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)
.
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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.