High Liner Foods
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 D HIGH LINER FOODS 2018 Financial Highlights (UNAUDITED) (Amounts in USD 000s, except per share amounts, unless otherwise noted) Revenues Adjusted EBITDA(1) Net income Basic earnings per common share Diluted earnings per common share Adjusted net income(1) Basic earnings per common share Diluted earnings per common share Total assets Gross capital expenditures Shareholders’ equity Book value per share Dividends paid per share (CAD) Operating Highlights Sales volumes (000s of pounds) Number of employees 2018 1,048,531 62,474 16,776 0.50 0.50 17,049 0.51 0.51 837,155 14,607 263,859 7.90 0.580 283,969 1,259 2017 1,053,846 66,112 31,653 0.98 0.97 30,142 0.93 0.93 907,969 27,775 268,867 8.05 0.565 291,826 1,362 % Change (0.5)% (5.5)% (47.0)% (49.0)% (48.5)% (43.4)% (45.2)% (45.2)% (7.8)% (47.4)% (1.9)% (1.9)% 2.7 % (2.7)% (7.6)% (1) See the Non-IFRS Financial Measures section starting on page 34 of this annual report for further explanation of Adjusted EBITDA and Adjusted Net Income. Sales Sales (in millions of USD) 2018 2017 2016 2015 2014 Sales Product Sales Volume (in millions of pounds) 2018 2017 2016 2015 2014 $500 $700 $900 $1,100 $100 $205 $310 Sales vs Adjusted Sales vs. Adjusted EBITDA(1) (in millions of USD) $1000 $500 $750 $625 $875 Adjusted Diluted Adjusted Diluted Earnings per Share(1) (in USD) $1,125 2018 2017 2016 2015 2014 2018 2017 2016 2015 2014 $0 $20 $40 $60 $80 $100 $0 $0.75 $1.50 Sales Adjusted EBITDA (1) See the Non-IFRS Financial Measures section starting on page 34 of this annual report for further explanation of Adjusted EBITDA and Adjusted Diluted Earnings per Share. 0 20000 40000 60000 80000 100000 Annual Report 2018 1 By inspiring North Americans to enjoy seafood like never before — making it easier for them to buy and prepare one of the healthiest, most sustainable sources of protein available — we are building a simple yet powerful platform for growth. Who We Are High Liner Foods is a leading North American processor and marketer of value-added frozen seafood. Our retail branded products are sold throughout the United States, Canada and Mexico under the High Liner, Fisher Boy, Sea Cuisine and C. Wirthy & Co. labels, and are available in most grocery and club stores. We also sell branded products under the High Liner, Icelandic Seafood and FPI labels to restaurants and institutions, and are a major supplier of private-label, value-added frozen seafood products to North American food retailers and foodservice distributors. High Liner Foods is a publicly traded Canadian company, trading under the symbol HLF on the Toronto Stock Exchange. Inside This Report 02 AT A GLANCE 08 RUBICON REALIGNMENT AND SHRIMP GROWTH 04 ONE HIGH LINER FOODS: IN CONVERSATION WITH THE CEO 09 PROFITABLE ORGANIC GROWTH 06 BUSINESS SIMPLIFICATION 07 SUPPLY CHAIN EXCELLENCE 12 MANAGEMENT’S DISCUSSION AND ANALYSIS 53 FINANCIAL STATEMENTS AND NOTES IBC CORPORATE INFORMATION 10 THE MANY VOICES OF ONE HIGH LINER FOODS 2 HIGH LINER FOODS At a Glance High Liner Foods is a leading North American processor and marketer of value-added frozen seafood to the foodservice and retail trade. Our unified platform and well-known core brands give us the unique ability to serve our customers with a variety of value-added seafood that meets their diverse needs. To help us deliver what our customers want, when they want it, we source seafood from around the world. No matter where we source, our requirements are the same: suppliers must strive to catch or farm seafood responsibly, protect against overfishing and limit impacts on the natural environment. They’re also expected to treat their employees well and uphold high worker safety and social standards. Top sourcing countries Manufacturing Offices Distribution Annual Report 2018 3 OUR TOP SPECIES We have the scale and global reach to deliver the products our customers and consumers want. Our top species by percentage of 2018 sales (in USD): 27.7% Shrimp 27.3% Cod (Atlantic and Pacific) 14.1% Salmon (Wild and Farmed) 10.6% Haddock 6.9% Pollock 4.6% Tilapia 3.3% Sole KEY RETAIL BRANDS KEY FOODSERVICE BRANDS ® 4 HIGH LINER FOODS One High Liner Foods: IN CONVERSATION WITH THE CEO President and CEO Rod Hepponstall joined High Liner Foods on May 1. “I am extremely pleased to be joining High Liner Foods,” he said at the time. 01 WHAT DID YOU SEE IN HIGH LINER FOODS BACK IN MAY, AND WHAT DO YOU SEE NOW? Before I came to High Liner Foods, I saw an organization with tremendous brand recognition and a history that has stood the test of time. At the same time, I saw shifting consumer trends more broadly. Seafood is an “under-consumed” protein compared to beef, poultry and pork. So I saw an exciting opportunity to tap into consumer demands for healthier sources of protein. What I quickly realized when I arrived was the quality of our people here. All across the globe — whether in Canada, the United States, Asia or Iceland — we have a company full of ambitious, hard-working people who really care about what we do and why we do it. It’s one thing to instill passion in people. It’s a whole other ballgame when the passion and potential for success are already there. 02 HOW DO YOU TAP INTO THAT PASSION AND TRANSFORM IT INTO RESULTS? First, you have to make sure everyone is on the same page — that we’re not duplicating efforts, working inefficiently or operating in silos. You have to bring everyone together and say, “Look, no matter your role or your location, we’re one organization.” When people aren’t stranded in their specific roles — but feel part of something bigger — you begin to unlock all sorts of potential. I arrived with my sleeves already rolled up! Right away, I made a point of visiting each and every one of our facilities, and with my team we took an in-depth look at our collective strengths and capabilities. Those run the gamut. At one end, you might have a highly engaged employee, at one of our plants, with an original idea. At the other end, you have an organizational DNA based on 120 years of deep seafood expertise, along with the legacy of resilience, innovation and reinvention that comes with that. “ I look forward to working with my new team to improve the business, to create innovative products that help drive seafood consumption and to deliver on a strategy that will create long-term value for our shareholders.” ROD HEPPONSTALL, President and CEO Annual Report 2018 5 That said, we’re driving process improvements, realizing efficiencies and working as one company. We’re a leaner, smarter, flatter business that can be faster to market, more competitive and overall better equipped to tap into the market opportunity we see ahead. I truly believe that we can take advantage of the “halo effect” seafood has in the minds of more and more consumers, who increasingly associate it with healthy eating. 05 WHAT DOES 2019 HAVE IN STORE FOR HIGH LINER FOODS? Heading into the year, we have a talented, calibrated leadership team in place, and enthusiasm throughout the organization. As an integrated company, we will continue realizing the benefits of Organizational Realignment, and we will advance our other critical initiatives — Business Simplification, Supply Chain Excellence, and Rubicon Alignment and Shrimp Growth. Taken together, this provides the foundation for our final — and ongoing — initiative, Profitable Organic Growth. 03 AND THAT’S WHAT YOU MEAN WHEN YOU TALK ABOUT “ONE HIGH LINER FOODS”? Exactly. “One High Liner Foods” gives expression to the first of five critical initiatives we’ve identified as essential for our next two years to unlock our potential value and return to organic growth. Through Organizational Realignment, our first critical initiative, we are creating an integrated, cohesive and collaborative culture to ensure we’re operating efficiently, sharing information and establishing company-wide best practice across the globe. In a lot of ways, I came to two companies — one operating in the United States and one in Canada — that happened to share a name. Through Organizational Realignment, we are now operating as one unified company. Today, internal connections are global in nature, not just local. Employees are working with their colleagues around the world more cohesively than ever before. They’re making decisions together, sharing lessons learned and testing out new ideas for how we operate, innovate and reach consumers. 04 WHERE DOES ONE HIGH LINER FOODS GO FROM HERE? While we had to make some difficult decisions, we’ve made important progress in realigning the organization. Fully realizing the strengths of High Liner Foods will never be “done” in my book, though. Empowering people to do the best they can do — that never stops. Encouraging colleagues to question the status quo — that never stops either. As soon as you stop paying attention to learning moments, you’re missing opportunities to improve. High Liner Foods is developing the next wave of innovative seafood products to help North Americans live healthier lives. 6 HIGH LINER FOODS Business Simplification Among seafood’s many benefits for consumers is its variety, which can appeal to a wide range of tastes and meal occasions. For years, High Liner Foods has procured dozens of species from countries all over the world. The right mix of product diversity going forward, though, depends on the evolving consumer trends of tomorrow. As part of our Business Simplification initiative, we are reviewing our entire brand and product portfolio through the lens of the latest in market trends, customer expectations and financial analytics. Today, a handful of seafood species account for the vast majority of consumer demand. Through Business Simplification, we are identifying those species and SKUs that have the most potential among foodservice and retail customers, and shifting our focus away from those that appeal to an increasingly small market segment. High Liner Foods will continue to offer a comprehensive selection of frozen seafood products, but we are removing unnecessary complexity — simplifying raw materials, ingredients and packaging — in order to focus on margins, growth potential and the overall customer experience. “More than anything, this is all about focus,” explains Paul Jewer, EVP and CFO. “We’re focused on the things that can drive value for High Liner Foods.” “Paul’s the right person to lead our Business Simplification initiative,” Rod Hepponstall points out. “He has a long history with the food industry and consumer packaged goods, and he’s unique in his ability to pair financial expertise and pragmatic thinking with a deep understanding of R&D and marketing insights.” “ We’re focused on the things that can drive value for High Liner Foods.” PAUL JEWER, EVP and CFO High Liner Foods is innovating products that are on trend, shareable and appropriate for multiple types of meal occasion. Annual Report 2018 7 Supply Chain Excellence As part of our One High Liner Foods culture, we are implementing an integrated supply chain — creating a cross-border operating system, increasing manufacturing efficiencies and optimizing overall supply chain structure. “We’ve identified a number of opportunities to reduce costs,” explains Paul Snow, a 40-year seafood industry veteran who joined High Liner Foods in 1978 and is spearheading the supply chain initiative. “These opportunities will help us reduce costs by several million dollars in 2019, and efficient operations will position us to take full advantage of future market opportunities.” Our supply chain connects all parts of High Liner Foods — and many of those connections can be optimized. In 2018, for example, we aligned our Canadian and American warehousing and transportation strategies, so they are now operating as one. By “flexing the muscle” of our North American network, we have increased our operational standards and fill rates. We have increased service levels and lowered inventories — all while delivering industry-leading quality to customers and consumers. “In addition to having a keen understanding of our global business and the seafood industry, generally,” says Rod Hepponstall, “Paul has a knack for motivating people and finding efficiencies. I’m confident this critical initiative is in safe hands.” One way that Paul and his team are finding those efficiencies is by aligning operational standards and capabilities so that individual products can be made in multiple facilities, and don’t have to be shipped farther than necessary. “We’re also implementing a continuous improvement methodology in 2019,” Paul notes, while laying the foundation for a transformative sales and operational planning (S&OP) platform, to be introduced in 2020. By “flexing the muscle” of a unified North American network, High Liner Foods is increasing its operational standards and fill rates. 8 HIGH LINER FOODS Rubicon Alignment and Shrimp Growth By leveraging the scale and resources of High Liner Foods, Rubicon Resources can further capitalize on the growing consumer appetite for shrimp. In May 2017, High Liner Foods acquired Rubicon Resources, a leading U.S. shrimp importer. Representing our broader platform to grow our shrimp and aquaculture business, Rubicon has an entrepreneurial spirit that has guided it for the past 20 years. As part of our Rubicon Alignment and Shrimp Growth initiative, we are nurturing Rubicon’s entrepreneurial streak, while leveraging the scale and resources of High Liner Foods where appropriate. This includes organization-wide insight, analytics and marketing efforts to help Rubicon maximize its consumer and customer relevance. By complementing Rubicon’s culture with the scale, strengths and insights of One High Liner Foods, we are extracting value and identifying synergies not yet fully realized by our 2017 acquisition. We are also ensuring we are best positioned to capitalize on the consumer demand for shrimp, which remains one of the fastest growing seafood categories. Through this critical initiative, we are aligning Rubicon with our North American sales and marketing network, along with other back office resources that make sense for shrimp. “We are focused on bringing Rubicon products to market in a more meaningful, succinct way than ever before,” says Rod Hepponstall. “ We are focused on bringing Rubicon products to market in a more meaningful, succinct way than ever before.” ROD HEPPONSTALL, President and CEO Annual Report 2018 9 SUSTAINABILITY AT HIGH LINER FOODS As a company, we are working toward organic growth by nurturing North America’s appetite for quality, great tasting seafood. At the same time, we are doing our part to ensure our industry is good for those who work in it — and good for the planet — so that we can feed that appetite for years to come. Since 2010, we have been publicly committed to sourcing from responsible fisheries and aquaculture farms. And as a global seafood leader, we take responsibility for using our scale to influence positive change, and to procure, produce, package and distribute our products in the most environmentally and socially responsible ways possible. To learn more, visit highlinerfoods.com/sustainability Profitable Organic Growth At High Liner Foods, five critical initiatives are positioning us to fully leverage our products, our capabilities and our talents — in ways that take full advantage of our scale and reach. “We have a real opportunity to encourage seafood consumption among consumers,” explains Craig Murray, SVP Marketing and Innovation. “This past year, we have completed an in-depth market assessment and established new planning processes for the entire organization. We’re poised to bring a number of innovations to market — a cohesive North American market — in 2019. This is new and exciting for us.” Chris Mulder, SVP North American Sales, agrees. “We are in a position to capitalize on our historical strengths,” he says, “while adopting a continuous improvement mindset that will help us focus on the needs of our customers and consumer trends.” Together Craig and Chris are spearheading our Profitable Organic Growth initiative, which aims to strengthen customer engagement models, understand (and shape) consumer tastes and increase demand for our seafood products. Through insight, research, partnerships and a unified North American platform, we are launching innovative products like Haddock Bites — products that are on trend, shareable and appropriate for multiple eating occasions, including snacking. It’s about recognizing opportunities and ensuring High Liner Foods is there quickly. “Through a comprehensive assessment of the North American seafood market,” Chris explains, “we are able to identify, align, resource and market opportunities dynamically.” Improved innovation processes — whether through sales or marketing — will help drive incremental organic growth, particularly among snacking and other growing segments. “I’m confident that we’re building momentum,” says Craig, “as we make our way back to profitable growth.” High Liner Foods can capitalize on the “halo effect” seafood has in the minds of consumers, who increasingly associate it with healthy eating. 10 HIGH LINER FOODS The Many Voices of One High Liner Foods High Liner Foods is a company of more than 1,000 customer-focused, innovative and responsible people — coming together from five countries around the world. 01 “ Every day, in my hometown, I get to work with diverse teams of people from all corners of the world. We’re passionate, and together we’re collaborating on new ways to deliver sustainable, quality products that get people excited about eating seafood.” JENNIFER CREASER Seafood Procurement Manager, Lunenburg, Nova Scotia 06 “ We’re an increasingly active, productive company — with a strong and faithful brand.” SHARON QI Manager China Operations, Qingdao, China 02 “ I am proud to work for a company that’s known as a fair player in the industry — and an increasingly significant player in aquaculture.” LOUIS WIN General Manager Asian Operations, Bangkok, Thailand 03 “ My team has made amazing progress as part of Organizational Realignment — really remarkable stuff. I couldn’t be more proud of the innovations that are helping us grow in the industry.” GREG MULLER Warehouse Manager, Newport News, Virginia 04 “ We produce a wide variety of quality products — and that keeps me on my toes. Every day, I look forward to problem- solving and keeping the plant running as efficiently as possible.” JEFF THORNTON Maintenance Supervisor, Portsmouth, New Hampshire 05 “ We have a deep history, while our quality and our brands continue to set standards for today. It’s a combination that no other seafood company can match.” BRIAN JOBE Sales Team Leader, Halifax, Nova Scotia 07 “ Seafood has so much potential for growth. My team and I are imagining the next wave of innovative products to help people live healthier lives. Plus, it gives me great pleasure to work with a company that does everything it can to preserve our oceans for future generations.” PHILMAN GEORGE Corporate Chef, Mississauga, Ontario 08 “ We’re bringing seafood to tables of millions of North Americans. And as we continue to improve, innovate and inspire quality selections for customers, I have unlimited opportunities to learn and develop in my career.” NATALIE WHITE Communications Manager, Lunenburg, Nova Scotia 09 “ When I was growing up, this company put food on my family’s table. Now that I work at High Liner Foods, I get to collaborate with a dynamic, supportive team that’s inspiring innovation and driving positive change. It’s an ideal opportunity to develop professionally.” NIKKI MILLS Senior Accountant, Halifax, Nova Scotia 10 “ We have a rich heritage and team culture. With increasingly advanced levels of communications and strong leadership throughout the company, it’s an exciting time to work toward shared objectives.” CHRISTINE CONRAD Executive Assistant/Office Services Manager, Halifax, Nova Scotia Management’s Discussion and Analysis Consolidated Financial Statements Annual Report 2018 11 Introduction Company Overview Financial Objectives Outlook Recent Developments Performance Consolidated Performance Performance by Segment Results by Quarter Fourth Quarter Consolidated Performance Performance by Segment Business Acquisition, Integration and Other (Income) Expenses Finance Costs Income Taxes Contingencies Liquidity and Capital Resources Related Party Transactions Events After the Reporting Period Non-IFRS Financial Measures Governance Accounting Estimates and Standards Risk Factors Forward-Looking Information 12 13 14 15 15 16 17 20 22 23 23 26 27 27 28 28 28 33 34 34 39 39 43 51 Management’s Responsibility Independent Auditors’ Report Consolidated Statements of Financial Position Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Accumulated Other Comprehensive Income (Loss) (“AOCI”) Consolidated Statements of Changes  in Shareholders’ Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements Note 1 Corporate information Note 2  Statement of compliance and basis for presentation Note 3 Significant accounting policies Note 4 Critical accounting estimates and judgments Note 5 Business combinations Note 6 Product recall Note 7 Accounts receivable Note 8 Inventories Note 9 Property, plant and equipment Note 10 Goodwill and intangible assets Note 11 Bank loans Note 12 Accounts payable and accrued liabilities Note 13 Provisions Note 14  Long-term debt and finance lease obligations Note 15 Future employee benefits Note 16 Share capital Note 17 Share-based compensation Note 18 Income tax Note 19 Revenues from contracts with customers Note 20 Earnings per share Note 21  Changes in financial liabilities arising from  financing activities Note 22 Guarantees and commitments Note 23 Related party disclosures Note 24 Operating segment information Note 25 Fair value measurement Note 26 Capital management Note 27  Financial risk management objectives and policies Note 28 Supplemental information Note 29 Events after the reporting period Historical figures 53 54 56 57 58 58 59 60 61 61 61 61 73 75 76 76 77 78 79 81 82 82 83 83 87 88 91 93 93 94 94 95 96 96 99 99 103 103 104 12 HIGH LINER FOODS Management’s Discussion and Analysis For the fifty-two weeks ended December 29, 2018 (All amounts are in United States dollars unless otherwise stated) Introduction This Management’s Discussion and Analysis (“MD&A”), dated February 27, 2019, relates to the financial condition and results of operations of High Liner Foods Incorporated for the fifty-two weeks ended December 29, 2018 (“Fiscal 2018”) compared to the fifty-two weeks ended December 30, 2017 (“Fiscal 2017”). Throughout this discussion, “We”, “Us”, “Our”, “Company” and “High Liner Foods” refer to High Liner Foods Incorporated and its businesses and subsidiaries. This document should be read in conjunction with our 2018 Annual Report along with our Annual Audited Consolidated Financial Statements (“Consolidated Financial Statements”) as at and for the fifty-two weeks ended December 29, 2018, prepared in accordance with International Financial Reporting Standards (“IFRS”). The information contained in this document, including forward-looking statements, is based on information available to management as of February 27, 2019, except as otherwise noted. Comparability of Periods The Company’s fiscal year-end floats, and ends on the Saturday closest to December 31. The Company follows a fifty-two week reporting cycle, which periodically necessitates a fiscal year of fifty-three weeks. Fiscal years 2018, 2017 and 2016 were fifty-two weeks. When a fiscal year contains fifty- three weeks, the reporting cycle is divided into four quarters of thirteen weeks each except for the fourth quarter, which is fourteen weeks in duration. Therefore, amounts presented may not be entirely comparable. Non-IFRS Financial Measures This document also includes certain non-IFRS financial measures, which we use as supplemental indicators of our operating performance and financial position, as well as for internal planning purposes. These non-IFRS measures do not have any standardized meaning as prescribed by IFRS, and therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with IFRS. Non-IFRS financial measures are defined and reconciled to the most directly comparable IFRS measures in the Non-IFRS Financial Measures section starting on page 34 of this MD&A. Currency All amounts in this MD&A are in United States dollars (“USD”), unless otherwise noted. Although the functional currency of High Liner Foods’ Canadian company (the “Parent”) is the Canadian dollar (“CAD”), management believes the USD presentation better reflects the Company’s overall business activities and improves investors’ ability to compare the Company’s consolidated financial results with other publicly traded businesses in the packaged foods industry (most of which are based in the United States (“U.S.”) and report in USD) and should result in less volatility in reported sales and income on the conversion into the presentation currency. For the purpose of presenting the Consolidated Financial Statements in USD, CAD-denominated assets and liabilities in the Parent’s operations are converted using the exchange rate at the reporting date, and revenue and expenses are converted at the average exchange rate of the month in which the transaction occurs. As such, foreign currency fluctuations affect the reported values of individual lines on our balance sheet and income statement. When the USD strengthens (weakening CAD), the reported USD values of the Parent’s CAD-denominated items decrease in the Consolidated Financial Statements, and the opposite occurs when the USD weakens (strengthening CAD). In some parts of this document, balance sheet and operating items of the Parent are discussed in the CAD functional currency (the “domestic currency” of the Parent) to eliminate the effect of fluctuating foreign exchange rates used to translate the Parent’s operations to the USD presentation currency. Forward-Looking Statements This MD&A includes statements that are forward looking. Our actual results may be substantially different because of the risks and uncertainties associated with our business and the general economic environment. We discuss the principal risks of our business in the Risk Factors section on page 43 of this MD&A. We cannot provide any assurance that forecasted financial or operational performance will actually be achieved, and if it is achieved, we cannot provide assurance that it will result in an increase in the Company’s share price. See the Forward-Looking Information section on page 51 of this MD&A. MD&AAnnual Report 2018 13 The Company’s five critical initiatives are: • Organizational Realignment: Important progress has been made on this initiative, as mentioned above to realign the organization to create a “One High Liner Foods” culture that improves efficiency, cuts costs, will facilitate knowledge sharing, organizational best practices and lay the foundation for the critical initiatives that follow. • Business Simplification: The Company will take unnecessary complexity out of its business to ensure the product portfolio is simple, yet powerful and focuses on the best of High Liner Foods – in terms of margins, customer appeal and growth potential. Although this will require certain product eliminations, this will enable the Company to focus its resources on developing and innovating the most profitable and desirable products. • Supply Chain Excellence: The Company will build on efforts to date to create one integrated supply chain by creating a cross-border operating system, increasing the efficiency of manufacturing activities through further centralization and standardization and is focusing its attention on sales and operational planning and continuous improvement. • Rubicon Alignment and Growth: The Company will work to extract the value and synergies in this acquisition that have yet to be fully realized. By fully aligning Rubicon with High Liner Foods, the Company will maximize the opportunity for growth in the shrimp business. • Profitable Organic Growth: The Company will invest in product innovation, research and partnerships to strengthen its customer engagement, shape consumer tastes and demand for our seafood with the goal of returning to profitable growth by 2020. Additional information relating to High Liner Foods, including our most recent Annual Information Form (“AIF”), is available on SEDAR at www.sedar.com and in the Investor Center section of the Company’s website at www.highlinerfoods.com. Company Overview High Liner Foods, through its predecessor companies, has been in business since 1899 and has been a publicly traded Canadian company since 1967, trading under the symbol ‘HLF’ on the Toronto Stock Exchange (“TSX”). We are the leading North American processor and marketer of value-added (i.e. processed) frozen seafood, producing a wide range of products from breaded and battered items to seafood entrées, that are sold to North American food retailers and foodservice distributors. The retail channel includes grocery and club stores and our products are sold throughout the U.S., Canada and Mexico under the High Liner, Fisher Boy, Mirabel, Sea Cuisine and C. Wirthy & Co. labels. The foodservice channel includes sales of seafood that are usually eaten outside the home and our branded products are sold through distributors to restaurants and institutions under the High Liner, Icelandic Seafood1 and FPI labels. The Company is also a major supplier of private- label value-added frozen premium seafood products to North American food retailers and foodservice distributors. We own and operate three food-processing plants located in Lunenburg, Nova Scotia (“NS”), Portsmouth, New Hampshire (“NH”), and Newport News, Virginia (“VA”). Although our roots are in the Atlantic Canadian fishery, we purchase all our seafood raw material and some finished goods from around the world. From our headquarters in Lunenburg, NS, we have transformed our long and proud heritage into global seafood expertise. We deliver on the expectations of consumers by selling seafood products that respond to their demands for sustainable, convenient, tasty and nutritious seafood, at good value. The Company has embarked on a significant undertaking as represented by the five critical initiatives summarized below to eliminate the challenges in its internal operations and strengthen the overall health of the business. The Company expects to execute on the critical initiatives outlined below within nine to twelve months and as previously disclosed, expects to achieve a minimum of $10 million in annualized cost savings, on a run rate basis, associated with these critical initiatives, starting in 2019. Annualized cost savings of $7.0 million were identified as part of the Company’s organizational realignment that was completed in November 2018 (see the Recent Developments section on page 15). 1 In December 2011, as part of our acquisition of the U.S. subsidiary of Icelandic Group h.f., we acquired several brands and agreed to a seven year royalty-free licensing agreement with Icelandic Group for the use of the Icelandic Seafood brand in the U.S., Canada and Mexico. In April 2018, the Company executed a seven year brand license agreement for the continued use of the Icelandic Seafood brand in the U.S. and Canada with royalty payments effective January 2019 (1.5% on net sales of products sold under the Icelandic Seafood brand). MD&A6.0% 6.3% 0% 5% 10% 15% 20% 25 14 HIGH LINER FOODS Financial Objectives Our strategy was designed with the expectation to increase shareholder value. To help us focus on meeting investor expectations, we use three key financial measures to gauge our financial performance: Fiscal 2018 Fiscal 2017 6.6% 5.8% 8.2% 12.1% Return On assets managed On equity Profitability Adjusted EBITDA as a percentage  of sales Financial strength Net interest-bearing debt to  Adjusted EBITDA ratio (times)(1) 5.8x 5.9x (1) Including trailing twelve-month Adjusted EBITDA for Rubicon, net interest- bearing debt to Adjusted EBITDA (see the Non-IFRS Financial Measures section on page 34 of this MD&A for further discussion of Adjusted EBITDA) was 5.6x at December 30, 2017. Each of these financial measures is further discussed below. See the Non-IFRS Financial Measures section starting on page 34 for further explanation of these measures. Return on Assets Managed (“ROAM”) 2018 2017 2016 2015 2014 6.6% 8.2% 12.1% 10.3% 11.3% 0% 5% 10% 15% 20 In 2018, Adjusted EBIT decreased by $5.1 million, or 10.2%, compared to 2017 and the thirteen-month rolling average net assets managed increased by $65.5 million, or 10.7%. The combined impact of these changes was a decrease in ROAM from 8.2% at the end of Fiscal 2017 to 6.6% at the end of Fiscal 2018. The decrease in Adjusted EBIT in 2018 is a result of the same factors causing the $3.6 million decrease in Adjusted EBITDA in 2018 compared to 2017, as discussed in the Consolidated Performance section on page 17 of this MD&A and an increase in depreciation and amortization expense primarily related to the full year impact of the Rubicon Resources LLC (“Rubicon”) acquisition in May 2017. The increase in the average net assets managed in 2018 compared to 2017 is primarily due to the timing of the Rubicon acquisition in 2017, which resulted in higher average inventory held, intangibles, and goodwill, partially offset by an increase in average accounts payable and accrued liabilities over the comparable period. Return on Equity (“ROE”) 2018 2017 2016 2015 2014 5.8% 12.1% 17.6% 17.2% 18.4% In 2018, Adjusted Net Income less share-based compensation expense decreased by $13.6 million, or 46.2%, compared to 2017, and the thirteen-month rolling average common equity increased by $28.9 million, or 11.9%, primarily reflecting the higher average common shares outstanding in 2018 due to the issuance of common shares in May 2017 related to the Rubicon acquisition. The combined impact of these changes resulted in a decrease in ROE from 12.1% at the end of Fiscal 2017 to 5.8% at the end of Fiscal 2018. The decrease in Adjusted Net Income in 2018 compared to 2017 is discussed in the Consolidated Performance section on page 17 of this MD&A. ADJUSTED EBITDA AS A PERCENTAGE OF SALES Adjusted EBITDA as a percentage of sales is calculated as follows: • Adjusted EBITDA as defined in the Non-IFRS Financial Measures section on page 34 of this MD&A, divided by: • Sales as disclosed on the consolidated statements of income. In 2018, Adjusted EBITDA decreased by $3.6 million, or 5.5%, compared to 2017 and sales decreased by $5.3 million, or 0.5%. The combined impact of these changes resulted in a decrease in Adjusted EBITDA as a percentage of sales from 6.3% in 2017 compared to 6.0% in 2018. The decrease in Adjusted EBITDA as a percentage of sales for 2018 compared to 2017 reflects lower gross profit (after adjusting the prior year for the losses associated with the 2017 product recall) and higher distribution expenses, partially offset by lower SG&A expenses in 2018, as discussed in the Consolidated Performance section on page 17 of this MD&A. MD&ANET INTEREST-BEARING DEBT TO ADJUSTED EBITDA Net interest-bearing debt to Adjusted EBITDA is calculated as follows: Recent Developments Organizational Realignment Annual Report 2018 15 • Net interest-bearing debt as defined in the Non-IFRS Financial Measures section on page 38 of this MD&A, divided by: • Adjusted EBITDA as defined in the Non-IFRS Financial Measures section on page 34 of this MD&A. Net interest-bearing debt to Adjusted EBITDA was 5.8x at the end of Fiscal 2018 compared to 5.9x at the end of Fiscal 2017, as shown in the following table: (Amounts in $000s, except as otherwise noted) Net interest-bearing debt Adjusted EBITDA Net interest-bearing debt to  Adjusted EBITDA ratio (times) Twelve months ended December 29, 2018 December 30, 2017 $ $ 360,642 62,474 $ $ 387,869 66,112 5.8x 5.9x U.S. Tariffs In August 2018, the Company communicated plans to optimize the Company’s structure in order to take better advantage of the Company’s North American scale, lower operating costs and improve financial performance. On November 7, 2018, the Company announced an organizational realignment which resulted in a reduction of 14.0% of its salaried workforce. The Company expects to recognize termination benefits of approximately $4.9 million related to this workforce reduction, of which $3.5 million was recognized in the fourth quarter of 2018 as business acquisition, integration and other (income) expense in the consolidated statements of income. The full organizational realignment undertaken in 2018 will generate approximately $7.0 million in net annualized run rate cost savings. During 2018, net interest-bearing debt decreased by $27.3 million and Adjusted EBITDA decreased by $3.6 million. The combined impact of these changes was a decrease in net interest-bearing debt to Adjusted EBITDA for 2018 compared to 2017. The change in net interest-bearing debt is discussed on page 38 of this MD&A, and the change in Adjusted EBITDA is discussed on page 34 of this MD&A. Including trailing twelve month Adjusted EBITDA for Rubicon, net interest-bearing debt to Adjusted EBITDA was 5.6x at December 30, 2017. In the absence of any major acquisitions or strategic initiatives requiring capital expenditures in 2019, we expect this ratio will be lower at the end of Fiscal 2019. Outlook High Liner continues to advise shareholders that until it successfully executes its critical initiatives over the next nine to twelve months, it is likely to continue to face pressure on its financial results due to a number of internal and external factors. Longer term, the Company expects its financial performance to improve and targets a return to profitable growth by 2020. In September 2018, the U.S. Administration announced an additional 10% tariff on certain Chinese imports, including seafood, effective September 24, 2018, increasing to 25% effective January 1, 2019. On December 19, 2018, the U.S. Administration postponed the January 1, 2019 tariff increase, pending negotiations between the U.S. Administration and China. The Company currently purchases its seafood raw materials from more than 20 countries around the world, including from the U.S., to meet U.S. consumer demand. A portion of this raw material is imported into China for primary processing and then exported to the U.S. for sale and secondary processing. The Company has determined that the additional tariff applies to the import of certain species into the U.S., most notably haddock, tilapia and sole/flounder. The estimated exposure of a 10% and 25% tariff in 2019 is approximately $4 million and $9 million, respectively based on current volume and raw material costs; however, the Company has begun implementing plans, including pricing actions and other supply chain initiatives, to mitigate the impact of these tariffs and reduce the estimated impact to the Company. The Company will continue to monitor these developments closely, particularly if further information becomes available regarding potential additional tariffs or how the previously announced tariffs will impact the Company. MD&A16 HIGH LINER FOODS Product Recall Appointment of New President and Chief Executive Officer In 2017, the Company announced a voluntary recall of certain brands of breaded fish and seafood products sold in Canada and the U.S. that may contain a milk allergen that was not declared on the ingredient label and allergen statement. The Company identified that the allergen had originated from ingredients supplied by one of the Company’s U.S. based ingredient suppliers. As a result, during the fifty-two weeks ended December 30, 2017, the Company recognized $13.5 million in net losses associated with the product recall related to consumer refunds, customer fines, the return of product to be re-worked or destroyed, and direct incremental costs. These losses did not include any reduction in earnings as a result of lost sales opportunities due to limited product availability and customer shortages, or increased production costs related to the interruption of production at the Company’s facilities. During the fifty-two weeks ended December 29, 2018, the Company recognized an $8.5 million recovery associated with the product recall losses from the ingredient supplier, which was recognized as business acquisition, integration and other (income) expense in the consolidated statements of income. Subsequent to December 29, 2018, the Company recovered an additional $8.5 million associated with the product recall from the ingredient supplier, for a total recovery of $17.0 million, see Note 6 “Product recall” to the Consolidated Financial Statements for further information). This additional recovery will be recognized during the first quarter of 2019, reflecting the period in which the recovery became virtually certain, in accordance with IFRS. No further recoveries are expected. As a result, the Company has fully recovered the $13.5 million in losses recognized during the fifty-two weeks ended December 30, 2017 related to consumer refunds, customer fines, the return of product to be re-worked or destroyed, and direct incremental costs, and an additional $3.5 million related to lost sales opportunities and increased production costs. See the “Events After the Reporting Period” section on page 34 for further information. Upgrade of Enterprise Resource Planning System During the second quarter of 2018, the Company completed a significant upgrade to its enterprise resource planning (“ERP”) system, which is the business management software that supports the Company’s core business processes. The upgrade provides improved capability to support the organizational realignment, current business objectives and future growth. The upgrade was completed on time, within internal spending targets, and without interruption to customers or the business. Effective May 1, 2018, High Liner Foods’ Board of Directors appointed Rod Hepponstall as President and Chief Executive Officer. Mr. Hepponstall assumed this position from Henry Demone, Chairman of the Board of Directors. Mr. Hepponstall has extensive experience working in the food industry in the United States and Canada, in both retail and foodservice, and most recently, held the position of Senior Vice President, General Manager Retail & Foodservice Business Units at Lamb-Weston Inc., one of the world’s leading suppliers of frozen potato products. In connection with Mr. Hepponstall’s appointment, he also joined the Company’s Board of Directors. Amendments to the Working Capital Credit Facility In April 2018, the Company amended the $180.0 million working capital credit facility (see Note 11 “Bank loans” to the Consolidated Financial Statements) to extend the term from April 2019 to April 2021. There were no other significant changes to the existing terms, other than an amendment to the standby fees paid on the unutilized facility to 0.25%. Performance The discussion and analysis of the Company’s financial results focuses on the performance of the consolidated operations, and the performance of the two reportable segments described in Note 24 “Operating segment information” to the Consolidated Financial Statements: Canada Operations and U.S. Operations. Information is also provided for the “Corporate” category, which includes expenses for corporate functions, share-based compensation costs and business acquisition, integration and other expenses. Seasonality Overall, the first quarter of the year is historically the strongest for both sales and profit, and the second quarter is the weakest. Both our retail and foodservice businesses traditionally experience a strong first quarter due to retailers and restaurants promoting seafood during the Lenten period. As such, the timing of Lent can impact our quarterly results. A significant percentage of advertising and promotional activity is typically done in the first quarter. Customer-specific promotional expenditures such as trade spending, listing allowances and couponing are deducted from “Revenues” and non-customer-specific consumer marketing expenditures are included in selling, general and administrative expenses. MD&AAnnual Report 2018 17 Inventory levels fluctuate throughout the year, most notably increasing to support strong sales periods such as the Lenten period. In addition, the timing of ordering raw materials is earlier than typically required in order to have adequate quantities available during the seasonal closure of plants in Asia during the Lunar New Year period. These events typically result in significantly higher inventories in December, January, February and March than during the rest of the year. Consolidated Performance The table below summarizes key consolidated financial information for the relevant periods. (in $000s, except sales volume, per share amounts, percentage amounts, and exchange rates) Sales volume (millions of lbs) Fifty-two weeks ended Fifty-two weeks ended December 29, 2018 December 30, 2017 284.0 291.8 Change (7.8) December 31, 2016 277.3 Average foreign exchange rate (USD/CAD) $ 1.2956 $ 1.2983 $ (0.0027) $ 1.3248 Sales Sales in domestic currency Foreign exchange impact Sales in USD Gross profit Gross profit as a percentage of sales Distribution expenses Selling, general and administrative expenses Adjusted EBITDA(1) Adjusted EBITDA in domestic currency Foreign exchange impact Adjusted EBITDA in USD Adjusted EBITDA as a percentage of sales Net income Basic Earnings per Share ("EPS") Diluted EPS Adjusted Net Income(1) Adjusted Basic EPS Adjusted Diluted EPS(1),(2) Total assets Total long-term financial liabilities Dividends paid per common share (CAD) $ 1,123,228 $ 1,131,733 (74,697) (77,887) $ 1,048,531 $ 1,053,846 $ 188,157 $ 186,079 17.9% 17.7% $ $ $ $ $ $ $ $ $ $ $ $ $ 52,649 92,208 66,731 (4,257) 62,474 6.0% 16,776 0.50 0.50 17,049 0.51 0.51 837,155 335,364 0.580 $ $ $ $ $ $ $ $ $ $ $ $ $ 49,827 99,449 68,780 (2,668) 66,112 6.3% 31,653 0.98 0.97 30,142 0.93 0.93 907,969 348,774 0.565 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (8,505) $ 1,036,229 3,190 (5,315) 2,078 0.2% 2,822 (7,241) $ $ $ $ (81,243) 954,986 201,807 21.1% 43,610 96,978 (2,049) $ 88,352 (1,589) (6,969) (3,638) $ 81,383 (0.3)% 8.5% (14,877) (0.48) (0.47) (13,093) (0.42) (0.42) (70,814) (13,410) 0.015 $ $ $ $ $ $ $ $ $ 32,284 1.04 1.04 40,284 1.30 1.29 685,108 276,303 0.520 (1) See the Non-IFRS Financial Measures section starting on page 34 for further explanation of Adjusted EBITDA, Adjusted Net Income, and Adjusted Diluted EPS. (2) CAD-Equivalent Adjusted Diluted EPS was $0.66, $1.21 and $1.71 for the fifty-two weeks ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively. See the Non-IFRS Financial Measures section on page 37 for further explanation of CAD-Equivalent Adjusted Diluted EPS. The acquisition of Rubicon on May 30, 2017 had the impact of increasing sales volume by 7.5 million pounds, sales by $35.1 million, gross profit by $4.4 million and Adjusted EBITDA by $1.2 million in 2018 as compared to 2017 as a result of incorporating Rubicon’s results for the full year. Additional information relating to the Rubicon acquisition is available in the Company’s Consolidated Financial Statements for the year ended December 29, 2018. SALES Sales volume in 2018 decreased by 7.8 million pounds, or 2.7%, to 284.0 million pounds compared to 291.8 million pounds in 2017, including the following: • An additional 7.5 million pounds in 2018 from Rubicon, which was acquired on May 30, 2017, compared to 2017; and • Lower sales volume in 2017 associated with the product recall of 2.4 million pounds. MD&A 18 HIGH LINER FOODS Excluding these items, sales volume in 2018 decreased by 17.7 million pounds, or 6.5%, primarily due to lower sales volume in our U.S. retail and foodservice businesses and Canadian retail business, partially offset by higher sales volume in our Canadian foodservice business. Sales in 2018 were $1,048.5 million, representing a decrease of $5.3 million, or 0.5%, compared to $1,053.8 million in 2017. The stronger Canadian dollar in 2018 compared to 2017 increased the value of reported USD sales from our CAD-denominated operations by approximately $0.5 million relative to the conversion impact last year. Sales in domestic currency decreased by $8.5 million, or 0.8%, to $1,123.2 million in 2018 compared to $1,131.7 million in 2017. Excluding the additional sales from Rubicon of $35.1 million and the lower sales during 2017 associated the product recall ($8.8 million), sales decreased by $52.4 million, or 5.1%, due to the lower sales volume mentioned above and changes in product mix, partially offset by price increases related to raw material cost increases. Sales by reportable segment are discussed in more detail in the Performance by Segment section on page 20. GROSS PROFIT Gross profit increased in 2018 by $2.1 million, or 1.1%, to $188.2 million compared to $186.1 million in 2017, reflecting an increase in gross profit as a percentage of sales to 17.9% compared to 17.7% in the prior year and losses associated with the product recall in 2017 ($13.5 million). Excluding the impact of the product recall, gross profit decreased by $11.4 million, or 5.7%, due to the decrease in sales volume previously mentioned, raw material cost increases, unfavourable changes in product mix and U.S. plant inefficiencies, partially offset by the price increases, improved efficiency in our Canadian plant and increased gross profit associated with the inclusion of Rubicon for the full period in the current year. In addition, the stronger Canadian dollar had the effect of increasing the value of reported USD gross profit from our Canadian operations in 2018 by approximately $0.2 million relative to the conversion impact last year. Gross profit by reportable segment is discussed in more detail in the Performance by Segment section on page 20. DISTRIBUTION EXPENSES Distribution expenses, consisting of freight and storage, increased in 2018 by $2.8 million to $52.6 million compared to $49.8 million in the same period last year, due to the acquisition of Rubicon and higher fuel, line-haul and storage costs, partially offset by the lower sales volume mentioned previously. As a percentage of sales, distribution expenses increased to 5.0% in 2018 compared to 4.7% in the same period in 2017. SELLING, GENERAL AND ADMINISTRATIVE (“SG&A”) EXPENSES (Amounts in $000s) Fifty-two weeks ended December 29, 2018 December 30, 2017 SG&A expenses, as reported $ 92,208 $ 99,449 Less: Share-based compensation  expense(1) Depreciation and amortization  expense(1) 1,188 9,441 712 8,296 SG&A expenses, net $ 81,579 $ 90,441 SG&A expenses, net as a  percentage of sales 7.8% 8.6% (1) Represents share-based compensation expense and depreciation and amortization expense that is allocated to SG&A only. The remaining expense is allocated to cost of sales and distribution expenses. SG&A expenses decreased by $7.2 million to $92.2 million in 2018 as compared to $99.4 million in 2017. SG&A expenses included share-based compensation expense of $1.2 million in 2018 compared to an expense of $0.7 million in 2017, primarily reflecting additional stock option grants during the year, partially offset by a lower share price during the year. SG&A expenses also included depreciation and amortization expense of $9.4 million in 2018 compared to $8.3 million in 2017. The increase in depreciation and amortization expense is primarily related to the amortization of intangible assets acquired as part of the Rubicon acquisition in May 2017. Excluding share-based compensation and depreciation and amortization expenses, SG&A expenses decreased in 2018 by $8.8 million to $81.6 million compared to $90.4 million in the same period last year, due to lower administrative expenditures, including termination benefits, and lower consumer marketing expenditures across the Company, reflecting cost saving initiatives. The decrease in SG&A expenses was partially offset by increased expenses associated with the inclusion of Rubicon for the full period in the current year. As a percentage of sales, SG&A excluding share-based compensation and depreciation and amortization expense decreased to 7.8% in 2018 compared to 8.6% in the same period last year. MD&AAnnual Report 2018 19 ADJUSTED EBITDA We refer to Adjusted EBITDA throughout this MD&A, including in the Performance by Segment section on page 20, where Adjusted EBITDA is discussed for both our Canadian and U.S. operations. See the Non-IFRS Financial Measures section on page 34 for further explanation of this non-IFRS measure. Consolidated Adjusted EBITDA decreased in 2018 by $3.6 million, or 5.5%, to $62.5 million compared to $66.1 million in 2017. The impact of converting our CAD- denominated operations and corporate activities to our USD presentation currency decreased the value of reported Adjusted EBITDA in USD by $4.3 million in 2018 compared to $2.7 million in 2017. In domestic currency, Adjusted EBITDA decreased in 2018 by $2.1 million, or 3.0%, to $66.7 million (5.9% of sales) compared to $68.8 million (6.1% of sales) in 2017 reflecting the lower gross profit ($11.8 million) after adjusting for the losses associated with the 2017 product recall and an increase in distribution expenses explained previously, partially offset by the lower SG&A expenses mentioned previously. In addition, Adjusted EBITDA in 2017 included $2.3 million ($2.0 million USD) in product recall costs that were not added back for the purpose of Adjusted EBITDA. The following table shows the impact in 2018 and 2017 of converting our CAD-denominated operations and corporate activities to our USD presentation currency. (Amounts in $000s) External Sales Canada USA Conversion Adjusted EBITDA Canada USA Corporate Conversion Fifty-two weeks ended Fifty-two weeks ended December 29, 2018 USD December 30, 2017 USD % Change USD December 29, 2018 Domestic $ December 30, 2017 Domestic $ % Change Domestic $ $ 253,329 $ 262,063 (3.3)% $ 328,026 $ 339,950 795,202 791,783 0.4% 795,202 791,783 1,048,531 1,053,846 (0.5)% 1,123,228 1,131,733 — — (74,697) (77,887) (3.5)% 0.4% (0.8)% $ 1,048,531 $ 1,053,846 (0.5)% $ 1,048,531 $ 1,053,846 (0.5)% $ 16,039 $ 50,604 (4,169) 62,474 — 13,657 56,991 (4,536) 66,112 — 17.4% $ 20,795 $ (11.2)% (8.1)% (5.5)% 50,604 (4,668) 66,731 (4,257) 17,715 56,991 (5,926) 68,780 (2,668) 17.4% (11.2)% (21.2)% (3.0)% $ 62,474 $ 66,112 (5.5)% $ 62,474 $ 66,112 (5.5)% Adjusted EBITDA as percentage of sales In USD In Domestic $ 6.0% 6.3% 5.9% 6.1% NET INCOME We refer to Adjusted Net Income, Adjusted Diluted EPS and CAD-Equivalent Adjusted Diluted EPS throughout this MD&A. See the Non-IFRS Financial Measures section starting on page 34 for further explanation of these non- IFRS measures. Net income decreased in 2018 by $14.9 million, or 47.0%, to $16.8 million ($0.50 per diluted share) compared to $31.7 million ($0.97 per diluted share) in 2017. The decrease in net income reflects the decrease in Adjusted EBITDA mentioned previously, an impairment of property, plant and equipment, an increase in termination benefits as a result of restructuring activities in the first three quarters of 2018 and the organizational realignment announced in November 2018 (see the Recent Developments section on page 15), an increase in finance costs and depreciation and amortization expense. Additionally, in 2018 the Company had an income tax expense of $6.1 million compared to an income tax recovery of $14.1 million in the same period last year that related to the impact of the reduction in federal corporate income tax rate associated with the U.S. Tax Reform in 2017 (see the Income Taxes section on page 28 of this MD&A). This decrease in net income was partially offset by the product recall recovery of $8.5 million from the ingredient supplier (see the Recent Developments section on page 15). MD&A 20 HIGH LINER FOODS In 2018, net income included “business acquisition, integration and other (income) expense” (as explained in the Business Acquisition, Integration and Other (Income) Expense section on page 27 of this MD&A) related to the product recall recovery mentioned above, termination benefits as a result of restructuring activities in the first three quarters of 2018 and the organizational realignment announced in November 2018, and other non-cash expenses, including an impairment of property, plant and equipment. In 2017, net income included “business acquisition, integration and other (income) expense” related to the acquisition of Rubicon and other business development activities, losses associated with the product recall, and other non-cash expenses. Excluding the impact of these non-routine expenses or other non-cash expenses, and the impact of the U.S. Tax Reform in 2017, Adjusted Net Income in 2018 decreased by $13.1 million, or 43.4%, to $17.0 million compared to $30.1 million in 2017. Adjusted Diluted EPS decreased by $0.42 to $0.51 in 2018 compared to $0.93 in 2017 and when converted to CAD using the average USD/CAD exchange rate for 2018 of 1.2956 (2017: 1.2983), CAD-Equivalent Adjusted Diluted EPS decreased by CAD$0.55 to CAD$0.66 in 2018 compared to CAD$1.21 in 2017 due to the increase in the weighted average number of shares outstanding associated with the acquisition of Rubicon and the decrease in Adjusted Net Income explained above. Performance by Segment CANADIAN OPERATIONS (All currency amounts in this section are in CAD) (in $000s, except sales volume and percentage amounts) Sales volume (millions of lbs) Sales Gross profit Gross profit as a percentage of sales Adjusted EBITDA(1) Adjusted EBITDA as a percentage of sales Fifty-two weeks ended December 29, 2018 December 30, 2017 $ $ $ 66.6 328,026 60,576 18.5% 20,795 6.3% $ $ $ 68.9 339,950 59,358 17.5% 17,715 5.2% $ $ $ Change (2.3) (11,924) 1,218 1.0% 3,080 1.1% (1) See the Non-IFRS Financial Measures section on page 34 for further explanation of Adjusted EBITDA. Sales volume for our Canadian operations decreased in 2018 by 2.3 million pounds to 66.6 million pounds compared to 68.9 million pounds in 2017. Excluding the reduced sales volume associated with the product recall during 2017 (0.4 million pounds), sales volume in 2018 decreased by 2.7 million pounds, or 3.9% reflecting lower sales volume in the retail business, partially offset by higher volume in the foodservice business. Sales in 2018 decreased by $12.0 million, or 3.5%, to $328.0 million compared to $340.0 million in 2017. Excluding the sales impact of the 2017 product recall ($2.8 million), sales in 2018 decreased by $14.8 million, or 4.3%, primarily reflecting the decreased sales volume and changes in product mix, partially offset by price increases related to raw material cost increases. Gross profit increased in 2018 by $1.2 million to $60.6 million (18.5% of sales) compared to $59.4 million (17.5% of sales) in 2017. Excluding the losses associated with the 2017 product recall ($5.0 million), gross profit decreased by $3.8 million, or 6.0%, reflecting the lower sales volume noted above, changes in product mix and raw material cost increases, partially offset by the price increases and improvement in plant efficiency. Adjusted EBITDA for our Canadian operations increased in 2018 by $3.1 million, or 17.4%, to $20.8 million (6.3% of sales) compared to $17.7 million (5.2% of sales) in 2017, primarily reflecting decreased SG&A expenses due to lower administrative and consumer marketing expenses, partially offset by the lower gross profit ($3.8 million) after adjusting for the losses associated with the 2017 product recall, and increased distribution expenses. In addition, Adjusted EBITDA in 2017 included $1.4 million in product recall costs that were not added back for the purpose of Adjusted EBITDA. MD&AU.S. OPERATIONS (All currency amounts in this section are in USD) (in $000s, except sales volume and percentage amounts) Sales volume (millions of lbs) Sales Gross profit Gross profit as a percentage of sales Adjusted EBITDA(1) Adjusted EBITDA as a percentage of sales Annual Report 2018 21 Fifty-two weeks ended December 29, 2018 December 30, 2017 $ $ $ 217.3 795,202 140,775 17.7% 50,604 6.4% $ $ $ 222.9 791,783 140,372 17.7% 56,991 7.2% $ $ $ Change (5.6) 3,419 403 —% (6,387) (0.8)% (1) See the Non-IFRS Financial Measures section on page 34 for further explanation of Adjusted EBITDA. Sales volume for our U.S. operations decreased by 5.6 million pounds, or 2.5%, in 2018 to 217.3 million pounds compared to 222.9 million pounds in 2017, including the following: • An additional 7.5 million pounds in 2018 from Rubicon, which was acquired on May 30, 2017, as compared to 2017; and • Lower sales volume in 2017 related to the product recall of 1.9 million pounds. Excluding the impact of these items, sales volume for the 2018 decreased by 15.0 million, or 7.4%, reflecting lower sales volume in both the retail and foodservice businesses. Sales in 2018 increased by $3.4 million, or 0.4%, to $795.2 million compared to $791.8 million in 2017, primarily reflecting the additional sales from Rubicon ($35.1 million) and lower sales during 2017 associated with the product recall ($6.0 million). Excluding the impact of these items, sales decreased by $37.7 million, or 5.5%, primarily due to the decreased volume mentioned above and changes in product mix, partially offset by price increases related to raw material cost increases. Gross profit increased in 2018 by $0.4 million to $140.8 million (17.7% of sales) compared to $140.4 million (17.7% of sales) in 2017, reflecting the losses associated with the product recall in 2017 ($9.6 million). Excluding the impact the 2017 product recall, gross profit decreased by $9.2 million, or 6.1%, primarily due to the lower sales volume mentioned above, raw material cost increases, plant inefficiencies and product mix, partially offset by the price increases and increased gross profit associated with the inclusion of Rubicon for the full period in the current year. Adjusted EBITDA for our U.S. operations decreased in 2018 by $6.4 million, or 11.2%, to $50.6 million (6.4% of sales) compared to $57.0 million (7.2% of sales) in 2017 reflecting the lower gross profit ($9.2 million) after adjusting for the losses associated with the 2017 product recall, and increases in distribution expenses that were partially related to the inclusion of Rubicon for the full period in the current year. The decrease in Adjusted EBITDA was partially offset by lower SG&A expenses due to lower consumer marketing expenditures and lower administrative expenses, despite the inclusion of Rubicon for a full period in the current year. In addition, Adjusted EBITDA in 2017 included $0.9 million in recall costs that were not added back for the purpose of Adjusted EBITDA. MD&A22 HIGH LINER FOODS RESULTS BY QUARTER The following table provides summarized financial information for the last eight quarters: FISCAL 2018 (Amounts in $000s, except per share amounts) Sales Adjusted EBITDA(1) Net Income Basic EPS Diluted EPS Adjusted Net Income(1) Adjusted Basic EPS Adjusted Diluted EPS(1) Dividends paid per common share (in CAD) Net non-cash working capital(2) FISCAL 2017 (Amounts in $000s, except per share amounts) Sales Adjusted EBITDA(1) Net Income Basic EPS Diluted EPS Adjusted Net Income(1) Adjusted Basic EPS Adjusted Diluted EPS(1) Dividends paid per common share (in CAD) Net non-cash working capital(2) First quarter 319,184 24,221 10,251 0.31 0.31 10,703 0.32 0.32 0.145 244,764 First quarter 275,735 22,337 10,742 0.35 0.34 10,815 0.34 0.34 0.140 218,832 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Second quarter 245,312 12,050 2,804 0.08 0.08 3,766 0.11 0.11 0.145 227,935 Second quarter 232,385 13,417 644 0.02 0.02 6,054 0.19 0.19 0.140 206,094 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Third quarter 241,157 14,235 4,531 0.13 0.13 412 0.01 0.01 0.145 233,916 Third quarter 282,704 17,298 6,040 0.18 0.18 8,424 0.25 0.25 0.140 208,507 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Fourth quarter Full year 242,878 $ 1,048,531 11,968 (810) (0.02) (0.02) 2,169 0.07 0.07 0.145 227,223 $ $ $ $ $ $ $ $ $ 62,474 16,776 0.50 0.50 17,049 0.51 0.51 0.580 227,223 Fourth quarter Full year 263,022 $ 1,053,846 13,060 14,227 0.43 0.43 4,849 0.15 0.15 0.145 239,102 $ $ $ $ $ $ $ $ $ 66,112 31,653 0.98 0.97 30,142 0.93 0.93 0.565 239,102 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) See the Non-IFRS Financial Measures section starting on page 34 for further explanation of Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS. (2) Net non-cash working capital comprises accounts receivable, inventories and prepaid expenses, less accounts payable and accrued liabilities, contract liability, and provisions. MD&AAnnual Report 2018 23 FOURTH QUARTER Consolidated Performance (in $000s, except sales volume, per share amounts, percentage amounts and exchange rates) Sales volume (millions of lbs) Thirteen weeks ended Thirteen weeks ended December 29, 2018 December 30, 2017 66.1 71.6 Change (5.5) December 31, 2016 62.4 Average foreign exchange rate (USD/CAD) $ 1.3197 $ 1.2715 $ 0.0482 $ 1.3341 Sales Sales in domestic currency Foreign exchange impact Sales in USD Gross profit Gross profit as a percentage of sales Distribution expenses Selling, general and administrative expenses Adjusted EBITDA(1) Adjusted EBITDA in domestic currency Foreign exchange impact Adjusted EBITDA in USD Adjusted EBITDA as a percentage of sales Net (loss) income Basic EPS Diluted EPS Adjusted Net Income(1) Adjusted EPS Adjusted Diluted EPS(1) $ 261,224 $ 280,917 $ (19,693) $ 229,580 (18,346) (17,895) (451) (20,787) $ $ $ $ $ $ $ $ $ $ $ $ 242,878 40,287 16.6% 12,125 20,959 13,663 (1,695) 11,968 4.9% (810) (0.02) (0.02) 2,169 0.07 0.07 $ $ $ $ $ $ $ $ $ $ $ $ 263,022 44,504 16.9% 13,328 24,609 13,355 (295) 13,060 5.0% 14,227 0.43 0.43 4,849 0.15 0.15 $ $ $ $ $ $ $ $ $ $ $ $ (20,144) (4,217) (0.3)% (1,203) (3,650) $ $ $ $ 208,793 46,632 20.9% 10,023 21,300 308 $ 17,986 (1,400) (1,869) (1,092) $ 16,117 (0.1)% 7.7% (15,037) (0.45) (0.45) (2,680) (0.08) (0.08) $ $ $ $ $ $ 6,658 0.22 0.21 6,969 0.22 0.22 (1) See the Non-IFRS Financial Measures section starting on page 34 for further explanation of Adjusted EBITDA, Adjusted Net Income and Adjusted Diluted EPS. SALES Consolidated sales volume for the fourth quarter of 2018 decreased by 5.5 million pounds, or 7.6%, to 66.1 million pounds compared to 71.6 million pounds in the same period in 2017 due to lower sales volumes in our Canadian retail business and our U.S. retail and foodservice businesses. Sales in the fourth quarter of 2018 decreased by $20.1 million, or 7.7%, to $242.9 million compared to $263.0 million in the same period last year. The weaker Canadian dollar in the fourth quarter of 2018 compared to the same quarter of 2017 decreased the value of USD sales from our CAD-denominated operations by approximately $2.2 million relative to the conversion impact last year. Sales in domestic currency decreased by $19.7 million, or 7.0%, to $261.2 million in the fourth quarter of 2018 compared to $280.9 million in the fourth quarter of 2017. Excluding the decrease in sales during the fourth quarter of 2017 associated with the revision of estimated product returns related to the product recall ($0.4 million), sales decreased by $20.1 million, or 7.1%, mainly due to the decreased volume mentioned previously and changes in product mix, partially offset by price increases related to raw material cost increases. GROSS PROFIT Gross profit decreased in the fourth quarter of 2018 by $4.2 million, or 9.5%, to $40.3 million compared to $44.5 million in the same period in 2017, partially reflecting a decrease in gross profit as a percentage of sales to 16.6% compared to 16.9%. Gross profit in the fourth quarter of 2017 included losses associated with the product recall in 2017 ($1.5 million). Excluding the impact of the recall, gross profit decreased by $5.7 million to $40.3 million (16.6% as a percentage of sales) compared to $46.0 million in the same period of 2017 (17.5% as a percentage of sales), due to lower sales volume, raw material cost increases, unfavourable changes in product mix and U.S. plant inefficiencies, partially offset by the price increases. In addition, the weaker Canadian dollar had the effect of decreasing the value of reported USD gross profit from our Canadian operations in 2018 by approximately $0.4 million relative to the conversion impact last year. MD&A24 HIGH LINER FOODS DISTRIBUTION EXPENSES Distribution expenses, consisting of freight and storage, decreased in the fourth quarter of 2018 by $1.2 million to $12.1 million compared to $13.3 million in the same period in 2017, primarily due to the lower sales volume, partially offset by higher fuel and line-haul costs. As a percentage of sales, these expenses decreased to 5.0% in the fourth quarter of 2018 compared to 5.1% in the same period in 2017. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES SG&A expenses decreased in the fourth quarter of 2018 by $3.6 million to $21.0 million compared to $24.6 million in the same period last year. SG&A expenses included share-based compensation expense of $0.2 million in the fourth quarter of 2018 compared to a nominal recovery for the same period in 2017. SG&A expenses also included depreciation and amortization expense of $2.4 million in the fourth quarter of 2018 and $2.3 million in the same period of 2017. Excluding share-based compensation and depreciation and amortization expenses, SG&A expenses decreased in the fourth quarter of 2018 by $3.9 million to $18.4 million compared to $22.3 million in the same period last year, due to lower administrative expenses, termination benefits and consumer marketing expenditures across the Company, reflecting cost saving initiatives. As a percentage of sales, SG&A excluding share-based compensation and depreciation and amortization expense decreased to 7.6% in the fourth quarter of 2018 compared to 8.5% in the same period last year. ADJUSTED EBITDA Consolidated Adjusted EBITDA decreased in the fourth quarter of 2018 by $1.1 million, or 8.4%, to $12.0 million compared to $13.1 million in 2017. The impact of converting our CAD-denominated operations and corporate activities to our USD presentation currency decreased the value of reported Adjusted EBITDA in USD by $1.7 million in the fourth quarter of 2018 compared to $0.3 million in 2017. In domestic currency, Adjusted EBITDA increased in the fourth quarter of 2018 by $0.3 million, or 2.3%, to $13.7 million (5.2% of sales) compared to $13.4 million (4.8% of sales) in 2017. The increase in Adjusted EBITDA reflects lower distribution expenses and SG&A expenses across the Company, partially offset by the lower gross profit ($5.0 million) after adjusting for the losses associated with the 2017 product recall. MD&AThe following table shows the impact in the fourth quarter of 2018 and 2017 of converting our CAD-denominated operations and corporate activities to our USD presentation currency. Annual Report 2018 25 (Amounts in $000s) External Sales Canada USA Conversion Adjusted EBITDA Canada USA Corporate Conversion Thirteen weeks ended Thirteen weeks ended December 29, 2018 USD December 30, 2017 USD % Change USD December 29, 2018 Domestic $ December 30, 2017 Domestic $ % Change Domestic $ $ 57,509 $ 65,928 (12.8)% $ 75,855 $ 83,823 185,369 242,878 — 197,094 263,022 — (5.9)% (7.7)% 185,369 261,224 197,094 280,917 (18,346) (17,895) (9.5)% (5.9)% (7.0)% $ 242,878 $ 263,022 (7.7)% $ 242,878 $ 263,022 (7.7)% $ $ 4,700 8,825 (1,557) 11,968 — 3,476 11,231 (1,647) 13,060 — 35.2% $ (21.4)% (5.5)% (8.4)% $ 6,223 8,825 (1,385) 13,663 (1,695) 4,418 11,231 (2,294) 13,355 (295) 40.9% (21.4)% (39.6)% 2.3% $ 11,968 $ 13,060 (8.4)% $ 11,968 $ 13,060 (8.4)% Adjusted EBITDA as percentage of sales In USD In Domestic $ 4.9% 5.0% 5.2% 4.8% NET (LOSS) INCOME Net income decreased in the fourth quarter of 2018 by $15.0 million, or 105.7%, to a net loss of $0.8 million ($0.02 loss per diluted share) compared to net income of $14.2 million ($0.43 per diluted share) in 2017. The decrease in net income reflects the lower income tax recovery during the fourth quarter of 2018 of $1.7 million compared to the $13.5 million recovery in the same period last year related to the impact of the reduction in federal corporate income tax rate associated with the U.S. Tax Reform (see the Income Taxes section on page 28 of this MD&A). Additionally, net income decreased due to the decrease in Adjusted EBITDA mentioned previously, an impairment of property, plant and equipment, an increase in termination benefits associated with the organizational realignment announced in November 2018 (see the Recent Developments section on page 15) and an increase in finance costs. In 2018, net loss included “business acquisition, integration and other (income) expense” (as explained in the Business Acquisition, Integration and Other (Income) Expense section on page 27 of this MD&A) related to termination benefits associated with the organizational realignment and other non-cash expenses, including an impairment of property, plant and equipment. In 2017, net income included “business acquisition, integration and other (income) expense” related to business development activities, termination benefits associated with restructuring activities, losses related to the product recall, and other non-cash expenses. Excluding the impact of these non-routine or non-cash expenses and the impact of the U.S. Tax Reform in 2017, Adjusted Net Income in the fourth quarter of 2018 decreased by $2.6 million, or 55.3%, to $2.2 million compared to $4.8 million in 2017. Correspondingly, Adjusted Diluted EPS decreased by $0.08 to $0.07 compared to $0.15 in the fourth quarter of 2017, and when converted to CAD using the average USD/CAD exchange rate for the period of 1.3197 (2017: 1.2715), CAD-Equivalent Adjusted Diluted EPS decreased by CAD$0.10 to CAD$0.09 compared to CAD$0.19 in the fourth quarter of 2017. MD&A26 HIGH LINER FOODS Performance by Segment CANADIAN OPERATIONS (All currency amounts in this section are in CAD) (in $000s, except sales volume and percentage amounts) Sales volume (millions of lbs) Sales Gross profit Gross profit as a percentage of sales Adjusted EBITDA(1) Adjusted EBITDA as a percentage of sales Thirteen weeks ended December 29, 2018 December 30, 2017 $ $ $ 15.7 75,855 14,562 $ $ 17.0 83,823 14,784 19.2% 17.6% 6,223 $ 4,418 8.2% 5.3% $ $ $ Change (1.3) (7,968) (222) 1.6% 1,805 2.9% (1) See the Non-IFRS Financial Measures section on page 34 for further explanation of Adjusted EBITDA. THIRTEEN WEEKS Sales volume for our Canadian operations decreased in the fourth quarter of 2018 by 1.3 million pounds to 15.7 million pounds as compared to 17.0 million pounds in 2017 primarily reflecting lower sales volume in the retail business. Sales in the fourth quarter decreased by $8.0 million, or 9.5%, to $75.8 million compared to $83.8 million in the same period of 2017. Excluding the incremental sales during the fourth quarter of 2017 associated with the revision of estimated product returns related to the product recall ($0.1 million), sales in the fourth quarter of 2018 decreased by $7.9 million, or 9.4%, due to decreased sales volume and changes in product mix, partially offset by price increases related to raw material cost increases. Gross profit decreased by $0.2 million in the fourth quarter of 2018 to $14.6 million compared to $14.8 million in 2017, while gross profit as a percentage of sales increased to 19.2% U.S. OPERATIONS (All currency amounts in this section are in USD) in the fourth quarter of 2018 compared to 17.6% in 2017. Excluding the losses associated with the 2017 product recall ($0.1 million), gross profit decreased by $0.3 million, or 2.3%, reflecting the lower sales volume mentioned above and raw material cost increases, partially offset by price increases and favorable changes in product mix resulting in a higher gross profit as a percentage of sales as noted above. Adjusted EBITDA for our Canadian operations increased during the fourth quarter of 2018 by $1.8 million, or 40.9%, to $6.2 million (8.2% of sales) as compared to $4.4 million (5.3% of sales) in 2017, reflecting lower distribution, consumer marketing and administrative expenses, partially offset by the lower gross profit ($0.3 million) after adjusting for the losses associated with the 2017 product recall. (in $000s, except sales volume and percentage amounts) Sales volume (millions of lbs) Sales Gross profit Gross profit as a percentage of sales Adjusted EBITDA(1) Adjusted EBITDA as a percentage of sales (1) See the Non-IFRS Financial Measures section on page 34 for further explanation of Adjusted EBITDA. Thirteen weeks ended December 29, 2018 December 30, 2017 50.5 185,369 29,035 54.6 $ $ 197,094 33,115 15.7% 16.8% 8,825 $ 11,231 $ $ $ $ $ $ Change (4.1) (11,725) (4,080) 1.1% (2,406) 4.8% 5.7% (0.9)% MD&AAnnual Report 2018 27 THIRTEEN WEEKS Sales volume for our U.S. operations decreased by 4.1 million pounds, or 7.6%, in the fourth quarter of 2018 to 50.5 million pounds compared to 54.6 million pounds in 2017, due to lower sales volume from the foodservice and retail businesses. Sales during the fourth quarter decreased by $11.7 million, or 5.9%, to $185.4 million compared to $197.1 million in 2017, partially reflecting lower sales during the fourth quarter of 2017 associated with the product recall ($0.5 million). Excluding the impact of the recall, sales decreased by $12.2 million, or 6.2%, primarily due to the lower sales volume mentioned above, partially offset by price increases to recover raw material cost increases and changes in product mix. Gross profit decreased in the fourth quarter of 2018 by $4.1 million to $29.0 million (15.7% of sales) compared to $33.1 million (16.8% of sales) in the same period last year. Excluding the non-reoccurring losses associated with the 2017 product recall ($1.4 million), gross profit decreased by $5.5 million, or 16.0%, due to plant inefficiencies, the lower sales volume mentioned above, raw material cost increases and unfavourable changes in product mix, partially offset by price increases related to raw material cost increases. Adjusted EBITDA for our U.S. operations decreased during the fourth quarter of 2018 by $2.4 million, or 21.4%, to $8.8 million (4.8% of sales), compared to $11.2 million (5.7% of sales) in 2017 reflecting the lower gross profit ($5.5 million) after adjusting for the losses associated with the 2017 product recall, partially offset by lower consumer marketing and administrative expenses. Business Acquisition, Integration and Other (Income) Expenses The Company reports expenses associated with business acquisition and integration activities, and certain other non-routine costs separately in its consolidated statements of income as follows: (Amounts in $000s) Thirteen weeks ended Fifty-two weeks ended December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017 Business acquisition, integration and other (income) expense $ 3,631 $ 991 $ (2,471) $ 2,639 Business acquisition, integration and other (income) expense for the fifty-two weeks ended December 29, 2018 included the recognition of an $8.5 million recovery associated with the 2017 product recall from the ingredient supplier, partially offset by termination benefits as a result of restructuring activities during the first three quarters of 2018 and the organizational realignment initiated in November 2018 of $3.5 million. See Recent Developments section on page 15 of this MD&A for further discussion. In 2017, business acquisition, integration and other (income) expense included costs related to the acquisition of Rubicon, termination benefits related to restructuring activities, and other strategic business development activities. Finance Costs The following table shows the various components of the Company’s finance costs: (Amounts in $000s) Interest paid in cash during the period Change in cash interest accrued during the period Total interest to be paid in cash Deferred financing cost amortization Total finance costs Thirteen weeks ended Fifty-two weeks ended December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017 $ 5,229 $ 4,549 $ 19,917 $ 14,745 344 5,573 215 71 4,620 221 812 20,729 874 1,160 15,905 721 $ 5,788 $ 4,841 $ 21,603 $ 16,626 Finance costs were $1.0 million higher in the fourth quarter of 2018 and $5.0 million higher in 2018 compared to the same periods last year due to higher interest rates and higher average net interest-bearing debt during 2018 compared to 2017. MD&A28 HIGH LINER FOODS Income Taxes High Liner Foods’ effective income tax rate for the year ended December 29, 2018 was an expense of 26.6% compared to a recovery of 80.5% in 2017. In the fourth quarter of 2018, the effective tax rate was a recovery of 67.8% compared to a recovery of 1,835.6% in the fourth quarter of 2017. The higher effective tax rate for the year and quarter ended December 29, 2018 compared to the same period last year was attributable to the reduced interest expense deductibility associated with the Company’s tax efficient financing structures and the recognition of transitional tax benefits in the fourth quarter of 2017 triggered by the U.S. Tax Reform resulting in a revaluation of the deferred tax liability for changes in substantively enacted tax rates. The applicable statutory rates in Canada and the U.S. were 29.2% and 27.6%, respectively. On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was signed into law, which reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the U.S. Tax Reform, the Company’s net deferred tax liability at December 30, 2017 decreased by $11.2 million. The U.S. Tax Reform introduced other important changes in the U.S. corporate income tax laws, including the creation of a new Base Erosion Anti-Abuse Tax that subjects certain payments from U.S. corporations to foreign related parties to additional taxes, and limitations to certain deductions for net interest expense incurred by U.S. corporations. The U.S. Tax Reform also included an increase in bonus depreciation from 50% to 100% for qualified property placed in service after September 27, 2017 and before 2023. Future regulations and interpretations may be issued by U.S. authorities that may also impact the Company’s estimates and assumptions used in calculating its income tax provisions. See Note 18 “Income tax” to the Consolidated Financial Statements for full information with respect to income taxes. Per credit agreement Canadian Prime Rate revolving loans, Canadian Base Rate revolving and  U.S. Prime Rate revolving loans, at their respective rates Bankers’ Acceptances (“BA”) revolving loans, at BA rates LIBOR revolving loans at LIBOR, at their respective rates Letters of credit, with fees of Standby fees, required to be paid on the unutilized facility, of Contingencies The Company has no material outstanding contingencies. Liquidity and Capital Resources The Company’s balance sheet is affected by foreign currency fluctuations, the effect of which is discussed in the Introduction section on page 12 of this MD&A (under the heading “Currency”) and in the Foreign Currency risk discussion on page 49 (in the Risk Factors section). Our capital management practices are described in Note 26 “Capital management” to the 2018 Consolidated Financial Statements. Working Capital Credit Facility The Company entered into an asset-based working capital credit facility in November 2010 with the Royal Bank of Canada as Administrative and Collateral agent, which would expire by its terms in April 2019. There have been several amendments made to this facility, with the most substantial amendment occurring in April 2014 when it was amended concurrently with the term loan, and increased from $120.0 million to $180.0 million. In April 2018, the Company amended the working capital credit facility to extend the term from April 2019 to April 2021. There were no other significant changes to the existing terms, other than an amendment to the standby fees paid on the unutilized facility to 0.25% (previously a range of 0.25% to 0.375%). The working capital credit facility provides for the rates noted in the following table, based on the “Average Adjusted Aggregate Availability” as defined in the credit agreement. The Company’s borrowing rates as of December 29, 2018 are also noted in the following table. As at December 29, 2018 plus 0.00% to 0.25% plus 1.25% to 1.75% plus 1.25% to 1.75% 1.25% to 1.75% 0.25% plus 0.00% plus 1.25% plus 1.25% 1.25% 0.25% Average short-term borrowings outstanding during 2018 were $46.8 million compared to $24.1 million in 2017. This $22.7 million increase primarily reflects increased borrowing due to the acquisition of Rubicon in May 2017, reduced cash flow provided by operations in the latter half of Fiscal 2017 and increased working capital requirements during the first half of 2018, partially offset by higher payments in the latter half of 2018. MD&AAnnual Report 2018 29 At the end of the fourth quarter of 2018, the Company had $118.2 million (December 30, 2017: $111.8 million) of unused borrowing capacity, taking into account both margin calculations and the total line availability. Included in this amount are letters of credit, which reduce the availability under the working capital credit facility. On December 29, 2018, letters of credit and standby letters of credit were outstanding in the amount of $15.4 million (December 30, 2017: $14.7 million) to support raw material purchases and to secure certain contractual obligations, including those related to the Company’s Supplemental Executive Retirement Plan (“SERP”). The facility is asset-based and collateralized by the Company’s inventories, accounts receivable and other personal property in Canada and the U.S., subject to a first charge on brands, trade names and related intangibles under the Company’s term loan facility, and excluding the assets acquired as part of the Rubicon acquisition. A second charge over the Company’s property, plant and equipment is also in place. Additional details regarding the Company’s working capital credit facility are provided in Note 11 “Bank loans” to the Consolidated Financial Statements. In the absence of any major acquisitions or capital expenditures, we expect average short-term borrowings by the end of 2019 to be lower than 2018, and we believe the asset-based working capital credit facility should be sufficient to fund all of the Company’s anticipated cash requirements. Term Loan Facility The Company entered into a term loan in December 2011. There have been several amendments made to the term loan with the most recent being in April 2014, when it was amended concurrently with the working capital credit facility and increased to $300.0 million. In June 2017, the term loan facility was increased from $300.0 million to $370.0 million to facilitate the Rubicon acquisition. The $70.0 million addition to the term loan was made in accordance with the term loan credit agreement, which provides for incremental increases that meet stated provisions, at consistent terms. Minimum repayments on the term loan are required on an annual basis, plus, based on a leverage test, additional payments could be required of up to 50% of the previous year’s defined excess cash flow. There were excess cash flows in 2015, due largely to decreased working capital and capital expenditures in 2015 as compared to 2014, and as a result, an excess cash flow payment of $11.8 million was made in March 2016. In addition, the Company made a voluntary repayment of $15.0 million during the second quarter of 2016 to reduce excess cash balances. Quarterly principal repayments of $0.9 million are required on the term loan; however, as per the loan agreement, the mandatory excess cash flow payment and the voluntary repayment will be applied to future regularly scheduled principal repayments. As such, no regularly scheduled principal repayments were paid in 2018 and no principal repayments are required for 2019. There were excess cash flows in 2018, primarily due to higher cash flows from operations and lower capital expenditures in 2018 compared to 2017, and as a result an excess cash flow payment of $13.7 million is payable as at December 29, 2018. Substantially all tangible and intangible assets (excluding working capital) of the Company are pledged as collateral for the term loan. During the fifty-two weeks ended December 29, 2018, the Company had the following interest rate swaps outstanding to hedge interest rate risk resulting from the term loan facility: Effective date Maturity date Receive floating rate Pay fixed rate Designated in a formal hedging relationship: Notional amount (millions) December 31, 2014 December 31, 2019 3-month LIBOR (floor 1.0%) 2.1700%   $ March 4, 2015 April 4, 2016 April 4, 2016 January 4, 2018 March 4, 2020 3-month LIBOR (floor 1.0%) 1.9150%   $ April 4, 2018 3-month LIBOR (floor 1.0%) 1.2325%   $ April 24, 2021 3-month LIBOR (floor 1.0%) 1.6700%   $ April 24, 2021 3-month LIBOR (floor 1.0%) 2.2200%   $ 20.0 25.0 35.0 40.0 80.0 As of December 29, 2018, the combined impact of the interest rate swaps listed above effectively fix the interest rate on $165.0 million of the $370.0 million face value of the term loan and the remaining portion of the debt continues to be at variable interest rates. As such, we expect that there will be fluctuations in interest expense due to changes in interest rates when LIBOR is higher than the embedded floor of 1.0%. Additional details regarding the Company’s term loan are provided in Note 14 “Long-term debt and finance lease obligations” to the Consolidated Financial Statements. MD&A30 HIGH LINER FOODS Net Interest-Bearing Debt The Company’s net interest-bearing debt (as calculated in the Non-IFRS Financial Measures section on page 38 of this MD&A) is comprised of the working capital credit and term loan facilities (excluding deferred finance costs) and finance leases, less cash. Net interest-bearing debt decreased by $27.3 million to $360.6 million at December 29, 2018 compared to $387.9 million at December 30, 2017, reflecting higher payments in the latter half of 2018 due to higher cash flow from operating activities during 2018 compared to 2017, partially due to improved inventory management, lower capital expenditures and a higher cash balance on hand as at December 29, 2018 compared to December 30, 2017. Capital Structure Net interest-bearing debt to rolling twelve-month Adjusted EBITDA (see the Non-IFRS Financial Measures section on page 34 of this MD&A for further discussion of Adjusted EBITDA) was 5.8x at December 29, 2018 compared to 5.9x at the end of Fiscal 2017, as shown in the table in the Financial Objectives section on page 14 of this MD&A. Including trailing twelve-month Adjusted EBITDA for Rubicon, net interest- bearing debt to rolling twelve-month Adjusted EBITDA was 5.6x at the end of Fiscal 2017. In the absence of any major acquisitions or strategic initiatives requiring capital expenditures in 2019, we expect this ratio will be lower at the end of Fiscal 2019. At December 29, 2018, net interest-bearing debt was 58.0% of total capitalization compared to 59.1% at December 30, 2017. (Amounts in $000s) Net interest-bearing debt Shareholders’ equity Unrealized gains on derivative financial instruments included in AOCI Total capitalization Net interest-bearing debt as percentage of total capitalization Using our December 29, 2018 market capitalization of $178.9 million, based on a share price of CAD$7.30 (USD$5.36 equivalent), instead of the book value of equity, net interest-bearing debt as a percentage of total capitalization increased to 66.8%. Normal Course Issuer Bid In January 2017, we filed a new Normal Course Issuer Bid (“2017 NCIB”) to purchase up to 150,000 common shares. The 2017 NCIB terminated on February 8, 2018. During the fifty-two weeks ended December 30, 2017 there were no purchases under this plan. In January 2018, we filed a new NCIB (“2018 NCIB”) to purchase up to 150,000 common shares. The 2018 NCIB terminates on February 1, 2019. During the fifty-two weeks ended December 29, 2018 there were no purchases under this plan. The Company has established an automatic securities purchase plan for the common shares of the Company for all the bids listed above with a termination date coinciding with the NCIB termination date. The preceding plans also constitute an “automatic plan” for purposes of applicable Canadian Securities Legislation and have been approved by the TSX. December 29, 2018 December 30, 2017 $ 360,642 $ 387,869 263,859 (2,215) 268,867 (220) $ 622,286 $ 656,516 58.0% 59.1% Dividends As shown in the following table, the quarterly dividend on the Company’s common shares increased one time during the last two fiscal years. The quarterly dividends paid in the last two years were as follows: Dividend record date December 1, 2018 September 1, 2018 June 1, 2018 March 1, 2018 December 1, 2017 September 1, 2017 June 1, 2017 March 1, 2017 Quarterly dividend CAD   $   $   $   $   $   $   $   $ 0.145 0.145 0.145 0.145 0.145 0.140 0.140 0.140 Dividends and NCIBs are subject to restrictions as follows: • Under the working capital credit facility, Average Adjusted Aggregate Availability, as defined in the credit agreement, must be $22.5 million or higher, and was $109.8 million on December 29, 2018, and NCIBs are subject to an annual limit of $10.0 million with a provision to carry forward unused amounts subject to a maximum of $20.0 million per annum; and MD&AAnnual Report 2018 31 • Under the term loan facility, dividends cannot exceed $17.5 million per year. This amount increases to the greater of $25.0 million per year or the defined available amount based on excess cash flow accumulated over the term of the loan when the defined total leverage ratio is below 4.5x, and becomes unlimited when the defined total leverage ratio is below 3.75x. The defined total leverage ratio was 5.3x on December 29, 2018. NCIBs are subject to an annual limit of $10.0 million under the term loan facility. On February 27, 2019, the Directors approved a quarterly dividend of CAD$0.145 per share on the Company’s common shares payable on March 15, 2019 to holders of record on March 7, 2019. These dividends are “eligible dividends” for Canadian income tax purposes. The Board is continuing to review the Company’s capital structure to determine the prudent use of capital and will provide an update when the Company reports its financial results for the first quarter of 2019 in May. Disclosure of Outstanding Share Data On February 27, 2019, 33,383,481 common shares and 1,624,681 options were outstanding. The options are exercisable on a one-for-one basis for common shares of the Company. Cash Flow (Amounts in $000s) Cash flows provided by operations before  changes in non-cash working capital,  interest and income taxes refunded (paid)   Interest paid   Income taxes refunded (paid) Cash flows provided by operations, including  interest and income taxes, and before  change in non-cash working capital balances   Net change in non-cash working    capital balances Net cash flows provided by (used in)  operating activities Net cash flows provided by (used in)  financing activities Net cash flows used in investing activities Foreign exchange (decrease) increase on cash Thirteen weeks ended Fifty-two weeks ended December 29, 2018 December 30, 2017 Change December 29, 2018 December 30, 2017 Change $ 7,922 $ 10,777 $ (2,855) $ 64,647 $ 51,331 $ 13,316 (5,229) 3,736 (4,549) (202) (680) 3,938 (19,917) 7,762 (14,745) (9,166) (5,172) 16,928 6,429 6,026 403 52,492 27,420 25,072 3,535 (29,339) 32,874 4,441 (48,909) 53,350 9,964 (23,313) 33,277 56,933 (21,489) 78,422 1,826 (3,541) (1,068) 32,995 (6,021) (1,250) (31,169) 2,480 182 (36,942) (13,842) (1,319) 106,329 (143,271) (101,068) 2,714 87,226 (4,033) Net change in cash during the period $ 7,181 $ 2,411 $ 4,770 $ 4,830 $ (13,514) $ 18,344 Net cash flows provided by (used in) operating activities increased by $33.3 million in the fourth quarter of 2018 to an inflow of $10.0 million compared to an outflow of $23.3 million in 2017 reflecting the following: • Cash flows from operating activities, including interest and income taxes, and before the change in non-cash working capital balances, increased $0.4 million in the fourth quarter of 2018 to an inflow of $6.4 million compared to an inflow of $6.0 million in 2017. This increase reflects income tax refunds received, partially offset by less favourable cash flows from operations and higher interest payments. • Cash flows from changes in net non-cash working capital increased by $32.9 million in the fourth quarter of 2018 to an inflow of $3.6 million compared to an outflow of $29.3 million in 2017. This increase primarily reflects more favourable changes in inventories, provisions and accounts payable and accrued liabilities, partially offset by a less favourable change in accounts receivable, during the fourth quarter of 2018 compared to 2017. MD&A32 HIGH LINER FOODS Net cash flows provided by (used in) operating activities increased by $78.4 million in 2018 to an inflow of $56.9 million compared to an outflow of $21.5 million in 2017, reflecting the following: in 2017. This increase primarily reflects more favourable changes in inventories and accounts receivable, partially offset by a less favourable change in accounts payable and accrued liabilities during 2018 compared to 2017. • Cash flows from operating activities, including interest and income taxes, and before the change in non-cash working capital balances, increased by $25.1 million in 2018 to an inflow of $52.5 million compared to an inflow of $27.4 million in 2017. This increase reflects more favourable cash flows from operations and income tax refunds received, partially offset by higher interest payments. • Cash flows from changes in net non-cash working capital increased by $53.3 million in 2018 to an inflow of $4.4 million compared to an outflow of $48.9 million Standardized Free Cash Flow (see the Non-IFRS Financial Measures section on page 37 for further explanation of Standardized Free Cash Flow) for the rolling twelve months ended December 29, 2018 increased by $91.0 million to an inflow of $43.0 million compared to an outflow of $48.0 million for the twelve months ended December 30, 2017. This increase reflects higher cash flows from operating activities, including interest and income taxes, a more favourable change in working capital and lower capital expenditures during the twelve months ended December 29, 2018 as compared to the twelve months ended December 30, 2017. Net Non-Cash Working Capital (Amounts in $000s) Accounts receivable Inventories Prepaid expenses Accounts payable and accrued liabilities Provisions Net non-cash working capital December 29, 2018 December 30, 2017 Change $ 84,873 $ 92,395 $ (7,522) 301,411 4,333 353,433 3,462 (161,934) (209,910) (1,460) (278) (52,022) 871 47,976 (1,182) $ 227,223 $ 239,102 $ (11,879) Net non-cash working capital consists of accounts receivable, inventories and prepaid expenses, less accounts payable and accrued liabilities, and provisions. Net non-cash working capital decreased by $11.9 million to $227.2 million at the end of December 29, 2018 as compared to $239.1 million at the end of December 30, 2017, primarily reflecting lower inventories and accounts receivable, partially offset by lower accounts payable and accrued liabilities, reflecting improved inventory management due to the timing of working capital requirements. Our working capital requirements fluctuate during the year, usually peaking between December and March as our inventory is the highest at that time. Going forward, we expect the trend of inventory peaking between December and March to continue, and believe we have enough availability on our working capital credit facility to finance our working capital requirements throughout 2019. Capital Expenditures Capital expenditures (including finance leases and computer software) were $3.7 million and $14.6 million during the fourth quarter and fifty-two weeks ended 2018 respectively, as compared to capital expenditures of $6.5 million and $27.8 million during the fourth quarter and fifty-two weeks ended 2017, respectively, due to non-reoccurring 2017 projects that were primarily related to improvements in manufacturing facilities and leasehold improvements, and the timing of capital expenditures related to improvements in the Company’s enterprise-wide business management system, which was completed in May 2018. Excluding strategic initiatives that may arise, management expects that capital expenditures in 2019 will be approximately $10.0 million and funded by cash generated from operations and short-term borrowings. Other Liquidity Items SHARE-BASED COMPENSATION AWARDS Share-based compensation expense of $1.2 million was recorded in 2018 compared to $0.8 million in 2017, based on: the change in the Company’s share price for outstanding awards accounted for as a liability, expense over the vesting period for outstanding awards accounted for as equity- settled transactions, and the issuance of options during the year valued using a Black-Scholes model. Share-based compensation expense is non-cash until unit holders exercise the awards, and was higher in 2018 compared to 2017 primarily due to the issuance of options and cash- MD&AAnnual Report 2018 33 settled awards during the year resulting in a higher share- based compensation expense, partially offset by the lower share price during 2018, which impacts the fair value of the outstanding awards accounted for as a liability. During 2018, holders exercised Performance Share Units (“PSUs”) and Restricted Share Units (“RSUs”) and received cash in the amount of $0.2 million (2017: $0.5 million). The liability for share-based compensation awards at the end of Fiscal 2018 was $1.7 million compared to $1.8 million at the end of Fiscal 2017. Any options exercised in shares are cash positive or cash neutral if the holder elects to use the cashless exercise method under the plan. Cash received from options exercised for shares during 2018 was $nil (2017: $0.1 million). DEFINED BENEFIT PENSION PLANS The Company’s defined benefit pension plans can impact the Company’s cash flow requirements and affect its liquidity. In 2018, the defined benefit pension expense for accounting purposes was $1.3 million (2017: $1.3 million) and the annual cash contributions were $0.1 million lower than the 2018 accounting expense (2017: $0.2 million lower). For 2019, we expect cash contributions to be approximately CAD$2.1 million and the defined benefit pension expense to be approximately CAD$1.6 million. We have more than adequate availability under our working capital credit facility to make the required future cash contributions for our defined benefit pension plans. As well, we have a SERP liability for accounting purposes of $5.9 million that is secured by a letter of credit in the amount of $8.5 million. Contractual Obligations Contractual obligations relating to our long-term debt, finance lease obligations, operating leases, purchase obligations and other long-term liabilities as at December 29, 2018 were as follows: (Amounts in $000s) Long-term debt Finance lease obligations Other current and long-term liabilities Operating leases Purchase obligations Total contractual obligations Total Less than 1 year 1–5 Years Thereafter Payments due by period $ 337,926 $ 13,655 $ 324,271 $ 779 1,738 20,186 89,995 372 245 5,537 84,832 407 1,493 12,205 5,163 — — — 2,444 — $ 450,624 $ 104,641 $ 343,539 $ 2,444 Purchase obligations are for the purchase of seafood and other non-seafood inputs, including flour, paper products and frying oils. See the Procurement risk section on page 44 and the Foreign Currency section on page 49 of this MD&A for further details. Financial Instruments and Risk Management The Company has exposure to the following risks as a result of its use of financial instruments: foreign currency risk, interest rate risk, credit risk and liquidity risk. The Company enters into interest rate swaps, foreign currency contracts, and insurance contracts to manage these risks that arise from the Company’s operations and its sources of financing, in accordance with a written policy that is reviewed and approved by the Audit Committee of the Board of Directors. The policy prohibits the use of derivative financial instruments for trading or speculative purposes. Readers are directed to Note 25 “Fair value measurement” of the Consolidated Financial Statements for a complete description of the Company’s use of derivative financial instruments and their impact on the financial results, and to Note 27 “Financial risk management objectives and policies” of the Consolidated Financial Statements for further discussion of the Company’s financial risks and policies. Related Party Transactions The Company’s business is carried on through the Parent company, High Liner Foods Incorporated, and wholly-owned operating subsidiaries, Sjovik, h.f. and High Liner Foods (USA) Incorporated. Sjovik, h.f. has a subsidiary in Thailand. High Liner Foods (USA) Incorporated’s wholly owned subsidiaries include: ISF (USA), LLC; and Rubicon Resources, LLC. These companies purchase and/or sell inventory between them, and do so in the normal course of operations. The companies lend and borrow money between them, and periodically, capital assets are transferred between companies. High Liner Foods Incorporated buys the seafood for all of the subsidiaries, and also provides management, procurement and IT services to the subsidiaries. On consolidation, revenue, costs, gains or losses, and all inter-company balances are eliminated. MD&A34 HIGH LINER FOODS In addition to transactions between the Parent and subsidiaries, High Liner Foods may enter into certain transactions and agreements in the normal course of business with certain other related parties (see Note 23 “Related party disclosures” to the Consolidated Financial Statements). Transactions with these parties are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. As a result of the Rubicon acquisition during Fiscal 2017, the Company has right of first refusal on certain commodity seafood sales from a company controlled by Brian Wynn, who is part of the Company’s management. Total purchases from related parties for the fifty-two weeks ended December 29, 2018 were $nil (fifty-two weeks ended December 30, 2017: $1.7 million), and as at December 29, 2018, there was $nil (December 30, 2017: $nil) due to the related parties. Total sales to related parties for the fifty-two weeks ended December 29, 2018 were $0.9 million (fifty-two weeks ended December 30, 2017: $0.2 million), and as at December 29, 2018 there was $0.5 million (December 30, 2017: $0.2 million) due from the related parties. The Company leases an office building from a related party at an amount which approximates the fair market value that would be incurred if leased from a third party. The aggregate payments under the lease, which are measured at the exchange amount, totaled approximately $0.7 million during the fifty-two weeks ended December 29, 2018 (fifty-two weeks ended December 30, 2017: $0.6 million). Events After the Reporting Period As described in the Recent Developments section on page 15 of this MD&A, subsequent to December 29, 2018, the Company recovered an additional $8.5 million associated with the product recall from the ingredient supplier, for a total recovery of $17.0 million. This additional recovery will be recognized during the first quarter of 2019, reflecting the period in which the recovery became virtually certain, in accordance with IFRS. No further recoveries are expected. As a result, the Company has fully recovered the $13.5 million in losses recognized during the fifty-two weeks ended December 30, 2017 related to consumer refunds, customer fines, the return of product to be re-worked or destroyed, and direct incremental costs, and an additional $3.5 million related to lost sales opportunities and increased production costs. Non-IFRS Financial Measures The Company uses the following non-IFRS financial measures in this MD&A to explain the following financial results: Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”); Adjusted Earnings before Interest and Taxes (“Adjusted EBIT”); Adjusted Net Income; Adjusted Diluted Earnings per Share (“Adjusted Diluted EPS”); CAD-Equivalent Adjusted Diluted EPS; Standardized Free Cash Flow; Net Interest-Bearing Debt; Return on Assets Managed; and Return on Equity. Adjusted EBITDA Adjusted EBITDA follows the October 2008 “General Principles and Guidance for Reporting EBITDA and Free Cash Flow” issued by the Chartered Professional Accountants of Canada (“CPA Canada”) and is earnings before interest, taxes, depreciation and amortization, excluding: business acquisition, integration and other expenses including those related to the cessation of plant operations; gains or losses on disposal of assets; termination benefits; and share-based compensation expense. The related margin is defined as Adjusted EBITDA divided by net sales (“Adjusted EBITDA as a percentage of sales”), where net sales is defined as “Revenues” on the consolidated statements of income. We use Adjusted EBITDA (and Adjusted EBITDA as a percentage of sales) as a performance measure as it approximates cash generated from operations before capital expenditures and changes in working capital, and it excludes the impact of expenses associated with business acquisition, integration activities, certain non-routine costs and share- based compensation expense related to the Company’s share price. We believe investors and analysts also use Adjusted EBITDA and Adjusted EBITDA as a percentage of sales to evaluate performance of our business. The most directly comparable IFRS measure to Adjusted EBTIDA is “Results from operating activities” on the consolidated statements of income. Adjusted EBITDA is also useful when comparing companies, as it eliminates the differences in earnings that are due to how a company is financed. Also, for the purpose of certain covenants on our credit facilities, “EBITDA” is based on Adjusted EBITDA, with further adjustments as defined in the Company’s credit agreements. MD&AAnnual Report 2018 35 The following table reconciles our Adjusted EBITDA with measures that are found in our Consolidated Financial Statements, including the operating segment information disclosed in Note 24 “Operating segment information”. (Amounts in $000s) Net income (loss) Add back (deduct): Depreciation and amortization  expense Financing costs Income tax recovery Standardized EBITDA Add back (deduct): Business acquisition, integration  and other expenses(1) Impairment of property, plant and  equipment Loss on disposal of assets Direct costs and returned destroyed  product(2) Share-based compensation expense  (recovery) Thirteen weeks ended December 29, 2018 Thirteen weeks ended December 30, 2017 Canada U.S. Corporate Total Canada U.S. Corporate Total $ 3,908 $ 5,359 $ (10,077) $ (810) $ 2,883 $ 6,173 $ 5,171 $ 14,227 512 — — 3,340 — — 612 5,788 4,464 5,788 (1,705) (1,705) 512 — — 3,561 — — 345 4,841 4,418 4,841 (13,492) (13,492) 4,420 8,699 (5,382) 7,737 3,395 9,734 (3,135) 9,994 — 238 42 — — — 61 65 — — 3,631 3,631 — 5 — 189 299 112 — 189 — — — 81 — — — 54 991 — 523 991 — 577 1,443 — 1,524 — (26) (26) Adjusted EBITDA $ 4,700 $ 8,825 $ (1,557) $ 11,968 $ 3,476 $ 11,231 $ (1,647) $ 13,060 (Amounts in $000s) Net income (loss) Add back (deduct): Depreciation and amortization  expense Financing costs Income tax expense (recovery) Standardized EBITDA Add back (deduct): Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 Canada U.S. Corporate Total Canada U.S. Corporate Total $ 13,681 $ 35,822 $ (32,727) $ 16,776 $ 8,853 $ 34,997 $ (12,197) $ 31,653 2,094 13,602 — — — — 2,075 21,603 6,090 15,775 49,424 (2,959) 17,771 21,603 6,090 62,240 1,961 13,120 — — — — 1,230 16,626 16,311 16,626 (14,115) (14,115) 10,814 48,117 (8,456) 50,475 Business acquisition, integration and  other (income) expenses(1) Impairment of property, plant  and equipment — — (2,471) (2,471) 238 1,033 31 1,302 Loss (gain) on disposal of  assets Direct costs and returned  destroyed product(2) Share-based compensation  expense 26 — — 147 — — — — 56 — — 168 2,639 2,639 — 510 — 734 166 (7) — — 2,787 8,706 — 11,493 Adjusted EBITDA $ 16,039 $ 50,604 $ (4,169) $ 62,474 $ 13,657 $ 56,991 $ (4,536) $ 66,112 (1) See the Business Acquisition, Integration and Other (Income) Expense section on page 27. (2) Associated with the product recall (see the Recent Developments section on page 15). 1,237 1,237 — — 771 771 MD&A36 HIGH LINER FOODS Adjusted EBIT Adjusted EBIT is Adjusted EBITDA less depreciation and amortization expense. Corporate incentives and management analysis of the business are based on Adjusted EBIT. The following tables reconcile Adjusted EBITDA to Adjusted EBIT. (Amounts in $000s) Adjusted EBITDA Less: Depreciation and amortization  expense Thirteen weeks ended December 29, 2018 Thirteen weeks ended December 30, 2017 Canada U.S. Corporate Total Canada U.S. Corporate Total $ 4,700 $ 8,825 $ (1,557) $ 11,968 $ 3,476 $ 11,231 $ (1,647) $ 13,060 512 3,340 612 4,464 512 3,561 345 4,418 Adjusted EBIT $ 4,188 $ 5,485 $ (2,169) $ 7,504 $ 2,964 $ 7,670 $ (1,992) $ 8,642 (Amounts in $000s) Adjusted EBITDA Less: Depreciation and amortization  expense Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 Canada U.S. Corporate Total Canada U.S. Corporate Total $ 16,039 $ 50,604 $ (4,169) $ 62,474 $ 13,657 $ 56,991 $ (4,536) $ 66,112 2,094 13,602 2,075 17,771 1,961 13,120 1,230 16,311 Adjusted EBIT $ 13,945 $ 37,002 $ (6,244) $ 44,703 $ 11,696 $ 43,871 $ (5,766) $ 49,801 Adjusted Net Income and Adjusted Diluted EPS Adjusted Net Income is net income excluding the after-tax impact of: business acquisition, integration and certain other non-routine costs; the non-cash expense or income related to marking-to-market an interest rate swap not designated for hedge accounting; termination benefits; the U.S. Tax Reform and share-based compensation expense. Adjusted Diluted EPS is Adjusted Net Income divided by the average diluted number of shares outstanding. We use Adjusted Net Income and Adjusted Diluted EPS to assess the performance of our business without the effects of the aforementioned items, and we believe our investors and analysts also use these measures. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. The most comparable IFRS financial measures are net income and EPS. The table below reconciles our Adjusted Net Income with measures that are found in our Consolidated Financial Statements: Net income Add back (deduct): Business acquisition, integration and other (income) expenses(1) Impairment of property, plant and equipment Direct costs and returned destroyed product(2) Share-based compensation expense (recovery) U.S. Tax Reform(3) Tax impact of reconciling items Adjusted Net Income Average shares for the period (000s) Thirteen weeks ended December 29, 2018 Thirteen weeks ended December 30, 2017 $000s Diluted EPS $000s Diluted EPS $ (810) $ (0.02) $ 14,227 $ 0.43 3,631 299 — 189 — 0.10 0.01 — 0.01 — (1,140) (0.03) 991 — 1,524 (26) (11,186) (681) $ 2,169 $ 0.07 $ 4,849 $ 33,675 0.03 — 0.05 — (0.34) (0.02) 0.15 33,423 MD&ANet income Add back (deduct): Business acquisition, integration and other (income) expenses(1) Impairment of property, plant and equipment Direct costs and returned destroyed product(2) Share-based compensation expense U.S. Tax Reform(3) Tax impact of reconciling items Adjusted Net Income Average shares for the period (000s) Annual Report 2018 37 Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 $000s Diluted EPS $000s Diluted EPS $ 16,776 $ 0.50 $ 31,653 $ 0.97 (2,471) 1,302 — 1,237 — 205 $ 17,049 $ 2,639 — 11,493 770 (11,186) (5,227) $ 30,142 $ (0.07) 0.04 — 0.03 — 0.01 0.51 33,619 0.08 — 0.35 0.03 (0.34) (0.16) 0.93 32,527 (1) See the Business Acquisition, Integration and Other (Income) Expense section on page 27 for further details. (2) Associated with the product recall (see the Recent Developments section on page 15). (3) Associated with the U.S. Tax Reform enacted on December 22, 2017 (see the Income Taxes section on page 28). CAD-Equivalent Adjusted Diluted EPS CAD-Equivalent Adjusted Diluted EPS is Adjusted Diluted EPS, as defined above, converted to CAD using the average USD/CAD exchange rate for the period. High Liner Foods’ common shares trade on the TSX and are quoted in CAD. The CAD-Equivalent Adjusted Diluted EPS is provided for the purpose of calculating financial ratios, like share price-to- earnings ratio, where investors should take into consideration that the Company’s share price and dividend rate are reported in CAD and its earnings and financial position are reported in USD. This measure is included for illustrative purposes only, and would not equal the Adjusted Diluted EPS in CAD that would result if the Company’s Consolidated Financial Statements were presented in CAD. Adjusted Diluted EPS Average foreign exchange rate for the period CAD-Equivalent Adjusted Diluted EPS Standardized Free Cash Flow Standardized Free Cash Flow follows the October 2008 “General Principles and Guidance for Reporting EBITDA and Free Cash Flow” issued by CPA Canada and is cash flow from operating activities less capital expenditures (net of investment tax credits) as reported in the consolidated statements of cash flows. The capital expenditures related to business acquisitions are not deducted from Standardized Free Cash Flow. Thirteen weeks ended Fifty-two weeks ended December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017 $ $ 0.07 1.3197 0.09 $ $ 0.15 1.2715 0.19 $ $ 0.51 1.2956 0.66 $ $ 0.93 1.2983 1.21 We believe Standardized Free Cash Flow is an important indicator of financial strength and performance of our business because it shows how much cash is available to pay dividends, repay debt and reinvest in the Company. We believe investors and analysts use Standardized Free Cash Flow to value our business and its underlying assets. The most comparable IFRS financial measure is “cash flows from operating activities” in the consolidated statements of cash flows. MD&A38 HIGH LINER FOODS The table below reconciles our Standardized Free Cash Flow calculated on a rolling twelve-month basis, with measures that are in accordance with IFRS and as reported in the consolidated statements of cash flows. (Amounts in $000s) Net change in non-cash working capital items Cash flow from operating activities, including interest and income taxes Cash flow from operating activities Less: total capital expenditures, net of investment tax credits Standardized Free Cash Flow Twelve months ended December 29, 2018 December 30, 2017 $ 4,441 $ (48,909) $ 52,492 56,933 (13,961) 27,420 (21,489) (26,488) $ 42,972 $ (47,977) $ Change 53,350 25,072 78,422 12,527 90,949 Net Interest-Bearing Debt Return on Assets Managed Net Interest-Bearing Debt is calculated as the sum of bank loans, long-term debt and finance lease obligations, less cash. We consider Net Interest-Bearing Debt to be an important indicator of our Company’s financial leverage because it represents the amount of debt that is not covered by available cash. We believe investors and analysts use Net Interest- Bearing Debt to determine the Company’s financial leverage. Net Interest-Bearing Debt has no comparable IFRS financial measure, but rather is calculated using several asset and liability items in the consolidated statements of financial position. The following table reconciles Net Interest-Bearing Debt to IFRS measures reported as at the end of the indicated periods. (Amounts in $000s) Current bank loans Add-back: deferred finance costs  on current bank loans Total current bank loans Long-term debt Current portion of long-term debt Add-back: deferred finance costs  on long-term debt Total term loan debt Long-term portion of finance lease  obligations Current portion of finance lease  obligations Total finance lease obligation Less: cash December 29, 2018 December 30, 2017 $ 31,152 $ 53,352 353 31,505 322,674 13,655 1,597 337,926 407 372 779 (9,568) 208 53,560 335,441 — 2,485 337,926 407 714 1,121 (4,738) Net interest-bearing debt $ 360,642 $ 387,869 ROAM is Adjusted EBIT divided by average assets managed (calculated using the average net assets month-end balance for each of the preceding thirteen months, where “net assets managed” includes all assets, except for future employee benefits, deferred income taxes and other certain financial assets, less accounts payable and accrued liabilities, and provisions). We believe investors and analysts use ROAM as an indicator of how efficiently the Company is using its assets to generate earnings. ROAM has no comparable IFRS financial measure, but rather is calculated using several asset items in the consolidated statements of financial position. The table below reconciles our average net assets, calculated on a rolling thirteen-month basis, with Adjusted EBIT (which is reconciled to IFRS measures on page 36 of this MD&A). (Amounts in $000s) Adjusted EBIT Thirteen-month rolling average  net assets ROAM Return on Equity December 29, 2018 December 30, 2017 $ 44,703 $ 49,801 676,343 610,891 6.6% 8.2% ROE is calculated as Adjusted Net Income, less share-based compensation expense, divided by average common equity (calculated using the common equity month-end balance for each of the preceding thirteen months, comprised of common shares, contributed surplus, retained earnings, and accumulated other comprehensive income). We believe investors and analysts use ROE as an indicator of how efficiently the Company is managing the equity provided by shareholders. ROE has no comparable IFRS financial measure, but rather is calculated using average equity from the consolidated statements of financial position. MD&AThe table below reconciles our average common equity calculated on a rolling thirteen-month basis, with Adjusted Net Income (which is reconciled to IFRS measures on page 36 of this MD&A). (Amounts in $000s) Adjusted Net Income Less: Share-based compensation  expense, net of tax(1) Thirteen-month rolling average  common equity ROE December 29, 2018 December 30, 2017 $ 17,049 $ 30,142 1,176 15,873 658 29,484 272,952 244,012 5.8% 12.1% (1) Net of tax expense of $0.1 million during the fifty-two weeks ended December 29, 2018 and net of tax expense of $0.1 million during the fifty-two weeks ended December 30, 2017 Governance Our 2018 Management Information Circular, to be filed in connection with our Annual General Meeting of Shareholders on May 14, 2019, includes full details of our governance structures and processes. We maintain a set of disclosure controls and procedures (“DC&P”) designed to ensure that information required to be disclosed in filings made pursuant to National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, is recorded, processed, summarized and reported within the time periods specified in the Canadian Securities Administrators’ rules and forms. For the first two quarters of 2018, in accordance with National Instrument 52-109, our certifying officers had limited the scope of their DC&P, and the Company’s Internal Control over Financial Reporting (“ICFR”) to exclude controls, policies and procedures relating to Rubicon Resources, LLC which was acquired on May 30, 2017, as they had not performed sufficient procedures to include it in the Company’s certifications. National Instrument 52-109 permits a business that an issuer acquires not more than 365 days before the issuer’s financial year-end be excluded from the scope of the certifications to allow it sufficient time to perform adequate procedures to ensure controls, policies and procedures are effective. Rubicon Resources, LLC was integrated with High Liner Foods as of June 30, 2018, and the scope limitation was removed for the Fiscal 2018 year-end certificates. Annual Report 2018 39 In May 2018, the Company upgraded its ERP system which has resulted in changes to the Company’s ICFR. The Company has made appropriate changes to internal controls and procedures, as is expected with a system upgrade, and has evaluated the design and effectiveness of these controls as part of the financial compliance program as of December 29, 2018. Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the design and effectiveness of our DC&P as of December 29, 2018. They have concluded that our current DC&P are designed to provide, and do operate to provide, reasonable assurance that: (a) information required to be disclosed by the Company in its annual filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the prescribed time periods; and (b) material information regarding the Company is accumulated and communicated to the Company’s management, including its CEO and CFO to allow timely decisions regarding required disclosure. In addition, our CEO and CFO have designed or caused to be designed under their supervision, ICFR, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. Furthermore, our CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the design and operation of ICFR at the fiscal year-end and have concluded that our current ICFR was effective at the fiscal year-end based on that evaluation. There has been no change in the Company’s ICFR during 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR, except as noted above. Accounting Estimates and Standards Critical Accounting Estimates The preparation of the Company’s Consolidated Financial Statements requires management to make critical judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. On an ongoing basis, management evaluates its judgments, estimates and assumptions using historical experience and various other factors it believes to be reasonable under the given circumstances. Actual outcomes may differ from these estimates under different assumptions and conditions that could require a material adjustment to the reported carrying amounts in the future. MD&A40 HIGH LINER FOODS The most significant estimates made by management include the following: IMPAIRMENT OF NON-FINANCIAL ASSETS The Company’s estimate of the recoverable amount for the purpose of impairment testing requires management to make assumptions regarding future cash flows before taxes. Future cash flows are estimated based on multi-year extrapolation of the most recent historical actual results and/or budgets, and a terminal value calculated by discounting the final year in perpetuity. The future cash flows are then discounted to their present value using an appropriate discount rate that incorporates a risk premium specific to each business. Further details, including the manner in which the Company identifies its CGUs, and the key assumptions used in determining the recoverable amounts, are disclosed in Note 10 “Goodwill and intangible assets” to the Consolidated Financial Statements. FUTURE EMPLOYEE BENEFITS The cost of the defined benefit pension plan and other post-employment benefits and the present value of the defined benefit obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions, including the discount rate, future salary increases, mortality rates and future pension increases. In determining the appropriate discount rate, management considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Interest income on plan assets is a component of the return on plan assets and is determined by multiplying the fair value of the plan assets by the discount rate. See Note 15 “Future employee benefits” to the Consolidated Financial Statements for certain assumptions made with respect to future employee benefits. INCOME TAXES The Company is subject to income tax in various jurisdictions. Significant judgment is required to determine the consolidated tax provision. The tax rates and tax laws used to compute income tax are those that are enacted or substantively enacted at the reporting date in the countries where the Company operates and generates taxable income. There are transactions and calculations during the ordinary course of business for which the ultimate tax determination is uncertain. The Company maintains provisions for uncertain tax positions that are believed to appropriately reflect the risk with respect to tax matters under active discussion, audit, dispute or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions for uncertain tax positions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at each reporting date; however, it is possible that at some future date, an additional liability could result from audits by taxing authorities. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. FAIR VALUE OF FINANCIAL INSTRUMENTS Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of estimation is required in establishing fair values. The estimates include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in these inputs could affect the reported fair value of financial instruments. SALES AND MARKETING ACCRUALS The Company estimates variable consideration to determine the costs associated with the sale of product to be allocated to certain variable sales and marketing expenses, including volume rebates and other sales volume discounts, coupon redemption costs, costs incurred related to damages and other trade marketing programs. The Company’s estimates include consideration of historical data and trends, combined with future expectations of sales volume, with estimates being reviewed on a frequent basis for reasonability. Accounting Standards High Liner Foods reports its financial results using IFRS. Our detailed accounting policies are included in the Notes to the Consolidated Financial Statements. As disclosed in Note 3 “Significant accounting policies” to the Consolidated Financial Statements for the period ended December 29, 2018, we adopted the following new standards and amendments that were effective for annual periods beginning on January 1, 2018 and that the Company has adopted on December 31, 2017: IFRS 2, Share-based Payment In June 2016, the IASB issued final amendments to IFRS 2, Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments, which were developed through the IFRS Interpretations Committee, provide requirements on the accounting for: (i) the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; MD&AAnnual Report 2018 41 (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Company has adopted the amendments to IFRS 2; however they did not have a material impact on the Consolidated Financial Statements. IFRS 9, Financial Instruments: Classification and Measurement In 2015, the IASB issued the final version of the amendments to IFRS 9, Financial Instruments, issued in 2010, which replaced IAS 39. The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. The issuance of IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities, and a new hedge accounting model with corresponding disclosures about risk management activity. With the exception of hedge accounting, which the Company applied prospectively, the Company has applied IFRS 9 retrospectively, with the initial application date of December 31, 2017. The Company performed a detailed impact assessment of all three aspects of IFRS 9; however, as discussed below, they did not have a material impact on the Consolidated Financial Statements and no adjustments to the comparative information for the period beginning January 1, 2017 were required. • The Company did not identify any changes to the classification and measurement of the existing financial instruments upon applying IFRS 9, other than a change in the classification of cash and accounts receivable from loans and receivables to financial assets at amortized cost, which had no impact on measurement of these financial instruments. • The adoption of IFRS 9 has fundamentally changed the Company’s accounting for impairment losses for financial assets by replacing IAS 39’s incurred loss approach with a forward-looking expected credit loss (“ECL”) approach. IFRS 9 requires the Company to record ECL on the entire accounts receivable balance. The Company has applied the simplified approach and has calculated the lifetime ECLs based on an established provision matrix that considers the Company’s historical credit loss experience, adjusted for forward-looking factors specific to the Company’s customers and the economic environment. The adoption of the ECL requirements of IFRS 9 had an immaterial impact on the Consolidated Financial Statements (see Note 7 “Accounts receivable” to the Consolidated Financial Statements). • The Company has concluded that all existing hedge relationships that are currently designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 does not have an impact on the Company’s Consolidated Financial Statements. IFRS 15, Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which replaces IAS 18, Revenue, IAS 11, Construction Contracts and various revenue-related interpretations. IFRS 15 establishes a new control-based revenue recognition model where revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard is applicable to all contracts the Company has with customers. The Company has elected to adopt the standard using the full retrospective method and applied the completed contract practical expedients, which allows the Company to exclude completed contracts that began and ended in the same annual reporting period and those contracts that were complete at the beginning of the earliest period presented. For completed contracts with variable consideration, the Company applied the practical expedient and has used the transaction price at the date when the contract was completed rather than estimating the variable consideration amounts in the comparative reporting periods because the Company has concluded that the difference was immaterial. The Company has applied the new standard and did not identify any material impacts on the consolidated statements of financial position or income upon initial application. Specifically, the adoption of IFRS 15 did not result in any material refinements to the current estimation methodologies or the timing of the recognition of estimates in relation to the Company’s trade marketing programs. However, the following two presentation differences on the consolidated statements of income have been identified:  • The Company receives donated product at no cost from the United States Department of Agriculture for the purpose of processing the product for distribution to eligible recipient agencies. IFRS 15 requires the Company to include the fair value of the donated product in the transaction price recognized on the sale of the finished products. This will increase both the revenue recorded upon distribution to the eligible agencies and the related cost of sales (by an equivalent amount), as compared to the Company’s historical accounting treatment. • The Company identified payments made to a customer that were accounted for as a reduction of revenue under IFRS 15. This decreased revenue and the related cost of sales by an equivalent amount, as compared to the Company’s historical accounting treatment. MD&Athis method. The Company has reached conclusions on key accounting policies upon transition to IFRS 16. The Company will finalize the impact of the new standard and disclosures on the consolidated financial statements during the first quarter of Fiscal 2019. IAS 19, Employee Benefits In February 2018, the IASB issued amendments to IAS 19, Employee Benefits (“IAS 19”), which addresses the accounting when a plan amendment, curtailment or settlement occurs during the reporting period. The current service cost and net interest for the remainder of the period after the plan amendment, curtailment or settlement should reflect the updated actuarial assumptions after such an event. The amendments apply to plan amendments, curtailments, or settlements that occur on or after January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements. IFRIC Interpretation 23, Uncertainty over Income Tax Treatment The IFRS Interpretation Committee issued an Interpretation to address the accounting for income taxes when treatments involve uncertainty that affects the application of IAS 12, Income Taxes (“IAS 12”) and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately; • The assumptions an entity makes about the examination of tax treatments by taxation authorities; • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and • How an entity considers changes in facts and circumstances. 42 HIGH LINER FOODS If the Company did not elect to use the completed contract practical expedient, revenue and cost of sales in the comparative period would require adjustments, with no resulting impact on net income, as follows: • The Company would have recognized $4.7 million of incremental revenue and cost of sales on the sale of donated finished products for the fifty-two weeks ended December 30, 2017. • The Company would have decreased revenue and cost of sales recorded by $0.6 million for the fifty-two weeks ended December 30, 2017 for identified payments made to a customer that would be accounted for as a reduction of revenue under IFRS 15. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE In addition to the existing IFRS standards adopted by the Company, the International Accounting Standards Board and the IFRS Interpretations Committee have issued additional standards and interpretations with an effective date subsequent to Fiscal 2018. The Company intends to adopt these standards when they become effective. IFRS 16, Leases In January 2016, the IASB issued IFRS 16, Leases, which replaces IAS 17, Leases, and its associated interpretive guidance. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. The standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted if entities have also applied IFRS 15, Revenue from Contracts with Customers. The Company has substantially completed the assessment of IFRS 16 and the impact the new standard will have on the consolidated financial statements, which will be significant as the Company will recognize new assets and liabilities for most of the leases that are currently classified as operating leases. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight- line operating lease expense with depreciation expense for right-of-use assets and an interest expense on the lease liabilities. The standard permits two methods of adoption: retrospectively to each reporting period presented (full retrospective method), or retrospective with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company has decided to adopt the standard on December 30, 2018 using the modified retrospective method with certain practical expedients that are available under MD&AAnnual Report 2018 43 An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The Interpretation is effective for annual reporting periods beginning on or after January 1, 2019, but certain transition reliefs are available. The Company will apply the interpretation from the effective date. The Company is currently evaluating the impact of the Interpretation on its consolidated financial statements. Risk Factors High Liner Foods is exposed to a number of risks in the normal course of business that have the potential to affect operating performance. The Company takes a strategic approach to risk management. To achieve a return on investment, we have designed an enterprise-wide approach, overseen by the senior management of the Company and reported to the Board, to identify, prioritize and manage risk effectively and consistently across the organization. While risk management is part of the Company’s transactional, operational and strategic decisions, as well as the Company’s overall management approach, risk management does not guarantee that events or circumstances will not occur which could have a material adverse impact on the Company’s financial condition and performance. Food Safety At High Liner Foods, food safety is our top priority. Our brand equity and reputation are inextricably linked to the quality and safety of our food products. We must be vigilant in ensuring our products are safe and comply with all applicable laws and regulations. Customers expect consistently safe, quality products and their expectations are unwavering regardless of the commodity or complexity of the supply chain. Consumers are increasingly better informed about conscientious food choices. High Liner processing plants have all the required State, Provincial and/or Federal licenses to operate. Additionally, all High Liner plants are certified to the Global Food Safety Initiatives (“GFSI”), Safe Quality Foods (“SQF”) and British Retail Consortium (“BRC”) standards, meaning our processing plants have passed a rigorous quality and food safety system audit that is internationally recognized and globally benchmarked. The GSFI certification enables High Liner to supply our wide range of products to some of the industry’s most discerning customers. This yearly certification process helps drive improvement across the organization, critical for maintaining customer and consumer confidence. In Canada, all seafood-processing plants are required to adopt a Preventative Control Plan (“PCP”) under the recently implemented Safe Food for Canadians Act and Regulations. These requirements cover the regulatory and safety aspects of food processing and importing in Canada and have been developed by the Canadian Food Inspection Agency (“CFIA”) based on global best practices. This plan must also include a Hazard Analysis Critical Control Point (“HACCP”) Plan. High Liner Foods’ PCP and processing facilities are regularly inspected and audited by the CFIA and remain in good standing. In the United States, High Liner’s plants produce product in accordance with standards set forth by the U.S. Food and Drug Administration’s (“FDA”) and the U.S. Department of Agriculture (“USDA”). The regulatory requirements for seafood processing (and importing) in the United States are very specific for fish and fishery products and all plants are required to operate with current seafood HACCP programs. Our plants are regularly inspected and audited by our regulatory partners in the U.S. and remain in good standing. In addition, our suppliers’ plants outside of North America must demonstrate compliance for imported products in accordance with the guidelines set forth in the FDA seafood HACCP. All of the Company’s non-North American suppliers operate with HACCP approved plans and are required to adhere to newly strengthened FDA and Canadian CFIA importation requirements focusing on food safety and traceability. In addition, all purchases are subject to risk based quality review and inspection by the Company’s own trained quality inspectors. We have strict specifications for suppliers of both raw material and finished goods to ensure that procured goods are of the same quality and consistency as products processed in our own plants. High Liner Foods has offices in Qingdao, China; Bangkok, Thailand; and Reykjavik, Iceland and employs full-time procurement and food safety and quality experts to oversee procurement activities around the world. This oversight includes production monitoring and finished product inspection at the source before shipment to North America. We also maintain strict Supplier Approval and Audit Standards. Through audit procedures, all food suppliers are required to meet our quality control and safety standards, which, in many instances, are higher than regulatory standards. All product is inspected, to assure consumers that High Liner Foods quality is consistent, regardless of source or origin. In order to maintain compliance with the various, and ever changing regulatory, industry and customer requirements and expectations, we employ a Food Safety and Quality Assurance team comprised of highly qualified, trained and experienced personnel including food scientists, quality technicians, quality and food safety auditors, and labelling and nutritional professionals. High Liner has retained independent auditors to add an additional level of scrutiny to our food safety programs. High Liner Foods has robust audit policies MD&A44 HIGH LINER FOODS and processes that are consistently applied throughout the Company, audit processes are implemented and all personnel are adequately trained. Quality and food safety activities also include state-of-the-art product specification and traceability systems. We are continuously evaluating and updating our internal operating standards to keep pace with the industry expectations and to support improved performance and greater success. Product Recall The Company is subject to risks that affect the food industry in general, including risks posed by food spoilage, accidental contamination, product tampering, consumer product liability, and the potential costs and disruptions of a product recall. The Company actively manages these risks by maintaining strict and rigorous controls and processes in its manufacturing facilities and distribution systems and by maintaining prudent levels of insurance. However, the Company cannot assure that such systems, even when working effectively, will eliminate the risks related to food safety. The Company could be required to recall certain of its products in the event of contamination or adverse test results or as precautionary measures. There is also a risk that not all of the product subject to the recall will be properly identified, or that the recall will not be successful or not be enacted in a timely manner. Any product contamination could subject the Company to product liability claims, adverse publicity and government scrutiny, investigation or intervention, resulting in increased costs and decreased sales. Many of these costs and losses are not covered by insurance. Any of these events could have a material adverse impact on the Company’s financial condition and results of operations. The Company initiated a product recall during the second quarter of 2017. See the Recent Developments section on page 15 of this MD&A. Procurement Our business depends upon the procurement of frozen raw seafood materials and finished goods on world markets. In 2018, the Company purchased approximately 180 million pounds of seafood, with an approximate value of $556.0 million. Seafood and other food input markets are global with values expressed in USD. We buy approximately 30 species of seafood from 20 countries around the world. There are no formal hedging mechanisms in the seafood market. Prices can fluctuate due to changes in the balance between supply and demand over which the Company has little or no control. Weather, quota changes, disease, geopolitical issues, including economic sanctions, tariffs and trade barriers, and other environmental impacts in key fisheries can affect supply. Changes in the relative values of currency can change the demand from a particular country whose currency has risen or fallen as compared to the U.S. dollar. The increasing middle class and government policies in emerging economies, as well as demand from health- conscious consumers, affect demand as well. Raw material costs in Canada are affected by the Canadian and U.S. dollar exchange rates. A strong Canadian dollar offsets increases in the U.S. dollar cost of raw materials for our Canadian operations, and conversely, when the Canadian dollar weakens, it increases our costs. We hedge exposures to currency changes and enter into annual supply contracts when possible. All foreign currency hedging activities are carried out in accordance with the Company’s formal “Price Risk Management Policy”, under the oversight of the Audit Committee of the Board of Directors. Our broad product line and customer base, along with geographically diverse procurement operations, help us mitigate changes in the cost of our raw materials. In addition, product formulation changes, long-term relationships with suppliers, and price changes to customers are all important factors in our ability to manage supply of necessary products. We purchase frozen raw material and finished goods originating from many different areas of the world and ensure, to the extent possible, that our supplier base is diverse to ensure no over-reliance on any source. Our strategy is to always have at least two suppliers of seafood products where possible. There can be no assurance that disruptions in supply will not occur, nor can there be any assurance that all or part of any increased costs experienced by the Company from time to time can be passed along to consumers of the Company’s products directly or in a timely manner. Availability of Seafood and Non-Seafood Goods Historically, North American markets have consumed less seafood per capita than certain Asian and European markets. If increased global seafood demand results in materially higher prices, North American consumers may be less likely to consume amounts historically consistent with their share of the global seafood market, which may adversely affect the financial results of High Liner Foods due to its North American focus. The Company expects demand for seafood to grow from current levels as the global economy, and particularly the BRIC and Southeast Asian economies, improve. In general, we expect the supply of wild-caught seafood in our core species to be stable over the long term. We anticipate new seafood demand will be supplied primarily from aquaculture. Currently, four of the top seven species consumed in the U.S. (shrimp, salmon, tilapia and pangasius) are partly or MD&Atotally supplied by aquaculture and approximately 41% of the Company’s procurement by value is related to aquaculture products. To the extent there are unexpected declines in our core products of wild-caught seafood, or aquaculture is unable to supply future demand, prices may increase materially, which may have a negative impact on the Company’s results. The Company has made the strategic decision not to be vertically integrated for a number of reasons, including the large amount of capital that would be involved and expected returns on such capital. However, in the event supply shortages of certain seafood, or trade barriers to acquiring seafood as a result of economic sanctions or otherwise, results in difficulty procuring species, the financial results of High Liner Foods may be adversely affected. In addition, the Company purchases non-seafood goods and ingredients from a limited number of suppliers as a result of consolidation within the industries in which these suppliers operate in North America and other major markets. Furthermore, issues with suppliers regarding pricing or performance of the goods they supply or the inability of suppliers to supply the required volumes of such goods and services in a timely manner could impact the Company’s financial condition and performance. Any such impact will depend on the effectiveness of the Company’s contingency plan. Seafood Production from Asia For more than a decade, many seafood companies, including High Liner Foods, have diverted production of certain primary produced products to Asia, and China in particular. Asian processing plants are able to produce many high quality seafood products at a lower cost than is possible in North America and in other more developed countries. These plants are also able to achieve a better yield on raw material due to the use of more manual processes. We work closely with selected Asian suppliers and have made it possible for these suppliers to meet our exacting quality and manufacturing standards. In turn, we have access to the variety and volume of seafood products, including a significant amount of wild- caught product from the Atlantic and Pacific Oceans, that we need to fulfil our brand strategy. These suppliers are central to our supply chain operating efficiently, and thus, any adverse changes in the operations of such suppliers, or our commercial relationships with such suppliers, may adversely affect the Company’s results. Non-Seafood Commodities Our operating costs are affected by price changes in commodities such as crude oil, wheat, corn, paper products Annual Report 2018 45 and frying oils. To minimize our risk, the Company’s “Price Risk Management Policy” dictates the use of fixed pricing with suppliers whenever possible but allows the use of hedging with derivative instruments if deemed prudent. Throughout 2018 and 2017, the Company has managed this risk through contracts with suppliers. Crude oil prices, which influence fuel surcharges from freight suppliers increased during 2018 compared to 2017. World commodity prices for flour, soy and canola oils, important ingredients in many of the Company’s products, fluctuated throughout the year, with flour prices increasing and soy and canola oil prices decreasing in 2018 compared to 2017. The price of corrugated and folding carton, which is used in packaging, increased in 2018. The Company currently has fixed price contracts with suppliers relating to our 2019 commodity purchase requirements and any additional amounts will be negotiated and fixed as necessary. Customer Consolidation We sell the vast majority of our products to large food retailers, including supercentres and club stores, and foodservice distributors in North America. As the retail grocery and foodservice trades continue to consolidate and customers grow larger and more sophisticated, the Company is required to adjust to changes in purchasing practices and changing customer requirements. Failure to do so could result in losing sales volumes and market share. The Company’s net sales and profitability could also be affected by deterioration in the financial condition of, or other adverse developments in, the relationship with one or more of its major customers. Any of these events could have a material adverse effect on the Company’s financial condition and results of operations. Consolidation of customers is expected to result in some consolidation of suppliers in the U.S. seafood industry. The supply of seafood, especially in the U.S. foodservice market, is highly fragmented. Consolidation is needed to reduce costs and increase service levels to keep pace with the expectation of customers. We are focusing efforts on brand strength, new products, procurement activities and customer service to ensure we outperform competitors. Consolidation makes it more important to achieve and maintain a brand leadership position, as consolidators move towards centralized buying and streamlined procurement. We are in a good position to meet these demands, since we offer quality, popular products under leading brands and have the ability to meet the customer service expectations of the major retailers. MD&A46 HIGH LINER FOODS Competition Risk High Liner Foods competes with a number of food manufacturers and distributors and its competition varies by distribution method, product category and geographic market. Some of High Liner Foods’ competitors have greater financial and other resources than it does and/or may have access to labour or products that are not available to High Liner Foods. In addition, High Liner Foods’ competitors may be able to better withstand market volatility. There can be no assurance that High Liner Foods’ principal competitors will not be successful in capturing, or that new competitors will not emerge and capture, a share of the Company’s present or potential customer base and/or market share. In addition, High Liner Foods and its financial results may be significantly adversely affected if High Liner Foods’ suppliers become competitors, if our customers decide to source their own food products, or if one or more of High Liner Foods’ competitors were to merge with another of its competitors. Competitors may also establish or strengthen relationships with parties with whom High Liner Foods has relationships, thereby limiting its ability to distribute certain products. Disruptions in High Liner Foods’ business caused by such events could have a material adverse effect on its results of operations and financial condition. Geopolitical Risk The Company’s operations are currently conducted in North America and, as such, the Company’s operations are exposed to various levels of political, economic and other risks and uncertainties. These risks and uncertainties vary for each country and include, but are not limited to: fluctuations in currency exchange rates; inflation rates; labour unrest; terrorism; civil commotion and unrest; changes in taxation policies; restrictions on foreign exchange and repatriation; changing political conditions and social unrest; changes in trade agreements; economic sanctions, tariffs and other trade barriers. Changes, if any, in trade agreements or policies, or shifts in political attitude, could adversely affect the Company’s operations or profitability. Operations may be affected in varying degrees by government regulations including, but not limited to, export controls, income taxes, foreign investment, and environmental legislation. In 2017, the U.S. Tax Reform resulted in significant changes to tax legislation in the United States and certain aspects of the U.S. Tax Reform are still subject to interpretation which could impact the results of operations, financial condition and cash flows of the Company (see the Income Taxes section on page 28 of this MD&A). In September 2018, the U.S. Administration announced an additional 10% tariff on certain Chinese imports, including seafood, effective September 24, 2018, increasing to 25% effective January 1, 2019. On December 19, 2018, the U.S. Administration postponed the January 1, 2019 tariff increase, pending negotiations between the U.S. Administration and China. The Company currently purchases its seafood raw materials from more than 20 countries around the world, including from the U.S., to meet U.S. consumer demand. A portion of this raw material is imported into China for primary processing and then exported to the U.S. for sale and secondary processing. The Company has determined that the additional tariff will apply to the import of certain species into the U.S., most notably haddock, tilapia and sole/flounder. The estimated exposure of a 10% and 25% tariff in 2019 is approximately $4 and $9 million, respectively based on current volume and raw material costs; however, the Company has begun implementing plans, including pricing action and certain supply chain initiatives, to mitigate the impact of these tariffs and reduce the estimated impact to the Company. The Company will continue to monitor these developments closely, particularly if further information becomes available regarding additional tariffs or how the previously announced tariffs will impact the Company. The occurrence and the extent of these various factors and uncertainties cannot be accurately predicted and could have a material adverse effect on the Company’s operations and profitability. Sustainability, Corporate Responsibility and Public Opinion The future success and growth of our business relies heavily upon our ability to use our position in the marketplace to protect and preserve the natural resources essential for our business and to make sustainability part of how we operate in every facet of our business. High Liner Foods made a public sustainability commitment in late 2010 to source all of its seafood from “certified sustainable or responsible” fisheries and aquaculture by the end of 2013. The Company was substantially successful in fulfilling the commitment it made in late 2010 and is now recognized as a global leader in driving best practice improvements in wild fisheries and aquaculture. Customers will continue to demand product solutions that are innovative, MD&AAnnual Report 2018 47 high quality and responsibly-sourced. To the extent we fail to meet these customer expectations, or customer expectations in this regard change, operational results and brand equity may be adversely affected. Credible sustainability certifications have become a required tool to validate industry-driven wild fishery and aquaculture improvements. Environmental advocacy groups will continue to promote use of credible certification schemes to define sustainable wild fisheries and aquaculture. In 2015, the Company implemented a social compliance program with seafood suppliers which outlines acceptable standards for the treatment of all suppliers’ employees involved in the production of seafood product for our Company. Corporate Social Responsibility (“CSR”) is a term used to refer to the set of voluntary actions companies take to mitigate the social and environmental impacts of their operations on society. CSR is significant in the seafood industry as seen through the multiplication of private initiatives such as certification programs, sourcing commitments and improvement projects. Many of the issues addressed through CSR in seafood occur in the downstream end of seafood supply chains and include sustainable fish stocks, social aspects such as working conditions and fair wages, and transparency. High Liner Foods has continued its leadership position with the publication of CSR reports in 2017 and 2018, which disclose many of the improvement efforts underway. High Liner’s business and operations are subject to environmental laws and regulations, including those relating to permitting requirements, wastewater discharges, air emissions (greenhouse gases and other), releases of hazardous substances and remediation of contaminated sites. The Company believes that its operations are in compliance, in all material respects, with environmental laws and regulations. Compliance with these laws and regulations requires that the Company continue to incur operating and maintenance costs and capital expenditures, including to control potential impacts of its operations on local communities. Future events such as changes in environmental laws and regulations or more vigorous regulatory enforcement policies could have a material adverse effect on the Company’s financial position and could require additional expenditures to achieve or maintain compliance. In the long term, further enhancing policies related to sustainability, environmental and social compliance both within High Liner Foods and its supply chain may add to High Liner Foods’ costs and reduce margins. Growth (Other than by Acquisition) A key component of High Liner Foods’ growth strategy is organic or internal growth by (a) increasing sales and earnings in existing markets with existing products; and (b) expanding into new markets and products. There can be no assurance that the Company will be successful in growing its business or in managing its growth in a manner consistent with this strategy. Furthermore, successful expansion may place a significant strain on key personnel of High Liner Foods, from a retention perspective, as well as on its operations, financial resources and other resources. The Company’s ability to manage growth will also depend in part on its ability to continue to grow and enhance its information systems in a timely fashion. It must also manage succession planning for personnel across the organization to support such growth. Any inability to properly manage growth could result in cancellation of customer orders, as well as increased operating costs, and correspondingly, could have an adverse effect on High Liner Foods’ financial results. In addition, the success of the Company depends in part on the Company’s ability to respond to market trends and produce innovative products that anticipate and respond to the changing tastes and dietary habits of consumers. From time to time certain products are deemed more or less healthy and this can impact consumer buying patterns. The Company’s failure to anticipate, identify, or react to these changes or to innovate could result in declining demand and prices for the Company’s products, which in turn could have a material adverse effect on the Company’s financial condition and results of operations. Acquisition and Integration Risk A component of the Company’s strategy is to pursue acquisition opportunities to support sales and earnings growth and further species diversification. While management intends to be careful in selecting businesses to acquire, acquisitions inherently involve a number of risks, including, but not limited to, the possibility that the Company pays more than the acquired assets are worth; the additional expense associated with completing an acquisition; the potential loss of customers of the particular business; the difficulty of assimilating the operations and personnel of the acquired business; the challenge of implementing uniform standards, controls procedures and policies throughout the acquired business; the inability to integrate, train, retain and motivate key personnel of the acquired business; the potential disruption to the Company’s ongoing business and the MD&A48 HIGH LINER FOODS distraction of management from the Company’s day-to-day operations; the inability to incorporate acquired businesses successfully into the Company’s existing operations; and the potential impairment of relationships with the Company’s employees, suppliers and customers. If any one or more of such risks materialize, they could have a material adverse effect on the Company’s business, financial condition, liquidity and operating results. In addition, the Company may not be able to maintain the levels of operating efficiency that the acquired company had achieved or might have achieved had it not been acquired by the Company. Successful integration of the acquired company’s operations would depend upon the Company’s ability to manage those operations and to eliminate redundant and excess costs. As a result of difficulties associated with combining operations, the Company may not be able to achieve the cost savings and other benefits that it expected to achieve with the acquisition. Any difficulties in this process could disrupt the Company’s ongoing business, distract its management, result in the loss of key personnel or customers, increase its expenses and otherwise materially adversely affect the Company’s business, financial condition, liquidity and operating results. Further, inherent in any acquisition, there is risk of liabilities and contingencies that the Company may not discover in its due diligence prior to the consummation of a particular acquisition, and the Company may not be indemnified for some or all of these liabilities and contingencies. The discovery of any material liabilities or contingencies in any acquisition could also have a material adverse effect on the Company’s business, financial condition, liquidity and operating results. Employment Matters The Company and its subsidiaries have approximately 1,300 full-time and part-time employees, which include salaried and union employees, some of whom are covered by collective agreements. These employees are located in various jurisdictions, each such jurisdiction having differing employment laws. While the Company maintains systems and procedures to comply with the applicable requirements, there is a risk that failures or lapses by individual managers could result in a violation or cause of action that could have a material adverse effect on the Company’s financial condition and results of operations. Furthermore, if a collective agreement covering a significant number of employees or involving certain key employees were to expire or otherwise cease to have effect leading to a work stoppage, there can be no assurance that such work stoppage would not have a material adverse effect on the Company’s financial condition and results of operations. The Company’s success is also dependent on its ability to recruit and retain qualified personnel. The loss of one or more key personnel could have a material adverse effect on the Company’s financial condition and results of operations. Credit Risk The Company grants credit to its customers in the normal course of business. Credit valuations are performed on a regular basis and the financial statements take into account an allowance for bad debts. The Company considers that it has low exposure to concentration of credit risk with respect to accounts receivable from customers due to its large and diverse customer base. Although we insure our accounts receivable risk, our bad debt expense has historically been insignificant. As of the filing of this report, we are not aware of any customer that is in financial trouble that would result in a material loss to the Company and our receivables are substantially current at year-end. MD&AAnnual Report 2018 49 Foreign Currency High Liner Foods reports its results in USD to reduce volatility caused by changes in the USD to CAD exchange rate. The Company’s results of operations and financial condition are both affected by foreign currency fluctuations in a number of ways. The table below summarizes the effects of foreign exchange on our operations in their functional currency: Currency CAD CAD Euro Euro Strength Strong Weak Strong Weak Asian currencies Strong Asian currencies Weak USD USD Strong Weak Impact on High Liner Foods Results in a reduction in the cost of inputs for the Canadian operations in CAD. Competitive activity may result in some selling price declines on unprocessed product. Results in an increase in the cost of inputs for the Canadian operations in CAD. Justified cost increases are usually accepted by customers. If prices rise too sharply there may be a volume decline until consumers become accustomed to the new level of pricing. Results in increased demand from Europe for seafood supplies and may increase prices in USD. Results in decreased demand from Europe for seafood supplies and may decrease prices in USD. Results in higher cost for seafood related to Asian-domestic inputs such as labour and overheads of primary producers. As well, increased demand may result from domestic Asian markets increasing USD prices. Justified cost increases are usually accepted by customers. If prices rise too sharply, there may be a volume decline until consumers become accustomed to the new level of pricing. Results in lower cost for seafood related to Asian-domestic inputs such as labour and overheads of primary producers. As well, decreased demand may result from domestic Asian markets, decreasing USD prices. Competitive activity may result in some selling price declines on unprocessed product. As in most commodities, a strong USD usually decreases input costs in USD, as suppliers in countries not using the USD need less USD to receive the same amount in domestic currency. In Canadian operations, it increases input costs in CAD. As in most commodities, a weak USD usually increases input costs in USD, as suppliers in countries not using the USD need more USD to receive the same amount in domestic currency. In Canadian operations, it decreases input costs in CAD. The value of the USD compared to other world currencies has an impact on many commodities, including seafood, packaging, flour-based products, cooking oil and transportation costs that are either sold in USD or have USD- input costs. This is because many producing countries do not use the USD as their functional currency and, therefore, changes in the value of the USD means that producers in other countries need less or more USD to obtain the same amount in their domestic currency. Changes in the value of the CAD by itself against the USD simply result in an increase or decrease in the CAD cost of inputs. For products sold in Canada, raw material is purchased in USD and flour-based ingredients, cooking oils and transportation costs all have significant commodity components that are traded in USD. However, labour, packaging and ingredient conversion costs, overheads and SG&A costs are incurred in CAD. A strengthening CAD decreases the cost of these inputs and vice versa in the Canadian operation’s domestic currency. When the value of the CAD changes, competitive factors on commodity products, primarily raw frozen shellfish and groundfish, especially in our Canadian foodservice business, force us to react when competitors use a lower CAD cost of imported products to decrease prices and, therefore, pass on the cost decrease to customers. An increasing CAD cost usually results in higher selling prices to Canadian customers. The Parent has a CAD functional currency, meaning that all transactions are recorded in CAD. However, as we report in USD, the results of the Parent are converted into USD for external reporting purposes. As such, fluctuations in exchange rates impact the translated value of the Parent’s sales, costs and expenses when translated to USD. Although High Liner Foods reports in USD, our Canadian operations continue to be managed in CAD. Therefore, in accordance with the Company’s “Price Risk Management Policy” (the “Policy”), we undertake hedging activities, buying USD forward and using various derivative products. To reduce our exposure to the USD on the more price inelastic items, the Policy allows us to hedge forward a maximum of 15 months of purchases; at 70-90% of exposure for the first three months, 55-85% for the next three months, 30-75% for the next three months, 10-60% for the next three months, and 0-60% for the last three months. The lower end of these ranges is required to be hedged by the Policy, with the upper ranges allowed if management believes the situation warrants a higher level of purchases to be hedged. Variations from the Policy require the approval of the Audit Committee. MD&A50 HIGH LINER FOODS The Policy excludes certain products where the price in the marketplace moves up or down with changes in the CAD cost of the product. Approximately $60.0-80.0 million of the USD purchases of the Parent are part of the hedging program annually and are usually hedged between 40.0% and 75.0% of the next twelve months of forecasted purchases. We are currently forecasting purchases of $48.8 million to be hedged in 2019 and of this amount, 47.0% are currently hedged. results of operations, cash flows, financial position or prospects and which could impact its liquidity and ability to declare and pay dividends (whether at current levels, revised levels or at all), and is also dependent on, among other things the ability of the Company to generate sufficient cash flows, the financial requirements of High Liner, and applicable solvency tests and contractual restrictions (whether under credit agreements or other contracts). Details on the hedges in place as at December 29, 2018 are included in Note 25 “Fair value measurement” to the Consolidated Financial Statements. Liquidity Risk The ability of the Company to secure short-term and long- term financing on terms acceptable to the Company is critical to fund business growth and manage its liquidity. Our primary sources of working capital are cash flows from operations and borrowings under our credit facilities. We actively manage our relationships with our lenders and have adequate credit facilities in place until April 2021, when the working capital credit facility expires. The failure or inability of the Company to secure short-term and long-term financing in the future on terms that are commercially reasonable and acceptable to the Company could have a significant impact on the Company’s opportunity for growth. The Company monitors its risk to a shortage of funds using a detailed budgeting process that identifies financing needs for the next twelve months as well as models that look out five years. Working capital and cash balances are monitored daily and a procurement system provides information on commitments. This process projects cash flows from operations. The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, letters of credit, bank loans, notes payable and finance leases. The Company’s objective is that not more than 50% of borrowings should mature in the next twelve- month period. At December 29, 2018, less than 4% of our debt will mature in less than one year based on the carrying value of borrowings reflected in the Consolidated Financial Statements. Our long-term debt is described in Note 14 “Long-term debt and finance lease obligations” to the Consolidated Financial Statements. At December 29, 2018 and at the date of this document, we are in compliance with all covenants and terms of our banking facilities. Uncertainty of Dividend Payments Payment of dividends may be impacted by factors that can have a material adverse effect on High Liners’ business, As the payment of dividends is subject to the discretion of the Company’s Board of Directors, the Company’s dividend policy could change at any time if the Board determines that a change is in the best interests of the Company. Pension Plan Assets and Liabilities In the normal course of business, the Company provides post-retirement pension benefits to its employees under both defined contribution and defined benefit pension plan arrangements. The funded status of the plans significantly affects the net periodic benefit costs of the Company’s pension plans and the ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, and the market value of plan assets can affect the level of plan funding required, increase the Company’s future funding requirements, and cause volatility in the net periodic pension cost as well as the Company’s financial results. Any increase in pension expense or funding requirements could have a material adverse impact on the Company’s financial condition and results of operations. The asset mix of our defined benefit pension plans was established with the objective of reducing the volatility of the plan’s anticipated funded position. This has resulted in investing part of the portfolio in fixed income assets with a duration similar to that of the pension obligations. The latest actuarial valuations of these two plans were performed during Fiscal 2016 and Fiscal 2017 and showed: combined going concern surpluses of CAD$2.9 million; one plan had a solvency deficit of CAD$1.4 million; and the other plan had a solvency deficit of CAD$3.4 million. Information Technology and Cybersecurity Risk High Liner Foods relies on information technology systems and network infrastructure in all areas of operations and is therefore exposed to an increasing number of sophisticated cybersecurity threats. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving. A cybersecurity attack and a breach of sensitive information could disrupt systems and services and compromise the Company’s financial position or brands, and/or otherwise adversely affect the ability to achieve its strategic objectives. MD&AAnnual Report 2018 51 The Company maintains policies, processes and procedures to address capabilities, performance, security and availability including resiliency and disaster recovery for systems, infrastructure and data. Security protocols, along with corporate information security policies, address compliance with information security standards, including those relating to information belonging to the Company’s customers and employees. The Company actively monitors, manages and continues to enhance its ability to mitigate cyber risk through its enterprise-wide programs. The implementation of major information technology projects carries with it various risks, including the risk of realization of benefits, that must be mitigated by disciplined change management and governance processes. The Company has a business process optimization team staffed with knowledgeable internal resources (supplemented by external resources as needed) that is responsible for implementing the various initiatives. Forward-Looking Information This MD&A contains forward-looking statements within the meaning of securities laws. In particular, these forward- looking statements are based on a variety of factors and assumptions that are discussed throughout this document. In addition, these statements and expectations concerning the performance of our business in general are based on a number of factors and assumptions including, but not limited to: availability, demand and prices of raw materials, energy and supplies; the condition of the Canadian and American economies; product pricing; foreign exchange rates, especially the rate of exchange of the CAD to the USD; our ability to attract and retain customers; our operating costs and improvement to operating efficiencies; interest rates; continued access to capital; the competitive environment and related market conditions; and the general assumption that none of the risks identified below or elsewhere in this document will materialize. Specific forward-looking statements in this document include, but are not limited to: statements with respect to: future growth strategies and their impact on the Company’s market share and shareholder value; anticipated financial performance, including earnings trends and growth; achievement, and timing of achievement, of strategic goals and publicly stated financial targets, including to increase our market share, acquire and integrate other businesses and reduce our operating and supply chain costs; and our ability to develop new and innovative products that result in increased sales and market share; increased demand for our products whether due to the recognition of the health benefits of seafood or otherwise; changes in costs for seafood and other raw materials; any proposed disposal of assets and/ or operations; increases or decreases in processing costs; the USD/CAD exchange rate; percentage of sales from our brands; expectations with regards to sales volume, earnings, product margins, product innovations, brand development and anticipated financial performance; competitor reaction to Company strategies and actions; impact of price increases or decreases on future profitability; sufficiency of working capital facilities; future income tax rates; the expected timing and the amount of the recovery associated with product recall costs; our ability to successfully integrate the acquisition of Rubicon Resources, LLC; levels of accretion and synergy and earnings growth relating to Rubicon; the expected amount and timing of integration activities related to acquisitions; expected leverage levels and expected net interest-bearing debt to Adjusted EBITDA; statements under the “outlook” heading including expected demand, sales of new product, the efficiency of our plant production and U.S. tariffs on certain seafood products imported from China; expected amount and timing of cost savings related to the optimization of the Company’s structure; decreased leverage in the future; estimated capital spending; future inventory trends and seasonality; market forces and the maintenance of existing customer and supplier relationships; availability of credit facilities; our projection of excess cash flow and minimum repayments under the Company’s long-term loan facility; expected decreases in debt-to-capitalization ratio; dividend payments; and amount and timing of the capital expenditures in excess of normal requirements to allow the movement of production between plants. Forward-looking statements can generally be identified by the use of the conditional tense, the words “may”, “should”, “would”, “could”, “believe”, “plan”, “expect”, “intend”, “anticipate”, “estimate”, “foresee”, “objective”, “goal”, “remain” or “continue” or the negative of these terms or variations of them or words and expressions of similar nature. Actual results could differ materially from the conclusion, forecast or projection stated in such forward-looking information. As a result, we cannot guarantee that any forward-looking statements will materialize. Assumptions, expectations and estimates made in the preparation of forward-looking statements and risks that could cause our actual results to differ materially from our current expectations are discussed in detail in the Company’s materials filed with the Canadian securities regulatory authorities from time to time, including the Risk Factors section of this MD&A and the Risk Factors section of our most recent AIF. The risks and uncertainties MD&A52 HIGH LINER FOODS that may affect the operations, performance, development and results of High Liner Foods’ business include, but are not limited to, the following factors: volatility in the CAD/ USD exchange rate; the interpretation of the U.S. Tax Reform by tax authorities; competitive developments including increases in overseas seafood production and industry consolidation; availability and price of seafood raw materials and finished goods and the impact of geopolitical events (and related economic sanctions) on same; the impact of the U.S. Administration’s tariffs on certain seafood products; costs of commodity products and other production inputs, and the ability to pass cost increases on to customers; successful integration of acquired operations; potential increases in maintenance and operating costs; shifts in market demands for seafood; performance of new products launched and existing products in the market place; changes in laws and regulations, including environmental, taxation and regulatory requirements; technology changes with respect to production and other equipment and software programs; enterprise resource planning system risk; supplier fulfillment of contractual agreements and obligations; competitor reactions; High Liner Foods’ ability to generate adequate cash flow or to finance its future business requirements through outside sources; compliance with debt covenants; the availability of adequate levels of insurance; and management retention and development. Forward-looking information is based on management’s current estimates, expectations and assumptions, which we believe are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Except as required under applicable securities laws, we do not undertake to update these forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf, whether as a result of new information, future events or otherwise. MD&AAnnual Report 2018 53 Management’s Responsibility To the Shareholders of High Liner Foods Incorporated The Management of High Liner Foods Incorporated includes corporate executives, operating and financial managers and other personnel working full-time on Company business. The statements have been prepared in accordance with generally accepted accounting principles consistently applied, using management’s best estimates and judgments, where appropriate. The financial information elsewhere in this report is consistent with the statements. Management has established a system of internal control that it believes provides a reasonable assurance that, in all material respects, assets are maintained and accounted for in accordance with management’s authorization and transactions are recorded accurately on the Company’s books and records. The Company’s internal audit program is designed for constant evaluation of the adequacy and effectiveness of the internal controls. Audits measure adherence to established policies and procedures. The Audit Committee of the Board of Directors is composed of four outside directors. The Committee meets periodically with management, the internal auditor and independent chartered professional accountants to review the work of each and to satisfy itself that the respective parties are properly discharging their responsibilities. The independent chartered professional accountants and the internal auditor have full and free access to the Audit Committee at any time. In addition, the Audit Committee reports its findings to the Board of Directors, which reviews and approves the consolidated financial statements. Dated February 27, 2019 (Signed) P.A. Jewer, FCPA Executive Vice President and Chief Financial Officer 54 HIGH LINER FOODS Independent Auditors’ Report To the Shareholders of High Liner Foods Incorporated We have audited the consolidated financial statements of High Liner Foods Incorporated and its subsidiaries [the “Group”], which comprise the consolidated statements of financial position as at December 29, 2018 and December 30, 2017, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of accumulated other comprehensive income (loss), consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the fifty-two weeks then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 29, 2018 and December 30, 2017, and its consolidated financial performance and its consolidated cash flows for the fifty-two weeks then ended in accordance with International Financial Reporting Standards [“IFRSs”]. BASIS FOR OPINION We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. OTHER INFORMATION Management is responsible for the other information. The other information comprises: • Management’s Discussion and Analysis • The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance. RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, 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. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Annual Report 2018 55 AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Gina Kinsman. Chartered Professional Accountants Licensed Public Accountants Halifax, Canada February 27, 2019 56 HIGH LINER FOODS Annual Report 2018 56 Consolidated Statements of Financial Position (in thousands of United States dollars) Notes December 29, 2018 December 30, 2017 ASSETS Current assets Cash Accounts receivable Income taxes receivable Other financial assets Inventories Prepaid expenses Total current assets Non-current assets Property, plant and equipment Deferred income taxes Other receivables and miscellaneous assets Intangible assets Goodwill Total non-current assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Bank loans Accounts payable and accrued liabilities Contract liability Provisions Other current financial liabilities Other current liabilities Income taxes payable Current portion of long-term debt Current portion of finance lease obligations Total current liabilities Non-current liabilities Long-term debt Other long-term financial liabilities Other long-term liabilities Long-term finance lease obligations Deferred income taxes Future employee benefits Total non-current liabilities Total liabilities Shareholders’ equity Common shares Contributed surplus Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes to the Consolidated Financial Statements 7 25 8 9 18 25 10 10 $ 9,568 84,873 6,411 2,504 301,411 4,333 409,100 114,371 7 1,013 155,594 157,070 428,055 $ 4,738 92,395 13,533 570 353,433 3,462 468,131 120,289 2,787 837 158,044 157,881 439,838 11, 14 $ 837,155 $ 907,969 11 12 19 13 25 14 14 14 25 14 18 15 16 $ 31,152 $ 53,352 157,162 205,855 4,772 1,460 78 245 585 13,655 372 209,481 4,055 278 1,965 166 — — 714 266,385 322,674 335,441 5 1,493 407 28,451 10,785 363,815 573,296 112,887 15,357 161,377 (25,762) 263,859 62 1,641 407 23,943 11,223 372,717 639,102 112,835 14,354 159,157 (17,479) 268,867 $ 837,155 $ 907,969 Notes to the Consolidated Financial Statements57 HIGH LINER FOODS Annual Report 2018 57 Consolidated Statements of Income (in thousands of United States dollars, except per share amounts) Revenues Cost of sales Gross profit Distribution expenses Selling, general and administrative expenses Impairment of property, plant and equipment Business acquisition, integration and other (income) expense Results from operating activities Finance costs Income before income taxes Income taxes Current Deferred Total income tax expense (recovery) Net income Earnings per common share Basic Diluted Weighted average number of shares outstanding Basic Diluted See accompanying notes to the Consolidated Financial Statements Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 $ 1,048,531 $ 1,053,846 860,374 188,157 52,649 92,208 1,302 (2,471) 44,469 21,603 22,866 1,583 4,507 6,090 867,767 186,079 49,827 99,449 — 2,639 34,164 16,626 17,538 (723) (13,392) (14,115) $ 16,776 $ 31,653 $ $ 0.50 0.50 $ $ 0.98 0.97 33,617,203 33,618,919 32,412,215 32,527,296 Notes 19 9 6, 15 28 18 18 20 20 20 20 Notes to the Consolidated Financial Statements58 HIGH LINER FOODS Annual Report 2018 58 Consolidated Statements of Comprehensive Income (in thousands of United States dollars) Net income Other comprehensive income (loss), net of income tax Other comprehensive income (loss) to be reclassified to net income: (Loss) gain on hedge of net investment in foreign operations Gain (loss) on translation of net investment in foreign operations Translation impact on Canadian dollar denominated non-AOCI items Translation impact on Canadian dollar denominated AOCI items Total exchange (losses) gains on translation of foreign operations and Canadian dollar  denominated items Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to carrying amount of hedged item Net change in fair value of cash flow hedges transferred to income Translation impact on Canadian dollar denominated AOCI items Total exchange gains (losses) on cash flow hedges Net other comprehensive (loss) gain to be reclassified to net income Other comprehensive income (loss) not to be reclassified to net income Defined benefit plan actuarial gains (losses) Other comprehensive (loss) income, net of income tax Total comprehensive income Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 $ 16,776 $ 31,653 (25,160) 35,067 (21,793) 1,608 (10,278) 3,494 (533) (181) (785) 1,995 (8,283) 107 (8,176) 20,985 (30,309) 17,803 (1,291) 7,188 (1,838) 482 436 579 (341) 6,847 (1,877) 4,970 $ 8,600 $ 36,623 Consolidated Statements of Accumulated Other Comprehensive Income (Loss) (“AOCI”) (in thousands of United States dollars) Balance at December 30, 2017 Total exchange losses on translation of foreign operations and Canadian  dollar denominated items Total exchange losses on cash flow hedges Balance at December 29, 2018 Balance at December 31, 2016 Total exchange gains on translation of foreign operations and Canadian  dollar denominated items Total exchange losses on cash flow hedges Balance at December 30, 2017 See accompanying notes to the Consolidated Financial Statements Foreign currency translation differences Net exchange differences on cash flow hedges Total AOCI $ (17,699) $ 220 $ (17,479) $ $ (10,278) — (27,977) (24,887) 7,188 — $ $ $ (17,699) $ — 1,995 2,215 561 — (341) 220 $ $ (10,278) 1,995 (25,762) (24,326) 7,188 (341) $ (17,479) Notes to the Consolidated Financial Statements59 HIGH LINER FOODS Annual Report 2018 59 Consolidated Statements of Changes in Shareholders’ Equity (in thousands of United States dollars) Balance at December 30, 2017 Other comprehensive income Net income Common share dividends Share-based compensation Balance at December 29, 2018 Balance at December 31, 2016 Other comprehensive income Net income Common share dividends Share-based compensation Share issuance Balance at December 30, 2017 See accompanying notes to the Consolidated Financial Statements Common shares Contributed surplus Retained earnings AOCI Total $ 112,835 $ 14,354 $ 159,157 $ (17,479) $ 268,867 — — — 52 $ $ 112,887 86,094 $ $ — — — 983 25,758 — — — 1,003 15,357 14,654 $ $ — — — (300) — 107 16,776 (14,663) — 161,377 143,782 (1,877) 31,653 (14,355) — (46) (8,283) — — — $ $ (25,762) (24,326) 6,847 $ $ — — — — (8,176) 16,776 (14,663) 1,055 263,859 220,204 4,970 31,653 (14,355) 683 25,712 $ 112,835 $ 14,354 $ 159,157 $ (17,479) $ 268,867 Notes to the Consolidated Financial Statements60 HIGH LINER FOODS Annual Report 2018 60 Consolidated Statements of Cash Flows (in thousands of United States dollars) Cash flows provided by (used in): Operating activities Net income Adjustments to net income not involving cash from operations: Depreciation and amortization Share-based compensation expense Loss on asset disposals and impairment Future employee benefits contribution, net of expense Finance costs Income tax expense (recovery) Unrealized foreign exchange gain Cash flows provided by operations before changes in non-cash working capital, interest and  income taxes refunded (paid) Changes in non-cash working capital balances: Accounts receivable Inventories Prepaid expenses Accounts payable and accrued liabilities Provisions Net change in non-cash working capital balances Interest paid Income taxes refunded (paid) Net cash flows provided by (used in) operating activities Financing activities (Decrease) increase in bank loans Repayment of finance lease obligations Proceeds of long-term debt Deferred finance costs Common share dividends paid Options exercised for shares Share issuance Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 Notes 24 17 9 18 $ 16,776 $ 31,653 17,771 1,237 1,565 (84) 21,603 6,090 (311) 16,311 771 789 233 16,626 (14,115) (937) 64,647 51,331 5,666 44,561 (1,030) (45,977) 1,221 4,441 (19,917) 7,762 56,933 (21,380) (598) — (325) (14,663) 24 — (1,612) (37,158) 321 (10,284) (176) (48,909) (14,745) (9,166) (21,489) 52,618 (725) 70,000 (1,276) (14,355) 140 (73) 21 21 14, 21 Net cash flows (used in) provided by financing activities (36,942) 106,329 Investing activities Purchase of property, plant and equipment, net of investment tax credits, and  intangible assets Net proceeds on disposal of assets Acquisition of business, net of cash acquired Net cash flows used in investing activities Foreign exchange (decrease) increase on cash Net change in cash during the period Cash, beginning of period Cash, end of period See accompanying notes to the Consolidated Financial Statements 5 (13,961) 119 — (13,842) (1,319) 4,830 4,738 9,568 $ (26,488) 331 (74,911) (101,068) 2,714 (13,514) 18,252 4,738 $ Notes to the Consolidated Financial StatementsAnnual Report 2018 61 Notes to the Consolidated Financial Statements In United States dollars, unless otherwise noted 1. Corporate information High Liner Foods Incorporated (the “Company” or “High Liner Foods”) is a company incorporated and domiciled in Canada. The address of the Company’s registered office is 100 Battery Point, P.O. Box 910, Lunenburg, Nova Scotia, B0J 2C0. The Consolidated Financial Statements (“Consolidated Financial Statements”) of the Company as at and for the fifty-two weeks ended December 29, 2018, comprise High Liner Foods’ Canadian company (the “Parent”) and its subsidiaries (herein together referred to as the “Company” or “High Liner Foods”). The Company is primarily involved in the processing and marketing of prepared and packaged frozen seafood products. These Consolidated Financial Statements were authorized for issue in accordance with a resolution of the Company’s Board of Directors on February 27, 2019. 2. Statement of compliance and basis for presentation These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These Consolidated Financial Statements have been prepared on the historical-cost basis except for derivative financial instruments, financial instruments at fair value through profit or loss, and liabilities for cash-settled share-based compensation payment arrangements, which are measured at fair value, and the defined benefit employee future benefit liability which is recognized as the net total of the plan assets plus unrecognized past-service costs and the present value of the defined benefit obligation. 3. Significant accounting policies (a) Basis of consolidation These Consolidated Financial Statements comprise the financial statements of the Company and its subsidiaries as at December 29, 2018. Control is achieved when the Company is exposed, or has rights, to direct the activities that significantly affect the returns from its involvement with the investee. The Company reassesses whether or not it controls an investee on an ongoing basis. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Company’s accounting policies. All intercompany balances, equity, income, expenses and cash flows are eliminated in full on consolidation. (b) Foreign currency FUNCTIONAL AND PRESENTATION CURRENCY The Company determines its functional currency based on the currency of the primary economic environment in which it operates. The Parent’s functional currency is the Canadian dollar (“CAD”), while the functional currencies of its subsidiaries are the CAD and the United States dollar (“USD”). The Company has chosen a USD presentation currency for its Consolidated Financial Statements because the USD better reflects the Company’s overall business activities and improves investors’ ability to compare the Company’s consolidated financial results with other publicly traded businesses in the packaged foods industry (most of which are based in the United States [“U.S.”] and report in USD) and should result in less volatility in reported sales and income on the conversion to the presentation currency. The Company follows the requirements set out in IAS 21, The Effects of Change in Foreign Exchange Rates to translate to the presentation currency. The assets and liabilities of the Parent are translated to USD at the exchange rate as at the reporting date, and the income and expenses of the Parent are translated to USD at the monthly average exchange rates of the reporting period. Foreign currency differences are recognized in other comprehensive income (“OCI”). Notes to the Consolidated Financial Statements62 HIGH LINER FOODS TRANSLATION OF TRANSACTIONS AND BALANCES INTO THE FUNCTIONAL CURRENCY Transactions in currencies other than the functional currency (“foreign currencies”) are translated to the respective functional currencies of the Parent and its subsidiaries at the exchange rates prevailing at the dates of the transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rate prevailing at that date. Foreign currency non-monetary items that are measured in terms of historical cost are not retranslated. Foreign currency non-monetary items that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Differences arising on settlement or translation of monetary items are recognized in the consolidated statements of income with the exception of monetary items that are designated as part of the hedge of the Company’s net investment in a foreign operation. The latter exchange differences are recognized in OCI, to the extent the hedge is effective, until the net investment is disposed of or the hedge is ineffective, at which time the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in OCI. (c) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Any contingent consideration to be transferred by the Company will be recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 – Financial Instruments (“IFRS 9”), is measured at fair value with changes in fair value recognized either in the consolidated statements of income. If the contingent consideration is not within the scope of IFRS 9, it is measured in accordance with the appropriate IFRS. When the Company acquires a business, it assesses the financial assets and financial liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Acquisition-related costs are expensed as incurred and included in business acquisition, integration and other expenses in the consolidated statements of income. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests, and any previous interest held, over the net identifiable assets acquired and liabilities assumed. After initial recognition, goodwill is not amortized, and is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash generating units (“CGUs”) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. (d) Non-current assets held for sale and discontinued operations The Company classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell (“FVLCS”). For the asset to be classified as held for sale, the sale must be highly probable and the asset or disposal group must be available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Property, plant and equipment and intangible assets are not depreciated or amortized once classified as held for sale. (e) Cash Cash includes cash on hand and demand deposits with initial and remaining maturity of three months or less. Cash does not include any restricted cash. Notes to the Consolidated Financial StatementsAnnual Report 2018 63 (f) Inventories Inventories are measured at the lower of cost and net realizable value. The cost of manufactured inventories is based on the first-in first-out method. The cost of procured finished goods and unprocessed raw material inventory is based on weighted average cost. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories includes expenditures incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing the inventories to their existing location and condition. In the case of manufactured inventories and semi-finished materials, cost includes an appropriate share of production overheads based on normal operating capacity. Cost may also include transfers from OCI of any gain or loss on qualifying cash flow hedges of foreign currency related to purchases of inventories. (g) Property, plant and equipment Property, plant and equipment is recorded at cost less accumulated depreciation and accumulated impairment losses, if any. The initial cost of an asset comprises its purchase price or construction cost, any expenditures directly attributable to bringing the asset into operation, and the present value of the expected cost for decommissioning the asset after its use, if the recognition criteria for a provision are met. The cost of self-constructed assets includes the cost of materials, direct labour, other costs directly attributable to bringing the assets to a working condition for their intended use, and costs of dismantling and removing the items and restoring the site on which they are located. Cost may also include transfers from OCI of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. The capitalized value of a finance lease is also included in property, plant and equipment, and is measured at the lower of the present value of the minimum lease payments and the fair value of the leased asset. Subsequent costs are included in the asset’s carrying amount when it is probable that future economic benefits associated with the asset will flow to the Company, and the costs can be measured reliably. This would include costs related to the refurbishment or replacement of major components of the asset, when the refurbishment results in a significant extension in the physical life of the component, and in which case, the carrying amount of the replaced part is derecognized. The costs of the day-to-day maintenance of property, plant and equipment are expensed as incurred in the consolidated statements of income. Gains or losses from the derecognition of an asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income when the asset is derecognized. The cost of property, plant and equipment, less any residual value, is allocated over the estimated useful life of the asset on a straight-line basis. Depreciation is recognized on a straight-line basis as this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets and leasehold improvements are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives applicable to each category of property, plant and equipment, except for land, for the current and comparative periods are as follows: Buildings Furniture, fixtures and production equipment Computer equipment and vehicles 20–40 years 10–25 years 4–10 years When components of an item of property, plant and equipment have different useful lives than those noted above, they are accounted for as separate items of property, plant and equipment. The estimated useful lives, depreciation methods, and residual values are reviewed annually, with any changes in estimate being accounted for prospectively from the date of the change. (h) Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date: whether fulfillment of the arrangement is dependent on the use of a specific asset(s) or the arrangement conveys a right to use the asset(s). Notes to the Consolidated Financial Statements64 HIGH LINER FOODS COMPANY AS A LESSEE Finance leases, which transfer substantially all the risks and rewards incidental to ownership of the leased item to the Company, are capitalized at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the consolidated statements of income. Operating lease payments are recognized as an expense in the consolidated statements of income on a straight-line basis over the lease term. (i) Intangible assets Intangible assets acquired separately are measured at cost on initial recognition. Intangible assets acquired in a business combination are recorded at fair value on the date of acquisition. Subsequent to initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses, if applicable. The useful lives of intangible assets are assessed to be either finite or indefinite. • Intangible assets with finite lives are amortized over their useful or economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. • Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually at the CGU level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether the indefinite life assessment continues to be supportable. Certain brands acquired through business combinations have no foreseeable limit to the period over which the assets are expected to generate net cash flows and are therefore determined to have indefinite useful lives. The estimated useful lives applicable to each category of intangible assets for the current and comparative periods are as follows: Brands Customer and supplier relationships Computer software Indefinite lived brands 2–8 years 10–25 years 3–15 years Indefinite, subject to impairment testing annually Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and accounted for prospectively from the date of the change. The amortization expense on intangible assets with finite lives is recognized in the consolidated statements of income in the expense category consistent with the function of the intangible asset. Gains or losses from the derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statements of income when the asset is derecognized. (j) Impairment NON-FINANCIAL ASSETS The carrying amounts of non-financial assets, excluding inventories and deferred income tax assets, are reviewed for impairment at each reporting date, or whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. If there are indicators of impairment, a review is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. Reviews are undertaken on an asset-by-asset basis, except where the recoverable amount for an individual asset cannot be determined, in which case the review is undertaken at a CGU level. On an annual basis, the Company evaluates the carrying amount of CGUs to which goodwill has been allocated, to determine whether such carrying amount may be impaired. To accomplish this, the Company compares the recoverable amount of a CGU to its carrying amount. This evaluation is performed more frequently if there is an indication that a CGU may be impaired. Notes to the Consolidated Financial StatementsAnnual Report 2018 65 The Company estimates the non-financial asset’s recoverable amount for the purpose of impairment testing using the higher of its FVLCS and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount. The excess of the carrying amount over the recoverable amount is considered an impairment loss and is recognized in the consolidated statements of income. With respect to CGUs, impairment losses are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro-rata basis. In determining FVLCS, an appropriate valuation model is used. These calculations are corroborated by the use of valuation multiples, quoted share prices and other available fair value indicators. For non-financial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previous impairment losses may no longer exist or may have decreased. If such an indication exists, the Company estimates the recoverable amount of the asset or CGU. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The impairment loss to be reversed in the consolidated statements of income is limited to the recoverable amount, but not beyond the carrying amount, net of depreciation or amortization, that would have arisen if the prior impairment loss had not been recognized. FINANCIAL ASSETS The Company adopted IFRS 9, Financial Instruments (“IFRS 9”) with an initial application date of December 31, 2017 (see Note 3(t)). The Company recognizes an allowance for expected credit losses (“ECL”) for all financial assets not held at fair value through profit and loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate (“EIR”). The expected cash flows include cash flows from the sale, collateral held and other credit enhancements that are integral to the contractual terms. In relation to trade receivables, the Company records ECLs on the entire accounts receivable balance. The Company applies the simplified approach and calculates the lifetime ECLs based on an established provision matrix that considers the Company’s historical credit loss experience, adjusted for forward-looking factors specific to the Company’s customers and the economic environment. The carrying amount of the asset or group of assets is reduced through use of an ECL account and the loss is recognized in the consolidated statements of income. The gross carrying amount of a financial asset is written off to the extent that there is no realistic prospect of recovery. (k) Provisions, contingent liabilities and contingent assets All provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resources as a result of present obligations is considered improbable or remote, no liability is recognized. When the Company expects some or all of a provision to be reimbursed, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the consolidated statements of income net of any reimbursement, when the reimbursement is realized in the same reporting period as the related expense. Possible inflows of economic benefits to the Company are considered contingent assets when the possible inflows become virtually certain. Restructuring provisions are recognized only when the Company has a constructive obligation, which is when: (i) there is a detailed formal plan that identifies the business or part of the business concerned, the location and number of employees affected, the expenditures that will be undertaken, and the timing of when the plan will be implemented; and (ii) the employees affected have been notified of the plan’s main features. (l) Future employee benefits DEFINED BENEFIT PENSION PLANS (“DBPP”) For DBPPs and other post-employment benefits, the net periodic pension expense is actuarially determined on an annual basis by independent actuaries using the projected-unit-credit method pro-rated on service and management’s best estimate of expected salary escalation and retirement ages of employees. Notes to the Consolidated Financial Statements66 HIGH LINER FOODS The determination of benefit expense requires assumptions such as the discount rate to measure the obligation, the projected age of employees upon retirement, the expected rate of future compensation increases and the expected mortality rate of pensioners. The total past-service cost arising from plan amendments is recognized immediately in the consolidated statements of income. The present value of the defined benefit obligation (“DBO”) is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. All actuarial gains and losses that arise in calculating the present value of the DBO and the fair value of plan assets are recognized immediately in the consolidated statements of comprehensive income. For funded plans, surpluses are recognized only to the extent that the surplus is considered recoverable. Recoverability is primarily based on the extent to which the Company can unilaterally reduce future contributions to the plan. Fair value is based on market price information, and in the case of quoted securities, is the published bid price. The value of any defined benefit asset recognized is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. DEFINED CONTRIBUTION PENSION PLANS (“DCPP”) A DCPP is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to DCPPs are recognized as an employee benefit expense in the consolidated statements of income in the periods during which services are rendered by employees. SHORT-TERM EMPLOYEE BENEFITS Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or incentive plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. TERMINATION BENEFITS Termination benefits are recognized as an expense when the Company is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits payable more than twelve months after the reporting period are discounted to their present value. (m) Revenue recognition Revenue from the sale of products is recognized when the terms of a contract with a customer has been satisfied, which occurs when control has been transferred to customers, either upon delivery to or pick-up by the customer. Revenue is measured as the amount of consideration the Company expects to receive, and varies with changes in marketing programs provided to customers, including volume rebates, cooperative advertising and other trade marketing programs that promote the Company’s products. Revenue from customer contracts is recognized based on the price specified in the contract, net of the estimated trade marketing programs. Accumulated historical experience is used to estimate and accrue for the trade marketing programs, using the expected value method or most likely method, depending on the program. Revenue is only recognized to the extent that it is highly probable that a significant reversal will not occur. A receivable is recognized when the goods are delivered or picked up by the customer as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. The Company has determined that no significant financing components exist with respect to contracts with customers, as account receivables bear normal commercial credit terms and are non-interest bearing. The Company has elected to apply the practical expedient and will recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period of the asset that the Company otherwise would have recognized is less than one year. See Note 3(t) for further details on the transition to IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). Notes to the Consolidated Financial StatementsAnnual Report 2018 67 (n) Share-based compensation EQUITY-SETTLED TRANSACTIONS The Company measures all equity-settled share-based awards made to employees and others providing similar services (collectively, “employees”) based on the fair value of the options or units on the date of grant. The grant date fair value of stock options is estimated using an option pricing model and is recognized as employee benefits expense over the vesting period, based on the number of options that are expected to vest, with a corresponding increase recognized in contributed surplus. The fair value estimate requires determination of the most appropriate inputs to the pricing model, including the expected life, volatility, and dividend yield, which are fully described in Note 17. The grant date fair value of equity-settled deferred share units, performance share units and restricted share units is determined based on the market value of the Company’s shares on the date of grant, and is expensed over the vesting period based on the estimated number of units that are expected to vest. Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of the award and lead to an immediate expensing of an award unless there are also service and/or performance conditions. See Note 3(t) for further details regarding final transition to IFRS 2, Share-based Payment (“IFRS 2”). When the terms of an equity-settled award are modified, the minimum expense recognized is the expense had the terms not been modified, if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based compensation payments or is otherwise beneficial to the employee as measured at the date of modification. CASH-SETTLED TRANSACTIONS The cost of cash-settled transactions is initially measured at fair value using the Company’s share price at the award grant date and is remeasured at each reporting date using the market value of the Company’s shares. The Company recognizes the fair value of the amount payable to employees as compensation expense as it is earned, based on the estimated number of units expected to vest with a corresponding change to the liability. The approach used to account for vesting conditions when measuring equity-settled transactions also applies to cash-settled transactions. In the case of stock options issued with tandem share appreciation rights (“SARs”), if employees elect to exercise their options for shares, thereby cancelling the SARs, share capital is increased by the sum of the consideration paid by employees and the liability is reversed, with any difference being recorded in the consolidated statements of income. (o) Income taxes Income tax expense comprises current and deferred income taxes, and is recognized in the consolidated statements of income, except to the extent that it relates to a business combination or to items recognized directly in equity or OCI. Current income tax is the expected tax payable or receivable on the taxable income or loss for the year using tax rates that are enacted or substantively enacted at the reporting date and any adjustment to taxes payable or receivable in respect of previous years. Current income tax assets and liabilities are offset if there is a legally enforceable right to offset current income tax assets and liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity or on different taxable entities but the entity intends to settle current income tax assets and liabilities on a net basis or their income tax assets and liabilities will be realized simultaneously. Deferred income 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 income tax is not recognized for the following temporary differences: (i) the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; (ii) differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future and the timing of the reversal of the temporary differences can be controlled, and (iii) taxable temporary differences arising on the initial recognition of goodwill which is not deductible for tax purposes. Deferred income tax assets and liabilities are measured at the enacted or substantively enacted rate that is expected to apply when the related temporary differences reverse. Notes to the Consolidated Financial Statements68 HIGH LINER FOODS A deferred income tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent it is probable future taxable profits will be available against which they can be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent it is no longer probable the related tax benefit will be realized. (p) Earnings per share Basic earnings per share is calculated by dividing net income attributable to equity holders by the weighted average number of shares outstanding during the period, accounting for any changes to the number of shares outstanding, except those transactions affecting the number of shares outstanding without a corresponding change in resources. Diluted earnings per share is calculated by dividing net income attributable to equity holders by the weighted average number of shares outstanding adjusted for the effects of all potentially dilutive shares. Potentially dilutive shares are only those shares that would result in a decrease to earnings per share or increase to loss per share. Dilutive shares are calculated using the treasury method for stock options, which assumes that outstanding units with an average exercise price below the market price of the underlying shares are exercised and the assumed proceeds are used to repurchase common shares of the Company at the average market price of the common shares for the period. The if-converted method is used for other share-based units, and assumes that all units have been converted in determining diluted earnings per share if they are in-the-money, except where such conversion would be anti-dilutive. (q) Financial instruments Financial instruments are measured at fair value on initial recognition of the instrument. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component and financial assets at fair value through profit or loss, the Company initially measures a financial asset at its fair value including related transaction costs. Trade receivables that do not contain a significant financing component are measured at the transaction price determined under IFRS 15, Revenue from Contracts with Customers (see Note 3(m)). In order for a financial asset to be classified and measured at amortized cost or fair value through OCI, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding, which is the Company’s business model. This assessment is referred to as the SPPI test and is performed at an instrument level. All financial liabilities are recognized initially at fair value, and in the case of loans and borrowings and payables, net of directly attributable transaction costs. Measurement in subsequent periods depends on whether the financial instrument has been classified as: (i) financial asset at fair value through profit or loss, (ii) financial assets at fair value through other comprehensive income, (iii) financial assets at amortized cost, (iv) financial liabilities at fair value through profit or loss, or (v) financial liabilities at amortized cost. FINANCIAL ASSETS OR LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (“FVTPL”) Financial assets and liabilities at FVTPL include financial instruments which are held-for-trading (“HFT”), financial instruments that are designated as FVTPL upon initial recognition, and financial instruments required to be measured at fair value. Financial instruments are classified as HFT if they are acquired for the purpose of selling or repurchasing in the near term. Financial instruments at FVTPL are carried in the consolidated statements of financial position at fair value with net changes in fair value presented as finance costs or finance income in the consolidated statements of income. ASSETS AT AMORTIZED COST Financial assets at amortized cost are non-derivative financial assets which are classified as such if the following conditions are met: (i) the financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. After initial measurement, such financial assets are subsequently measured at amortized cost using the EIR method, less any impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance costs in the consolidated statements of income. Any losses arising from impairment are recognized in the consolidated statements of income in finance costs for loans and in selling, general and administrative expenses for receivables. Notes to the Consolidated Financial StatementsAnnual Report 2018 69 FINANCIAL LIABILITIES AT AMORTIZED COST Financial liabilities at amortized cost generally include interest-bearing loans and borrowings. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in the consolidated statements of income when the liabilities are derecognized as well as through the EIR amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. Transaction costs are combined with the fair value of the financial liability on initial recognition and amortized using the EIR method. DERECOGNITION OF FINANCIAL INSTRUMENTS A financial asset is derecognized when the rights to receive cash flows from the asset have expired, the Company transfers its contractual rights to receive cash flows without retaining control or substantially all the risks and rewards of ownership of the asset, or the Company enters into a pass-through arrangement. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. When an existing liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially different, such an exchange or substantial modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated statements of income. Transaction costs related to the original financial liability are expensed in the event of an exchange or substantial modification, or if the terms of a modification are not substantially different, the transaction costs related to the original financial liability are combined with the new carrying amount, and amortized over the new term of the financial liability using the EIR method. The Company’s financial instruments are classified and subsequently measured as follows: Asset/liability Cash Accounts receivable Foreign exchange contracts Interest rate swaps Bank loans Accounts payable and accrued liabilities Provisions Long-term debt Finance lease obligations (r) Fair value measurement Classification Subsequent measurement Financial assets at amortized cost Financial assets at amortized cost Fair value through profit or loss Fair value through profit or loss Financial liabilities at amortized cost Financial liabilities at amortized cost Financial liabilities at amortized cost Financial liabilities at amortized cost Financial liabilities at amortized cost Amortized cost Amortized cost Fair value Fair value Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the Consolidated Financial Statements are categorized within the fair value hierarchy, described as follows, based on the lowest-level input that is significant to the fair value measurement as a whole: • Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities; • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; or • Level 3 – Valuation techniques for which the lowest-level input that is significant to the fair value measurement is unobservable. Notes to the Consolidated Financial Statements70 HIGH LINER FOODS For assets and liabilities that are recognized in the Consolidated Financial Statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest-level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability, and the level of the fair value hierarchy as explained above. (s) Derivative instruments and hedging All derivative instruments, including embedded derivatives that are not closely related to the host contract, are recorded in the consolidated statements of financial position at fair value on the date a contract is entered into and subsequently remeasured at fair value. At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedge instrument, the hedged item of the transaction, the nature of the risk being hedged and how the Company will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined). A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: • There is an economic relationship between the hedged item and the hedging instrument; • The effect of credit risk does not dominate the value changes that result from that economic relationship; and • The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Company actually hedges and the quantity of the hedging instrument that the Company actually uses to hedge that quantity of hedged item. Hedges that meet all the qualifying criteria for hedge accounting are accounted for as described below. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the hedge designation. The Company designates certain derivatives as one of the following: (i) Embedded derivatives are measured at fair value with changes in fair value recognized in the consolidated statements of income. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset or financial liability out of FVTPL. (ii) Fair value hedges are hedges of the fair value of recognized assets, liabilities or a firm commitment. Changes in the fair value of derivatives that are designated as fair value hedges are recorded in the consolidated statements of income together with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. (iii) Cash flow hedges are hedges of highly probable forecasted transactions. The effective portion of changes in the fair value of derivatives that are designated as cash flow hedges are recognized in OCI. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statements of income. Additionally: • Amounts accumulated in OCI are recycled to the consolidated statements of income in the period when the hedged item affects profit and loss; • When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss that was reported in OCI remains in AOCI and is recognized in the consolidated statements of income when the forecasted transaction ultimately affects profit and loss; and • When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in OCI is immediately recognized in the consolidated statements of income. (iv) Hedges of a net investment in a foreign operation are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognized in OCI while any gains or losses relating to the ineffective portion are recognized in the consolidated statements of income. On disposal of the foreign operation, the cumulative value of any such gains or losses recorded in AOCI is transferred to the consolidated statements of income. (v) Derivatives that do not qualify for hedge accounting Certain of the Company’s derivative instruments, while providing effective economic hedges, are not designated as Notes to the Consolidated Financial StatementsAnnual Report 2018 71 hedges for accounting purposes. Changes in the fair value of any derivatives that are not designated as hedges for accounting purposes are recognized as finance costs in the consolidated statements of income consistent with the underlying nature and purpose of the derivative instruments. (t) New standards, interpretations and amendments thereof, adopted by the Company The Company transitioned to the following new standards and amendments that were effective for annual periods beginning on January 1, 2018 and that the Company has adopted on December 31, 2017: IFRS 2, SHARE-BASED PAYMENT In June 2016, the IASB issued final amendments to IFRS 2, Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments, which were developed through the IFRS Interpretations Committee, provide requirements on the accounting for: (i) the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii) a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Company has adopted the amendments to IFRS 2; however they did not have a material impact on the Consolidated Financial Statements. IFRS 9, FINANCIAL INSTRUMENTS: CLASSIFICATION AND MEASUREMENT In 2015, the IASB issued the final version of the amendments to IFRS 9, Financial Instruments, issued in 2010, which replaced IAS 39. The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. The issuance of IFRS 9 provides guidance on the classification and measurement of financial assets and financial liabilities, and a new hedge accounting model with corresponding disclosures about risk management activity. With the exception of hedge accounting, which the Company applied prospectively, the Company has applied IFRS 9 retrospectively, with the initial application date of December 31, 2017. The Company performed a detailed impact assessment of all three aspects of IFRS 9; however, as discussed below, they did not have a material impact on the Consolidated Financial Statements and no adjustments to the comparative information for the period beginning January 1, 2017 were required. • The Company did not identify any changes to the classification and measurement of the existing financial instruments upon applying IFRS 9, other than a change in the classification of cash and accounts receivable from loans and receivables to financial assets at amortized cost, which had no impact on measurement of these financial instruments. The changes in the Company’s classification of financial instruments are as follows: Asset/liability Cash Accounts receivable Foreign exchange contracts Interest rate swaps Bank loans IFRS 9 – Classification IAS 39 – Classification Financial assets at amortized cost Loans and receivables Financial assets at amortized cost Loans and receivables Fair value through profit or loss Fair value through profit or loss Fair value through profit or loss Fair value through profit or loss Financial liabilities at amortized cost Other financial liabilities Accounts payable and accrued liabilities Financial liabilities at amortized cost Other financial liabilities Provisions Long-term debt Finance lease obligations Financial liabilities at amortized cost Other financial liabilities Financial liabilities at amortized cost Other financial liabilities Financial liabilities at amortized cost Other financial liabilities • The adoption of IFRS 9 has fundamentally changed the Company’s accounting for impairment losses for financial assets by replacing IAS 39’s incurred loss approach with a forward-looking expected credit loss (“ECL”) approach. IFRS 9 requires the Company to record ECL on the entire accounts receivable balance. The Company has applied the simplified approach and has calculated the lifetime ECLs based on an established provision matrix that considers the Company’s historical credit loss experience, adjusted for forward-looking factors specific to the Company’s customers and the economic environment. The adoption of the ECL requirements of IFRS 9 had an immaterial impact on the Consolidated Financial Statements (see Note 7). • The Company has concluded that all existing hedge relationships that are currently designated in effective hedging relationships will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of Notes to the Consolidated Financial Statements72 HIGH LINER FOODS how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 does not have an impact on the Company’s Consolidated Financial Statements. IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which replaces IAS 18, Revenue, IAS 11, Construction Contracts and various revenue-related interpretations. IFRS 15 establishes a new control-based revenue recognition model where revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard is applicable to all contracts the Company has with customers. The Company has elected to adopt the standard using the full retrospective method and applied the completed contract practical expedients, which allows the Company to exclude completed contracts that began and ended in the same annual reporting period and those contracts that were complete at the beginning of the earliest period presented. For completed contracts with variable consideration, the Company applied the practical expedient and has used the transaction price at the date when the contract was completed rather than estimating the variable consideration amounts in the comparative reporting periods because the Company has concluded that the difference was immaterial. The Company has applied the new standard and did not identify any material impacts on the consolidated statements of financial position or income upon initial application. Specifically, the adoption of IFRS 15 did not result in any material refinements to the current estimation methodologies or the timing of the recognition of estimates in relation to the Company’s trade marketing programs. However, the following two presentation differences on the consolidated statements of income have been identified: • The Company receives donated product at no cost from the United States Department of Agriculture for the purpose of processing the product for distribution to eligible recipient agencies. IFRS 15 requires the Company to include the fair value of the donated product in the transaction price recognized on the sale of the finished products. This will increase both the revenue recorded upon distribution to the eligible agencies and the related cost of sales (by an equivalent amount), as compared to the Company’s historical accounting treatment. • The Company identified payments made to a customer that were accounted for as a reduction of revenue under IFRS 15. This decreased revenue and the related cost of sales by an equivalent amount, as compared to the Company’s historical accounting treatment. If the Company did not elect to use the completed contract practical expedient, revenue and cost of sales in the comparative period would require adjustments, with no resulting impact on net income, as follows: • The Company would have recognized $4.7 million of incremental revenue and cost of sales on the sale of donated finished products for the fifty-two weeks ended December 30, 2017. • The Company would have decreased revenue and cost of sales recorded by $0.6 million for the fifty-two weeks ended December 30, 2017 for identified payments made to a customer that would be accounted for as a reduction of revenue under IFRS 15. (u) Accounting pronouncements issued but not yet effective The standards, amendments and interpretations that have been issued, but are not yet effective, up to the date of issuance of these financial statements are disclosed below. The Company intends to adopt these standards when they become effective. IFRS 16, LEASES In January 2016, the IASB issued IFRS 16, Leases, which replaces IAS 17, Leases, and its associated interpretive guidance. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. The standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted if entities have also applied IFRS 15, Revenue from Contracts with Customers. The Company has substantially completed the assessment of IFRS 16 and the impact the new standard will have on the consolidated financial statements, which will be significant as the Company will recognize new assets and liabilities for most of Notes to the Consolidated Financial StatementsAnnual Report 2018 73 the leases that are currently classified as operating leases. In addition, the nature and timing of expenses related to those leases will change as IFRS 16 replaces the straight-line operating lease expense with depreciation expense for right-of-use assets and an interest expense on the lease liabilities. The standard permits two methods of adoption: retrospectively to each reporting period presented (full retrospective method), or retrospective with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company has decided to adopt the standard on December 30, 2018 using the modified retrospective method with certain practical expedients that are available under this method. The Company has reached conclusions on key accounting policies upon transition to IFRS 16. The Company will finalize the impact of the new standard and disclosures on the consolidated financial statements during the first quarter of Fiscal 2019. IAS 19, EMPLOYEE BENEFITS In February 2018, the IASB issued amendments to IAS 19, Employee Benefits (“IAS 19”), which addresses the accounting when a plan amendment, curtailment or settlement occurs during the reporting period. The current service cost and net interest for the remainder of the period after the plan amendment, curtailment or settlement should reflect the updated actuarial assumptions after such an event. The amendments apply to plan amendments, curtailments, or settlements that occur on or after January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements. IFRIC INTERPRETATION 23, UNCERTAINTY OVER INCOME TAX TREATMENT The IFRS Interpretation Committee issued an Interpretation to address the accounting for income taxes when treatments involve uncertainty that affects the application of IAS 12, Income Taxes (“IAS 12”) and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately; • The assumptions an entity makes about the examination of tax treatments by taxation authorities; • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and • How an entity considers changes in facts and circumstances. An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The Interpretation is effective for annual reporting periods beginning on or after January 1, 2019, but certain transition reliefs are available. The Company will apply the interpretation from the effective date. The Company is currently evaluating the impact of the Interpretation on its consolidated financial statements. 4. Critical accounting estimates and judgments The preparation of the Company’s Consolidated Financial Statements requires management to make critical judgments, estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. On an ongoing basis, management evaluates the judgments, estimates and assumptions using historical experience and various other factors believed to be reasonable under the given circumstances. Actual outcomes may differ from these estimates and could require a material adjustment to the reported carrying amounts in the future. The most significant estimates made by management include the following: Impairment of non-financial assets The Company’s estimate of the recoverable amount for the purpose of impairment testing requires management to make assumptions regarding future cash flows before taxes. Future cash flows are estimated based on multi-year extrapolation of the most recent historical actual results and/or budgets, and a terminal value calculated by discounting the final year in perpetuity. The future cash flows are then discounted to their present value using an appropriate discount rate that incorporates a risk premium specific to each business. Further details, including the manner in which the Company identifies its CGUs, and the key assumptions used in determining the recoverable amounts, are disclosed in Note 10. Notes to the Consolidated Financial Statements74 HIGH LINER FOODS Future employee benefits The cost of the defined benefit pension plan and other post-employment benefits and the present value of the defined benefit obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions, including the discount rate, future salary increases, mortality rates and future pension increases. In determining the appropriate discount rate, management considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Interest income on plan assets is a component of the return on plan assets and is determined by multiplying the fair value of the plan assets by the discount rate. See Note 15 for certain assumptions made with respect to future employee benefits. Income taxes The estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of the Company’s ability to utilize the underlying future tax deductions against future taxable income before they expire. The Company’s assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of the Company’s ability to utilize the underlying future tax deductions changes, the Company would be required to recognize more or fewer of the tax deductions as assets, which would decrease or increase the income tax expense in the period in which this is determined. There are transactions and calculations during the ordinary course of business for which the ultimate tax determination is uncertain. The Company maintains provisions for uncertain tax positions that are believed to appropriately reflect the risk with respect to tax matters under active discussion, audit, dispute or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions for uncertain tax positions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at each reporting date; however, it is possible that at some future date, an additional liability could result from audits by taxing authorities. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. Fair value of financial instruments Where the fair value of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of estimation is required in establishing fair values. The estimates include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in these inputs could affect the reported fair value of financial instruments. Sales and marketing accruals The Company estimates variable consideration to determine the costs associated with the sale of product to be allocated to certain variable sales and marketing expenses, including volume rebates and other sales volume discounts, coupon redemption costs, costs incurred related to damages and other trade marketing programs. The Company’s estimates include consideration of historical data and trends, combined with future expectations of sales volume, with estimates being reviewed on a frequent basis for reasonability. The most significant judgments made by management include the following: Impairment of non-financial assets Assessment of impairment triggers are based on management’s judgement of whether there are sufficient internal and external factors that would indicate an asset or CGU is impaired, or any indicators of impairment reversal, which would require a quarterly impairment test. The determination of the Company’s CGUs is also based on management’s judgement and is an assessment of the smallest group of assets that generate cash inflows independently of other assets. Income taxes The Company is subject to income tax in various jurisdictions. Significant judgment is required to determine the consolidated tax provision. The tax rates and tax laws used to compute income tax are those that are enacted or substantively enacted at the reporting date in the countries where the Company operates and generates taxable income. Notes to the Consolidated Financial StatementsAnnual Report 2018 75 5. Business combinations Acquisition of Rubicon Resources, LLC On May 30, 2017, the Company acquired 100% of the outstanding interests in Rubicon Resources, LLC (“Rubicon”), a privately held U.S.-based company engaged principally in the import and distribution of sustainably sourced frozen shrimp products in the private-label U.S. retail market. The Company believes this acquisition will provide a strong platform for growth in this key species. The transaction also includes a five-year renewable supply agreement with Rubicon’s supply partners based on mutually acceptable terms. The results of Rubicon have been consolidated with the results of the Company commencing on May 30, 2017. After working capital adjustments and cash acquired as part of the acquisition, the Company paid $100.6 million to acquire 100% of the outstanding interests in Rubicon. The purchase consideration was settled in cash ($75.0 million), and in common shares ($25.8 million or 2.43 million shares). The share consideration is subject to a three-year standstill agreement during which time the sellers are not permitted to sell the shares (except in limited circumstances). The acquisition was financed using the Company’s existing asset-based revolving credit facility (“ABL”, see Note 11); however, on June 6, 2017, the Company refinanced a portion of this additional ABL debt to a fixed term by replacing it with a $70.0 million addition to the senior secured term loan (see Note 14). The total consideration paid of $100.6 million was calculated as follows: (Amounts in $000s) Cash Common shares, net of discount Post-closing working capital adjustments Net purchase consideration recorded $ 75,000 25,758 (119) $ 100,639 For accounting purposes, the consideration transferred for the acquired business includes a discount on the value of the common shares reflecting the trading restrictions placed on the shares. In accordance with the acquisition method of accounting, the purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values at the date of acquisition. Fair values were determined based on discounted cash flows and quoted market prices. The following sets forth the final allocation of the purchase price to assets and liabilities acquired, based on the final estimate of the fair value of the identifiable assets and liabilities recognized on the acquisition date. (Amounts in $000s) Assets Cash Accounts receivable Prepaid expenses Inventories Property, plant and equipment Deferred income taxes Intangible assets Goodwill Liabilities Accounts payable and accrued liabilities Total identifiable net assets at fair value Final fair value recognized on acquisition $ 89 14,273 293 58,631 184 6,683 57,785 39,105 177,043 (76,404) $ 100,639 Notes to the Consolidated Financial Statements76 HIGH LINER FOODS Receivables acquired were primarily comprised of receivables from Rubicon’s customers and have been collected subsequent to the acquisition. Therefore, no allowance was recorded against these amounts. Goodwill recorded on this transaction represents the value anticipated to be created from the Company’s ability to grow sales of shrimp throughout its operations. The goodwill, with a tax basis of $44.4 million, is deductible for income tax purposes. The goodwill has been allocated to the Canadian and U.S. CGUs during Fiscal 2017, based on synergies expected to be realized in each CGU (see Note 10). In order to complete this acquisition, the Company incurred acquisition-related costs, in the form of advisory, legal, and professional fees. Acquisition-related costs totaled $0.7 million during the fifty-two weeks ended December 30, 2017 and have been included in business acquisition, integration and other expenses on the consolidated statements of income. From the date of acquisition, Rubicon contributed $117.1 million of revenue and $3.0 million of earnings before income taxes, excluding one-time business acquisition costs for the fifty-two weeks ended December 30, 2017. Had the acquisition occurred as of the beginning of the annual reporting period, January 1, 2017, the revenue for the combined entity, including Rubicon, would have been $1.1 billion, and earnings before income taxes, excluding one-time business acquisition costs, for the combined entity would have been $19.5 million for the fifty-two weeks ended December 30, 2017. 6. Product recall In April 2017, the Company announced a voluntary recall of certain brands of breaded fish and seafood products sold in Canada that may contain a milk allergen that was not declared on the ingredient label and allergen statement. The Company identified that the allergen had originated from ingredients supplied by one of the Company’s U.S.-based ingredient suppliers. Subsequently, the Company was notified by the ingredient supplier that several additional ingredients were being recalled due to the potential presence of undeclared milk allergens, which necessitated the expansion of the Company’s initial recall to include additional value-added seafood products sold in the U.S. and Canada. As a result, during the fifty-two weeks ended December 30, 2017, the Company recognized $13.5 million in net losses associated with the product recall related to consumer refunds, customer fines, the return of product to be re-worked or destroyed, and incremental costs. These losses did not include any reduction in earnings as a result of lost sales opportunities due to limited product availability and customer shortages, or increased production costs related to the interruption of production at the Company’s facilities. During the fifty-two weeks ended December 29, 2018, the Company recognized an $8.5 million recovery associated with the product recall losses from the ingredient supplier, which was recognized as business acquisition, integration and other (income) expense in the consolidated statements of income. The Company will continue to record future recoveries of the product recall losses in the period in which they occur or are virtually certain to occur, in accordance with IFRS (see Note 29, Events after the reporting period). 7. Accounts receivable (Amounts in $000s) Trade accounts receivable Other accounts receivable December 29, 2018 December 30, 2017 $ $ 83,843 1,030 84,873 $ $ 90,148 2,247 92,395 Accounts receivable bear normal trade credit terms and are non-interest bearing. Trade accounts receivable includes revenue from contracts with customers. The entire accounts receivable balance is pledged as collateral for the Company’s working capital facility (see Note 11), excluding the accounts receivable acquired as part of the acquisition of Rubicon (see Note 5). As part of the Rubicon acquisition, the Company has assumed financing arrangement guarantees for certain suppliers granting a security interest in substantially all of the inventory and proceeds thereon (see Note 22). Notes to the Consolidated Financial StatementsThe following is a reconciliation of the changes in the allowance for expected credit losses of receivables: (Amounts in $000s) At December 31, 2016 New provision for expected credit losses(1) Provision utilized Unused provision for expected credit losses reversed At December 30, 2017 New provision for expected credit losses(1) Provision utilized Unused provision for expected credit losses reversed At December 29, 2018 Annual Report 2018 77 $ $ $ 240 287 (22) (24) 481 273 — (40) 714 (1) For the fifty-two weeks ended December 29, 2018, the Company recognized $0.3 million of impairment losses (fifty-two weeks ended December 30, 2017: $0.3 million) related to receivables arising from contracts with customers. The aging analysis of trade accounts receivables, based on the invoice date is as follows: At December 30, 2017 At December 29, 2018 0–30 days 31–60 days Over 60 days 89% 88% 10% 10% 1% 2% 8. Inventories Total inventories at the lower of cost and net realizable value on the consolidated statements of financial position comprise the following: (Amounts in $000s) Finished goods Raw and semi-finished material December 29, 2018 December 30, 2017 $ 215,744 $ 246,460 85,667 106,973 $ 301,411 $ 353,433 During 2018, $860.4 million (2017: $867.8 million) was recognized as an expense for inventories in cost of sales on the consolidated statements of income. Of this, $6.7 million (2017: $5.9 million) was written-down during the year and a reversal for unused impairment reserves of $0.1 million (2017: $1.2 million) was recorded. As of December 29, 2018, the value of inventory pledged as collateral for the Company’s working capital facility (see Note 11), which excludes inventory acquired as part of the Rubicon inventory acquisition (see Note 5), was $177.6 million (December 30, 2017: $230.9 million). As part of the Rubicon acquisition, the Company has assumed financing arrangement guarantees for certain suppliers granting a security interest in substantially all of the inventory and proceeds thereon (see Note 22). Notes to the Consolidated Financial Statements78 HIGH LINER FOODS 9. Property, plant and equipment (Amounts in $000s) Cost At December 31, 2016 Additions Acquisition Disposals Effect of exchange rates At December 30, 2017 Additions Disposals Effect of exchange rates At December 29, 2018 Accumulated depreciation and impairment At December 31, 2016 Depreciation and impairment Disposals Effect of exchange rates At December 30, 2017 Depreciation and impairment Disposals Effect of exchange rates At December 29, 2018 Net carrying value At December 30, 2017 At December 29, 2018 Furniture, fixtures, and production equipment Computer equipment and vehicles(1) Land and buildings Total $ 71,953 $ 80,007 $ 16,245 $ 168,205 5,217 — (181) 1,197 12,262 — (1,633) 1,452 1,715 184 (431) 795 19,194 184 (2,245) 3,444 $ 78,186 $ 92,088 $ 18,508 $ 188,782 1,467 (50) (1,468) 5,774 (891) (1,905) 1,256 (1,431) (873) 8,497 (2,372) (4,246) $ 78,135 $ 95,066 $ 17,460 $ 190,661 $ (20,554) $ (30,281) $ (7,744) $ (58,579) (2,700) 75 (531) (5,043) 1,442 (587) (2,010) (172) (388) (9,753) 1,345 (1,506) $ (23,710) $ (34,469) $ (10,314) $ (68,493) (3,092) (6,366) (2,164) (11,622) 27 698 656 805 1,112 527 1,795 2,030 $ (26,077) $ (39,374) $ (10,839) $ (76,290) $ $ 54,476 52,058 $ $ 57,619 55,692 $ $ 8,194 6,621 $ $ 120,289 114,371 (1) The carrying value of vehicles and equipment held under finance leases at December 29, 2018 was $1.3 million (December 30, 2017: $1.6 million) and additions during the year were $0.6 million (December 30, 2017: $0.4 million). An impairment loss of $1.3 million (December 30, 2017: $nil) was recorded during the fifty-two weeks ended December 29, 2018 reflecting a write-down of certain property, plant and equipment in the U.S. CGU and Canadian CGU of $1.0 million and $0.3 million, respectively as a result of equipment obsolescence. The Company has a General Security Agreement that has pledged all of its property, plant and equipment as collateral for its bank loans and long-term debt. See Note 11 and Note 14 for further information. Notes to the Consolidated Financial Statements10. Goodwill and intangible assets The Company’s intangible assets consist of brands and customer and supplier relationships that have been acquired through a business combination, and computer software. Annual Report 2018 79 (Amounts in $000s) Cost At December 31, 2016 Additions Effect of exchange rates At December 30, 2017 Additions Effect of exchange rates At December 29, 2018 Accumulated amortization At December 31, 2016 Amortization Amortization on acquisition Effect of exchange rates At December 30, 2017 Amortization Effect of exchange rates At December 29, 2018 Net carrying value At December 30, 2017 At December 29, 2018 Intangible assets Customer and supplier relationships Indefinite lived brands Computer software Total intangible assets Brands Goodwill Total goodwill and intangible assets $ 6,938 $ 106,988 $ 14,501 $ 1,696 $ 130,123 $ 118,101 $ 248,224 — — 57,785 75 — 9 7,666 217 65,451 39,105 104,556 301 675 976 $ 6,938 $ 164,848 $ 14,510 $ 9,579 $ 195,875 $ 157,881 $ 353,756 — (39) — (116) — (68) 6,113 6,113 — 6,113 (1,062) (1,285) (811) (2,096) $ 6,899 $ 164,732 $ 14,442 $ 14,630 $ 200,703 $ 157,070 $ 357,773 $ (5,337) $ (25,473) $ (441) $ — $ (31,251) $ — $ (31,251) (1,035) — — (4,122) (1,401) (22) — — — — — — (5,157) (1,401) (22) — — — (5,175) (1,401) (22) $ (6,372) $ (31,018) $ (441) $ — $ (37,831) $ — $ (37,831) (451) 39 (6,396) 82 — 30 (604) (7,451) 22 173 — — (7,451) 173 $ (6,784) $ (37,332) $ (411) $ (582) $ (45,109) $ — $ (45,109) $ $ 566 115 $ 133,830 $ 14,069 $ 9,579 $ 158,044 $ 157,881 $ 315,925 $ 127,400 $ 14,031 $ 14,048 $ 155,594 $ 157,070 $ 312,664 Goodwill related to the Rubicon acquisition (see Note 5) has been allocated to the Canadian and U.S. CGUs during Fiscal 2017, based on synergies expected to be realized in each CGU. The carrying amount of goodwill acquired through business combinations and brands with indefinite lives have been allocated to the Canadian and U.S. CGUs for impairment testing as follows: (Amounts in $000s) Goodwill Indefinite lived brands Canada U.S. December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017 $ $ 19,459 425 $ $ 20,270 463 $ $ 137,611 13,606 $ $ 137,611 13,606 Impairment of goodwill and identifiable intangible assets As described in Note 3, the carrying values of goodwill and intangible assets with indefinite lives are tested for impairment annually (as at the first day of the Company’s fourth quarter). The Company’s impairment test for goodwill and intangible assets with indefinite useful lives was based on FVLCS at September 30, 2018, resulting in $nil impairment in the U.S. and Canadian CGUs, respectively (October 1, 2017: $nil, respectively). The key assumptions used to determine the recoverable amount for the different CGUs for the most recently completed impairment calculations for Fiscal 2018 and Fiscal 2017 are discussed below. Notes to the Consolidated Financial Statements80 HIGH LINER FOODS The Company identified additional internal and external indicators of impairment in the U.S. CGU during the fourth quarter of Fiscal 2018, and as a result, an additional impairment calculation was performed as at December 29, 2018. The Company has experienced negative trends in operating results in the U.S. business, which were further exacerbated by the uncertainty regarding U.S. tariffs on certain seafood products imported from China. The key assumptions used to determine the recoverable amount for the U.S. CGU at December 29, 2018 are also discussed below. The recoverable amount of the CGUs has been determined based on the FVLCS, determined using an income approach using the discounted cash flow methodology. The fair value of the CGU must be measured using the assumptions that market participants would use rather than those related specifically to the Company. In addition, the market approach was employed in assessing the reasonableness of the conclusions reached. INCOME APPROACH The discounted cash flow (“DCF”) technique provides the best assessment of what each CGU could be exchanged for in an arm’s length transaction as fair value is represented by the present value of expected future cash flows of the business together with the residual value of the business at the end of the forecast period. The DCF was applied on an enterprise-value basis, where the after- tax cash flows prior to interest expense are discounted using a weighted average cost of capital (“WACC”). This approach requires assumptions regarding revenue growth rates, income margins before finance costs, income taxes, depreciation and amortization, capital expenditures, tax rates and discount rates. MARKET APPROACH It is assumed under the market approach that the value of a company reflects the price at which comparable companies in the same industry are purchased under similar circumstances. A comparison of a CGU to similar companies in the same industry whose financial information is publicly available may provide a reasonable basis to estimate fair value. Fair value under this approach is calculated based on EBITDA multiples and revenue multiples compared to the multiples based on publicly available information for comparable companies and transaction prices. Key assumptions used in determining the FVLCS CASH FLOW PROJECTIONS The cash flow projections, covering a five-year period (“projection period”), were based on financial projections approved by management using assumptions that reflect the Company’s most likely planned course of action, given management’s judgment of the most probable set of economic conditions, adjusted to reflect the perspective of the expectations of a market participant. For the purpose of the Company’s annual impairment tests as at September 30, 2018, gross margins are based on actual and estimated values in the first year of the projection period, budgeted values in the second year of the projection period, and these are increased over the projection period for anticipated efficiency improvements and growth. For the purpose of the U.S. CGU test as at December 29, 2018, gross margins are based on budgeted values in the first year of the projection period (fiscal 2019), and these are increased over the projection period using an approximate growth rate for anticipated efficiency improvements. The projected gross margins are updated to reflect anticipated future changes, such as currency fluctuations, in the cost of inputs (primarily raw materials and commodity products used in processing), which are obtained from forward-looking data. Forecast figures are used where data is publicly available; otherwise, past actual raw material cost movements have been used combined with management’s industry experience and analysis of the seafood and commodity markets. DISCOUNT RATE The discount rate, derived from the WACC, represents the current market assessment of the risk specific to each CGU, taking into consideration the time value of money and individual risks that have not been incorporated in the cash flow projections. The discount rate was based on the weighted average cost of equity and cost of debt for comparable companies within the industry. The cost of equity was calculated using the capital asset pricing model. The debt component of the WACC was determined by using an after-tax cost of debt. The after-tax WACC applied to the Canadian CGU and U.S. CGU cash flow projections was 10.1% and 11.2%, respectively, at September 30, 2018. The after-tax WACC applied to the U.S. CGU cash flow projections was 11.3% at December 29, 2018 compared to the September 30, 2018 impairment test, which reflects additional uncertainty in cash flow projections, partially attributed to the U.S. tariffs on certain seafood products imported from China. Notes to the Consolidated Financial StatementsAnnual Report 2018 81 GROWTH RATE Growth rates used to extrapolate the Company’s projection were determined using published industry growth rates in combination with inflation assumptions and the input of each CGU’s management group based on historical trend analysis and future expectations of growth. The long-term growth rate applied to the cash flow projections of both the Canadian and U.S. CGUs was 2.0% at September 30, 2018 and December 29, 2018, respectively. COSTS TO SELL The costs to sell each CGU have been estimated at approximately 3.0% of the CGU’s enterprise value. The costs to sell reflect the incremental costs, excluding finance costs and income taxes, that would be directly attributable to the disposal of the CGU, including legal costs, marketing costs, costs of removing assets and direct incremental costs incurred in preparing the CGU for sale. SENSITIVITY TO CHANGES IN ASSUMPTIONS With regard to the assessment of the FVLCS for the Canadian CGU, management believes that no reasonably possible change in any of the above key assumptions would cause the carrying value of either CGU to materially exceed its recoverable amount. With regards to the assessment of the FVLCS for the U.S. CGU, the key assumptions would have to change as follows at September 30, 2018 and December 29, 2018, respectively, in order to cause the recoverable amount to equal the carrying value of the U.S. CGU: • Discount rate: increase by approximately 0.5% and 0.3% as at September 30, 2018 and December 29, 2018; • Growth rate: decrease by approximately 1.0% and 0.5% as at September 30, 2018 and December 29, 2018; • Cash flow projections: management has estimated an annual growth rate for anticipated efficiency improvements that are based on historical returns and are applied over the projection period. If management assumes no efficiency improvements will be realized, the recoverable value would equal the carrying value. 11. Bank loans (Amounts in $000s) December 29, 2018 December 30, 2017 Bank loans, denominated in CAD (average variable rate of 3.95%; December 30, 2017: 3.04%) $ 165 $ Bank loans, denominated in USD (average variable rate of 4.80%; December 30, 2017: 3.64%) Less: deferred finance costs 31,340 31,505 (353) 9,435 44,125 53,560 (208) $ 31,152 $ 53,352 In April 2018, the Company amended the $180.0 million working capital facility (the “Facility”), with the Royal Bank of Canada as Administrative and Collateral Agent, to extend the term from April 2019 to April 2021. There were no other significant changes to the existing terms, other than an amendment to the standby fees paid on the unutilized facility to 0.25% (previously 0.25% to 0.375%). The amendment to the Facility was not assessed as a substantial modification, and as a result, the deferred finance costs related to the original Facility continue to be amortized over the remaining term. The Facility is asset-based and collateralized by the Company’s inventories, accounts receivable and other personal property in Canada and the U.S., subject to a first charge on brands, trade names and related intangibles under the Company’s term loan facility (see Note 14), and excluding the assets acquired as part of the Rubicon acquisition which was closed on May 30, 2017 (see Note 5). A second charge over the Company’s property, plant and equipment is also in place. As at December 29, 2018, the Company had $118.2 million of undrawn borrowing facility (December 30, 2017: $111.8 million). Notes to the Consolidated Financial Statements82 HIGH LINER FOODS As at December 29, 2018 and December 30, 2017, the Facility allowed the Company to borrow: Canadian Prime Rate revolving loans, Canadian Base Rate revolving and U.S. Prime Rate revolving loans, at their  respective rates Bankers’ Acceptances (“BA”) revolving loans, at BA rates LIBOR revolving loans at LIBOR, at their respective rates Letters of credit, with fees of Standby fees, required to be paid on the unutilized facility, of 12. Accounts payable and accrued liabilities (Amounts in $000s) Trade accounts payable and accrued liabilities Employee accruals, including incentives and vacation pay Share-based compensation (Note 17) plus 0.00% to 0.25% plus 1.25% to 1.75% plus 1.25% to 1.75% 1.25% to 1.75% 0.25% and 0.25% to 0.375%, respectively December 29, 2018 December 30, 2017 $ 146,990 $ 194,274 10,172 — 11,546 35 $ 157,162 $ 205,855 Trade accounts payable and accrued liabilities are non-interest bearing. Employee accruals, including incentives and vacation pay, are non-interest bearing and normally settle within fifty-two weeks. Share-based payments included in the above are settled within fifty-two weeks. 13. Provisions The amounts recognized in provisions include the Company’s coupon redemption costs, termination benefits (see Note 15) and expenditures associated with the restructuring. Employee termination benefits, when applicable, are included as other provisions until the amounts can be estimated with certainty, at which time they are reclassified to accounts payable and accrued liabilities. The following is a reconciliation of the carrying amounts: (Amounts in $000s) At December 30, 2017  New provisions added  Provisions utilized  Reclassified to accounts payable and accrued liabilities At December 29, 2018 Restructuring Other $ — $ 278 $ 3,515 (533) (1,785) 1,049 (1,064) — Total 278 4,564 (1,597) (1,785) $ 1,197 $ 263 $ 1,460 On November 7, 2018, the Company announced an organizational realignment that is expected to result in the recognition of termination benefits of approximately $4.9 million, of which $3.5 million was recognized in the fourth quarter of 2018. The restructuring is expected to be completed by the second quarter of 2019. The Company’s provision amounts are usually settled within eleven months from initiation and, other than the restructuring provision, are immaterial to the Company on an individual basis. Management does not expect the outcome of any of the recorded amounts will give rise to any significant expense beyond the amounts recognized at December 29, 2018. The Company is not eligible for any reimbursement by third parties for these amounts. Notes to the Consolidated Financial Statements14. Long-term debt and finance lease obligations (Amounts in $000s) Term loan Less: current portion Less: deferred finance costs Annual Report 2018 83 December 29, 2018 December 30, 2017 $ 337,926 $ 337,926 (13,655) 324,271 (1,597) — 337,926 (2,485) $ 322,674 $ 335,441 As at December 29, 2018, the Company had a $370.0 million term loan facility with an interest rate of 3.25% plus LIBOR (LIBOR floor of 1.00%), maturing on April 24, 2021. The term loan facility was increased from $300.0 million to $370.0 million on June 6, 2017 to facilitate the Rubicon acquisition, in accordance with the term loan credit agreement, which provides for incremental increases that meet stated provisions, at consistent terms. Quarterly principal repayments of $0.9 million are required on the term loan. During the fifty-two weeks ended December 31, 2016, a mandatory prepayment of $11.8 million was made due to excess cash flows in 2015, and a voluntary repayment of $15.0 million was made to reduce excess cash balances. The prepayments are applied to future regularly scheduled principal repayments, and as such, no regularly scheduled principal repayments were paid in 2017 and 2018. As at December 29, 2018, the Company had a mandatory payment of $13.7 million due to excess cash flows in 2018. Substantially all tangible and intangible assets (excluding working capital) of the Company are pledged as collateral for the term loan facility. The Company has finance leases for various vehicles and other items of equipment. The principal payments required on finance leases are as follows: Finance lease obligations (Amounts in $000s) 2019 2020 2021 2022 Less: current portion Future minimum lease payments Imputed interest Finance lease liabilities $ $ 409 277 150 2 37 19 3 — $ $ 372 258 147 2 779 (372) 407 Interest payable on the various obligations ranges from fixed rates of 0% to 8.38% for the fifty-two weeks ended December 29, 2018 (fifty-two weeks ended December 30, 2017: 0% to 8.84%). 15. Future employee benefits Non-pension benefit plan In Canada, the Company sponsors a non-pension benefit plan for employees hired before May 19, 1993. This benefit is a paid- up life insurance policy or a lump sum payment based on the employee’s final earnings at retirement. In both Canada and the U.S., the Company maintains a non-pension benefit plan for employees who retire after twenty-five years of service with the Company. At retirement, the benefit is a payment of $1,000 to $2,500 depending on the years of service. Notes to the Consolidated Financial Statements84 HIGH LINER FOODS Defined contribution pension plans In Canada, the Company maintains a DCPP for all salaried employees. In the U.S., the Company maintains two DCPP under the provisions of the Employment Retirement Income Security Act of 1974 (a 401(k) Savings Plan), which covers substantially all employees of the Company’s U.S. subsidiary. The Company also makes a safe harbor matching contribution equal to 100% of salary deferrals (contributions to the plan) that do not exceed 3% of compensation plus 50% of salary deferrals between 3% and 5% of salary compensation. In both Canada and the U.S., the Company maintains defined contribution Supplemental Executive Retirement Plans (“SERP”) to extend the same pension plan benefits to certain senior executives, as is provided to others in the DCPP who were not affected by income tax maximums. Total expense and cash contributions for the Company’s DCPP was $2.0 million for the year ended December 29, 2018 (December 30, 2017: $2.0 million). Defined benefit pension plans In Canada, the Company also sponsors two actively funded DBPPs. None of the Company’s pension plans provide indexation in retirement. CANADIAN UNION EMPLOYEE PLAN One of the actively funded DBPPs is for the Nova Scotia Union employees and provides a flat-dollar plan with negotiated increases. CANADIAN MANAGEMENT PLAN The Company sponsors a DBPP specifically for Canadian management employees (the “Management Plan”). On December 29, 2018, six persons were enrolled as active members in the Management Plan, including one senior executive, who are Canadian residents and were employed prior to January 1, 2000. The objective of the Management Plan is to provide an annual pension (including Canada Pension Plan) of 2% of the average of a member’s highest five years’ regular earnings while a member of the Management Plan, multiplied by the number of years of credited service. Incentive payments are not eligible earnings for pension purposes. The Management Plan was grandfathered and no new entrants are permitted. All members contribute 3.25% of their earnings up to the Years Maximum Pensionable Earnings (“YMPE”) and 5% in excess of the YMPE to the maximum that a member can contribute based on income tax rules. The credited service under the Management Plan for the Canadian senior executive is twenty-seven years. Upon retirement, the employees in the Management Plan are provided lifetime retirement income benefits based on their best five years of salary less Canada Pension Plan benefits. Full benefits are payable at age 65, or at age 60 if the executive has at least twenty-five years of service. The normal benefits are payable for life and 60% is payable to their spouse upon the employee’s death, with a guarantee of sixty months. Members can retire at age 55 with a reduction. Other levels of survivor benefits are offered. Instead, members can elect to take their pension benefit in a lump-sum payment at retirement. As at December 29, 2018, the Company also guarantees through its SERP to extend the same pension plan benefits to one Canadian senior executive that it provides to others in the Management Plan who were not affected by income tax maximums. The annual pension amounts derived from the aggregate of the Management Plan and SERP benefits represent 1.3% of the five- year average YMPE plus 2% of the salary remuneration above the five-year average YMPE. The combination of these amounts is multiplied by the years of service to determine the full annual pension entitlement from the two plans. Notes to the Consolidated Financial StatementsAnnual Report 2018 85 U.S. MANAGEMENT PLANS The Company also has one DBPP in the U.S. that covers two former employees. These plans have ceased to accrue benefits to employees. Information regarding the Company’s DBPPs, and non-pension benefit plans in aggregate, is as follows: Funded status (Amounts in $000s) Total present value of obligations(1)(2) Fair value of plan assets Net accrued defined benefit obligation December 29, 2018 December 30, 2017 $ $ 36,903 26,118 10,785 $ $ 43,066 31,843 11,223 (1) The Company has a letter of credit outstanding as at December 29, 2018 relating to the securitization of the Company’s unfunded benefit plans under the SERP in the amount of $8.5 million (December 30, 2017: $9.7 million). (2) As at December 29, 2018, $0.9 million (December 30, 2017: $1.2 million) of the total obligation is related to non-pension benefit plans. Movement in the present value of the defined benefit obligations (Amounts in $000s) DBO at the beginning of the year Benefits paid by the plans Effect of movements in exchange rates Current service costs Interest on obligations Employee contributions Plan curtailment Effect of changes in financial assumptions related to non-pension benefit plans Effect of changes in financial assumptions DBO at the end of the year Movement in the present value of plan assets (Amounts in $000s) Fair value of plan assets at the beginning of the year Employee contributions paid into the plans Employer contributions paid into the plans Benefits paid by the plans Effect of movements in exchange rates Actual return on plan assets: Return on plan assets Actuarial (losses) gains in OCI Fees and expenses December 29, 2018 December 30, 2017 $ 43,066 $ 37,073 (2,231) (3,446) 929 1,395 54 177 (273) (2,768) (1,695) 2,762 842 1,466 53 — — 2,565 $ 36,903 $ 43,066 December 29, 2018 December 30, 2017 $ 31,843 $ 28,883 54 1,243 (2,165) (2,514) 53 979 (1,695) 2,116 28,461 $ 30,336 1,027 $ 1,127 (3,291) (79) (2,343) 459 (79) 1,507 $ $ Fair value of plan assets at the end of the year $ 26,118 $ 31,843 Notes to the Consolidated Financial Statements86 HIGH LINER FOODS Expense recognized in the consolidated statements of income (Amounts in $000s) Current service costs Interest on obligation Return on plan assets Plan curtailment Effect of changes in financial assumptions related to non-pension benefit plans Fees and expenses Expense recognized in the following line items in the consolidated statements of income (Amounts in $000s) Cost of sales Selling, general and administrative expenses Plan assets comprise: (Amounts in $000s) Equity securities(1) Debt securities Cash and cash equivalents December 29, 2018 December 30, 2017 $ 929 $ 1,395 (1,027) 177 (273) 79 842 1,466 (1,127) — — 79 $ 1,280 $ 1,260 December 29, 2018 December 30, 2017 $ $ $ 968 312 730 530 1,280 $ 1,260 December 29, 2018 December 30, 2017 $ 10,760 $ 14,522 836 13,565 17,418 860 $ 26,118 $ 31,843 (1) The plan assets include CAD$1.3 million of the Company’s own common shares at market value at December 29, 2018 (December 30, 2017: CAD$2.7 million). Actuarial (gains) losses recognized in OCI (Amounts in $000s) Cumulative amount at the beginning of the year Recognized during the period Effect of exchange rates Cumulative amount at the end of the year Principal actuarial assumptions (Expressed as weighted averages) Discount rate for the benefit cost for the year ended Discount rate for the accrued benefit obligation as at year-end Expected long-term rate on plan assets as at year-end Future compensation increases for the benefit cost for the year ended Future compensation increases for the accrued benefit obligation as at year-end December 29, 2018 December 30, 2017 $ 8,234 $ 499 (640) $ 8,093 $ 5,596 2,182 456 8,234 December 29, 2018 % December 30, 2017 % 3.40 3.92 3.40 3.00 3.00 3.82 3.40 3.82 3.00 3.00 A quantitative sensitivity analysis for significant assumptions as at December 29, 2018 is shown below: (Amounts in $000s) Sensitivity level (Decrease) increase on DBO Discount rate Mortality rate 0.5% increase 0.5% decrease One-year increase One-year decrease $ (2,252) $ 2,498 $ 1,001 $ (1,037) The sensitivity analysis above has been determined based on a method that extrapolates the impact on the net DBO as a result of reasonable changes in key assumptions occurring at the end of the reporting period. An analysis on salary increases and decreases is not material. The Company expects CAD$2.1 million in contributions to be paid to its DBPP and CAD$2.4 million to its DCPP in Fiscal 2019. Notes to the Consolidated Financial StatementsAnnual Report 2018 87 Short-term employee benefits The Company has recognized severance and retention benefits that were dependent upon the continuing provision of services through to certain pre-defined dates, which for the fifty-two weeks ended December 29, 2018 was an expense of $1.2 million (December 30, 2017: $0.2 million expense) in the consolidated statements of income. Termination benefits The Company has also expensed termination benefits during the period, which are recorded as of the date the committed plan is in place and communication is made. These termination benefits relate to severance that is not based on a future service requirement, and are included on the following line items in the consolidated statements of income: (Amounts in $000s) Cost of sales Distribution expenses Business acquisition, integration and other expenses Selling, general and administrative expenses 16. Share capital The share capital of the Company is as follows: Authorized: Preference shares, par value of CAD$25 each, issuable in series Subordinated redeemable preference shares, par value of CAD$1 each, redeemable at par Non-voting equity shares Common shares, without par value Purchase of shares for cancellation December 29, 2018 December 30, 2017 $ $ 19 — 4,769 115 $ 4,903 $ 260 11 897 1,804 2,972 December 29, 2018 December 30, 2017 5,999,994 1,025,542 Unlimited Unlimited 5,999,994 1,025,542 Unlimited Unlimited In January 2018, the Company announced that the Toronto Stock Exchange approved the renewal of the Company’s Normal Course Issuer Bid (“NCIB”) to repurchase for cancellation up to 150,000 common shares. The price the Company will pay for any common shares acquired will be the market price at the time of acquisition. Purchases could commence on February 2, 2018 and will terminate no later than February 1, 2019. During the fifty-two weeks ended December 29, 2018 there were no purchases under this plan. A summary of the Company’s common share transactions is as follows: Balance, beginning of period Shares issued on acquisition of Rubicon Options exercised for shares Options exercised for shares via cashless exercise method (Note 17) Fair value of share-based compensation on options exercised Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 Shares ($000s) Shares 33,379,815 $ 112,835 30,889,078 $ — 3,666 — — — 24 — 28 2,429,014 19,187 42,536 — ($000s) 86,094 25,758 140 — 843 Balance, end of period 33,383,481 $ 112,887 33,379,815 $ 112,835 During the fifty-two weeks ended December 29, 2018, the Company distributed dividends per share of CAD$0.580 (fifty-two weeks ended December 30, 2017: CAD$0.565). Notes to the Consolidated Financial Statements88 HIGH LINER FOODS On February 27, 2019, the Company’s Board of Directors declared a quarterly dividend of CAD$0.145 per share, payable on March 15, 2019 to shareholders of record as of March 7, 2019. 17. Share-based compensation The Company has a Share Option Plan (the “Option Plan”) for designated directors, officers and certain managers of the Company, a Performance Share Unit (“PSU”) Plan for eligible employees which includes the potential issuances of restricted share units (“RSU”), and a Deferred Share Unit (“DSU”) Plan for directors of the Company. Issuances of options, RSUs and PSUs may not result in the following limitations being exceeded: (a) the aggregate number of shares issuable to insiders pursuant to the PSU Plan, the Option Plan or any other share-based compensation arrangement of the Company exceeding 10% of the aggregate of the issued and outstanding shares at any time; and (b) the issuance from treasury to insiders, within a twelve-month period, of an aggregate number of shares under the PSU Plan, the Option Plan and any other share-based compensation arrangement of the Company exceeding 10% of the aggregate of the issued and outstanding shares. The carrying amount of cash-settled share-based compensation arrangements recognized in other current liabilities and other long-term liabilities on the consolidated statements of financial position was $0.2 million and $1.5 million, respectively, as at December 29, 2018 (December 30, 2017: $0.2 million and $1.6 million, respectively). Share-based compensation expense is recognized in the consolidated statements of income as follows: (Amounts in $000s) Cost of sales resulting from: Equity-settled awards(1) Selling, general and administrative expenses resulting from: Cash-settled awards(1) Equity-settled awards(1) Share-based compensation expense Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 $ 49 $ 59 200 988 $ 1,237 $ 256 456 771 (1) Cash-settled awards may include options with SARs, RSUs, PSUs, and DSUs. Equity-settled awards include options. Share Option Plan Under the terms of the Company’s Share Option Plan, the Company may grant options to eligible participants, including: Directors, members of the Company’s Leadership Team, and senior managers of the Company. Shares to be optioned are not to exceed the aggregate number of 3,800,000 as of May 7, 2013 (adjusted for the two-for-one stock split that was effective May 30, 2014), representing 12.4% of the then issued and outstanding authorized shares. The option price for the shares cannot be less than the fair market value (as defined further in the Share Option Plan) of the optioned shares as of the date of grant. The term during which any option granted may be exercised may not exceed ten years from the date of grant. The purchase price is payable in full at the time the option is exercised. Options are not transferable or assignable. The Share Option Plan permits, at the time of granting an option, granting the right to receive, at the time of exercise and in lieu of the right to purchase an optioned share, a cash amount equal to the difference between the option price and the fair market value of the share on the date of exercise (a SAR). Effective March 29, 2013, amendments were made to eliminate the SARs on certain options granted in early 2012 and prior for certain Directors and officers of the Company. On a voluntary basis, these Directors and officers relinquished the entitlement under the SARs, resulting in 409,649 options with SARs being extinguished, and then reinvested as options that do not have SARs. On the amendment date, the liability of $7.6 million for these options with SARs was fixed, resulting in no future impact on profit or loss for the options that were vested at that time, and was reclassified to contributed surplus. Options with SARs are accounted for as cash-settled transactions and options without SARs are accounted for as equity-settled transactions. Notes to the Consolidated Financial StatementsAnnual Report 2018 89 Options issued may also be awarded a cashless exercise option at the discretion of the Board, where the holder may elect to receive, without payment of any additional consideration, optioned shares equal to the value of the option as computed by the Option Plan. When the holder elects to receive the cashless exercise option, the Company accounts for these options as equity- settled transactions. The following table illustrates the number (“No.”) and weighted average exercise prices (“WAEP”) of, and movements in, options during the period: Outstanding, beginning of period Granted Exercised for shares(2) Exercised for shares via cashless method(1)(2) Exercised for shares(2) Exercised for cash(2) Cancelled or forfeited Expired Outstanding, end of period Exercisable, end of period Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 No. WAEP (CAD) No. WAEP (CAD) 1,340,449 $ 804,312 — (3,666) (3,666) (2,000) (169,177) (345,237) 1,624,681 753,439 $ $ 18.99 11.27 — 8.25 8.25 8.25 16.68 20.92 15.03 18.04 1,607,350 $ 216,599 (116,384) (19,187) (135,571) (10,083) (190,997) (146,849) 1,340,449 825,375 $ $ 18.21 17.70 9.27 9.37 9.29 10.02 18.07 19.42 18.99 20.34 (1) For the fifty-two weeks ended December 29, 2018, nil shares were issued via the cashless exercise method (fifty-two weeks ended December 30, 2017: 42,536 shares). (2) The weighted average share price at the date of exercise for these options was CAD$10.79 for the fifty-two weeks ended December 29, 2018 (fifty-two weeks ended December 30, 2017: CAD$14.62). Set forth below is a summary of the outstanding options to purchase common shares as at December 29, 2018: Option price (CAD) $8.25–10.00 $10.01–15.00 $15.01–20.00 $20.01–25.00 Options outstanding Options exercisable Number outstanding Weighted average exercise price Average life (years) Number exercisable Weighted average exercise price 8,666 $ 841,991 390,402 383,622 1,624,681 8.25 11.45 15.30 22.79 0.25 4.76 2.25 1.09 8,666 $ 146,300 242,890 355,583 753,439 8.25 11.18 15.30 22.96 The fair value of options granted during the fifty-two weeks ended December 29, 2018 and December 30, 2017 was estimated on the date of grant using the Black-Scholes pricing model with the following weighted average inputs and assumptions: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life (years) Weighted average share price (CAD) Weighted average fair value (CAD) December 29, 2018 December 30, 2017 5.16 35.45 2.10 5.00 11.34 2.32 $ $ 3.15 34.71 1.62 6.73 17.70 4.28 $ $ The expected life of the options is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily be the actual outcome. Notes to the Consolidated Financial Statements90 HIGH LINER FOODS Performance Share Unit Plan The PSU Plan is intended to align the Company’s senior management with the enhancement of shareholder returns and other operating measures of performance. Both PSUs and RSUs may be issued under the PSU Plan to any eligible employee of the Company, or its subsidiaries, who have rendered meritorious services that contributed to the success of the Company. Directors who are not full-time employees of the Company may not participate in the PSU Plan. The Company is permitted to issue up to 400,000 shares from treasury in settling entitlements under the PSU Plan. The PSU plan is dilutive and units may be settled in cash or shares upon vesting. If settled in cash, the amount payable to the participant shall be determined by multiplying the number of PSUs or RSUs (which will be adjusted in connection with the payment of dividends by the Company as if such PSUs or RSUs were common shares held under a dividend reinvestment plan) by the fair market value of a common share at the vesting date, and in the case of PSUs, by a performance multiplier to be determined by the Company’s Board of Directors. If settled in shares on the vesting date, each RSU is exchanged for a common share, and each PSU is multiplied by a performance multiplier and then exchanged for common shares. The following table illustrates the movements in the number of PSUs during the period: Outstanding, beginning of period Granted Reinvested dividends Released and paid in cash Forfeited and expired Outstanding, end of period Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 263,556 730,695 31,624 (14,096) (132,022) 879,757 216,070 95,096 9,153 (25,873) (30,890) 263,556 The expected performance multiplier used in determining the fair value of the liability and related share-based compensation expense for PSUs for the fifty-two weeks ended December 29, 2018 was 65% (December 30, 2017: 34%). The following table illustrates the movements in the number of RSUs during the period: Outstanding, beginning of period Granted Reinvested dividends Forfeited Outstanding, end of period Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 72,529 213,133 16,804 (21,362) 280,562 — 70,971 2,283 (725) 72,529 The share price at the reporting date was CAD$7.30 (December 30, 2017: CAD$14.83). The PSUs will vest at the end of a three-year period, if agreed-upon performance measures are met (if applicable) and the RSUs will vest in accordance with the terms of the agreement. Deferred Share Unit Plan The DSU Plan allows a director to receive all or any portion of their annual retainer, additional fees and equity value in DSUs in lieu of cash or options. DSUs cannot be redeemed for cash until the holder is no longer a Director of the Company. These units are considered cash-settled share-based payment awards and are non-dilutive. Notes to the Consolidated Financial StatementsThe following table illustrates the movements in the number of DSUs during the period: Outstanding, beginning of period Granted Reinvested dividends Outstanding, end of period Annual Report 2018 91 Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 77,934 66,657 8,834 153,425 34,337 41,239 2,358 77,934 18. Income tax The Company’s statutory tax rate for the year ended December 29, 2018 is 29.2% (December 30, 2017: 29.3%). The Company’s effective income tax rate was an expense of 26.6% for the year ended December 29, 2018 (December 30, 2017: a recovery of 80.5%). The higher effective income tax rate in Fiscal 2018 compared to the same period last year was attributable to the reduced interest expense deductibility associated with the Company’s tax efficient financing structures and the recognition of transitional tax benefits in the fourth quarter of 2017 triggered by the U.S. Tax Reform resulting in a revaluation of the deferred tax liability for changes in substantively enacted tax rates. On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was signed into law, which reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of the U.S. Tax Reform, the Company’s net deferred tax liability at December 30, 2017 decreased by $11.2 million. The U.S. Tax Reform introduced other important changes in the U.S. corporate income tax laws, including the creation of a new Base Erosion Anti-Abuse Tax that subjects certain payments from U.S. corporations to foreign related parties to additional taxes, and limitations to certain deductions for net interest expense incurred by U.S. corporations. The U.S. Tax Reform also included an increase in bonus depreciation from 50% to 100% for qualified property placed in service after September 27, 2017 and before 2023. Future regulations and interpretations may be issued by U.S. authorities that may also impact the Company’s estimates and assumptions used in calculating its income tax provisions. The major components of income tax (recovery) expense are as follows: Consolidated statements of income (Amounts in $000s) Current income tax expense (recovery) Deferred income tax expense (recovery) Origination and reversal of temporary differences Change in substantively enacted tax rates (U.S.) Income tax (recovery) expense reported in the consolidated statements of income $ Consolidated statements of comprehensive income (Amounts in $000s) Income tax expense (recovery) related to items charged or credited directly to OCI during the period: (Loss) gain on hedge of net investment in foreign operations Gain (loss) on translation of net investment in foreign operations Effective portion of changes in fair value of cash flow hedges Net change in fair value of cash flow hedges transferred to carrying amount of hedged item Net change in fair value of cash flow hedges transferred to income Defined benefit plan actuarial loss Income tax expense (recovery) directly to other comprehensive income (loss) $ 902 $ December 29, 2018 December 30, 2017 $ 1,583 $ (723) 4,507 — 4,507 6,090 (2,206) (11,186) (13,392) $ (14,115) December 29, 2018 December 30, 2017 $ (1,834) $ 1,481 1,732 1,444 (221) (75) (144) (1,242) (756) 199 177 (641) (782) Notes to the Consolidated Financial Statements92 HIGH LINER FOODS The reconciliation between income tax (recovery) expense and the product of accounting profit multiplied by the Company’s statutory tax rate is as follows: (Amounts in $000s) Accounting profit before tax at statutory income tax rate of 29.2% (2017: 29.3%) Non-deductible expenses for tax purposes: Non-deductible share-based compensation Tax benefits not previously recognized Other non-deductible items Effect of (lower) higher income tax rates of U.S. subsidiary U.S. Base Erosion & Anti-Abuse Tax Acquisition financing structures deduction Change in substantively enacted tax rates (U.S.) Other Income tax expense (recovery) December 29, 2018 December 30, 2017 $ 6,677 $ 5,139 220 228 325 (546) 379 (1,526) — 333 575 (1,639) 239 1,566 — (8,720) (11,186) (89) $ 6,090 $ (14,115) Deferred income tax (Amounts in $000s) Consolidated statements of financial position as at Consolidated statements of income for the years ended December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017 Accelerated depreciation for tax purposes on property, plant and equipment $ (12,493) $ (10,378) $ (428) $ Inventory Intangible assets Pension Revaluation of cash flow hedges Losses available for offset against future taxable income Deferred charges and other Deferred income tax recovery (expense) Net deferred income tax liability (3,115) (21,397) 3,404 (392) 2,697 2,852 (93) (21,142) 3,499 302 4,179 2,477 3,022 3,053 (32) (479) (742) 113 (2,621) (1,203) (7,879) (46) (10) (884) (749) $ (28,444) $ (21,156) $ 4,507 $ (13,392) Reflected in the consolidated statements of financial position as follows: Deferred income tax assets Deferred income tax liabilities Net deferred income tax liability $ 7 $ 2,787 (28,451) (23,943) $ (28,444) $ (21,156) Reconciliation of net deferred income tax liabilities (Amounts in $000s) Opening balance, beginning of year Deferred income tax (expense) recovery during the period recognized in income Deferred income tax recovery arising from a change in tax rate Deferred income tax recovery arising from an acquisition (Note 5) Deferred income tax reclassified to income tax receivable Deferred income tax recovery during the period recognized in retained earnings Deferred income tax (expense) recovery during the period recognized in OCI December 29, 2018 December 30, 2017 $ (21,156) $ (42,312) (4,507) — — (1,800) 144 (1,125) 2,206 11,186 6,683 — 641 440 Closing balance, end of year $ (28,444) $ (21,156) The Company has net operating losses in its U.S. subsidiaries of $3.1 million at December 29, 2018 (December 30, 2017: $1.7 million) that are available to use from 2019 to 2029. A deferred income tax asset has been recognized for the amount that is probable to be realized. Notes to the Consolidated Financial StatementsAnnual Report 2018 93 The Company had unused capital losses of $nil at December 29, 2018 (December 30, 2017: $18.4 million), which have an indefinite carryforward period. A deferred tax asset has only been recognized to the extent of the benefit that is probable to be realized. The Company can control the distribution of profits, and accordingly, no deferred income tax liability has been recorded on the undistributed profit of its subsidiaries that will not be distributed in the foreseeable future. The temporary difference associated with investments in subsidiaries, for which a deferred tax liability has not been recognized, is $nil at December 29, 2018 and December 30, 2017. There are no income tax consequences attached to the payment of dividends in either 2018 or 2017 by the Company to its shareholders. 19. Revenue from contracts with customers Disaggregation of revenue The Company disaggregates revenue from contracts with customers using existing operating segments, which are based on geographical locations, the U.S. and Canada (see Note 24). The Company has determined that a disaggregation of revenue using existing segments best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Contract liability The Company’s contract liability consists of donated product received from the United States Department of Agriculture for the purpose of processing the product for distribution to eligible recipient agencies. The donated inventory is non-cash consideration that is recorded at the fair value of the product received. The Company has an obligation to sell the product to the eligible agencies at the reduced price, with the donated product being included in the transaction price recognized on the sale of the finished products. The Company has changed the presentation of this obligation on the consolidated statements of financial position and has reclassified $4.1 million as at December 30, 2017 from accounts payable and accrued liabilities to contract liability to reflect the terminology and the presentation requirements of IFRS 15. The contract liability continues to be classified as current because the Company expects to settle the obligation within twelve months from the reporting date. During the fifty-two weeks ended December 29, 2018, the Company recognized $5.6 million (fifty-two weeks ended December 30, 2017: $6.5 million) in revenue that was included in the contract liability balance at the beginning of the period. 20. Earnings per share Net income and basic weighted average shares outstanding are reconciled to diluted earnings and diluted weighted average shares outstanding, respectively, as follows: Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 Net income ($000s) $ $ 16,776 — 16,776 Weighted average shares (000s) Per share ($) Net income ($000s) Weighted average shares (000s) 33,617 $ 0.50 $ 31,653 32,412 $ 2 — — 115 33,619 $ 0.50 $ 31,653 32,527 $ Per share ($) 0.98 — 0.97 Net income Dilutive options Diluted earnings Excluded from the diluted earnings per common share calculation for the fifty-two weeks ended December 29, 2018 were 1,616,015 options, as their effect would have been anti-dilutive (December 30, 2017: 752,152 options). Notes to the Consolidated Financial Statements94 HIGH LINER FOODS 21. Changes in financial liabilities arising from financing activities (Amounts in $000s) Bank loans Current portion of long-term debt Other current financial liabilities Current portion of finance lease  obligations Long-term debt Other long-term financial liabilities Long-term finance lease obligations Total liabilities from financing  activities December 30, 2017 Cash flows Reclassified between current and non-current Change in fair values New (cancelled) leases Deferred finance costs December 29, 2018 Other(1) $ 53,352 $ (21,380) $ — $ — $ — $ (325) $ (495) $ 31,152 — 1,965 — — 13,655 — — (1,829) 714 (598) 407 335,441 62 407 — — — (13,655) — (407) — — (53) — — — (153) — — 487 — — — — — — — (58) 2 888 (4) (80) 13,655 78 372 322,674 5 407 $ 391,941 $ (21,978) $ — $ (1,882) $ 334 $ (325) $ 253 $ 368,343 (1) ‘Other’ includes the effect of amortization of deferred financing charges and the impact of the foreign exchange movements. The Company classifies interest paid and income taxes paid as cash flows from operating activities. 22. Guarantees and commitments Guarantee of supplier financing arrangement As part of the Rubicon acquisition (see Note 5), the Company assumed financing arrangement guarantees for certain suppliers that finance their exports of seafood products to Rubicon. As part of this financing arrangement, the Company has granted a security interest in substantially all of the inventory and proceeds thereon arising from purchases from these suppliers and has guaranteed the suppliers’ borrowings, to the extent that such borrowings were used in connection with the exportation of seafood products to Rubicon. The Company has deemed the amount of the guarantee to be the open accounts payable to these suppliers and as of December 29, 2018, the open accounts payable was $26.6 million. Operating lease commitments for the next five years and thereafter are as follows: (Amounts in $000s) 2019 2020 2021 2022 2023 Thereafter Operating lease payments $ 5,537 5,234 4,067 1,454 1,450 2,444 Operating lease commitments result principally from leases for cold storage facilities, office equipment, premises and production equipment. Operating lease payments recognized as an expense during the fifty-two weeks ended December 29, 2018 were $5.8 million (December 30, 2017: $5.1 million). The Company’s lease arrangements do not contain restrictions concerning dividends, additional debt, and further leasing imposed by the lessor, and the Company has the option, under some operating leases, to renew the contract for an additional term. The Company had letters of credit outstanding as at December 29, 2018 relating to the procurement of inventories and the security of certain contractual obligations of $6.9 million (December 30, 2017: $5.0 million). The Company also had a letter of credit outstanding as at December 29, 2018 relating to the securitization of the Company’s SERP benefit plan (see Note 15) in the amount of $8.5 million (December 30, 2017: $9.7 million). Notes to the Consolidated Financial StatementsAnnual Report 2018 95 23. Related party disclosures Entity with significant influence over the Company As at December 29, 2018, Thornridge Holdings Limited owns 34.5% of the Company’s outstanding common shares (December 30, 2017: 34.5%). Other related parties As a result of the Rubicon acquisition, the Company has related party transactions with a company controlled by certain key management of Rubicon. Total purchases from related parties for the fifty-two weeks ended December 29, 2018 were $nil (fifty-two weeks ended December 30, 2017: $1.7 million), and as at December 29, 2018, there was $nil (December 30, 2017: $nil) due to the related parties. Total sales to related parties for the fifty-two weeks ended December 29, 2018 were $0.9 million (fifty-two weeks ended December 30, 2017: $0.2 million), and as at December 29, 2018 there was $0.5 million (December 30, 2017: $0.2 million) due from the related parties. The Company leases an office building from a related party at an amount which approximates the fair market value that would be incurred if leased from a third party. The aggregate payments under the lease, which are measured at the exchange amount, totaled approximately $0.7 million during the fifty-two weeks ended December 29, 2018 (fifty-two weeks ended December 30, 2017: $0.6 million). The Company did not have any transactions during 2017 or 2018 with entities who had significant influence over the Company or with members of the Board of Directors and their related interests. Key management personnel compensation In addition to their salaries, the Company also provides benefits to the Chief Executive Officer (“CEO”), and certain senior executive officers in the form of contributions to post-employment benefit plans, non-cash plans and various other short- and long-term incentive and benefit plans. The Company has entered into Change of Control Agreements (the “Agreements”) with certain senior executive officers. The Agreements are automatically extended annually by one additional year unless the Company provides 90 days’ notice of its unwillingness to extend the agreements. The Agreements provide that in the event of a termination by the Company following a change of control, other than for cause or by senior executive officers for good reason as defined in the Agreements, senior executive officers are entitled to: (a) cash compensation equal to their final annual compensation (including base salary and short-term incentives) multiplied by two for all senior executive officers; (b) the automatic vesting of any options or other entitlements for the purchase or acquisition of shares in the capital of the Company which are not then exercisable, which shall be exercisable following termination for two years for all senior executive officers; and (c) continue to participate in certain benefit programs for two years for all senior executive officers. The following are the amounts recognized as an expense during the reporting period related to key management personnel compensation: (Amounts in $000s) Salaries and short-term incentive plans(1) Post-employment benefits(2) Termination benefits(2) Share-based compensation(3) (1) Short-term incentive amounts were for those earned in 2018 and 2017. (2) Refer to Note 15 for details of each plan. (3) Refer to Note 17 for details regarding the Company’s Share Option, DSU, PSU and RSU Plans. Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 $ 5,594 $ 228 697 1,052 7,571 $ $ 3,218 163 1,534 544 5,459 Notes to the Consolidated Financial Statements96 HIGH LINER FOODS 24. Operating segment information The Company operates in one dominant industry segment, the manufacturing and marketing of prepared and packaged frozen seafood. The Company evaluates performance of the reportable segments on a geographical basis using net income before depreciation, amortization, finance costs and income taxes. The Company also reports a “Corporate” category, which does not qualify as a component of another reportable segment or as a separate reportable segment. Corporate includes expenses for corporate functions, share-based compensation costs and business acquisition, integration and other expenses. Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties. No operating segments have been aggregated to form the reportable operating segments. The operating results and identifiable assets and liabilities by reportable segment are as follows: (Amounts in $000s) Revenue (excluding  intercompany sales) Cost of sales (excluding  intercompany sales) Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 Canada U.S. Corporate Total Canada U.S. Corporate Total $ 253,329 $ 795,202 $ — $ 1,048,531 $ 262,063 $ 791,783 $ — $ 1,053,846 206,505 654,427 (558) 860,374 216,329 651,411 27 867,767 Gross profit $ 46,824 $ 140,775 $ 558 $ 188,157 $ 45,734 $ 140,372 $ (27) $ 186,079 Income (loss) before income taxes $ 13,681 $ 35,822 $ (26,637) $ 22,866 $ 8,853 $ 34,997 $ (26,312) $ 17,538 Add-back: Depreciation and amortization   included in: Cost of sales Distribution expenses Selling, general and  administrative expenses Total depreciation and amortization Finance costs Income (loss) before depreciation,  amortization, finance costs and  income taxes 1,411 147 536 2,094 — 5,218 1,335 7,049 13,602 219 — 1,856 2,075 — 21,603 6,848 1,482 9,441 17,771 21,603 1,319 150 492 1,961 — 5,073 1,320 6,727 13,120 153 — 1,077 1,230 — 16,626 6,545 1,470 8,296 16,311 16,626 $ 15,775 $ 49,424 $ (2,959) $ 62,240 $ 10,814 $ 48,117 $ (8,456) $ 50,475 (Amounts in $000s) Canada U.S. Corporate Total Canada U.S. Corporate Total Total assets Total liabilities $ 171,244 $ 648,318 $ 17,593 $ 837,155 $ 172,180 $ 713,729 $ 22,060 $ 907,969 $ 52,996 $ 106,374 $ 413,926 $ 573,296 $ 51,894 $ 156,821 $ 430,387 $ 639,102 As at December 29, 2018 As at December 30, 2017 For the fifty-two weeks ended December 29, 2018 and December 30, 2017 the Company recognized $272.1 million and $332.7 million of sales from two customers, respectively, that represent more than 10% of the Company’s total consolidated sales, arising from sales in both the Canadian and U.S. reportable operating segments. 25. Fair value measurement Fair value of financial instruments Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are required to reflect the assumptions that market participants would use in pricing an asset or liability based on the best available information including the risks inherent in a particular valuation technique, such as a pricing model, and the risks inherent in the inputs to the model. Management is responsible for valuation policies, processes and the measurement of fair value within the Company. Financial liabilities carried at amortized cost are shown using the EIR method. Other financial assets and other financial liabilities represent the fair value of the Company’s foreign exchange contracts as well as the fair value of interest rate swaps on debt. Notes to the Consolidated Financial StatementsThe Company uses a fair value hierarchy, based on the relative objectivity of the inputs used to measure the fair value of financial instruments, with Level 1 representing inputs with the highest level of objectivity and Level 3 representing inputs with the lowest level of objectivity. The following table sets out the Company’s financial assets and liabilities by level within the fair value hierarchy: Annual Report 2018 97 (Amounts in $000s) Fair value of financial assets Foreign exchange contracts Interest rate swaps Fair value of financial liabilities Interest rate swaps Foreign exchange contracts Long-term debt Finance lease obligations December 29, 2018 December 30, 2017 Level 2 Level 3 Level 2 Level 3 $ 1,424 2,093 — 83 — — $ — $ — — — 310,647 749 $ 501 906 367 1,660 — — — — — — 335,711 1,129 The Company’s Level 2 derivatives are valued using valuation techniques such as forward pricing and swap models. These models incorporate various market-observable inputs including foreign exchange spot and forward rates, and interest rate curves. The fair values of long-term debt instruments, classified as Level 3 in the fair value hierarchy, are estimated based on unobservable inputs, including discounted cash flows using current rates for similar financial instruments subject to similar risks and maturities, adjusted to reflect the Company’s credit risk. The Company uses the date of the event or change in circumstances to recognize transfers between Level 1, Level 2 and Level 3 fair value measurements. During the fifty-two weeks ended December 29, 2018 and December 30, 2017, no such transfers occurred. The financial liabilities that are not measured at fair value on the consolidated statements of financial position consist of long-term debt (including current portion) and finance lease obligations. The carrying amounts for these instruments are $336.3 million and $0.8 million, respectively, as at December 29, 2018 (December 30, 2017: $335.4 million and $1.1 million, respectively). Amortized cost impact on interest expense During the fifty-two weeks ended December 29, 2018, the Company expensed $0.2 million and $0.7 million (December 30, 2017: $0.2 million and $0.6 million) of short-term and long-term interest, respectively, relating to interest that was calculated using the EIR method associated with transaction fees and borrowings. The fair values of other financial assets and liabilities at December 29, 2018 and December 30, 2017 are shown below: (Amounts in $000s) Financial instruments at fair value through OCI: Foreign exchange forward contracts Interest rate swap Financial instruments at fair value through profit or loss: Foreign exchange forward contracts not designated in hedge relationships — — $ 3,517 $ 1,407 $ Other financial assets Other financial liabilities December 29, 2018 December 30, 2017 December 29, 2018 December 30, 2017 $ $ 1,424 2,093 $ 501 906 83 — — 83 $ $ 1,532 367 128 2,027 Notes to the Consolidated Financial Statements98 HIGH LINER FOODS Hedging activities INTEREST RATE SWAPS During the fifty-two weeks ended December 29, 2018, the Company had the following interest rate swaps outstanding to hedge interest rate risk resulting from the term loan facility (see Note 14): Effective date Maturity date Receive floating rate Pay fixed rate Designated in a formal hedging relationship: Notional amount (millions) December 31, 2014 December 31, 2019 3-month LIBOR (floor 1.0%) 2.1700%   $ March 4, 2015 April 4, 2016 April 4, 2016 January 4, 2018 March 4, 2020 3-month LIBOR (floor 1.0%) 1.9150%   $ April 4, 2018 3-month LIBOR (floor 1.0%) 1.2325%   $ April 24, 2021 3-month LIBOR (floor 1.0%) 1.6700%   $ April 24, 2021 3-month LIBOR (floor 1.0%) 2.2200%   $ 20.0 25.0 35.0 40.0 80.0 The cash flow hedge of interest expense variability was assessed to be highly effective for the fifty-two weeks ended December 29, 2018 and December 30, 2017, and therefore, the change in fair value for those interest rate swaps designated in a hedging relationship was included in OCI as after-tax net gains of $1.3 million and a nominal after-tax net loss, respectively. The Company did not hold any interest rate swaps that were not designated in a formal hedging relationship during the fifty-two weeks ended December 29, 2018 and December 30, 2017. FOREIGN CURRENCY CONTRACTS Foreign currency forward contracts are used to hedge foreign currency risk resulting from expected future purchases denominated in USD, which the Company has qualified as highly probable forecasted transactions, and to hedge foreign currency risk resulting from USD monetary assets and liabilities, which are not covered by natural hedges. As at December 29, 2018, the Company had outstanding notional amounts of $23.9 million (December 30, 2017: $38.1 million) in foreign currency average-rate forward contracts and $1.4 million (December 30, 2017: $6.0 million) in foreign currency single-rate forward contracts that were formally designated as a hedge. With the exception of $0.4 million (December 30, 2017: $1.5 million) average-rate forward contracts with maturities ranging from January 2020 to March 2020, all foreign currency forward contracts have maturities that are less than one year. The cash flow hedges of the expected future purchases were assessed to be highly effective for the fifty-two weeks ended December 29, 2018 and December 30, 2017, and therefore, the change in fair value was recorded in OCI as after-tax net gains of $2.2 million and after-tax net losses of $1.8 million, respectively. The amounts recognized in the consolidated statements of income resulting from hedge ineffectiveness during the fifty-two weeks ended December 29, 2018 and December 30, 2017 were nominal. As at December 29, 2018, the Company had $nil outstanding notional amounts (December 30, 2017: $5.0 million) of foreign currency single-rate forward contracts outstanding to hedge foreign currency exchange risk on USD monetary assets and liabilities that were not formally designated as a hedge. The change in fair value for the fifty-two weeks ended December 29, 2018 and December 30, 2017 was a net gain of $0.3 million and nominal, respectively, which was recorded in the consolidated statements of income. HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS As at December 29, 2018, a total borrowing of $338.0 million ($324.3 million included in long-term debt and $13.7 million included in the current portion of long-term debt) (December 30, 2017: a total borrowing of $312.3 million ($5.0 million included in bank loans and $307.3 million included in long-term debt)) has been designated as a hedge of the net investment in the U.S. subsidiary and is being used to hedge the Company’s exposure to foreign exchange risk on this net investment. Gains or losses on the re-translation of this borrowing are transferred to OCI to offset any gains or losses on translation of the net investment in the U.S. subsidiary. There was no hedge ineffectiveness recognized during the fifty-two weeks ended December 29, 2018 and December 30, 2017. Notes to the Consolidated Financial StatementsAnnual Report 2018 99 26. Capital management The primary objective of the Company’s capital management policy is to ensure a strong credit rating and healthy capital ratios in order to support the business and maximize shareholder value. The Company defines capital as funded debt and common shareholder equity, including AOCI, except for gains and losses on derivatives used to hedge interest and foreign exchange cash flow exposure. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions, by adjusting the dividend payment to shareholders, returning capital to shareholders, purchasing capital stock under a NCIB, or issuing new shares. Capital distributions, including purchases of capital stock, are subject to availability under the Company’s working capital debt facility. The consolidated Average Adjusted Aggregate Availability under the working capital debt facility must be greater than $22.5 million. As at December 29, 2018, the Company has Average Adjusted Aggregate Availability of $109.8 million. The Company also has restrictions on capital distributions, where the aggregate amount for dividends are subject to an annual limit of $17.5 million with a provision to increase this amount subject to leverage and excess cash flow tests. NCIBs are subject to an annual limit of $10.0 million with a provision to carry forward unused amounts, subject to a maximum of $20.0 million per annum. For the fifty-two weeks ended December 29, 2018 and December 30, 2017, the Company paid $14.7 million and $14.4 million in dividends, respectively, and $nil under the NCIB. The Company monitors capital (excluding letters of credit) using the ratio of net interest-bearing debt to capitalization, which is net interest-bearing debt divided by total capital plus net interest-bearing debt. The Company’s objective is to keep this ratio between 35% and 60%. Seasonal working capital debt may result in the Company exceeding the ratio at certain times throughout the fiscal year. The Directors of the Company have also decided that this range can be exceeded on a temporary basis as a result of acquisitions. (Amounts in $000s) Total bank loans (Note 11) Total term loan debt (Note 14) Total finance lease obligation (Note 14) Interest-bearing debt Less: cash Net interest-bearing debt Shareholders' equity Unrealized gains on derivative financial instruments included in AOCI Total capitalization Net interest-bearing debt as percentage of total capitalization December 29, 2018 December 30, 2017 $ 31,505 $ 53,560 337,926 779 370,210 (9,568) 360,642 263,859 (2,215) 337,926 1,121 392,607 (4,738) 387,869 268,867 (220) $ 622,286 $ 656,516 58% 59% No changes were made in the objectives, policies or processes for managing capital for the fiscal year ended December 29, 2018 and December 30, 2017. 27. Financial risk management objectives and policies The Company’s principal financial liabilities, other than derivatives, comprise bank loans and overdrafts, term loans, letters of credit, notes payable, finance leases, and trade payables. The main purpose of these financial liabilities is to finance the Company’s operations. The Company has various financial assets such as trade receivables, other accounts receivable, and cash, which arise directly from its operations. The Company is exposed to interest rate risk, foreign currency risk, price risk, credit risk and liquidity risk. The Company enters into interest rate swaps, foreign currency contracts and insurance contracts to manage these types of risks from the Company’s operations and its sources of financing. The Company’s policy is that no speculative trading in derivatives shall be undertaken. The Audit Committee of the Board of Directors reviews and approves policies for managing each of these risks, which are summarized below. Notes to the Consolidated Financial Statements100 HIGH LINER FOODS Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates, which relates to the Company’s debt obligations with floating interest rates. The Company’s policy is to manage interest rate risk by having a mix of fixed and variable rate debt. The Company’s objective is to keep between 35% and 55% of its borrowings at fixed rates of interest. To manage this, the Company enters into fixed rate debt facilities or interest rate swaps, in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional amount. These swaps are designated to hedge the underlying debt obligations. Interest rate options that effectively fix the maximum rate of interest that the Company will pay may also be used to manage this exposure. At December 29, 2018, 45% of the Company’s borrowings, including the long-term debt and the working capital facility, were either hedged or at a fixed rate of interest (December 30, 2017: 51%). INTEREST RATE SENSITIVITY The Company’s income before income taxes is sensitive to the impact of a change in interest rates on that portion of debt obligations with floating interest rates, with all other variables held constant. As at December 29, 2018, the Company’s current bank loans were $31.5 million (December 30, 2017: $53.6 million) and long-term debt was $324.3 million (December 30, 2017: $337.9 million). An increase of 25 basis points on the bank loans would have reduced income before income taxes by $0.1 million (December 30, 2017: $0.1 million). An increase of 25 basis points above the LIBOR floor on the long-term debt would have reduced income before income taxes by $0.4 million (December 30, 2017: $0.3 million). A corresponding decrease in respective interest rates would have an approximately equal and opposite effect. There is no impact on the Company’s equity except through changes in income. Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates primarily to the Parent company having a CAD functional currency, meaning that all transactions are recorded in CAD. However, as the Company’s Consolidated Financial Statements are reported in USD, the results of the Parent are converted into USD for external reporting purposes. Therefore, the Canadian to U.S. exchange rates (USD/CAD) impact the results reported in the Company’s Consolidated Financial Statements. The Parent’s operating activities, including the majority of sales that are in CAD, have USD-denominated input costs. For products sold in Canada, raw material is purchased in USD. However, labour, packaging and ingredient conversion costs, overheads and selling, general and administrative costs are incurred in CAD. A strengthening Canadian dollar has an overall effect of increasing income before income taxes in USD terms and conversely, a weakening Canadian dollar has the overall effect of decreasing income before income taxes in USD terms. The Parent hedges forecasted cash flows for purchases of USD-denominated products for the Canadian operations where the purchase price is substantially known in advance. At December 29, 2018, the Parent hedged 37% (December 30, 2017: 49%) of these purchases identified for hedging, extending to March 2020. The Company’s Price Risk Management Policy dictates that cash flows out fifteen months are hedged between a minimum and maximum percent that declines by quarter the further into the future the cash flows are. The Company does not hedge cash flows on certain USD-denominated seafood purchases in which the ultimate selling price charged to the Company’s Canadian customers move with changes in the USD/CAD exchange rates. It is the Company’s policy to set the terms of the hedge derivatives to match the terms of the hedged item to maximize hedge effectiveness. The Company also has foreign exchange risk related to the USD-denominated input costs of commodities used in its Canadian operations related to freight surcharges on transportation costs, paper products in packaging, grain and corn products in its breading and batters, and soya and canola bean-based cooking oils. The Company hedges these USD- denominated input costs on a small scale, but relies where possible on three to thirty-six month, fixed price contracts in CAD with suppliers. For the fifty-two weeks ended December 29, 2018, approximately 84.3% of the Parent’s costs were denominated in USD, while approximately 91% of the Parent’s sales were denominated in its CAD functional currency. Notes to the Consolidated Financial StatementsAnnual Report 2018 101 The Parent has some assets and liabilities that are denominated in CAD, and therefore, the assets and liabilities reported in the Consolidated Financial Statements change as USD/CAD exchange rates fluctuate. A stronger CAD has the effect of increasing the carrying value of assets and liabilities such as accounts receivable, inventory, property, plant and equipment, and accounts payable of the Parent when translated to USD. The net offset of those changes flow through OCI. Based on the equity of the Parent as of December 29, 2018, a one-cent increase/decrease in the USD/CAD exchange rate will decrease/increase equity by approximately $0.7 million (December 30, 2017: $0.4 million). Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company trades only with recognized, creditworthy third parties. It is the Company’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, the Company holds credit insurance on its trade accounts receivable and all receivable balances are managed and monitored at the corporate level on an ongoing basis with the result that the Company’s exposure to bad debts is not significant. The Company’s top ten customers account for 67% of the trade receivables at December 29, 2018 (December 30, 2017: 68%), with the largest customer accounting for 14% (December 30, 2017: 14%). With respect to credit risk arising from the other financial assets of the Company, which comprise cash and certain derivative instruments, the Company’s exposure to credit risk arises from default of the counterparty. The Company manages this risk by dealing with financially creditworthy counterparties, such as Chartered Canadian banks and U.S. banks with investment grade ratings. The maximum exposure to credit risk is equal to the carrying value of accounts receivable and derivative instruments. Liquidity risk Liquidity risk is the risk that the Company may not have cash available to satisfy financial liabilities as they come due. The Company monitors its risk to a shortage of funds using a detailed budgeting process that identifies financing needs for the next twelve months as well as the models that look out five years. Working capital and cash balances are monitored daily and a procurement system provides information on commitments. This process projects cash flows from operations. The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, letters of credit, bank loans, notes payable, and finance leases. The Company’s objective is that not more than 50% of borrowings should mature in the next twelve-month period. At December 29, 2018, less than 4% of the Company’s debt (December 30, 2017: less than 1%) will mature in less than one year based on the carrying value of borrowings reflected in the Consolidated Financial Statements. At December 29, 2018, the Company was in compliance with all covenants and terms of its debt facilities. The table below shows the maturities of the Company’s non-derivative financial liabilities: (Amounts in $000s) Bank loans Accounts payable and accrued liabilities Contract liability Other liabilities Long-term debt Finance lease obligations As at December 29, 2018 Bank loans Accounts payable and accrued liabilities Contract liability Other liabilities Long-term debt Finance lease obligations As at December 30, 2017 Due within 1 year Due in 1–5 years Total $ — $ 31,505 $ 31,505 157,162 4,772 245 13,655 372 — — 1,493 324,271 407 157,162 4,772 1,738 337,926 779 $ 176,206 $ 357,676 $ 533,882 $ — $ 53,560 $ 53,560 205,855 4,055 166 — 714 — — 1,641 337,926 407 205,855 4,055 1,807 337,926 1,121 $ 210,790 $ 393,534 $ 604,324 Notes to the Consolidated Financial Statements102 HIGH LINER FOODS Commodity price risk The Company is affected by price volatility of certain commodities such as crude oil, wheat, corn, paper products, and frying oils. The Company’s Price Risk Management Policy dictates the use of fixed pricing with suppliers whenever possible, but allows the use of hedging with derivative instruments if deemed prudent. Throughout 2018 and 2017, the Company managed this risk through contracts with suppliers. The Company enters into fixed price contracts with suppliers on an annual basis and, therefore, a significant portion of the Company’s 2019 commodity purchase requirements are covered. Should an increase in the price of commodities materialize, there could be a negative impact on earnings performance and alternatively, a decrease in the price of commodities could result in a benefit to earnings performance. Crude oil prices, which influence fuel surcharges from freight suppliers increased during 2018 compared to 2017. World commodity prices for flour, soy and canola oils, important ingredients in many of the Company’s products, fluctuated throughout the year, with flour prices increasing and soy and canola oil prices decreasing in 2018 compared to 2017. The price of corrugated and folding carton, which is used in packaging, increased in 2018. Seafood price risk The Company is dependent upon the procurement of frozen raw seafood materials and finished goods on world markets. The Company buys as much as $556.0 million of this product annually. A 1.0% change in the price of frozen raw seafood materials would increase/decrease the Company’s procurement costs by $5.6 million. Prices can fluctuate and there is no formal commercial mechanism for hedging either sales or purchases. Purchases of seafood on global markets are principally in USD. The Company hedges exposures to a portion of its currency exposures and enters into longer-term supply contracts when possible. The Company maintains a strict policy of Supplier Approval and Audit Standards, including a diverse supplier base to ensure no over-reliance on any one source or species. The Company has multiple strategies to manage seafood costs, including purchasing significant quantities of frozen raw material and finished goods originating from all over the world. Over time, the Company strives to adjust selling prices to its customers as the world price of seafood changes or currency fluctuations occur. Notes to the Consolidated Financial Statements28. Supplemental information The components of income and expenses included in the consolidated statements of income are as follows: Annual Report 2018 103 (Amounts in $000s) Included in finance costs: Interest expense on bank loans Interest expense on long-term debt Deferred financing charges Interest on letter of credit for SERP Foreign exchange loss (gain) Total finance costs Foreign exchange (gain) loss included in: Cost of sales Finance costs Total foreign exchange gain Loss (gain) on disposal of assets included in: Cost of sales Distribution expenses Selling, general and administrative expenses Total losses on disposal of assets Employee compensation and benefit expense: Wages and salaries (including payroll benefits) Future employee benefit costs Share-based compensation expense Termination benefits Short-term employee benefits Fifty-two weeks ended December 29, 2018 Fifty-two weeks ended December 30, 2017 $ 2,053 $ 18,373 874 108 195 1,453 14,456 721 119 (123) $ 21,603 $ 16,626 $ $ $ $ (573) $ 195 (378) $ (13) (122) (135) $ 240 10 (84) 166 $ 179 59 496 734 $ 97,445 $ 102,198 3,264 1,237 4,903 1,197 3,088 771 2,972 153 Total employee compensation and benefit expense $ 108,046 $ 109,182 29. Events after the reporting period Product recall Subsequent to December 29, 2018, the Company recovered an additional $8.5 million associated with the product recall from the ingredient supplier, for a total recovery of $17.0 million (see Note 6). This additional recovery will be recognized during the first quarter of 2019, reflecting the period in which the recovery became virtually certain, in accordance with IFRS. No further recoveries are expected. As a result, the Company has fully recovered the $13.5 million in losses recognized during the fifty-two weeks ended December 30, 2017 related to consumer refunds, customer fines, the return of product to be re-worked or destroyed, and direct incremental costs, and an additional $3.5 million related to lost sales opportunities and increased production costs. Notes to the Consolidated Financial Statements104 HIGH LINER FOODS Historical Consolidated Statement of Income (unaudited) (in thousands of USD, except per share  amounts, unless otherwise noted) Revenues Gross profit Distribution expenses Selling, general and administrative  expenses Impairment of property, plant and  equipment Business acquisition, integration  and other (income) expenses Finance costs (Income) loss from equity accounted  investee, net of income tax Non-operating items and gain on  disposal of assets Income before income taxes Income taxes Current Deferred Total income tax expense (recovery) Net income Reconciliation to EBITDA: Net income Add-back: Income tax expense (recovery) Finance costs Amortization of intangible assets Depreciation Standardized EBITDA Add-back: Business acquisition, integration and  other (income) expenses Impairment of property, plant and  equipment Increase in cost of sales due to  purchase price allocation to  inventory Loss (gain) on disposal of assets Share-based compensation expense Non-operating items Adjusted EBITDA Reconciliation to Adjusted Net Income: Net income Add-back, after-tax: 2018 $ 1,048,531 188,157 52,649 2017(1) 2016(1) 2015(1) $ 1,053,846 $ 954,986 $ 999,471 186,079 49,827 201,807 43,610 199,627 48,037 2014 $ 1,051,613 220,405 52,558 2013(2) 2012 (2) (3) 2011 (2) (3) (4) 2010 (2) (3) (4) 2009 (2) (3) (4) $ 947,301 $ 942,631 $ 675,539 $ 567,572 $ 549,922 215,335 53,368 206,661 44,511 153,530 35,382 133,169 29,149 117,953 28,383 92,208 99,449 96,978 93,597 105,313 98,820 100,862 72,898 66,565 58,787 1,302 — 2,327 — 852 — 13,230 — — — (2,471) 21,603 2,639 16,626 4,787 14,296 7,473 16,247 6,582 17,569 3,256 16,329 10,741 36,585 11,049 6,019 870 5,025 — — — — — — — — — — (86) — 22,866 17,538 39,809 34,273 37,531 43,648 196 — 536 52 — (16) — 28,130 31,576 1,583 4,507 6,090 (723) (13,392) (14,115) 8,514 (989) 7,525 5,184 738 5,922 3,906 3,325 7,231 12,378 (86) 12,292 5,442 (7,109) (1,667) 5,762 3,708 9,470 6,220 6,057 12,277 403 4,895 — 808 24,677 2,234 5,130 7,364 $ 16,776 $ 31,653 $ 32,284 $ 28,351 $ 30,300 $ 31,356 $ 2,203 $ 18,660 $ 19,299 $ 17,313 $ 16,776 $ 31,653 $ 32,284 $ 28,351 $ 30,300 $ 31,356 $ 2,203 $ 18,660 $ 19,299 $ 17,313 6,090 21,603 7,451 10,320 (14,115) 16,626 6,558 9,753 7,525 14,296 5,166 11,948 5,922 16,247 5,225 11,515 7,231 17,569 4,923 11,874 12,292 16,329 5,258 9,901 (1,667) 36,585 5,551 13,830 9,470 6,019 1,840 7,981 12,277 5,025 1,169 7,094 7,364 4,895 1,314 5,796 $ 62,240 $ 50,475 $ 71,219 $ 67,260 $ 71,897 $ 75,136 $ 56,502 $ 43,970 $ 44,864 $ 36,682 (2,471) 2,639 4,787 7,473 6,582 3,256 10,741 11,049 870 1,302 — 2,327 — 852 — 13,230 — — 166 1,237 — — 734 771 11,493 — (179) 3,229 — — 329 1,119 — — 681 3,329 — — 247 6,704 — 1,149 (190) 10,255 — 510 192 737 — — 55 14 3,653 — 403 — — 431 320 504 $ 62,474 $ 66,112 $ 81,383 $ 76,181 $ 83,341 $ 85,343 $ 91,687 $ 56,458 $ 49,456 $ 38,340 $ 16,776 $ 31,653 $ 32,284 $ 28,351 $ 30,300 $ 31,356 $ 2,203 $ 18,660 $ 19,299 $ 17,313 Share-based compensation expense 1,176 658 2,794 1,207 2,958 6,366 10,025 703 3,653 219 Impairment of property, plant and  equipment Accelerated depreciation on  equipment/property disposed as  part of a discontinuation/acquisition Business acquisition, integration and  other (income) expenses Non-operating items Increase in cost of sales due to  purchase price allocation to  inventory Mark-to-market loss (gain) on  embedded derivative and related  accretion Mark-to-market (gain) loss on  interest rate swaps Accelerated amortization of deferred  financing costs and other items  resulting from debt refinancing and   amendment activities Intercompany dividend withholding tax 938 — (1,841) — — — — — — — — 1,785 7,232 — — — — — 1,614 — 520 668 216 — — — 3,014 4,985 4,290 2,068 — — — — — — — — — — 8,635 1,146 6,895 — — — 8,397 — 761 312 188 (105) 1,899 (90) (426) (80) 76 529 — — — — 605 — 776 744 6,380 (402) — — — 782 — — 541 — 34 — — — 996 — — 497 504 — — — — — Adjusted Net Income $ 17,049 $ 41,328 $ 40,284 $ 34,333 $ 38,781 $ 41,281 $ 38,071 $ 28,854 $ 24,523 $ 18,533 Notes to the Consolidated Financial StatementsAnnual Report 2018 105 Historical Consolidated Statement of Income (unaudited) $ $ (in thousands of USD, except per share  amounts, unless otherwise noted) Book value per common share Gross capital expenditures from  continuing operations Per share information: Basic earnings per common share Based on net income Based on adjusted net income Diluted earnings per common share Based on net income Based on adjusted net income Common shares Outstanding at year-end Weighted average outstanding 2018 7.90 $ 2017(1) 8.05 $ 2016(1) 7.13 $ 2015(1) 6.43 $ 2014 6.41 $ 2013(2) 6.04 $ 2012 (2) (3) 2011 (2) (3) (4) 2010 (2) (3) (4) 2009 (2) (3) (4) 5.07 $ 5.27 $ 4.89 $ 3.76 14,607 27,775 17,686 18,587 28,075 15,419 13,447 7,675 5,134 11,107 $ 0.50 0.51 0.50 0.51 $ 0.98 0.93 0.97 0.93 1.04 1.30 1.04 1.29 $ 0.92 $ 1.11 0.95 1.10 $ 0.99 1.26 0.97 1.24 $ 1.03 1.36 1.01 1.32 $ 0.08 1.26 0.07 1.23 $ 0.62 0.95 0.61 0.94 $ 0.60 0.76 0.60 0.76 0.47 0.51 0.47 0.51 33,383 33,380 30,889 30,874 30,706 30,571 30,258 30,174 30,298 36,662 Basic Diluted 33,617 33,619 32,412 32,527 30,917 31,175 30,819 31,265 30,665 31,317 30,367 31,186 30,238 30,920 30,218 30,682 32,192 32,490 Dividends declared and paid $ 14,663 $ 14,355 $ 12,145 $ 11,023 $ 11,285 $ 10,305 $ 6,379 $ 5,891 $ 5,238 $ Dividends per common share (CAD) 0.580 0.565 0.520 0.465 0.410 0.350 0.210 0.195 0.165 36,770 36,792 4,959 0.135 (1) For Fiscal 2017, 2016, and 2015 the operating results contain certain corrections of errors identified in previously reported amounts related to the accounting for donated products received from the United States Department of Agriculture for the purpose of processing the product for distribution to eligible recipient agencies. (2) Share and per share amounts for Fiscal 2013 and prior years have been restated to reflect the retrospective application of the May 30, 2014 2-for-1 stock split. (3) In Fiscal 2012, the Company changed its presentation currency from CAD to USD. Results for Fiscal 2011 and 2010 have been fully restated to USD. Historical information for Fiscal 2009 and prior years has been converted to USD by translating the previously reported CAD results at the average annual exchange rate for that year. (4) The Company adopted International Financial Reporting Standards effective January 2, 2011, with retrospective application to Fiscal 2010. In Fiscal 2009 and prior years, the Company’s results were prepared in accordance with Canadian generally accepted accounting principles. Notes to the Consolidated Financial Statements106 HIGH LINER FOODS Historical Consolidated Statement of Financial Position (unaudited) (in thousands of USD,  unless otherwise noted) Cash Accounts receivable Income taxes receivable Other financial assets Inventories Prepaid expenses Deferred income taxes Total current assets Property, plant and equipment Deferred income taxes Investment in equity accounted investee Other receivables and miscellaneous  assets Future employee benefits Intangible assets Goodwill Assets classified as held for sale $ 2018 9,568 84,873 6,411 2,504 2017(1) 4,738 $ 2016(1) $ 18,252 $ 2015(1) 1,043 $ 92,395 13,533 570 75,190 4,809 1,705 76,335 6,023 6,453 2014 1,044 81,772 7,381 4,139 $ 2013 1,206 90,113 3,509 1,524 2012(2) 65 $ 2011 (2) (3) 2010 (2) (3) 2009 (2) (3) $ 3,205 $ 601 $ 1,866 73,947 5,145 533 83,590 3,498 1,323 50,724 704 895 56,901 1,231 — 301,411 353,433 252,059 263,043 261,987 252,960 222,313 256,324 132,696 114,261 4,333 — 409,100 114,371 7 — 1,013 — 155,594 157,070 — 3,462 — 468,131 120,289 2,787 — 837 — 158,044 157,881 — 3,340 — 355,355 109,626 2,290 — 864 — 98,872 118,101 — 2,051 — 354,948 115,879 2,495 — 1,683 — 102,315 117,824 — 2,481 — 358,804 114,231 3,372 — 1,678 — 107,704 119,270 515 2,361 — 351,673 101,470 4,656 — 1,906 — 105,253 111,999 542 2,991 — 304,994 89,268 7,207 96 1,847 92 110,631 112,873 4,819 2,969 — 350,909 105,808 1,667 271 1,190 92 116,594 110,816 — 1,899 — 187,519 67,634 2,416 154 819 92 31,409 40,036 — 1,934 3,675 179,868 56,878 333 — 232 7,062 18,904 27,423 — Total assets $ 837,155 $ 907,969 $ 685,108 $ 695,144 $ 705,574 $ 677,499 $ 631,827 $ 687,347 $ 330,079 $ 290,700 Bank loans – actual amounts owing $ 31,505 $ 53,560 $ 959 $ 17,628 $ 65,851 $ 97,899 $ 60,530 $ 119,936 $ 43,261 $ 22,084 Bank loans – deferred charges (353) (208) (338) (470) (721) (672) (826) (978) (304) (312) Accounts payable and accrued liabilities Share-based compensation payable –  current Contract liability(4) Provisions Other current financial liabilities Income taxes payable Current portion of long-term debt Current portion of finance lease  obligations Total current liabilities Long-term debt – actual amounts owing Long-term debt – deferred charges and  market valuations Other long-term financial liabilities Other long-term liabilities Share-based compensation payable –  long-term Long-term finance lease obligations Deferred income taxes Future employee benefits Liabilities classified as held for sale Shareholders' equity Total liabilities and shareholders’  equity 157,162 205,820 138,766 124,132 83,595 100,945 91,436 102,623 55,821 52,431 245 4,772 1,460 78 585 13,655 201 4,055 278 1,965 — — 372 209,481 324,271 714 266,385 337,926 1,028 — 386 1,626 851 — 721 143,999 267,926 613 — 263 817 2,242 11,816 1,015 158,056 282,934 2,259 3,313 10,005 — 437 580 20 3,000 — 240 459 2,543 — 994 156,015 294,750 979 205,706 232,720 — 1,614 550 1,165 34,237 1,039 199,750 213,888 4,233 — 1,013 780 2,024 2,500 4,559 — 553 2,347 3,248 4,450 1,046 233,177 247,500 978 114,913 44,456 (1,597) (2,485) (1,599) (1,917) (2,717) (5,791) (529) (20,254) 5 — 1,493 407 28,451 10,785 — 62 — 1,641 407 23,943 11,223 — 196 — 888 702 44,602 8,190 — 89 125 358 715 46,529 9,631 — 951 2,180 620 1,212 46,722 8,867 — 5,597 175 869 1,647 43,998 7,929 — 1,130 — 1,532 2,181 45,126 13,791 1,604 6,223 — 243 2,555 47,991 11,085 — (305) 208 — — 3,062 9,949 9,682 — — — — — 28 4,378 826 79,435 48,996 (412) 1,198 — — 2,580 4,479 4,338 — 263,859 268,867 220,204 198,624 196,974 184,649 153,354 158,827 148,114 150,086 $ 837,155 $ 907,969 $ 685,108 $ 695,144 $ 705,574 $ 677,499 $ 631,827 $ 687,347 $ 330,079 $ 290,700 (1) For Fiscal 2017, 2016, and 2015 the operating results contain certain corrections of errors identified in previously reported amounts related to the accounting for donated products received from the United States Department of Agriculture for the purpose of processing the product for distribution to eligible recipient agencies. (2) In Fiscal 2012, the Company changed its presentation currency from CAD to USD. Results for Fiscal 2011 and 2010 have been fully restated to USD. Historical information for Fiscal 2009 and prior years has been converted to USD by translating the previously reported CAD results at the average annual exchange rate for that year. (3) The Company adopted International Financial Reporting Standards effective January 2, 2011, with retrospective application to Fiscal 2010. In Fiscal 2009 and prior years, the Company’s results were prepared in accordance with Canadian generally accepted accounting principles. (4) The Company has changed the presentation of this obligation on the consolidated statements of financial position and has reclassified the related balance as at December 30, 2017 from accounts payable and accrued liabilities to contract liability to reflect the terminology and the presentation requirements of IFRS 15, Revenue from Contracts with Customers, adopted on December 31, 2017. Notes to the Consolidated Financial StatementsCorporate Information HONORARY DIRECTOR Donald Sobey BOARD OF DIRECTORS Alan Bell2,3,4 Joan Chow2 Henry Demone (Chair)3 Rob Dexter, Q.C.2 David Hennigar (Vice Chair & Lead Director)3,4 Jill Hennigar1 Rod Hepponstall3 Shelly Jamieson2,3,4 Jolene Mahody1 Andy Miller1 Robert Pace1,3,4 Frank vanSchaayk2 EXECUTIVE LEADERSHIP Rod Hepponstall President & Chief Executive Officer Paul Jewer, FCPA Executive Vice President & CFO Chris Mulder Senior Vice President, North American Sales Craig Murray Senior Vice President, Marketing & Innovation Tim Rorabeck Executive Vice President, Corporate Affairs & General Counsel Mike Kocsis Vice President, Strategic Initiatives John Kramer Director, Sales & Operations Planning Bill Mandly Director, Project Management Dale Martin Vice President, Seafood Procurement Karl McHugh General Manger, Portsmouth Charlene Milner Vice President, Finance Fred Pace Director, Supply Chain Inventory Management JR Pierce Director, Commodity Seafood Sales Mike Sirois Vice President, Product Development & Technical Services Chad Stewart Vice President, Plant Operations Ed Snook General Manger, Lunenburg David Thomas Director, Field Sales Foodservice Canada Brian Thon Director, Sales Operations Paul Snow Executive Vice President, Chief Supply Chain Officer Tom Walker Vice President, Information Technology OTHER SENIOR LEADERSHIP Tania Albanese Senior Director, National Accounts Keith Blanks General Manager, Rubicon Resources Mark Burton Treasurer Bill DiMento Vice President, Sustainability & Government Affairs Chad Groves Vice President, Foodservice Sales Tyler Held Director, Internal Audit Meggan Hodgson Vice President, Quality Assurance & Food Safety Catherine Hu Vice President, Marketing Naomi Jewers Assistant Corporate Secretary PLANTS & WAREHOUSE FACILITIES Massachusetts: Peabody New Hampshire: Portsmouth Virginia: Newport News Nova Scotia: Lunenburg OPERATING SUBSIDIARY COMPANIES High Liner Foods (USA), Incorporated ISF (USA), LLC Rubicon Resources, LLC High Liner Foods (Thailand) Co., Ltd. Sjopvik, h.f. AUDITORS Ernst & Young LLP, Chartered Accountants TRANSFER AGENT For help with: • Changes of address • Transfer of shares • Loss of share certificates • Consolidation of multiple mailings to Heather Keeler-Hurshman Vice President, Investor Relations & Communications one shareholder • Estate settlements Pam Kellogg Vice President, Retail Sales Annual Report 2018 11 Contact: AST Trust Company (Canada) AnswerLineTM: 1-800-387-0825 (toll-free in North America) or (416) 682-3860 Fax: 1-888-249-6189 E-mail inquiries: inquiries@astfinancial.com www.astfinancial.com/ca Mailing Address: P.O. Box 2082, Station C Halifax, NS B3J 3B7 BANKS The Royal Bank of Canada JPMorgan Chase Bank, N.A. Bank of Montreal Canadian Imperial Bank of Commerce Rabobank INVESTOR RELATIONS For: • Additional financial information • Industry and Company developments • Additional copies of this report Contact: Heather Keeler-Hurshman Vice President, Investor Relations & Communication Tel.: (902) 421-7100 Fax: (902) 634-6228 E-mail: investor@highlinerfoods.com Investor relations website: www.highlinerfoods.com Mailing Address: 100 Battery Point P.O. Box 910 Lunenburg, NS B0J 2C0 Common Shares listed on The Toronto Stock Exchange Trading Symbol – HLF ANNUAL GENERAL MEETING OF SHAREHOLDERS Tuesday, May 14, 2019 11:30 a.m. High Liner Foods Incorporated, Lunenburg, Nova Scotia 1 Audit Committee (Robert Pace, Chair) 2 Human Resources & Governance Committee (Shelly Jamieson, Chair) 3 Executive Committee (Henry Demone, Chair) 4 Nominating Committee (Alan Bell, Chair) . m o c n g i s e d s k r o w I I S N O T A C N U M M O C N G I S E D S K R O W E H T : n g i s e D d n a t p e c n o C Our oceans have many species. Our employees have many stories. But our company has one goal: to grow North America’s appetite for seafood like never before. This is our integrated focus. This is our platform for growth. 

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