CLEARWATER SEAFOODS INCORPORATED 2016 ANNUAL REPORT
& Growing
About Clearwater
Clearwater Seafoods is one of North America’s largest vertically integrated
seafood companies with over 1,900 employees in offices, plants and vessels
around the world. The Bedford, Nova Scotia-based company is recognized
globally for its superior quality, food safety and diversity of premium
From ocean-to-plate
1 harvest
Together with Macduff,
Clearwater owns 23 vessels
and one research vessel.
Clearwater is the largest
holder of shellfish licenses
and quotas in Canada.
2 processing
Scallops, lobster, clams,
coldwater shrimp, Norway lobster,
crabs and whelk are processed
in our nine processing facilities
around the world.
locations where we have
processing facilities
ocean areas that we harvest
countries that we supply
Clearwater customer base
retail
foodservice
Clearwater-branded and private-label
products sold globally to food retailers.
Products sold through distributors and
directly to national, regional and independent
foodservice establishments.
wild-caught seafood. Since its founding in 1976, Clearwater has invested in its
resource ownership and management to sustain and grow its wild resource.
This commitment has established Clearwater as a global leader in sustainable
seafood excellence.
3 logistics
4 culinary
Clearwater’s global logistics
team coordinates delivery
to our customers worldwide.
Products are shipped via
ground, air and ocean to
over 40 countries.
Clearwater uses 20 cold storage facilities
around the world, enabling fast and efficient
delivery of our products worldwide.
Clearwater’s premium wild-caught
seafood can be found on plates
and stores around the world.
Our customer base includes
retail, foodservice operators,
food processors, and importers
and wholesalers.
food processors
importers/wholesalers
Products sold to food processors for further
foodservice and value-added production.
Relationships with importers and wholesalers
to expand global reach.
Clearwater Seafoods Incorporated 2016 Annual Report
1
Species
Argentine Scallops
Sweet-tasting, sustainably harvested
and dry, Argentine Scallops are
100% natural and a cost-effective way
to offer a premium scallop option for
customers. Also featured in a value-added
Scallops & Sauce format.
Canadian Sea Scallops
Clearwater’s premium frozen-at-sea,
wild Sea Scallops come from the
cold, clear waters of the Canadian
North Atlantic. 100% natural,
dry and sustainably harvested, they
consistently outperform fresh
and frozen scallops on weight loss,
yield, flavor, texture and shelf life. Also
featured in a bacon-wrapped format.
Snow Crab
Clearwater’s Snow Crab is 100%
natural, wild-caught and sustainably
harvested from the pristine waters of
the Canadian North Atlantic.
Prized for its sweet flavor, snow white
meat and delicate texture, Snow Crab
is ideal as an appetizer, buffet item
or entrée dish.
Propeller Clams
As the exclusive offshore harvester
of wild-caught Canadian Northern
Propeller Clams, Clearwater offers
ocean-to-customer quality control.
Pre-blanched and distinctive yellow-
white and red-orange colors present
a truly unique shellfish delicacy.
Also available in a convenient and
ready-to-use canned format – Premium
Wild Northern Propeller Clams.
Cockle Clams
Sustainably harvested from
the deep, icy-cold waters of the
North Atlantic, Cockle Clams add
a fresh, delicate flavor to any recipe.
Pre-blanched and 100% natural,
they’re sushi and sashimi ready.
Arctic Surf Clams
Popular in Asian cuisines, Clearwater
Arctic Surf Clams are prized for their
sweet taste and unique texture. Their
brilliant red tongues make them visually
appealing, particularly in sushi and
sashimi dishes. Also available in two
convenient and ready-to-use canned
formats – Chopped, Wild Arctic Surf
Clams and Premium Wild Blend Clams.
Lobster
The highest quality in live lobster,
available year-round, Clearwater’s
Premium Hardshell Fresh™ Lobster
is fully meated, wild-caught and
sustainably harvested, yielding up to
50% more meat than soft shell lobster.
Also available in a ready-to-cook, frozen
raw format – Nova Scotia Prime Lobster.
Through a specialized high-pressure
extraction process, raw lobster meat is
released from its shell and then frozen in
both shell-on and shell-off formats.
Coldwater Shrimp
Clearwater Canadian Coldwater
Shrimp are cooked, peeled and frozen
at the company’s processing facility
closely located within a day of the
world’s best shrimp grounds. MSC-
certified, wild-caught and ready-to-
serve, Coldwater Shrimp offer more
flavor, better texture and a brighter pink
color than warm water varieties. Also
available in a frozen-at-sea shell-on
format, most popular in Asian cuisines.
Whelk
Harvested from the surrounding
coasts of the UK, Whelk is often
used as an alternative to the rare and
expensive conch. It is also highly
popular in Mediterranean countries
and Korean and Japanese cuisines.
Brown Crab
Clearwater’s Brown Crab is sweet
and full, with delicate white meat,
making them a true shellfish delicacy.
Wild-caught from the cold, clear UK
waters, Brown Crab is also available in
a scored crab claw format.
Langoustines
Prized for their delicate flesh and
sweet, succulent taste, Langoustines
originate from the cold, clear waters
surrounding the UK. Whole Langoustines
are slim, with orange-pink shells and
bodies growing up to 10 inches in
length. The product range is available in
a variety of formats.
King and Queen Scallops
Clearwater’s King and Queen Scallops
are harvested from the surrounding
waters of the UK. With a sweet,
delicate flavor and meaty texture,
King and Queen Scallops are
available in both fresh and frozen
formats as whole, on the half shell
or as meat only.
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Clearwater Seafoods Incorporated 2016 Annual Report
Highlights in 2016
Macduff integration
It’s been a full year since the acquisition
of Macduff. The integration of the operations
and our people has gone smoothly and
we are extremely pleased with the continued
performance of the business.
Record sales and adjusted earnings
before interest, tax, depreciation and
amortization (EBITDA)
Record annual sales and adjusted EBITDA
for 2016 of $611.6 million and $120.9 million,
representing double-digit growth rates of
21.1% and 10.2%, respectively.
Growth in
Sales
Growth in
Adjusted EBITDA
21.1%
10.2%
40th anniversary
Vision 2020
We began implementation of our next five-
year plan to 2020. In this plan, we will focus
on attractive opportunities for future growth
in wild-caught, sustainably harvested
seafood and perform in the top quartile of
our peer group.
20I20
Access to supply
For the first time, we harvested the entire
quota for clams and higher volumes for
lobster and langoustines, positioning us to be
able to support growth opportunities in 2017.
In August 2016
Clearwater
celebrated
40 years! Our
entrepreneurial
zeal for growth,
diversity and continuous improvements
has been at the forefront of Clearwater’s
core mission to build the world’s most
extraordinary wild seafood company,
dedicated to sustainable seafood excellence.
40 years
Anne Risley
Announced the $70 million replacement of a
28-year-old clam vessel with a state-of-the-
art factory vessel that will deliver significant
productivity and efficiency improvements.
$70 million
Clearwater Seafoods Incorporated 2016 Annual Report
3
Financial Highlights
Clearwater reported record sales and adjusted EBITDA1 of
$611.6 million and $120.9 million, respectively, for 2016 versus
2015 comparative results of $504.9 million and $109.7 million.
Sales and adjusted EBITDA were positively impacted by strong sales prices for scallops
and higher sales volumes for clams, lobster, langoustine, whelk and crab. Higher average
foreign exchange rates for the US dollar, Yen and the Euro had a net positive impact of
$7.0 million, contributing to the improvement in sales.
Earnings increased $80.3 million to $59.6 million in 2016 primarily as a result of improvements
in gross margin from strong sales prices for the majority of core species and the impact of
lower average foreign exchange rates. The changes in foreign exchange rates resulted in
This represents
growth rates of
21.1% for sales
and 10.2% for
adjusted EBITDA
marking
Clearwater’s
seventh
consecutive
year of top
and bottom
line growth.
1 Refer to discussion on
non-IFRS measures, definitions
and reconciliations in the 2016
Management’s Discussion
and Analysis.
non-cash unrealized foreign exchange gains on long-term debt and forward contracts as the
Canadian dollar strengthened against the US dollar and the GBP.
We faced challenges in several core species during the year that resulted in lower than expected
sales and earnings.
The Total Allowable Catch (“TAC”) for coldwater shrimp was reduced and reallocated in 2016,
resulting in decline in our coldwater shrimp sales and margins. The decline in TAC from historic
highs is in natural response to the decline of the coldwater shrimp biomass as the cod species
return to the North Atlantic fishery.
The TAC for Canadian sea scallops was at its lowest level in 11 years, resulting in lower sales
and earnings compared to 2015. Lower available supply enabled stronger prices for this high
demand species.
In the live lobster business, higher volumes resulted in increased sales. Margins were weaker in
this species, however, due to poor quality received from the inshore fishery and an increase in
low-priced competition in the China wholesale market as prices could not be increased quickly
enough in the latter part of the year to offset higher procurement prices and mortality.
In Arctic Surf Clam, harvested volumes increased rapidly in the second half of the year with
the resulting supply outstripping the capacity of our existing channels and customers. Heavier
promotional activity resulted in higher sales. A smaller size mix in the clams and a reduction in
selling prices to increase consumer demand resulted in an overall reduction in margins.
Our Argentine scallop species had its strongest year in recent history with increased volumes,
higher selling prices and lower costs.
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Clearwater Seafoods Incorporated 2016 Annual Report
SALES
(in millions)
ADJUSTED EBITDA1
(in millions)
FREE CASH FLOWS1
(in millions)
612
612
121
121
110
505
445
87
79
72
39
31
26
17
389
350
10
10
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
'2011
'2012
'2013
'2014
'2015
'2011
'2012
'2013
'2014
'2015
'2011
'2012
'2013
'2014
'2015
1 Refer to Non-IFRS measures, definitions and reconciliations
in the 2016 Management’s Discussion and Analysis.
2 Leverage prior to 2013 excludes adjustments for
non-controlling interest.
Sales
'2012
'2013
'2014
2015
2016
350
389
445
505
612
Adjusted EBITDA
'2012
'2013
'2014
'2015
'2016
72
79
87
110
121
Free Cash flows
'2012
'2013
'2014
'2015
'2016
17
26
31
39
10
LEVERAGE1,2
RETURN ON ASSETS1
4.4
4.2
4.2x
13.7
13.4
12.1
12.5
3.3
3.3
2.9
11.0
11.0%
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
120
100
80
60
40
20
0
500
450
400
350
300
250
5
4
3
2
1
0
120
100
80
60
40
20
0
14.0
12.8
11.6
10.4
9.2
8.0
'2012
'2013
'2014
'2012
'2013
'2014
'2015
'2016
Leverage
'2012
'2013
'2014
2015
2016
2.9
3.3
3.3
4.4
4.2
Return on Assets
'2012
'2013
'2014
'2015
'2016
12.1
13.4
13.7
12.5
11.0
2016 represents a continued strong track record for both top and bottom
line growth. By focusing on our six core strategies, including increasing
access to supply, targeting profitable and growing markets, and building
organizational capacity, we successfully reported another record year
that builds our foundation for the next four years.
Clearwater Seafoods Incorporated 2016 Annual Report
5
Financial Highlights (continued)
Our Macduff business also had its strongest year with high volumes, pricing and increased access to supply through
procurement arrangements. The weaker Sterling versus Euro had a favorable impact on results although this was partially
offset when translated to Canadian dollars. The higher proportion of procured products through the Macduff operations had a
dilutive effect on margin as a percent of sales.
The combined effect of these items resulted in a decline in gross margin as a percent of sales of 2.6% for the 2016 year
compared to 2015.
The reductions in coldwater shrimp and sea scallop TAC and poor live lobster quality, from the inshore fishery, combined
with high shore prices resulted in lower margins. Lower average foreign exchange rates, as the Canadian dollar strengthened
against the US dollar, Euro and GBP, resulted in a negative impact to sales of $5.2 million. Despite these challenges, our
business fundamentals remain strong and we are positioned well for another year of significant growth in 2017.
Earnings in the fourth quarter of 2016 increased $16.2 million to $12.4 million primarily as a result of higher average foreign
exchange rates as the US dollar and GBP had strengthened against the Canadian dollar in the fourth quarter of 2015,
resulting in higher non-cash unrealized foreign exchange losses on US dollar and GBP denominated debt. In addition general
and administrative expenses declined in the fourth quarter of 2016 as a result of a reduction in variable and share-based
compensation expense as compared to the same period in 2015.
The cash flows used in working capital increased against 2015 by $2.3 million to use of $21.1 million for 2016. The increased
level of working capital resulted primarily from high inventory levels for clams and certain procured species, partially offset by
timing of collections of accounts receivable.
Inventory levels increased during the third and fourth quarters of 2016 to higher than anticipated levels following successful
harvesting in our clam fleet. With the addition of the third vessel into the fishery in the latter part of 2015 combined with
improved efficiency through the implementation of advanced harvesting technology and equipment, harvesting volumes
increased significantly and therefore the Company was able to catch the full clam quota for the first time in 2016. Overall
inventory levels increased through the second half of 2016, resulting in year-end clam inventories closing $23.9 million
higher than 2015. Clam sales volumes increased 22.7% over the prior year with pricing adjustments, investments in marketing,
promotion and distribution expansion initiated to increase sales. The benefits of these investments were not fully realized in 2016
as it will take time to effect expanded distribution of clams. Management anticipates the benefits will be realized through 2017
and inventories will return to normal levels by the end of the year.
Free cash flows1 were $10.2 million in 2016 as compared to $39.1 million in 2015. Higher adjusted EBITDA was offset by
higher working capital balances from inventory. Other contributing factors included higher interest expense that resulted from
higher inventory balances and timing of payments to non-controlling interests, which reduced free cash flow balances by
approximately $12.7 million in 2016. Cash taxes were also higher by $5.2 million as a result of a full year of Macduff operations.
Leverage1 decreased to 4.2x adjusted EBITDA as at December 31, 2016 compared to 4.4x at the end of 2015 and was slightly
higher than management’s initial expectations as a result of higher working capital balances. Clearwater continues to have a
long-term target for leverage of 3.0x or lower and plans to be in line with this target within the next two years.
Return on assets1 (“ROA”) declined from 13.8% in 2015 to 11.0% in 2016. The full year impact of the addition of Macduff diluted
ROA due to the higher proportion of procured species sold at lower margins. Average total assets for 2016 versus 2015 also
increased with the completion of the Belle Carnell vessel later in 2015 and the ERP system investment completed early in 2016.
Growth in EBIT was modestly higher than the increase in depreciation expense of $8.9 million higher resulting from these
additions.
2016 represents a continued strong track record for both top and bottom line growth despite our challenges. By focusing
on our six core strategies, including increasing access to supply, targeting profitable and growing markets, and building
organizational capacity, we successfully reported another record year that builds our foundation for the next four years.
1 Refer to discussion on non-IFRS measures, definitions and reconciliations in the 2016 Management’s Discussion and Analysis.
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Clearwater Seafoods Incorporated 2016 Annual Report
Letter from the Chairman of Clearwater Seafoods Incorporated
“ Whether our people are at sea, in plants
or offices or helping customers, their
commitment to providing the finest quality
seafood never wavers. Our dedication to
responsible and sustainable harvesting,
quality control processing and timely delivery
is behind everything we do. ”
We are all very proud of Clearwater’s success
over the past 40 years.
When John and I started Clearwater in August of 1976, it was in
heavily in scallop licenses. Then, in 1995 we spearheaded
the old Navarro’s restaurant on the Bedford Highway, Halifax,
the development and success of the Argentinean scallop
Nova Scotia. We started with an image of a retail lobster
resource – both at the harvest and market levels.
shop, coupled with enormous dedication, perseverance
and desperation…and, yes, an unbridled sense of optimism,
dreams of endless possibilities and a whole lot of courage and
luck. In those humble beginnings, John and I were the packer,
driver, foreman, sweeper, salesman, plumber, accountant
and electrician. Today we have a dedicated global team of
men and women harvesting, processing, administering our
books, maintaining our plants and vessels and selling to over
That energy and passion continues today as we now hold
licenses in a multitude of diverse species globally and continue
to develop technological improvements to reduce both waste
and the impact of our global footprint on the resource and
the environment by developing tools such as ocean bottom
mapping, frozen-at-sea processing, Dryland Pound Lobster
storage and automated shucking, plus many other innovations.
40 countries proudly under the Clearwater name and logo.
Most importantly, however, we are reminded daily that our
The entrepreneurial zeal that John and I and our people have
for growth, diversity and continuous improvement has been at
the forefront of Clearwater’s core mission to build the world’s
most extraordinary wild seafood company, dedicated to
sustainable seafood excellence. It is that zeal that energized
us to not only develop new markets for lobsters in Europe
and the US, as well as Japan and China, but also to pioneer
new fisheries in the late ’80s and ’90s as we became the first
company to develop Arctic surf clam frozen-at-sea factory
vessels for the use of an exploratory clam license. In the mid
’80s, the year that the Canadian fishery was split between
inshore and offshore, we were the first company to invest
greatest resource is our people. Although we harvest the richest
bounty of the oceans off Atlantic Canada, Argentina and the
UK, these valued seafood resources pale in comparison to the
quality of our people. The success of Clearwater relates directly
to its extremely dedicated workforce that has faced every new
challenge with courage and determination and has allowed us
to turn those challenges into opportunities and to grow our
company into a world leader in the global seafood industry.
Colin MacDonald
Clearwater Seafoods Incorporated 2016 Annual Report
7
On August 10, 1976, Clearwater opened for business
when two young and innovative entrepreneurs
started the company with just a pickup truck and
1976
Founding
John Risley
and Colin
MacDonald
founded
Clearwater
with a
lobster retail shop on the
Bedford Highway in Halifax.
1981
Opened Clearwater
UK Ltd. Lobster
Clearwater opened UK Ltd.
Lobster after determining this
marketplace was a strong fit
for exporting lobster.
1991
Opened Grand Bank
Clearwater opened Grand
Bank Seafoods, located in
Grand Bank,
Newfoundland
and Labrador,
home of the
company’s clam
processing
operation.
1979
Developed and
implemented the world’s
first Dryland Lobster Pound
Clearwater’s Dryland Lobster
Pound holds lobster in a
stress-free environment,
providing access to a year-
round supply of fresh,
live lobster.
1986–1988
Added the ‘Atlantic Surf I’
to fleet and acquired
Highland Fisheries in Glace
Bay, NS and Pierce Fisheries
in Lockeport, NS
1994–1996
Opened first sales offices in
China and the US
Clearwater was the first
Canadian seafood company
to open a sales office
in China.
8
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Clearwater Seafoods Incorporated 2016 Annual Report
Clearwater Seafoods Incorporated
1976 tremendous vision. Forty years later, Clearwater remains dedicated to
the same mission to build the world’s most extraordinary wild seafood
company, dedicated to Sustainable Seafood Excellence.
2014–2015
Added the Capesante and
Belle Carnell to fleet
and acquired Macduff
Shellfish Group
The acquisition of Macduff
brings together two of the
world’s leading and fastest-
growing vertically integrated
wild-shellfish harvesters.
2016
Participated in the first mobile
TSX market close from
Clearwater’s Bedford, NS
retail store
1999
Opened St. Anthony Seafoods
Clearwater opened
St. Anthony Seafoods, located
in St. Anthony, Newfoundland
and Labrador, home of the
company’s shrimp processing
operation.
2002
Clearwater became a
publicly traded company
Clearwater Seafoods Inc.
is traded on the Toronto
Stock Exchange under the
symbol CLR.
2007
Modernized lobster fleet
and replaced aging vessels
with the ‘Randell Dominaux’
The addition of the modern
and efficient Randell Dominaux
consolidated Clearwater’s
offshore lobster fishing fleet
from five vessels to one.
2012
Marine
Stewardship
Council (MSC)
certification of
all core species
Arctic surf clams, Nova Scotia
snow crab, Canadian sea
scallops, Argentine scallops,
Canadian coldwater shrimps
and Eastern Canadian
offshore lobster are all
MSC-certified.
Clearwater Seafoods Incorporated 2016 Annual Report
9
2016 Letter from the Chief Executive Officer of Clearwater Seafoods Incorporated
“ Our business is strong,
and our strategies and plans
will yield another year of
significant growth in 2017.”
2016 marked Clearwater Seafoods’ first 40 years of
continuous operation and the beginning of our fifth decade
of sustainable seafood excellence.
Of the last 40 years, 2016 will be remembered
as a year of firsts:
1. The first year since the acquisition of Macduff
Shellfish in Scotland
2. The first year the Belle Carnell entered service
in the Clearwater clam fleet
3. The first year of SAP implementation
4. The first e-commerce flagship store in China
on Alibaba’s T-Mall
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Clearwater Seafoods Incorporated 2016 Annual Report
We celebrated these milestones along with our highest
complete harvest of the TAC for the first time in the history
sales revenue and adjusted EBITDA in history. We also faced
of the fishery. While this bodes well for a strong 2017, the
challenges in several core species, particularly in the fourth
rapid increase in supply was unexpected and outstripped
quarter where a short-term dislocation between supply, costs
the capacity of our existing channels and customers to the
and prices resulted in lower margins and profits.
detriment of prices, margins and year-end inventory.
A necessary reduction in northern shrimp TAC and the
Despite these challenges, our business fundamentals remain
lowest annual TAC for sea scallops in 11 years contributed
strong and our strategies and plans will yield another year
to weaker results than planned. We are proud to be one of
of significant growth in 2017 as Clearwater successfully
the world’s leading sustainable seafood harvesters but this
navigates the combined forces of technological change,
responsibility sometimes requires taking less to ensure the
globalization and Mother Nature herself.
long-term health of the resource.
In this amazing sea of change, the one constant that
In live lobster, poor quality from the inshore fishery and an
matters most of all is our people. Working and leading
increase in low-priced competition in the China wholesale
with character, competence and teamwork to accomplish
market resulted in sharply lower margins as we worked to
extraordinary things in the workplace, the marketplace and
offset higher procurement prices and mortality. In 2017,
in our communities around the globe. They were the most
adjustments to our procurement, logistics and sales plans
important thing 40 years ago and they will always be what
along with the expansion of our e-commerce program in
defines Clearwater Seafoods.
China will help restore market-leading profitability to this
hallmark business.
In Arctic surf clam, the reintroduction of a third clam
vessel to the Grand Banks combined with our proprietary
advancements in harvesting technology resulted in the
Ian D. Smith
Clearwater Seafoods Incorporated 2016 Annual Report
11
Staying the Course
Clearwater continues to execute with excellence against its six core
business strategies. Combined, these strategies focus on connecting
a diverse global customer base with premium wild-caught seafood
products and will continue guiding Clearwater toward becoming the
world’s most extraordinary shellfish company dedicated to sustainable
seafood excellence.
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Clearwater Seafoods Incorporated 2016 Annual Report
Expanding
Access to Supply
Expanding access to supply of core species and other
complementary, high demand, premium, wild and sustainably
harvested seafood through improved utilization and productivity
of core licenses as well as acquisitions, partnerships, joint
ventures and commercial agreements.
Target Profitable
and Growing
Markets, Channels
and Customers
Clearwater targets growing markets, consumers, channels and
customers on the basis of size, profitability, demand for eco-label
seafood and ability to win. Our focus is to win in key channels
and with customers that are winning with consumers.
Innovate and Position
Products to Deliver
Superior Customer
Satisfaction and Value
We continue to work with customers on new products and
formats as we innovate and position our premium seafood to
deliver superior satisfaction and value that is differentiated by
relevant dimensions such as taste, quality, safety, sustainability,
wellness, convenience and fair labour practices.
Increase Margins
by Improving Price
Realization and
Cost Management
Leverage the scarcity of seafood supply and increasing global
demand, in addition to continuing to invest in, innovate and adopt
state-of-the-art technology, systems and processes.
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 the bounty is every harvester’s responsibility
and the only proven way to ensure access to a reliable, stable,
renewable and long-term supply of seafood. Sustainability is not
just good business, like innovation it’s in our DNA.
Build Organizational
Capability, Capacity
and Engagement
We attract, train and retain the best talent to build business
system and process excellence company-wide.
Clearwater Seafoods Incorporated 2016 Annual Report
13
2016 Strategies in Action
Expanding Access to Supply
2016 marked the first year that Clearwater
successfully harvested the full quota
of Arctic surf clams on Grand Bank and
Banquereau Bank.
This milestone was achieved through
Clearwater’s proprietary investments
in innovative harvesting technologies
and the launch of a new clam vessel,
the Belle Carnell.
In September 2016, Clearwater announced
the replacement of an existing clam vessel
with a second $70 million state-of-the-art
factory vessel.
The “Anne Risley” will join the fleet in late 2017, employ
the same advanced proprietary technology as the
Belle Carnell and deliver significant productivity and
efficiency improvements.
Clearwater’s acquisition of the UK-based Macduff Shellfish in 2015 has provided
access to an incremental 15 million pounds of premium, wild-caught, safe, traceable and
complementary shellfish species and significant opportunities for future growth in
multiple fisheries.
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Clearwater Seafoods Incorporated 2016 Annual Report
Expanding Access to Supply
Target Profitable and Growing Markets,
Channels and Customers
Through the Macduff acquisition, Clearwater
enhanced its access to key distribution
channels, including foodservice and grocery
retail in multiple markets, such as the UK,
France, Italy, Spain and Portugal.
North American and Asian customers are also eager
to enjoy Macduff products.
In the fall of 2016, Clearwater
launched its e-commerce flagship
store in China on Alibaba’s
T-Mall site.
China’s e-commerce market is estimated
at over USD $830 billion and is growing
at over 38%.
“ Clearwater has been a valuable and progressive partner in supplying Wegmans
with high quality seafood. Clearwater’s continued commitment to sustainability
and traceability places them in the highest echelon of our confidence and trust,
as we continue our partnership and expand our future business together.”
– Dave Wagner, Vice President, Wegmans Seafood
“ Aligning with suppliers who understand our core beliefs and are able to create
strategic partnerships has been instrumental to Santa Monica Seafood’s success.
Clearwater epitomizes these attributes, supplying sustainably sourced and
premium-quality products in a manner that has helped our company grow sales
R
significantly year-over-year and further deliver our mission.”
– R. Logan Kock, VP Strategic Purchasing/Responsible Source, Santa Monica Seafood
“ Macduff Shellfish is now the largest supplier of raw material to Yusung, with
80% of our sales turnover coming from canned whelk meat. Over the years,
Macduff has made significant changes in business volume and the quality of
whelk products. I am very proud of the business relationship we have developed
and look forward to working together in the coming years.”
– Seung-Mo, Chief Executive Officer, Yusung
Clearwater Seafoods Incorporated 2016 Annual Report 15
Innovate and Position Products to Deliver
Superior Customer Satisfaction and Value
In 2016, Clearwater announced a new
investment in a ready-to-eat “prime-cut”
Arctic surf clam line.
Trimmed, sliced and cleaned, Frozen Arctic Surf
Clam Sushi-Ready Slices provide a ready-to-use
format, while eliminating preparation time and cost
for foodservice operators.
In 2016, Clearwater introduced a peeled and
deveined Scottish Langoustine tail, also referred
to as Norway Lobster, as a promotional item
on the holiday menu of a major seafood chain
restaurant in North America.
Sell-through was encouraging and Clearwater expects
to make this format more broadly available in 2017.
Increase Margins by Improving Price
Realization and Cost Management
In 2016, we continued the implementation of
our “ocean to shelf” global supply chain with
a focus on capturing cost savings through
greater efficiency and improved productivity
of our global operations.
In 2016, the development
of proprietary gear and
ocean bottom mapping
technologies, combined with the launch
of a new state-of-the-art clam harvesting
vessel contributed to the successful harvest
of the full total
allowable catch
(TAC) for the first
time in the history
of the Arctic surf
clam fishery.
Patented automatic shucking technology (AST) has made
Clearwater the most efficient and profitable large-scale,
frozen-at-sea (FAS) scallop harvester in the industry globally.
Clearwater recently converted a surplus FAS trawler equipped with AST for a partner
company in the Canadian Sea Scallop fishery, growing access to supply of FAS Sea
Scallops by more than 20%.
16
Clearwater Seafoods Incorporated 2016 Annual Report
Pursue and Preserve the Long-Term Sustainability
of Resources on Land and Sea
Commitment to Sustainability
Together, Clearwater and Macduff continue to make investments in science and technology
to ensure the sustainable harvesting of seafood. Clearwater offers the widest selection of
Marine Stewardship Council (MSC) certified species of any shellfish harvester worldwide.
As awareness grows for sustainable seafood products, consumers can be assured that our products originate
from fisheries that meet the MSC’s strict environmental standards for sustainable and well-managed fisheries.
“ Macduff is making great strides to promote and improve the management of shellfish stocks in and around the
waters of the United Kingdom. Together with Clearwater, we are committed to working closely with government,
scientists and external stakeholders across the UK to support the development of fisheries science and
sustainable management strategies for the long-term health of our resources.
We’re also fully committed to social sustainability by promoting responsible
fishing and ethical labour practices in the UK and anticipate that our fleet of
14 scallop vessels will be certified in 2017.”
– Juliette Hatchman, Director, Sustainability and Public Affairs, Macduff Shellfish
The Marine Stewardship Council (MSC) conducted its 2016 consumer survey, resulting in the largest
ever global analysis of attitudes to seafood consumption. Consumers in 21 countries were surveyed:
85%
of seafood purchasing households
express a concern about
ocean sustainability.
72%
of seafood consumers agree
that to save the oceans, shoppers should
only consume sustainably sourced seafood.
62%
of seafood consumers agree
that eco-labels raise trust
and confidence.
54%
of seafood consumers
are prepared to pay more for
certified sustainable products.
10%
of the world’s wild-caught
seafood comes from
MSC-certified fisheries.
37%
of all consumers
said that they have seen the
blue MSC label.
Source: 2016 Seafood Consumer Survey, GlobeScan on behalf of MSC
Clearwater Seafoods Incorporated 2016 Annual Report
17
Build Organizational Capability, Capacity
and Engagement
In 2016, Clearwater continued to invest in talent and programs to build world-class capabilities
throughout its organization.
Corporate Awards
In 2015, Clearwater introduced employee recognition awards highlighting individuals and teams who
truly demonstrate and exemplify our company values of Character, Competence and Teamwork.
Congratulations to the 2016 award winners:
Character Award – Catherine Boyd, Director, Sustainability and Public Affairs
Catherine Boyd exemplifies the Clearwater value of Character. Since joining the company in
2007, she continually acts with integrity in everything that she does. Catherine is a natural
leader who inspires trust from both internal and external stakeholders, by developing
thoughtful and fact-based direction and clearly communicating that direction in a manner that
is credible and consistent.
Competence Award – Shaun Mitchelitis, General Manager, Scallops
Joining Clearwater nearly 10 years ago, Shaun has developed into a highly experienced
General Manager of Clearwater’s global Scallop portfolio. His market knowledge and
leadership skills contribute to Clearwater’s impressive business results worldwide. At the same
time, Shaun continues to foster a culture of passion and extraordinary achievement, qualities
appreciated by the many people he works with.
Competence Award – Darren Bowen, VP Global Supply Chain
Darren joined the Clearwater team in February 2015. Over the past two years, his
dedication, talent, determination and involvement in the implementation of SAP as well as
the development of an ocean-to-plate Global Supply Chain organization have significantly
contributed to the company’s 2016 performance.
Teamwork Award – Growth: Macduff Shellfish
2016 marked the first full year of integration with Macduff, a company
that truly demonstrates a shared set of core values, aiming to be leaders
at sea, in the workplace and in the marketplace. Together, Clearwater
and Macduff expect to deliver another year of record growth as part of
our 2017 and five-year plan.
Teamwork Award – Safety: Global Supply Chain
Throughout 2016, Clearwater’s Global Supply Chain focused on
increasing safety awareness onboard our vessels and within our factories.
These tremendous efforts, led by Lionel Enslow, Coordinator for Land
Based Operations, and Becky Langille, Coordinator for Fleet Operations,
resulted in significant improvements in all of Clearwater’s safety KPIs.
18
Clearwater Seafoods Incorporated 2016 Annual Report
Management’s Discussion and Analysis
Table of Contents
Management’s discussion and analysis
Non-IFRS measures
Clearwater overview
Mission, value proposition and strategies
Capability to deliver results
Selected annual information
Explanation of 2016 financial results
Key performance indicators
Explanation of change in earnings
Capital structure
Liquidity
Commitments
Outlook
Risks and uncertainties
Critical accounting policies
Related party transactions
Summary of quarterly results
Non-IFRS measures, definitions and reconciliations
Clearwater Seafoods Incorporated – 2016 financial statements
Selected annual information
Quarterly and share information
Corporate information
20
21
22
24
26
27
28
30
37
40
45
45
46
49
52
52
53
60
111
112
inside back cover
This Management’s Discussion and Analysis (“MD&A”) was prepared effective March 8, 2017.
The Audit Committee and the Board of Directors of Clearwater Seafoods Incorporated (“Clearwater”, or “the Company”) have
reviewed and approved the contents of this MD&A, the financial statements and the 2016 fourth quarter news release.
This MD&A should be read in conjunction with the 2016 annual financial statements and the 2016 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 W A R D - L O O K I N G S TAT E M E N T S
This report may contain “forward-looking information” as defined in applicable Canadian securities legislation. All statements
other than statements of historical fact, including, without limitation, statements regarding future plans and objectives of
Clearwater, constitute forward-looking information that involve various known and unknown risks, uncertainties, and other
factors outside management’s control.
Forward-looking information is based on a number of factors and assumptions which have been used to develop such information
but which may prove to be incorrect, including, but not limited to, total allowable catch levels, selling prices, weather, exchange
rates, fuel and other input costs.
There can be no assurance that such information will prove to be accurate and actual results and future events could differ
materially from those anticipated in such forward-looking information.
In addition, this report contains forward-looking information relating to Clearwater’s acquisition of Macduff Shellfish Group
Limited (“Macduff”), financing of the acquisition, enhancement of Clearwater’s scale of operations and accelerated growth, as
well as expectations regarding sales, adjusted EBITDA, adjusted earnings and leverage. This forward-looking information is
based on a number of factors and assumptions which have been used to develop such information but which may prove to be
incorrect including, but not limited to, Clearwater’s ability to successfully integrate or grow the business of Macduff as planned,
total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs. There can be no assurance that
such information will prove to be accurate and actual results and future events could differ materially from those anticipated
in such forward-looking information. Risk factors that could cause actual results to differ materially from those indicated by
Clearwater Seafoods Incorporated 2016 Annual Report 19
Management’s Discussion and Analysis
forward-looking information include risks and uncertainties related to: (i) the timing and extent of changes in interest rates, prices
and demand, and (ii) economic conditions and related uncertainties.
For additional information with respect to risk factors applicable to Clearwater, reference should be made to Clearwater’s
continuous disclosure materials filed from time to time with securities regulators, including, but not limited to, Clearwater’s
Annual Information Form.
The forward-looking information contained in this report is made as of the date of this release and Clearwater does not undertake
to update publicly or revise the forward-looking information contained in this report, whether as a result of new information,
future events or otherwise, except as required by applicable securities laws.
No regulatory authority has approved or disapproved the adequacy or accuracy of this report.
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 financial 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 may not 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, adjusted earnings, free cash flows, leverage, and return
on assets.
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 EBITDA is defined as EBITDA excluding extraordinary, non-operating, non-recurring or non-routine items that are
unusual and are deemed not to be a part of normal operations of the business. Items that are excluded from adjusted EBITDA
include restructuring and reorganization expenses, gains and losses on investment activities, costs associated with acquisitions
to the extent not capitalized, financing and refinancing costs, net gains on insurance claims and stock-based compensation. 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
reflect the economic effect of the hedging relationships in the period to which they relate.
Adjusted Earnings
Adjusted Earnings is defined as earnings excluding items such as refinancing and reorganization costs, acquisition-related costs
and recurring accounting gains and losses on foreign exchange (other than realized gains and losses on forward exchange
contracts). 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 reflect 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 Earnings
as they do not relate to the general operations of the business.
Free Cash Flow
Free cash flow is defined as cash flows from operating activities, less planned capital expenditures (net of any borrowings of debt
designated to fund such expenditures), scheduled payments on long-term debt and distributions to non-controlling interests.
Items excluded from the free cash flow include discretionary items such as debt refinancing and repayments changes in the
revolving loan and discretionary financing and investing activities.
20
Clearwater Seafoods Incorporated 2016 Annual Report
Leverage
Leverage calculations are calculated by dividing the current and preceding annual adjusted EBITDA (excluding non-controlling
interest) by the total debt (excluding non-controlling interest) on the balance sheet adjusted for cash reserves (excluding non-
controlling interest).
Return on Assets
Return on assets is defined as the ratio of adjusted earnings before interest and taxes (“EBIT”) to average total quarterly assets
including all working capital assets.
Refer to non-IFRS measures reconciliations for further information.
C L E A R W AT E R O V E R V I E W
Leading Global Provider of Wild-Caught Shellfish
Clearwater is North America’s largest vertically integrated harvester, processor and distributor of premium shellfish. With
harvesting operations in Canada, Argentina and the UK, Clearwater is recognized for its consistent quality, wide diversity, and
reliable delivery of premium, wild, eco-labeled seafood, including scallops, lobster, clams, coldwater shrimp, crab and groundfish
with approximately 93 million pounds sold in 2016.
Powerful Industry Fundamentals
Global demand for premium wild-caught seafood among aging boomers and a rising middle class in the Asian-Pacific region is
outpacing resource supply. This in combination with conservatively managing 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 Marine
Stewardship Council (“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 to acquire and
harvest fishing quotas create barriers to entry.
Clearwater continues to create competitive advantage through investment in R&D, technology and intellectual property that
has resulted in state-of-the-art factory vessels with harvesting and processing technologies that enable high productivity and
frozen-at-sea products that deliver superior tasting and higher quality products.
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 we
have no single customer representing more than 5% of total sales.
The vertical integration of Clearwater’s quotas and licences, sustainable fishing practices, at-sea processing of shellfish, onshore
processing and distribution network and global sales forces combine to make Clearwater the industry leader in shellfish.
Proven and Experienced Leadership Team
Clearwater continues to build upon its world class capabilities in quality control and food safety, operations, new product
development and leadership through the addition of key resources to complement its existing team. Through its deep industry
knowledge and talent, our team will continue to deliver on our operational and financial growth opportunities.
Clearwater Seafoods Incorporated 2016 Annual Report 21
Management’s Discussion and Analysis
C L E A R W AT 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 define:
• “extraordinary” as sustainable, growth in revenue, margins, adjusted EBITDA, free cash flows and the creation of long-term
shareholder value;
• “wild seafood” as premium wild shellfish, including our core species (scallops, lobster, clams, langoustines and coldwater
shrimp); and
• “sustainable seafood excellence” as delivering best-in-class quality, food safety, traceability and certified sustainability.
We believe that the fulfillment of this mission will result in extraordinary value creation for shareholders, customers, and
employees and for the communities in which we work and live.
Value Proposition
At Clearwater, we have a passion for wild seafood and strive to deliver a highly differentiated and competitively advantaged
value proposition to a global customer base. Key elements of Clearwater’s unique value proposition are:
• Great tasting, nutritious, highest quality, frozen-at-sea, premium shellfish.
• Expertise in premium shellfish science, harvesting, processing and logistics technology to ensure quality and safety from
“ocean to plate”.
• Marine Stewardship Council (“MSC”) certification 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.
Strategies
Clearwater’s six core strategies are designed to strengthen a competitive and differentiated value proposition. They are:
1. Expanding access to supply – Expanding access to supply of core species and other complementary, high demand,
premium, wild and sustainably harvested seafood through improved utilization and productivity of core licenses as well as
acquisitions, partnerships, joint ventures and commercial agreements.
• Modernizing our fleet
In 2016, Clearwater announced plans to invest $70 million in another new and innovative vessel for its Canadian clam
fleet. Entering service in early 2018, The Anne Risley is a sister-ship to Clearwater’s new clam vessel, the Belle Carnell
and will replace a veteran clam vessel that has served the company well for 28 years. Like the “Belle,” The Anne Risley
will be a state-of-the-art harvest platform and frozen-at-sea factory providing significant productivity and efficiency
improvements. This new investment completes Clearwater’s fleet modernization program, positioning the company to
execute its extraordinary growth plans over the next five years. Following the launch of the Anne Risley, Clearwater does
not anticipate any major new vessel capital expenditures until 2021.
• Largest holder of shellfish licenses and quotas in Canada
Operating from ocean-to-plate, Clearwater is the largest holder of shellfish licenses and quotas in Canada, including Arctic
Surf Clam, Offshore Lobster, Canadian Sea Scallops and Coldwater Shrimp, in addition to Argentine Scallops in Argentina.
Licensing, quotas and strategic procurement provide Clearwater with a consistent and renewable supply of premium,
wild-caught, sustainably harvested seafood for distribution around the globe. In 2017, Clearwater expects to harvest all of
its quotas and secure access to additional supply through harvest and procurement contracts, growing overall volumes,
including Macduff, by more than 10 per cent versus 2016.
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Clearwater Seafoods Incorporated 2016 Annual Report
• Macduff Shellfish Group
Macduff is now fully integrated. Together, both companies will continue to grow as one of the world’s leading vertically
integrated harvesters, processors and distributors of premium, wild shellfish. Closely complementing Clearwater’s product
offerings, Macduff provides access to an additional 7,000 metric tons of premium, wild-caught, safe and traceable
shellfish, including King and Queen Scallops, Langoustine, Brown Crab and Whelk. In addition to being a leading harvester,
Macduff is one of the largest processors of wild shellfish in the UK with tremendous opportunity for future growth.
2. Target profitable & growing markets, channels & customers – Clearwater targets growing markets, consumers, channels
and customers on the basis of size, profitability, demand for eco-label seafood and ability to win. Our focus is to win in key
channels and with customers that are winning with consumers.
• Growing globally – In every region
In Europe, Clearwater expects to benefit from increased sales of all Scallop species, Crab, Processed Lobster,
Langoustine and the launch of Arctic Surf Clams into most major European markets. In addition, the early ratification of
the Comprehensive European Trade Agreement (“CETA”) by the European Parliament will remove millions of dollars of
tariffs on Clearwater’s Canadian seafood exports to the largest seafood import market in the world.
In the Americas, Clearwater expects to continue to benefit from duty-free access to the US market by profitably growing
volume in virtually every core Clearwater species and expanding the distribution of Macduff products, including Langoustine
and Brown Crab. In Arctic Surf Clams, Clearwater will expand distribution within the sushi, Asian grocery and processor
segments with new value-added formats.
In Asia, Clearwater will continue to grow sales and distribution of all species with a particular emphasis on Arctic Surf
Clam, Live Lobster, Brown Crab and Whelk. In China, Clearwater expects to benefit from the expansion of foodservice
distribution to more Tier 2 cities, retail distribution expansion in Tier 1 cities, as well as the rapid growth of the company’s
China Ecommerce partnerships with Alibaba’s Tmall and JD.com. Both ecommerce platforms represent a huge opportunity
for Clearwater to capitalize on China’s booming $830 billion online market (which is growing at over 38 per cent), while
providing Chinese consumers with the ability to purchase authentic Clearwater products. As the number of online shoppers
in China increases, Clearwater will continue to leverage ecommerce to target profitable and growing markets, channels
and customers.
• Channels and consumers
Clearwater boasts an experienced global sales force selling directly to a diverse group of customers in over 40 countries.
Supplying to retailers, foodservice operators and distributors, processors, importers and wholesalers throughout the
world, products are sold globally under Clearwater, Macduff and other popular private label brands, with no single
customer representing more than seven per cent of total sales revenue.
3. Innovate and position products to deliver superior customer satisfaction and value – We continue to work with
customers on new products and formats as we innovate and position our premium seafood to deliver superior satisfaction
and value that’s relevantly differentiated on the dimensions of taste, quality, safety, sustainability, wellness, convenience and
fair labour practices.
• Frozen Arctic Surf Clam sushi-ready slices
Clearwater announced a new investment in a ready to eat “prime cut” clam line to support expanded distribution and
growth of the Arctic Surf Clam business in Europe and North America. Trimmed, sliced and cleaned, Frozen Arctic Surf
Clam Sushi Ready Slices provide an ideal ready-to-use format for foodservice operators, while eliminating preparation
time and cost. This innovative investment allows Clearwater to continue to diversify its markets to build the value of Arctic
Surf Clam and grow its consumption globally.
4. Increase margins by improving price realization and cost management – Leverage the scarcity of seafood supply and
increasing global demand, in addition to continuing to invest in, innovate and adopt state-of-the-art technology, systems
and processes.
• Ocean floor mapping
Clearwater continues to be a world leading shellfish harvester, with a fleet of vessels now fully equipped with habitat
mapping, innovative gear and geographic positioning technology. Ocean floor mapping allows for increased productivity
and more valuable use of Clearwater’s fleet, targeting only those areas that can be fished most efficiently, while leaving
sensitive habitats undisturbed.
Clearwater Seafoods Incorporated 2016 Annual Report 23
Management’s Discussion and Analysis
• Fleet-based innovation – Automatic shucking technology
Clearwater continues to make investments in innovative technology and solutions to deliver superior products to customers
around the globe. This includes Clearwater’s patented onboard Automatic Scallop Shucking technology, enabling the
production of fresh frozen-at-sea scallops. Harvested and frozen within an hour of catch, frozen-at-sea (“FAS”) scallops
deliver a superior tasting and higher quality product to Clearwater’s discerning customers.
• Clam dredging technology
Clearwater has implemented a state-of-the-art clam dredging technology for its Canadian clam fleet, which has led to
significantly higher catch rates, improved productivity and reduced the company’s carbon footprint. This specialized
technology also reduced Clearwater’s number of clam vessels from 4 to 3, avoiding $70 million in capital expenditures
and millions of dollars in operating costs.
5. 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 the bounty is every harvester’s responsibility and the only proven way to
ensure access to a reliable, stable, renewable 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”) as a
leader in sustainable harvesting for wild fisheries and how Clearwater can offer the widest selection of sustainably certified
species of any seafood harvester worldwide.
• Commitment to sustainability
Together, Clearwater and Macduff continue to make investments in science and technology to ensure the sustainable
harvesting of seafood. Clearwater offers the widest selection of MSC certified species of any shellfish harvester worldwide.
As awareness grows for sustainable seafood products, consumers can be assured that our products originate from
fisheries that meet MSC’s strict environmental standards for sustainable and well-managed fisheries.
6. Build organizational capability, capacity & engagement – We attract, train and retain the best talent to build business
system and process excellence company-wide.
• In 2016, Clearwater continued to invest in talent and programs to build world-class capabilities through-out its organization.
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 shellfish. 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 fishery management organizations. All
stocks are managed sustainably providing assurance of the long-term availability of the resource, however annual fluctuations
in supply of a natural resource are normal. Short term impacts of such fluctuations can normally be offset within Clearwater’s
species portfolio and/or by making adjustments within each business unit.
The primary shellfish stocks that Clearwater harvests are Canadian sea, Argentine and UK scallops, clams, lobster and coldwater
shrimp, which are harvested in offshore fisheries that have a limited number of participants. Clearwater harvests scallops
and clams with its own vessels. Clearwater obtains its lobster and coldwater shrimp through harvesting with its own vessels
and through purchases from independent fishermen. Clearwater obtains its supply of crab, whelk, and langoustines through
purchases from independent fishermen.
• The Canadian sea scallop resource typically fluctuates 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 in
Canada. Total annual landings are based upon the harvesting capacity of our three vessels. 2016 marked the first time in the
history of these fisheries that the company harvested the entire quota. This was achieved through its significant investments
in a new factory-at-sea vessel which was launched in the fourth quarter of 2015 and proprietary investments in harvesting
technologies.
• The Argentine scallop volumes are stable and are expected to be in line or modestly higher than recent years. Argentina is the
first scallop fishery in the world to have earned the rigorous Marine Stewardship Council (“MSC”) independent certification.
24
Clearwater Seafoods Incorporated 2016 Annual Report
• Coldwater shrimp – The Northern shrimp TAC has declined from historic highs over the last five years and is expected
to continue to decline at a similar rate over the next five years as the cod species, a natural predator of shrimp, return to
this fishery. Clearwater holds access to quotas directly through licences and through long-term harvesting agreements.
Clearwater procures shrimp from the inshore fishery for its cooked and peeled business and supplements this with raw
material from its offshore vessels.
• The offshore Canadian lobster resource is healthy with a consistent offshore TAC. Clearwater harvests all of its lobster quota
each year. During 2016, Clearwater purchased approximately 80% of its lobster from inshore lobster fishermen. The quality
of lobster has seen a decline in this fishery as harvesters move further offshore, resulting in higher mortality.
• The UK scallop landings are stable, with total 2016 landings coming down slightly from the recent high levels. The fishery
is managed under a combination of effort days, gear regulation and minimum landing size, which vary by area.
Clearwater maintains the largest, most modern fleet of factory freezer vessels in Canada together with vessels that are used
to harvest Clearwater’s offshore lobster and to complete research and development. The Company also operates a fleet of
13 scallop trawlers in the UK.
Clearwater grades investments in property, plant, equipment and licenses as either return on investment (“ROI”) or maintenance
capital. Significant expenditures that are expected to have a return in excess of the cost of capital are classified as ROI, and all
refits and expenditures that are expected to return less than the average cost of capital are classified as maintenance.
Clearwater spent the following on capital expenditures and repairs and maintenance over the last three years:
(In 000s)
For the years ended December 31
Vessels
Plants and other
Return on investment capital
Maintenance capital
Maintenance capital
Repairs and maintenance expense
Depreciation/Amortization
Maintenance spending as a % of depreciation
$
$
$
$
$
$
$
2016
44,343
11,989
56,332
31,913
24,419
56,332
24,418
24,135
48,553
38,634
125.7%
$
$
$
$
$
$
$
2015
49,748
13,642
63,390
50,370
13,019
63,389
13,019
19,714
32,733
29,732
110.1%
$
$
$
$
$
$
$
2014
72,700
10,609
83,309
60,417
22,892
83,309
22,892
14,149
37,041
23,753
155.9%
$
$
$
$
$
$
$
Total
166,791
36,240
203,031
142,700
60,330
203,030
60,329
57,998
118,327
92,119
128.5%
In 2016 Clearwater invested $56.3 million in capital expenditures of which $25.9 million of investment capital related to a
replacement clam harvesting vessel and $24.2 million of maintenance capital related to vessel refits and $6.2 million to improve
operational efficiencies in our plants and information systems.
In 2015 Clearwater invested $63.4 million in capital expenditures, excluding the acquisition of Macduff. Of these amounts,
$25.9 million related to the construction of the Belle Carnell, a new clam vessel, which had a total cost of approximately
$65 million and was fully operational in late 2015, $7.1 million for the purchase and conversion of a research vessel, $18.7 million
related to maintenance capital investments and $11.7 million to improve operational efficiencies in our plants and information
systems.
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 Belle Carnell vessel.
Also in 2014, Clearwater invested $16.7 million to complete the conversion of an Argentine scallop vessel which began harvesting
early in the first quarter of 2015. Additional investments in 2014 included $7.3 million for an enterprise resource planning system,
$18.2 million on refits including $12.5 million for a life extending refit of a shrimp vessel and $4.7 million on other planned
maintenance.
Clearwater Seafoods Incorporated 2016 Annual Report 25
Management’s Discussion and Analysis
In addition to the annual amounts capitalized above, Clearwater historically has spent and expensed on average about
$19.3 million a year over the past three years on the maintenance of its fleet and processing plants. This reflects Clearwater’s
commitment to ensuring that the assets are kept in top condition, enabling it to harvest and process its allowable catch efficiently
and providing sufficient capacity.
Clearwater’s largest fleet investments are in its nine factory vessels located within Canada and Argentina. These vessels are
used in the harvesting of Canadian scallops, Argentine scallops, shrimp and clams.
Of the nine factory vessels:
• Two are used to harvest shrimp and are on average 23 years old. These vessels have a capacity to harvest 14,000 to 18,000
metric tons of our 20,000 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 refit, thereby extending its useful life.
Four are used to harvest sea and Argentine scallops with the sea scallop vessels being on average 18 years old and the
Argentine scallop vessels being on average 21 years old. In 2014, an idle vessel was converted from harvesting sea scallops
to harvesting Argentine scallops and began operations in early 2015.
• Three of Clearwater’s vessels are used to harvest clams and are on average 15 years old. In 2015, Clearwater completed
construction of a new clam harvesting vessel which was operational in the third quarter of 2015 with product reaching the
market in the fourth quarter of 2015. In 2016, Clearwater began the construction of a new clam harvesting vessel which will
replace an existing vessel and is expected to be added to the fleet in the first quarter of 2018.
With the acquisition of Macduff, Clearwater’s fleet now includes 13 mid-shore scallop harvesting vessels within the UK with
average useful lives between 5–15 years.
In 2017 Clearwater expects to invest approximately $90.0 million in capital projects with the most significant investments relating
to the new clam harvesting vessel, refits and land-based processing capacity expansion.
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 000s except per share amounts)
For the year ended December 31
Sales
Gross margin
Net earnings (loss)
Basic and diluted earnings (loss) per share
$
2016
611,551
144,621
59,596
0.71
$
2015
504,945
132,188
(20,671)
(0.65)
$
2014
444,742
102,834
9,797
(0.05)
Adjusted EBITDA1
120,937
109,734
87,368
Adjusted earnings attributable to shareholders1
Adjusted earnings per share1
23,766
0.38
43,457
0.76
22,571
0.41
Total assets
Long-term debt
729,735
436,414
$
753,195
480,769
$
464,397
273,041
$
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
2016 Financial Achievements
Clearwater reported record sales and adjusted EBITDA for 2016 of $611.6 million and $120.9 million, versus 2015 comparative
figures of $504.9 million and $109.7 million, respectively. This represents double digit growth rates for sales of 21.1% and
adjusted EBITDA of 10.2%, marking Clearwater’s seventh consecutive year of top and bottom line growth.
Sales and adjusted EBITDA were positively impacted by strong selling prices for scallops, higher sales volumes for clams,
lobster, langoustine, whelks and crab and higher average foreign exchange rates for the US dollar, Yen and the Euro.
Our Macduff Shellfish operation in the UK had a very successful year delivering strong volumes and earnings. Selling prices
and foreign exchange were favorable for the operation and enabled delivery of the strongest financial performance in its history.
26
Clearwater Seafoods Incorporated 2016 Annual Report
In Arctic Surf Clam, Clearwater harvested the Grand Banks for the first time since 2006. This was made possible with the addition
of the Belle Carnell to our fleet. This when combined with our proprietary advancements in harvesting technology resulted in
the complete harvest of the TAC for the first time in the history of the fishery and increased our sales volumes of this unique
sushi and sashimi focused product.
Cash flows from working capital improved in the fourth quarter of 2016, by $31.3 million to $64.6 million, as compared to the
same period in 2015, as several species finished harvesting Clearwater’s quota earlier in the year and these inventories were
sold in the normal course of business.
E X P L A N AT I O N O F 2 0 1 6 F I N A N C I A L R E S U LT S
Overview
The following statements reflect the results of Clearwater for the 13 weeks and years ended December 31, 2016 and 2015:
(In 000s of Canadian dollars)
Sales
Cost of goods sold1
Gross margin
Administrative and selling
Net finance costs
(Gains) losses on contract derivatives
Foreign exchange (gains) losses on long-term debt
Other expense (income)
Research and development
Earnings (loss) before income taxes
Income tax expense
13 weeks ended
December 31
2016
2015
$
165,690
136,737
$
165,503
122,404
$
28,953
17.5%
9,814
4,602
(8,372)
4,449
(855)
643
10,281
18,672
6,261
43,099
26.0%
16,852
1,105
7,450
18,950
(147)
822
45,032
(1,933)
1,860
Year ended
December 31
$
2015
504,945
372,757
132,188
26.2%
51,363
21,634
26,763
46,287
444
1,981
148,472
(16,284)
4,387
2016
611,551
466,930
144,621
23.6%
58,492
26,948
(7,279)
(7,295)
(5,209)
2,922
68,579
76,042
16,446
Earnings (loss)
$
12,411
$
(3,793)
$
59,596
$
(20,671)
Earnings (loss) attributable to:
Non-controlling interest
Shareholders of Clearwater
$
3,800
8,611
$
12,411
$
$
3,267
(7,060)
$
15,668
43,928
$
16,937
(37,608)
(3,793)
$
59,596
$
(20,671)
1 In 2015 there was $2.1 million included in cost of goods sold related to fair value adjustment for inventory and depreciation that resulted from IFRS
requirements on purchase price accounting on the acquisition of Macduff.
Clearwater Seafoods Incorporated 2016 Annual Report 27
Management’s Discussion and Analysis
K E Y P E R F O R M A N C E I N D I C AT O R S 1
(In 000s of Canadian dollars)
As at December 31
Profitability
Adjusted EBITDA1
Adjusted EBITDA (as a % of sales)
Sales
Sales growth
Free Cash Flows and Leverage Targets
Free cash flows1
Leverage1
Returns
Return on assets1
2016 Financial Results
2016
2015
2014
$
$
$
120,937
19.8%
611,551
21.1%
10,242
4.2
$
$
$
109,734
21.7%
504,945
13.5%
39,089
4.4
$
$
$
87,368
19.6%
444,742
14.4%
30,856
3.3
11.0%
13.8%
13.9%
Clearwater reported record sales and adjusted EBITDA1 of $611.6 million and $120.9 million respectively for 2016 versus 2015
comparative results of $504.9 million and $109.7 million. This represents growth rates of 21.1% for sales and 10.2% for adjusted
EBITDA, marking Clearwater’s seventh consecutive year of top and bottom line growth.
Sales and adjusted EBITDA were positively impacted by strong sales prices for scallops and higher sales volumes for clams,
lobster, langoustine, whelk and crab. Higher average foreign exchange rates for the US dollar, Yen and the Euro had a net positive
impact of $7.0 million, contributing to the improvement in sales.
Earnings for the year increased $80.3 million to $59.6 million in 2016 primarily as a result of improvements in gross margin from
strong sales prices for the majority of core species and the impact of lower average foreign exchange rates. The changes in
foreign exchange rates resulted in non-cash unrealized foreign exchange gains on long-term debt and forward contracts as the
Canadian dollar strengthened against the US dollar and the GBP.
We faced challenges in several core species during the year that resulted in lower than expected sales and earnings.
The Total Allowable Catch (“TAC”) for coldwater shrimp was reduced and reallocated in 2016, resulting in decline in our coldwater
shrimp sales and margins. The decline in TAC from historic highs is in natural response to the decline of the coldwater shrimp
biomass as the cod species return to the North Atlantic fishery.
The TAC for Canadian sea scallops was at its lowest level in 11 years, resulting in lower sales and earnings compared to 2015.
Lower available supply enabled stronger prices for this high demand species.
In the live lobster business, higher volumes resulted in increased sales. Margins were weaker in this species however due to
poor quality received from the inshore fishery and an increase in low-priced competition in the China wholesale market as prices
could not be increased quickly enough in the latter part of the year to offset higher procurement prices and mortality.
In Arctic surf clam, harvested volumes increased rapidly in the second half of the year, with the resulting supply outstripping the
capacity of our existing channels and customers. Heavier promotional activity resulted in higher sales. A smaller size mix in the
clams and a reduction in selling prices to increase consumer demand resulted in an overall reduction in margins.
Our Argentine scallop species had its strongest year in recent history with increased volumes, higher selling prices and lower
costs.
Our Macduff business also had its strongest year, with high volumes, pricing and increased access to supply through procurement
arrangements. The weaker Sterling versus Euro had a favorable impact on results although this was partially offset when
translated to Canadian dollars. The higher proportion of procured products through the Macduff operations had a dilutive effect
on margin as a percent of sales.
The combined effect of these items resulted in a decline in gross margin as a percent of sales of 2.6% for the 2016 year
compared to 2015.
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
28
Clearwater Seafoods Incorporated 2016 Annual Report
Reductions in coldwater shrimp and sea scallop Total Allowable Catch (“TAC”) and poor live lobster quality, from the inshore
fishery, combined with high shore prices resulted in lower margins. Lower average foreign exchange rates as the Canadian
dollar strengthened against the US dollar, Euro and GBP resulted in a negative impact to sales of $5.2 million. Despite these
challenges, our business fundamentals remain strong and we are positioned well for another year of significant growth in 2017.
Earnings in the fourth quarter of 2016 increased $16.2 million to $12.4 million primarily as a result of higher average foreign
exchange rates as the US dollar and GBP had strengthened against the Canadian dollar in the fourth quarter of 2015, resulting
in higher non-cash unrealized foreign exchange losses on US dollar and GBP denominated debt. In addition general and
administrative expenses declined in the fourth quarter of 2016 as a result of a reduction in variable and share-based compensation
expense as compared to the same period in 2015.
The cash flows used in working capital increased against 2015 by $2.3 million to a use of $21.1 million for 2016. The increased
level of working capital resulted primarily from high inventory levels for clams and certain procured species, partially offset by
timing of collections of accounts receivable.
Inventory levels increased during the third and fourth quarters of 2016 to higher than anticipated levels following successful
harvesting in our clam fleet. With the addition of the third vessel into the fishery in the latter part of 2015 combined with improved
efficiency through the implementation of advanced harvesting technology and equipment, harvesting volumes increased
significantly and therefore the Company was able to catch the full clam quota for the first time in 2016. Overall inventory
levels increased through the second half of 2016 resulting in year end clam inventories closing $23.9 million higher than 2015.
Clam sales volumes increased 22.7% over the prior year with pricing adjustments, investments in marketing, promotion and
distribution expansion initiated to increase sales. The benefits of these investments were not fully realized in 2016 as it will take
time to effect expanded distribution of clams. Management anticipates the benefits will be realized through 2017 and inventories
will return to normal levels by the end of the year.
Free cash flows1 were $10.2 million in 2016 as compared to $39.1 million in 2015. Higher adjusted EBITDA was offset by higher
working capital balances from inventory. Other contributing factors included higher interest expense that resulted from higher
inventory balances and timing of payments to non-controlling interests, which reduced free cash flow balances by approximately
$12.7 million in 2016. Cash taxes were also higher by $5.2 million as a result of a full year of Macduff operations.
Leverage1 decreased to 4.2x adjusted EBITDA as at December 31, 2016 compared to 4.4x at the end of 2015 and was slightly
higher than management’s initial expectations as a result of higher working capital balances. Clearwater continues to have a
long-term target for leverage of 3.0x and plans to be in line with this target within the next two years or less.
Return on assets1 (“ROA”) declined from 13.8% in 2015 to 11.0% in 2016. The full year impact of the addition of Macduff diluted
ROA due to the higher proportion of procured species sold at lower margins. Average total assets for 2016 versus 2015 also
increased with the completion of the Belle Carnell vessel later in 2015 and the ERP system investment completed early in 2016.
Growth in EBIT was modestly higher than the increase in depreciation expense of $8.9 million resulting from these additions.
2016 represents a continued strong track record for both top and bottom line growth despite our challenges. By focusing on our
six core strategies, including increasing access to supply, targeting profitable and growing markets, and building organizational
capacity, we successfully reported another record year that builds our foundation for the next four years.
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
Clearwater Seafoods Incorporated 2016 Annual Report 29
Management’s Discussion and Analysis
E X P L A N AT I O N O F C H A N G E I N E A R N I N G S
Overview
The following table reflects the changes in earnings for Clearwater for the 13 weeks ended and year ended December 31, 2016:
(In 000s of Canadian dollars)
Earnings (loss) – 2015
Explanation of changes in earnings (loss) related to operations:
Higher (lower) gross margin
Lower (higher) administrative and selling
Higher interest expense
Higher realized foreign exchange gains
Explanation of changes in earnings (loss) related to non-operational items:
Higher unrealized foreign exchange gains on long-term debt
and working capital and forward contracts
Higher income tax expense
Accretion on deferred consideration
Higher fair value adjustments on embedded derivative
All other
Earnings (loss) – 2016
Sales By Region
13 weeks ended
December 31
2016
Year ended
December 31
2016
$
(3,793)
$
(20,671)
(14,146)
7,038
(1,248)
6,343
(2,013)
23,095
(4,401)
(821)
(1,051)
16,822
1,395
12,433
(7,129)
(6,553)
3,689
2,440
88,869
(12,059)
(3,562)
(766)
72,482
5,345
$
12,411
$
59,596
(In 000s of Canadian dollars)
2016
2015
Change
2016
2015
Change
13 weeks ended
December 31
Year ended
December 31
Europe
China
Japan
Other Asia
Asia
United States
Canada
North America
Other
Summary
$ 75,830
$ 75,241
$
589
$ 246,909 $
183,881
$
63,028
28,089
15,079
6,618
49,786
23,661
16,381
40,042
32
32,413
17,208
5,852
55,473
21,265
12,799
34,064
725
(4,324)
(2,129)
766
94,623
76,230
36,036
95,140
66,401
18,113
(5,687)
206,889
179,654
2,396
3,582
85,385
72,275
80,668
58,696
5,978
157,660
139,364
(693)
93
2,046
(517)
9,829
17,923
27,235
4,717
13,579
18,296
(1,953)
$ 165,690
$ 165,503
$
187
$ 611,551 $
504,945
$
106,606
Clearwater reported sales and adjusted EBITDA1 for 2016 of $611.6 million and $120.9 million, versus 2015 comparative figures
of $504.9 million and $109.7 million, respectively.
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
30
Clearwater Seafoods Incorporated 2016 Annual Report
Europe
Europe is Clearwater’s largest scallop market and it is an important market for coldwater shrimp, langoustines, crab and lobster
products.
European sales increased $63.0 million, or 34.3% to $246.9 million for 2016 versus 2015.
The increase in sales was primarily as a result of higher sales volumes for King and Queen scallops, langoustines and brown
crab. Higher available supply for Argentine scallops also resulted in increased sales.
Lower available supply for sea scallops and coldwater shrimp reduced sales. Lower market demand that reduced average selling
prices for cooked and peeled shrimp, a non-core species, partially offset the improvement in sales.
Sales that are primarily transacted in Euro, GBP and Danish Kroner were negatively impacted in 2016 by lower average foreign
exchange rates1 that had a net impact on sales of $4.9 million.
For the fourth quarter, higher sales volumes were offset by lower average foreign exchange rates of $5.5 million as the Canadian
dollar strengthened against the Euro and the GBP in the last quarter of 2016 as compared to the same period of 2015.
China
China is a key market for clams, coldwater shrimp, lobster and turbot.
For the year, sales to customers in China remained consistent at $94.6 million as higher sales volumes for clams and lobster
and higher average foreign exchange rates for the US dollar were offset by reductions in available supply for shrimp.
Sales in China are almost exclusively transacted in US dollars. The US dollar strengthened against the Canadian dollar for 2016
contributing $1.8 million to the increase in sales.
Fourth quarter 2016 sales volumes were impacted negatively by lower TAC levels for both sea scallops and coldwater shrimp,
resulting in lower sales in comparison to the same period of 2015.
Japan
Clams, lobster, coldwater shrimp and turbot are the main species sold in Japan.
Sales to customers in Japan increased $9.8 million, or 14.8% to $76.2 million for 2016 primarily as a result of higher sales
volumes for clams, strong sales prices for shrimp and higher average foreign exchange rates as the Yen strengthened against
the Canadian dollar.
Sales, which were primarily transacted in Yen, were positively impacted in 2016 by approximately $7.8 million related to an
increase of 9.1% in foreign exchange rates1 over the same period in 2015.
In the fourth quarter, sales to Japan declined $2.1 million primarily as a result of lower available supply for coldwater shrimp
and average sales prices for clams, partially offset by higher sales volumes for clams and higher average Yen exchange rates.
Other Asia
The Other Asia region includes Korea, Taiwan, Singapore and other Asian countries. Whelk, clams and lobster are key products
for these markets.
Sales in this region increased $17.9 million to $36.0 million for 2016 in comparison to 2015 primarily as a result of sales for Whelk.
United States
Scallops, coldwater shrimp, lobster and clams are the primary species sold in the United States.
Sales for 2016 and for the fourth quarter increased $4.7 million and $2.3 million, respectively, primarily as a result of higher sales
volumes for lobster. Lower sales prices, resulting from a smaller size mix and volumes for scallops and clams partially offset
the increase in sales.
Sales for 2016 were positively impacted by $1.5 million due to stronger foreign exchange rates as the US dollar strengthened
against the Canadian dollar. Average foreign exchange rates1 for the US dollar increased by 1.8% to 1.319 in 2016.
1 Refer to discussion on risks and uncertainties.
Clearwater Seafoods Incorporated 2016 Annual Report 31
Management’s Discussion and Analysis
Canada
Canada is a large market for lobster, scallops, snow crab, clams and coldwater shrimp.
Sales within Canada increased $13.6 million, or 23.1% to $72.3 million for 2016 primarily as a result of an increase in sales prices
for snow crab and sea scallops as well as higher sales volumes for clams, scallops and lobster. Lower average sales prices for
lobster and clams and timing of sales volumes for snow crab, partially offset the improvement in sales.
Sales within Canada increased $3.6 million for the fourth quarter of 2016 as compared to the same quarter in 2015 primarily as
a result of an increase in sales volume for lobster.
Sales By Species1
(In 000s of Canadian dollars)
2016
2015
Scallops
Lobster
Coldwater shrimp
Clams
Langoustine
Crab
Whelks
Ground fish and other shellfish
$ 47,644
29,022
29,126
30,846
13,441
11,154
3,361
1,096
$ 59,787
21,863
37,299
32,288
7,873
4,798
878
717
13 weeks ended
December 31
$
Change
(12,143)
7,159
(8,173)
(1,442)
5,568
6,356
2,483
379
Year ended
December 31
2016
2015
Change
$ 188,421
108,402
93,250
91,918
47,572
38,243
22,204
21,541
$ 165,544
92,589
109,963
84,350
7,873
26,141
878
17,607
$ 22,877
15,813
(16,713)
7,568
39,699
12,102
21,326
3,934
$ 165,690
$ 165,503
$
187
$ 611,551
$ 504,945
$ 106,606
Sales increased $106.6 million for 2016 to $611.6 million versus sales of $504.9 million in 2015 primarily as a result of higher
sales volumes for clams, lobster, scallops, langoustines and whelk. Higher average foreign exchange rates1 had a $7.0 million
positive impact on sales, as the US dollar, Yen and Euro strengthened against the Canadian dollar.
Sales volumes for coldwater shrimp decreased due to a necessary reduction in Total Allowable Catch (“TAC”) to preserve
the health of the species. The TAC and volumes are expected to continue to decline as the species comes into balance from
historical levels with the return of its natural predator, the cod.
Canadian sea scallop volumes were below 2015 as the TAC was at its lowest annual level in 11 years. This is a normal natural
cycle for the species and is expected to increase in the future. Strong sea scallops prices and expanded access to supply
resulted in strong growth in sales.
Clearwater is a leader in sustainable seafood harvesters which is a responsibility that we take seriously. Clearwater maintains
Marine Stewardship Council certification (“MSC”) in all harvested species within North America and Argentina. This certification
reflects our commitment to sustainability, environmental impact and good management practices. This responsibility sometimes
requires taking less to ensure the long-term health of the resource, which has impacted sales in the short-term but provides for
sustainable resources into the future.
Sales of clams increased following the reintroduction of a third clam vessel into the Grand Banks fishery. Clearwater successfully
harvested the full TAC for the first time in the history of the fishery.
Cost of Goods Sold
Cost of goods sold includes harvesting and procurement costs, manufacturing costs, depreciation, transportation and
administration. Cost of goods sold increased $94.2 million for 2016 and $14.3 million for the fourth quarter, as compared to
the same periods of 2015, primarily due to higher sales volumes. Higher procurement prices for lobster, crab and shrimp and
lower catch rates for frozen-at-sea shrimp resulted in higher average costs per pound, contributing to the increase in cost of
goods sold.
Harvesting and procurement include all costs incurred in the operation of the vessels including labour, fuel, repairs and
maintenance, fishing gear, supplies, other costs and fees plus procured raw material costs for lobster, shrimp, scallops and crab.
1 Refer to discussion on risks and uncertainties.
32
Clearwater Seafoods Incorporated 2016 Annual Report
Gross Margin
Gross margin increased $12.4 million in 2016 to $144.6 million as a result of higher sales volumes for clams, lobster, scallops,
langoustines and whelk, partially offset by declines in sales volumes for shrimp.
Gross margins as a percentage of sales declined 2.6% for 2016 and 8.5% for the fourth quarter of 2016 in comparison to the
same periods in 2015. The reduction in gross margin as a percentage of sales was primarily a result of lower sales prices for
clams and lobster and higher procurement prices for both lobster and shrimp. Canadian sea scallop harvest occurred earlier in
2016 thus fewer sea scallops were available for sale for the year and for the fourth quarter. Lower volumes of coldwater shrimp
due to quota reductions and reallocations also resulted in lower margins for the year and quarter. Increased volumes of new
procured species including langoustine, whelk and crab which generate a lower gross margin further contributed to the decline
in gross margin as a percentage of sales.
For the year, strong sales prices for scallops and higher average foreign exchange rates1 as the US dollar and Yen strengthened
against the Canadian dollar had a $10.8 million positive impact that partially offset the decline in margins.
Currency
% sales
rate realized1
% sales
2016
Average
13 weeks ended
December 31
2015
2016
Year ended
December 31
2015
Average
rate realized1
Average
% sales rate realized1
Average
% sales rate realized1
US dollars
Euros
Canadian dollar
and other
UK pounds
Japanese Yen
Danish Kroner
36.6%
26.2%
16.9%
11.3%
7.5%
1.5%
1.336
1.428
1.662
0.012
0.194
37.4%
30.2%
10.2%
7.3%
8.8%
6.1%
1.35
1.475
2.03
0.011
0.196
37.4%
27.0%
12.9%
10.0%
9.6%
3.1%
100.0%
100.0%
100.0%
1.319
1.459
43.2%
22.7%
1.296
1.438
1.760
0.012
0.199
12.1%
5.6%
10.0%
6.4%
100.0%
1.993
0.011
0.192
Administrative and Selling
(In 000s of Canadian dollars)
2016
2015
Change
2016
2015
Change
13 weeks ended
December 31
Year ended
December 31
$
6,677
$ 10,645
$
(3,968)
$ 39,346
$ 34,941
$
4,405
Salaries and benefits
Share-based incentive
compensation
Employee compensation
Consulting and professional fees
Other
Reorganizational costs
Selling costs
Travel
Occupancy
Allocation to cost of goods sold
(2,303)
4,374
4,594
1,262
833
929
1,074
423
(3,675)
3,004
13,649
1,530
1,158
1,143
954
1,031
472
(3,085)
(5,307)
(9,275)
3,064
104
(310)
(25)
43
(49)
(590)
2,902
42,248
13,135
6,907
986
2,857
3,906
1,947
(13,494)
5,270
40,211
7,600
4,815
3,150
2,949
2,940
1,569
(11,871)
(2,368)
2,037
5,535
2,092
(2,164)
(92)
966
378
(1,623)
$
9,814
$ 16,852
$
(7,038)
$ 58,492
$ 51,363
$
7,129
Administrative and selling increased $7.1 million for 2016 and declined $7.0 million in the fourth quarter of 2016 in comparison
to the same periods of 2015.
Salaries and benefits increased $4.4 million in 2016 primarily as a result of new hires in senior management and other staff to
support the company’s growth platform and to expand capabilities to deliver on market opportunities. The decline of $4.0 million
in the fourth quarter of 2016 compared to 2015 is related to the timing of variable compensation expense.
1 Refer to discussion on risks and uncertainties.
Clearwater Seafoods Incorporated 2016 Annual Report 33
Management’s Discussion and Analysis
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 grants outstanding.
Share-based compensation expense decreased $2.4 million for 2016 and $5.3 million in the fourth quarter of 2016 primarily
as a result of a lower share price for 2016 versus 2015 comparative periods. In addition there were fewer average share-based
grants outstanding for 2016 versus 2015.
Consulting and professional fees include operations management, legal, audit and accounting, insurance and other specialized
consulting services. Consulting and professional fees increased in 2016 as a result of specialized fees in support of the enterprise
resource planning system (“ERP”) implementation, higher consulting fees related to a full year of Macduff operations and higher
audit fees.
Other includes a variety of administrative expenses such as communication, computing, service fees, depreciation, storage,
gains or losses and write-downs of assets, all of which vary from year to year. Other increased in 2016 as a result of higher
depreciation related to the ERP that was implemented in the first quarter of 2016 and increases in administrative expenses due
to additional office space.
Selling costs include advertising, marketing, trade shows, samples, product development and bad debt expenses.
Reorganization costs for 2015 included a provision for severance related to certain executives and long-term employees
affected by the reorganization.
Allocation to cost of goods sold reflects costs that are attributable to the production of goods and are allocated on a
proportionate basis based on production volumes.
Net Finance Costs
13 weeks ended
December 31
Year ended
December 31
(In 000s of Canadian dollars)
2016
2015
Change
2016
2015
Change
Interest and bank charges
Amortization of deferred financing charges
and accretion
Interest rate swaps and caps
Accretion on deferred considera tion
Fair value adjustment on embedded derivative
Debt refinancing fees and other
$ 6,778
$ 5,467 $ 1,311
$ 24,776
$ 19,002
$ 5,774
478
7,256
(1,665)
821
(1,710)
(100)
541
6,008
(2,550)
—
(2,761)
408
(63)
2,113
1,334
1,248
26,889
20,336
885
821
1,051
(508)
(2,027)
3,562
(1,350)
(126)
2,908
—
(2,118)
508
779
6,553
(4,935)
3,562
768
(634)
$ 4,602
$ 1,105 $ 3,497
$ 26,948
$ 21,634
$ 5,314
Interest and bank charges increased $5.8 million for 2016 and $1.3 million for the fourth quarter of 2016 as compared to
the same periods in 2015 due to higher average debt balances throughout the year, primarily resulting from the acquisition of
Macduff on October 30, 2015. Higher US dollar denominated debt facilities resulted in an increase in foreign exchange expense,
which contributed to the increase in interest expense for the year.
Higher amortization of deferred financing charges and accretion relates primarily to charges from the financing of the Macduff
acquisition.
The interest rate swaps and caps relates to non-cash mark to market gains and losses on USD $100 million and CDN $24 million
swaps and caps that were entered into in 2015. The change in the mark to market represents changes in relative expected future
interest rates and foreign exchange impacts as the Canadian dollar strengthened against the US dollar in 2016.
The accretion on deferred consideration arises for the deferred consideration obligation associated with the acquisition of
Macduff as the notes are non-interest bearing.
34
Clearwater Seafoods Incorporated 2016 Annual Report
The fair value adjustment on the embedded derivatives in Term Loan B relates to a Libor floor provision in the loan agreement
and the earnings impact represents the change in the estimated fair values.
(Gains) Losses1 on Contract Derivatives
(In 000s of Canadian dollars)
2016
2015
Change
2016
2015
Change
13 weeks ended
December 31
Year ended
December 31
Realized loss
Forward foreign exchange contracts
Unrealized loss (gain)
Forward foreign exchange contracts
$
238
$ 4,343 $
(4,105) $ 7,345
$ 15,595
$
(8,250)
(8,610)
3,107
(11,717)
(14,624)
11,168
(25,792)
$ (8,372) $ 7,450 $ (15,822) $
(7,279) $ 26,763
$ (34,042)
Gains on forward contract derivatives in the fourth quarter of 2016 and for the year as compared to the same periods of 2015
primarily resulted from unrealized gains in 2016 related to USD contracts where the contracted rates are higher than the relative
spot rate. In 2015, USD contracted rates were lower than the relative spot rate at the date of the financial statements.
Realized losses of $7.3 million for 2016 are primarily a result of the Yen, Euro and the USD contracts for which contracted rates
were below spot rates at time of settlement.
Clearwater is primarily an export company with approximately 87.9% of our sales taking place outside Canada and in foreign
currencies. We have a business model built on access to a limited resource and diversity of species, markets and customers
and have operated successfully in a variety of exchange rate environments.
As part of our risk management strategy we enter into short-term currency and interest rate instruments and loan agreements
to give us certainty regarding exchange rates and cash flows for a period of time. We recognize and include in our earnings any
realized gains and losses on these instruments and loans as they mature and are settled.
We are also required to record and include any unrealized non-cash gains and losses on these instruments in our earnings
by assuming the settlement of these currency and interest rate instruments prior to their maturity and at each period end. To
reflect this accounting, we obtain estimates of the fair value of the hedging instruments and convert them, as well as any foreign
currency denominated debt, to Canadian dollars at each balance sheet date.
This results in unrealized non-cash gains or losses that are included in earnings for the period. As these gains and losses do
not relate to operating results of the period, we exclude these gains and losses when calculating Adjusted EBITDA, Adjusted
Earnings Attributable to Shareholders of Clearwater and Free Cash Flows.
Foreign Exchange1 (Gains) Losses on Long-Term Debt and Working Capital
(In 000s of Canadian dollars)
2016
2015
Change
2016
2015
Change
13 weeks ended
December 31
Year ended
December 31
Realized (gain) loss
Working capital and other
Unrealized (gain) loss
Foreign exchange on long-term debt
and working capital
Cross currency swaps and cap
1 Refer to discussion on risks and uncertainties.
$
776
$ 3,900 $
(3,124) $ 7,803
$
(1,690) $ 9,493
5,881
(2,208)
17,547
(2,497)
(11,666)
289
(18,045)
2,947
51,168
(3,191)
(69,213)
6,138
$ 4,449
$ 18,950 $ (14,501) $
(7,295) $ 46,287
$ (53,582)
Clearwater Seafoods Incorporated 2016 Annual Report 35
Management’s Discussion and Analysis
Foreign exchange gains on long-term debt and working capital increased by $53.6 million from a loss of $46.3 million for 2015 to
a gain of $7.3 million in 2016. The increase was primarily a result of non-cash unrealized gains on the translation of $183.8 million
in US dollar denominated debt as the Canadian dollar strengthened against the US dollar by 3.0%.
Realized foreign exchange losses on working capital and other increased $9.5 million from a gain of $1.7 million for 2015 to
a loss of $7.8 million for the same period of 2016 primarily as a result of realized losses on intercompany accounts to wholly
owned subsidiaries classified as foreign operations for accounting purposes.
Also contributing to the increase in foreign exchange gains were non-cash unrealized gains on the translation of the deferred
consideration and the earnout obligations denominated in GBP as the Canadian dollar also strengthened against the GBP in
2016.
For 2015 the US dollar and Sterling strengthened against the Canadian dollar.
Unrealized exchange gains on cross currency swaps declined in 2016 versus 2015 as a result of the changes in US dollar
exchange rates.
In the fourth quarter of 2016 foreign exchange losses on long-term debt and working capital of $5.9 million compared to
$17.5 million in 2015 were primarily a result of $183.8 million of US denominated debt as the average foreign exchange rates
for the US dollar were higher and strengthened against the Canadian dollar in the fourth quarter of 2015.
Other Income
13 weeks ended
December 31
Year ended
December 31
(In 000s of Canadian dollars)
2016
2015
Change
2016
2015
Acquisition-related costs
Share of earnings of equity-accounted investee
Royalties, interest and other fees
Other (income) fees
Fair value adjustment on earn-out liability
Export rebate income
$ 1,287
(872)
(749)
(602)
150
(69)
$ 2,185 $
(623)
(129)
(1,580)
—
—
$
(898) $ 2,561
(1,185)
(249)
(1,379)
(620)
(1,950)
978
(1,110)
150
(2,146)
(69)
$ 3,240
(2,591)
(664)
459
—
—
Change
(679)
1,406
(715)
(2,409)
(1,110)
(2,146)
$
(855) $
(147) $
(708) $
(5,209) $
444
$
(5,653)
Acquisition-related costs for 2015 and 2016 related to the acquisition and integration of Macduff Shellfish.
Share of earnings in equity-accounted investee declined in 2016 primarily as a result of lower total available catch (“TAC”) for
sea scallops which resulted in a decline in sales and earnings.
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.
The fair value adjustment on earn-out liability relates to the Macduff acquisition. The earn-out liability is an unsecured additional
consideration to be paid dependent on the future financial performance of Macduff and is recognized using fair value, with
adjustments included in profit and loss.
The export rebate income relates to incentives received and accrued by our Argentine subsidiary for exports from certain
economic zones in Argentina. Late in 2016, the Argentina government announced a change to the export rebate program that
will result in a reduction to the incentive program effective immediately. Management expects to receive all accrued balances
in due course.
Research and Development
Research and development relates to new harvesting, processing and storage technology and research into ocean habitats
and fishing grounds. Research and development can vary year to year depending on the scope, timing and volume of research
completed. Clearwater’s business plans expect a consistent investment in research and development for the 2017 fiscal year.
36
Clearwater Seafoods Incorporated 2016 Annual Report
Income Taxes
Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the United Kingdom and Canada.
Deferred tax assets are being recognized based on management’s estimate that it is more likely than not that Clearwater will
earn sufficient taxable profit to utilize these losses. The increase in deferred tax expense for the year was a result of expected
higher taxable income.
Earnings Attributable to Non-controlling Interest
Non-controlling interest relates to minority share of earnings from Clearwater’s majority investments in a shrimp/turbot joint
venture and subsidiaries in Argentina and Newfoundland and Labrador.
The decrease in earnings attributable to non-controlling interest of $1.3 million for 2016 relates primarily to lower landings for
shrimp as a result of lower quotas and difficult weather conditions in northern fishing zones. For the fourth quarter, earnings
attributable to non-controlling interest increased by $0.5 million due to timing of landings.
It is important to note that the earnings attributable to non-controlling interest relates to the portion of Clearwater’s partnerships
owned by other parties. Income taxes are included in earnings attributable to shareholders for Clearwater’s share of partnership
earnings, whereas the earnings attributable to non-controlling interest are not tax affected.
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, definitions and reconciliations
section of the MD&A.
Earnings Attributable to Shareholders
Earnings increased $80.3 million to $59.6 million in 2016 primarily as a result of improvements in gross margin from strong
sales prices for the majority of core species and the impact of lower average foreign exchange rates. The changes in foreign
exchange resulted in non-cash unrealized foreign exchange gains on long-term debt and forward contracts as the Canadian
dollar strengthened against the US dollar and the GBP.
Adjusted Earnings Attributable to Shareholders
To assist readers in understanding 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, definitions and reconciliations section of the MD&A.
Adjusted earnings attributable to shareholders declined $19.7 million to $23.8 million in 2016 primarily as a result of higher
interest expense resulting from higher working capital balances and income tax expense.
Refer to the Management Discussion and Analysis for a breakdown of the non-IFRS measure and the related earnings attributable
to shareholders.
C A P I TA L S T R U C T U R E
Clearwater’s capital structure includes a combination of equity and various types of debt facilities. Clearwater’s goal is to have a
cost effective capital structure that supports its growth plans, while maintaining flexibility, reducing interest rate risk and reducing
exchange risk by borrowing when in currencies other than the Canadian dollar when appropriate.
Clearwater uses leverage, in particular revolving and term debt, to lower its cost of capital.
The amount of debt available to Clearwater under its lending facilities is a function of Adjusted EBITDA1 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.
1 Refer to discussion on non-IFRS measures, definitions and reconciliations.
Clearwater Seafoods Incorporated 2016 Annual Report 37
Management’s Discussion and Analysis
Clearwater maintains flexibility 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, utilizing surplus cash, extending the term of existing debt facilities and selling
surplus assets to repay debt.
Clearwater’s capital structure was as follows as at December 31, 2016 and 2015:
(In 000s of Canadian dollars)
As at December 31
Equity
Share capital
Contributed surplus
Deficit
Accumulated other comprehensive income
Non-controlling interest
Long-term debt
Senior debt, non-amortizing
Revolving debt, due in 2018
Term loan, due in 2017
Term loan, due in 2091
Senior debt, amortizing
Term Loan A, due 2018 (net of deferred financing charges of $0.4 million
(December 31, 2015 – $0.7 million))
Term Loan B, due 2019 (including embedded derivative,
net of deferred financing charges of $1.1 million)
Marine mortgage, due in 2017
Other loans
Deferred Obligation
Earnout liability
Total long-term debt
Total capital
$
2016
2015
210,860
1,419
(4,793)
(38,931)
168,555
19,930
188,485
23,400
13,459
3,500
40,359
$
157,161
547
(36,333)
(1,625)
119,750
29,325
149,075
16,400
13,953
3,500
33,853
50,218
55,562
307,210
—
222
357,650
29,298
9,107
335,024
457
277
391,320
43,035
12,561
436,414
480,769
$
624,899
$
629,844
There are 63,934,698 shares outstanding as of December 31, 2016 (December 31, 2015 – 59,958,998).
On June 21, 2016, Clearwater issued 2,895,700 shares for $13.90 per share yielding gross proceeds of approximately
$40.3 million. Concurrently, Clearwater completed a non-brokered private placement with certain existing shareholders for
1,080,000 shares at $13.90 per share for approximate gross proceeds of $15.0 million. The total approximate gross proceeds
from the offering were $55.3 million and the approximate proceeds net of expenses were $53.1 million. Transactions costs were
net of deferred taxes of $0.7 million.
On June 30, 2015, Clearwater issued 3,755,900 shares at $12.25 per share yielding gross proceeds of approximately $46 million.
Concurrently, Clearwater completed a non-brokered private placement with certain existing shareholders for 1,225,000 shares at
$12.25 per share for gross proceeds of approximately $15 million. The total gross proceeds from the offering were approximately
$61 million and the proceeds net of expenses were $58.6 million.
Long-term debt consists of a revolving loan, and non-amortizing and amortizing senior debt:
• The revolving loan allows Clearwater to borrow a maximum of CDN $100 million (denominated in either Canadian or the US
dollar equivalent) and it matures in June 2018. The balance was $23.4 million at December 31, 2016 (December 31, 2015 –
38
Clearwater Seafoods Incorporated 2016 Annual Report
$16.4 million). 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 availability on this loan is reduced by the amount outstanding on a USD $10 million
non-amortizing term loan and as such the availability as at December 31, 2016 was $63.1 million (December 31, 2015 –
$69.6 million).
• Non-amortizing debt consists of a USD $10 million loan due in June 2017 and a CDN $3.5 million loan due in 2091.
• Amortizing senior debt consists of a Term Loan A and Term Loan B.
Term Loan A – has principal outstanding as at December 31, 2016 of CDN $50.6 million (December 31, 2015 – CDN $56.3 million).
The balance is shown net of deferred financing charges of $0.4 million (December 31, 2015 – $0.7 million).
The initial portion of term loan A has a principal outstanding as at December 31, 2016 of CDN $24.2 million (December 31,
2015 – CDN $27.0 million). The balance is shown net of deferred financing charges of CDN $0.1 million (December 31,
2015 – $0.1 million). The loan is repayable in quarterly instalments of CDN $0.4 million from September 2015 to June
2017, and CDN $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, 2016 this resulted in an effective rate
of approximately 4.14%.
The second portion of the term loan A (a delayed draw portion) has a principal outstanding as at December 31, 2016 of
CDN $26.4 million (December 31, 2015 – CDN $29.3 million). The balance is shown net of deferred financing charges of
CDN $0.3 million (December 31, 2015 – $0.6 million). The loan is repayable in quarterly instalments of CDN $0.4 million.
The facility matures in June 2018 and bears interest payable monthly at the banker’s acceptance rate plus 3.25%.
Term Loan B – The principal outstanding as at December 31, 2016 was USD $178.5 million (December 31, 2015 – $189.7 million)
and CDN $70.4 million (December 31, 2015 – $74.8 million).
The USD 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 floor of 1.25%. As of December 31, 2016
this resulted in an effective rate of 4.75%. The Libor interest rate floor of 1.25% is accounted for separately as embedded
derivative and is recorded at the estimated fair market value. The change in fair market value of the embedded derivative
is recorded through profit or loss.
The CDN loan is repayable in quarterly instalments of CDN $0.2 million with the balance due at maturity in June 2019. It
bears interest payable monthly at the banker’s acceptance rate plus 3.50%. As of December 31, 2016 this resulted in an
effective rate of 4.39%.
• The Deferred Obligation and Earn out relate to the acquisition of Macduff in 2015 and work as follows:
The Deferred Obligation relates to 33.75% of the shares of Macduff Shellfish Group Limited acquired by Clearwater
(the “Earn Out Shares”). The principal amount of the deferred obligation at December 31, 2016 was £21.0 million
and is recorded at a discounted amount of £17.7 million (CDN $29.3 million) (December 31, 2015 – £20.9 million,
CDN $43.0 million) based on estimated timing of payment and is being accreted to the principal amount over the estimated
term using the effective interest method with an effective average interest rate of 7.8%.
In each year, the holders of the Earn Out Shares can elect to be paid up to 20% of the Deferred Obligation. Clearwater
has the right to exercise the payout of 20% of the Deferred Obligation annually commencing two years after the date of
closing. The percentage of the Deferred Obligation remaining unpaid will impact the fair value of the future performance
component of the additional consideration, the Earnout. The fair value of the Deferred Obligation was estimated as of the
acquisition date based on discounting the projected future cash out flows.
On October 30, 2016 the holders of the Earn Out Shares elected to be paid 20% of the outstanding deferred obligation.
As a result a payment £5.2 million (CDN – $8.7 million) was made on November 15, 2016.
The Earnout liability is unsecured additional consideration to be paid dependent upon the future financial performance of
Macduff and the percentage of Deferred Obligation remaining unpaid at the time of payment (refer to Deferred Obligation
above). The estimated fair value of the Earnout at December 31, 2016 was £5.5 million (CDN – $9.1 million) (December 31,
2015 – £6.1 million, CDN – $12.6 million) based on forecast earnings and probability assessments. The actual Earnout
payments are to be paid over the next five years.
Clearwater Seafoods Incorporated 2016 Annual Report 39
Management’s Discussion and Analysis
The amount of the total Earnout is calculated as follows:
The greater of:
i) £3.8 million; OR
ii) up to 33.75% (dependent upon the percentage of Deferred obligation remaining unpaid each year) of the increase in
equity value of the business over five years calculated as 7.5x adjusted EBITDA less the outstanding debt of Macduff;
and
iii) 10% of adjusted EBITDA above £10 million (dependent upon the percentage of Deferred obligation remaining unpaid
each year)
The Earnout liability is recorded at fair value on the balance sheet at each reporting period until paid in cash, with changes
in the estimated fair value being recorded as a component of other expense on the statement of operations.
Clearwater has entered into interest rate swap and cross-currency swap arrangements whereby:
• CDN $12 million of Term Loan A is fixed at 6.25% to June 2018.
• CDN $12 million of Term Loan A is capped at 5.85% to June 2018.
• USD $50 million of the Term Loan B is fixed at 6.15% to June 2019.
• USD $50 million of the Term Loan B is fixed at 6.49% to June 2019.
•
USD $75 million of the Term Loan B debt has been swapped into Canadian dollars at an effective exchange rate of 1.32
until June 26, 2018.
Taking into account the above interest rate swaps and excluding revolving loans, deferred compensation and the related earnout,
Clearwater has effectively fixed the interest rate on 46% of its debt.
Clearwater includes the change in market value for all interest rate swap and foreign exchange swap arrangements in earnings
during the period in finance costs.
The revolver, term loan A and term loan B are secured by a first 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 financial and non-financial covenants. Clearwater is in compliance with all
covenants associated with its debt facilities.
Acquisition and Financing of Macduff Shellfish Group Limited
On October 30, 2015 Clearwater completed its acquisition of Macduff, one of Europe’s leading wild shellfish companies. The
total fair value of the consideration paid or payable by Clearwater in connection with the acquisition as of the closing was
£81 million (CDN $164 million) plus the repayment of Macduff outstanding debt facilities of £19 million (CDN $39 million) and
management fees of £1.6 million (CDN $3.2 million) for a total of £102 million (CDN $206 million).
Macduff was acquired for cash consideration and an unsecured deferred consideration obligation of £27.0 million (the “Deferred
Consideration”) (CDN – $54.7 million) with a contingent consideration component that will be a minimum of £3.8 million
(CDN – $7.7 million).
Clearwater financed the cash portion of the acquisition from existing loan facilities including:
• CDN $75 million increase in Term Loan B facility
• CDN $25 million increase in Revolving Loan Facility
• CDN $51 million borrowing on existing Revolving Loan Facility and cash on hand
L I Q U I D I T Y
Clearwater has a number of treasury management policies and objectives 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 flows and
dividends.
40
Clearwater Seafoods Incorporated 2016 Annual Report
Management continuously evaluates its capital structure in light of these policies and strategies:
• Liquidity – As of December 31, 2016 Clearwater had $39.5 million in cash, and a $100.0 million revolving loan, of which
$63.1 million was available for drawing upon. The cash balance, together with available credit on the revolving loan, is used
to manage seasonal working capital demands, capital expenditures, and other commitments.
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 flows and lower leverage in the second half of the year. This typically results in lower free cash flow, higher debt
balances and higher leverage in the first half of the year.
• Leverage1 – Clearwater’s long-term leverage target calculated as net debt to adjusted EBITDA is 3.0x or lower. Periodically,
leverage may be higher due to planned investments, or lower due to seasonality but over time Clearwater manages to this
target. As of December 31, 2016 leverage decreased to 4.2x from 4.4x as of December 31, 2015. The decrease is primarily
due to a lower GBP exchange rate on the Deferred Obligation and Earnout Liability and the US dollar exchange rate on USD
denominated debt compared to 2015.
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 manages its 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 cash flows.
Clearwater’s leverage measure is based on the ratio of Clearwater’s share of adjusted EBITDA to its outstanding debt, net
of cash balances.
(In 000s of Canadian dollars)
As at December 31
Adjusted EBITDA1,4 (excluding non-controlling interest)
Debt2,3 (excluding non-controlling interest)
Less cash (excluding non-controlling interest)
Net debt
Leverage
$
2016
98,447
436,834
(25,110)
$
2015
101,310
475,685
(32,938)
$
2014
70,651
272,554
(40,712)
$
411,724
$
442,747
$
231,842
4.2
4.4
3.3
1 Refer to discussion on non-IFRS measures, definitions and reconciliations.
2
Debt at December 31, 2016 has been adjusted to include the USD $75 million cross-currency swap at contracted rates of 1.3235 that was entered
into in the third quarter 2015.
3 Debt is net of deferred financing charges of $2.0 million (December 31, 2015 – $2.3 million; December 31, 2014 – $0.6 million).
4 Adjusted EBITDA for 2015 includes an adjustment of $11.9 million to include the trailing earnings of Macduff which were acquired on October 3, 2015.
Clearwater Seafoods Incorporated 2016 Annual Report 41
Management’s Discussion and Analysis
•
Foreign Exchange Management1
Clearwater’s plan to mitigate foreign exchange risk is as follows:
(1) Diversify sales geographically, which reduces the impact of any country-specific economic and exchange 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 six months.
(4) Use conservative exchange estimates – Clearwater regularly reviews economist estimates of future exchange rates and
uses conservative estimates when managing its business.
(5) Foreign exchange risk management – Clearwater has a targeted foreign exchange program. This program focuses on
using forward contracts to lock in exchange rates up to 15 months for sales currencies (the US dollar, Euro, Yen and
Sterling) thereby lowering the potential volatility in cash flows from changes in exchange rates.
As of March 8, 2017 Clearwater had forward exchange contracts to be settled in 2017 and 2018 of:
• USD $70.4 million at an average rate of 1.30;
• 2.8 billion Yen at an average rate of .012;
• 35.8 million Euro at an average rate of 1.47;
• 11.8 million Euro to GBP at an average rate of 0.86;
• USD $3.9 million to GBP at an average rate of 0.81; and
• 2.6 million Euro to CDN at an average rate of 1.41.
The purpose of these contracts is to give certainty to Clearwater on the exchange rates it receives on a portion of its foreign
currency sales1. 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 up to 75% of its net exposures and that higher or lower spot exchange rates are reflected in sales, any losses or
gains on contracts are more than offset by the impact on sales.
• Free cash flows2 – Clearwater has a goal to generate strong cash flows from operations in order to fund scheduled loan
payments and capital expenditures and in turn to use this free cash flow to invest in growth investments. Clearwater’s goal
is to grow free cash flows such that it can fund growth, target leverage of approximately 3x Adjusted EBITDA and pay a
sustainable dividend to its shareholders.
1
2
Refer to discussion on risks and uncertainties.
Refer to discussion on non-IFRS measures, definitions and reconciliations.
42
Clearwater Seafoods Incorporated 2016 Annual Report
13 weeks ended
December 31
Year ended
December 31
2016
2015
2016
2015
2014
$
29,460
$
39,000
$
120,937
$
109,732
$
87,368
Adjusted EBITDA1
Less:
Cash interest
Cash taxes
Other income and expense items
Operating cash flow before changes
in working capital
Changes in working capital
(6,778)
(2,349)
(5,591)
14,742
64,745
Cash flows from operating activities
79,487
Use of cash:
Purchase of property, plant, equipment,
quota and other assets
Disposal of fixed assets
Less: Designated borrowingsA
Scheduled payments on long-term debt
Payments on long-term incentive plans
Distribution to non-controlling interests
Dividends received from joint venture
Other financing activities
Non-routine project costs
(13,158)
—
5,703
(1,519)
—
(5,097)
—
—
684
(5,471)
736
(926)
33,339
33,482
66,821
(4,292)
4,517
230
(1,669)
—
(2,781)
—
676
888
(24,776)
(7,078)
(4,955)
84,128
(21,088)
63,040
(56,332)
1,131
25,883
(6,475)
5,670
(24,560)
—
—
1,885
(19,006)
(1,896)
(1,590)
87,240
(18,746)
68,494
(63,390)
4,584
35,097
(5,461)
8,953
(11,817)
—
676
1,953
(14,938)
(2,585)
(5,295)
64,550
3,476
68,026
(83,309)
5
63,431
(8,360)
—
(10,427)
1,490
—
—
Free cash flows1
$
66,100
$
64,390
$
10,242
$
39,089
$
30,856
Add/(less):
Other debt borrowings (repayments)
of debt, use of cashB
Issuance of equity
Payments on long-term incentive plans
Other investing activitiesC
Other financing activities
(50,743)
(25)
—
(2,203)
(6,696)
90,261
—
—
(144,033)
(5,555)
(46,306)
53,024
(5,670)
(2,513)
(20,369)
78,099
58,628
(8,953)
(148,930)
(14,425)
(60,398)
32,487
—
1,805
(3,611)
Change in cash flows for the period
$
6,433
$
5,063
$
(11,592)
$
3,508
$
1,139
A Designated borrowings relate to capital projects for which there is long-term financing and therefore they will not be financed with operating cash flows.
For 2016 the periods covered in this table includes the replacement of the Ocean Concord clam vessel. For the purpose of free cash flow calculations
the amount invested (up to the total amount of the related financing) during the period on these projects is backed out of the calculation of free cash
flows irrespective of the timing of the related borrowing.
B Other debt borrowings (repayments) of debt includes $25.9 million of cash invested in designated capital projects.
C Other investing activities for 2015 includes $151.1 million for the acquisition of Macduff, less cash acquired in the acquisition of $9.1 million.
Cash flow generated by Clearwater’s operations along with cash on deposit and available credit on the revolving loan are
used to fund current operations, seasonal operations, seasonal working capital demands, capital expenditures, and other
commitments.
Free cash flows were $10.2 million for the year ended December 31 as compared to $39.1 million for the comparative period
in 2015. Increase in distributions to non-controlling interests, increased investment in working capital, higher interest and
taxes, partially offset by higher adjusted EBITDA resulted in lower free cash flows. Distributions to non-controlling interests
were higher due to the timing of payments. Increases in working capital were due to increases in inventory primarily due to
increased clam harvesting and the addition of the Macduff portfolio of products. Higher cash interest was due to increased
loan facilities as a result of the Macduff acquisition in late 2015. Higher taxes were primarily due to higher income before tax.
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
Clearwater Seafoods Incorporated 2016 Annual Report 43
Management’s Discussion and Analysis
Certain large investments in longer term assets, such as vessel conversion and/or 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 flows and deducts the related debt payments.
• Changes in working capital
(In 000s of Canadian dollars)
Decrease (increase) in inventory
(Decrease) increase in accounts payable
Decrease (increase) in accounts receivable
(Increase) decrease in prepaids
13 weeks ended
December 31
$
$
2016
33,179
13,154
20,722
(2,309)
2015
16,680
3,291
17,562
(4,051)
$
2016
(22,030)
(7,786)
3,775
4,953
Year ended
December 31
$
2015
(7,297)
5,025
(13,564)
(2,908)
$
64,746
$
33,482
$
(21,088)
$
(18,744)
Working capital for the year ended December 31, 2016 was an investment of $21.1 million versus $18.7 million in the same
period of 2015 primarily as a result of strong harvesting conditions for clams and procurement opportunities that increased
inventory levels.
Clearwater is focused on managing its free cash flows through:
•
•
Managing working capital – Clearwater manages its investment in trade receivables through a combination of tight
collection terms and, when appropriate, discounting. Clearwater has a policy of utilizing a combination of credit reporting
agencies, credit insurance, letters of credit and secured forms of payment to mitigate customer and country specific credit
risk. As a result, Clearwater does not have any significant concentration of credit risk. Clearwater manages its investment
in inventories through tight review of supply and production plans versus sales forecasts, and through continuous
improvements in the integration of its fleet 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. Significant expenditures that are expected to have a return in
excess of the cost of capital are classified as ROI, and all refits and expenditures that are expected to return less than the
average cost of capital are classified as maintenance.
On average, Clearwater expects to invest $15–$20 million a year in maintaining its fixed assets with a further $10–$15 million
of repairs and maintenance expensed and included in the cost of goods sold.
In 2017 Clearwater expects to invest approximately $90 million in capital expenditures with the largest portion relating to
the purchase and conversion of the clam replacement vessel, vessel maintenance and refits.
•
Dividends – On March 8, 2017 the Board of Directors approved and declared a dividend of $0.05 per share payable on April 3,
2017 to shareholders of record as of March 17, 2017.
In making the determination of dividend levels Clearwater’s Board gives consideration to several key principles including:
• expected future earnings;
•
•
•
free cash flows 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 increase the dividend in the future as the business continues to grow and expand.
The Board will continue to 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 defined for the purposes of the Income Tax Act (Canada) and applicable provincial
legislation and, therefore, qualify for the favorable tax treatment applicable to such dividends.
44
Clearwater Seafoods Incorporated 2016 Annual Report
C O M M I T M E N T S
In the normal course of business, Clearwater is obligated to make future payments, including contractual obligations for non-
derivative and derivative financial instruments, operating leases and other commitments. The table includes undiscounted cash
flows of financial liabilities, operating lease and other commitments, interest and principal cash flows based on the earliest date
on which Clearwater is required to pay.
December 31, 2016
Interest – long-term debt
Principal repayments –
long-term debt
Total long-term debt
Trade and other payables
Operating leases and other
Capital and maintenance projects
Derivative financial instruments
– asset
Derivative financial instruments
– liabilities
Carrying
amount
Total
contractual
cash flow
2017
2018
2019
2020
2021
>2022
$
$ 58,065 $ 16,674 $ 14,698 $ 6,893 $
275 $
275 $ 19,250
435,711
67,005 58,463 295,172
9,608
1,963
3,500
493,776
75,953
16,912
30,308
83,679 73,161 302,065
75,953
—
2,204
7,687
—
30,308
—
3,100
—
9,883
—
1,934
—
2,238 22,750
—
1,081
—
—
905
—
436,414
75,953
—
—
(4,821)
(4,821)
(4,821)
5,640
5,640
5,640
—
—
—
—
—
—
—
—
—
—
$ 513,185 $ 617,767 $ 198,446 $ 76,261 $ 304,269 $ 11,817 $ 3,143 $ 23,831
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.
2016 will be the seventh consecutive year of record top and bottom line results for Clearwater. The single largest contributor to
year over year growth was the addition of Macduff Shellfish, acquired in October 2015. Excluding Macduff, Clearwater’s core
business financial performance was below expectations as the company felt the combined effects of shortages of supply in
northern shrimp and sea scallops. The addition of the Belle Carnell combined with our proprietary advancements in harvesting
technology across the clam fleet resulted in the complete harvest of the Arctic surf clam Total Allowable Catch (“TAC”) for the
first time in the history of the fishery. While this bodes well for a strong 2017, the rapid increase in supply was not anticipated
and outstripped the near term capacity of our existing channels and customers to the detriment of prices, margins and year-
end inventory levels.
In 2017, we expect to deliver another year of record sales and adjusted EBITDA with growth in virtually every market, channel
and species.
Harvest conditions challenged us in 2016 but our scale, access to supply, advanced harvesting and processing technology,
diversity of species and breadth of markets, channels and customers position us well for sustainable and profitable growth in
2017 and beyond.
Clearwater Seafoods Incorporated 2016 Annual Report 45
Management’s Discussion and Analysis
Core Strategies
Expanding access to supply – Clearwater will continue to actively invest in access to supply of core species and other
complementary, high demand, premium, wild and sustainably harvested seafood through improved utilization and productivity
of core licenses as well as acquisitions, partnerships, joint ventures and commercial agreements.
Target profitable & growing markets, channels & customers – In 2017, Clearwater will continue to target markets, consumers,
channels and customers on the basis of size, profitability, demand for eco-label seafood and ability to win. Our focus is to win
in key channels and with customers that are winning with consumers.
• In Europe, Clearwater expects to benefit from the early ratification of the Comprehensive European Trade Agreement (“CETA”)
by the European Parliament. As the largest seafood import market in the world, the millions of dollars of tariffs removed will
enable expanded profitable growth for Clearwater and its customers.
• In Asia, Clearwater will continue to grow sales and distribution of all species with a particular emphasis on Arctic surf clam,
live lobster, crab and whelk. In China, Clearwater expects to benefit from the expansion of foodservice distribution to more
Tier 2 cities, retail distribution expansion in Tier 1 cities, as well as the rapid growth of the company’s China Ecommerce
partnerships with Alibaba’s T-mall and JD.com. Both ecommerce platforms represent a large opportunity for Clearwater to
capitalize on China’s booming $830 billion online market, providing Chinese consumers with the ability to purchase authentic
Clearwater products. As the number of online shoppers in China increases, Clearwater will continue to leverage ecommerce
to target profitable and growing markets, channels and customers.
Innovate and position products to deliver superior customer satisfaction and value – Clearwater will continue to work with
customers on new products and formats as we innovate and position our premium seafood to deliver superior satisfaction and
value that is relevantly differentiated on the dimensions of taste, quality, safety, sustainability, wellness, convenience and fair
labour practices.
Increase margins by improving price realization and cost management – In 2017, Clearwater will continue to expand our
“ocean to shelf” global supply chain cost savings program to achieve greater efficiency and improved productivity throughout
our global operations. This includes leveraging the scarcity of seafood supply versus increasing global demand to continuously
improve price realization, revenue and margins. It also includes investing in innovative state-of-the-art technology, systems and
processes that maximize value, minimize cost, reduce waste, increase yield and improve quality, reliability and safety of our
products and people.
Pursue and preserve the long-term sustainability of resources on land and sea – Clearwater will continue to invest in science
and sustainable harvesting technology and practices to add value to all fisheries in which we participate in Canada, Argentina
and the United Kingdom.
Build organizational capability, capacity & engagement – A high level of performance can only be achieved by a talented,
engaged and high performing global workforce at sea and on land, employing well communicated strategies and plans with
measurable objectives. Clearwater will continue to invest in our talented and engaged global workforce to continue to deliver
on the operational and growth opportunities available to us.
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 flow,
including risks related to resource supply, food processing and product liability, suppliers, customers, competition and
foreign exchange exposure and lawsuits in the normal course of business. For further disclosure of additional risk factors
please refer to the Annual Information Form, which is available on Sedar at www.sedar.com as well as Clearwater’s website at
www.clearwater.ca.
Foreign exchange risk
Clearwater’s financial results are subject to volatility as a result of foreign exchange rate fluctuations.
The majority of Clearwater’s sales are to locations outside Canada and are transacted in currencies other than the Canadian
dollar whereas the majority of its expenses are in Canadian dollars. As a result, fluctuations in the foreign exchange rates of
these currencies can have a material impact on the financial condition and operating results. In addition Clearwater has a
subsidiary which operates in the offshore scallop fishery in Argentina which exposes Clearwater to changes in the value of the
Argentine Peso.
46
Clearwater Seafoods Incorporated 2016 Annual Report
Risks associated with foreign exchange are partially mitigated by the following strategies:
(1) Diversify sales internationally which reduces the impact of any country-specific economic risks.
(2) Execute on pricing strategies so as to offset the impact of exchange rates.
(3) Limit the amount of long-term sales contracts – Clearwater has very few long-term sales contracts with any customers.
Contracts are typically less than 6 months and are based on list prices that provide a margin for exchange rate fluctuations.
(4) Plan conservatively – Clearwater regularly reviews economist estimates of future exchange rates and uses conservative
estimates when managing its business, and
(5) Foreign exchange hedging program – that focuses on using forward contracts to enable Clearwater to lock in exchange
rates up to 15 months for key sales currencies (the US dollar, Euro, Yen and Sterling) thereby lowering the potential volatility
in cash flows through derivative contracts.
In 2016 approximately 37% of Clearwater’s sales were denominated in US dollars.
Based on 2016 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 $1.7 million change in sales.
• a change of 0.01 in the Euro rate as converted to Canadian dollars would result in a $1.1 million change in sales.
• a change of 0.001 in the Yen rate as converted to Canadian dollars would result in a change of $4.8 million in sales.
As of March 8, 2017 Clearwater had forward exchange contracts to be settled in 2017 and 2018 of:
• USD $70.4 million at an average rate of 1.30;
• 2.8 billion Yen at an average rate of .012;
• 35.8 million Euro at an average rate of 1.47;
• 11.8 million Euro to GBP at an average rate of 0.86;
• USD $3.9 million to GBP at an average rate of 0.81; and
• 2.6 million Euro to CDN at an average rate of 1.41.
The purpose of these contracts is to give certainty to Clearwater on the exchange rates that it expects to receive on a portion of
its 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.
Political risk
Our international operations are subject to economic and political risks, which could materially and adversely affect our business.
Our operations and investments are subject to numerous risks, including fluctuations in foreign currency, exchange rates
and controls, expropriation of our assets, nationalization, renegotiation, forced divestiture, modification or nullification of our
contracts and changes in 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.
Argentina
In December 2015 and largely the first half of 2016 our Argentine operation has been subject to fluctuations in foreign
currency related to volatility with the Argentine Peso. Clearwater continues to monitor these fluctuations and any risks that the
volatility in the exchange rates could cause Clearwater to report its Argentine operations using IAS 29 – Financial Reporting in
Hyperinflationary Economies.
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 financial assets that are surplus to our needs to operate the business outside of Canada. We
do not carry financial assets in Pesos to mitigate exchange risk. In addition we have structured our operations in Argentina with
an Argentine partner who owns 20% of the Argentine business and who is actively managing the business.
Clearwater Seafoods Incorporated 2016 Annual Report 47
Management’s Discussion and Analysis
In certain previous years, Clearwater has been unable to repatriate dividends from Argentina.
To compensate for the potential restriction on dividend payouts Clearwater put in place domestic loan financing 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.
No assurance can be given that our operations will not be adversely impacted as a result of existing or future legislation.
United Kingdom
On June 23, 2016, the United Kingdom (“UK”) voted to leave the European Union (“EU”). Although the vote has taken place,
our understanding is that this vote initiates a negotiation process between the UK and the EU over the terms of the withdrawal
and the country’s future relationship with the EU. This negotiation process is likely to take several years and as such it will take
some time to develop the full details of the exit plan. With the acquisition of Macduff, Clearwater and Macduff are confident that
we will see continued strength and growth in our business. We are confident in our ability to mitigate any negative impacts on
the business and continue to monitor the impact on operations.
At this time we do not expect any material impacts on the business as a result of this decision. We will continue to analyze the
detailed impacts on the business as the details of the exit agreement become known.
United States
NAFTA is a comprehensive trade agreement that sets the rules of trade and investment between Canada, the United States,
and Mexico. Since the agreement entered into force on January 1, 1994, NAFTA has systematically eliminated most tariff and
non-tariff barriers to free trade and investment between the three NAFTA countries. The current President of the United States
has expressed his intent to change the existing NAFTA, however the specifics related to these changes are unknown at this
time and therefore the impact to Canada and Clearwater is indeterminable. Approximately 14% of total sales for 2016 were in
the United States.
Management continues to review, assess and monitor for any changes to NAFTA that could significantly impact Clearwater.
Europe
In February 2017, the European Union (“EU”) approved a deal which will drop barriers between the EU and Canada (the
“Comprehensive Economic and Trade Agreement” or “CETA”). Europe is one of the world’s top consumption markets for
seafood. The EU imported in excess of CDN $25 billion of seafood with exports of only CDN $5.7 billion. Europe is a major export
market for Clearwater products, representing approximately 40% of total sales or $246 million in 2016. With CETA, Clearwater
and its European customers expect to see a financial benefit through tariff reduction. Clearwater also anticipates the reduction
in tariffs to lead to accelerated growth in the European market.
China and Japan
On January 30, 2017, the Government of the United States officially withdrew from the Trans-Pacific Partnership Agreement
(“TPP”). As much of the TPP was negotiated around specific U.S. conditions, the status of the TPP is unknown and therefore,
the impact to Canada and Clearwater is indeterminable. In the absence of TPP, the Governments of Canada, China and Japan
have expressed interest in exploring bilateral free trade agreements. Ratified bilateral free trade agreements would be expected
to have positive benefits to Clearwater’s sales and margins through reductions of tariffs and duties.
Contingent liability
From time to time Clearwater is subject to claims and lawsuits arising in the ordinary course of operations. In the opinion
of management, the ultimate resolution of such pending legal proceedings will not have a material effect on Clearwater’s
consolidated financial position.
48
Clearwater Seafoods Incorporated 2016 Annual Report
Resource supply risk
A material change in the population and biomass of scallop, lobster, clam, langoustine, crab, whelk or coldwater shrimp stocks
in the fisheries in which we operate would materially and adversely affect our business.
Clearwater’s business is dependent on our allocated quotas of the annual Total Allowable Catch (“TAC”) for the species of
seafood we harvest. The annual TAC is generally related to the health of the stock of the particular species as measured by
a scientific survey of the resource. The population and biomass of shellfish stocks are subject to natural fluctuations, some
of which are beyond our control and which may be exacerbated by factors such as water temperatures, food availability, the
presence of predators, disease, disruption in the food chain, reproductive problems or other biological issues. We are unable to
fully predict the timing and extent of fluctuations in the population and biomass of the shellfish stocks we harvest and process,
and we therefore may not be able to engage in effective measures to alleviate the adverse effects of these fluctuations. In
addition, the population models utilized by scientists evaluating the fisheries in which we operate are constantly evolving. Certain
changes in the population models could negatively impact future biomass estimates. Any material reduction in the population
and biomass or TAC of the stocks from which we source seafood would materially and adversely affect our business. Any
material increase in the population and biomass or TAC could dramatically reduce the market price of any of our products.
The source of all Clearwater’s supply of products comes from fisheries in Canada, the United Kingdom and Argentina. The
governments of Canada, the UK and EU and Argentina set the annual TAC and/or define fishing regulations for each species by
reviewing scientific studies of the resource and then consulting with key stakeholders including ourselves and our competitors
to determine acceptable catch levels. The potentially differing interests of our competitors may result in conflicting 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 financial condition and results of operations.
Resource supply risk is managed through adherence with government policies and regulations related to fishing in Canada and
Argentina and Clearwater’s investment in science and technology, which enables Clearwater to understand the species that
it harvests. Clearwater has invested in projects with the scientific community, such as ocean floor mapping and the resource
assessment surveys to ensure access to the best available science information. Resource management plans, developed by
DFO, are developed through an open and transparent process with strong input from industry participants. Clearwater engages
in these processes to promote best in class, robust, and sustainable management of the resource. The Marine Stewardship
Council certification of all of our core species demonstrates that the resources that Clearwater harvests meet the leading global
standard for sustainable fisheries management practice. Clearwater further mitigates the risk associated with resource supply
and competition through the diversification across species.
The northern shrimp resource is declining from record high levels and on July 15, 2016, the Government of Canada announced
a decrease in the TAC for the Northern coldwater shrimp fishery area (“SFA”) 6. The decline in the TAC reverses the tremendous
growth in the resource and is a reversal that has been expected by scientists and industry participants. Clearwater will continue
to pursue adjustments to the business as required to find additional efficiencies and market value to offset the volume declines.
The diversity in Clearwater’s species portfolio also helps to mitigate the impact of shrimp declines in the business.
Other risks
For further disclosure of additional risk factors please refer to the Annual Information Form.
Clearwater Seafoods Incorporated 2016 Annual Report 49
Management’s Discussion and Analysis
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 financial position and
operations and may require management to make judgments based on underlying estimates and assumptions about future
events and their effects. These estimates can include but are not limited to estimates regarding inventory valuation, accounts
receivable valuation allowances, estimates of expected useful lives of vessels and plant facilities, and estimates of future cash
flows for impairment tests. Underlying estimates and assumptions are based on historical experience and other factors that are
believed by management to be reasonable under the circumstances. These estimates and assumptions are subject to change
as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment
changes. Clearwater has considered recent market conditions including changes to its cost of capital in making these estimates.
Refer to the notes to the annual financial statements for a complete listing of critical accounting policies and estimates used in
the preparation of the consolidated financial statements.
Disclosure Controls and Internal Controls Over Financial Reporting
Clearwater has established and maintains disclosure controls and procedures over financial reporting, as defined under the
rules adopted by the Canadian Securities Regulators in instrument 52-109. The Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”) have evaluated the design and effectiveness of Clearwater’s disclosure controls and procedures as
of December 31, 2016 and have concluded that such procedures are adequate and effective to provide reasonable assurance
that material information relating to Clearwater and its consolidated subsidiaries would be made known to them by others within
those entities to allow for accurate and complete disclosures in annual filings.
The Management of Clearwater, with the participation of the CEO and the CFO (collectively “Management”), is responsible for
establishing and maintaining adequate internal controls over financial reporting. Clearwater’s internal controls over financial
reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial
statements in accordance with International Financial Reporting Standards (“IFRS”).
Management evaluated the design and effectiveness of Clearwater’s internal controls over financial reporting as at December 31,
2016. 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.
For the year ended December 31, 2016, Macduff Shellfish was incorporated into management’s review and assessment of
internal controls over financial reporting and in February 2016, Clearwater successfully completed the implementation of its
new ERP system (“SAP”), including general ledger, sales distribution, supply chain and transportation modules, replacing its
legacy systems.
Based on management’s evaluation, the CEO and the CFO have concluded that as of December 31, 2016, Clearwater’s internal
controls over financial reporting are effective in providing reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with IFRS.
50
Clearwater Seafoods Incorporated 2016 Annual Report
Adoption of New and Revised Standards
The IASB has issued the following standards that have not been applied in preparing these consolidated financial statements
as their effective dates fall within annual periods beginning subsequent to the current reporting period.
Foreign Currency Transactions and Advance Consideration (“IFRIC 22”)
On December 6, 2016, the IASB issued IFRIC 22, Foreign Currency Transactions and Advance Consideration which clarifies
the date of the transaction, for the purpose of determining the exchange rate to use on initial recognition of the related asset,
expense or income, is the date on which an entity has received or paid advance consideration.
The Company intends to adopt IFRIC 22 in its financial statements for the annual period beginning on January 1, 2018. The
extent of the impact of adoption of IFRIC 22 has not yet been determined.
Disclosure Initiative (Amendments to IAS 7)
On January 7, 2016 the IASB issued Disclosure Initiative (Amendments to IAS 7). The amendments require disclosures that
enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes
arising from cash flow and non-cash changes. One way to meet this new disclosure requirement is to provide a reconciliation
between the opening and closing balances for liabilities from financing activities.
The Company intends to adopt the amendments to IAS 7 in its financial statements for the annual period beginning on January 1,
2017. To meet the disclosure requirement, the company will provide a reconciliation of the opening and closing balances of
long-term debt.
Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12)
The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying
amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the
carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology to determine the
future taxable profits used for assessing the utilization of deductible temporary differences.
The Company intends to adopt the amendments to IAS 12 in its financial statements for the annual period beginning on
January 1, 2017. The extent of the impact of adoption of the amendments is not expected to have a material impact on the
consolidated financial statements.
Clearwater Seafoods Incorporated 2016 Annual Report 51
Management’s Discussion and Analysis
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 five-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 new standard applies to contracts with customers. It does not apply to
insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs.
The Company intends to adopt IFRS 15 in its financial 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.
IFRS 9 – Financial Instruments
IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014),
financial assets are classified and measured based on the business model in which they are held and the characteristics of
their contractual cash flows. The standard introduces additional changes relating to financial 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 financial 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.
IFRS 16 Leases
On January 13, 2016 the IASB issued IFRS 16 Leases. This standard introduces a single lessee accounting model and requires
a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of
low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting
requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting
model have been impacted, including the definition of a lease. Transitional provisions have been provided.
The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. 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 (amendments to IFRS 10)
On September 11, 2014 the IASB issued Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
(Amendments to IFRS 10 and IAS 28). The amendments were to be applied prospectively for annual periods beginning on or
after January 1, 2016, however, on December 17, 2015 the IASB decided to defer the effective date for these amendments
indefinitely. 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. Specifically,
under the existing consolidation standard the parent recognises the full gain on the loss of control, whereas under the existing
guidance on associates and joint ventures the parent recognises the gain only to the extent of unrelated investors’ interests in
the associate or joint venture. The main consequence of the amendments is that a full gain/loss is recognised when the assets
transferred meet the definition of a ‘business’ under IFRS 3 Business Combinations. A partial gain/loss is recognised when the
assets transferred do not meet the definition of a business, even if these assets are housed in a subsidiary. The Company will
evaluate the impact if and when the IASB determines an effective date.
IFRS 2 Share-Based Payment
In June 2016, the IASB issued amendments to IFRS 2 Share-Based Payment. The amendments provide clarification on how to
account for certain types of share-based payment transactions.
The Company intends to adopt the amendments to IFRS 2 in its consolidated financial statements for the annual period
beginning January 1, 2018. The extent of the impact of adoption of the amendments has not yet been determined.
52
Clearwater Seafoods Incorporated 2016 Annual Report
R E L AT E D PA R T Y T R A N S A C T I O N S
Clearwater often transacts in the normal course of business with other related parties. The details are as follows for the year
ended December 31, 2016 and 2015:
Clearwater rents office space to Clearwater Fine Foods Incorporated (“CFFI”) (the controlling shareholder of Clearwater)
and provides computer network support services to CFFI. The net amount due to CFFI in respect of these transactions was
$0.04 million (December 31, 2015 – net amount due to CFFI of $0.05 million), is unsecured and due on demand.
In June 2016, Clearwater sold an idle vessel to the joint venture; the sales price of CDN $13.5 million was the book value at the
time of the sale plus refit costs.
For the year ended December 31, 2016, Clearwater expensed approximately $0.4 million in factory and equipment rentals from
companies related to a member of its management team (December 31, 2015 – $0.07 million). Clearwater incurred $0.04 million
in legal fees paid to a law firm in which a Director of Clearwater is a partner (December 31, 2015 – $0.1 million).
In addition, for the year ended December 31, 2016, Clearwater expensed approximately $0.1 million for goods and services from
companies related to its parent (December 31, 2015 – $0.2 million). The transactions are recorded at the exchange amount and
the balance due to these companies was $0.05 million as at December 31, 2016 (December 31, 2015 – $0.01 million).
At December 31, 2016 Clearwater had a balance of $1.4 million (December 31, 2015 – $1.3 million), included in long-term
receivables, for interest bearing loans made to a non-controlling interest shareholder in a subsidiary.
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 000s of Canadian dollars)
Fiscal 2016
Sales
Earnings
Earnings per share (“EPS”)
Diluted earnings per share1
Weighted average shares outstanding
Fiscal 2015
Sales
Earnings (loss)
Earnings (loss) per share (“EPS”)
Diluted earnings (loss) per share
Fiscal 2014
Sales
Earnings (loss)
Earnings (loss) per share (“EPS”)
Diluted earnings (loss) per share
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
$
116,225
15,812
0.24
0.24
59,958,998
$
140,180
13,514
0.16
0.16
60,439,577
$
189,457
17,859
0.17
0.17
63,934,698
$
165,690
12,411
0.14
0.14
63,934,698
$
$
75,362
(28,336)
(0.57)
(0.57)
77,771
(12,144)
(0.27)
(0.27)
$
$
116,748
9,739
0.10
0.10
113,403
18,850
0.30
0.30
$
$
147,332
1,717
(0.08)
(0.09)
134,069
2,959
(0.02)
(0.02)
$
$
165,503
(3,793)
(0.07)
(0.07)
119,498
130
(0.07)
(0.07)
1 Diluted earnings (loss) per share are anti-dilutive for the first nine months of 2016, for the fourth quarter of 2015 and for all periods in 2014.
Clearwater Seafoods Incorporated 2016 Annual Report 53
Management’s Discussion and Analysis
For a more detailed analysis of each quarter’s results, please refer to our quarterly reports and our annual reports.
In general, sales increase with each successive quarter with the highest revenues in the third and fourth quarter of each year
which is consistent with Clearwater’s seasonality.
Volatility in exchange rates can have a significant impact on earnings. The volatility is partially offset by Clearwater’s foreign
exchange management program.
Net loss in the first and fourth quarter of 2015 includes unrealized foreign exchange losses on the translation of the US dollar
denominated debt.
Earnings in the second quarter of 2014 include unrealized foreign exchange gains of $17.7 million on the translation of long-term
debt and marking forward contracts to market. This offsets the unrealized foreign exchange losses of $15.2 million on translation
of long-term debt and marking forward contracts to market incurred in the first quarter of 2014.
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 flows.
Adjusted EBITDA is defined as EBITDA excluding extraordinary, non-operating, non-recurring or non-routine items that are
unusual and are deemed not to be a part of normal operations of the business. Items that are excluded from adjusted EBITDA
include restructuring and reorganization expenses, gains and losses on investment activities, costs associated with acquisitions
to the extent not capitalized, financing and refinancing costs, net gains on insurance claims and stock-based compensation. 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
reflect the economic effect of the hedging relationships in the period to which they relate.
54
Clearwater Seafoods Incorporated 2016 Annual Report
Reconciliation of net earnings (loss) to adjusted EBITDA for the 13 weeks ended December 31, 2016 and 2015 and the years
ended December 31, 2016, 2015 and 2014 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
13 weeks ended
December 31
Year ended
December 31
2016
2015
2016
2015
2014
$
12,411
$
(3,793)
$
59,596
$
(20,671)
$
9,797
6,261
530
9,781
7,256
1,860
285
8,835
6,008
16,446
960
33,501
4,387
5,949
1,154
29,414
1,265
24,544
26,889
20,336
15,716
$
36,239
$
13,195
$
137,392
$
34,620
$
57,271
Add (deduct) other items:
Unrealized foreign exchange
and derivative loss (income)
Fair market value on embedded derivative
Realized foreign exchange loss (gain)
on working capital
Restructuring and refinancing costs
Stock-based compensation
(recovery) expense
Loss (gain) on disposal of assets
and quota
Loss on insurance claim
(5,779)
(1,710)
776
2,237
(2,303)
—
—
15,607
(2,761)
(28,190)
(1,350)
3,900
6,055
3,004
—
—
7,803
2,380
2,902
—
—
62,053
(2,118)
(1,690)
11,299
5,270
—
300
17,288
(1,229)
1,172
1,981
8,948
1,937
—
Adjusted EBITDA
$
29,460
$
39,000
$
120,937
$
109,734
$
87,368
Adjusted EBITDA attributed to:
Non-controlling interests
Shareholders of Clearwater
$
4,382
25,078
$
5,576
33,424
$
22,491
98,446
$
22,829
86,905
$
16,718
70,650
$
29,460
$
39,000
$
120,937
$
109,734
$
87,368
Clearwater Seafoods Incorporated 2016 Annual Report 55
Management’s Discussion and Analysis
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 net earnings to adjusted earnings for the 13 weeks and years ended December 31, 2016 and 2015 is as follows:
Reconciliation of net earnings to adjusted earnings
Earnings (loss)
Add (subtract)
Restructuring and refinancing costs
Acquisition-related costs
Fair value impact of purchase price allocation
Stock-based compensation (recovery) expense
Insurance claim
Unrealized foreign exchange and derivative loss
Devaluation of peso on working capital
Fair value on long-term debt
13 weeks ended
December 31
Year ended
December 31
2016
2015
2016
2015
$
12,411
$
(3,793)
$
59,596
$
(20,671)
951
—
—
(2,303)
—
(6,603)
—
(888)
(8,843)
1,551
2,338
2,166
3,004
—
15,607
5,344
(2,761)
27,249
(182)
1,159
—
2,902
—
(31,753)
5,199
2,211
(20,464)
5,821
3,403
2,166
5,270
300
62,053
5,344
(2,118)
82,239
Adjusted earnings
$
3,568
$
23,456
$
39,132
$
61,568
Adjusted earnings attributable to:
Non-controlling interests
Shareholders
2,773
793
4,486
18,970
15,366
23,766
18,111
43,457
$
3,566
$
23,456
$
39,132
$
61,568
Adjusted earnings per share:
Weighted average of shares outstanding
Adjusted earnings per share for shareholders
63,935
0.01
59,959
0.32
62,050
0.38
57,489
0.76
Reconciliation of adjusted earnings to adjusted EBITDA
Adjusted earnings
$
3,567
$
23,456
$
39,132
$
61,568
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
Other reorganizational costs
6,261
9,781
7,256
530
779
1,286
1,860
8,835
6,008
285
(1,444)
—
25,893
15,544
16,446
33,501
26,889
960
2,606
1,403
81,805
4,387
29,414
20,336
1,154
(7,034)
(91)
48,166
Adjusted EBITDA1
$
29,460
$
39,000
$
120,937
$
109,734
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
56
Clearwater Seafoods Incorporated 2016 Annual Report
Leverage
Leverage is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by
other companies. Management believes leverage to be a useful term when discussing liquidity and does monitor and manage
leverage. In addition, as leverage is a measure frequently analyzed for public companies, Clearwater has calculated the amount in
order to assist readers in this review. Leverage should not be construed as a measure of liquidity or as a measure of cash flows.
Leverage for banking purposes differs from the below calculations as agreements require the exclusion of certain cash from the
calculation and EBITDA excludes non-controlling interests and most significant non-cash and non-recurring items. Clearwater
is in compliance with all of the non-financial and financial covenants associated with its debt facilities.
Reconciliation of adjusted EBITDA (excluding non-controlling interest) to debt (net of deferred financing charges) for the years
ended December 31, 2016, 2015 and 2014 is as follows:
(In 000s of Canadian dollars)
As at December 31
2016
2015
2014
Adjusted EBITDA1,4 (excluding non-controlling interest)
$
98,447
$
101,310
$
70,651
Debt2,3 (excluding non-controlling interest)
Less cash (excluding non-controlling interest)
Net debt
Leverage
436,834
(25,110)
475,685
(32,938)
272,554
(40,712)
$
411,724
$
442,747
$
231,842
4.2
4.4
3.3
1 Refer to discussion on non-IFRS measures, definitions and reconciliations.
2 Debt at December 31, 2016 has been adjusted to include the USD $75 million cross-currency swap at contracted rates of 1.3235 that was entered
into in the third quarter 2015.
3 Debt is net of deferred financing charges of $2.0 million (December 31, 2015 – $2.3 million; December 31, 2014 – $0.6 million).
4 Adjusted EBITDA for 2015 includes an adjustment of $11.9 million to include the trailing earnings of Macduff which were acquired on October 3, 2015.
Free Cash Flows
Free cash flow is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented
by other companies. Management believes that in addition to net earnings and cash provided by operating activities, free cash
flow is a useful supplemental measure from which to determine Clearwater’s ability to generate cash available for debt service,
working capital, capital expenditures and distributions. Free cash flow should not be construed as an alternative to net earnings
determined in accordance with IFRS, as a measure of liquidity, or as a measure of cash flows.
Free cash flow is defined as cash flows from operating activities, less planned capital expenditures (net of any borrowings of debt
designated to fund such expenditures), scheduled payments on long-term debt and distributions to non-controlling interests.
Items excluded from the free cash flow include discretionary items such as debt refinancing and repayments changes in the
revolving loan and discretionary financing and investing activities.
Clearwater Seafoods Incorporated 2016 Annual Report 57
Management’s Discussion and Analysis
Reconciliation for the 13 weeks ended December 31, 2016 and 2015 and years ended December 31, 2016, 2015 and 2014 is
as follows:
13 weeks ended
December 31
Year ended
December 31
2016
2015
2016
2015
2014
$
29,460
$
39,000
$
120,937
$
109,732
$
87,368
Adjusted EBITDA1
Less:
Cash interest
Cash taxes
Other income and expense items
Operating cash flow before changes
in working capital
Changes in working capital
(6,778)
(2,349)
(5,591)
14,742
64,745
Cash flows from operating activities
79,487
Use of cash:
Purchase of property, plant, equipment,
quota and other assets
Disposal of fixed assets
Less: Designated borrowingsA
Scheduled payments on long-term debt
Payments on long-term incentive plans
Distribution to non-controlling interests
Dividends received from joint venture
Other financing activities
Non-routine project costs
(13,158)
—
5,703
(1,519)
—
(5,097)
—
—
684
(5,471)
736
(926)
33,339
33,482
66,821
(4,292)
4,517
230
(1,669)
—
(2,781)
—
676
888
(24,776)
(7,078)
(4,955)
84,128
(21,088)
63,040
(56,332)
1,131
25,883
(6,475)
5,670
(24,560)
—
—
1,885
(19,006)
(1,896)
(1,590)
87,240
(18,746)
68,494
(63,390)
4,584
35,097
(5,461)
8,953
(11,817)
—
676
1,953
(14,938)
(2,585)
(5,295)
64,550
3,476
68,026
(83,309)
5
63,431
(8,360)
—
(10,427)
1,490
—
—
Free cash flows1
$
66,100
$
64,390
$
10,242
$
39,089
$
30,856
Add/(less):
Other debt borrowings (repayments)
of debt, use of cashB
Issuance of equity
Payments on long-term incentive plans
Other investing activitiesC
Other financing activities
(50,743)
(25)
—
(2,203)
(6,696)
90,261
—
—
(144,033)
(5,555)
(46,306)
53,024
(5,670)
(2,513)
(20,369)
78,099
58,628
(8,953)
(148,930)
(14,425)
(60,398)
32,487
—
1,805
(3,611)
Change in cash flows for the period
$
6,433
$
5,063
$
(11,592)
$
3,508
$
1,139
A Designated borrowings relate to capital projects for which there is long-term financing and therefore they will not be financed with operating cash flows.
For 2016 the periods covered in this table include the replacement of the Ocean Concord clam vessel. For the purpose of free cash flow calculations
the amount invested (up to the total amount of the related financing) during the period on these projects is backed out of the calculation of free cash
flows irrespective of the timing of the related borrowing.
B Other debt borrowings (repayments) of debt includes $25.9 million of cash invested in designated capital projects.
C Other investing activities for 2015 includes $151.1 million for the acquisition of Macduff, less cash acquired in the acquisition of $9.1 million.
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
58
Clearwater Seafoods Incorporated 2016 Annual Report
Return on Assets
Return on assets is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures
presented by other companies. Management believes that return on assets measures the efficiency of the use of total assets
to generate income. Return on assets should not be construed as an alternative to net earnings determined in accordance
with IFRS.
Return on assets is defined as the ratio of rolling 12 month adjusted earnings before interest and taxes (“EBIT”) to average total
quarterly assets including all working capital assets.
The calculation of adjusted earnings before interest and taxes to total assets for the twelve months ended December 31, 2016,
2015 and 2014 is as follows:
(In 000s of Canadian dollars)
As at December 31
Adjusted EBITDA1
Depreciation and amortization
2016
2015
$
120,938
38,634
$
109,734
29,732
$
Adjusted earnings before interest and taxes
82,304
80,002
2014
87,368
23,753
63,615
Average quarterly total assets
$
746,896
$
581,253
$
456,628
11.0%
13.8%
13.9%
1
Refer to discussion on non-IFRS measures, definitions and reconciliations.
Clearwater Seafoods Incorporated 2016 Annual Report 59
Clearwater Seafoods Incorporated
Management’s Statement of Responsibility for Financial Reporting
The consolidated financial statements and all related financial information contained in the annual report, including Management’s
Discussion and Analysis, are the responsibility of the Management of Clearwater Seafoods Incorporated. The statements
have been prepared in accordance with generally accepted accounting principles, using management’s best estimates and
judgments, where appropriate.
Management is responsible for the reliability and integrity of the consolidated financial statements, the notes to the consolidated
financial statements, and other financial information contained in 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 reflected in the
accompanying consolidated financial statements.
Management is also responsible for maintaining a system of internal control designed to provide reasonable assurance that
assets are safeguarded and that accounting systems provide timely, accurate and reliable financial information.
The Board of Directors of Clearwater Seafoods Incorporated is responsible for ensuring that management fulfills its responsibilities
for financial reporting and internal control. The Board is assisted in exercising its responsibilities through the Audit Committee
of the Board, which is composed of non-management directors. The Committee meets periodically with management and
the auditors to satisfy itself that management’s responsibilities are properly discharged, to review the consolidated financial
statements and to recommend approval of the consolidated financial statements to the Board.
KPMG LLP, the independent auditors appointed by the Board, have audited Clearwater Seafoods Incorporated’s consolidated
financial statements in accordance with generally accepted auditing standards and their report follows. The independent auditors
have full and unrestricted access to the Audit Committee to discuss their audit and their related findings as to the integrity of
the financial reporting process.
March 8, 2017
I A N S M I T H
Chief Executive Officer
T E R E S A F O R T N E Y
Vice-President, Finance and Chief Financial Officer
60
Clearwater Seafoods Incorporated 2016 Annual Report
KPMG LLP
Suite 1500 Purdy’s Wharf Tower I
1959 Upper Water Street
Halifax NS B3J 3N2
Canada
Telephone (902) 492-6000
Telefax (902) 492-1307
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Clearwater Seafoods Incorporated
We have audited the accompanying consolidated financial statements of Clearwater Seafoods
Incorporated, which comprise the consolidated statements of financial position as at December 31, 2016
and December 31, 2015, the consolidated statements of earnings (loss), other comprehensive income,
changes in equity and cash flows for the years then ended, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control as
management determines is necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgement, 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 is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of Clearwater Seafoods Incorporated as at December 31, 2016 and December 31, 2015,
and its consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
March 8, 2017
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 2016 Annual Report 61
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 financial instruments (Note 8)
Non-current assets
Long-term receivables (Note 9)
Other assets
Property, plant and equipment (Note 10)
Investment in equity investee (Note 12)
Deferred tax assets (Note 13(c))
Intangible assets (Note 11)
Goodwill (Note 11)
T O TA 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 taxes payable (Note 13)
Current portion of long-term debt (Note 14)
Derivative financial instruments (Note 8)
Non-current liabilities
Long-term debt (Note 14)
Other long-term liabilities
Deferred tax liabilities (Note 13(c))
S H A R E H O L D E R S ’ E Q U I T Y
Share capital (Note 15)
Contributed surplus
Deficit
Accumulated other comprehensive loss
Non-controlling interest (Note 16)
2016
2015
$
39,514
82,108
91,831
5,414
4,821
$
51,106
81,734
65,022
9,587
3,788
223,688
211,237
8,132
81
233,807
10,496
6,429
197,321
49,781
506,047
10,076
1,164
251,197
9,311
14,184
201,846
54,180
541,958
$
729,735
$
753,195
$
$
75,953
4,303
67,005
5,640
$
82,870
454
65,685
18,622
152,901
167,631
369,409
887
18,053
388,349
210,860
1,419
(4,793)
(38,931)
168,555
19,930
188,485
$
415,084
2,088
19,317
436,489
157,161
547
(36,333)
(1,625)
119,750
29,325
149,075
T O TA L L I A B I L I T I E S A N D S H A R E H O L D E R S ’ E Q U I T Y
$
729,735
$
753,195
See the accompanying notes to the consolidated financial statements
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
62
Clearwater Seafoods Incorporated 2016 Annual Report
Clearwater Seafoods Incorporated
Consolidated Statements of Earnings (Loss)
(In thousands of Canadian dollars)
Year ended December 31
Sales
Cost of goods sold
Administrative and selling costs
Net finance costs (Note 8 (d))
Foreign exchange (gains) losses on long-term debt and working capital (Note 8 (e))
(Gains) losses on contract derivatives (Note 8 (f))
Other (income) expense (Note 17)
Research and development
Earnings (loss) before income taxes
Income tax expense (Note 13)
Earnings (loss) for the year
Earnings (loss) attributable to:
Non-controlling interest
Shareholders of Clearwater
Basic earnings (loss) per share (Note 19)
Diluted earnings (loss) per share (Note 19)
See the accompanying notes to the consolidated financial statements
$
2016
611,551
466,930
144,621
$
58,492
26,948
(7,295)
(7,279)
(5,209)
2,922
68,579
76,042
16,446
2015
504,945
372,757
132,188
51,363
21,634
46,287
26,763
444
1,981
148,472
(16,284)
4,387
$
59,596
$
(20,671)
$
$
$
$
15,668
43,928
59,596
0.71
0.71
$
$
$
$
16,937
(37,608)
(20,671)
(0.65)
(0.65)
Clearwater Seafoods Incorporated 2016 Annual Report 63
Clearwater Seafoods Incorporated
Consolidated Statements of Other Comprehensive Income
(In thousands of Canadian dollars)
Year ended December 31
Earnings (loss) for the year
Other comprehensive income (loss) –
Items that may be reclassified subsequently to income (loss):
Foreign currency translation differences of foreign operations
Comprehensive income (loss) for the year
Comprehensive income (loss) attributable to:
Non-controlling interest
Shareholders of Clearwater
See the accompanying notes to the consolidated financial statements
2016
2015
$
59,596
$
(20,671)
(37,154)
3,848
$
22,442
$
(16,823)
$
$
15,820
6,622
$
17,084
(33,907)
22,442
$
(16,823)
64
Clearwater Seafoods Incorporated 2016 Annual Report
Clearwater Seafoods Incorporated
Consolidated Statements of Changes in Equity
(In thousands of Canadian dollars)
Common
shares
Contributed
surplus
Retained
earnings
(deficit)
Other
comprehensive
income (loss)
Non-
controlling
interest
Total
Balance at January 1, 2015
$ 97,267
$
—
$ 11,084
$
(5,326)
$ 24,962
$ 127,987
—
—
(37,608)
3,701
17,084
(16,823)
Comprehensive (loss) income
for the year
Transactions recorded
directly in equity
Issuance of
common shares (Note 15)
Share-based
compensation (Note 20)
Distributions to
non-controlling interest
Dividend equivalent units on
equity-settled share-based
compensation (Note 20)
Dividends declared on
common shares (Note 15)
Comprehensive income (loss)
for the year
Transactions recorded
directly in equity
Issuance of
common shares (Note 15)
Share-based
compensation (Note 20)
Distributions to
non-controlling interest
Dividends declared on
common shares (Note 15)
59,894
—
—
—
—
53,699
—
—
—
Total transactions with owners
59,894
Total transactions with owners
53,699
—
547
—
—
—
547
—
—
—
(14)
(9,795)
(9,809)
—
—
—
—
—
—
—
—
59,894
547
(12,721)
(12,721)
—
—
(12,721)
(14)
(9,795)
37,911
—
872
—
—
872
—
—
—
(12,388)
(12,388)
—
—
—
—
—
—
—
53,699
872
(25,215)
(25,215)
—
(25,215)
(12,388)
16,968
Balance at December 31, 2015 $ 157,161
$
547
$
(36,333)
$
(1,625)
$ 29,325
$ 149,075
—
—
43,928
(37,306)
15,820
22,442
Balance at
December 31, 2016
$ 210,860
$
1,419
$
(4,793)
$
(38,931)
$
19,930
$ 188,485
See the accompanying notes to the consolidated financial statements
Clearwater Seafoods Incorporated 2016 Annual Report 65
Clearwater Seafoods Incorporated
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Year ended December 31
Operating
Earnings (loss) for the year
Adjustments for:
Depreciation and amortization
Net finance costs (Note 8 (f))
Unrealized foreign exchange (gains) losses on financial instruments
Fair value adjustments to financial instruments
Income tax expense
Share-based compensation
(Gain) loss on disposal of property, plant, and equipment
Earnings in equity investee (Note 12)
Foreign exchange and other
Change in operating working capital (Note 25)
Interest paid
Income taxes paid
Financing
Repayment of long-term debt (Note 14)
Net proceeds from long-term debt
Net proceeds from common share issue (Note 15)
Net proceeds from revolving credit facility
Distributions paid to non-controlling interest
Advances to minority partners
Dividends paid on common shares
Investing
Purchase of property, plant and equipment, and other
Proceeds on disposal of property, plant and equipment
Acquisition of subsidiary net of cash acquired (Note 4)
Purchase of other assets
Net receipts of long-term receivables
Effect of foreign exchange rate changes on cash
(D EC RE AS E) INCREA SE IN CASH
C AS H , BE GIN NING OF PERIO D
C AS H , END OF PERIOD
See the accompanying notes to the consolidated financial statements
66
Clearwater Seafoods Incorporated 2016 Annual Report
2016
2015
$
59,596
$
(20,671)
38,634
30,446
(30,881)
(1,481)
16,446
2,902
2
(1,185)
(3,038)
29,732
19,002
59,455
—
4,229
5,270
(144)
(2,591)
15,352
111,441
109,634
(19,429)
(26,434)
(2,538)
(21,646)
(16,101)
(3,393)
$
63,040
$
68,494
(33,899)
—
53,024
7,000
(24,560)
(1,843)
(12,388)
(12,692)
104,027
58,628
16,400
(11,817)
(1,824)
(9,795)
$
(12,666)
$
142,927
(56,332)
8,624
—
(7,692)
(473)
(63,390)
4,584
(142,404)
(1,335)
(3,366)
$
$
(55,873)
$
(205,911)
$
(6,093)
(11,592)
51,106
(2,002)
3,508
47,598
$
39,514
$
51,106
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 financial statements of Clearwater as at and for the years ended December 31, 2016 and 2015 comprise
the company, its subsidiaries and a joint venture (see Note 22). 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 financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRSs”) as issued by the International Accounting Standards Board.
The financial statements were authorized for issue by Clearwater’s Board of Directors on March 8, 2017.
(b) Basis of Measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following material items
measured at fair value through profit or loss:
• Derivative financial instruments
• Embedded derivative liability within long-term debt
• Earnout liability entered into as part of a business combination
• 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 financial statements are presented in Canadian dollars, which is the functional currency of Clearwater
and its Canadian subsidiaries. Clearwater’s subsidiary in the United Kingdom has a functional currency of Pounds Sterling and
the Argentine operations have a functional currency of Argentine Peso. All tabular financial information presented in Canadian
dollars has been rounded to the nearest thousand except per share amounts, and as otherwise noted.
(d) Critical judgments and estimates in applying accounting policies
The preparation of financial statements requires management to make estimates, judgments and assumptions that materially
affect the amounts reported in the consolidated financial statements and accompanying notes. Management bases
assumptions, estimates and judgments on historical experience, current trends and events, and all available information that
management believes is relevant at the time it prepares the financial statements. Actual results may differ materially from
these estimates.
The following are the accounting policies that are subject to judgments and estimates that Clearwater believes could have the
most significant impact on the reported results and financial position.
The information in this note is grouped by accounting policy to include:
• Key sources of estimation uncertainty
• Judgments management made in the process of applying Clearwater’s accounting policies (where applicable)
Clearwater Seafoods Incorporated 2016 Annual Report 67
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
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 operates. 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, Clearwater makes assumptions
about when deferred tax assets are likely to reverse, the extent to which it is probable that temporary differences will reverse and
whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. Clearwater recognizes
deferred tax assets only to the extent that it considers it probable that those assets will be recoverable.
Judgments made in relation to accounting policies applied
Clearwater makes judgments about whether to recognize the benefit 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 profitability and whether it is sustainable, and earnings forecasts.
For further discussion on deferred income taxes refer to Note 13.
ii) Goodwill and intangible assets
Key sources of estimation uncertainty
Clearwater conducts impairment testing on its goodwill and intangible assets annually in the third quarter and whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. Clearwater determines the fair value of
each cash-generating unit (“CGU”) to which goodwill and intangible assets are allocated using the value in use method, which
estimates fair value using a discounted five-year forecasted cash flow estimate with a terminal value. The determination of the
recoverable amount involves estimates and assumptions for future sales, product margins, market conditions, allowable catch
rates, and appropriate discount rates.
Judgments made in relation to accounting policies applied
In performing its impairment testing, Clearwater makes judgments in determining its CGUs, and the allocation of working capital
assets and liabilities and corporate assets to these CGUs.
For further discussion on goodwill and intangible assets, refer to Note 11.
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 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 20.
iv) Derivative financial instruments
Key sources of estimation uncertainty
Clearwater records the fair value of certain financial asset and 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, inflation rates, defaults and other relevant variables such as foreign
exchange volatility.
68
Clearwater Seafoods Incorporated 2016 Annual Report
For further discussion on derivative financial instruments, refer to Note 8.
v) Earnout
Key sources of estimation uncertainty
Clearwater determines the fair value measurement of the Earnout based on significant inputs not observable in the market.
The inputs used in the fair value model 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
forecasted earnings and probability assessments.
For further discussion on the fair value measurement of the Earnout, refer to Note 8(l).
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
financial statements.
(a) Basis of consolidation
i) Business combinations and goodwill
Clearwater measures goodwill as the excess of the fair value of the consideration transferred, the amount of any non-controlling
interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities
assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately
in consolidated earnings (loss).
Goodwill is subsequently measured at cost less accumulated impairment losses. Goodwill is not amortized and is tested
for impairment annually in the third quarter and as required if events occur that indicate that its carrying amount may not be
recoverable. Goodwill is tested for impairment at the CGU group level by comparing the carrying amount to its recoverable
amount, consistent with the methodology outlined in Note 3 (h).
Clearwater elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its
proportionate share of the recognized amount of the identifiable net assets, at the acquisition date.
Any contingent consideration payable is measured at fair value at the acquisition date. Subsequent changes in the fair value of
the contingent consideration are recognized in consolidated earnings (loss).
When the initial accounting for a business combination has not been finalized by the end of the reporting period in which the
combination occurs, the Company reports provisional amounts for the items for which the accounting has not been finalized.
These provisional amounts are adjusted during the measurement period, which does not exceed one year from the acquisition
date, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that
existed at the acquisition date that, if known, would have affected the amounts recognized at that 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 and included in other (income) expense in the consolidated statement
of earnings (loss).
ii) Subsidiaries
Subsidiaries are entities controlled by Clearwater. The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that control ceases.
iii) 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 financial statements using the equity method
of accounting. Under the equity method a joint venture is initially recognized in the consolidated statement of financial position
at cost and adjusted thereafter to recognize Clearwater’s share of the profit or loss and other comprehensive income of the
joint venture.
Clearwater Seafoods Incorporated 2016 Annual Report 69
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
iv) Transactions eliminated on consolidation
Intercompany balances and transactions are eliminated in preparing the consolidated financial statements. Unrealized losses
are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
(b) Inventories
Inventories consist primarily of finished goods and are stated at the lower of cost and net realizable value. Cost includes the cost
of materials plus direct labour applied to the product and the applicable share of manufacturing overheads, administration and
depreciation, determined on a first-in, first-out basis. Net realizable value is 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 refits are capitalized when incurred
and amortized over the period between scheduled refits. Construction in progress assets are capitalized during the construction
period and depreciation commences when the asset is available for use.
Depreciation is recognized 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,
they are accounted for as separate items (major components). Estimated useful lives are the following:
Asset component
Buildings and wharves
Plant and equipment
Vessels
Vessels equipment
Rate
10 to 50 years
5 to 15 years
15 to 25 years
1 to 7 years
The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it
is probable that the future economic benefits embodied within the part will flow to Clearwater and its cost can be measured
reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and
equipment are recognized in profit or loss as incurred.
Gains and losses on disposal of an item of property, plant and equipment are determined as the difference between the proceeds
from disposal and the carrying amount of the item, and are recognized net within administrative and selling costs in profit or loss.
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted prospectively if
appropriate.
(d) Intangible assets
Intangible assets include licenses, brand names, fishing rights and computer software. Definite life intangible assets are
measured at cost less accumulated amortization and any net accumulated impairment losses. Amortization is recognized in
the consolidated statements of earnings (loss) on a straight-line basis over their estimated useful lives as follows:
Intangible asset
Fishing rights
Computer software
Rate
10 to 15 years
3 to 8 years
i)
Licenses, brand names and fishing rights
Licenses and brand names represent intangible assets acquired directly or in a business combination that meet the specified
criteria for recognition apart from goodwill and are recorded at their fair values at the date of acquisition and are subsequently
carried at cost.
70
Clearwater Seafoods Incorporated 2016 Annual Report
Indefinite life intangibles, including licenses and brand names, are not amortized and are tested for impairment annually in the
third quarter or more frequently if events or changes in circumstances indicate that the asset may be impaired.
Fishing rights arise from contractual rights to fish quotas; they have definite lives and are amortized over the term of the related
operating agreement.
ii) Computer software
Computer software represents intangible assets developed during the enterprise resource planning (“ERP”) system conversion
including all costs directly attributable to bringing the asset to the location and condition necessary for its intended use. The
computer software has a definite life and is amortized over the estimated useful life.
(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 significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration
is probable, the associated costs and possible return of the goods can be estimated reliably, there is no continuing managerial
involvement with the goods, and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the
consideration received or receivable, net of 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 any forgivable loans.
(g) Financial instruments
Clearwater has the following non-derivative and derivative financial assets and liabilities that are classified into the following
categories:
Financial instrument
Category
Measurement method
Cash
Fair value through profit 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 financial liabilities
Non-derivative financial liabilities
Initial: Fair value
Subsequent: Amortized cost through profit or loss
Earnout liability
Derivative financial instruments
Derivative financial instruments
Derivative financial instruments
Fair value
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. Loans and receivables are initially recognized at their fair values, plus any attributable transaction costs, and are
subsequently measured at amortized cost using the effective interest rate method, with gains and losses recognized in profit
or loss in the period in which they arise.
From time-to-time, Clearwater enters into transactions to sell selected accounts receivables to a commercial partner without
recourse. The amount of receivables sold is recorded as a sale of financial asset and balances are removed from the consolidated
statement of financial position at the time of sale. The difference between the carrying amount and the proceeds on sale of
receivables is recorded in net finance costs in the consolidated statement of earnings (loss). Sale of receivables during the year
represent less than 5 percent of consolidated sales.
Clearwater Seafoods Incorporated 2016 Annual Report 71
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
Non-derivative financial liabilities
Non-derivative financial 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 profit or
loss in the period in which they arise.
Derivative financial instruments
Clearwater enters into a variety of derivative financial instruments to manage its exposure to foreign exchange and interest rate
risks, including foreign exchange forward contracts, interest rate swaps, caps, and floors.
Embedded derivatives are contained in non-derivative host contracts and are treated as separate derivatives when they meet
the definition of a derivative and their risks and characteristics are not closely related to those of the host contracts.
The Earnout liability is unsecured additional consideration to be paid dependent upon the future financial performance of
Macduff Shellfish Company Limited (“Macduff”), a subsidiary of Clearwater, and the percentage of Deferred Obligation remaining
unpaid at the time of payment. Refer to Note 14 for further information.
Derivative financial instruments and embedded derivatives are recorded at fair value with changes in fair value recorded in
consolidated earnings (loss).
(h) Impairment
i)
Financial assets
Financial assets are assessed at each reporting date to determine whether there is objective evidence of impairment. A financial
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 flows of that asset that can be estimated reliably. Objective
evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to
Clearwater on terms that Clearwater would not consider otherwise or indications that a debtor will enter bankruptcy.
Clearwater considers evidence of impairment for receivables on a specific customer basis.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses
are recognized in profit or loss and reflected in an allowance account against receivables. When a subsequent event causes the
amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
ii) Non-financial assets
Clearwater reviews non-financial assets 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 indefinite useful lives an annual impairment test is performed.
The recoverable amount of an asset or CGU 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 flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of
assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups
of assets or CGU. Goodwill and the intangible assets acquired in a business combination are allocated to the CGU, or the group
of CGUs, that are expected to benefit from the synergies of the combination. This allocation is subject to an operating segment
ceiling test and reflects the lowest level at which that asset is monitored for internal reporting purposes.
An impairment loss is recognized if the carrying value of an asset or its CGU exceeds its estimated recoverable amount.
Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce
the carrying amount of any goodwill allocated to the CGUs, and then to reduce the carrying amounts of the other assets in the
unit 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
72
Clearwater Seafoods Incorporated 2016 Annual Report
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 the company or component’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 company or component’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 profit or loss
as part of the profit or loss on disposal. On the partial disposal of a subsidiary that does not result in loss of control the relevant
proportion of such cumulative translation account is reattributed to non-controlling interest and not recognized in profit or loss.
(j)
Income taxes
Income tax expense is comprised of current and deferred income tax. Current tax and deferred income tax are recognized in
profit or loss except to the extent that 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 statement of earnings (loss) because of items of income or expense that are taxable
or deductible in years other than the current reporting period or items that are never taxable or deductible.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary
differences: differences relating to investments in subsidiaries and 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
recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when
they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets
and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income
taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current
tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, and deductible temporary differences, to the extent that it is probable
that future taxable profits will be available against which 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 benefit will be realized.
(k) Borrowing costs
Clearwater capitalizes borrowing costs attributable to the acquisition, or construction of its qualifying assets, which are assets
that necessarily take a substantial period of time to ready for their intended use, as they are being constructed. Other borrowing
costs are recognized as an expense in the period in which they are incurred.
(l) Finance costs
Finance costs comprise interest expense on borrowings, gains and losses on financial instruments that are recognized in profit
or loss, accretion on deferred consideration and refinancing and settlement fees. Borrowing costs determined to be period
costs, or the amortization of such costs, are recorded through profit or loss.
Clearwater Seafoods Incorporated 2016 Annual Report 73
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(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”)
On May 12, 2015, Clearwater amended the terms of its PSU plan. Under the plan, holders of PSUs receive settlement amounts
measured based upon the relative performance of Clearwater shares to its pre-defined peer group. Performance is based on
the total return to shareholders over the defined period.
Under the original terms of the PSU plan, vested units were to be settled in cash at the end of the performance period. Under
the amended terms of the PSU plan, vested units are to be settled in cash or shares or by a combination thereof as determined
by the company. Prior grants will continue to be cash-settled, and all future grants under the PSU plan will be settled by the
issuance of shares.
Cash-settled PSU awards are recorded as liabilities at fair market value at each reporting period with changes in fair value
recorded to profit and loss. Equity-settled PSU awards are measured at fair market value on the grant date of the awards. The
fair value of the PSUs are 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 related to cash-settled PSUs is included in trade and other payables in the consolidated
statement of financial position. Compensation expense related to the equity-settled PSUs is recorded as contributed surplus
in equity. The related compensation expense for both cash-settled and equity-settled PSUs is recorded in administrative and
selling costs in the consolidated statement of earnings (loss) over the vesting period.
(n) Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing earnings (loss) for the year attributable to the shareholders of Clearwater
by the weighted average number of common shares outstanding during the year.
Diluted earnings (loss) per share is calculated by dividing earnings (loss) for the year attributable to the shareholders of Clearwater,
adjusted for the change in the fair market value of the cash-settled PSUs, by the weighted average number of common shares
outstanding and the voting rights attributable to the PSUs outstanding during the year. The calculation of the potential dilutive
common shares assumes all outstanding PSUs are contingently issuable shares.
74
Clearwater Seafoods Incorporated 2016 Annual Report
(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, 2016. These changes were made in accordance with the applicable transitional provisions.
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. These amendments had no impact on Clearwater.
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. These amendments had no impact on Clearwater.
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 financial reports. These amendments will not require any significant change to current
practice. These amendments had no impact on Clearwater.
Measurement of deferred income taxes (“IAS 12”)
Following the November 2016 publication of the IFRS Interpretations Committee’s agenda decision addressing the expected
manner of recovery of intangible assets with indefinite useful lives for the purposes of measuring deferred tax, we have
retrospectively changed our related accounting policy. The IFRS Interpretations Committee observed that in applying IAS 12,
an entity determines its expected manner of recovery of the carrying amount of the intangible asset with an indefinite useful life,
and reflects the tax consequences that follow from that expected manner of recovery.
Previously, we measured deferred taxes on temporary differences arising from indefinite-life intangible assets using the tax rate
applied to taxable income based upon the notion that recovery would result from use of the assets. Consequently, we have
adopted an accounting policy to measure deferred taxes on temporary differences arising from indefinite-life intangible assets
based upon the tax consequences that follow from the expected manner of recovery of the assets. Application of this policy
resulted in no change to the tax rates used to calculate deferred taxes and therefore, no retrospective adjustments were required.
(p) New accounting standards not yet adopted
The IASB has issued the following standards that have not been applied in preparing these consolidated financial statements
as their effective dates fall within annual periods beginning subsequent to the current reporting period.
Foreign Currency Transactions and Advance Consideration (“IFRIC 22”)
On December 6, 2016, the IASB issued IFRIC 22, Foreign Currency Transactions and Advance Consideration which clarifies
the date of the transaction, for the purpose of determining the exchange rate to use on initial recognition of the related asset,
expense or income, is the date on which an entity has received or paid advance consideration.
The Company intends to adopt IFRIC 22 in its financial statements for the annual period beginning on January 1, 2018. The
extent of the impact of adoption of IFRIC 22 has not yet been determined.
Clearwater Seafoods Incorporated 2016 Annual Report 75
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
Disclosure Initiative (Amendments to IAS 7)
On January 7, 2016 the IASB issued Disclosure Initiative (Amendments to IAS 7). The amendments require disclosures that
enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes
arising from cash flow and non-cash changes. One way to meet this new disclosure requirement is to provide a reconciliation
between the opening and closing balances for liabilities from financing activities.
The Company intends to adopt the amendments to IAS 7 in its financial statements for the annual period beginning on January 1,
2017. To meet the disclosure requirement, the company will provide a reconciliation of the opening and closing balances of
long-term debt.
Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12)
The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying
amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the
carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology to determine the
future taxable profits used for assessing the utilization of deductible temporary differences.
The Company intends to adopt the amendments to IAS 12 in its financial statements for the annual period beginning on
January 1, 2017. The extent of the impact of adoption of the amendments is not expected to have a material impact on the
consolidated financial statements.
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 five-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 new standard applies to contracts with customers. It does not apply to
insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs.
The Company intends to adopt IFRS 15 in its financial 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.
IFRS 9 – Financial Instruments
IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014),
financial assets are classified and measured based on the business model in which they are held and the characteristics of
their contractual cash flows. The standard introduces additional changes relating to financial 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 financial 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.
IFRS 16 Leases
On January 13, 2016 the IASB issued IFRS 16 Leases. This standard introduces a single lessee accounting model and requires
a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of
low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting
requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting
model have been impacted, including the definition of a lease. Transitional provisions have been provided.
The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The
extent of the impact of adoption of the standard has not yet been determined.
76
Clearwater Seafoods Incorporated 2016 Annual Report
Transfer of assets between an investor and its associate or joint venture (amendments to IFRS 10)
On September 11, 2014 the IASB issued Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
(Amendments to IFRS 10 and IAS 28). The amendments were to be applied prospectively for annual periods beginning on or
after January 1, 2016, however, on December 17, 2015 the IASB decided to defer the effective date for these amendments
indefinitely. 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. Specifically,
under the existing consolidation standard the parent recognises the full gain on the loss of control, whereas under the existing
guidance on associates and joint ventures the parent recognises the gain only to the extent of unrelated investors’ interests in
the associate or joint venture. The main consequence of the amendments is that a full gain/loss is recognised when the assets
transferred meet the definition of a ‘business’ under IFRS 3 Business Combinations. A partial gain/loss is recognised when the
assets transferred do not meet the definition of a business, even if these assets are housed in a subsidiary. The Company will
evaluate the impact if and when the IASB determines an effective date.
IFRS 2 Share-Based Payment
In June 2016, the IASB issued amendments to IFRS 2 Share-Based Payment. The amendments provide clarification on how to
account for certain types of share-based payment transactions.
The Company intends to adopt the amendments to IFRS 2 in its consolidated financial statements for the annual period
beginning January 1, 2018. The extent of the impact of adoption of the amendments has not yet been determined.
4 . B U S I N E S S C O M B I N AT I O N S
On October 30, 2015 Clearwater acquired 100% of all outstanding shares of Macduff Shellfish Group Limited (“Macduff”), a
wild shellfish company based in Scotland, pursuant to the terms and conditions set forth in a share purchase agreement dated
October 9, 2015 (the “Acquisition”). Macduff expands Clearwater’s access to shellfish supply and diversifies Clearwater’s
access in wild shellfish complementary species including King and Queen scallops, langoustine, brown crab and whelk, the
majority of which is sold within the European market. The transaction will allow Clearwater to integrate its vessel management and
sustainable harvesting practices and innovative processing technologies along with its global sales, marketing and distribution
into Macduff, a company that holds resource assets, 13 mid-shore scallop trawlers, and a strong presence in the European Union.
The total fair value of the consideration paid or payable by Clearwater in connection with the Acquisition as of the closing was
£81 million (CDN $164 million) plus the repayment of Macduff outstanding debt facilities of £19 million (CDN $39.0 million) and
management fees of £1.6 million (CDN $3.2 million) for a total of £102 million (CDN $206 million).
The fair value of the consideration of approximately £81 million is comprised of:
• cash paid on closing to shareholders of £54 million (CDN $109.2 million);
• an unsecured £26.2 million deferred consideration obligation (“Deferred Obligation”) with a fair value of £20.9 million
(CDN $42.3 million); and
• unsecured additional consideration to be paid in the future dependent upon the future financial performance of Macduff
(“Earnout”) with an acquisition date estimated fair value of £6.1 million (CDN $12.4 million).
The Company has incurred acquisition-related costs of $3.2 million for legal fees, due diligence, and other related costs in 2015,
which were recorded in other (income) expenses in the consolidated statement of earnings (loss).
Clearwater financed the cash portion of the acquisition from existing loan facilities and cash on hand including (refer to Note 14):
• CDN $75 million increase in its Term Loan B facility
• CDN $25 million increase in its Revolving Loan Facility
• CDN $51 million borrowing on its existing Revolving Loan Facility
Clearwater Seafoods Incorporated 2016 Annual Report 77
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
The following table summarizes the purchase price for the Macduff acquisition as of October 30, 2015:
Cash paid to settle outstanding shareholder loans
Cash paid to settle preferred shares and dividends
Cash paid to acquire common shares
Repayment of loans:
Repayment of Macduff bank loans and revolver
Payment of Management fees
Deferred Obligation:
Fair value of unsecured Deferred Obligation (Refer to Note 14)
Fair value of unsecured Earnout (Refer to Note 14)
Total purchase price consideration
Deferred Obligation
Fair value
in Sterling (£)
£
$
28,228
20,144
5,542
Fair value
in CDN ($)
57,181
40,806
11,226
£
53,914
$
109,214
19,275
1,599
39,045
3,239
£
20,874
$
42,284
20,900
6,100
27,000
101,788
42,337
12,357
54,694
206,192
$
$
£
£
The Deferred Obligation applies to 33.75% of the shares acquired by Clearwater (the “Earn Out Shares”). The amount of
£26.2 million (CDN $53.0 million) will be paid over the next five to six years, depending on whether the holders of the Earn Out
Shares elect to be paid in the first year (after which Clearwater has the right to exercise the payout). The fair value the Deferred
Obligation was determined to be £20.9 million (CDN $42.3 million) as of the acquisition date based on the expected cash flow
timing discounted at a rate of 7.75%. Refer to Note 14 for further information on the fair value of the Deferred Obligation at
December 31, 2016.
The Earnout
The Earnout is unsecured additional consideration to be paid dependent upon the future financial performance of Macduff
and the percentage of Deferred Obligation remaining unpaid at the time of payment (refer to Deferred Obligation above). The
acquisition date estimated fair value of the Earnout is £6.1 million (CDN $12.4 million) based on forecast earnings and probability
assessments at that time. The actual Earnout payments are expected to be paid over the next five years. Refer to Note 14 for
further information on the fair value of the Earnout at December 31, 2016.
78
Clearwater Seafoods Incorporated 2016 Annual Report
The initial estimates of the fair value of the identifiable assets and liabilities of the acquisition as at the date of the acquisition
were as follows:
Assets
Cash
Accounts receivable
Inventories
Other assets
Branding
Property, plant and equipment
Licenses and fishing rights
Liabilities
Trade and other payables
Capital leases
Deferred tax liabilities
Goodwill arising on acquisition
Total purchase price consideration
Initial fair value
recognized on
acquisition CDN ($)
Adjustments to the
provision during
the period CDN ($)
Final fair value
recognized on
acquisition CDN ($)
$
$
9,119
18,220
21,314
5,342
12,474
33,994
89,805
$
190,268
$
—
—
—
—
—
—
—
—
$
9,119
18,220
21,314
5,342
12,474
33,994
89,805
$
190,268
(13,237)
(1,337)
(19,173)
(33,747)
—
—
(2,129)
(2,129)
(13,237)
(1,337)
(21,302)
(35,876)
$
156,521
$
(2,129)
$
154,392
49,670
2,129
51,799
$
206,191
$
—
$
206,191
The net assets recognized in the December 31, 2015 consolidated financial statements were based on provisional estimates
of fair value. The Company engaged an independent valuations advisor to value the acquired assets. The final valuation is now
complete and fair value at the end of December 31, 2016 remained consistent with December 31, 2015, with the exception of
an increase in deferred tax liability and goodwill of CDN $2.1 million related to a temporary difference of the tax and accounting
basis of the fair value of the deferred consideration.
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
2016
66,874
15,234
$
2015
72,234
9,500
82,108
$
81,734
$
$
Included in other receivables is $6.4 million (December 31, 2015 – $4.7 million) of input tax credits receivable and $8.8 million
(December 31, 2015 – $4.8 million) of other receivables.
Clearwater Seafoods Incorporated 2016 Annual Report 79
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
6 .
I N V E N T O R I E S
As at December 31
Goods for resale
Supplies and other
2016
81,796
10,035
$
2015
52,594
12,428
91,831
$
65,022
$
$
In 2016 inventory costs of $440.4 million (2015 – $341.6 million) were recognized in cost of goods sold. Clearwater incurred
$2.9 million (2015 – $3.7 million) in inventory write-downs which was recognized in cost of goods sold. Refer to Note 14 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 22)
8 . F I N A N C I A L I N S T R U M E N T S
2016
5,268
146
5,414
$
$
2015
9,571
16
9,587
$
$
The Company periodically uses derivative instruments as part of an active risk management program. 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 fair values of derivative financial instrument positions:
As at December 31
Derivative financial assets
Forward foreign exchange contracts
Interest rate caps, floors and swap contracts
Derivative financial liabilities
Forward foreign exchange contracts
Interest rate and cross-currency swap contracts
2016
2015
$
$
$
$
4,637
184
4,821
(1,356)
(4,284)
$
$
$
—
3,788
3,788
(12,437)
(6,185)
(5,640)
$
(18,622)
80
Clearwater Seafoods Incorporated 2016 Annual Report
(a) Clearwater has forward contracts maturing each month until December 2017. At December 31, 2016 Clearwater had
outstanding forward contracts as follows:
Foreign currency
notional amount (in 000s)
Average
contract
exchange rate
Weighted
average
months
to maturity
Currency
Contracts in asset position
Euro
USD
Yen
35,995
30,800
2,863,100
1.472
1.322
0.012
Contracts in liability position
USD
41,050
1.309
6
3
6
3
At December 31, 2015, Clearwater had outstanding forward contracts as follows:
Currency
Contracts in a liability position
Euro
USD
Yen
Foreign currency
notional amount (in 000s)
Average
contract
exchange rate
Weighted
average
months
to maturity
43,400
65,200
3,356,000
1.446
1.279
0.011
8
7
8
Fair value
asset (liability)
$
$
$
$
1,677
574
2,386
4,637
(1,356)
(1,356)
Fair value
asset (liability)
$
(3,153)
(6,466)
(2,818)
$
(12,437)
Certain USD forward contracts contain provisions that, subject to the spot rate being greater than the contract rate, the contract
rate is adjusted by 50% or 25% (December 31, 2015 – 50% or 25%) of the excess of the spot rate over the contract rate at
maturity. The notional amount of the forward contracts subject to the contract rate being adjusted by 50% in US dollars at
December 31, 2016 was nil (December 31, 2015 – nil). The notional amount of the forward contracts subject to the contract rate
being adjusted by 25% in US dollars at December 31, 2016 was nil (December 31, 2015 – $13.2 million).
Clearwater Seafoods Incorporated 2016 Annual Report 81
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(b) At December 31, 2016 Clearwater had interest rate cap, floor and swap contracts and cross-currency swap contracts
outstanding as follows:
Effective
date
Expiry
date
interest
rate
Currency
Contracted
Notional
amount
(in 000s)
Fair value
(liability)
Term Loan A – Interest rate cap
Term Loan B – Interest rate floor
December 2015
October 2015
June 2018
June 2018
6.25%
LIBOR +
1.25%
CDN
USD
12,000 $
75,000
—
184
$
184
Effective
date
Expiry
date
Contracted
interest
rate
Currency
Notional
amount
(in 000s)
Fair value
asset
Term Loan A – Interest rate swap December 2015
Term Loan B – Interest rate swap December 2015
Term Loan B – Interest rate swap
June 2016
Term Loan B – Cross-currency swap October 2015
5.85%
June 2018
6.15%
June 2019
June 2019
6.49%
June 2018 CDN Banker’s
CDN
USD
USD
CDN
12,000 $
50,000
50,000
99,263
(274)
(1,785)
(2,225)
—
Acceptance +
4.41%
$
(4,284)
(c) At December 31, 2015 Clearwater had interest rate cap and floors and swap contracts outstanding as follows:
Effective
date
Term Loan A – Interest rate swap
Term Loan B – Interest rate swap
Term Loan B – Interest rate swap
December 2015
December 2015
June 2016
Expiry
date
June 2018
June 2019
June 2019
Contracted
fixed
interest rate
Notional
amount
(in 000s)
Fair value
(liability)
Currency
5.85%
6.15%
6.49%
CDN
USD
USD
12,000 $
50,000
50,000
(495)
(2,702)
(2,988)
$
(6,185)
Effective
date
Expiry
date
Contracted
capped
interest rate
Currency
Notional
amount
(in 000s)
Fair value
asset
Term Loan A – Interest rate cap
Term Loan B – Interest rate cap
Term Loan B – Interest rate floor
December 2015
September 2014
October 2015
Term Loan B – Cross-currency swap October 2015
June 2018
June 2016
June 2018
6.25%
4.75%
LIBOR +
1.25%
June 2018 CDN Banker’s
Acceptance +
4.41%
CDN
USD
USD
12,000 $
50,000
75,000
—
710
750
CDN
99,263
2,328
$
3,788
82
Clearwater Seafoods Incorporated 2016 Annual Report
(d) Net finance costs
Year ended December 31
Interest expense on financial liabilities
Amortization of deferred financing charges and accretion
Fair value adjustment on embedded derivative
Accretion on deferred consideration (Note 14)
Interest rate swap and caps
Debt refinancing fees
(e) Foreign exchange (gains) losses on long-term debt and working capital
Year ended December 31
Realized (gain) loss
Working capital and other
Unrealized (gain) loss
Foreign exchange on long-term debt and working capital
Cross currency swaps and caps
(f) Losses (gains) on forward exchange contract derivatives
Year ended December 31
Realized loss
Forward foreign exchange contracts
Unrealized loss (gain)
Forward foreign exchange contracts
(g) Credit risk
$
$
2016
24,776
2,113
26,889
(1,350)
3,562
(2,027)
(126)
2015
19,002
1,334
20,336
(2,118)
—
2,908
508
$
26,948
$
21,634
2016
2015
$
7,803
$
(1,690)
(18,045)
2,947
51,168
(3,191)
$
(7,295)
$
46,287
2016
2015
$
7,345
$
15,595
(14,624)
11,168
$
(7,279)
$
26,763
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 counterparties to its derivative financial
instruments but does not anticipate non-performance of any of the counterparties as Clearwater only deals with highly rated
financial institutions.
Clearwater has significant accounts receivable from customers operating in Canada, the United States, Europe and Asia.
Significant portions of Clearwater’s customers from a sales dollar perspective have been transacting with Clearwater in excess
of five years and bad debt losses have been minimal. Clearwater has a policy of utilizing a combination of credit reporting
agencies, credit insurance, letters of credit and secured forms of payment to mitigate customer specific credit risk and country
specific credit risk. No single customer of Clearwater represents more than 5% of total sales. As a result Clearwater does not
have any significant concentration of credit risk.
As at December 31, 2016, Clearwater’s trade accounts receivable aging based on the invoice due date was as follows: 93.6%
0–30 days, 5.3% 31–60 days, and 1.1% over 60 days. As at December 31, 2015, Clearwater’s trade accounts receivable aging
based on the invoice due date was as follows: 83.2% 0–30 days, 8.6% 31–60 days, and 8.2% over 60 days.
Clearwater Seafoods Incorporated 2016 Annual Report 83
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts of $0.4 million (2015 – $0.6 million).
Clearwater reviews accounts past due on a regular basis and provides an allowance on a specific account basis. Accounts are
only written off completely when it becomes virtually certain that collection will not occur. Changes in the allowance for doubtful
accounts are summarized in the table below:
As at December 31
Balance at January 1
Acquisition through business combination
Allowance recognized
Amounts recovered
Amounts written off as uncollectible
Foreign exchange
Balance at December 31
(h) Foreign currency exchange rate risk
$
$
2016
555
—
311
—
(394)
(48)
$
424
$
2015
278
406
—
(44)
(103)
18
555
Foreign currency exchange rate risk refers to the risk that the value of financial instruments or cash flows associated with the
instruments will fluctuate due to changes in foreign exchange rates. Approximately 87% of Clearwater’s sales are in currencies
other than Canadian dollars, whereas the majority of expenses are in Canadian dollars. As a result fluctuations in foreign
exchange rates may have a material impact on Clearwater’s financial results. In addition Clearwater has subsidiaries which
operate in the scallop fishery in Argentina and United Kingdom which exposes Clearwater to changes in the value of the
Argentine Peso and Pound Sterling.
Risks associated with foreign exchange are partially mitigated by the fact that Clearwater (i) diversifies sales internationally
which reduces the impact of any country-specific 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.
In 2015, Clearwater entered into a cross-currency swap whereby USD $75 million of Term Loan B was swapped into Canadian
dollars at a fixed rate of 1.32. This arrangement has a maturity date of June 26, 2018.
The carrying amounts of Clearwater’s foreign currency denominated monetary assets and monetary liabilities (excluding derivative
financial instruments) as at December 31, 2016 and December 31, 2015 were as follows (presented in Canadian dollars):
As at December 31
Cash
Trade receivables
Other receivables
Long-term receivables
Trade and other payables
Long-term debt
Other long-term liabilities
$
2016
2015
35,578
50,238
8,462
9,705
(19,570)
(289,184)
(887)
$
48,272
65,348
4,288
9,235
(24,132)
(330,937)
(1,422)
Net exposure to consolidated statements of financial position
$
(205,658)
$
(229,348)
84
Clearwater Seafoods Incorporated 2016 Annual Report
The components of this net exposure by currency are as follows (in foreign currency 000s) at December 31, 2016:
December 31, 2016
GBP
USD
Yen
Euros
RMB
NOK
DKK
1,165
Cash
5,769
Trade receivables
554
Other receivables
Long-term receivables
1,307
Trade and other payables (4,939)
Long-term debt
(23,151)
Other long-term liabilities
(534)
3,618
8,688
2,054
3,705
(2,986)
(186,564)
—
56
87,874
—
—
(6,187)
—
—
1,668
19,639
1,001
—
(408)
—
—
(604)
—
1
—
1,792
—
—
—
—
—
—
(37)
—
—
138,856
819
(19)
—
(2,541)
—
—
Argentine
Peso
1,590
1,151
39,944
30,204
(77,603)
—
—
Net exposure to
consolidated statements
of financial position
(19,829)
(171,485)
81,743
21,900
1,189
(37)
137,115
(4,714)
The components of this net exposure by currency are as follows (in foreign currency 000s) at December 31, 2015:
December 31, 2015
GBP
USD
Yen
Euros
RMB
DKK
3,605
5,301
520
1,289
(6,807)
(27,000)
(690)
5,077
10,593
413
2,851
(3,628)
(197,937)
—
13
508,598
—
—
(219)
(39,690)
—
1,540
20,321
704
—
(703)
—
—
756
—
—
—
1,048
—
—
154,038
14,636
(14)
—
(2,713)
—
—
Argentine
Peso
113
398
14,787
24,510
(34,416)
—
—
Cash
Trade receivables
Other receivables
Long-term receivables
Trade and other payables
Long-term debt
Other long-term liabilities
Net exposure to
consolidated statements
of financial position
(23,782)
(182,631)
468,702
21,862
1,804
165,947
5,392
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 in the
consolidated statements of financial position.
GBP
USD
Yen
Euros
RMB
NOK
DKK
Argentine Peso
2016
(3,289)
(23,049)
94
3,096
23
(1)
2,608
(40)
2015
(4,897)
(25,356)
539
3,312
39
—
3,370
58
Clearwater Seafoods Incorporated 2016 Annual Report 85
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(i)
Interest rate risk
Interest rate risk refers to the risk that the value of a financial instrument or cash flow associated with the instrument will fluctuate
due to changes in market interest rates. Clearwater’s interest rate risk arises from long-term borrowings issued at fixed rates
that create fair value interest rate risk and from variable rate borrowings that create cash flow interest rate risk. Clearwater’s
debt is carried at amortized cost with the exception of the embedded interest rate floor in Term Loan B. The interest rate floor
is a derivative instrument and is recorded at fair value through profit or loss.
Clearwater manages its interest rate risk exposure by using a mix of fixed and variable rate debt. As at December 31, 2016,
excluding the impact of interest rate swap derivative instruments, approximately 3.9% (2015 – 3.6%) of Clearwater’s debt of
$436.4 million (2015 – $480.8 million) was fixed rate debt with a weighted average interest rate of 4.0% (2015 – 4.0%). A 1%
change in interest rates for variable rate borrowings, including the impact of interest rate swaps derivative instruments, would
result in a $2.1 million increase (or decrease) in interest expense.
Clearwater enters into interest rate swap, cap and floor arrangements to hedge interest rate risk on its variable rate debt. As at
December 31, 2016, Clearwater has entered into interest rate swap arrangements to economically hedge interest rates on its
CDN $30 million Term Loan A facility and its USD $200 million Term Loan B facility whereby:
• CDN $12 million of Term Loan A is effectively subject to an interest rate that is the lesser of the floating rate of interest on
the loan or a maximum fixed rate of interest of 6.25% to June 2018.
• CDN $12 million of Term Loan A is subject to a fixed interest rate of 5.85% to June 2018.
• USD $50 million of Term Loan B is subject to a fixed interest rate of 6.15% to June 2019.
• USD $50 million of Term Loan B is capped to June 30, 2018 at an interest rate of 4.75% and then the rate is fixed at 6.49%
to June 2019.
Clearwater accounts for these swap arrangements at fair value and records the change in fair value through consolidated
earnings (loss). The fair value of interest rate swaps and interest rate caps at the end of the reporting period is determined by
discounting the future cash flows using the yield curves at the end of the reporting period. For the year ended December 31,
2016, this resulted in a $2.0 million unrealized gain (2015 – $2.9 million unrealized loss).
(j) Liquidity risk
Liquidity risk is the risk that Clearwater will encounter difficulty in meeting obligations associated with financial liabilities.
Clearwater manages liquidity risk by monitoring forecasted and actual cash flows, minimizing reliance on any single source
of credit, maintaining sufficient undrawn committed credit facilities and matching the maturity profiles of financial assets and
financial liabilities.
Clearwater’s debt facilities are subject to certain financial and non-financial covenants. Clearwater is in compliance with all
covenants associated with its debt facilities as of December 31, 2016.
86
Clearwater Seafoods Incorporated 2016 Annual Report
The following are the contractual maturities of non-derivative financial liabilities, derivative financial instruments, operating
leases and other commitments. The table includes undiscounted cash flows of financial liabilities, operating leases and other
commitments, interest and principal cash flows based on the earliest date on which Clearwater is required to pay.
December 31, 2016
Interest – long-term debt
Principal repayments –
long-term debt
Total long-term debt
Trade and other payables
Operating leases and other
Capital and maintenance projects
Derivative financial instruments
– asset
Derivative financial instruments
– liabilities
Carrying
amount
Total
contractual
cash flow
2017
2018
2019
2020
2021
>2022
$ 58,065
$ 16,674
$ 14,698
$
6,893
$
275
$
275
$ 19,250
436,414
75,953
—
—
435,711
67,005
58,463
295,172
439,776
75,953
16,912
30,308
83,679
75,953
7,687
30,308
73,161
—
3,100
—
302,065
—
2,204
—
(4,821)
(4,821)
(4,821)
5,640
5,640
5,640
—
—
—
—
9,608
9,883
—
1,934
—
—
—
1,963
2,238
—
905
—
—
—
3,500
22,750
—
1,081
—
—
—
$ 513,185
$ 617,767
$ 198,446
$ 76,261
$ 304,269
$ 11,817
$
3,143
$ 23,831
Included in the above commitments for “operating leases and other” are amounts to which Clearwater is committed directly –
and indirectly through its partnerships – for various licenses and lease agreements, office, machinery and vehicle leases, and
vessel and equipment commitments. These commitments require approximate minimum annual payments in each of the next
five years as shown above.
Also included in commitments for operating leases and other are (i) amounts to be paid to a company controlled by a director
of Clearwater over a period of years ending in 2018 for vehicle and office leases, which aggregate approximately $0.04 million
(2015 – $0.05 million); and (ii) annual amounts to be paid to a company related to a member of its management team who is
a former shareholder of Macduff for $1.6 million (December 31, 2015 – $1.9 million). These amounts relate to the lease of a
production plant and will be paid over a period of 5 years.
Clearwater Seafoods Incorporated 2016 Annual Report 87
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(k) Fair value of financial instruments
The following tables set out Clearwater’s classification and carrying amount, together with fair value, for each type of non-
derivative and derivative financial asset and liability:
December 31, 2016
Through
profit or loss
Derivatives
Loans and
receivables
Non-derivative
financial liabilities
Carrying
amount
Fair
value
Fair value
Amortized cost
Total
Assets:
Cash
Trade and other receivables
Long-term receivables
Forward foreign
exchange contracts
Interest rate caps, floors
and cross-currency swap
$ 39,514
—
—
$
—
—
—
$
—
82,108
8,132
$
—
—
4,637
184
—
—
$ 39,514
$ 4,821
$ 90,240
$
—
—
—
—
—
—
$
39,514
82,108
8,132
$
39,514
82,108
8,132
4,637
4,637
184
184
$ 134,575
$ 134,575
Liabilities:
Trade and other payables $
Long-term debt
Forward foreign
exchange contracts
Embedded derivative
Interest rate swaps
Earnout liability
(7,588)
—
—
—
—
(9,107)
$
$
—
—
(1,356)
(703)
(4,284)
—
$ (16,695)
$
(6,343)
$
—
—
—
—
—
—
—
$
(68,365)
(426,604)
$
(75,953)
(426,604)
$
(75,953)
(426,975)
—
—
—
—
(1,356)
(703)
(4,284)
(9,107)
(1,356)
(703)
(4,284)
(9,107)
$ (494,969)
$ (518,007)
$ (518,378)
December 31, 2015
Through
profit or loss
Derivatives
Loans and
receivables
Non-derivative
financial liabilities
Carrying
amount
Fair
value
Fair value
Amortized cost
Total
Assets:
Cash
Trade and other receivables
Long-term receivables
Interest rate cap, floors
and cross-currency swap
$ 51,106
—
—
$
—
—
—
$
—
81,734
10,076
$
—
3,788
—
$ 51,106
$ 3,788
$ 91,810
$
—
—
—
—
—
$
51,106
81,734
10,076
$
51,106
81,734
10,076
3,788
3,788
$ 146,704
$ 146,704
Liabilities:
Trade and other payables $ (11,406)
Long-term debt
—
Forward foreign
exchange contracts
Embedded derivative
Interest rate swaps
Earnout liability
—
—
—
(12,561)
$
$
—
—
(12,437)
(2,353)
(6,185)
—
$ (23,967)
$ (20,975)
$
—
—
—
—
—
—
—
$
(71,464)
(465,855)
$
(82,870)
(465,855)
$
(82,870)
(466,614)
—
—
—
—
(12,437)
(2,353)
(6,185)
(12,561)
(12,437)
(2,353)
(6,185)
(12,561)
$ (537,319)
$ (582,261)
$ (583,020)
88
Clearwater Seafoods Incorporated 2016 Annual Report
Fair value of financial instruments carried at amortized cost
Except as detailed below, Clearwater considers that the carrying amounts of financial assets and financial liabilities recognized
in the consolidated financial statements materially approximate their fair values. For cash, trade and other receivables, and trade
and other payables, the carrying values approximate their fair values due to the short-term maturity of these instruments. The
fair values of the long-term receivables are not materially different from their carrying value.
The estimated fair value of Clearwater’s long-term debt for which carrying value did not approximate fair value at December 31,
2016 was $46.8 million (December 31, 2015 – $18.9 million) and the carrying value was $46.5 million (December 31, 2015 –
$18.2 million). The fair value of long-term debt has been classified as level 2 in the fair value hierarchy and was estimated based
on discounted cash flows using current rates for similar financial instruments subject to similar risks and maturities.
l) Fair value hierarchy
Assets and liabilities carried at fair value must be classified using a three-level hierarchy that reflects the significance of the
inputs used in making the fair value measurements. The levels are defined 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)
• 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 financial instruments carried at fair value through profit and loss using the
fair value hierarchy:
December 31, 2016
Recurring measurements
Financial Assets:
Cash
Forward foreign exchange contracts
Interest rate caps, floors and cross-currency swaps
Financial Liabilities:
Forward foreign exchange contracts
Embedded derivative
Interest rate swaps and cross-currency swaps
Earnout liability
Level 1
Level 2
Level 3
$
39,514
—
—
$
$
—
4,637
184
$
39,514
$
4,821
$
$
$
—
—
—
—
—
$
$
(1,356)
(703)
(4,284)
—
$
(6,343)
$
—
—
—
—
—
—
—
9,107
9,107
Clearwater Seafoods Incorporated 2016 Annual Report 89
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
December 31, 2015
Recurring measurements
Financial Assets:
Cash
Interest rate caps, floors and cross-currency swaps
Financial Liabilities:
Forward foreign exchange contracts
Embedded derivative
Interest rate swaps
Earnout liability
Level 1
Level 2
Level 3
$
51,106
—
$
51,106
$
$
—
—
—
—
—
$
$
$
—
3,788
3,788
(12,437)
(2,353)
(6,185)
—
$
$
$
—
—
—
—
—
—
(12,561)
$
(20,975)
$
(12,561)
There were no transfers between levels during the years ended December 31, 2016 and December 31, 2015.
Clearwater used the following techniques to value financial instruments categorized in Level 2:
• Forward foreign exchange contracts are measured using present value techniques. Future cash flows 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 reflects the credit risk of Clearwater and the various counterparties and the risk-free yield curves
of the respective currencies.
• The embedded derivative is fair valued using a Bloomberg valuation model for interest rate floors.
• Interest rate swaps, caps and floors and cross-currency swaps are measured using present value techniques that utilize a
variety of inputs that are a combination of quoted prices and market-corroborated inputs.
The Earnout relating to the Macduff acquisition is a financial liability categorized in Level 3 as the fair value measurement of this
financial liability is based on significant inputs not observable in the market.
To determine the fair value of the Earnout liability three primary sources of risk are assessed: (i) the risk associated with the
underlying performance of Macduff’s EBITDA (“Earnings before interest, taxes, depreciation and amortization”), (ii) the risk
associated with the functional form of the Earnout payments; and (iii) the credit risk associated with the future Earnout payments.
The fair value of the Earnout payments is estimated based on a Monte Carlo simulation under a risk-neutral framework. The
preliminary fair value of the Earnout is estimated based on discounted expected future EBITDA cash flows for Macduff for the
five-year period ending December 31, 2020 using a Geometric Brownian Motion model. The following inputs and assumptions
were used in calculating the fair value of the Earnout including:
• Payments dates: The Earnout will be payable for the periods ending December 31, 2017 through December 31, 2020, based
on the expected pattern of the Deferred Obligation and the expected outstanding amount of Deferred Obligation at the end
of each year.
• Forecasted EBITDA: Management’s five-year forecast
• Risk-free rate: 0.759%
• Risk-adjusted discount rates: 7.50%–10.00%
90
Clearwater Seafoods Incorporated 2016 Annual Report
• Asset volatility: The estimated asset volatility of Macduff is based on the Merton option pricing model. In the context of
calculating the asset volatility, the following inputs to derive the asset volatility were used:
• Debt value: £19 million
• Enterprise Value: £100 million
• Equity value: £81 million
• Equity volatility: 39%
A risk-adjusted payout is calculated at each time period and discounted at the risk-free rate to the valuation date. This process
is simulated 100,000 times and the expected value of the Earnout is retrieved. Based on the range of risk-adjusted discount
rates (per above) the range in fair values determined was between £5.2 million and £5.7 million.
The change in the fair value of the Earnout from December 31, 2015 to December 31, 2016 was a decrease of £0.6 million.
The fair value estimates are not necessarily indicative of the amounts that Clearwater will receive or pay at the settlement of
the contracts.
9 . 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 fishermen
Other
$
2016
1,368
6,481
283
$
2015
1,343
8,733
—
$
8,132
$
10,076
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% (2015 – 0%–12%), and they are unsecured and have no set terms
of repayment.
Certain advances to fishermen are made for a fixed term, secured by an assignment of catch and are non-interest bearing
unless there is no supply for 6 weeks, at which time the loans become repayable in installments and are interest bearing. Other
advances to fishermen bear interest at prime plus 2%–3% (2015 – prime plus 2%–3%), are due on demand, and are secured
by an assignment of catch, a marine mortgage on the related vessels, equipment and licenses. Advances to fishermen 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. Certain advances to fishermen are
denominated in Pounds Sterling (see Note 8 (h)).
Clearwater Seafoods Incorporated 2016 Annual Report 91
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
1 0 . 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
Vessels and
Equipment
vessel Construction
in progress
equipment
Total PPE
Deferred
gov’t
assistance
Total
Cost
Balance at January 1, 2016
Additions
Disposals
Reclassifications and
other adjustments
Effect of movements
in exchange rates
$
2,823
—
—
$ 67,235
567
(32)
$ 74,667
939
(436)
$ 328,017
23,035
(1,547)
$ 21,612
38,531
—
$ 494,354
63,072
(2,015)
$
(8,962) $ 485,392
63,072
(2,015)
—
—
—
1,003
948
(11,677)
(23,986)
(33,712)
(4)
(1,671)
(3,094)
(12,745)
(114)
(17,628)
—
—
(33,712)
(17,628)
Balance at December 31, 2016
$
2,819
$ 67,102
$ 73,024
$ 325,083
$ 36,043
$ 504,071
$
(8,962) $ 495,109
Accumulated depreciation
Balance at January 1, 2016
Depreciation for the year
Disposals
Reclassifications and
other adjustments
Effect of movements
in exchange rates
$
989
16
—
$ 47,871
2,466
—
$ 59,740
3,020
(332)
$ 133,648
29,013
(1,547)
$
—
—
(14)
5
325
(628)
(2,113)
(2,924)
—
—
—
7
—
$
$ 242,248
34,515
(1,879)
(8,053) $ 234,195
34,328
(1,879)
(187)
—
323
(5,665)
—
—
323
(5,665)
Balance at December 31, 2016
$
1,005
$ 49,695
$ 60,320
$ 158,515
$
7
$ 269,542
$
(8,240) $ 261,302
Carrying amounts
At January 1, 2016
At December 31, 2016
$
$
1,834
1,814
$ 19,364
$ 17,407
$ 14,927
$ 12,704
$ 194,369
$ 166,568
$ 21,612
$ 36,036
$ 252,106
$ 234,529
$
$
(909) $ 251,197
(722) $ 233,807
92
Clearwater Seafoods Incorporated 2016 Annual Report
Building
and
wharves
Land
Vessels and
vessel
equipment
Equipment
Construction
in progress
Total PPE
Deferred
gov’t
assistance
Total
Cost
Balance at January 1, 2015
Acquisition through
business combinations
Additions
Disposals
Reclassification and
other adjustments
Effect of movements
in exchange rates
$
2,795
$ 62,706
$ 74,790
$ 225,481
$ 51,142
$ 416,914
$
(8,962) $ 407,952
—
—
—
33
3,559
111
(8)
4,898
569
(616)
25,433
3,786
(18,995)
—
60,220
—
33,890
64,686
(19,619)
1,239
(5,235)
98,892
(89,748)
5,181
(5)
(372)
261
(6,580)
(2)
(6,698)
—
—
—
—
—
33,890
64,686
(19,619)
5,181
(6,698)
Balance at December 31, 2015
$
2,823
$ 67,235
$ 74,667
$ 328,017
$ 21,612
$ 494,354
$
(8,962) $ 485,392
Accumulated depreciation
Balance at January 1, 2015
Depreciation for the year
Disposals
Reclassifications and
other adjustments
Effect of movements
in exchange rates
$
974
15
—
$ 45,969
1,906
(8)
$ 65,177
1,931
(590)
$ 117,483
24,319
(13,698)
$
—
—
—
4
(6,954)
7,073
176
(1,529)
Balance at December 31, 2015
$
989
$ 47,871
$ 59,740
$ 133,648
$
—
—
—
—
—
—
$
$ 229,603
28,171
(14,296)
(7,668) $ 221,935
27,786
(14,296)
(385)
—
119
(1,349)
—
—
119
(1,349)
$ 242,248
$
(8,053) $ 234,195
Carrying amounts
At January 1, 2015
At December 31, 2015
$
$
1,821
1,834
$ 16,737
$ 19,364
9,613
$
$ 14,927
$ 107,998
$ 194,369
$ 51,142
$ 21,612
$ 187,311
$ 252,106
$
$
(1,294) $ 186,017
(909) $ 251,197
Total depreciation and amortization expense related to property, plant and equipment and definite-life intangible assets for 2016
was $38.6 million (2015 – $29.7 million). In 2016, $37.1 million (2015 – $29.2 million) of depreciation and amortization expense for
assets used in the harvesting and production of goods was classified as cost of goods sold and $1.6 million (2015 – $0.5 million)
was recorded in administrative and selling costs for assets used in administrative activities. Refer to Note 14 for assets pledged
as security for long-term debt.
Clearwater Seafoods Incorporated 2016 Annual Report 93
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
1 1 . I N TA N G I B L E A S S E T S A N D G O O D W I L L
Intangible assets
Goodwill
Brand
names
Computer
software
Indefinite
life
licenses
Fishing
rights
Total
Goodwill
and
intangible
asset total
Cost
Balance at January 1, 2015
Acquisition through business combination
(Note 4)
Additions
Foreign currency exchange translation
Balance at December 31, 2015
Acquisition through business combination
(Note 4)
Additions
Foreign currency exchange translation
$
5,638
$
—
$
—
$ 81,804
$ 24,094
$ 105,898
$ 111,536
49,670
—
(1,128)
12,474
—
206
—
—
—
89,790
—
585
—
2,644
(660)
102,264
2,644
131
151,934
2,644
(997)
54,180
12,680
—
172,179
26,078
210,937
265,117
2,129
—
(6,528)
—
—
(2,464)
—
21,078
—
—
—
(18,453)
—
—
(414)
—
21,078
(21,331)
2,129
21,078
(27,859)
Balance at December 31, 2016
$ 49,781
$ 10,216
$ 21,078
$ 153,726
$ 25,664
$ 210,684
$ 260,465
Accumulated amortization
Balance at January 1, 2015
Amortization
Foreign currency exchange translation
Balance at December 31, 2015
Amortization
Foreign currency exchange translation
Balance at December 31, 2016
Carrying amounts
As at December 31, 2015
As at December 31, 2016
$
$
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
$
$
—
—
—
—
2,392
—
$
2,392
$
—
—
—
—
—
—
—
$
$
$
7,156
1,975
(40)
9,091
1,914
(34)
7,156
1,975
(40)
9,091
4,306
(34)
7,156
1,975
(40)
9,091
4,306
(34)
$ 10,971
$ 13,363
$ 13,363
$ 54,180
$ 49,781
$ 12,680
$ 10,216
$
—
$ 18,686
$ 172,179
$ 153,726
$ 16,987
$ 14,693
$ 201,846
$ 197,321
$ 256,026
$ 247,102
Clearwater maintains fishing licenses and rights to ensure continued access to the underlying resource. Except for fishing rights,
licenses have an indefinite life as they have nominal annual renewal fees, which are expensed as incurred, and the underlying
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.
94
Clearwater Seafoods Incorporated 2016 Annual Report
Indefinite life licenses, brand names and goodwill
Annual impairment testing for each CGU was performed using a value in use (“VIU”) approach as of October 1, 2016. The
recoverable amount is the higher of the VIU and fair value less cost of disposal. The VIU for all CGUs were determined to be
higher than their carrying amounts and therefore no impairments were recorded during 2016.
The value in use approach was determined by discounting the projected future cash flows generated from earnings from
operations for the applicable CGU. Unless otherwise indicated in notes i–iii, the assumptions used in the value in use approach
for 2016 were determined similarly to those used in 2015.
The carrying value of Clearwater’s significant CGUs is as follows:
As at December 31
Scallops
Indefinite life licenses
Macduff
Goodwill
Indefinite life licenses
Brand names
All other CGUs individually without significant carrying value
Goodwill
Indefinite life licenses
2016
2015
$ 55,458
$ 57,623
44,143
73,544
10,216
5,638
24,724
48,542
91,286
12,680
5,638
23,270
$ 213,723
$ 239,039
The discounted cash flows used in determining the recoverable amounts for the Scallops, Macduff and all other CGUs were
based on the following key assumptions:
i)
Cash flows from operations were projected for a period of five years based on a combination of past experience, actual
operating results and forecasted earnings. Terminal values and forecasts for future periods were extrapolated using inflation
rates of 2%–2.5% (2015: 1%). Gross margins for all future periods were determined using a combination of forecasted and
historical margins.
ii) Pre-tax discount rates ranging from 9%–13% (2015: 13%–18%) were applied in determining the recoverable amount of the
CGUs. The discount rates were estimated based upon weighted average cost of capital, and associated risk for the CGU.
iii) Cash flow adjustments for capital expenditures were based upon the management approved capital expenditure forecast,
and terminal year capital expenditures were based on required refits over the period of the fishing license.
Clearwater Seafoods Incorporated 2016 Annual Report 95
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
The following assumptions were used for each individual CGU:
Argentine scallops
Clams
Turbot
CDN scallops
FAS shrimp
Lobster
Macduff
Other
2016
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.5%
2.0%
Inflation
Pre-tax discount rates
2015
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
2016
13.0%
9.5%
9.5%
9.5%
9.5%
10.0%
11.0%
9.0%
2015
13.0%
10.5%
12.8%
10.5%
10.5%
10.5%
11.6%
12.8%
The values assigned to the key assumptions represent management’s assessment of future trends in the industry and are based
on both internal and external sources.
Definite life fishing rights
Amortization relates to fishing rights. Amortization is allocated to the cost of inventory and is recognized in cost of goods sold
as inventory is sold. In 2015, Clearwater acquired fishing rights for CDN $2.6 million. These fishing rights relate to the Scallop
CGU, are valid for 15 years and are amortized over that period. In 2016, there have been no disposals.
Refer to Note 14 for assets pledged as security for long-term debt.
Enterprise resource planning system
During the year ended December 31, 2016, the new enterprise resource planning system (“ERP”) was put into use and reclassified
from construction in progress (property, plant and equipment) to intangible assets. The amount reclassified was $21.1 million
and is being amortized on a straight line basis over 3–8 years, beginning in the second quarter.
96
Clearwater Seafoods Incorporated 2016 Annual Report
1 2 . 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
The following table summarizes the financial information of Adams and Knickle Limited, a joint venture in which Clearwater owns
50% and is accounted for using the equity method:
Year ended December 31
Carrying amount of interest in joint venture
Share of:
Earnings for the year
Commissions paid to joint venture
1 3 . I N C O M E TA X E S
(a) Reconciliation of income tax expense
2016
2015
$
10,496
$
9,311
1,185
11,341
$
$
2,591
8,598
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 (loss) 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
Benefit of capital loss not recognized
Recognition of previously unrecorded deferred tax assets
Effect of rate differences
Income of foreign subsidiary not subject to tax
Other
$
$
$
2016
76,042
30.5%
23,193
(4,022)
(1,265)
(1,425)
—
(1,581)
2,304
(758)
$
$
$
2015
(16,284)
30.5%
(4,967)
(5,605)
6,255
6,021
(3,864)
(1,557)
5,890
2,214
Actual provision
$
16,446
$
4,387
Clearwater Seafoods Incorporated 2016 Annual Report 97
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(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 assets:
Non-capital loss carry-forwards
Unrealized foreign exchange
Share issuance costs
Reserve for unpaid share-based compensation
Deferred tax liabilities:
Licenses and intangibles
Property, plant and equipment
Long-term debt
Other
Classified in the consolidated statement of financial position as:
Deferred tax asset
Deferred tax liability
2016
7,079
9,367
16,446
$
$
$
$
2015
1,896
2,491
4,387
December 31,
2016
December 31,
2015
$
17,144
250
1,192
2,001
$
17,327
4,524
905
2,969
(18,200)
(13,004)
(586)
(431)
(21,376)
(9,198)
1,272
(1,556)
$
(11,634)
$
(5,133)
6,429
(18,063)
14,184
(19,317)
$
(11,634)
$
(5,133)
The net change in deferred income taxes is reflected in deferred income tax expense of $9.4 million (2015 – $2.5 million), plus
$2.1 million of adjustments in relation to the 2015 business combination less $0.7 million as an adjustment to equity, less the
foreign exchange effect of deferred taxes of foreign subsidiaries totaling $4.3 million (2015 – $0.1 million), the effect of which
was recorded through foreign exchange.
The deferred tax asset recorded for non-capital loss carry-forwards is recognized based on Clearwater’s estimate that it is more
likely than not that it will earn sufficient taxable profits to utilize these losses before they expire.
98
Clearwater Seafoods Incorporated 2016 Annual Report
Unrecognized deferred tax assets
Clearwater has the following deductible temporary differences, unused tax losses and unused tax credits for which no deferred
tax asset is recognized in the consolidated statements of financial position.
Non-capital losses
Investment tax credits
Capital losses
Long-term debt
Accounts receivable
Unrecognized deferred tax liabilities
Clearwater
Seafoods Inc.
Subsidiary
corporations
Total
Expiry
$
—
$
7,954
$
7,954
2026–2035
12,421
13,131
—
—
590
380
51,100
16,956
13,011
2023–2036
13,511
No Expiry
51,100
16,956
N/A
N/A
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, 2016 for the Company’s subsidiaries was $49.8 million (December 31,
2015 – $47.4 million).
1 4 . L O N G - T E R M D E B T
As at December 31
Senior debt:
Term loan A, due June 2018 (a)
Term loan B, due June 2019 (a)
Term loan B, embedded derivative
Revolving facility (a)
Deferred obligation (b)
Earnout liability (b)
Term loan, due June 2017 (c)
Marine mortgage
Term loan, due in 2091 (d)
Other loans
Less: current portion
2016
2015
$
50,218
306,507
703
$
55,562
332,671
2,353
23,400
29,298
9,107
13,459
—
3,500
222
16,400
43,035
12,561
13,953
457
3,500
277
436,414
(67,005)
480,769
(65,685)
$ 369,409
$ 415,084
(a) Senior debt consists of a Term Loan A facility, a Term Loan B facility and a revolving debt facility.
Term Loan A facility – The Term Loan A consists of an initial term loan of CDN $30.0 million and a delayed draw facility of
CDN $30.0 million. The principal outstanding on the initial term as at December 31, 2016 was CDN $24.2 million (December 31,
2015 – $27.0 million). The balance is shown net of deferred financing charges of CDN $0.1 million (December 31, 2015 –
$0.1 million). The loan is repayable in quarterly installments of $0.4 million 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, 2016 this resulted in an effective rate of 4.14%.
Clearwater Seafoods Incorporated 2016 Annual Report 99
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
The principal outstanding on the Term Loan A delayed draw facility as at December 31, 2016 was $26.4 million (December 31,
2015 – $29.3 million). The balance is shown net of deferred financing charges of CDN $0.3 million (December 31, 2015 –
$0.6 million). The facility is repayable in quarterly installments of $0.4 million. The facility matures in June 2018 and bears
interest payable monthly at the banker’s acceptance rate plus 3.25%. As at December 31, 2016 this resulted in an effective
rate of 4.14%.
Term Loan B facility – The principal outstanding as at December 31, 2016 was USD $178.5 million (December 31, 2015 –
$189.7 million) and CDN $70.4 million (December 31, 2015 – $74.8 million). The loan is repayable in quarterly installments of
USD $0.5 million and CDN $0.2 million, with the balance due at maturity in June 2019. The USD balance bears interest payable
monthly at the US Libor plus 3.50% with a LIBOR interest rate floor of 1.25%, and the CDN balance bears interest at the banker’s
acceptance rate plus 3.50%. As of December 31, 2016 this resulted in an effective rate of 4.75% on the USD balance and 4.39%
on the CDN balance. The embedded derivative represents the fair market value of the Libor interest rate floor of 1.25%. The
change in fair market value of the embedded derivative was recorded through profit or loss as a component of net finance costs.
Revolving debt facility – Clearwater has a CDN $100.0 million revolving facility that matures in June 2018. The availability of this
facility is reduced by the term loan outstanding in note (c), as such the availability as at December 31, 2016 was $63.1 million
(December 31, 2015 – $69.6 million). The facility can be drawn in Canadian and/or US dollars. As at December 31, 2016 the
balances were Canadian $23.4 million (December 31, 2015 – $16.4 million) and US dollars of $ nil (December 31, 2015 – 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, 2016 this results in effective rates of 4.14% for Canadian dollar balances
and 4.28% for US dollar balances. The facility has standby fees of 0.375%.
The revolver, Term Loan A, delayed draw and Term Loan B are secured by a first charge on cash and cash equivalents, accounts
receivable, inventories, marine vessels, licenses and quotas, and Clearwater’s investments in certain subsidiaries.
Clearwater’s debt facilities are subject to certain financial and non-financial covenants. Clearwater is in compliance with all
covenants associated with its debt facilities.
In addition to the minimum principal payments for Term Loans A and B, the loan agreement requires that between 0% and
50% of excess cash flow (defined in the loan agreement as EBITDA, excluding non-controlling interest in EBITDA and the most
significant non-cash and non-recurring items less certain scheduled principal payments, certain capital expenditures and certain
cash taxes) be used to repay the principal based on the previous fiscal year’s results upon approval of the annual financial
statements. Payments are allocated amongst the term loans on a pro rata basis. During the year ended December 31, 2016,
Clearwater repaid $18.6 million in principal relating to this requirement (2015 – $7.3 million).
Refer to Note 8 for detail on interest rate caps and swaps that economically hedge interest rate risk on the term loans.
100
Clearwater Seafoods Incorporated 2016 Annual Report
In connection with the 2015 acquisition of Macduff, there are two components of the purchase price that are to be paid
(b)
in future periods as discussed below:
i) Deferred Obligation – The Deferred Obligation relates to deferred payments for 33.75% of the shares of Macduff acquired by
Clearwater (the “Earn Out Shares”) in 2015. Excluding the fair value adjustment on acquisition, the principal balance outstanding
as at December 31, 2016 is £21.0 million (CDN $34.8 million) (December 31, 2015 – £26.2 million (CDN $53.9 million)) and does
not bear interest. The Deferred Obligation is recorded at the discounted amount based on estimated timing of payment and is
being accreted to the principal amount over the estimated term using the effective interest method with an effective average
interest rate of 7.8%. The following is a reconciliation of the Deferred Obligation:
Principal balance on acquisition
Fair value adjustment
Fair value of Deferred Obligation – October 2015
Effect of movement in foreign exchange
Balance – December 31, 2015
Accretion – 2016
Principal repayment
Effect of movement in foreign exchange
Balance – December 31, 2016
£
$
GBP
26.2
(5.3)
20.9
—
20.9
2.0
(5.2)
—
CDN
53.0
(10.7)
42.3
0.6
42.9
3.6
(8.7)
(8.5)
£
17.7
$
29.3
On October 30th of each year, the holders of the Earn Out Shares can elect to be paid up to 20% of the Deferred Obligation.
Clearwater has the right to exercise the payout of 20% of the Deferred Obligation annually commencing two years after the
date of closing. The percentage of the Deferred Obligation remaining unpaid will impact the fair value of the future performance
component of the additional consideration, the Earnout.
On October 30, 2016 the holders of the Earn Out Shares elected to be paid 20% of the outstanding Deferred Obligation. As a
result a payment of £5.2 million (CDN – $8.7 million) was made on November 15, 2016.
ii) Earnout liability – The Earnout liability is unsecured additional consideration to be paid dependent upon the future financial
performance of Macduff and the percentage of Deferred Obligation remaining unpaid at the time of payment (refer to Deferred
Obligation above). The estimated fair value of the Earnout liability at December 31, 2016 is £5.5 million (CDN – $9.1 million)
(December 31, 2015 – £6.1 million, CDN – $12.6 million) based on forecast earnings and probability assessments. The actual
Earnout payments are expected to be paid over the next five years. Refer to Note 4 for further information.
The amount of the total Earnout liability is calculated as follows:
The greater of:
i) £3.8 million; OR
ii) up to 33.75% (dependent upon the percentage of Deferred Obligation remaining unpaid each year) of the increase in equity
value of the business over five years calculated as 7.5x adjusted EBITDA of Macduff less the outstanding debt of Macduff;
and
iii) 10% of adjusted EBITDA of Macduff above £10 million (dependent upon the percentage of Deferred Obligation remaining
unpaid each year)
Refer to Note 8(l) for further information on the process in which to determine the fair value of the Earnout liability. The Earnout
liability is recorded at fair value on the consolidated statement of financial position at each reporting period until paid in cash,
with changes in the estimated fair value being recorded as a component of other expense on the statement of earnings (loss).
The change in fair value for the year ended December 31, 2016 was a decrease (gain) of £0.6 million (CDN $1.1 million).
Clearwater Seafoods Incorporated 2016 Annual Report 101
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(c) Term Loan – The principal outstanding as at December 31, 2016 was USD $10.0 million (December 31, 2015 – $10.0 million).
The loan is held through a Clearwater subsidiary. The loan is non amortizing, repayable at maturity in June 2017 and bears
interest payable monthly at 8.0%.
(d) Term Loan – due in 2091. In connection with this term 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 5 . 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
Share capital:
Balance at January 1
Issuance of common shares
Balance at December 31
December 31, 2016
December 31, 2015
#
59,958,998
3,975,700
$
157,161
53,699
#
54,978,098
4,980,900
$
97,267
59,894
63,934,698
210,860
59,958,998
157,161
On June 21, 2016 Clearwater completed the issuance of 3,975,700 common shares at $13.90 per common share for gross
proceeds of $55.3 million. Transaction costs associated with the equity issue were $2.2 million and have been deducted, net of
deferred taxes of $0.6 million, from the recorded amount for the common shares.
Total common shares outstanding as at December 31, 2016 were 63,934,698 common shares.
On June 30, 2015 Clearwater completed the issuance of 4,980,900 common shares at $12.25 per common share for gross
proceeds of $61 million. Transaction costs associated with the equity issue were $2.4 million and were deducted, net of deferred
taxes of $1.2 million, from the recorded amount for the common shares.
During the year ended 2016, dividends of $12.4 million were declared and paid as follows:
Payment date
April 15, 2016
June 10, 2016
September 1, 2016
December 2, 2016
# of shares
outstanding
59,958,998
59,958,998
63,934,698
63,934,698
During the year ended 2015, dividends of $9.8 million were declared and paid as follows:
Payment date
March 24, 2015
May 28, 2015
September 2, 2015
December 15, 2015
# of shares
outstanding
54,978,098
54,978,098
59,958,998
59,958,998
Dividends
per share
0.050
0.050
0.050
0.050
Dividends
per share
0.040
0.040
0.040
0.050
$
$
$
$
$
$
$
$
Subsequent to the end of the year, on March 8, 2017 the Board of Directors declared a quarterly dividend of CDN $0.05 per
share payable on April 3, 2017 to shareholders of record as of March 17, 2017.
102
Clearwater Seafoods Incorporated 2016 Annual Report
1 6 . N O N - C O N T R O L L I N G I N T E R E S T
Summarized financial information in respect of Clearwater’s subsidiaries that have non-controlling interests (“NCI”) is set out
below.
(a) Summarized statements of financial position
Year ended December 31
NCI Percentage
Current assets
Current liabilities
Non-current assets
Non-current liabilities
Net assets
Coldwater shrimp
2016
2015
46.34%
46.34%
$
$
38,772
(14,018)
24,754
22,838
—
22,838
47,592
53,408
(15,364)
38,044
33,139
(114)
33,025
71,069
Accumulated non-controlling interests
$
24,941
$
33,660
Year ended December 31
NCI Percentage
Current assets
Current liabilities
Non-current assets
Non-current liabilities
Net assets
$
2016
20.0%
9,505
(34,030)
(24,525)
23,914
1,154
25,068
543
Scallops
$
2015
20.0%
7,371
(38,803)
(31,432)
27,084
—
27,084
(4,348)
Accumulated non-controlling interests
$
(1,485)
$
(1,922)
Clearwater Seafoods Incorporated 2016 Annual Report 103
Coldwater shrimp
2016
2015
$
100,161
29,524
$
111,051
39,446
15,842
24,560
19,740
11,817
Scallops
$
2015
31,642
(15,814)
(1,445)
(17,259)
(2,941)
2016
41,637
1,282
1,300
2,582
437
Coldwater shrimp
2016
45,677
(53,500)
—
$
2015
54,194
(26,095)
(4,000)
$
$
$
(7,823)
$
24,099
Scallops
$
2015
5,092
—
(5,094)
2016
6,500
—
(6,377)
123
$
(2)
$
$
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
(b) Summarized statements of earnings
Year ended December 31
Sales
Earnings and comprehensive income for the year
Earnings allocated to non-controlling interest
Dividends paid to non-controlling interest
Year ended December 31
Sales
Earnings (loss) for the year
Other comprehensive income
Total comprehensive income
Earnings (loss) allocated to non-controlling interest
(c) Summarized statements of cash flows
Year ended December 31
Cash flow from operating activities
Cash flow used in financing activities
Cash flow used in investing activities
Net increase (decrease) in cash
Year ended December 31
Cash flow from operating activities
Cash flow from (used in) financing activities
Cash flow used in investing activities
Net increase (decrease) in cash
104
Clearwater Seafoods Incorporated 2016 Annual Report
1 7 . O T H E R E X P E N S E ( I N C O M E )
Year ended December 31
Acquisition-related costs
Share of earnings of equity-accounted investee
Royalties, interest income and other fees
Other (income) fees
Fair value adjustment on earn-out liability
Export rebates
Other expense (income)
1 8 . E M P L O Y E E C O M P E N S AT I O N
$
$
2016
2,561
(1,185)
(1,379)
(1,950)
(1,110)
(2,146)
2015
3,240
(2,591)
(664)
459
—
—
$
(5,209)
$
444
Employee compensation is classified in the consolidated statement of earnings (loss) based on the related function. The
following table reconciles Clearwater’s compensation expense items to the functions where the amounts are presented on the
consolidated statement of earnings (loss):
Year ended December 31
Salaries and benefits
Share-based compensation
Cost of goods sold
Administrative and selling costs
$
$
$
2016
155,533
2,902
2015
$
121,730
5,269
158,435
$
126,999
119,669
38,766
$
90,505
36,494
$
158,435
$
126,999
1 9 . E A R N I N G S ( L O S S ) P E R S H A R E
The earnings and weighted average number of shares used in the calculation of basic and diluted earnings (loss) per share is
as follows (in thousands except per share data):
Basic
Earnings (loss) for the period
Weighted average number of shares outstanding
Earnings (loss) per share
Diluted
Earnings (loss) for the period
Weighted average number of shares outstanding
Earnings (loss) per share
2016
2015
43,928
$
62,050,325
0.71
$
$
(37,608)
57,489,017
(0.65)
$
44,131
$
62,193,543
0.71
$
$
(37,608)
57,489,017
(0.65)
$
The revaluation adjustment on the cash-settled share-based payments for the year ended December 31, 2016 results in a dilutive
impact on earnings (loss) per share. As a result, for the period ended December 31, 2016, 145,622 potential ordinary shares were
included in the calculation of the weighted average number of ordinary shares for the purpose of diluted earnings (loss) per share.
Clearwater Seafoods Incorporated 2016 Annual Report 105
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
2 0 . 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). An aggregate amount of 2,500,000 Common Shares
of Clearwater are issuable under the PSU Plan which was approved by the shareholders with the most recent management
information circular dated June 13, 2016.
The number of share-based awards outstanding and vested as of December 31, 2016 and 2015 were as follows:
As at December 31, 2016 (In thousands)
SARs
PSU – Tranche 3
PSU – Tranche 4
PSU – Tranche 5
DSU
Total
As at December 31, 2015 (In thousands)
SARs
PSU – Tranche 2
PSU – Tranche 3
PSU – Tranche 4
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
N/A
Number
outstanding
Number
vested
83
67
141
79
124
391
885
83
67
141
—
—
313
604
Number
outstanding
Number
vested
83
67
204
190
105
448
1,097
83
67
204
—
—
268
622
Grant date
May 2010
May 2010
March 2014
April 2015
April 2016
June 2012–December 2016
Grant date
May 2010
May 2010
March 2013
March 2014
April 2015
June 2012–December 2015
The following reconciles the share-based awards outstanding for the year ended December 31, 2016:
(In thousands of share units)
PSU –
Tranche 2
PSU –
Tranche 3
PSU –
Tranche 4
PSU –
Tranche 5
DSU
SARs
Total
Outstanding at January 1, 2016
Granted
Granted from dividends
Forfeited
Exercised
204
—
—
—
(204)
Outstanding at December 31, 2016 —
Vested at January 1, 2016
Vested
Exercised
Vested at December 31, 2016
204
—
(204)
—
190
—
2
(51)
—
141
—
141
—
141
105
—
1
(27)
—
79
—
—
—
—
—
127
1
(4)
—
124
—
—
—
—
448
—
50
—
(108)
390
267
152
(108)
311
150
—
—
—
—
150
150
—
—
150
1,097
127
54
(82)
(312)
884
621
293
(312)
602
106
Clearwater Seafoods Incorporated 2016 Annual Report
The following reconciles the number of share-based awards outstanding for the year ended December 31, 2015:
(In thousands of share units)
PSU –
Tranche 1
PSU –
Tranche 2
PSU –
Tranche 3
PSU –
Tranche 4
DSU
SARs
Total
Outstanding at January 1, 2015
Granted
Granted from dividends
Forfeited
Exercised
424
—
—
—
(424)
Outstanding at December 31, 2015 —
Vested at January 1, 2013
Vested
Exercised
Vested at December 31, 2015
424
—
(424)
—
219
3
—
(18)
—
204
—
204
—
204
208
3
—
(21)
—
190
—
—
—
—
—
112
1
(8)
—
105
—
—
—
—
398
6
44
—
—
448
220
47
—
267
150
—
—
—
—
150
150
—
—
150
1,399
124
45
(47)
(424)
1,097
794
251
(424)
621
For the year ended December 31, 2016, there were 204 PSU awards exercised (2015 – 424). These awards were cash settled
for total cash payments of $4.2 million (December 31, 2015 – $8.9 million).
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 PSU and DSU share units outstanding.
The additional PSUs and DSUs granted are subject to the same terms and conditions as the corresponding PSU or DSU Grant.
Fair value of share-based awards
The SARs issued and outstanding are fully vested and are expected to be cash settled on the exercise date; therefore, vested
awards are recorded as liabilities at the intrinsic value of the SARs.
The PSU Tranche 3 are fully vested as of December 31, 2016 and are recorded as a liability of $1.6 million. This is expected to
be cash settled in the first quarter of 2017.
PSU Tranches 4 and 5 are expected to be equity settled.
Measurement inputs for the remaining plans include the fair value of Clearwater’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:
PSU
Tranche 4
Weighted average fair value per award
Weighted average risk-free interest rate
Weighted average expected volatility
Expected life of awards (years)
$
18.19
0.10%–3.46%
20.38%–74.54%
1
PSU
Tranche 3
Weighted average fair value per award
Weighted average risk-free interest rate
Weighted average expected volatility
Expected life of awards (years)
$
14.94
0.06%–1.85%
15.88%–35.50%
1
PSU
Tranche 5
$
17.78
1.01%–2.28%
18.66%–43.43%
2
PSU
Tranche 4
$
18.19
0.10%–3.46%
20.38%–74.54%
2
2016
DSU
$
11.65
0.479%–0.64%
33.78%–38.12%
1–3.25
2015
DSU
$
11.99
0.479%–0.64%
33.78%–38.12%
2.5–4.25
Clearwater Seafoods Incorporated 2016 Annual Report 107
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
Share-based compensation expense included in the consolidated statements of earnings (loss) for the year ended December 31,
2016 is $2.9 million (December 31, 2015 – $5.3 million).
The liability for share-based compensation is $7.6 million at December 31, 2016 (December 31, 2015 – $11.4 million). The vested
portion of the liability for share-based compensation is $6.9 million at December 31, 2016 (December 31, 2015 – $8.5 million).
2 1 . S E G M E N T 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 fish and other shellfish
Langoustine
(b) Sales by geographic region of the customer
Year ended December 31
France
Scandinavia
UK
Other
Europe
China
Japan
Other
Asia
United States
Canada
North America
Other
(c) Non-current assets by geographic region
As at December 31
Property, plant and equipment, licenses, fishing rights and goodwill
Canada
Argentina
Scotland
Other
108
Clearwater Seafoods Incorporated 2016 Annual Report
$
2016
188,421
93,250
108,402
91,918
38,243
43,745
47,572
$
2015
165,544
109,963
92,589
84,350
26,141
18,485
7,873
$
611,551
$
504,945
$
2016
102,806
32,529
17,632
93,942
246,909
94,623
76,230
36,036
$
2015
85,974
35,931
24,615
37,361
183,881
95,140
66,401
18,113
206,889
179,654
85,385
72,275
80,668
58,696
157,660
139,364
93
2,046
$
611,551
$
504,945
2016
2015
$
298,517
24,055
158,077
260
$
291,644
27,751
187,620
208
$
480,909
$
507,223
2 2 . 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 financial statements include the accounts of the Corporation and its material subsidiaries, partnerships
and joint venture, as follows:
Entity
Ownership %
Clearwater Seafoods Limited Partnership
Macduff Shellfish Group Limited
Clearwater Ocean Prawns Venture
St. Anthony Seafoods Limited Partnership
Adams and Knickle Limited
Clearwater Seafoods Holdings Incorporated
Clearwater Fine Foods Europe Limited
Clearwater Fine Foods USA Incorporated
Glaciar Pesquera S.A.
(b) Key management personnel
100%
100%
53.66%
75%
50%
100%
100%
100%
80%
Accounts
Consolidated
Consolidated
Consolidated
Consolidated
Equity method
Consolidated
Consolidated
Consolidated
Consolidated
Clearwater has defined key management personnel as senior executive officers, as well as the Board of Directors, as they have
the collective authority and responsibility for planning, directing and controlling the activities of the Corporation. The following
table outlines the total compensation expense for key management personnel for the years ended December 31, 2016 and 2015.
Year ended December 31
Wages and salaries
Share-based compensation
Bonuses
Other benefits
$
$
2016
3,998
2,702
—
1,442
2015
3,651
4,764
1,473
717
$
8,142
$
10,605
(c) Transactions with other related parties
Clearwater rents office space to Clearwater Fine Foods Incorporated (“CFFI”) (the controlling shareholder of Clearwater) and
provides computer network support services to CFFI. The net amount due to CFFI in respect of these transactions was
$0.04 million (December 31, 2015 – net amount due to CFFI of $0.05 million), is unsecured and due on demand.
In June 2016, Clearwater sold an idle vessel to the joint venture, the sales price of CDN $13.5 million was the book value at the
time of the sale plus refit costs.
For the year ended December 31, 2016, Clearwater expensed approximately $0.4 million in factory and equipment rentals from
companies related to a member of its management team (December 31, 2015 – $0.07 million). Clearwater incurred $0.04 million
in legal fees paid to a law firm in which a Director of Clearwater is a partner (December 31, 2015 – $0.1 million).
In addition, for the year ended December 31, 2016, Clearwater expensed approximately $0.1 million for goods and services from
companies related to its parent (December 31, 2015 – $0.2 million). The transactions are recorded at the exchange amount and
the balance due to these companies was $0.05 million as at December 31, 2016 (December 31, 2015 – $0.01 million).
At December 31, 2016 Clearwater had a balance of $1.4 million (December 31, 2015 – $1.3 million), included in long-term
receivables, for interest bearing loans made to a non-controlling interest shareholder in a subsidiary.
Clearwater Seafoods Incorporated 2016 Annual Report 109
Clearwater Seafoods Incorporated
Notes to the Consolidated Financial Statements
(Tabular amounts are in thousands of Canadian dollars)
2 3 . 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 flexibility 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 flexibility 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 4 . C O N T I N G E N T L I A B I L I T I E S
From time to time Clearwater is subject to claims and lawsuits arising in the ordinary course of operations. In the opinion
of management, the ultimate resolution of such pending legal proceedings will not have a material effect on Clearwater’s
consolidated financial position.
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 non-cash operating working capital (excludes change in accrued interest)
Increase in inventory
Increase (decrease) in accounts payable
(Increase) in accounts receivable
Decrease (increase) in prepaids
$
2016
(22,030)
(6,127)
3,775
4,953
$
2015
(7,297)
2,123
(13,564)
(2,908)
$
(19,429)
$
(21,646)
2 6 . C O M PA R AT I V E I N F O R M AT I O N
These consolidated financial statements contain certain reclassifications of prior year amounts to be consistent with the current
period presentation.
110
Clearwater Seafoods Incorporated 2016 Annual Report
Selected Annual Information
2016
(Audited)
2015
(Audited)
20141
20131
20121
(Audited)
(Audited)
(Audited)
Sales
Costs of goods sold
Gross margin
$
611,551
466,930
$
504,945
372,757
$
144,621
132,188
Administrative and selling
Net finance costs
Foreign exchange (gains) losses on
long-term debt and working capital
(Gains) losses on contract derivatives
Other income
Research and development
58,492
26,948
(7,295)
(7,279)
(5,209)
2,922
68,579
51,363
21,634
46,287
26,763
444
1,981
148,472
Earnings before income taxes
76,042
(16,284)
Income taxes expense (recovery)
16,446
4,387
Earnings before non-controlling interest
59,596
(20,671)
444,742
341,908
102,834
48,252
37,829
—
4,047
(5,031)
1,991
87,088
15,746
5,949
9,797
Non-controlling interest
15,668
16,937
12,702
$
388,659
301,291
$
350,302
277,777
87,368
39,005
33,935
—
8,812
(3,240)
1,659
80,171
7,197
(8,101)
15,298
8,965
72,525
32,536
29,041
—
(4,654)
(3,399)
1,759
55,283
17,242
(5,462)
22,704
7,695
Earnings attributable to shareholders
$ 43,928
$ (37,608)
$
(2,905)
$
6,333
$
15,009
1
2014, 2013 and 2012 have not been updated to reflect the current presentation of net finance costs, foreign exchange (gains) losses on long-term
debt and working capital and (gains) losses on contract derivatives.
Clearwater Seafoods Incorporated 2016 Annual Report 111
Clearwater Seafoods Incorporated
Quarterly and Share Information
($000s except per share amounts)
Sales
Earnings attributable to:
Non-controlling interests
Shareholders of Clearwater
Per share data
Basic net (loss) earnings
Diluted net (loss) earnings
Q4
Q3
Q2
2016
Q1
Q4
Q3
Q2
2015
Q1
165,690
189,457
140,180
116,225
165,503
165,503
116,748
75,362
3,800
8,611
7,012
10,847
3,551
9,963
1,305
14,507
3,267
(7,060)
6,485
(4,768)
4,123
5,616
3,062
(31,398)
0.13
0.13
0.28
0.28
0.16
0.16
0.24
0.24
(0.12)
(0.12)
(0.08)
(0.09)
0.10
0.10
(0.57)
(0.57)
Clearwater Seafoods Incorporated,
Trading Information
symbol CLR
Trading price range of shares
(board lots)
Low
Close
Trading volumes (000s)
Average daily
Q4
Q3
Q2
2016
Q1
Q4
Q3
2015
Q1
14.55
10.69
14.85
13.50
14.85
12.05
13.63
9.95
13.13
9.22
14.42
11.66
15.24
10.93
5,688
2,747
3,995
3,051
3,030
3,100
3,690
112
Clearwater Seafoods Incorporated 2016 Annual Report
Corporate Information
Head office 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
Ian Smith
Chief Executive Officer
John C. Risley
President, Clearwater Fine Foods Inc.
Teresa Fortney
Vice-President, Finance and Chief Financial Officer
Harold Giles
Chair of Human Resource Development and Compensation
(“HRDCC”) Committee
Independent Consultant
Larry Hood
Chair of Audit Committee
Former Audit Partner, KPMG
Jane Craighead
Senior Vice President, Scotiabank
Mickey MacDonald
President, Micco Companies
Ronald van der Giesen
President, Global Supply Chain
Greg Morency
President, Global Markets and Chief Commercial Officer
Christine Penney
Vice-President, Sustainability & Public Affairs
David Kavanagh
Vice-President and General Counsel
Dieter Gautschi
Vice-President, Human Resources
Brendan Paddick
Chief Executive Officer, Columbus Capital Corporation
Kirk Rothenberger
Chief Information Officer, Information Services
Stan Spavold
Chair of Finance Committee
Executive Vice President, Clearwater Fine Foods Inc.
Jim Dickson
Chair of Governance Committee
Counsel, Stewart McKelvey
Investor relations
Investor relations
(902) 443-0550
Investorinquiries@clearwater.ca
Auditors
KPMG LLP
Halifax, Nova Scotia
Shares listed
Toronto Stock Exchange
SHARE Symbol: CLR
Transfer agent
Computershare Investor Services Inc.
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www.clearwater.ca