluded from
the calculation of adjusted EBITDA. Unrealized gains and losses on forward exchange contracts relate to economic hedging on
future operational transactions and by adjusting for them, the results more closely refl ect the economic effect of the hedging
relationships in the period to which they relate. In addition adjustments to stock based compensation have been excluded from
adjusted EBITDA as they do not relate to the general operations of the business.
Reconciliation of earnings to adjusted EBITDA for the 13 weeks ended, the years ended December 31, 2014 and 2013 is
as follows:
Earnings (loss)
Add (deduct):
Income taxes
Taxes and depreciation
for equity investment
Depreciation and amortization
Interest on long-term debt
and bank charges
Earnings before interest, taxes,
depreciation and amortization
Add (deduct) other items:
Unrealized foreign exchange
and derivative loss (income)
Fair market value on long term debt
Realized foreign exchange
loss (gain) on working capital
Restructuring and refi nancing costs
Stock based compensation
Loss (gain) on disposal of assets
and quota
13 weeks ended
December 31
Year ended
December 31
2014
2013
2014
2013
2012
$
130
$
(298)
$
9,797
$
15,298
$
22,704
1,401
280
6,563
987
5,949
(8,101)
(5,019)
237
7,261
1,265
24,544
951
24,171
—
22,976
4,491
3,852
15,716
17,310
21,506
$
12,865
$
12,039
$
57,271
$
49,629
$
62,167
10,523
(451)
(134)
130
2,928
10,853
(1,009)
(2,449)
—
2,913
17,288
(1,229)
1,172
1,981
8,948
11,493
(1,710)
3,586
10,642
5,861
(3,476)
2,898
1,359
6,964
2,331
—
—
1,937
(398)
—
Adjusted EBITDA
$
25,861
$
22,347
$
87,368
$
79,103
$
72,243
Adjusted EBITDA attributed to:
Non-controlling interests
Shareholders of Clearwater
$
4,763
21,098
$
3,847
18,500
$
16,295
71,073
$
14,021
65,082
12,848
59,395
$
25,861
$
22,347
$
87,368
$
79,103
$
72,243
50
Clearwater Seafoods Incorporated 2014 Annual Report
Adjusted earnings attributable to shareholders
To assist readers in estimating our earnings we have included a calculation of adjusted earnings. Management believes that in
addition to earnings and cash provided by operating activities, adjusted earnings is a useful supplemental measure from which to
determine Clearwater’s earnings from operations and ability to generate cash available for debt service, working capital, capital
expenditures, income taxes and dividends.
Reconciliation of earnings to adjusted earnings for the 13 weeks ended, the years ended December 31, 2014 and 2013 is
as follows:
Reconciliation of earnings to adjusted earnings
Earnings (loss)
Deferred tax assets booked related to prior years
Restructuring and refi nancing costs
Stock based compensation
Unrealized foreign exchange
Fair value on long term debt
13 weeks ended
December 31
Year ended
December 31
2014
2013
2014
2013
$
130
—
130
2,928
10,523
(451)
13,130
$
$
(298)
—
—
2,913
10,853
(1,009)
12,757
9,797
(2,575)
1,981
8,948
17,288
(1,229)
24,413
$
15,298
(15,800)
10,642
5,861
11,493
(1,710)
10,486
Adjusted earnings
$
13,260
$
12,459
$
34,210
$
25,784
Adjusted earnings attributable to:
Non-controlling interests
Shareholders
3,646
9,614
2,965
9,494
11,639
22,571
10,086
15,698
$
13,260
$
12,459
$
34,210
$
25,784
Adjusted earnings per share:
Weighted average of shares outstanding
Earnings per share for shareholders
54,978
0.17
50,949
0.19
54,787
0.41
50,949
0.31
Reconciliation of adjusted earnings to adjusted EBITDA
Adjusted earnings
$
13,260
$
12,459
$
34,210
$
25,784
Add (subtract)
Cash and deferred taxes
Depreciation and amortization
Interest on long term debt and bank charges
Taxes and depreciation on equity investment
Realized foreign exchange on working capital
Gain on disposal of assets
1,401
6,563
4,491
280
(134)
—
12,601
987
7,261
3,852
237
(2,449)
—
9,888
8,524
24,544
15,716
1,265
1,172
1,937
53,158
7,699
24,171
17,310
951
3,586
(398)
53,319
Adjusted EBITDA1
$
25,861
$
22,347
$
87,368
$
79,103
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
Clearwater Seafoods Incorporated 2014 Annual Report
51
Management’s Discussion and Analysis
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 fl ows.
Current leverage calculations are calculated by dividing the current and preceding annual adjusted EBITDA by the total debt on
the balance sheet adjusted for cash reserves.
Reconciliation of adjusted EBITDA to debt (net of deferred fi nancing charges) for the years ended December 31, 2014 and 2013
is as follows:
In 000’s of Canadian dollars
As at December 31
Adjusted EBITDA1
Debt (net of deferred fi nancing charges of $0.6 million
(December 31, 2013 – $0.6 million))
Less cash
Net debt
Leverage
2014
2013
2012
$
87,368
$
79,103
$
72,243
273,041
(47,598)
257,325
(46,793)
253,791
(41,504)
$
225,443
$
210,532
$
212,287
2.6
2.7
2.9
We have provided leverage calculations in the past to assist readers in comparing our leverage levels to our peers. Given that
our leverage levels are in-line or below our peers we do not feel this measure is as critical to disclose. However, we understand
that readers may wish to have leverage measures to assist them in their assessment of our liquidity. As a result, we will include
a revised leverage measure going forward that is more appropriate for this purpose – one that is based on Clearwater’s share
of adjusted EBITDA, debt and cash balances.
The revised calculation excludes the minority share of our cash and adjusted EBITDA and is calculated as follows for the years
ended December 31, 2014 and 2013:
In 000’s of Canadian dollars
As at December 31
Adjusted EBITDA1
Debt (net of deferred fi nancing charges of $0.6 million
(December 31, 2013 – $0.6 million))2
Less cash3
Net debt
Leverage
2014
2013
$
71,073
$
65,082
272,554
(40,712)
256,498
(38,510)
$
231,842
$
217,988
3.3
3.3
2 Debt was reduced by the share attributable to non-controlling shareholders for which Clearwater does not provide a guarantee. This included
$0.5 million in 2014 and $0.8 million in 2013.
3 Cash was reduced by the share attributable to non-controlling shareholders of $6.9 million in 2014 and $8.3 million in 2013.
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
52
Clearwater Seafoods Incorporated 2014 Annual Report
Free cash fl ows
Free cash fl ow 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
fl ow 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 fl ow 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 fl ows.
Free cash fl ow is defi ned as cash fl ows 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 fl ow include discretionary items such as debt refi nancing and repayments changes in the
revolving loan and discretionary fi nancing and investing activities.
Reconciliation for the 13 weeks and year ended December 31, 2014 and 2013 is as follows:
13 weeks ended
December 31
Year ended
December 31
2014
2013
2014
2013
2012
$
25,861
$
22,347
$
87,368
$
79,103
$
72,243
(4,288)
(375)
(789)
(3,657)
(270)
514
(14,938)
(2,585)
(5,295)
(16,317)
(1,812)
(863)
(20,346)
(1,693)
(12,448)
Adjusted EBITDA1
Less:
Cash Interest
Cash taxes
Other income and expense items
Operating cash fl ow before changes
in working capital
20,409
18,934
64,550
60,111
37,756
Changes in working capital
from operating activities
27,571
Cash fl ows from operating activities
47,980
Other sources (uses) of cash:
Purchase of property, plant, equipment,
quota and other assets
Proceeds on disposal of fi xed assets
Designated borrowingsA
Scheduled payments on long-term debt
Dividends received from joint venture
Distribution to non-controlling interests
(12,802)
—
11,017
(6,205)
—
(2,780)
29,816
48,750
3,476
68,026
(5,448)
54,663
8,184
45,940
(11,182)
—
6,231
(1,366)
—
(3,707)
(83,309)
5
63,431
(8,360)
1,490
(10,427)
(23,813)
978
7,700
(3,233)
1,240
(11,414)
(16,572)
—
2,056
(6,327)
1,740
(9,491)
Free cash fl ow1
$
37,210
$
38,726
$
30,856
$
26,121
$
17,346
Add/(less):
Other debt borrowings (repayments)
of debt, use of cashB
Issuance of equity
Other investing activities
Other fi nancing activities
(11,054)
—
(482)
(1,649)
(7,505)
—
(386)
—
(60,398)
32,487
1,805
(4,397)
(20,759)
—
(717)
—
13,584
—
1,358
—
Change in cash fl ows for the period
$
24,025
$
30,835
$
353
$
4,645
$
32,288
A Designated borrowings relate to capital projects for which there is long-term fi nancing and therefore they will not be fi nanced with operating cash
fl ows. For 2014, this includes a conversion of a vessel for Argentina, the addition of a third clam vessel and a late life refi t on a shrimp vessel. For
the purpose of free cash fl ow calculations the amount invested (up to the total amount of the related fi nancing) during the period on these projects is
backed out of the calculation of free cash fl ows irrespective of the timing of the related borrowing.
B Other debt borrowings (repayments) of debt, use of cash for year to date 2014 includes $63.4 million of cash invested in designated capital projects.
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
Clearwater Seafoods Incorporated 2014 Annual Report
53
Management’s Discussion and Analysis
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 effi ciency 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 defi ned as the ratio of adjusted earnings before interest and taxes (“EBIT”) to average total assets including
all working capital assets.
The calculation of adjusted earnings before interest and taxes to total assets for the rolling twelve months ended December 31,
2014 and December 31, 2013 is as follows:
In 000’s of Canadian dollars
As at December 31
Adjusted EBITDA1
Depreciation and amortization
Adjusted earnings before interest and taxes
Total Assets
$
2014
87,368
23,753
63,615
$
2013
79,103
24,167
54,936
$
2012
72,243
22,475
49,768
$
464,397
$
410,796
$
410,789
13.7%
13.4%
12.1%
1 Refer to discussion on non-IFRS measures, defi nitions and reconciliations
54
Clearwater Seafoods Incorporated 2014 Annual Report
KPMG LLP
Chartered Accountants
Suite 1500 Purdy’s Wharf Tower 1
1959 Upper Water Street
Halifax, NS B3J 3N2
Canada
Telephone (902) 492-6000
(902) 492-1307
Fax
www.kpmg.ca
Internet
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, 2014 and December 31,
2013, the consolidated statements of earnings, other 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 audits 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
the consolidated financial statements present
In our opinion,
the
consolidated financial position of Clearwater Seafoods Incorporated as at December 31, 2014 and December
31, 2013, and its consolidated financial performance and its consolidated cash flows for the years then ended
in accordance with International Financial Reporting Standards.
in all material respects,
fairly,
Chartered Accountants
February 25, 2015
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.
Clearwater Seafoods Incorporated 2014 Annual Report
55
Clearwater Seafoods Incorporated
Management’s Statement of Responsibility for Financial Reporting
The consolidated fi nancial statements and all related fi nancial information contained in the 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 fi nancial statements, the notes to the consolidated
fi nancial statements, and other fi nancial information contained in the annual 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 refl ected in the
accompanying consolidated fi nancial 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 fi nancial information.
The Board of Directors of Clearwater Seafoods Incorporated is responsible for ensuring that management fulfi lls its responsibilities
for fi nancial 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 fi nancial
statements and to recommend approval of the consolidated fi nancial statements to the Board.
KPMG LLP, the independent auditors appointed by the Board, have audited Clearwater Seafoods Incorporated’s consolidated
fi nancial 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 fi ndings as to the integrity of
the fi nancial reporting process.
February 25, 2015
I A N S M I T H
R O B E R T W I G H T
Chief Executive Offi cer
Vice-President, Finance and Chief Financial Offi cer
56
Clearwater Seafoods Incorporated 2014 Annual Report
Clearwater Seafoods Incorporated
Consolidated Statements of Financial Position
(In thousands of Canadian dollars)
As at December 31
A S S E T S
Current assets
Cash
Trade and other receivables (Note 5)
Inventories (Note 6)
Prepaids and other (Note 7)
Derivative fi nancial instruments (Note 12)
Non-current assets
Long-term receivables (Note 8)
Other assets
Property, plant and equipment (Note 9)
Licenses and fi shing rights (Note 10)
Investment in equity investee (Note 21)
Deferred tax assets (Note 17(c))
Goodwill (Note 10)
T O T A L A S S E T S
L I A B I L I T I E S
Current liabilities
Trade and other payables
Income tax payable (Note 17)
Current portion of long-term debt (Note 11)
Derivative fi nancial instruments (Note 12)
Non-current liabilities
Long-term debt (Note 11)
Deferred tax liabilities (Note 17(c))
S H A R E H O L D E R S ’ E Q U I T Y
Share capital (Note 13)
Retained earnings
Cumulative translation account
Non-controlling interest (Note 20)
T O T A L S H A R E H O L D E R S ’ E Q U I T Y A N D L I A B I L I T I E S
See the accompanying notes to the consolidated fi nancial statements
Subsequent event (Note 13)
Approved by the Board:
J O H N R I S L E Y
C O L I N M A C D O N A L D
Director
Chairman
2014
2013
$
47,598
49,812
40,056
5,508
5,312
$
46,793
43,702
46,987
6,291
1,466
148,286
145,239
3,872
288
186,017
98,742
6,198
15,356
5,638
316,111
6,656
296
126,451
101,467
4,701
18,943
7,043
265,557
$
464,397
$
410,796
$
$
52,308
1,367
22,847
8,691
85,213
250,194
1,003
$
40,760
648
14,297
6,869
62,574
243,028
1,453
251,197
244,481
97,267
11,084
(5,326)
103,025
24,962
$
64,780
19,762
(5,470)
79,072
24,669
127,987
464,397
$
103,741
410,796
$
Clearwater Seafoods Incorporated 2014 Annual Report
57
Clearwater Seafoods Incorporated
Consolidated Statements of Earnings
(In thousands of Canadian dollars)
Year ended December 31
Sales
Cost of goods sold
Administrative and selling costs
Net fi nance costs (Note 14)
Losses on forward contracts (Note 12 (e))
Other income (Note 15)
Research and development
Earnings before income taxes
Income tax expense (recovery) (Note 17)
Earnings for the year
Earnings (loss) attributable to:
Non-controlling interest
Shareholders of Clearwater
Basic and diluted (loss) earnings per share (Note 16)
See the accompanying notes to the consolidated fi nancial statements
2014
2013
$
444,742
341,908
$
388,659
301,291
102,834
48,252
37,829
4,047
(5,031)
1,991
87,088
15,746
5,949
87,368
39,005
33,935
8,812
(3,240)
1,659
80,171
7,197
(8,101)
$
$
$
$
9,797
$
15,298
12,702
(2,905)
9,797
(0.05)
$
$
$
8,965
6,333
15,298
0.12
58
Clearwater Seafoods Incorporated 2014 Annual Report
Clearwater Seafoods Incorporated
Consolidated Statements of Other Comprehensive Income
(In thousands of Canadian dollars)
Year ended December 31
Earnings
Other comprehensive income (loss) –
Items that may be reclassifi ed subsequently to income (loss):
Foreign currency translation differences of foreign operations
Total comprehensive income (loss)
Total comprehensive income (loss) attributable to:
Non-controlling interest
Shareholders of Clearwater
See the accompanying notes to the consolidated fi nancial statements
2014
2013
$
9,797
$
15,298
(1,188)
(1,604)
8,609
$
13,694
11,370
(2,761)
$
8,965
4,729
8,609
$
13,694
$
$
$
Clearwater Seafoods Incorporated 2014 Annual Report
59
Clearwater Seafoods Incorporated
Consolidated Statements of Shareholders’ Equity
(In thousands of Canadian dollars)
Common
shares
Retained
earnings
Cumulative
translation
account
Non-
controlling
interest
Total
Balance at January 1, 2013
$
64,867
$
14,616
$
(3,866)
$
27,495
$
103,112
Total comprehensive income
(loss) for the year
Transactions recorded directly in equity
Distributions to non-controlling interest
Dividends declared on common shares
Redemption of 2014 convertible
debentures (Note 13)
Total transactions with owners
—
—
—
(87)
(87)
6,333
(1,604)
8,965
13,694
—
(1,274)
87
(1,187)
—
—
—
—
(11,791)
—
(11,791)
(1,274)
—
—
(11,791)
(13,065)
Balance at December 31, 2013
$
64,780
$
19,762
$
(5,470)
$
24,669
$
103,741
Total comprehensive (loss)
income for the year
—
(2,905)
144
11,370
8,609
Transactions recorded directly in equity
Issuance of common shares
Distributions to non-controlling interest
Dividends declared on common shares
Total transactions with owners
32,487
—
—
32,487
—
—
(5,773)
(5,773)
—
—
—
—
—
(11,077)
—
(11,077)
32,487
(11,077)
(5,773)
15,637
Balance at December 31, 2014
$
97,267
$
11,084
$
(5,326)
$
24,962
$
127,987
See the accompanying notes to the consolidated fi nancial statements
60
Clearwater Seafoods Incorporated 2014 Annual Report
Clearwater Seafoods Incorporated
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Year ended December 31
Operating
Earnings for the year
Adjustments for:
Depreciation and amortization
Net fi nance costs and unrealized derivative and losses
Income tax expense (recovery)
Share-based compensation
Impairment of property, plant and equipment and goodwill (Note 9 & 10)
Loss (gain) on disposal of property, plant, and equipment
Earnings in equity investee (Note 21)
Foreign exchange and other
Change in operating working capital (Note 25)
Interest paid
Income tax paid
Financing
Repayment of long-term debt
Net proceeds from long-term debt
Net proceeds from common share issue
Net repayments of revolving credit facility
Distributions paid to non-controlling interest
Advances to non-controlling interests
Dividends paid on common shares
Government assistance received (Note 9)
Investing
Purchase of property, plant and equipment, and other
Proceeds on disposal of property, plant and equipment
Dividends received from equity investee
Purchase of other assets
Net receipts in long term receivables
Effect of foreign exchange rate changes on cash
I N C R E A S E I N C A S H
C A S H , B E G I N N I N G O F P E R I O D
C A S H , E N D O F P E R I O D
See the accompanying notes to the consolidated fi nancial statements
2014
2013
$
9,797
$
15,298
23,753
31,744
5,949
8,948
1,934
76
(2,987)
2,250
81,464
3,604
(15,067)
(1,975)
24,167
36,409
(8,101)
5,861
—
(747)
(2,082)
6,239
77,044
(1,297)
(20,464)
(621)
$
68,026
$
54,662
(14,848)
11,207
32,487
(31)
(10,427)
(1,104)
(5,773)
—
(260,320)
245,288
—
—
(11,414)
(957)
(1,274)
15
$
11,511
$
(28,662)
(83,309)
5
1,490
(65)
2,695
(79,184)
452
805
46,793
(23,813)
978
1,240
(83)
323
(21,355)
644
5,289
41,504
$
$
$
$
$
47,598
$
46,793
Clearwater Seafoods Incorporated 2014 Annual Report
61
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
1 . D E S C R I P T I O N O F T H E B U S I N E S S
Clearwater Seafoods Incorporated (“Clearwater”) was incorporated on July 7, 2011 and is domiciled at 757 Bedford Highway,
Bedford, Nova Scotia, Canada.
Clearwater’s sole investment is the ownership of 100% of the partnership units of Clearwater Seafoods Limited Partnership
(“CSLP”), which holds the underlying investments in subsidiaries and joint ventures.
The consolidated fi nancial statements of Clearwater as at and for the years ended December 31, 2014 and 2013 comprise
the company, its subsidiaries and a joint venture. Clearwater’s business includes the ownership and operation of assets and
property in connection with the harvesting, processing, distribution and marketing of seafood.
2 . B A S I S O F P R E PA R AT I O N
(a) Statement of compliance
These consolidated fi nancial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRSs”) as issued by the International Accounting Standards Board.
The fi nancial statements were authorized for issue by Clearwater’s Board of Directors on February 25, 2015.
(b) Basis of measurement
The consolidated fi nancial statements have been prepared on the historical cost basis except for the following material items
measured at fair value through profi t or loss:
• Derivative fi nancial instruments
• Embedded derivative liability within long-term debt
• Liabilities for cash settled share-based compensation arrangements
The fair value measurements have been described in the notes.
(c) Functional and presentation currency
These consolidated fi nancial statements are presented in Canadian dollars, which is Clearwater’s functional currency.
All tabular fi nancial information presented in Canadian dollars has been rounded to the nearest thousand except as
otherwise noted.
(d) Critical judgments and estimates in applying accounting policies
The preparation of fi nancial statements requires management to make estimates, judgments and assumptions that materially
affect the amounts reported in the consolidated fi nancial 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 fi nancial 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 could have the most signifi cant impact on the reported results and fi nancial 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 and the level and geographical mix of earnings will impact the effective tax rate. With respect to deferred taxes,
62
Clearwater Seafoods Incorporated 2014 Annual Report
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 suffi cient taxable profi ts 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.
Judgments made in relation to accounting policies applied
Clearwater makes judgments about whether to recognize the benefi t of deferred tax assets. In making this judgment Clearwater
continually evaluates all positive and negative evidence. Clearwater’s evaluation includes the magnitude and duration of any
past losses, current profi tability and whether it is sustainable, and earnings forecasts.
For further discussion on deferred income taxes refer to Note 17.
ii. Goodwill, licenses and fi shing rights
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 the carrying value may not be recoverable. Clearwater determines the fair value of
each cash-generating unit to which goodwill and intangible assets are allocated using the value in use method, which estimates
fair value using a discounted fi ve-year forecasted cash fl ow 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, and
appropriate discount rates.
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 these cash generating units.
For further discussion on goodwill and intangible assets, refer to Note 10.
iii. Share-based compensation
Key sources of estimation uncertainty
Clearwater determines compensation expense 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 black-scholes and Monte Carlo simulation valuation models. Certain performance-based share awards require Clearwater
to make estimates of 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 behaviours
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 23.
iv. Derivative fi nancial instruments
Key sources of estimation uncertainty
Clearwater records the fair value of certain fi nancial liabilities using 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, infl ation rates, defaults and other relevant variables such as foreign exchange volatility.
For further discussion on derivative fi nancial instruments, refer to Note 12.
Clearwater Seafoods Incorporated 2014 Annual Report
63
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
3 . S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
The principal accounting policies set out below have been applied consistently to all periods presented in these consolidated
fi nancial 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 identifi able 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 profi t 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 identifi able 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 fi nancial statements of subsidiaries are included in the consolidated
fi nancial statements from the date that control commences until the date that control ceases.
iii) Joint venture
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists
only when decisions about the relevant activities require unanimous consent of the parties sharing control. The results and
assets and liabilities of the joint venture are incorporated into these consolidated fi nancial statements using the equity method
of accounting. Under the equity method a joint venture is initially recognized in the consolidated statement of fi nancial position
at cost and adjusted thereafter to recognize Clearwater’s share of the profi t or loss and other comprehensive income of the
joint venture.
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 fi nancial statements. Unrealized losses are eliminated in the same way as unrealized
gains, but only to the extent that there is no evidence of impairment.
(b) Inventories
Inventories consist primarily of fi nished 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 fi rst-in, fi rst-out basis. Net realizable value is the estimated selling price in the ordinary course of
business, less the 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 refi ts are capitalized when incurred
and amortized over the period between scheduled refi ts. 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 its estimated useful life. When parts of an item of property, plant and equipment have different useful lives,
64
Clearwater Seafoods Incorporated 2014 Annual Report
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 and equipment
Vessels
Vessels 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 benefi ts embodied within the part will fl ow 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 profi t 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 administrative and
selling in profi t or loss.
Depreciation methods, useful lives and residual values are reviewed at each fi nancial year end and adjusted prospectively if
appropriate.
(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
benefi t from the acquisition synergies.
Goodwill is measured at cost less impairment losses.
ii) Licenses and fi shing rights
Licenses represent intangible assets acquired directly or in a business combination that meet the specifi ed 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 indefi nite 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 fi sh quotas; they have defi nite 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 or invoices,
which set out the terms of the sale, including pricing and shipping terms. Revenue is recognized when persuasive evidence
exists that the signifi cant 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 allowance for 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.
Clearwater Seafoods Incorporated 2014 Annual Report
65
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(g) Financial instruments
Clearwater has the following non-derivative and derivative fi nancial assets and liabilities that are classifi ed into the following
categories:
Financial instrument
Category
Measurement method
Cash
Fair value through profi t or loss
Fair value
Trade and other receivables
Long-term receivables
Trade and other payables
Long-term debt
Loans and receivables
Loans and receivables
Non-derivative fi nancial liabilities
Non-derivative fi nancial liabilities
Initial: Fair Value
Subsequent: Amortized cost
through profi t or loss
Derivative fi nancial instruments
Derivative fi nancial instruments
Fair value
Loans and receivables
Loans and receivables are non-derivative fi nancial assets with fi xed 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 profi t
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 are subsequently measured at amortized cost, with gains and losses recognized in profi t or loss in the
period in which they arise.
Derivative fi nancial instruments
Clearwater enters into a variety of derivative fi nancial instruments to manage its exposure to foreign exchange and interest rate
risks, including foreign exchange forward contracts, interest rate swaps, caps, and fl oors.
Embedded derivatives are contained in non-derivative host contracts and are treated as separate derivatives when they meet
the defi nition of a derivative, and their risks and characteristics are not closely related to those of the host contracts.
Derivative fi nancial instruments and embedded derivatives are recorded at fair value with mark-to-market adjustments recorded
in profi t or loss.
(h) Impairment
i)
Financial assets
Financial assets are assessed at each reporting date to determine whether there is objective evidence of impairment. A fi nancial
asset is impaired if objective evidence indicates that a loss event occurred after the initial recognition of the asset, and that
the loss event had a negative effect on the estimated future cash fl ows of that asset that can be estimated reliably. Objective
evidence that fi nancial 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 specifi c customer basis.
An impairment loss in respect of a fi nancial asset measured at amortized cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash fl ows discounted at the asset’s original effective interest rate. Losses
are recognized in profi t or loss and refl ected 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 profi t or loss.
ii) Non-fi nancial assets
Clearwater reviews non-fi nancial assets at 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 indefi nite useful lives an annual impairment test is performed.
66
Clearwater Seafoods Incorporated 2014 Annual Report
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of
disposal. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount
rate that refl ects current market assessments of the time value of money and the risks specifi c 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 infl ows from continuing use that are largely independent of the cash infl ows 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 benefi t from the synergies of the combination. This allocation
is subject to an operating segment ceiling test and refl ects 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 profi t or loss. Impairment losses recognized in respect of CGUs are allocated fi rst 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 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 with a functional currency different from Clearwater’s presentation currency,
including goodwill, other intangible assets and fair value adjustments arising on acquisition, are translated into Canadian dollars
at exchange rates at the reporting date. Foreign currency differences resulting from this translation are recognized in other
comprehensive income in the cumulative translation account. The income and expenses of foreign operations are translated to
Canadian dollars at average exchange rates.
When a foreign operation is disposed of, all relevant amounts in the cumulative translation account are transferred to profi t or
loss as part of the profi t 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 profi t
or loss.
(j)
Income taxes
Income tax expense is comprised of current and deferred income tax. Current tax and deferred income tax are recognized in
profi t or loss except to the extent that they relate to a business combination, or items recognized directly in equity or in other
comprehensive income.
Current tax is the expected tax payable 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 fi nancial
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 joint venture 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
Clearwater Seafoods Incorporated 2014 Annual Report
67
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
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 profi ts will be available against which it 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 benefi t 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 in the period in which they are incurred.
(l) Finance costs
Finance costs comprise interest expense on borrowings, changes in the fair value of fi nancial assets and liabilities measured at
fair value through profi t or loss, gains and losses recognized on derivative fi nancial assets and liabilities, gains and losses on
fi nancial instruments that are recognized in profi t or loss, foreign exchange gains and losses, and refi nancing and settlement
fees. Borrowing costs determined to be period costs, or the amortization of such costs are recorded through profi t or loss.
Foreign currency gains and losses are reported on a net basis.
(m) Share-based compensation
Clearwater has share-based compensation plans, which are described below.
Share appreciation rights (“SARs”)
The share appreciation rights plan is a phantom share plan that provides 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.
Deferred share units (“DSU”)
There are two deferred share unit plans that provide the holder a cash payment equal to the fair market value of Clearwater’s
shares on the date of settlement. The retention DSU plan awards vest once the holder reaches the age of 65 with continued
employment by Clearwater, or death. The director DSU plan allows non-employee directors to receive, in the form of deferred
share units, all or a percentage of director’s fees, which would be otherwise payable in cash. Each director DSU vests at the
grant date.
Performance share units (“PSU”)
The performance share unit plan provides the holder with the opportunity to receive a cash payment based upon the relative
performance of Clearwater shares to its pre-defi ned peer group. Performance is based on the total return to shareholders over
the defi ned period. Vested units will be settled in cash at the end of the performance period.
All plans are cash settled and are recorded as liabilities at fair market value at each reporting period with changes in fair value
recorded to profi t and loss. The fair value of the awards under the SAR and DSU plans is calculated using a Black-Scholes
valuation model and under the PSU plan is calculated using a Monte Carlo simulation model. 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. Clearwater estimates the expected forfeiture rate for each plan and adjusts for actual forfeitures in the period.
The share-based compensation liability is included in trade and other payables in the consolidated statement of fi nancial position
and the related compensation expense in administrative expense in the statement of earnings.
68
Clearwater Seafoods Incorporated 2014 Annual Report
(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 convertible debentures
outstanding during the year. The calculation of the potential dilutive common shares assumes the exercise of all convertible
debentures outstanding. There were no dilutive instruments during the year ended December 31, 2014.
(o) Application of new and revised International Financial Reporting Standards (IFRS)
Clearwater has adopted the following new and revised standards, along with any consequential amendments, effective January 1,
2014. These changes were made in accordance with the applicable transitional provisions.
Offsetting fi nancial assets and fi nancial liabilities – amendments to IAS 32
These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteria for non-simultaneous
settlement mechanisms of clearing houses to qualify for offsetting. These amendments had no impact on Clearwater.
Recoverable amount disclosures for non-fi nancial assets – amendments to IAS 36
These amendments remove the unintended consequences of IFRS 13 Fair Value Measurement on the disclosures required under
IAS 36 Impairment of Assets. In addition, these amendments require disclosure of the recoverable amounts of the assets or cash-
generating units (CGUs) for which an impairment loss has been recognized or reversed during the period. These amendments
resulted in additional disclosures relating to an impairment loss recognized during the year ended December 31, 2014. Refer
to Note 10 for additional disclosure.
IFRIC 21 – Levies
The interpretation clarifi es that an entity recogni ses a liability for a levy when the activity that triggers payments, as identifi ed
by the relevant legislation, occurs. The interpretation had no impact on Clearwater.
(p) 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 fi nancial statements as their effective dates fall within annual periods
beginning subsequent to the current reporting period.
Annual improvements to IFRS (2010–2012) and (2011–2013) cycles
On December 12, 2013 the IASB issued narrow-scope amendments to a total of nine standards as part of its annual improvements
process. The IASB uses the annual improvements process to make non-urgent but necessary amendments to IFRS.
The Company intends to adopt these amendments in its fi nancial statements for the annual period beginning on January 1,
2015. The extent of the impact of adoption of the amendments has not yet been determined.
Business combination accounting for interests in a joint operation (amendments to IFRS 11)
The amendments require business combination accounting to be applied to acquisitions of interests in a joint operation that
constitute a business. The Company intends to adopt the amendments to IFRS 11 in its fi nancial statements for the annual
period beginning on January 1, 2016. The extent of the impact of adoption of the amendments has not yet been determined.
IFRS 15 – Revenue from contracts with customers
The standard contains a single model that applies to contracts with customers and two approaches to recogni sing revenue: at
a point in time or over time. The model features a contract-based fi ve-step analysis of transactions to determine whether, how
much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the
amount and/or timing of revenue recognized. The Company intends to adopt IFRS 15 in its fi nancial statements for the annual
period beginning on January 1, 2017. The extent of the impact of adoption of the standard has not yet been determined.
Clearwater Seafoods Incorporated 2014 Annual Report
69
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
IFRS 9 Financial Instruments
IFRS 9 (2014) introduces new requirements for the classifi cation and measurement of fi nancial assets. Under IFRS 9 (2014),
fi nancial assets are classifi ed and measured based on the business model in which they are held and the characteristics of
their contractual cash fl ows. The standard introduces additional changes relating to fi nancial liabilities. It also amends the
impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a
new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard
does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness,
however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce
more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the
application of the new general hedging model.
The Company intends to adopt IFRS 9 (2014) in its fi nancial statements for the annual period beginning on January 1, 2018.
The extent of the impact of adoption of the standard has not yet been determined.
Transfer of assets between an investor and its associate or joint venture
The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28 (2011),
in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The Company intends
to adopt these amendments in its fi nancial statements for the annual period beginning on January 1, 2016. The extent of the
impact of adoption of the amendments has not yet been determined.
Annual improvements to IFRS (2012–2014) cycle
On September 25, 2014 the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements
process. The Company intends to adopt these amendments in its fi nancial statements for the annual period beginning on
January 1, 2016. The extent of the impact of adoption of the amendments has not yet been determined.
Disclosure initiative
On December 18, 2014 the IASB issued amendments to IAS 1 Presentation of Financial Statements as part of its major initiative
to improve presentation and disclosure in fi nancial reports. These amendments will not require any signifi cant change to current
practice, but should facilitate improved fi nancial statement disclosures. The Company intends to adopt these amendments
in its fi nancial statements for the annual period beginning on January 1, 2016. The extent of the impact of adoption of the
amendments has not yet been determined.
4 . E M P L O Y E E C O M P E N S AT I O N
Employee compensation is classifi ed 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 benefi ts
Share-based compensation
Cost of goods sold
Administrative and selling
$
$
$
2014
101,628
8,948
$
2013
96,610
5,861
110,576
$
102,471
74,428
36,148
$
70,798
31,673
$
110,576
$
102,471
70
Clearwater Seafoods Incorporated 2014 Annual Report
5 . T R A D E A N D O T H E R R E C E I VA B L E S
As at December 31
Trade receivables
Other receivables
$
2014
42,142
7,670
$
2013
37,187
6,515
$
49,812
$
43,702
Included in other receivables is $5.0 million (December 31, 2013 – $4.3 million) of input tax credits receivable and $2.7 million
(December 31, 2013 – $2.2 million) of other receivables.
6 .
I N V E N T O R I E S
As at December 31
Goods for resale
Supplies and other
$
2014
30,010
10,046
$
2013
36,550
10,437
$
40,056
$
46,987
In 2014 inventory costs of $323.7 million (2013 – $281.6 million) were recognized in cost of goods sold. Clearwater incurred
$3.2 million (2013 – $1.7 million) in inventory write-downs included in cost of goods sold. Refer to Note 11 for assets pledged
as security for long term debt.
7 . P R E PA I D S A N D O T H E R
As at December 31
Prepaids
Due from related parties (Note 19)
8 . L O N G - T E R M R E C E I VA B L E S
As at December 31
Notes receivable from non-controlling interest holder in subsidiary
Advances to fi shermen
2014
5,479
29
$
2013
4,767
1,524
5,508
$
6,291
2014
1,012
2,860
$
2013
5,002
1,654
3,872
$
6,656
$
$
$
$
Notes receivable from non-controlling interest consists of funds that are advanced to a shareholder in an incorporated subsidiary.
The notes bear interest at rates ranging from 0%–12% (2013 – 0%–12%), and they are unsecured and have no set terms of
repayment.
Advances to fi shermen bear interest at prime plus 5%–7.5% (2013 – prime plus 2%–3%), and they 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.
Clearwater Seafoods Incorporated 2014 Annual Report
71
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
9 . P R O P E R T Y, P L A N T A N D E Q U I P M E N T
Building
and
wharves
Land
Equipment
Construction
Vessels in progress
Total PPE
Deferred
gov’t
assistance
Total
Cost
Balance at
January 1, 2014
Additions
Disposals
Reclassifi cations and
other adjustments
Impairments
Effect of movements in
exchange rates
Balance at
December 31, 2014
$
2,783 $
60
(43)
66,022 $ 77,070 $ 191,076 $ 21,855 $ 358,806 $
678
(11,787)
83,310
(19,175)
82,381
—
24
(5,869)
167
(1,476)
(8,962) $ 349,844
— 83,310
(19,175)
—
—
—
2,532
—
(945)
—
47,960
(590)
(53,020)
—
(3,473)
(590)
—
—
(3,473)
(590)
(5)
(3)
(26)
(1,856)
(74)
(1,964)
—
(1,964)
$
2,795 $
62,706 $
74,790 $ 225,481 $
51,142 $ 416,914 $
(8,962) $ 407,952
1,006 $
$
Depreciation and impairment losses
Balance at
January 1, 2014
Depreciation for the year
Disposals
Reclassifi cations and
other adjustments
Impairments
Effect of movements in
exchange rates
11
(43)
—
—
—
50,578 $ 67,792 $ 111,298 $
1,852
(1,476)
18,668
(11,708)
1,766
(5,869)
— $ 230,674 $
—
—
22,297
(19,096)
(7,281) $ 223,393
21,910
(19,096)
(387)
—
(502)
—
(2,971)
—
—
(61)
—
—
(3,473)
(61)
—
—
(3,473)
(61)
(4)
(20)
(714)
—
(738)
—
(738)
Balance at
December 31, 2014
Carrying amounts
At January 1, 2014
At December 31, 2014
$
$
$
974 $
45,969 $
65,177 $ 117,483 $
— $ 229,603 $
(7,668) $ 221,935
1,777 $
1,821 $
15,444 $
16,737 $
9,278 $ 79,778 $ 21,855 $ 128,132 $
9,613 $ 107,998 $ 51,142 $ 187,311 $
(1,681) $ 126,451
(1,294) $ 186,017
72
Clearwater Seafoods Incorporated 2014 Annual Report
Building
and
wharves
Land
Equipment
Construction
Vessels in progress
Total PPE
Deferred
gov’t
assistance
Total
Cost
Balance at
January 1, 2013
Additions
Disposals
Reclassifi cations and
replacements assets
Effect of movements in
exchange rates
Balance at
December 31, 2013
$
2,790 $
—
—
65,696 $
77,303 $ 204,131 $
22
(24)
211
(3,016)
2,837
(6,940)
5,831 $ 355,751 $
20,743
(35)
23,813
(10,015)
(9,667) $ 346,084
(15) 23,798
(10,015)
—
—
(7)
351
2,686
(7,201)
(4,254)
(8,418)
720
(7,698)
(23)
(114)
(1,751)
(430)
(2,325)
—
(2,325)
$
2,783 $
66,022 $
77,070 $ 191,076 $ 21,855 $ 358,806 $
(8,962) $ 349,844
$
Depreciation and impairment losses
Balance at
January 1, 2013
Depreciation for the year
Disposals
Reclassifi cations and
other adjustments
Effect of movements in
exchange rates
995 $
11
—
—
—
49,020 $
1,592
(24)
68,769 $ 108,008 $
2,143
(3,015)
18,819
(6,854)
— $ 226,792 $
—
—
22,565
(9,893)
(7,288) $ 219,504
22,173
(9,893)
(392)
—
—
—
(7,544)
—
(7,544)
399
(7,145)
(10)
(105)
(1,131)
—
(1,246)
—
(1,246)
Balance at
December 31, 2013
Carrying amounts
At January 1, 2013
At December 31, 2013
$
$
$
1,006 $
50,578 $
67,792 $ 111,298 $
— $ 230,674 $
(7,281) $ 223,393
1,795 $
1,777 $
16,676 $
15,444 $
5,831 $ 128,959 $
8,534 $ 96,123 $
9,278 $ 79,778 $ 21,855 $ 128,132 $
(2,379) $ 126,580
(1,681) $ 126,451
Total depreciation and amortization expense related to property, plant and equipment and defi nite-life intangible assets for
2014 was $23.8 million (2013 – $24.2 million). In 2014, $23.3 million (2013 – $23.7 million) of depreciation and amortization
expense for assets used in the harvesting and production of goods was classifi ed as cost of goods sold and $0.4 million
(2013 – $0.4 million) was recorded in administrative and selling costs for assets used in administrative activities. Refer to Note 11
for assets pledged as security for long-term debt.
Clearwater Seafoods Incorporated 2014 Annual Report
73
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
1 0 . L I C E N S E S , F I S H I N G R I G H T S A N D G O O D W I L L
Cost
Balance at January 1, 2013
Foreign currency exchange translation
Balance at December 31, 2013
Foreign currency exchange translation
Impairment of non-core species
Goodwill
Indefi nite
life licenses
Fishing
rights
$
7,043
$
—
7,043
—
(1,405)
84,025
(1,299)
82,726
(922)
—
$
24,094
$
—
24,094
—
—
Total
115,162
(1,299)
113,863
(922)
(1,405)
Balance at December 31, 2014
$
5,638
$
81,804
$
24,094
$
111,536
Accumulated amortization
Balance at January 1, 2013
Amortization expense
Balance at December 31, 2013
Amortization expense
Balance at December 31, 2014
Carrying amounts
As at December 31, 2013
As at December 31, 2014
$
$
$
$
$
—
—
—
—
$
$
—
—
—
—
3,551
1,802
5,353
1,803
3,551
1,802
5,353
1,803
—
$
—
$
7,156
$
7,156
7,043
5,638
$
$
82,726
81,804
$
$
18,741
16,938
$
$
108,510
104,380
Clearwater maintains fi shing licenses and rights to ensure continued access to the underlying resource. Except for fi shing rights,
licenses have an indefi nite life as they have nominal annual renewal fees, which are expensed as incurred, and the underlying
stocks of the species are healthy. The licenses and goodwill are tested for impairment annually and when circumstances indicate
the carrying value may be impaired.
As at December 31
2014
2013
Scallops
Goodwill – $ nil (December 31, 2013 $ nil)
Indefi nite life licenses – $55.7 million (December 31, 2013 $56.6 million)
All other CGU’s individually
Goodwill – $5.6 million (December 31, 2013 $7.0 million)
Indefi nite life licenses – $26.1 million (December 31, 2013 $26.1 million)
$
55,719
$
56,599
31,723
33,170
$
87,442
$
89,769
Indefi nite life licenses and goodwill
Annual impairment testing for indefi nite life assets and goodwill was performed using a value in use approach as of September 27,
2014. The recoverable amounts for all cash generating unit (“CGU”) except for cooked and peeled shrimp were determined to
be higher than their carrying amounts and therefore no impairments were recorded relating to these CGUs during 2014 and
2013. During the year ended December 31, 2014, Clearwater recorded a $1.4 million impairment loss to goodwill associated
with a processing facility within the cooked and peeled shrimp CGU (a non-core species) and the Canadian reportable segment,
that was the result of estimated other than temporary reductions in margins for the cooked and peeled shrimp business. The
recoverable amount of the cooked and peeled shrimp CGU was $12.7 million which was determined through the value in use
approach with a pre-tax discount rate of 13.2%. Impairment losses are recognized within administrative and selling costs in the
condensed consolidated interim statements of earnings.
The value in use approach was determined by discounting the projected future cash fl ows generated from the continuing
earnings from operations for the applicable CGU. Unless otherwise indicated in notes i – iii, the assumptions used in the value
in use approach for 2014 were determined similarly to those used in 2013.
74
Clearwater Seafoods Incorporated 2014 Annual Report
The discounted cash fl ows used in determining the recoverable amounts for the Scallops and other CGU’s were based on the
following key assumptions:
i)
Cash fl ows from operations were projected for a period of fi ve years based on a combination of past experience, actual
operating results and 2015 forecasted earnings. Terminal values and forecasts for future periods were extrapolated using
infl ation rates of 1% (2013: 1%). For some CGU’s, this infl ation rate is well below the actual current infl ation for the country.
Gross margins for all future periods were estimated using a combination of forecasted and historical margins.
ii) Pre-tax discount rates ranging from 13%–18% (2013: 13%–18%) 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) Cash fl ow adjustments for capital expenditures were based upon the management approved capital expenditure forecast,
and terminal year capital expenditures were based on required refi ts over the period of the fi shing license.
The key assumptions represent management’s assessment of future trends in the industry and are based on both internal and
external sources.
Defi nite life fi shing rights
Amortization relates to fi shing rights. Amortization is allocated to the cost of inventory and is recognized in cost of goods sold
as inventory is sold. In 2014 there have been no additions or disposals.
Refer to Note 11 for assets pledged as security for long term debt.
1 1 . L O N G - T E R M D E B T
As at December 31
Term loans (a)
Term loan A, due June 2018
Delayed draw term loan A, due June 2018
Term loan B, due June 2019
Term loan B, embedded derivative
Term loan, due June 2015 (b)
Multi-currency revolving facility (c)
Marine mortgage, due in 2017 (d)
Term loan, due in 2091 (e)
Other loans
Less: current portion
2014
2013
$
28,950
(608)
224,366
3,845
$
29,700
(608)
207,197
4,704
11,595
10,642
21
1,030
3,500
342
—
1,785
3,500
405
273,041
(22,847)
257,325
(14,297)
$
250,194
$
243,028
(a) Term loans consist of a CDN $30.0 million Term Loan A facility, a CDN $45.0 million Delayed Draw Term Loan A facility, and
a USD $200.0 million Term Loan B facility.
Term Loan A – The principal outstanding as at December 31, 2014 was CDN $29.0 million (December 31, 2013 – $29.7 million).
The loan is repayable in quarterly installments of $0.2 million to June 2015, $0.4 million from September 2015 to June 2017
and $0.8 million from September 2017 to March 2018 with the balance due at maturity in June 2018. It bears interest at the
applicable banker’s acceptance rate plus 3.25%. As at December 31, 2014 this resulted in an effective rate of 4.51%.
Delayed Draw Term Loan A – The principal outstanding as at December 31, 2014 was $ nil (December 31, 2013 – $ nil) and
can be drawn upon any time up to June 30, 2015. The balance is shown net of deferred fi nancing charges of CDN $0.6
million. The facility is repayable in quarterly installments of 1.25% of the principal amount drawn under the facility with
repayment to begin in the fi rst quarter after the fi nal draw on the facility. The facility matures in June 2018 and bears interest
payable monthly at the banker’s acceptance rate plus 3.25%.
Clearwater Seafoods Incorporated 2014 Annual Report
75
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
Term Loan B – The principal outstanding as at December 31, 2014 was USD $196.8 million (December 31, 2013 –
$199.0 million). The loan is repayable in quarterly installments of USD $0.5 million with the balance due at maturity in
June 2019 and bears interest payable monthly at the US Libor plus 3.50% with a LIBOR interest rate fl oor of 1.25%. As of
December 31, 2014 this resulted in an effective rate of 4.75%. The facility has a provision that, subject to certain conditions
allows Clearwater to expand the facility by a maximum of USD $100.0 million (or the equivalent amount in Canadian dollars).
The embedded derivative represents the fair market value of the Libor interest rate fl oor of 1.25%. The change in fair market
value of the embedded derivative is recorded through profi t or loss as a component of net fi nance costs.
In addition, Clearwater has a CDN $75.0 million revolving facility that matures in June 2018. The facility can be denominated
in Canadian and US dollars. As at December 31, 2014 the balances in Canadian dollars were $ nil (December 31, 2013 – $ nil)
and in US dollars, $ nil (December 31, 2013 – $ nil). The Canadian dollar balances bear interest at the banker’s acceptance
rate plus 3.25%. The US dollar balances bear interest at the US Libor rate plus 3.25%. As of December 31, 2014 this results
in effective rates of 4.51% for Canadian dollar balances and 3.51% for US dollar balances. The facility has a provision that,
subject to certain conditions, allows Clearwater to expand the facility by a maximum of CDN $25.0 million. The availability
of this facility is reduced by the term loan outstanding in note (b); as such, the balance available as at December 31, 2014
was $63.4 million.
The revolver, term loan A, delayed draw and term loan B are secured by a fi rst charge on cash and cash equivalents,
accounts receivable, inventory, marine vessels, licenses and quotas, and Clearwater’s investments in certain subsidiaries.
Clearwater’s debt facilities are subject to certain fi nancial non-fi nancial covenants. Clearwater is in compliance with all
covenants associated with its debt facilities.
In addition to the minimum principal payments for Term Loan A and B, the loan agreement requires that between 0% and
50% of excess cash fl ow (defi ned in the loan agreement as EBITDA, excluding non controlling interest in EBITDA and the
most signifi cant non-cash and non-recurring items less certain scheduled principal payments, certain capital expenditures
and certain cash taxes) be repaid starting for the year ended December 31, 2014 based on the previous fi scal year’s results
upon approval of the annual fi nancial statements. Payments are allocated amongst the term loans on a pro rata basis.
Refer to Note 12(b) for detail on interest rate caps and swaps that hedge interest rate risk on the term loans.
(b) Term Loan – The principal outstanding as at December 31, 2014 was USD $10.0 million (December 31, 2013 – $10.0 million).
The loan is held through a Clearwater subsidiary. The loan is non amortizing, repayable at maturity in June 2015 and
bears interest payable monthly at 7.0%. The loan is secured by a marine vessel. Clearwater provides a guarantee on the
term loan.
(c) On April 29, 2014, Clearwater entered into a multi-currency revolving facility agreement that allows Clearwater to borrow
a maximum of DKK 53.0 million, which can be denominated in either DKK or Canadian and US dollar equivalents. The
principal availability reduces by the equivalent of DKK 10.6 million per year on June 30, 2015 and each anniversary thereafter
until the loan is fully repaid. As at December 31, 2014 the balance of the revolving facility is DKK 0.1 million (Canadian
equivalent $0.02 million). The facility bears interest in the same currency as the currency in which the principal balance is
denominated. The interest is payable on the last day of each fi scal quarter at the N-bor rate applicable to the currency of
the facility plus 1.875%. The N-bor rate is a variable interest rate as designated by the lender.
(d) Marine mortgage – The mortgage is payable in the principal amount of:
As at December 31
YEN
DKK
2014
69,457
1,870
2013
99,224
3,957
The mortgage bears interest at UNIBOR plus 1.0% payable semi-annually. UNIBOR is a variable interest rate component fi xed
on the basis of the average long-term borrowing interest rate of credit unions – members of the Lithuanian Central Credit Union.
Principal payments are required annually as follows:
YEN
DKK
2015
29,767
1,870
2016
29,767
—
2017
9,923
—
2018
—
—
The loan matures in 2017 and is secured by a fi rst mortgage over the related vessel.
76
Clearwater Seafoods Incorporated 2014 Annual Report
(e) Term Loan – due 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%.
1 2 . F I N A N C I A L I N S T R U M E N T S
The Company periodically enters into derivatives as part of an active economic hedging program to manage fi nancial risks. The
Company has elected not to use hedge accounting for these instruments and consequently changes in fair value are recorded
in earnings as they occur:
Summary of derivative fi nancial instrument positions:
As at December 31
Derivative fi nancial assets
Forward foreign exchange contracts
Interest rate cap contracts
Derivative fi nancial liabilities
Forward foreign exchange contracts
Interest rate swap contracts
2014
2013
$
4,678
634
$
1,297
169
$
5,312
$
1,466
(5,469)
(3,222)
(6,694)
(175)
$
(8,691)
$
(6,869)
(a) Clearwater has forward contracts maturing each month until December 2015. At December 31, 2014 Clearwater had
outstanding forward contracts as follows:
Currency
Sell:
Euro
Yen
Sell:
USD
Foreign currency
Notional amount
(in 000’s)
Average
contract
exchange rate
Weighted
average
months
to maturity
48,500
3,155,000
1.463
0.01
103,600
1.100
8
8
8
At December 31, 2013, Clearwater had outstanding forward contracts as follows:
Currency
Sell:
Yen
Sell:
USD
Euro
Foreign currency
Notional amount
(in 000’s)
Average
contract
exchange
rate
Weighted
average
months
to maturity
2,670,000
0.011
113,000
52,000
1.046
1.372
7
7
7
Fair value
asset (liability)
$
$
2,892
1,786
4,678
(5,469)
$
(5,469)
Fair value
asset (liability)
$
$
1,297
(1,598)
(5,096)
$
(6,694)
Certain USD and Euro forward contracts contain provisions that subject to the spot rate being greater than the contract rate, the
contract rate is adjusted by 50% (December 31, 2013 – 50%) of the excess of the spot rate over the contract rate at maturity.
The notional amount of the forward contracts subject to these provisions in USD at December 31, 2014 was $35.6 million
(December 31, 2013 – $39.5 million) and in Euro at December 31, 2014 was $nil million (December 31, 2013 – $2.0 million).
Clearwater Seafoods Incorporated 2014 Annual Report
77
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(b) At December 31, 2014 Clearwater had interest rate cap and swap contracts outstanding as follows:
Effective
date
Expiry
Contracted
capped
date interest rate
Notional
amount
(in 000’s)
Fair value
asset
Currency
Term Loan A – Interest rate cap
Term Loan A – Interest rate cap
Term Loan B – Interest rate cap
Term Loan B – Interest rate cap
December 2015
March 2014
March 2014
September 2014
June 2018
December 2015
December 2015
June 2016
6.25%
4.50%
4.75%
4.75%
CAD
CAD
USD
USD
12,000 $
12,000
50,000
50,000
6
18
16
594
Effective
date
Expiry
Contracted
fi xed
date interest rate
Notional
amount
(in 000’s)
Fair value
(liability)
Currency
$
634
Term Loan A – Interest rate swap
Term Loan A – Interest rate swap
Term Loan B – Interest rate swap
Term Loan B – Interest rate swap
December 2013
December 2015
December 2015
June 2016
December 2015
June 2018
June 2019
June 2019
5.38%
5.85%
6.15%
6.49%
CAD
CAD
USD
USD
12,000 $
12,000
50,000
50,000
(95)
(253)
(1,231)
(1,643)
$
(3,222)
(c) At December 31, 2013 Clearwater had an interest rate cap and swap contract outstanding as follows:
Effective
date
Expiry
Contracted
capped
date interest rate
Notional
amount
(in 000’s)
Fair value
asset
Currency
Term Loan A – Interest rate cap
December 2015
June 2018
6.25%
CAD
12,000 $
169
Term Loan A - Interest rate swap
December 2013
December 2015
5.38%
CAD
12,000 $
(175)
Effective
date
Expiry
Contracted
fi xed
date interest rate
Notional
amount
(in 000’s)
Fair value
(liability)
Currency
(d) Foreign exchange on debt and working capital per Note 14
Year ended December 31
Realized (gain) loss
Working capital and other
Unrealized loss (gain)
Foreign exchange on debt and other assets
Mark-to-market on interest rate swaps and caps
(e) Losses on forward contracts
Year ended December 31
Losses (gains) on forward contract derivatives
Realized loss
Unrealized (gain) loss
78
Clearwater Seafoods Incorporated 2014 Annual Report
2014
2013
$
1,172
$
3,586
1,172
3,586
19,481
2,589
22,070
5,427
6
5,433
$
23,242
$
9,019
2014
2013
$
$
8,829
(4,782)
4,047
$
$
2,752
6,060
8,812
(f) Credit risk:
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 fi nancial
instruments but does not anticipate non-performance of any of the counter parties as Clearwater only deals with highly rated
fi nancial institutions.
Clearwater has signifi cant accounts receivable from customers operating in Canada, United States, Europe and Asia. Signifi cant
portions of Clearwater’s customers from a sales dollar perspective have been transacting with Clearwater in excess of fi ve 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 specifi c credit risk and country specifi c credit
risk. As a result Clearwater does not have any signifi cant concentration of credit risk.
As at December 31, 2014, Clearwater’s trade accounts receivable aging based on the invoice due date was as follows: 98.9%
0–30 days, 0.1% 31–60 days, and 1.0% over 60 days. As at December 31, 2013, Clearwater’s trade accounts receivable aging
based on the invoice due date was as follows: 98.5% 0–30 days, 0.5% 31–60 days, and 1% over 60 days.
The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts of $ 0.3 million (2013 – $0.4 million).
Clearwater reviews accounts past due on a regular basis and provides an allowance on a specifi c 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:
As at December 31
Balance at January 1
Allowance recognized
Amounts recovered
Amounts written off as uncollectible
Foreign exchange
Balance at December 31
2014
$
393
$
549
(487)
(117)
(60)
2013
459
814
(808)
(105)
33
$
278
$
393
(g) Foreign currency exchange rate risk
Foreign currency exchange rate risk refers to the risk that the value of fi nancial instruments or cash fl ows associated with the
instruments will fl uctuate 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 fl uctuations in foreign
exchange rates may have a material impact on Clearwater’s fi nancial results.
Risks associated with foreign exchange are partially mitigated by the fact that Clearwater (i) diversifi es sales internationally
which reduces the impact of any country-specifi c economic risks; (ii) executes on pricing strategies so as to offset the impact of
exchange rates; (iii) limits the amount of long term sales contracts; (iv) regularly reviews economist estimates of future exchange
rates; and (v) has implemented a foreign exchange program that focuses on using forward contracts to lock in exchange rates
for up to 18 months.
The carrying amounts of Clearwater’s foreign currency denominated monetary assets and monetary liabilities (excluding derivative
fi nancial instruments) as at December 31, 2014 and December 31, 2013 were as follows (as converted to Canadian dollars):
As at December 31
Cash
Trade receivables
Other receivables
Long-term receivables
Trade and other payables
Long-term debt
$
2014
13,031
34,685
3,481
5,356
(6,759)
(241,440)
$
2013
22,993
30,667
3,341
8,704
(6,377)
(224,328)
Net exposure to consolidated statements of fi nancial position
$
(191,646)
$
(165,000)
Clearwater Seafoods Incorporated 2014 Annual Report
79
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
The components of this net exposure by currency are as follows (in foreign currency ‘000’s) at December 31, 2014:
December 31, 2014
GBP
USD
Yen
Euros
RMB
NOK
DKK
Argentine
Peso
Cash
Trade receivables
Other receivables
Long term receivables
Trade and other payables
Long-term debt
Net exposure to
consolidated statements
of fi nancial position
101
1,463
22
—
(227)
—
8,602
32
12,243 333,748
—
—
—
(69,457)
159
2,151
(534)
(207,252)
313
9,284
897
—
(1,227)
—
681
—
—
—
608
—
—
—
—
—
—
—
12,068
7,737
103
178
3 14,685
— 21,102
(27,030)
—
(2,352)
(1,989)
1,359
(184,631) 264,323
9,267
1,289
—
15,467
9,038
The components of this net exposure by currency are as follows (in foreign currency ‘000’s) at December 31, 2013:
December 31, 2013
GBP
USD
Yen
Euros
RMB
NOK
DKK
Argentine
Peso
Cash
Trade receivables
Other receivables
Long term receivables
Trade and other payables
Long-term debt
Net exposure to
consolidated statements
of fi nancial position
628
560
(5)
—
(245)
—
10,727
12,451
159
5,482
(913)
(209,157)
15
177,338
—
—
—
(99,224)
2,247
9,027
897
—
(891)
—
495
—
—
—
1
—
—
—
—
—
(64)
—
35,810
6,719
180
308
9 11,405
— 17,589
(18,411)
—
(3,294)
(3,957)
938
(181,251)
78,129
11,280
496
(64)
35,287
11,071
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 exchange rates. The change below is calculated based on the net exposure to the
consolidated statements of fi nancial position.
GBP
USD
Yen
Euros
RMB
NOK
DKK
Argentine Peso
(h) Interest rate risk
2014
245
(21,415)
257
1,309
24
—
293
123
2013
165
(19,285)
79
1,658
9
(1)
696
181
Interest rate risk refers to the risk that the value of a fi nancial instrument or cash fl ow associated with the instrument will fl uctuate
due to changes in market interest rates. Clearwater’s interest rate risk arises from long-term borrowings issued at fi xed rates
that create fair value interest rate risk and from variable rate borrowings that create cash fl ow interest rate risk. Clearwater’s
debt is carried at amortized cost with the exception of the embedded interest rate fl oor in Term Loan B. The interest rate fl oor
is a derivative instrument and is recorded at fair value through profi t or loss.
Clearwater manages its interest rate risk exposure by using a mix of fi xed and variable rate debt. At December 31, 2014,
excluding the interest rate swap, approximately 5.5% (2013 – 5.5%) of Clearwater’s debt of $273.0 million (2013 – $257.3 million)
was fi xed rate debt with a weighted average interest rate of 4.8% (2013 – 4.8%). A 1% change in interest rates for variable rate
borrowings would result in a $2.8 million increase (or decrease) in interest expense.
80
Clearwater Seafoods Incorporated 2014 Annual Report
Clearwater enters into interest rate swap, cap and fl oor arrangements to hedge interest rate risk on its variable rate debt. As at
December 31, 2014, Clearwater has entered into interest rate swap arrangements on its CDN $30 million Term Loan A facility
and its USD $500 million Term loan B facility whereby:
• CDN $12 million of Term Loan A is effectively subject to a fi xed interest rate of 5.38% until December 31, 2015 after which
it is subject to an interest rate that is the lessor of the fl oating rate of interest on the loan or a maximum fi xed rate of interest
of 6.25%.
• CDN $12 million of Term Loan A is subject to a rate cap to December 31, 2015 of 4.5% and then after which the rate is fi xed
at 5.85% to June 2018.
• USD $50 million of the debt is capped to December 31, 2015 at an interest rate of 4.75% and then the rate is fi xed at 6.15%
to June 2019.
• USD $50 million of the debt is capped to June 30, 2016 at an interest rate of 4.75% and then the rate is fi xed at 6.49% to
June 2019.
The fair value of interest rate swap and interest rate cap at the end of the reporting period is determined by discounting the
future cash fl ows using the yield curves at the end of the reporting period. For the year ended December 31, 2014, this resulted
in a $2.6 million unrealized loss. Clearwater accounts for these swap arrangements and the change in market value through
profi t and loss.
(i) Liquidity risk
Liquidity risk is the risk that Clearwater will encounter diffi culty in meeting obligations associated with fi nancial liabilities.
Clearwater manages liquidity risk by monitoring forecasted and actual cash fl ows, minimizing reliance on any single source
of credit, maintaining suffi cient undrawn committed credit facilities and matching the maturity profi les of fi nancial assets and
fi nancial liabilities.
The following are the contractual maturities of non-derivative fi nancial liabilities, derivative fi nancial instruments, operating
lease and other commitments. The table includes undiscounted cash fl ows of fi nancial liabilities, operating lease and other
commitments, interest and principal cash fl ows based on the earliest date on which Clearwater is required to pay.
December 31, 2014
Interest – long-term debt
Principal repayments –
long-term debt
Total long-term debt
Trade and other payables
Operating leases and other
Derivative fi nancial
instruments – asset1
Derivative fi nancial
instruments – liability
Carrying
Amount
Total
Contractual
Cash Flow
2015
2016
2017
2018
2019
>2020
75,465
13,097
12,585
12,449
11,776
5,758
19,800
274,562
22,847
4,165
3,972
26,619 212,780
4,179
273,041
52,308
—
350,027
52,308
37,053
35,944
52,308
27,247
16,750
—
2,292
16,421
—
2,221
38,395 218,538
—
1,726
—
1,876
23,979
—
1,691
(5,312)
(5,312)
(5,312)
8,691
8,691
8,691
—
—
—
—
—
—
—
—
—
—
$
328,728 $
442,767 $
118,878 $ 19,042 $ 18,642 $ 40,271 $ 220,264 $ 25,670
Included in the above commitments for operating leases and other are amounts that Clearwater is committed directly and
indirectly through its partnerships for various licenses and lease agreements, offi ce, machinery and vehicle leases, and vessel
and equipment commitments. These commitments require approximate minimum annual payments in each of the next fi ve
years as shown above.
Also included in commitments for operating leases and other are amounts to be paid to a company controlled by a director
of Clearwater over a period of years ending in 2016 for vehicle and offi ce leases, which aggregate approximately $0.1 million
(2013 – $0.02 million).
1 Operating leases and other includes capital commitments of 22.9 million.
Clearwater Seafoods Incorporated 2014 Annual Report
81
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(j) Fair value of fi nancial instruments
The following tables set out Clearwater’s classifi cation and carrying amount, together with fair value, for each type of non-derivative
and derivative fi nancial asset and liability:
December 31, 2014
Assets:
Cash
Trade and other receivables
Long-term receivables
Forward foreign exchange contracts
Interest rate caps
Liabilities:
Trade and other payables1
Long-term debt
Forward foreign exchange contracts
Embedded derivative
Interest rate swaps
December 31, 201 3
Assets:
Cash
Trade and other receivables
Long-term receivables
Forward foreign exchange contracts
Interest rate caps
Liabilities:
Trade and other payables1
Long-term debt
Forward foreign exchange contracts
Embedded derivative
Interest rate swaps
Fair Value
Amortized cost
Total
Through
profi t or loss
Derivatives
Loans and
receivables
Non-
derivative
fi nancial
liabilities
Carrying
amount
Fair
value
$ 47,598 $
—
—
—
—
— $
—
—
4,678
634
— $
49,812
3,872
—
—
— $
—
—
—
—
47,598 $
49,812
3,872
4,678
634
47,598
49,812
3,872
4,678
634
$ 47,598 $
5,312 $ 53,684 $
— $ 106,594 $ 106,594
$
— $
—
—
—
—
— $
—
(5,469)
(3,845)
(3,222)
— $ (36,366) $
— (269,196)
—
—
—
—
—
—
(36,366) $
(36,366)
(269,196) (269,058)
(5,469)
(3,845)
(3,222)
(5,469)
(3,845)
(3,222)
$
— $ (12,536) $
— $ (305,562) $ (318,098) $ (317,960)
Fair Value
Amortized cost
Total
Through
profi t or loss
Derivatives
Loans and
receivables
Non-
derivative
fi nancial
liabilities
Carrying
amount
Fair
value
$ 46,793 $
—
—
—
—
— $
—
—
1,297
169
— $
43,702
6,656
—
—
— $ 46,793 $
—
—
—
—
43,702
6,656
1,297
169
46,793
43,702
6,656
1,297
169
$
46,793 $
1,466 $ 50,358 $
— $ 98,617 $
98,617
$
— $
—
—
—
—
— $
—
(6,694)
(4,704)
(175)
— $ (33,766) $
— (252,621)
—
—
—
—
—
—
(33,766) $
(252,621)
(6,694)
(4,704)
(175)
( 33,766)
(252,621)
(6,694)
(4,704)
(175)
$
— $ (11,573) $
— $ (286,387) $ (297,960) $ (297,960)
1 Trade and other payables excludes the liability for share based compensation of $15.9 million at December 31, 2014 (December 31, 2013 – $7.0 million).
k) Fair value hierarchy:
Assets and liabilities carried at fair value must be classifi ed using a three-level hierarchy that refl ects the signifi cance of the
inputs used in making the fair value measurements. The levels are defi ned as follows:
• Level 1: Fair value measurements derived from quoted prices (unadjusted) in active markets for identical assets or liabilities
• Level 2: Fair value measurements 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)
82
Clearwater Seafoods Incorporated 2014 Annual Report
• Level 3: Fair value measurements 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 fi nancial instruments carried at fair value through profi t and loss using the
fair value hierarchy:
Level 1
Level 2
Level 3
December 31, 2014
Recurring measurements
Financial Assets:
Cash
Forward foreign exchange contracts
Interest rate caps
Financial Liabilities:
Forward foreign exchange contracts
Embedded derivative
Interest rate swaps
December 31, 2013
Recurring measurements
Financial Assets:
Cash
Forward foreign exchange contracts
Interest rate caps
Financial Liabilities:
Forward foreign exchange contracts
Embedded derivative
Interest rate swaps
$
$
47,598
—
—
$
—
4,678
634
$
47,598
$
5,312
$
$
—
—
—
$
(5,469)
(3,845)
(3,222)
—
$
(12,536)
$
Level 1
Level 2
Level 3
$
$
$
$
46,793
—
—
$
—
1,297
169
$
46,793
$
1,466
$
$
$
$
—
—
—
(6,694)
(4,704)
(175)
$
—
$
(11,573)
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Clearwater used the following techniques to value fi nancial instruments categorized in Level 2:
• Forward foreign exchange contracts are measured using present value techniques. Future cash fl ows are estimated based
on forward exchange rates (from observable exchange rates at the end of the reporting period) and contract forward rates,
discounted at a rate that refl ects the credit risk of Clearwater and the various counterparties and the risk free yield curves of
the respective currencies.
• The embedded derivative, interest rate swaps and caps are measured using present value techniques that utilize a variety
of inputs that are a combination of quoted prices and market-corroborated inputs.
The fair value estimates are not necessarily indicative of the amounts that Clearwater will receive or pay at the settlement of
the contracts.
There were no transfers between levels during the years ended December 31, 2014 and December 31, 2013.
Clearwater Seafoods Incorporated 2014 Annual Report
83
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
For cash, trade and other receivables, and trade and other payables, the carrying value approximates their fair value due to
the short-term maturity of these instruments. The fair value of the long term receivables is not materially different from their
carrying value.
Fair value of fi nancial instruments carried at amortized cost:
Except as detailed below Clearwater considers that the carrying amounts of fi nancial assets and fi nancial liabilities recognized
in the consolidated fi nancial statements materially approximate their fair values:
The estimated fair value of Clearwater’s long term debt for which carrying value did not approximate fair value at December 31,
2014 was $16.3 million (December 31, 2013 – $16.3 million) and the carrying value was $16.5 million (December 31, 2013 –
$16.3 million). The fair value of long-term debt has been classifi ed as level 2 in the fair value hierarchy and was estimated based
on discounted cash fl ows using current rates for similar fi nancial instruments subject to similar risks and maturities.
1 3 . S H A R E C A P I TA L
Authorized:
Clearwater is authorized to issue an unlimited number of common shares.
Share capital movement:
As at
December 31, 2014
December 31, 2013
#
$
#
$
Share capital:
Balance at January 1
Issuance of common shares
Redemption of 2013 and 2014 convertible debentures
50,948,698
4,029,400
—
64,780
32,487
—
50,948,698
—
—
Balance at December 31
54,978,098
97,267
50,948,698
64,867
—
(87)
64,780
On February 4, 2014 Clearwater completed the issuance of 4,029,400 common shares at $8.50 per common share for gross
proceeds of $34.2 million. Transaction costs associated with the equity issue were $1.8 million and deducted from the recorded
amount for the common shares.
The conversion option on the 2013 and 2014 convertible debentures remained unexercised on redemption in July 2013 and the
balance of $0.09 million was transferred from share capital to retained earnings.
During the year ended 2014, dividends of $5.8 million were declared and paid as follows:
Payment Date
March 24, 2014
May 28, 2014
September 2, 2014
December 15, 2014
# of shares
Outstanding
54,978,098
54,978,098
54,978,098
54,978,098
Dividends
per share
0.025
0.025
0.025
0.030
$
$
$
$
On February 25, 2015, Clearwater declared a quarterly dividend of $0.04 per share, payment to be made on March 24, 2015 to
shareholders of record on March 10, 2015.
During the year ended 2013 a dividend of $0.025 cents per share (total dividend $1.3 million) was declared and paid.
84
Clearwater Seafoods Incorporated 2014 Annual Report
1 4 . N E T F I N A N C E C O S T S
Year ended December 31
Interest expense on fi nancial liabilities
Amortization of deferred fi nancing charges and accretion
Fair value adjustment on convertible debentures and embedded derivative
Foreign exchange on debt and other assets (gain) loss (Note 12 (d))
Debt settlement and refi nancing fees
1 5 . O T H E R I N C O M E
Year ended December 31
Royalties, interest, and other fees
Share of earnings of equity-accounted investee
Other fees
Other income
1 6 . E A R N I N G S P E R S H A R E
$
2014
14,938
778
15,716
(1,229)
23,242
100
$
2013
16,317
993
17,310
(1,710)
9,019
9,316
$
37,829
$
33,935
$
2014
(844)
(2,987)
(1,200)
$
2013
92
(2,082)
(1,250)
$
(5,031)
$
(3,240)
The earnings and weighted average number of shares used in the calculation of basic and diluted earnings per share is as
follows: (in thousands except per share data):
Basic and diluted
Earnings (loss) for the period
Weighted average number of shares outstanding
Earnings (loss) per share
2014
2013
(2,905)
$
54,786,510
(0.05)
$
6,333
$
50,948,698
0.12
$
The interest on the convertible debentures (redeemed in July 2013) resulted in an anti-dilutive loss per share for December 31,
2013. As a result, for the period ended December 31, 2013, 7,523,559 potential ordinary shares were not included in the
calculation of the weighted average number of ordinary shares for the purpose of diluted loss per share.
The convertible debentures were redeemed in July 2013 and had no impact on 2014 results.
Clearwater Seafoods Incorporated 2014 Annual Report
85
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
1 7 . I N C O M E TA X E S
(a) Reconciliation of income tax expense
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.
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 partnerships taxed in the hands of partners
Permanent differences
Benefi t of capital loss not recognized
Recognition of previously unrecorded deferred tax assets
Income of foreign subsidiary not subject to tax
Other
Actual provision
(b) Income tax expense
The components of the income tax expense (recovery) for the year are as follows:
Year ended December 31
Current
Deferred recovery
(c) Deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Deferred tax asset:
Non-capital loss carry-forwards
Long-term debt
Reserve for unpaid share-based compensation
Unrealized foreign exchange
Inventory
Other
Licenses
Property, plant and equipment
Other
Classifi ed in the consolidated statement of fi nancial position as:
Deferred tax asset – non-current
Deferred tax liability – non-current
86
Clearwater Seafoods Incorporated 2014 Annual Report
$
$
$
2014
15,745
30.5%
$
2013
7,197
30.5%
4,802
$
2,195
$
(3,064)
3,047
2,807
—
(1,257)
(386)
(2,811)
2,819
—
(9,938)
(9)
(357)
$
5,949
$
(8,101)
2014
2,585
3,364
$
2013
1,812
(9,913)
5,949
$
(8,101)
$
$
December 31
2014
December 31
2013
$
13,898
2,460
4,356
1,031
—
—
(3,199)
(4,152)
(41)
$
14,740
3,150
1,785
1,648
625
294
(1,519)
(3,233)
—
$
14,353
$
17,490
15,356
(1,003)
18,943
(1,453)
$
14,353
$
17,490
The net change in deferred income taxes refl ected in deferred income tax expense of $3.1 million (2013 – $9.9 million) plus the
foreign exchange effect of deferred taxes of foreign subsidiaries totaling $0.2 million (2013 – $0.3 million), the effect of which
was recorded through foreign exchange.
These deferred tax assets are recognized based on Clearwater’s estimate that it is more likely than not it will earn suffi cient
taxable profi ts to utilize these losses before they expire.
Unrecognized deferred tax assets
Clearwater has the following investment tax credits and loss carryforwards for which no deferred tax asset is recognized in the
statements of fi nancial position.
Non-capital losses
Investment tax credits
Capital losses
Unrecognized deferred tax liabilities
Clearwater
Seafoods Inc
Subsidiary
corporations
$
14,429
$
6,684
5,022
12,229
274
380
Total
Expiry
$
$
$
21,113
2014–2033
5,296
2023–2034
12,609
No Expiry
Deferred tax is not recognized on the unremitted earnings of subsidiaries and other investments as the Company is in a
position to control the reversal of the temporary difference and it is probable that such differences will not reverse in the
foreseeable future. The unrecognized temporary difference at December 31, 2014 for the Company’s subsidiaries was
$87.3 million (December 31, 2013 – $72.2 million).
1 8 . S E G M E N T E D I N F O R M AT I O N
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
Lobster
Clams
Crab
Ground fi sh and other
$
2014
163,705
93,742
78,186
72,774
20,985
15,350
$
2013
147,637
81,592
66,452
60,780
18,271
13,927
$
444,742
$
388,659
Clearwater Seafoods Incorporated 2014 Annual Report
87
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(b) Sales by geographic region of the customer
Year ended December 31
France
Russia
UK
Scandinavia
Other
Europe
United States
Canada
North America
Japan
China
Other
Asia
Other
(c) Non-current assets by geographic region
As at December 31
Property, plant and equipment, licences, fi shing rights and goodwill
Canada
Argentina
Other
$
2014
54,418
8,976
19,639
30,442
36,141
$
2013
51,830
15,777
12,272
21,919
29,973
149,616
131,771
84,943
61,668
76,945
55,838
146,611
132,783
57,496
73,308
15,494
41,639
66,212
14,438
146,298
122,289
2,217
1,816
$
444,742
$
388,659
2014
2013
$
255,398
34,807
192
$
212,625
22,115
221
$
290,397
$
234,961
1 9 . R E L AT E D PA R T Y T R A N S A C T I O N S
(a) Subsidiaries, partnerships, and joint venture
Clearwater’s consolidated fi nancial statements include the accounts of the Corporation and its material subsidiaries, partnerships
and joint venture, as follows:
Entity
Ownership %
Accounts
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.
100%
53.66%
75%
50%
100%
100%
100%
80%
Consolidated
Consolidated
Consolidated
Equity method
Consolidated
Consolidated
Consolidated
Consolidated
88
Clearwater Seafoods Incorporated 2014 Annual Report
(b) Key management personnel
Clearwater has defi ned key management personnel as senior executive offi cers, 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, 2014 and 2013.
Year ended December 31
Wages and salaries
Share-based compensation
Bonuses
Other benefi ts
$
$
2014
3,408
8,740
1,539
1,829
2013
3,792
5,861
1,290
606
$
15,516
$
11,549
c) Transactions with other related parties
Clearwater rents offi ce space to Clearwater Fine Foods Incorporated (“CFFI”) (the controlling shareholder of Clearwater) and
provides computer network support services to CFFI. Clearwater charges CFFI management and other fees for fi nance and
administration services provided to CFFI by certain Clearwater staff. These fees apportion the salaries and benefi t costs of the
individuals providing the services based on estimated time spent.
Clearwater had the following transactions and balances with CFFI:
Opening balance due from CFFI
Management and other fees charged to CFFI
Rent and IT service fees charged to CFFI
Interest on intercompany account
Payments from CFFI
Other charges to (from) CFFI
December 31,
2014
December 31,
2013
$
$
1,524
—
184
56
(1,783)
50
1,596
122
184
78
(466)
10
$
31
$
1,524
The amount due from CFFI is unsecured and due on demand. As such the account has been classifi ed as a current asset
included in prepaids and other. The balance bears interest at a rate of 5%.
In addition, Clearwater expensed approximately $0.04 million for vehicle leases for the year ended December 31, 2014 (December 31,
2013 – $0.07 million) and approximately $0.13 million for other services for the year ended December 31, 2014 (December 31,
2013 – $0.11 million) by companies related to its parent. The transactions are recorded at the exchange amount and the balance
due to these companies was $nil million as at December 31, 2014 (December 31, 2013 – $0.01 million).
Clearwater recorded sales, sales commissions and storage fees to a non-controlling interest holder in a consolidated partnership.
These sales, sales commissions and storage fees are at negotiated prices and are settled on normal trade terms. Sales for the
year ended December 31, 2014 are $6.7 million (December 31, 2013 – $1.2 million). Sales commissions for the year ended
December 31, 2014 are $2.4 million (December 31, 2013 – $2.0 million). Storage fees for the year ended December 31, 2014
are $1.4 million (December 31, 2013 – $1.7 million).
At December 31, 2014 Clearwater had a balance of $1.0 million (December 31, 2013 – $5.0 million), included in long term
receivables, for interest bearing loans made to a non-controlling interest shareholder in a subsidiary. In the fi rst quarter of
2014, Clearwater changed its presentation of advances to a non-controlling interest shareholder in a subsidiary. Advances as
at December 31, 2014 of $4.4 million (December 31, 2013 – $3.8 million) were reclassifi ed from long term receivables to non-
controlling interest. These advances are now recorded as distributions to and repayments from a non-controlling shareholder
in a subsidiary.
During the year ended December 31, 2014, Clearwater incurred $0.02 million, in legal fees paid to a law fi rm in which a Director
of Clearwater is a partner (year ended December 31, 2013 – $0.03 million).
Clearwater Seafoods Incorporated 2014 Annual Report
89
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
2 0 . N O N - C O N T R O L L I N G I N T E R E S T
Summarized fi nancial information in respect of Clearwater’s subsidiaries that have non controlling interests (“NCI”) is set
out below.
(a) Summarized statements of fi nancial position
Coldwater shrimp
2014
2013
46.34%
46.34%
$
28,881
(10,684)
18,197
39,312
(386)
38,926
$
30,872
(8,194)
22,678
36,475
(1,072)
35,403
57,123
58,081
$
25,737
$
24,630
$
2014
20.0%
5,428
(28,753)
(23,325)
33,345
—
33,345
Scallops
$
2013
20.0%
5,629
(27,112)
(21,483)
23,972
(186)
23,786
10,020
2,303
$
1,019
$
(78)
Year ended December 31
NCI Percentage
Current assets
Current liabilities
Non-current assets
Non-current liabilities
Net assets
Accumulated non-controlling interests
Year ended December 31
NCI Percentage
Current assets
Current liabilities
Non-current assets
Non-current liabilities
Net assets
Accumulated non-controlling interests
90
Clearwater Seafoods Incorporated 2014 Annual Report
(b) Summarized statements of earnings
Year ended December 31
Sales
Earnings
Total comprehensive income
Earnings allocated to non-controlling interest
Dividends paid to non-controlling interest
Year ended December 31
Sales
Earnings
Other comprehensive income
Total comprehensive income
Earnings allocated to non-controlling interest
Dividends paid to non-controlling interest
(c) Summarized statements of cash fl ows
Year ended December 31
Cash fl ow from operating activities
Cash fl ow used in fi nancing activities
Cash fl ow used in investing activities
Net (decrease) increase in cash
Year ended December 31
Cash fl ow from operating activities
Cash fl ow from (used in) fi nancing activities
Cash fl ow used in investing activities
Net (decrease) increase in cash
2 1 . I N V E S T M E N T I N E Q U I T Y I N V E S T E E
$
$
$
$
Coldwater shrimp
2014
89,792
21,558
21,558
11,533
10,427
2014
38,407
5,272
505
5,777
1,097
—
$
Scallops
$
2013
77,866
19,998
19,998
8,438
11,349
2013
30,916
1,138
634
1,772
569
66
Coldwater shrimp
2014
32,387
(23,331)
(12,482)
(3,426)
$
2013
27,403
(25,342)
(13)
2,048
Scallops
$
2013
3,534
10,339
(13,863)
10
2014
8,626
—
(8,641)
(15)
The following table summarizes the fi nancial information of Clearwater’s joint venture accounted for using the equity method:
Year ended December 31
Carrying amount of interest in joint venture
Share of:
Earnings for the year
Dividends from joint venture
Commissions paid to joint venture
2014
2013
$
6,198
$
4,701
2,987
1,490
9,524
2,082
1,240
6,905
Clearwater Seafoods Incorporated 2014 Annual Report
91
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
2 2 . C A P I TA L M A N A G E M E N T
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 types of debt facilities. Clearwater’s objective when
managing its capital structure is to obtain the lowest cost of capital available, while maintaining fl exibility and reducing exchange
risk by borrowing when appropriate in currencies other than the Canadian dollar.
Clearwater uses leverage, in particular revolving and term debt to lower its cost of capital.
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 fl exibility in its capital structure by regularly reviewing forecasts and multi-year business plans and making
any required changes to its debt and equity facilities on a proactive basis. These changes can include early repayment of debt,
issuing or 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.
2 3 . S H A R E - B A S E D C O M P E N S AT I O N
Clearwater’s share-based compensation plans are disclosed in Note 3 (m).
The number of share-based awards outstanding and vested as of December 31, 2014 and 2013 were as follows:
As at December 31, 2014
SARs
PSU – Tranche 1
PSU – Tranche 2
PSU – Tranche 3
DSU
Total
As at December 31, 2013
SARs
PSU – Tranche 1
PSU – Tranche 2
DSU
Total
$
$
Grant
price
0.80
1.00
N/A
N/A
N/A
N/A
Grant
price
0.80
1.00
N/A
N/A
N/A
In thousands
Number
outstanding
83
67
424
219
208
398
1,399
In thousands
Number
outstanding
83
67
424
214
443
1,231
Number
vested
83
67
424
—
—
220
794
Number
vested
83
67
—
—
167
317
Grant Date
May 2010
May 2010
May 2012
March 2013
March 2014
June 2012 – December 2014
Grant Date
May 2010
May 2010
May 2012
March 2013
June 2012 – December 2013
92
Clearwater Seafoods Incorporated 2014 Annual Report
The following reconciles the share based awards outstanding for the year ended December 31, 2014:
PSU –
Tranche 1
PSU –
Tranche 2
PSU –
Tranche 3
DSU
SARS
Total
In thousands of awards
Outstanding at
January 1, 2014
Granted
Granted from dividends
Forfeited
Exercised
Outstanding at
December 31, 2014
Vested at January 1, 2014
Vested
Vested at December 31, 2014 424
424
37
5
(42)
—
424
—
424
214
18
3
(16)
—
219
—
—
—
—
206
2
—
—
208
—
—
—
443
51
5
(101)
—
398
167
53
220
The following reconciles the share based awards outstanding for the year ended December 31, 2013:
In thousands
Outstanding at January 1, 2013
Granted
Granted from dividends
Exercised
Outstanding at
December 31, 2013
Vested at January 1, 2013
Vested
Exercised
Vested at December 31, 2013
PSU –
Tranche 1
PSU –
Tranche 2
423
—
1
—
—
213
1
—
424
214
—
—
—
—
—
—
—
—
DSU
401
41
1
—
443
126
41
—
167
150
—
—
—
—
150
150
—
150
SARS
705
—
—
(555)
150
555
150
(555)
150
1,231
312
15
(159)
—
1,399
317
477
794
Total
1,529
254
3
(555)
1,231
681
191
(555)
317
For the year ended December 31, 2014, there were nil share based awards exercised during the year. The following share based
awards were exercised during the year ended December 31, 2013:
As at December 31, 2013
SARs
Total
$
Grant
price
0.01
0.80
1.00
Number
exercised
in thousands
255
167
133
555
Exercise
date
Share price at
exercise date
March 2013
March 2013
March 2013
$5.00
$5.00
$5.00
The total cash payment for share based awards exercised during the year were $nil (December 31, 2013 – $ 2.5 million).
There is no limit to the number of awards that can be issued as awards are expected to be cash settled.
When cash dividends are paid to shareholders of Clearwater, dividend equivalent PSUs and DSUs are granted to the Participants
which are equal to the greatest number of whole share units having a market value, as of the payment date of the dividend,
equal to the product of the cash dividend paid per share multiplied by the number of PSUs and DSUs subject to the Grant. The
additional PSUs and DSUs granted are subject to the same terms and conditions as the corresponding PSU or DSU Grant.
Clearwater Seafoods Incorporated 2014 Annual Report
93
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
Fair value of share based plans
The SARS issued and outstanding are fully vested and are expected to be cash settled on the exercise date; therefore, the fair
value of the SARS is based on the intrinsic value.
The PSU Tranche 1 are fully vested as of December 31, 2014 with a liability of $7.6 million. This is expected to be cash settled
in the fi rst quarter of 2015.
Measurement inputs for the remaining plans include the fair value of the company’s shares, 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 remaining 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), as follows:
Number of awards
PSU
Tranche 2
2014
PSU
Tranche 3
Weighted average fair value per award
Weighted average risk-free interest rate
Weighted average expected volatility
Expected life of awards (years)
$
17.11
1.19% – 3.69%
17.81% – 44.88%
1
$
17.47
0.75% – 3.69%
17.8% – 44.88 %
2
Number of awards
PSU
Tranche 1
2013
PSU
Tranche 2
Weighted average fair value per award
Weighted average risk-free interest rate
Weighted average expected volatility
Expected life of awards (years)
$
12.09
1.49% – 3.38%
22.65% – 64.39%
1
$
11.41
1.39% – 3.82%
21.62% – 58.90%
2
DSU
$
11.86
1.01% – 1.35%
52.33% – 52.89%
4.5 – 5.25
DSU
$
8.22
1.13% – 2.12%
58.60% – 77.22%
5.5 –12.3
Share-based compensation expense included in the income statement for the year ended December 31, 2014 is $8.9 million
(December 31, 2013 – $5.9 million).
The liability for share based compensation is $15.9 million at December 31, 2014 (December 31, 2013 – $7.0 million). The vested
portion of the liability for share based compensation is $11.8 million at December 31, 2014 (December 31, 2013 – $2.5 million).
2 4 . C O N T I N G E N T L I A B I L I T I E S
Clearwater has received a claim regarding alleged rights to certain intellectual property in the amount of $6 million. Clearwater
has agreed to arbitration; however, Clearwater does not believe there to be a material liability relating to the dispute.
In addition, 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 fi nancial position.
2 5 . A D D I T I O N A L C A S H F L O W I N F O R M AT I O N
Changes in operating working capital (excludes change in accrued interest)
Decrease in inventory
Increase (decrease) in accounts payable
(Increase) in accounts receivable
Increase) decrease in prepaids
December 31.
2014
December 31.
2013
$
$
6,237
2,685
(4,605)
(713)
2,745
(4,191)
(470)
619
$
3,604
$
(1,297)
94
Clearwater Seafoods Incorporated 2014 Annual Report
Clearwater Seafoods Incorporated
Quarterly and share information
($000’s except per share amounts)
2014
2013
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Sales
Net (loss) earnings
Per share data
Basic net (loss) earnings
Diluted net (loss) earnings
119,498
130
134,069
2,959
113,403
18,850
77,771
(12,144)
111,012
(298)
113,982
27,224
95,368
(9,866)
68,297
(1,762)
(0.07)
(0.07)
(0.02)
(0.02)
0.30
0.30
(0.27)
(0.27)
(0.06)
(0.06)
0.48
0.4 7
(0.24)
(0.24)
(0.06)
(0.06)
Clearwater Seafoods Incorporated
Trading information
symbol CLR
2014
2013
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Trading price range
of shares (board lots)
High
Low
Close
Trading volumes (000’s)
Total
Average daily
Shares outstanding
at end of quarter
12.23
9.30
11.86
10.80
7.75
10.56
8.70
6.90
8.69
9.21
7.27
7.55
8.50
5.37
8.22
5.82
4.86
5.68
4.98
4.10
4.92
5.30
4.00
4.85
5,907
91
3,793
67
2,974
47
3,370
55
2,635
41
2,416
39
1,930
30
6,709
110
54,978,098 54,978,098 54,978,098 54,978,098 50,948,698 50,948,698 50,948,698 50,948,698
Clearwater Seafoods Incorporated 2014 Annual Report
95
Selected Annual Information
Sales
Costs of goods sold
Gross margin
2014
2013
2012
2011
2010
(Audited)
(Audited)
(Audited)
(Audited)*
(Audited)
$
444,742
341,908
$
388,659
301,291
$
350,302
277,777
$
332,785
263,220
$
291,116
234,854
Administrative and selling
Net fi nance costs
(Gains) losses on forward contracts
Other income
Research and development
Gain on settlement of Glitnir transaction
Gain on change of control of joint venture
102,834
48,252
37,829
4,047
(5,031)
1,991
87,368
39,005
33,935
8,812
(3,240)
1,659
72,525
32,536
29,041
(4,654)
(3,399)
1,759
69,565
33,345
36,313
2,291
(5,893)
707
(12,445)
(11,571)
56,262
28,557
41,225
1,257
(2,477)
1,623
Earnings before income taxes
Income taxes expense (recovery)
15,746
5,949
7,197
(8,101)
17,242
26,818
(13,923)
(5,462)
3,863
3,564
Earnings before non-controlling interest
9,797
15,298
22,704
22,955
(17,487)
Non-controlling interest
12,702
8,965
7,695
6,619
1,704
Earnings attributable to shareholders
$
(2,905)
$
6,333
$
15,009
$
16,336
$
(19,191)
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96
Clearwater Seafoods Incorporated 2014 Annual Report
Corporate Information
Head offi ce of Clearwater Seafoods Incorporated
757 Bedford Highway
Bedford, Nova Scotia B4A 3Z7
902-443-0550
Directors of Clearwater Seafoods Incorporated
Executive of Clearwater Seafoods Incorporated
Colin E. MacDonald
Chairman of the Board
John C. Risley
President, Clearwater Fine Foods Inc.
Harold Giles
Chair of Human Resource Development and
Compensation (‘HRDCC”) Committee
Independent Consultant
Larry Hood,
Chair of Audit Committee
Director, Former Partner, KPMG
Thomas D. Traves
President Emeritus, Dalhousie University
Mickey MacDonald
President, Micco Companies
Brendan Paddick
Chief Executive Offi cer, Columbus International Inc.
Stan Spavold
Chair of Finance Committee
Executive Vice President, Clearwater Fine Foods Inc.
Jim Dickson
Chair of Governance Committee
Partner, Stewart McKelvey
Ian Smith
Chief Executive Offi cer
Robert D. Wight
Vice-President, Finance and Chief Financial Offi cer
Ronald van der Giesen
President, Global Supply Chain
Michael D. Pittman
Vice-President, Fleet
Greg Morency
President and Chief Commercial Offi cer
David Rathbun
Vice-President, Chief Talent Offi cer
Christine Penney
Vice-President, Sustainability & Public Affairs
Paul Broderick
Vice-President of International Sales
David Kavanagh
Vice-President and General Counsel
John Burwash
Vice-President, Chief Information Offi cer
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
Transfer agent
Computershare Investor Services Inc.
Why Invest in Clearwater?
• North America’s largest vertically integrated harvester,
processor and distributor of premium, wild, eco-labelled
shellfish with more than 81 million pounds sold in 2014
• Global demand for premium wild-caught seafood among
aging boomers and a rising middle class in the Asia-Pacific
region is outpacing resource supply. This in combination with
conservatively managing wild seafood fisheries to protect the
long-term health of the industry is creating new opportunities
from the rising demand for high-quality sustainable seafood.
• Largest holder of shellfish quotas and licenses within Canada
and maintains the widest selection of MSC-certified species
of any shellfish harvester worldwide
• Diverse channel and customer mix in foodservice, retail and
other food industries with no single customer representing
more than 6% of total sales
• Five consecutive years of sales and adjusted EBITDA growth