clearwater seafoods incorporated annual report
TRANSCRIPT
Clearwater Seafoods
Incorporated
annual report
2012
highlights 2012
Clearwater achieved Marine
Stewardship
Council
certification on its Arctic surf
clam and Nova Scotia snow
crab fisheries, completing
the certification of all seven of
its core species
MSC
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2012...Clearwater reported the highest revenues and
adjusted EBITDA in its history with $350.4 million of
revenue and adjusted EBITDA of $72.2 million
Clearwater achieved $17.1 million of free cash flows
in 2012 driven by growth in adjusted EBITDA of
18.1% higher from the prior year
Clearwater reduced its’ leverage to 2.9x adjusted
EBITDA driven by higher adjusted EBITDA and lower
net debt levels.
Clearwater made substantial improvements to its
capital structure by refinancing $264 million in new
term debt facilities.
An independent appraisal placed a value on
Clearwater’s quotas of $453 million - TriNav Fisheries
Consultants completed an independent appraisal
of Clearwater’s industry leading portfolio of quotas
confirming the inherent high value in the species for
which Clearwater has access.
in
dedicated to sustainable
seafood excellence
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innovationat clearwater
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Clearwater leverages its strengths in
innovation to compete in existing market
segments and to capture a growing
share of the seafood value chain through
the introduction of value-added new
products, in its core species.
In existing market segments, Clearwater
has sustained its competitive advantage
through its investment in research and
development in the areas of harvesting
and processing. In fact, Clearwater has
become an industry leader for pioneering
harvesting and processing technologies
and practices. Clearwater has a
long history of leading technological
innovation as we maintain the largest
and most modern fleet of factory freezer
vessels in Canada.
One of Clearwater’s
core strategies is to
innovate and position
products to deliver
superior customer
satisfaction and value.
Significant innovations include:
• Our patent-pending automatic
shucking technology for Canadian
scallops that allow us to catch more
efficiently, reducing our environmental
impact and reducing costs.
• Our patented scanning and biometric
testing of live lobster allows us to
guarantee high quality and low
storage and shipment mortality
• Our patented high pressure-shucking
process allows us to produce high
quality, raw, quick frozen lobster meat
that has become increasingly popular
in the high-end restaurant food
service and process food industry
• Our geographic information systems
and bottom imaging technology
was pioneered and shared with our
industry to continue to help us harvest
more efficiently. With such tools, we
can improve management of fishing
grounds and focus trips on zones
with higher catch rates to harvest the
product with more precision.
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In addition, we continue to embrace a disciplined
approach to value added product development
through the adoption of a structured innovation
process that is supported through the development
of cross functional teams.
This process has enabled the development of
bacon-wrapped scallops and our scallops and
sauce format which are consistent with Clearwater’s
innovation strategy and allows us to differentiate
value to our growing markets, channels and
customers. Demand for our bacon wrapped
scallops continues to grow with the recent launch
of both private label and Clearwater branded
listings with retailers in North America. Our scallops
and sauce format has recently launched in North
America in both retail and foodservice formats.
product
innovation
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value addedat clearwater
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ProfitabilityAdjusted EBITDA* Clearwater has experienced continued
growth in adjusted EBITDA as a percentage
of sales from strong sales prices and
volumes and by controlling costs and
improving productivity.
2012 72,2432011 61,188Target N/A
Adjusted EBITDA* as a % of sales
2012 20.6%
2011 18.4%
Target 18%or greater
Sales Sales growth of 5.3% came as a result of
higher volumes sold, improved sales prices
for most species and in particular strong
demand for coldwater shrimp.
Sales have grown in most markets. China
grew 29.4% during 2012 from strong
demand for core species. This offset the
decline in sales within Europe from the
economic slowdown.
2012 350,4472011 332,785Target N/A
Sales Growth2012 5.3%2011 5.5%Target 5.0%
Financial PerformanceFree cash flows The improvement in free cash flows was
driven by improvements in adjusted EBITDA
of 18.1%, lower capital expenditures and
reductions in 2012 year end inventory.
2012 17,0532011 2,197Target N/A
Leverage* As of December 31, 2012 leverage improved
to 2.9 versus 3.8 as at December 31, 2011. 2012 2.92011 3.8Target 3.0
or lower
ReturnsReturn on assets* Return on assets shows a continuning trend
of improvement and focused management
of investments. 2012 12.1%2011 10.7%Target 12.0%
or greaterNote: Refer to definitions * Supplemental information provided for Target
key performance indicators of clearwater seafoods incorporated
2012 20114.6%
4.9%
5.1%
5.4%
5.6% sales growth
2012 201117%
19%
21%
23% EBITDA as a % of sales
2012 20111.0
2.0
3.0
4.0
5.0
6.0leverage
2012 20119.0%
10.0%
11.0%
12.0%
13.0%
return on assets
14.0%
15.0%
2012 20110
5
10
15
20 (thousands)free cash flows
2012 20114.6%
4.9%
5.1%
5.4%
5.6% sales growth
2012 201117%
19%
21%
23% EBITDA as a % of sales
2012 20111.0
2.0
3.0
4.0
5.0
6.0leverage
2012 20119.0%
10.0%
11.0%
12.0%
13.0%
return on assets
14.0%
15.0%
2012 20110
5
10
15
20 (thousands)free cash flows
2012 20114.6%
4.9%
5.1%
5.4%
5.6% sales growth
2012 201117%
19%
21%
23% EBITDA as a % of sales
2012 20111.0
2.0
3.0
4.0
5.0
6.0leverage
2012 20119.0%
10.0%
11.0%
12.0%
13.0%
return on assets
14.0%
15.0%
2012 20110
5
10
15
20 (thousands)free cash flows
2012 20114.6%
4.9%
5.1%
5.4%
5.6% sales growth
2012 201117%
19%
21%
23% EBITDA as a % of sales
2012 20111.0
2.0
3.0
4.0
5.0
6.0leverage
2012 20119.0%
10.0%
11.0%
12.0%
13.0%
return on assets
14.0%
15.0%
2012 20110
5
10
15
20 (thousands)free cash flows2012 20114.6%
4.9%
5.1%
5.4%
5.6% sales growth
2012 201117%
19%
21%
23% EBITDA as a % of sales
2012 20111.0
2.0
3.0
4.0
5.0
6.0leverage
2012 20119.0%
10.0%
11.0%
12.0%
13.0%
return on assets
14.0%
15.0%
2012 20110
5
10
15
20 (thousands)free cash flows
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Clearwater reported sales of $350.4
million and adjusted EBITDA1 of $72.2
million for 2012 versus 2011 comparative
figures of $332.8 million and $61.2 million
representing growth rates of 5.3% in
sales and 18.1% in adjusted EBITDA.
Growth in sales and adjusted EBITDA
came as a result of higher sales volumes,
particularly for coldwater shrimp, as well
as higher sales prices for most species.
The impact of the growth in sales on
adjusted EBITDA was partially offset by
weakness in the European market, a
shift to lower margin species and higher
procurement costs in certain species.
Free cash flows grew in the fourth quarter
of 2012 to $37.8 million versus $15.9
million in 2011. Annual free cash flows
for 2012 improved to $17.1 million versus
$2.2 million in 2011. The improvements
to free cash flow were driven by growth
in adjusted EBITDA of 18.1%, lower capital
expenditures, and a reduction in working
capital. Reductions in working capital
were primarily a result of a decline in
inventory during the year.
Clearwater achieved leverage of 2.9x
as of December 31, 2012 as compared
to 3.8 at December 31, 2011, due to
growth in annual adjusted EBITDA and
a reduction in net debt of $17.8 million.
Management expects leverage to rise
in the first half of 2013 as a result of
seasonality as Clearwater’s operations
have a predictable pattern in which
adjusted EBITDA is higher in the second
half of the year and capital expenditures
and investments in working capital are
higher in the first half of the year.
Management is satisfied with the
progress made towards our financial
targets and expects that earnings and
free cash flow momentum will continue
through 2013. As a result, Management
is setting the following targets:
• sales growth – 5% or greater,
• adjusted EBITDA margins – 18% or
greater,
• leverage - 3.0x; and
• return on assets - 12% or higher on a
sustained basis.
Management expects that the trend of
earnings growth will continue in 2013
however, lower available supply of
inventories as of December 31, 2012 and
poor weather conditions may limit growth
for the first quarter of 2013. However,
continued strong results in the second
half of the year will enable Clearwater to
continue the trend of growth in annual
results in 2013.
1 – Refer to definition of Adjusted EBITDA
key performance indicators of clearwater seafoods incorporated
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Table of Contents
Page #
Letter from the Chairman 10 Letter from the Chief Executive Officer 11 Management’s Discussion and Analysis
Overview of Clearwater 13 Selected annual information 14 Mission, value proposition and strategies 14 Capability to deliver results 18 Explanation of annual 2012 earnings 21 Capital structure and liquidity management 33 Explanation of fourth quarter 2012 earnings 42 Outlook 53 Risks and uncertainties 54 Critical accounting policies 58 Summary of quarterly results 61 Definitions and reconciliations 63
Clearwater Seafoods Incorporated – fourth quarter 2012 financial statements 68 Quarterly and unit information 118 Selected annual information 119 Corporate Information 120
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Letter from the Chairman of Clearwater Seafoods Incorporated To our Shareholders, I am delighted to once again report another outstanding year for Clearwater Seafoods Incorporated (“Clearwater”). Clearwater’s operations, spanning more than three continents, continue to strive and reach new heights of success in sales growth, profitability and shareholder returns. In 2012 and for the second year in a row, Clearwater’s financial performance placed it in the top quartile of the seafood industry despite tough economic conditions in certain markets. Looking at fundamentals of the seafood industry; Global demand for seafood is outstripping supply, creating favorable market dynamics for vertically integrated producers such as Clearwater with strong resource access. Demand has been driven by growing worldwide population, shifting consumer tastes towards healthier diets, and rising purchasing power of middle class consumers in emerging economies. The supply of wild seafood is limited and is expected to lag behind the growing global demand. This supply-demand imbalance has created a market place in which purchasers of seafood are increasingly willing to pay a premium to suppliers that can provide consistent quality and food safety, wide diversity and reliable delivery of premium, wild, sustainably harvested seafood. Clearwater is well positioned to take advantage of this opportunity because of its licenses, premium product quality, diversity of species, global sales footprint, and year-round harvest and delivery capability. In addition, since our founding in 1976 our people have been at the forefront of our success, leading the company through change and growth with character and competence and through a culture of teamwork. They deserve our highest praise and continued appreciation. At Clearwater we are focused in our commitment and in our mission to build the world’s most extraordinary, wild seafood company, and believe that you, our shareholders, will continue to benefit from both the ability to participate in this exciting sector of the food industry and in Clearwater’s passionate pursuit of excellence. Yours truly, Colin MacDonald
Chairman Clearwater Seafoods Incorporated
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Letter from the Chief Executive Officer of Clearwater Seafoods Incorporated To our shareholders,
In 2012 Clearwater had the highest revenues and adjusted EBITDA in its history.
Our management team is pleased with the progress made towards our financial targets for creating shareholder value and expects that earnings and free cash flow momentum will continue through 2013.
Building on the success achieved in 2012, we have set the following targets: sales growth – 5% or greater, adjusted EBITDA margins – 18% or greater, leverage - 3.0x return on assets - 12% or higher on a sustained basis.
The sales and adjusted EBITDA ratios are annual goals whereas the return on assets and leverage ratios will be accomplished over time.
In addition, management has undertaken six initiatives to create shareholder value.
1. Growing adjusted EBITDA and sales sustainably - we have experienced continued growth in adjusted EBITDA and sales by controlling costs and improving productivity, product mix and prices. Sales growth in 2012 of 5.3% exceeded our 5% annual sales growth target. Annual adjusted EBITDA as expressed as a percentage of sales continues to be strong at 20.6% and exceeded 2011 rates of 18.4% by 12%.
We will continue to lever our vertical integration in existing segments to capture a growing share of the seafood value chain through the introduction of value-added new products in certain core species.
2. Generating strong free cash flows and improving leverage – we are focused on generating
increasing free cash flows and improving leverage on an annualized basis through generating strong cash earnings, managing our working capital and carefully planning and managing our capital expenditure program.
In 2012 free cash flows grew to $17.1 million versus $2.2 million in 2011. The improvements to free cash flow in 2012 were driven by growth in adjusted EBITDA of 18.1%, lower capital expenditures and a reduction in investment in working capital. Reductions in working capital were primarily a result of a decline in inventory during the year.
Leverage improved to 2.9x versus 3.8x as at December 31, 2011. Strong free cash flows were used to reduce debt during the fourth quarter of 2012.
3. Improving the capital structure - During the second quarter of 2012 we successfully completed
a series of capital market transactions that substantially improved our debt structure. The financing enables Clearwater to reduce future interest costs by approximately $4.6 million annually, strengthened our liquidity and provided the capital structure necessary to execute growth plans while further reducing overall leverage. We are now focused on initiating an
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active communications plan with its investors to ensure continued access, when required, to all sources of growth capital.
4. Focused management of foreign exchange - We have a focused and targeted foreign exchange hedging program to reduce the impact of short-term volatility in exchange rates on earnings. This, combined with stronger processes for price management reduces the impact of exchange rate volatility on the business.
5. Building world class leadership, management, sales and marketing capabilities - We have
spent the past year implementing best in class programs for key account management, new product development, sales and operations planning, recruitment and compensation practices. In addition, over the past two years Clearwater has added a number of new people to its senior management team and its’ Board of Directors.
6. Communicating underlying asset values - Clearwater has an industry-leading portfolio of
quotas that provide strong security of underlying value to lenders and investors. In the second quarter of 2012 an independent appraisal of these quotas was completed by TriNav Fisheries Consultants, which placed a value on the quotas of $453 million.
We believe that we have the correct strategies and focus to provide a sustainable competitive advantage and create long-term growth. These strategies include:
1. Expanding access to supply; 2. Targeting profitable and growing markets, channels and customers; 3. Innovating and positioning our products to deliver superior customer satisfaction and value; 4. Increasing margins by improving price realization and cost management; 5. Preserving the long-term sustainability of our resources; and 6. Improving our organizational capability and capacity, talent, diversity and engagement
We also believe that we have the people, processes and financial resources to execute this strategy to create value for our shareholders.
We look forward to a 2013 and the opportunities it will bring for Clearwater and its shareholders. Sincerely,
Ian D. Smith Chief Executive Officer Clearwater Seafoods Incorporated
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MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis (“MD&A”) was prepared effective March 11, 2013. The Audit Committee and the Board of Directors of Clearwater Seafoods Incorporated (“Clearwater”) have reviewed and approved the contents of this MD&A, the financial statements and the 2012 fourth quarter news release. This MD&A should be read in conjunction with the 2012 annual financial statements and the 2012 Annual Information Form, which are available on Sedar at www.sedar.com as well as Clearwater’s website, www.clearwater.ca. COMMENTARY REGARDING FORWARD-LOOKING STATEMENTS This Report may contain forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors outside management’s control including, but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs that could cause actual results to differ materially from those expressed in the forward-looking statements. Clearwater does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances other than as required under applicable securities laws. OVERVIEW OF CLEARWATER Clearwater is recognized for its consistent quality, wide diversity, and reliable delivery of premium, wild, eco-labeled seafood, including scallops, lobster, clams, coldwater shrimp, crab and ground fish. Our key competitive advantages include ownership of licences and quotas in key species, our innovations and intellectual property in harvesting and processing technologies, and our vertical integration, which allows Clearwater to manage harvesting, process, marketing, sales and distribution all in-house. Since the founding of the business in 1976, Clearwater has invested in science, people, technology, resource ownership and resource management to preserve and grow its seafood resource. This commitment has allowed Clearwater to become a leader in the global seafood market.
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SELECTED ANNUAL INFORMATION
CLEARWATER’S MISSION, VALUE PROPOSITION AND STRATEGIES Mission Clearwater’s mission is to build the world’s most extraordinary, wild seafood company, dedicated to sustainable seafood excellence. We define: “extraordinary” as sustainable, profitable growth in revenue, margins, adjusted
EBITDA and the creation of long term shareholder value; “wild seafood” as premium wild shellfish. Including our core species – (scallops,
lobster, clams and coldwater shrimp); and “sustainable seafood excellence” as delivering best in class, quality, food
safety, traceability and certified sustainability. We believe that the fulfillment of this mission will result in extraordinary value creation for shareholders, customers, employees and for the communities in which we work and live. Over the last two years, Clearwater has made significant progress in all aspects of its mission. Revenues have increased 11.1% since 2010 despite foreign exchange volatility. Gross margins have increased more than 2.6 percentage points from 18.6% in 2010 to 21.2% in 2012. Adjusted EBITDA has grown at a 19.4% cumulative average growth rate over the last two years. With this improved performance Clearwater has been able to improve its capital structure, increase shareholder value and reduce leverage to 2.9x adjusted EBITDA at December 31, 2012 versus 3.8x at December 31, 2010.
(In 000’s except per share amounts)For the year ended December 31 2012 2011 2010Sales $ 350,447 $ 332,785 $ 315,540 Gross Margin 74,257 69,565 58,818 Net earnings (loss) 22,704 22,955 (15,278)Basic and diluted earnings per share 0.29 0.32 (0.38)
Adjusted EBITDA 72,243 61,188 50,695
Total assets * 412,150 387,392 322,152 Long-term debt * 253,791 247,100 203,433
* Total assets and long term debt for 2010 do not reflect the consolidation of an entity previously proportionately consolidated
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Value Proposition At Clearwater, we have a passion for wild seafood and strive to deliver a highly differentiated and competitively advantaged value proposition to a global customer base. Key elements of Clearwater’s unique value proposition are: Great tasting, nutritious, highest quality, frozen-at-sea, premium shellfish.
Expertise in premium shellfish science, harvesting, processing and logistics
technology ensuring quality and safety from “ocean to plate”.
Marine Stewardship Council (“MSC”) certification for sustainability of species ensuring both the traceability and long term health of our wild resource.
Competitively advantaged global customer service with local market understanding and insight.
Scale in license and quota ownership guaranteeing exclusive and stable supply to even the largest global retail and food service customers.
Strategies Clearwater’s six core strategies are designed to strengthen a competitive and differentiated value proposition. They are: 1. Expand access to supply of core species through procurement, acquisitions,
partnerships, joint ventures, and yield-improving harvesting and processing technology. At Clearwater, we strive to sell everything we catch at a premium. But, being a sustainable harvester in a world of rapidly growing global demand and limited supply of wild seafood means that we must act responsibly and with agility and creativity to increase supply.
2. Target profitable and growing markets, channels and customers on the basis of size, profitability, demand for sustainable seafood and Clearwater’s ability to win.
The increase in global demand for premium shellfish and per capita consumption can be explained by general population growth, the shift to healthier eating choices among aging boomers and by rising incomes and purchasing power of middle class consumers in emerging economies –especially in Asia. Clearwater’s worldwide distribution presence combined with local sales and marketing teams creates a competitive advantage and positions Clearwater for growth in both mature and emerging markets. Clearwater has sales offices in all major geographies including the United States, Canada, Europe, as well as four representative offices in China.
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3. Innovate and position products to deliver superior customer satisfaction and
value. The value of Clearwater’s premium seafood is primarily differentiated on the dimensions of taste, nutrition, quality, safety and sustainability. Clearwater is best known in the industry for pioneering innovative harvesting technologies and processing practices that enhance this positioning. Going forward, Clearwater will continue to lever these strengths and its vertical integration to win in existing segments while capturing a growing share of the seafood value chain through the introduction of value-added new products in core species.
4. Increase margins by improving price realization and cost management, exercising price influence to maximize revenue and profit while managing supply. In addition Clearwater will continue to invest in R&D, introducing state-of-the-art harvesting, processing, storage and delivery systems that minimize per pound cost, reduce waste, increase yield and improve quality and reliability of supply.
5. Pursue and preserve the long term sustainability of resources on Land and Sea. Our fishing licences and quotas are the cornerstone of Clearwater’s business. From the beginning, Clearwater has invested in licences and quota in rights based fisheries to guarantee access to supply, as well as to create a defensible position in the market place. Clearwater’s licences and quotas provide not only the security of supply, but also the scale needed to invest in leading edge science and innovative harvesting, processing and marketing efforts. Its strategy of investing in secure access to the resource depends on ensuring sustainable harvesting through responsible resource management. Clearwater works in partnership with the Department of Fisheries and Oceans (“DFO”) to lead research and development of sustainable harvesting practices, ensuring long term health of the resource and value for the licenses and total allowable catch (“TAC”).
6. Build organizational capability, capacity and engagement. To ensure the
fulfillment of its mission, value proposition and strategies, Clearwater must continue to attract, develop, recognize, reward and retain the best global talent. Clearwater’s investment into training and development of its employees is just one of the reasons we were recognized again as one of the top 101 companies in Atlantic Canada.
Management’s commitment to creating shareholder value Management has undertaken six initiatives to create shareholder value.
1. Growing adjusted EBITDA and sales sustainably - Clearwater has experienced continued growth in adjusted EBITDA and sales by controlling costs and improving productivity, product mix and prices.
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2. Generating strong free cash flows and improving leverage – Clearwater is
focused on generating increasing free cash flows and improving leverage on an annualized basis through generating strong cash earnings, managing its working capital and carefully planning and managing its capital expenditure program. Clearwater’s operations have a predictable seasonal pattern in which adjusted EBITDA is higher in the second half of the year and capital expenditures and inventories are higher in the first half of the year. This results in lower free cash flows, higher debt balances and higher leverage in the first half of the year and higher free cash flows, lower debt balances and lower leverage levels in the second half of the year.
3. Improving the capital structure - During the second quarter of 2012
Clearwater successfully completed a series of capital market transactions that substantially improved its debt structure. The financing enables Clearwater to reduce projected interest costs by approximately $4.6 million annually, strengthens its liquidity and provides the capital structure necessary to execute growth plans while further reducing overall leverage. Clearwater is now focused on initiating an active communications plan with its investors to ensure continued access, when required, to all sources of growth capital.
4. Focused management of foreign exchange - Clearwater has a focused and
targeted foreign exchange hedging program to reduce the impact of short-term volatility in exchange rates on earnings. This, combined with stronger processes for price management reduces the impact of exchange rate volatility on the business.
5. Building world class leadership, management, sales and marketing capabilities - Clearwater has begun implementing best in class programs for key account management, new product development, sales and operations planning, recruitment and compensation practices. In addition, over the past two years Clearwater has added a number of new people to its senior management team and its’ Board of Directors.
6. Communicating underlying asset values - Clearwater has an industry-
leading portfolio of quotas that provide strong security of underlying value to lenders and investors. In the second quarter of 2012 an independent appraisal of these quotas was completed by TriNav Fisheries Consultants, which placed a value on the quotas of $453 million. Clearwater obtained further independent support for the value in these licenses in the third quarter of 2012 when both the Arctic surf clam fishery and Nova Scotia snow crab fishery received the Marine Stewardship Council (MSC) certification. These species join the Clearwater family of MSC-certified offerings including Canadian sea scallops, Argentine scallops, Canadian coldwater shrimp and Eastern Canadian offshore lobster. Clearwater now boasts a total of seven species certified by the MSC, completing the certification of all its core products, and
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giving the Company the widest selection of MSC-certified species of any seafood harvester worldwide.
CAPABILITY TO DELIVER RESULTS Clearwater's revenues and earnings are dependent primarily on its ability to harvest and purchase shellfish. This in turn is dependent to a large extent on the annual total allowable catch (“TAC”) for each species. The annual TAC is related to the health of the stock of the particular species. The primary shellfish stocks that Clearwater harvests are sea and Argentine scallops, clams, lobster and coldwater shrimp, which are harvested in offshore fisheries that have a limited number of participants. Clearwater harvests sea and Argentine scallops and clams with its own vessels. Clearwater obtains its lobster and coldwater shrimp through harvesting with its own vessels and through purchases from independent fishermen. The sea scallop resource has been stable over the last number of years.
Clearwater lands virtually all its’ sea scallop quota each year and harvests quotas for other industry participants under harvesting contracts to improve the utilization of its fleet.
The Arctic surf clam resource is stable. Clearwater has the Banquereau Bank
and the Grand Banks quotas available for harvesting. Total annual landings are currently based upon market demand.
The Argentine scallop resource is has stabilized after a period of growth and expansion of the fishery. Argentina, is the first scallop fishery in the world to have earned the rigorous Marine Stewardship Council (“MSC”) independent certification. Clearwater lands virtually all its scallop quota each year
Coldwater shrimp - Clearwater expects the offshore Northern shrimp TAC to decline slightly over the next several years from historically high levels. Clearwater holds access to quotas directly through licences and through long term harvesting agreements that exceed its harvesting capacity and will serve to offset any mid to long term declines in the TAC for northern shrimp. Clearwater does procure shrimp from the inshore for its cooked and peeled business and supplements this with raw material from its offshore vessels
The offshore lobster resource is strong with a consistent offshore TAC and the inshore resource is strong with abundant catches. Clearwater harvests virtually all its lobster quota each year. During 2012, Clearwater purchased approximately 80% of its total pounds from inshore lobster fishermen.
Clearwater maintains the largest, most modern, fleet of factory freezer vessels in Canada together with vessels that are used to harvest Clearwater's offshore lobster and complete research and development.
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The condition and operating capability of these vessels is paramount for Clearwater to successfully operate in its fisheries. In the past three years Clearwater has invested approximately $36.3 million on its fleet. Clearwater typically replaces vessels as a result of its focus on innovation and the adoption of new and leading edge technology. These additional investments typically provide greater efficiencies, lower costs and, in some cases, create new product forms. The following schedule sets out Clearwater’s capital expenditures and harvesting license investments for the past three years and clearly shows that Clearwater is both investing sufficiently to maintain its existing fleet and plants and is also investing for growth:
During 2012, Clearwater completed refits on its vessels of $11.8 million. Capital expenditures for the year also included $2.0 million in relation to new vessel based processing technologies. In 2011, Clearwater completed a substantial refit program, of $11.4 million, on the scallop, clam, shrimp and lobster factory vessels. Capital expenditures for the year also included $2.1 million in relation to new vessel based processing technologies and $4.1 million on the purchase of the remaining 40% share in a scallop vessel. In 2010 capital expenditures were minimal as the majority of Clearwater’s significant projects were largely completed in 2008 and restrictions on capital expenditures from senior lending agreements reduced funds available for capital expenditures. Capital expenditures for 2010 primarily related to $5.9 million in vessel refits, $1.2 million in new vessel based processing technologies, and $1.0 million on processing plant additions in Argentina.
(In 000’s)For the years ended December 31 2012 2011 2010 TOTALVessels 11,780 17,595 6,931 36,306 Plants and other 4,794 3,642 2,488 10,924
16,574$ 21,237$ 9,419$ 47,230$
Return on Investments 2,774 6,850 1,194 10,818Maintenance capital 13,800 14,387 8,225 36,412
16,574$ 21,237$ 9,419$ 47,230$
Maintenance capital 13,800 14,387 8,225 36,412 Repairs and maintenance 13,374 14,466 13,500 41,339
27,174$ 28,853$ 21,725$ 77,751$
Depreciation/Amortization 22,498$ 19,503$ 14,301$ 56,302$ Maintenance spending as a % of depreciation 120.8% 147.9% 151.9% 138.1%
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In addition to the annual amounts capitalized above, Clearwater historically has spent and expensed on average about $13.8 million a year on the maintenance of its fleet and processing plants. This reflects Clearwater’s commitment to ensuring that the assets are kept in top condition, enabling it to harvest and process its allowable catch efficiently and providing sufficient capacity. Clearwater’s largest fleet investments are in its ten factory vessels. These vessels are used in the harvesting of Canadian scallops, Argentine scallops, shrimp and clams. Of the ten factory vessels:
Two are used to harvest shrimp and are on average 19 years old. These vessels have a capacity to harvest 14,000 to 18,000 metric tons of our 22,000 metric ton quota and all of our 1,900 metric ton turbot quota in a ready for market form. One of the vessels was built in 1985 and will be due for replacement or extensive refit within the next 5 years.
Two are used to harvest sea scallops and are on average 15 years old. During 2012, Clearwater completed the conversion to automated processing factories using technology developed by Clearwater. As a result of the improvement in harvesting and processing capabilities, Clearwater has two idle vessels. It plans to convert one of the idle vessels to harvest bay Argentine scallops in 2013 and to sell the other surplus vessel.
Two of Clearwater’s vessels are used to harvest Argentine scallops and are
on average 32 years old. One vessel is expected to be replaced over the next year by the transfer and conversion of an idle sea scallop vessel. The second has about ten years of useful life available.
Two of Clearwater’s vessels are used to harvest clams and are on average
19 years old. Both of these vessels are harvesting at capacity. In 2013 Clearwater plans to upgrade the factories on these vessels to improve efficiency of processing the catch. In addition, one of the vessels was built in 1985 and will be due for replacement within the next five years.
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EXPLANATION OF ANNUAL 2012 EARNINGS Overview The statements reflect the earnings of Clearwater for the years ended December 31, 2012 and 2011.
In 000's of Canadian dollarsYear ended December 31 2012 2011
Sales 350,447$ 332,785$ Cost of goods sold 276,190 263,220 Gross margin 74,257 69,565
21.2% 20.9%
Administrative and selling 32,837 33,345 Finance costs 24,388 38,604 Other income (2,412) (5,893) Research and development 1,759 707 Gain on settlement of Glitnir liabilities - (12,445) Gain on change in control of joint venture - (11,571)
56,572 42,747
Earnings before income taxes 17,685 26,818 Income tax (recovery) expense (5,019) 3,863 Earnings 22,704$ 22,955$
Earnings attributable to: Non-controlling interests 7,695$ 6,619$ Shareholders of Clearwater 15,009 16,336
22,704$ 22,955$
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Annual 2012 Earnings Clearwater reported sales of $350.4 million and adjusted EBITDA1 of $72.2 million versus 2011 comparative figures of $332.8 million and $61.2 million representing growth rates of 5.3% in sales and 18.1% in adjusted EBITDA. This represents the fourth consecutive year of improved results. In 2012 earnings improved by $15.8 million as compared to 2011, excluding one-time accounting gains in 2012 of $8.0 million related to a realized deferred income tax asset and in 2011 of $11.6 million from the acquisition of an entity previously proportionally consolidated and $12.4 million on the settlement of liabilities with Glitnir. Improvements to net earnings in 2012 were largely due to higher gross margin and $8.9 million on realized foreign exchange gains primarily on Euro and US forward exchange contracts as the average spot rates were lower than average contract prices for both the Euro and US dollar contracts. Operational improvements from sales revenue growth of 5.3% and lower harvesting costs resulted in improvements in gross margin of $4.7 million.
These improvements were supplemented by non-cash unrealized foreign exchange gains on long term debt and foreign exchange contracts as well as lower interest expense and were offset by higher debt settlement and refinancing fees related to debt refinancing that was completed in June 2012.
1 – Refer to definition of Adjusted EBITDA
In 000’s of Canadian dollarsYear ended December 31 2012 2011 Change
Net earnings 22,704$ 22,955$ (251)$
Explanation of changes in earnings:
Gain on settlement of Glitnir liabilities in 2011 (12,445) Gain on change in control of joint venture in 2011 (11,571) Higher realized foreign exchange income 8,970 Higher future income tax asset 8,010 Higher gross margin 4,692 Higher fees on settlement of debt (4,200) Higher unrealized foreign exchange income 4,121 Lower other income (3,481) Lower fair value adjustment on long term debt 2,819 Lower interest expense 2,506 All other 328
(251)$
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Sales by region
Asia During 2012, Asia, at 35.3% of annual sales, surpassed Europe to become Clearwater’s largest regional market primarily as a result of strong market demand from China. China China is a growing market for clams, coldwater shrimp, lobster and turbot. In 2011, China surpassed Japan to become our largest market segment in Asia. Sales to customers in China increased $13.6 million, or 29.4%, to $59.6 million primarily as a result of an increase in available supply of coldwater shrimp due to a higher number of landings in 2012. In addition the increase in sales was a result of strong market demand for clams, turbot and lobster which in turn supported strong selling prices. Chinese sales are almost exclusively transacted in US dollars. The US dollar strengthened against the Canadian dollar during 2012 contributing to the improvement in sales as average
In 000's of Canadian dollarsYear ended December 31 2012 2011 Change %China 59,624$ 46,069$ 13,555$ 29.4 Japan 46,366 42,649 3,717 8.7 Other Asia 17,693 15,034 2,659 17.7 Asia 123,683 103,752 19,931 19.2
Europe 122,884 126,697 (3,813) (3.0)
United States 54,157 55,457 (1,300) (2.3) Canada 47,553 44,332 3,221 7.3 North America 101,710 99,789 1,921 1.9
Other 2,170 2,547 (377) (14.8) 350,447$ 332,785$ 17,662$ 5.3
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foreign exchange rates2 for the US dollar increased by 0.7% to 1.00 in 2012 from 0.99 in 2011. Japan Japan is an important market for clams, lobster, coldwater shrimp and turbot. Sales to customers in Japan increased 8.7%, or $3.7 million primarily as a result of an increase in available supply for coldwater shrimp. Strong sales volumes and sales prices for clams also contributed to the increase in sales. This was partially offset by a reduction in sales volumes for turbot as available supply was allocated to regions with higher margins. Average foreign exchange rates for the Yen improved during the quarter by 0.7% to 0.013 for 2012, partially contributing to the improvement in sales. 2 – Refer to risks and uncertainties
Other Asia Sales within the other Asia region includes sales to Korea, Taiwan, Singapore and other Asian countries. These Asian countries are an important market for clams, shrimp and turbot. Other Asian sales increased $2.7 million or 17.7% to $17.7 million in 2012 primarily as a result of strong demand and sales prices for clams and coldwater shrimp. In addition an increase in available supply for coldwater shrimp contributed to the increase in sales.
A decline in sales volumes for lobster partially offset the increase in sales for the region. Europe Europe, at 35.1% of annual sales, is Clearwater’s largest scallop market and it is an important market for coldwater shrimp and lobster products. European sales declined $3.8 million to $122.9 million in 2012, from $126.7 million for 2011 primarily as a result of an economic slowdown within the region that reduced sales volumes and prices for Argentine scallops and lobster. This decline was partially offset by an increase in market demand for coldwater shrimp and sea scallops. Finally, sales, which are primarily transacted in the Euro and the UK Pound, were negatively impacted during the year as the Euro declined 7.1% relative to the Canadian dollar from 1.38 in 2011 to 1.28 in 2012, while the UK Pound improved 0.2% to 1.58 over the same period.
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United States The United States, at 15.4% of annual sales, is an important market for scallops, coldwater shrimp, lobster and clams. It is our most diverse market, where a wide variety of products are sold. Sales in the United States declined $1.3 million, or 2.3%, to $54.2 million as a result of a reduction in supply for sea scallops and shrimp as available supply was sold to other higher yielding markets. Declines in sales prices from a change in product mix for lobsters contributed to the decline in sales. Increases in sales prices for scallops and shrimp and an increase in sales volumes for lobster partially offset the decline in sales. Sales were also positively impacted by exchange rates as average foreign exchange rates for the US dollar
strengthened against the Canadian dollar. Average foreign exchange rates for the US dollar increased by 0.7% to 1.00 in 2012 from 0.99 in 2011. Canada Canada is a large market for lobster, scallops and coldwater shrimp. Sales within Canada increased $3.2 million, or 7.3% primarily as a result of an increase in sales volumes for crab from higher available supply and an increase in sales volumes and prices for scallops. This was partially offset by a decline in sales prices that occurred due to a change in product mix for lobsters.
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Sales by species
Improvements in sales were as a result of an increase in sales volumes for coldwater shrimp, clams and crab, as well as strong selling prices for clams, sea scallops, and coldwater shrimp. This increase in sales was partially offset by lower available supply volumes of both sea scallops and turbot. Sales volumes for Argentine scallops declined during 2012 as a result of the economic conditions within Europe. The decline was partially offset by transferring available supply to higher yielding markets. Increases in sales price from a change in product mix for lobsters partially offset the decline in sales volumes for lobster.
In 000's of Canadian dollarsYear ended December 31 2012 2011 Change %Scallops* 109,899$ 115,843$ (5,944) (5.1) Coldwater shrimp 77,497 61,946 15,551 25.1 Clams 71,894 61,705 10,189 16.5 Lobster 61,458 64,073 (2,615) (4.1) Crab 15,628 13,831 1,797 13.0 Ground fish and other 14,071 15,387 (1,316) (8.6)
350,447$ 332,785$ 17,662$ 5.3 *Refer to risks and uncertainties
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Cost of Goods Sold
Cost of goods sold increased $13.0 million or 4.9% to $276.2 million primarily due to an increase in per pound procurement costs, manufacturing costs and depreciation. The increase in procurement costs related to an increase in raw material costs for lobster and shrimp. The increase in manufacturing costs is a result of higher volumes sold. In addition, higher depreciation charges resulted from an increase in capital expenditures, particularly refits which are depreciated over three to four years. Harvesting and procurement include all costs incurred in the operation of the vessels including labour, fuel, repairs and maintenance, fishing gear supplies, and other costs and fees plus procured raw material costs for species such as lobster, shrimp, scallops and crab. Excluding the impact of higher volumes sold, harvesting costs declined in 2012 primarily as a result of improved catch rates in several species and the planned delay in harvesting Canadian scallops in the first quarter. Higher fuel and inflation particularly in Argentina partially offset this decline in harvesting costs. In addition, procurement costs were higher as purchased volumes and purchase cost per pound for lobster and shrimp increased. Fuel costs for our vessels increased $0.3 million for 2012 to $23.9 million. This increase was a result of higher average prices per litre of fuel of $0.08, partially offset by a decline in volumes consumed on a per lbs basis due to higher catch rates. The sea scallop fleet benefited from the installation of new shucking equipment, which increased catch rates throughout 2012. As a result of the improved efficiencies management made a decision to delay harvesting for sea scallops later in the first half of the year contributing to the decline in consumption during the year. Clearwater’s vessels used approximately 27.8 million litres of fuel in 2012. Based on 2012 fuel consumption, a one-cent per litre change in the price of fuel would impact harvesting costs by approximately $0.3 million. Manufacturing includes labour costs related to the production of goods, plant utilities and supplies. Labour costs increased for the year as a result of higher production levels and scheduled increases in wages, salaries and benefits. Manufacturing costs also increased during the year primarily as a result of an increase in the cost of plant utilities, repairs and maintenance and storage.
In 000's of Canadian dollarsYear ended December 31 2012 2011 Change %Harvesting and procurement 189,045$ 181,162$ 7,883$ 4.4 Manufacturing 32,641 31,057 1,584 5.1 Freight, customs and other transport 21,254 21,179 75 0.4 Depreciation 22,251 18,983 3,268 17.2 Administrative 10,999 10,839 160 1.5
276,190$ 263,220$ 12,970$ 4.9
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Depreciation expense from assets used in the harvesting and production of goods increased $3.3 million to $22.3 million as a result of vessel refits and other additions that were completed during 2012. Vessel refits are depreciated over a 3 to 4 year period. Administrative overheads include salaries and benefits, professional and consulting fees and management fees attributable to the harvesting and production of goods. Refer to administrative and selling for further information. Gross margin Gross margin improved by $4.7 million, or 6.7% to $74.3 million versus $69.6 million in 2011. Gross margins were positively impacted by increases in sales prices in certain species, the continuance of prior year price increases throughout 2012 for other species and an increase in sales volumes for coldwater shrimp, and clams. Lower volumes of Argentine scallops as well as higher fuel, procurement costs, direct wages, indirect wages and salaries, partially offset the improvement in margins. Margins were negatively impacted by lower average foreign exchange rates2 for the Euro that resulted in a reduction in sales and gross margin of $5.9 million. Higher average foreign exchange rates for the US dollar partially offset the decline in foreign exchange. The net impact on sales from all foreign exchange volatility was a reduction in sales and gross margins of $5.2 million.
2 – Refer to risks and uncertainties for further information
Year ended December 31
Currency % sales
Average rate
realized % sales
Average rate
realized Change
in rate
US dollars 45.4% 0.999 43.1% 0.992 0.7%Euros 22.1% 1.280 24.7% 1.377 -7.1%Japanese Yen 12.5% 0.013 12.7% 0.012 0.7%UK pounds 3.3% 1.580 4.3% 1.578 0.2%Canadian dollar and other 16.7% 15.2%
100.0% 100.0%
2012 2011
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Administration and selling
Administration and selling costs declined $0.5 million, or 1.5%, to $32.8 million as Clearwater incurred higher severance costs for salaried employees in 2011. Share-based incentive compensation increased $1.4 million from 2011 as the cost of Clearwater’s stock-based compensation performance incentive programs reflected increases in our share price and additional units granted during 2012 for key executives and directors. Consulting and professional fees include legal, audit and accounting, insurance and other specialized consulting services. Costs will vary year over year based upon business requirements. The increase in costs in 2012 relates in part to recruiting costs, legal fees, technology development and risk consulting fees. Selling costs include advertising, marketing, trade shows, samples, product development and bad debt expenses. The reduction in costs of $0.7 million to $1.9 million in 2012 relates primarily to recoveries of bad debts. The allocation to cost of goods sold reflects costs that are attributable to the production of goods and are allocated on a proportionate basis based on production volumes.
In 000's of Canadian dollarsYear ended December 31 2012 2011 Change %Salaries and benefits 26,196$ 28,523$ (2,327)$ (8.2) Share-based incentive compensation 2,331 904 1,427 157.9 Employee compensation 28,527 29,427 (900) (3.1)
Consulting and professional fees 5,069 4,316 753 17.4 Other 4,913 4,485 428 9.5 Selling costs 1,871 2,602 (731) (28.1) Travel 2,036 1,981 55 2.8 Occupancy 1,412 1,317 95 7.2 Allocation to cost of goods sold (10,991) (10,783) (208) 1.9
32,837$ 33,345$ (508)$ (1.5)
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Finance costs
On June 6, 2012 Clearwater completed a $264 million refinancing of its debt facilities. The refinancing was completed to further strengthen Clearwater’s liquidity position, reduce cost of capital and provide a capital structure to allow management to continue to create shareholder value. The refinancing reduced Clearwater’s cost of capital by replacing higher cost debt facilities with lower cost facilities.
Interest declined $2.5 million for 2012 due to lower cash interest but primarily as a result of a decline in the amortization of deferred financing charges. The lower cash interest during 2012 was partially offset by an increase in debt due to higher levels of working capital in 2012. In 2011 interest expense included amortization of deferred financing charges for ISK denominated bonds and the term facilities that were refinanced in the first quarter of 2011. The fair value adjustment on the convertible debentures represents the change in value of the convertible debentures and varies depending on market conditions and interest rates. The reduction in the fair value adjustment for 2012 primarily relates to the redemption of the Class C convertible debentures that occurred in July 2012. In addition the convertible debentures have traded from below face value two years ago to and above face value in 2012. 2 – Refer to risks and uncertainties for further information
In 000’s of Canadian dollarsYear ended December 31 2012 2011Interest and bank charges 20,347$ 20,899$ Amortization of deferred financing charges 1,158 3,112 Interest on current and long term debt 21,505 24,011
Fair value adjustment on convertible debentures 2,898 5,717 Foreign exchange and derivative contracts (6,108) 6,983 Debt settlement and refinancing fees 6,093 1,893
24,388$ 38,604$
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Foreign exchange and derivative contracts
Foreign exchange and derivative (gains) losses2 changed by $13.1 million from a loss of $7.0 million in 2011 to a gain of $6.1 million in 2012. The foreign exchange gain for 2012 was primarily a result of realized gains of $4.0 million on foreign exchange contracts and $3.0 million of unrealized gains from the translation of the US dollar denominated debt as the US dollar weakened against the Canadian dollar from $1.02 at December 2011 to $0.995 at December 2012. Realized foreign exchange gains on foreign exchange contracts of $4.0 million relate to Euro and US forward exchange contracts settled within 2012 as average spot rates used to settle contracts were 3.6% and 2.6% lower than the average contract price for 2012 for the Euro and the US dollar, respectively. In addition, in 2011 there were realized losses incurred on mark to market adjustments on interest rate and currency swaps that settled in the first quarter of 2012. The gains in 2012 were partially offset by foreign exchange losses of $1.4 million from translating net working capital assets denominated in foreign currencies to Canadian dollars related to weakening foreign exchange rates against the Canadian dollar for the US dollar and Euro. During the last half of 2012, Clearwater entered into an interest rate swap that effectively locks in the interest rate on Canadian $30 million of long term debt at an effective interest rate of 6.29%, maturing May 31, 2017. Clearwater realized a mark-to-market loss of $0.2 million for 2012 related to the interest rate swap. Debt settlement and refinancing fees represent fees incurred for the settlement or refinancing of long term debt and will vary year to year depending on refinancing activities.
In 000’s of Canadian dollarsYear ended December 31 2012 2011
Realized loss (income)Foreign exchange contracts (3,991)$ 2,578$ Mark-to-market on interest and currency swaps - 1,048 Working capital 1,359 2,712
(2,632) 6,338 Unrealized (gain) loss
Foreign exchange on long term debt and other assets (3,013) 932 Mark-to-market on foreign exchange contracts (663) (287) Mark-to-market on interest swap 200 -
(3,476) 645
(6,108)$ 6,983$
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The debt settlement costs of $6.1 million in 2012 include $3.1 million in refinancing fees and early payment fees related to refinancing of debt facilities in June 2012 and $3.0 million of write-offs of deferred financing charges associated with the previously existing revolving debt facility and second lien loan. For 2011, debt settlement and refinancing fees include a gain of $1.8 million related to the settlement of the ISK denominated bonds, $2.8 million in fees resulting from the refinancing of the senior first lien loan debt facilities, and $1.0 million in other refinancing and restructuring fees. 2 – Refer to risks and uncertainties
Other income
Royalties and fees and other includes income related to quota rental, commissions, processing fees and other miscellaneous income and expense that vary based upon the operations of the business. Other income declined $3.5 million from 2011 due primarily to a decline in insurance claims during 2012. For 2011 insurance claims related primarily to the repair of a building damaged by a fire that occurred at one of the plants and repairs to one of our clam vessels. Research and Development Research and development relates to new technology and research into ocean habitats and fishing grounds. Research and development can vary year to year depending on the scope, timing and volume of research completed. Clearwater’s business plans call for increased investment in research and development . Gain on change in control of joint venture As a result of changes made effective January 1, 2011 to the partnership agreement that governs Clearwater’s frozen-at-sea shrimp and turbot harvesting operations, Clearwater began to fully consolidate these operations, which resulted in a one-time non-cash gain of $11.6 million related to recording the value of the fishing agreements assigned to the partnership at market value as at January 1, 2011.
In 000's of Canadian dollarsYear ended December 31 2012 2011
Royalties, interest, and other fees (1,443) (2,415) Other fees (645) (1,749) Insurance claims (324) (1,729)
(2,412)$ (5,893)$
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Income taxes Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the United Kingdom and Canada. Lower earnings in Argentina contributed to lower income cash taxes in 2012. During 2012, Clearwater recorded a deferred tax asset of $8.0 million related to deferred tax assets that are expected to be utilized based upon 2013 estimated taxable earnings. Clearwater has unrecorded tax losses of approximately $48.7 million, representing approximately $14.9 million in deferred tax asset as at December 31, 2012. The unrecorded asset can be utilized to the extent Clearwater realizes taxable earnings in Canada in future periods. Non-controlling interest Non-controlling interest relates to earnings from Clearwater’s investment in subsidiaries in Argentina, Nova Scotia and Newfoundland and Labrador. Capital Structure Clearwater’s capital structure includes a combination of equity and various types of debt facilities. Clearwater’s objective when managing its capital structure is to obtain the lowest cost of capital available, while maintaining flexibility and reducing exchange risk by borrowing when appropriate in currencies other than the Canadian dollar. Clearwater uses leverage, in particular senior revolving and term debt, and subordinated debt to lower its cost of capital. The amount of debt available to Clearwater is a function of earnings that can be impacted by known and unknown risks, uncertainties, and other factors outside Clearwater’s control including, but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs. Clearwater maintains flexibility in its capital structure by regularly reviewing forecasts of future results and making any required changes to its debt and equity facilities on a proactive basis. These changes can include early repayment of debt, repurchasing shares, issuing new debt or equity, utilizing surplus cash, extending the term of existing debt facilities, selling assets to repay debt and if required, limiting debt paid. Clearwater’s capital structure is as follows as at December 31, 2012 and December 31, 2011:
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There are 50,948,698 shares outstanding as of December 31, 2012 (December 31, 2011 - 50,948,698). On June 6, 2012 Clearwater completed a $264.0 million refinancing in order to further strengthen its liquidity position, reduce its cost of capital and provide for a capital structure to allow management to continue to build strong shareholder value. The refinancing included the redemption/repayment of: Canadian $43.4 million 10.5% convertible debentures, ("Debentures"). US $54.5 million of 12% second lien debt; Canadian $74.2 million in existing senior term notes; and
In 000’s of Canadian dollarsAs at December 31 2012 2011
Equity Common shares 64,867$ 65,309$ Retained earnings (deficit) 14,616 (835) Cumulative translation account (3,866) (3,122)
75,617 61,352 Non-controlling interest 30,904 32,700
106,521 94,052 Long term debtSubordinated debt 2013 convertible debentures - 43,573 2014 convertible debentures 44,722 41,632
44,722 85,205
Senior debt, non-amortizing Term loan, due in 2091 3,500 3,500 Second lien loan - 43,822 Glitnir liability - 14,500
3,500 61,822
Senior debt, amortizing Term Loan A, due 2017 72,259 - Term Loan B, due 2018 (including embedded derivative) 129,986 - First lien loan - 77,250 Revolving debt, due in 2017 - 17,513 Marine mortgage, due in 2017 2,697 4,470 Other loans 627 840
205,569 100,073
Total long term debt 253,791 247,100
Total capital structure 360,312$ 341,152$
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The remaining funds, after payment of expenses, were used to pay down the balance on the existing asset based revolving credit facility to $16.3 million.
In 2012 Clearwater reached an agreement with Glitnir Banki Hf (“Glitnir”) that provided for the settlement and release of all outstanding claims in exchange for a payment by Clearwater of Canadian $14.5 million. Long term debt consists of convertible debentures as well as non-amortizing and amortizing senior debt. The 2014 Convertible debentures which accrue interest at 7.25%, mature in March 2014 and are convertible at a price of $5.90 per share. They are redeemable by Clearwater at face value plus accrued interest. These debentures are recorded at estimated fair value. The principal amount outstanding as of December 31, 2012 was $44.4 million (December 31, 2011 - $44.4 million). To redeem the 2014 series of debentures, in whole or in part, Clearwater must issue a notice of the redemption not more than 60 days and not less than 30 days prior to the date of redemption. Any debenture holder that wishes to convert the Debentures held, rather than to have them redeemed, must complete and deliver a Notice of Conversion prior to the redemption date. The convertible debentures are unsecured and subordinated to senior debt. The debentures pay interest March 31 and September 30. Subject to regulatory approval, Clearwater may satisfy its obligation to repay the principal amount of the debentures on redemption or at maturity, in whole or in part, by delivering that number of shares equal to the amount due divided by 95% of the market price of the shares at that time, plus accrued interest in cash. Clearwater has several amortizing senior debt facilities including: Term loan A due June 2017, Term loan B due June 2018, Revolving loan due June 2017, and A marine mortgage that matures in June 2017.
The term loan A has a principal balance of Canadian $74.1 million, is repayable in quarterly instalments of $0.5 million to June 2015, $1.4 million from September 2015 to June 2016 and $2.3 million from September 2016 to March 2017 with the balance due at maturity in June 2017, and is recorded net of deferred financing charges of $1.8 million. The loan bears interest at an annual rate of banker’s acceptance plus 4.5%, payable monthly. As of December 31, 2012 this resulted in a rate of 5.8%. The loan contains an accordion provision that, subject to satisfaction of certain conditions, allows Clearwater to expand the facility by up to Canadian $25 million. As of September 2012 Clearwater entered into an interest rate swap that effectively locks in the interest rate on Canadian $30 million of this debt at an effective interest rate of 6.29%, maturing
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May 31, 2017. The amount outstanding under the swap reduces proportionately at the same rate as the scheduled payments on the loan. The term loan B has a principal balance of US dollars $133.3 million is repayable in quarterly instalments of $0.3 million with the balance of $119.0 million due at maturity in June 2018. The loan bears interest at an annual rate of US Libor plus 5.5% with a Libor interest rate floor of 1.25% payable at periods from monthly to annually, depending on the term selected. As of December 31, 2012 this resulted in an interest rate of 6.75%. The loan contains an accordion provision that, subject to satisfaction of certain conditions, allows Clearwater to expand the facility by up to US $50 million. Term loan B contains an embedded derivative of $4.2 million related to the fair market value of the Libor interest rate floor of 1.25%. As a result the net balance in Canadian dollars for the loan is $130.0 million (per the capital structure table) net of deferred financing charges financing charges of $2.6 million Under a provision of its Term Loan A and B agreements, Clearwater is required to remit a portion of “excess cash flows” (Adjusted EBITDA less certain fixed charges) that it currently estimates to be approximately $11.3 million. Both the term loan A and the term loan B are secured by a first charge on marine vessels, licenses and quotas, Clearwater’s investments in certain subsidiaries and a second charge on accounts receivable, inventory and cash and cash equivalents, subject to certain limitations. The revolving loan facility is due June 2017, and provides up to $65.0 million of credit based on 90% of eligible receivables and up to 75% of eligible inventory and can be denominated in both Canadian and US dollars. The revolving loan was undrawn as of December 31, 2012. The Canadian balances bear interest at the banker’s acceptance rate plus 2.5%. The US dollar balances bear interest rate at the US Libor rate plus 2.5%. As of December 31, 2012 this would result in rates of 4.5% for Canadian balances and 4.7% for US dollar balances. The revolving loan is secured by a first charge on accounts receivable, cash and cash equivalents subject to certain limitations, and inventory as well as a second charge on marine vessels, licenses and quotas and Clearwater’s investments in certain subsidiaries. The loan has an accordion provision that subject to certain conditions allows Clearwater to expand the facility by a maximum of Canadian $20.0 million. Clearwater’s debt facilities have covenants that include, but are not limited to, leverage ratios (for which senior and unsubordinated debt is compared to EBITDA, excluding most significant non-cash and non-recurring items) and fixed charge ratios that limit the amount of dividends, capital expenditures, and loan repayments to amounts approved by lenders. Clearwater is in compliance with all of the non-financial and financial covenants associated with its debt facilities.
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Some public entities provide information on debt to equity ratios. We do not believe that this ratio would provide useful information about Clearwater and its capital structure because a significant amount of assets (harvesting licenses and quotas in particular) are recorded at historical cost rather than at fair value. Instead, we believe that leverage measured in relation to adjusted EBITDA is a better measure to evaluate our capital structure and we have provided that information in the liquidity section. Liquidity Management Over the past several years Clearwater has formalized a number of its treasury management policies and goals so as to promote strong liquidity and continued access to capital to fund its growth plan. These include policies and strategies with respect to liquidity, leverage, foreign exchange management and free cash flows. Management continuously evaluates its capital structure in light of these policies and strategies and a summary of the results of its most recent evaluation is as follows:
Liquidity2 - As of December 31, 2012 Clearwater had $41.7 million in cash, and an undrawn $65 million revolving asset backed loan. The cash balance, together with available credit on the revolving loan, is used to manage seasonal working capital demands, capital expenditures, and other commitments. Due to the seasonality in Clearwater’s business, sales and gross profit are typically higher in the second half of the calendar year than in the first half of the year and capital expenditures are typically higher in the first half of the year. This typically results in Clearwater having higher liquidity in the second half of the year in the form of higher cash balances and lower balances on revolving debt facilities. Some of this higher liquidity will be used to repay a portion of term loans during the first quarter of 2013. Under a provision of its loan agreements, Clearwater is required to remit a portion of “excess cash flows” (Adjusted EBITDA less certain fixed charges) that it currently estimates to be approximately $11.3 million.
Free cash flows - Clearwater has a goal to generate strong cash flows from
operations in order to fund interest, scheduled loan payments and capital expenditures and in turn to use this free cash flow to reduce debt, invest in growth investments. Clearwater’s goal is to grow free cash flows such that it can reduce debt and pay a sustainable dividend to its shareholders.
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2 – Refer to risks and uncertainties
1 - Refer to definitions for free cash flows
Cash flows generated by Clearwater’s operations along with cash on deposit and available credit on the revolving asset-backed loan are used to fund current operations, seasonal working capital demands, capital expenditures, and other commitments. Clearwater’s operations have a predictable seasonal pattern in which adjusted EBITDA is higher in the second half of the year and capital expenditures and working capital requirements are higher in the first half of the year. This typically results in lower free cash flow, higher debt balances and higher leverage in the first half of the year.
The strong growth in free cash flows in the fourth quarter and the year were due to strong operating results that improved adjusted EBITDA, lower investment in capital assets as well as a reduction in working capital during the fourth quarter.
As a result of the predictable seasonal pattern previously noted, Clearwater expects that earnings and cash flows will be lower in the first half of 2013 and higher in the second half. Refer to Outlook section for further information.
Free cash flows December 31,
2012 December
31, 2011 December 31,
2012 December 31,
2011
Adjusted EBITDA 18,812 16,115 72,243 61,188
Less:Cash interest (4,471) (5,257) (20,347) (20,995) Cash taxes (399) (1,053) (2,154) (4,833) Other income and expense items 5,539 (4,826) (1,601) (8,223) Operating cash flow before changes in working capital 19,481 4,979 48,141 27,137
Change in working capital 26,948 14,605 (741) (9,258) Cash flows from operating activities 46,429 19,584 47,400 17,879
Purchase of property, plant, equipment, quota and other assets (4,219) (2,104) (16,574) (21,237) Less: Designated borrowings - - 2,056 19,223 Scheduled payments on long-term debt (1,629) (14) (6,338) (4,467) Distributions to non-controlling interests (2,780) (2,327) (9,491) (7,537) Other debt borrowings and repayments 718 (1,664)
Free cash flows 37,801 15,857 17,053 2,197
Add/(less):Other debt borrowings (repayments) of debt (10,597) (13,862) 13,593 5,883 Other investing activities (459) (1,152) 1,360 (2,429) Other financing activities - (748) - (1,197)
Change in cash flows for the period per statement of cash flows 26,745 95 32,006 4,454
13 weeks ended Year Ended
Uses of cash:
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Changes in working capital
The net investment in working capital declined $8.5 million during the year as Clearwater realized the benefit of its planned investment in inventory as inventory levels declined $9.5 million for the year. The timing of payments on accounts payable also reduced the net investment in working capital during the year. Receivable balances declined during the fourth quarter of 2012 by $4.4 million as a result of collections on sales. Investments in capital expenditures of $16.6 million for the year primarily resulted from planned vessel refits. From free cash flows Clearwater makes a number of discretionary payments/creates additional cash flows including repayments and draws on its revolving debt facility and discretionary financing and investing activities (such as payments under normal course issuer bids, sales of non-core assets, etc). Clearwater is focused on managing its free cash flows through:
Managing working capital - Clearwater manages its investment in trade receivables through a combination of tight collection terms and when appropriate, discounting. Clearwater limits its investment in inventories through tight review of any slow moving items, regular review and through continuous improvements in the integration of its fleet and sales force.
Capital spending - Clearwater grades investments in property, plant, equipment
and licences as either return on investment (“ROI”) or maintenance capital and tracks each project. Significant expenditures that are expected to have a return in excess of the cost of capital are classified as ROI, and expenditures that have less than the average cost of capital are classified as maintenance as are all refits.
On average, Clearwater expects to invest $15-20 million a year in maintaining its fixed assets with a further $10-15 million of repairs and maintenance expensed and included in the cost of goods sold. In 2013 it expects to invest approximately
December 31 December 31 December 31 December 31In 000's of Canadian dollars 2012 2011 2012 2011Decreases (increases) in inventory 16,231 (81) 9,581 (11,936) Increases in accounts payable 12,365 6,274 3,214 4,935 Decreases (increases) in accounts receivable 4,386 8,277 (2,273) (1,515) Decreases (increases) in prepaids 1,386 (226) (1,695) 679 Decreases in income taxes payable (105) (100) (2,461) (451) (Increases) decreases in deferred income tax assets (7,315) 461 (7,107) (970)
26,948$ 14,605$ (741)$ (9,258)$
13 weeks ended Year Ended
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$28.0 million in capital assets excluding repairs and maintenance, of which $22.0 million relates to maintenance capital investments and $5.8 million of investments to improve efficiencies. In addition, Clearwater has and will continue to review and liquidate underperforming and non-core assets. Leverage - As part of its continuing review of leverage levels Clearwater benchmarked itself versus a number of seafood and food companies and concluded that it should target to reduce its leverage of approximately 3.0x. Clearwater achieved leverage of 2.9x adjusted EBITDA as of December 31, 2012 as compared to 3.8 at December 31, 2011, as a result of the growth in annual adjusted EBITDA and reductions in net debt of $17.8 million. Clearwater’s leverage target is to achieve leverage of 3.0x or lower throughout the fiscal year.
1 – Refer to the definition of adjusted EBITDA and leverage
Foreign Exchange Management – Weakening exchange rates for the Euro
against the Canadian dollar resulted in a reduction in sales and gross margin of $5.9 million for the year. Higher average foreign exchange rates for the US dollar partially offset the decline in foreign exchange. The net impact from foreign exchange was a decline of sales and gross margin of $5.2 million for the year. Clearwater’s response to foreign exchange risk is as follows:
(1) Diversify sales geographically, which reduces the impact of any country-
specific economic risks on its business.
(2) Execute on pricing strategies so as to offset the impact of exchange rates
(3) Limit the amount of long-term sales contracts – Clearwater has very few long-term sales contracts with any customers. Contracts are typically less than 6 months and are based on list prices that provide a margin for exchange rate fluctuations.
In 000's of Canadian dollarsAs at December 31 2012 2011Adjusted EBITDA1 72,243$ 61,188$
Debt* (net of deferred financing charges of $4.4 million (2011 - $2.0 million) 253,791 247,100 Less cash (41,731) (14,725) Net debt 212,060 232,375
Net debt 212,060 232,375 Net debt leverage 2.9 3.8 * Debt was adjusted to include deferred financing charges during 2012
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(4) Use conservative exchange estimates in business plans – Clearwater regularly reviews economist estimates of future exchange rates and uses conservative estimates when preparing its’ business plans.
(5) Foreign exchange hedging program - Clearwater has a targeted foreign exchange program. This program focuses on using forward contracts to lock in exchange rates up to 18 months for key sales currencies (the US dollar, Euro, Yen and Sterling) thereby lowering the potential volatility in cash flows from derivative contracts.
At of March 11, 2013 Clearwater had forward exchange contracts to be settled in 2013 of:
US dollar $116.0 million at an average rate of 0.987; 2.5 billion Yen at an average rate of .013; and 51.9 million Euro at an average rate of 1.27.
The US dollar forwards include US dollars $70.5 million of participating forwards which provide that to the extent spot rates are higher than the contracted rates, the contract rate will be adjusted by approximately 41.7% of the excess.
As a result of its continued focus on increasing gross margin and managing its investments in working capital and capital assets, Clearwater believes that it has sufficient financial resources to execute on its strategy and business plan.
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EXPLANATION OF FOURTH QUARTER EARNINGS Overview The statements of earnings reflect the earnings of Clearwater for the 13 weeks ended December 31, 2012 and 2011.
In 000's of Canadian dollars13 weeks ended December 31 2012 2011
Sales 92,957$ 87,140$ Cost of goods sold 74,527 67,308 Gross margin 18,430 19,832
19.8% 22.8%
Administrative and selling 9,822 10,377 Finance costs 5,500 4,168 Other income (1,318) (687) Research and development 824 510 Gain on settlement of Glitnir transaction - (12,445)
14,828 1,923
Earnings before income taxes 3,602 17,909 Income tax (recovery) expense (6,916) 1,515 Earnings 10,518$ 16,394$
Earnings attributable to: Non-controlling interests 2,038$ 2,099$ Shareholders of Clearwater 8,480 14,295
10,518$ 16,394$
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Fourth Quarter Earnings Fourth quarter 2012 sales were $93.0 million and adjusted EBITDA1 was $18.8 million versus 2011 comparative figures of $87.1 million and $16.1 million representing growth rates of 6.7% in sales and 16.7% in adjusted EBITDA. Earnings increased by $6.6 million compared to 2011, excluding a one time accounting gain of $12.4 million related to the settlement of Glitnir liabilities. Improvements to net earnings in the fourth quarter of 2012 were primarily due to a realized income tax asset of $8.0 million, and $5.2 million on realized foreign exchange2 gains primarily on Yen and US forward exchange contracts as the Canadian dollar strengthened against the Yen and the US dollar during the fourth quarter of 2012. Higher procurement costs for raw materials including lobster and shrimp and lower average foreign exchange rates reduced gross margins for the quarter. Unrealized foreign exchange losses from the translation of the US dollar denominated debt in 2012 partially offset the improvement in earnings for the fourth quarter of 2012.
The 16.7% growth in the fourth quarter adjusted EBITDA came as a result of higher realized foreign exchange income and lower selling, general and administration costs. Management is satisfied with the progress made towards our targets and expects that earnings and free cash flow momentum will continue through 2013. As a result, Management is resetting its targets for 2013 as follows: Sales growth – 5% or greater, adjusted EBITDA margins – 18% or greater,
In 000’s of Canadian dollars13 weeks ended December 31 2012 2011 Change
Net earnings 10,518$ 16,394$ (5,876)$
Explanation of changes in earnings:
Gain on settlement of Glitnir liabilities in 2011 (12,445) Higher future income tax asset 8,010 Higher unrealized foreign exchange loss (7,586) Higher realized foreign exchange income 5,197 Lower gross margin (1,402) Lower interest expense 845 Higher other income 631 Lower fees on settlement of debt 57 Lower fair value adjustment on long term debt 155 All other 662
(5,876)$
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leverage - 3.0x; and return on assets - 12% or higher on a sustained basis.
1 – Refer to definition of adjusted EBITDA
2 – Refer to risks and uncertainties for further information
Sales by region
Europe Europe is Clearwater’s largest scallop region and it is an important market for coldwater shrimp and lobster products.
European sales increased $1.6 million from higher sales volumes of sea scallops as available supply was higher in the last half of the year due to Management’s decision to delay harvesting from the first quarter of 2012.
In 000's of Canadian dollars13 weeks ended December 31 2012 2011 Change %China 20,573$ 13,576$ 6,997$ 51.5 Japan 10,355 9,553 802 8.4 Other Asia 4,391 5,480 (1,089) (19.9) Asia 35,319 28,609 6,710 23.5
Europe 35,478 33,852 1,626 4.8
United States 10,914 13,909 (2,995) (21.5) Canada 10,752 10,271 481 4.7 North America 21,666 24,180 (2,514) (10.4)
Other 494 499 (5) (1.0) 92,957$ 87,140$ 5,817$ 6.7
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Sales were also higher due to higher prices that resulted from a change in mix weighted towards higher value products. The increase in sales was partially offset by a reduction in available supply for cooked and peeled shrimp as timing of sales were delayed into the first quarter of 2013. In addition the continued economic slowdown within the region reduced sales volumes and prices for Argentine scallops. Foreign exchange rates2 for sales to Europe, which are primarily transacted in Euros and UK Pounds, decreased during the quarter as the Euro declined 6.1% relative to the Canadian dollar from 1.37 in 2011 to 1.29 in 2012, while the UK Pound improved 1.2% from 1.57 to 1.59 over the same period. 2 – Refer to risks and uncertainties for further information
Asia China China is a growing market for clams, coldwater shrimp, lobster and turbot. Sales to China increased $7.0 million, or 51.5%, to $20.6 million for the quarter as a result of an increase in available supply of turbot as harvesting for turbot occurred in the latter half of 2012. Higher sales volumes for clams and shrimp increased sales despite lower available supply volumes for shrimp during the fourth quarter. Chinese sales are almost exclusively transacted in US dollars. The US dollar weakened against the Canadian dollar partially offsetting the increase in sales. Average foreign exchange rates for the US dollar declined by 3.2% from 1.02 in 2011 to 0.991 in 2012.
Japan Japan is an important market for clams, lobster, coldwater shrimp and turbot. Sales to Japan increased 8.4% or by $0.8 million, to $10.4 million as a result of an increase in available supply of turbot, clams and lobster. This was partially offset by a reduction in sales volumes for shrimp as available supply was sold to other higher yielding markets. Average foreign exchange rates reduced sales for the fourth quarter as the Canadian dollar strengthened against the Yen by 8.5% to an average rate of 0.012 for 2012
Other Asia Sales within the other Asia region include sales to Korea, Taiwan, Singapore and other Asian countries. These Asian countries are an important market for clams, shrimp and turbot. Sales within the other Asian countries declined $1.1 million to $4.4 million for the fourth quarter as a result of a reduction in sales volumes for shrimp as
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available supply was sold to other higher yielding markets during the quarter. United States The United States is an important market for scallops, coldwater shrimp, lobster and clams. It is our most diverse market, where a wide variety of products are sold. Sales in the United States decreased by $3.0 million, to $10.9 million in the fourth quarter primarily as a result of a reduction in sales volumes for sea scallops, lobster and shrimp. Available supply volumes were sold to other higher yielding markets during the quarter. Changes in product mix for sea scallops and lobster were weighted towards products with higher value, and an increase in sales volumes for clams, partially offset the decline in sales during the quarter. For the quarter, the US dollar weakened against the Canadian dollar. Average foreign exchange rates for the US dollar declined by 3.2% from 1.02 in 2011 to 0.991 in 2012.
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Sales by species
Improvements in sales were a result of increases in sales volumes for sea scallops and turbot. In addition increased market demand for sea scallops and clams led to improved sales prices. This increase in sales was partially offset by lower available supply volumes for shrimp and snow crab and slower economic conditions within Europe for Argentine scallops, which impacted prices and sales volumes.
In 000's of Canadian dollars13 weeks ended December 31 2012 2011 Change %Scallops* 33,967$ 28,400$ 5,567 19.6 Coldwater shrimp 19,460 24,346 (4,886) (20.1) Clams 18,949 16,514 2,435 14.7 Lobster 13,542 15,116 (1,574) (10.4) Ground fish and other 7,039 382 6,657 1,742.7 Crab - 2,382 (2,382) (100.0)
92,957$ 87,140$ 5,817$ 6.7 *Refer to risks and uncertainties
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Cost of Goods Sold
Cost of goods sold increased $7.2 million or 10.7% to $74.5 million primarily due to higher sales volumes for sea scallops and clams, an increase in raw material procurement costs for lobster and shrimp and higher depreciation charges. Harvesting and procurement include all costs incurred in the operation of the vessels including labour, fuel, repairs and maintenance, fishing gear supplies, and other costs and fees plus procured raw material costs for species such as lobster, shrimp, scallops and crab. Excluding the impact of higher sales volumes, harvesting costs declined in the fourth quarter as a result of a mix of products weighted towards lower cost primarily coldwater shrimp and lower fuel consumption. Higher procurement costs for lobster and shrimp offset the decline. Fuel costs for our vessels declined $0.1 million from $6.8 million in the fourth quarter of 2011 to $6.6 million in 2012. This decline was a result of a reduction in the litres consumed. The decline was partially offset by an increase in the average price per litre of fuel of 0.03 in comparison to the fourth quarter of 2011. Depreciation expense from assets used in the harvesting and production of goods increased $1.1 million to $6.3 million as a result of vessel refits and other additions that were completed at the end of 2011 and depreciated after completion. Administrative overheads include salaries and benefits, professional and consulting fees and management fees attributable to the harvesting and production of goods. Refer to Administrative and selling for further information.
In 000's of Canadian dollars13 weeks ended December 31 2012 2011 Change %Harvesting and procurement 51,920$ 45,919$ 6,001$ 13.1 Manufacturing 7,657 7,623 34 0.4 Freight, customs and other transport 5,442 5,684 (242) (4.3) Depreciation 6,348 5,221 1,127 21.6 Administrative 3,160 2,861 299 10.5
74,527$ 67,308$ 7,219$ 10.7
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Gross margin Gross margin declined by $1.4 million, or 2.9% basis points to $18.4 million is a result of lower available supply volumes for coldwater shrimp, due to the timing of landings. Gross margins were also impacted by lower average sales prices for Argentine scallops due in part to the economic slowdown within Europe and a negative impact from foreign exchange rates. Gross margins also declined as a result of higher raw material costs for lobster and cooked and peeled shrimp. Lower average foreign exchange rates2, primarily for the Euro and the US dollar, negatively impacted sales and gross margin by $3.9 million.
Excluding the affect of foreign exchange, gross margin was positively impacted by increases in sales prices for clams and sea scallops and an increase in sales volumes for turbot and sea scallops. 2 – Refer to risks and uncertainties for further information
13 weeks ended December 31
Currency % sales
Average rate
realized % sales
Average rate
realized Change
in rate
US dollars 43.0% 0.991 47.8% 1.024 -3.2%Euros 24.5% 1.286 20.1% 1.369 -6.1%Japanese Yen 9.8% 0.012 12.7% 0.013 -8.5%UK pounds 4.8% 1.592 5.8% 1.572 1.2%Canadian dollar and other 17.9% 13.6%
100.0% 100.0%
2012 2011
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Administration and selling
Administration and selling costs declined $0.6 million, or 5.3%, to $9.8 million in 2012. This was due to higher employee compensation costs that Clearwater incurred from higher severance and bonus costs for salaried employees in the fourth quarter of 2011. Share-based incentive compensation increased $0.9 million from 2011 as the cost of Clearwater’s stock-based compensation performance incentive programs reflected increases in our share price and additional units granted during 2012 for key executives and directors. Selling costs include advertising, marketing, trade shows, samples, product development and bad debt expenses. The reduction in costs of $0.7 million to $0.6 million in 2012 relates to recoveries of bad debts. The allocation to cost of goods sold reflects costs that are attributable to the production and sale of goods and are allocated based on production volumes.
In 000's of Canadian dollars13 weeks ended December 31 2012 2011 Change %Salaries and benefits 6,418$ 8,039$ (1,621)$ (20.2) Share-based incentive compensation 1,517 645 872 135.2 Employee compensation 7,935 8,684 (749) 115
Consulting and professional fees 1,258 1,221 37 3.0 Other 1,742 1,228 514 41.9 Selling costs 586 1,263 (677) (53.6) Travel 604 606 (2) (0.3) Occupancy 385 315 70 22.2 Allocation to cost of goods sold (2,688) (2,940) 252 (8.6)
9,822$ 10,377$ (555)$ (5.3)
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Finance costs
Interest declined $0.9 million for the fourth quarter as a result of lower average interest rates on debt facilities and lower average balances outstanding. Foreign exchange and derivative contracts
Foreign exchange and derivative contracts2 changed by $2.4 million from a gain of $1.5 million in the fourth quarter of 2011 to a loss of $0.9 million in 2012. The foreign exchange loss for the fourth quarter of 2012 was primarily a result of $1.6 million in unrealized foreign exchange from the translation of the US dollar denominated debt in 2012 as the US dollar strengthened against the Canadian dollar. In addition, unrealized losses of $1.3 million on the mark-to-market on foreign exchange contracts primarily from strengthening current market rates on the US dollar and the Euro against the Canadian dollar, contributed to the increase in unrealized losses for the fourth quarter of 2012. Realized foreign exchange gains of $1.4 million related primarily to Yen and US forward exchange contracts settled within 2012 as average spot rates were 7.1% and 3.6% lower than the average strike price for 2012 for the Yen and the US dollar, respectively. 2 – Refer to risks and uncertainties for further information
In 000’s of Canadian dollars13 weeks ended December 31 2012 2011Interest and bank charges 4,471$ 5,257$ Amortization of deferred financing charges 357 416 Interest on current and long term debt 4,828 5,673
Fair value adjustment on convertible debentures (128) 27 Foreign exchange and derivative contracts 905 (1,484) Debt settlement and refinancing fees (105) (48)
5,500$ 4,168$
In 000’s of Canadian dollars13 weeks ended December 31 2012 2011
Realized loss (income)Foreign exchange contracts (1,416)$ 809$ Working capital (808) 2,164
(2,224) 2,973 Unrealized (gain) loss
Foreign exchange on long term debt and other assets 1,626 (920) Mark-to-market on foreign exchange contracts 1,303 (3,537) Mark-to-market on interest swap 200 -
3,129 (4,457)
905$ (1,484)$
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Other income
Royalties and fees and other includes income related to quota rental, commissions, processing fees and other miscellaneous income and expense that varies based upon the operations of the business. Research and Development Research and development relates to new technology and research into ocean habitats and fishing grounds. Research and development can vary year to year depending on the scope, timing and volume of research completed. Clearwater’s business plans call for increased investment in research and development in 2012 and subsequent years. Income taxes Income taxes primarily relate to taxable subsidiaries in Argentina, the United States, the United Kingdom and Canada. Lower earnings in Argentina contributed to lower income taxes in 2012. During 2012, Clearwater recorded a deferred tax asset of $8.0 million related to deferred tax assets that are expected to be utilized based upon 2013 estimated taxable earnings. Clearwater has unrecorded tax losses of approximately $48.7 million, representing approximately $14.9 million in deferred tax asset as at December 31, 2012. The unrecorded asset can be utilized to the extent Clearwater realizes taxable earnings in Canada in future periods. Non-controlling interest Non-controlling interest relates to earnings from Clearwater’s investment in subsidiaries in Argentina, Nova Scotia and Newfoundland and Labrador.
In 000's of Canadian dollars13 weeks ended December 31 2012 2011
Royalties, interest, and other fees (755) (316) Other fees (563) (371)
(1,318)$ (687)$
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OUTLOOK Management expects the seasonality of Clearwater’s operations, lower available supply of inventories at December 31, 2012 and poor weather conditions may limit growth in the first quarter of 2013. However continued strong results in the second half of the year will enable Clearwater to continue the trend of growth in annual results in 2013. Looking forward, Clearwater’s operations have a predictable seasonal pattern in which adjusted EBITDA is higher in the second half of the year and capital expenditures and investments in working capital is higher in the first half of the year. As a result it expects leverage to rise in the first half of 2013 after which it will decline. Global demand for seafood is outstripping supply, creating favorable market dynamics for vertically integrated producers such as Clearwater with strong resource access. Demand has been driven by growing worldwide population, shifting consumer tastes towards healthier diets, and rising purchasing power of middle class consumers in emerging economies.
The supply of wild seafood is limited and is expected to lag behind the growing global demand. This supply-demand imbalance has created a market place in which purchasers of seafood are increasingly willing to pay a premium to suppliers that can provide consistent quality and food safety, wide diversity and reliable delivery of premium, wild, sustainably harvested seafood.
Clearwater, like other vertically integrated seafood companies, is well positioned to take advantage of this opportunity because of its licenses, premium product quality, diversity of species, global sales footprint, and year-round harvest and delivery capability.
Ian Smith, Chief Executive Officer, commented, “In 2012 the company had the highest revenues and adjusted EBITDA in its history. Management is pleased with the progress made towards our financial targets for creating shareholder value and expects that earnings and free cash flow momentum will continue through 2013.”
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RISKS AND UNCERTAINTIES The performance of Clearwater’s business is susceptible to a number of risks which affect income, liquidity and cash flow, including risks related to resource supply, food processing and product liability, suppliers, customers, competition and foreign exchange exposure and lawsuits in the normal course of business. For further disclosure of additional risk factors please refer to the Annual Information Form. Foreign exchange risk
Our financial results are subject to volatility as a result of foreign exchange rate fluctuations.
The majority of Clearwater’s sales are to locations outside Canada and are transacted in currencies other than the Canadian dollar whereas the majority of our expenses are in Canadian dollars. As a result, fluctuations in the foreign exchange rates of these currencies can have a material impact on our financial condition and operating results. In addition Clearwater has a subsidiary which operates in the offshore scallop fishery in Argentina which exposes Clearwater to changes in the value of the Argentine Peso. Risks associated with foreign exchange are partially mitigated by the following strategies:
(1) Diversify sales internationally which reduces the impact of any country-specific economic risks.
(2) Execute on pricing strategies so as to offset the impact of exchange rates. (3) Limit the amount of long-term sales contracts – Clearwater has very few long-
term sales contracts with any customers. Contracts are typically less than 6 months and are based on list prices that provide a margin for exchange rate fluctuations.
(4) Plan conservatively - Clearwater regularly reviews economist estimates of
future exchange rates and uses conservative estimates when preparing its’ business plans, and
(5) Foreign exchange hedging program - that focuses on using forward contracts
to enable Clearwater to lock in exchange rates up to 18 months for key sales currencies (the US dollar, Euro, Yen and Sterling) thereby lowering the potential volatility in cash flows through derivative contracts.
In 2012 approximately 45.4% of Clearwater’s sales were denominated in US dollars. Based on 2012 sales, a change of 0.01 in the U.S. dollar rate converted to Canadian dollars would result in a $1.6 million change in sales and gross profit. Approximately 22.1% of 2012 sales were denominated in Euros, based on 2012 sales, a change of
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0.01 in the Euro rate as converted to Canadian dollars would result in a $0.6 million change in sales and gross profit. Also, 12.5% of sales in 2012 were denominated in Japanese Yen, based on 2012 annual sales, a change of 0.0001 in the Yen rate as converted to Canadian dollars would result in a change of $0.4 million in sales and gross profit. At the end of December 2012 Clearwater had approximately 74% of its US Dollar, Euro and Yen exposures for 2013 hedged at rates of 0.988, 1.27 and 0.013 respectively.
A foreign exchange hedging program provides short-term risk management for foreign exchange risk. Further strengthening of the Canadian dollar relative to the currencies of our sales markets will result in lower sales prices and receipts when converted into Canadian dollars and will have an adverse impact on our profitability to the extent we are not able to adjust prices and costs to offset this risk.
Political risk
Our Argentine and other international operations are subject to economic and political risks, which could materially and adversely affect our business.
Our Argentine and other foreign operations and investments are subject to numerous risks, including fluctuations in foreign currency, exchange rates and controls, expropriation of our assets, nationalization, renegotiation, forced divestiture, modification or nullification of our contracts and changes in Argentine or other foreign laws or other regulatory policies of foreign governments and having to submit to the jurisdiction of a foreign court or arbitration panel or having to enforce the judgment of a foreign court or arbitration panel against a sovereign nation within its own territory.
During 2012 and as a result of economic pressures within Argentina, the Argentine Government withheld approvals on the ability of companies to transfer cash outside of Argentina, restricting Clearwater’s ability to payout dividends. However, Clearwater did receive approvals to pay approximately $2.2 million in dividends in the first half of 2012 and in December 2012 it received further approvals to pay dividends of approximately $2.8 million Canadian. There can be no assurance that the Argentine government will continue to provide approvals to pay dividends in 2013 and as of March 11, 2013 they have not provided approvals for payment of dividends in 2013.
To compensate for the restriction on dividend payouts Clearwater transferred receivable balances that enabled a flow of funds of approximately $2.9 million in 2012. In addition, Clearwater is reviewing options for the scheduled replacement of one of its two fishing vessels in Argentina in 2013. The replacement of this vessel will be funded with loan financing and it in turn will necessitate that funds be maintained in Argentina to fund the related loan payments, thus alleviating the need for any material dividend payments over the next several years.
Our operations in Argentina and elsewhere may be negatively affected by both foreign exchange and expropriation losses as well as the increased cost and risks of doing business in developing markets.
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We mitigate this risk through maintaining a policy of repatriating our share of the earnings from Argentina through dividends and we do not maintain any material financial assets that are surplus to our needs to operate the business outside of Canada. We do not carry financial assets in Pesos to mitigate exchange risk. In addition we have structured our operations in Argentina with an Argentine partner who owns 20% of the Argentine business and who is resident in Argentina and is actively managing the business.
No assurance can be given that our operations will not be adversely impacted as a result of existing or future legislation.
Resource supply risk
A material change in the population and biomass of scallop, lobster, clam, or coldwater shrimp stocks in the fisheries in which we operate would materially and adversely affect our business.
Clearwater's business is dependent on our allocated quotas of the annual Total Allowable Catch (TAC) for the species of seafood we harvest. The annual TAC is generally related to the health of the stock of the particular species as measured by a scientific survey of the resource. The population and biomass of shellfish stocks are subject to natural fluctuations some of which are beyond our control and which may be exacerbated by factors such as water temperatures, food availability, the presence of predators, disease, disruption in the food chain, reproductive problems or other biological issues. We are unable to fully predict the timing and extent of fluctuations in the population and biomass of the shellfish stocks we harvest and process, and we therefore may not be able to engage in effective measures to alleviate the adverse effects of these fluctuations. In addition, the population models utilized by scientists evaluating the fisheries in which we operate are constantly evolving. Certain changes in the population models could negatively impact future biomass estimates. Any material reduction in the population and biomass or TAC of the stocks from which we source seafood would materially and adversely affect our business. Any material increase in the population and biomass or TAC could dramatically reduce the market price of any of our products. The governments of Canada and Argentina set the annual TAC for each species by reviewing scientific studies of the resource and then consulting with key stakeholders including us and our competitors to determine acceptable catch levels. The potentially differing interests of our competitors may result in conflicting opinions on issues around resource management, including the establishment of TACs and other management measures potentially limiting our ability to grow, to fully capitalize on our investments in harvesting capacity, or to achieve targeted yields from the resource, which may adversely affect our financial condition and results of operations.
Resource supply risk is managed through adherence with government policies and regulations related to fishing in Canada and Argentina and Clearwater’s investment in
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science and technology, which enables Clearwater to understand the species that it harvests. Clearwater has invested in projects with the scientific community, such as ocean floor mapping and the resource assessment surveys to ensure access to the best available science information. Resource management plans, developed by DFO, are developed through an open and transparent process with strong input from industry participants. Clearwater engages in these processes to promote best in class, robust, and sustainable management of the resource. The Marine Stewardship Council certification of all of our core species demonstrates that the resources that Clearwater harvests meet the leading global standard for sustainable fisheries management practice. Clearwater further mitigates the risk associated with resource supply and competition through the diversification across species.
Capital availability and liquidity risk There are risks associated with capital availability and liquidity including:
1. The ability of Clearwater to obtain sufficient financing for working capital, capital expenditures or acquisitions in the future or to repay loans as they become due;
2. Certain borrowings are at variable rates of interest, which exposes Clearwater to the risk of increased interest rates; and
3. Clearwater may be more vulnerable to economic downturns and be limited in its ability to withstand competitive pressures if it has high leverage, debt coverage and limited liquidity.
Clearwater’s ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness will depend on its future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors, many of which are beyond its control. Clearwater’s credit facilities contain restrictive covenants of a customary nature, including covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, the ability of Clearwater to incur additional indebtedness, to pay dividends or make certain payments and to sell or otherwise dispose of assets. In addition, they contain a number of financial covenants that require Clearwater to meet certain financial ratios and financial condition tests. A failure to comply with the covenants could result in an event of default, which, if not cured or waived, could permit acceleration of the relevant indebtedness. If indebtedness under the credit facilities were to be accelerated, there can be no assurance that the assets of Clearwater would be sufficient to repay in full that indebtedness. There can also be no assurance that the credit facilities would be able to be refinanced. As of March 11, 2013 Clearwater is not in violation of the restrictive covenants.
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Clearwater mitigates capital availability and liquidity risk through a number of its treasury management policies and goals which promote strong liquidity and continued access to capital to fund its business. These include policies and goals with respect to leverage, foreign exchange, lending arrangements and free cash flows. See the Capital structure and liquidity management section for further information. Other risks For further disclosure of additional risk factors please refer to the Annual Information Form. CRITICAL ACCOUNTING POLICIES Clearwater’s critical accounting policies are those that are important to the portrayal of Clearwater’s financial position and operations and may require management to make judgments based on underlying estimates and assumptions about future events and their effects. These estimates can include but are not limited to estimates regarding inventory valuation, accounts receivable valuation allowances, estimates of expected useful lives of vessels and plant facilities, and estimates of future cash flows for impairment tests. Underlying estimates and assumptions are based on historical experience and other factors that are believed by management to be reasonable under the circumstances. These estimates and assumptions are subject to change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Clearwater has considered recent market conditions including changes to its cost of capital in making these estimates. Refer to the notes to the annual financial statements for a complete listing of critical accounting policies and estimates used in the preparation of the consolidated financial statements. Financial Reporting Controls and Procedures Clearwater has established and maintains disclosure controls and procedures over financial reporting, as defined under the rules adopted by the Canadian Securities Regulators in instrument 52-109. The Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the design and effectiveness of Clearwater’s disclosure controls and procedures as of December 31, 2012 and have concluded that such procedures are adequate and effective to provide reasonable assurance that material information relating to Clearwater and its consolidated subsidiaries would be made known to them by others within those entities to allow for accurate and complete disclosures in annual filings.
The Management of Clearwater, with the participation of the CEO and the CFO (collectively “Management”), is responsible for establishing and maintaining adequate internal controls over financial reporting. Clearwater’s internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of
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financial reporting and preparation of financial statements in accordance with International Financial Reporting Standards (“IFRS”).
Management evaluated the design and effectiveness of Clearwater’s internal controls over financial reporting as at December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its report “Internal Control – Integrated Framework (1992)”. This evaluation included reviewing controls in key risk areas, assessing the design of these controls, testing these controls to determine their effectiveness, reviewing the results and then developing an overall conclusion. Based on management’s evaluation, the CEO and the CFO have concluded that, as at December 31, 2012, Clearwater’s internal controls over financial reporting are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. There have been no significant changes in Clearwater’s internal controls over financial reporting or other factors that occurred during the period from September 30, 2012 to December 31, 2012, that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting. Adoption of new and revised standards
The following IFRS standards have been recently issued by the IASB: IFRS 9 Financial Instruments, IFRS 13 Fair Value Measurement Arrangements, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities.
Clearwater expects that the adoption of IFRS 11 Joint Arrangements will impact its balance sheet and income statement commencing in 2013 but will not have an adjusted EBITDA levels.
The following table provides the expected impact to the 2012 comparative amounts for the 2013 statement of financial position as follows:
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The following table provides the expected impact to the 2012 comparative amounts in for the 2013 statement of profit and loss as follows:
Clearwater is assessing the impact of the other new standards, but does not expect them to have a significant effect on its consolidated financial statements.
Consolidated Reported
Statement of financial position
Entity previously
proptionately consolidated
Entity to be recorded using
equity method as of January 1, 2013
Consolidated Reported
Comparatives ASSETS
Current assets 148,758 (1,146) - 147,612
Non-current assets 263,392 (4,103) 3,868 263,158
TOTAL ASSETS 412,150$ (5,248) 3,868 410,770
LIABILITIES
Current liabilities 64,169 (148) - 64,021
Non-current liabilities 241,460 (1,232) - 240,228
412,150$ (1,380) - 410,770 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES
In 000's of Canadian dollarsYear ended December 31, 2012 comparatives for the 2013 financials
In 000's of Canadian dollarsYear ended December 31, 2012 comparatives for the 2013 financials
Consolidated Reported
Statement of profit and loss
Entity previously proptionately consolidated
Entity to be recorded using
equity method as of January 1, 2013
Consolidated Reported
Comparatives
Sales 350,447$ (145) 350,302$ Cost of goods sold 276,190 1,611 277,801
74,257 (1,756) - 72,501
Administrative and selling 32,837 (258) 32,579 Research and development 1,759 1,759 Other income (2,412) (1,056) (3,468) Finance costs 24,388 24,388
56,572 (258) (1,056) 55,259
Earnings (loss) before income taxes 17,685 (1,498) 1,056 17,242
Income taxes (5,019) (443) (5,462)
Earnings (loss) for the year 22,704$ (1,056)$ 1,056$ 22,704$
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SUMMARY OF QUARTERLY RESULTS The following table provides historical data for the twelve most recently completed quarters.
1 – On October 2, 2011, Clearwater Seafoods Income Fund (“the Fund”) was reorganized into a publicly traded corporation, “Clearwater Seafoods
Incorporated”, (“Clearwater”). The 2011 comparative results have been adjusted to reflect the conversion of the Fund to the corporation to provide a
meaningful comparison to 2012. Earnings per share (“EPS”) for 2011 was calculated using these comparatives.
2 - Diluted earnings (loss) per share are anti-dilutive for all periods except September 29, 2012, December 31, 2011 and December 31, 2012.
3 – Earnings and diluted earnings per share were not calculated for 2010 results.
For a more detailed analysis of each quarter’s results, please refer to our quarterly reports and our annual reports. In general, sales increased with each successive quarter with the largest increase in the third quarter of each year. The third quarter has the highest sales revenue each year. In addition, volatility in exchange rates can have a significant impact on earnings. The volatility is partially offset by Clearwater’s foreign exchange management program. In addition, earnings for the fourth quarter of 2012 included an $8 million future tax recovery. Changes made effective January 1, 2011, to the management agreement that governs Clearwater’s frozen-at-sea shrimp and turbot harvesting operations, resulted in
First Second Third FourthIn 000's of Canadian dollars Quarter Quarter Quarter Quarter
Fiscal 2012Sales 70,884$ 84,966$ 101,640$ 92,957$ Earnings (loss) (2,927) (2,505) 17,618 10,518 Earnings per share ("EPS") (0.09) (0.08) 0.30 0.17
Diluted earnings per share2 (0.09) (0.08) 0.27 0.15
Fiscal 2011 Sales 69,235$ 78,820$ 97,590$ 87,140$ Earnings (loss) 1,832 (327) 5,058 16,390
Earnings per share ("EPS")1 0.01 (0.02) 0.05 0.28
Diluted earnings per share2 0.01 (0.02) 0.05 0.23
Fiscal 20103
Sales 69,262$ 70,844$ 91,633$ 83,801$ Earnings (loss) (9,583) (4,990) 4,260 (4,968)
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Clearwater fully consolidating these operations in 2011 incurring a non-cash gain of $11.6 million in the first quarter of 2011. The settlement of the Glitnir transaction during the fourth quarter of 2011 resulted in a non-cash gain of $12.4 million.
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DEFINITIONS AND RECONCILIATIONS Gross margin Gross margin consists of sales less harvesting, distribution, direct manufacturing costs, manufacturing overhead, certain administration expenses and depreciation related to manufacturing operations. Adjusted earnings before interest, tax, depreciation and amortization (“adjusted EBITDA”) Adjusted earnings before interest, tax, depreciation and amortization (“adjusted EBITDA”) is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes that in addition to net earnings and cash provided by operating activities, adjusted EBITDA is a useful supplemental measure from which to determine Clearwater’s ability to generate cash available for debt service, working capital, capital expenditures, income taxes and dividends. In addition, as adjusted EBITDA is a measure frequently analyzed for public companies, Clearwater has calculated adjusted EBITDA in order to assist readers in this review. Adjusted EBITDA should not be construed as an alternative to net earnings determined in accordance with IFRS as a measure of liquidity, or as a measure of cash. Adjusted EBITDA is defined as EBITDA excluding one-time non-recurring items such as severance charges, gains or losses on property, plant and equipment, gains or losses on quota sales, refinancing and reorganization costs. In addition recurring accounting gains and losses on foreign exchange (other than realized gains and losses on forward exchange contracts), and adjustments to stock based compensation, have been excluded from the calculation of adjusted EBITDA due to the variability in these gains and losses. In the fourth quarter of 2012 Clearwater began to exclude amounts related to stock based compensation from the calculation of adjusted EBITDA due to the variability in these gains and losses in the liability related to its cash settled share-based payment programs. It has restated all prior periods for this change.
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Reconciliation of Net Earnings to Adjusted EBITDA for the 13 weeks ended, and the years ended December 31, 2012 and 2011.
December 31 December 31 December 31 December 31 2012 2011 2012 2011
Net earnings 10,518$ 16,394$ 22,704$ 22,955$ Add (deduct): Income taxes (6,916) 1,515 (5,019) 3,863 Depreciation and amortization 6,587 5,350 22,976 19,503 Interest on long-term debt and bank charges 4,829 5,674 21,506 26,840
15,018 28,933 62,167 73,161 Add (deduct) other non-routine items: Foreign exchange and derivative income unrealized 3,129 (4,458) (3,476) 1,525 Fair market value on convertible debentures (128) 1,206 2,898 7,061 Realized foreign exchange on working capital (808) 2,164 1,359 2,713 Restructing and refinancing costs 84 70 6,964 3,737 Deferred retirement obligations 1,517 645 2,331 904 Gain on sale of quota - - - (672) Gain on settlement of debt - (12,445) - (14,242) Loss on disposal of investment - - - 267 Gain on change in ownership of joint venture - - - (11,571) Gain on insurance claim - - - (1,695) Stock appreciation rights - - - - Adjusted EBITDA 18,812$ 16,115$ 72,243$ 61,188$
Adjusted EBITDA attributable to: Non-controlling interests 3,346$ 3,836$ 12,693$ 13,495$ Shareholders of Clearwater 15,466 12,279 59,550 47,693
18,812$ 16,115$ 72,243$ 61,188$
13 weeks ended Year to date
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Leverage Leverage is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes leverage to be a useful term when discussing liquidity and does monitor and manage leverage. In addition, as leverage is a measure frequently analyzed for public companies, Clearwater has calculated the amount in order to assist readers in this review. Leverage should not be construed as a measure of liquidity or as a measure of cash flows.
Leverage is calculated by dividing the current and preceding annual adjusted EBITDA by the total debt on the balance sheet adjusted for cash reserves.
Leverage for banking purposes differs from the above calculations as agreements require the exclusion of cash from the calculation. Clearwater is in compliance with all of the non-financial and financial covenants associated with its debt facilities.
In 000's of Canadian dollarsAs at December 31 2012 2011Adjusted EBITDA1 72,243$ 61,188$
Debt* (net of deferred financing charges of $4.4 million (2011 - $2.0 million) 253,791 247,100 Less cash (41,731) (14,725) Net debt 212,060 232,375
Net debt 212,060 232,375 Net debt leverage 2.9 3.8 * Debt was adjusted to include deferred financing charges during 2012
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Free cash flows Free cash flow is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes that in addition to net earnings and cash provided by operating activities, free cash flow is a useful supplemental measure from which to determine Clearwater’s ability to generate cash available for debt service, working capital, capital expenditures and distributions. Free cash flow should not be construed as an alternative to net earnings determined in accordance with IFRS, as a measure of liquidity, or as a measure of cash flows. Free cash flow is defined as cash flows from operating activities, less planned capital expenditures (net of any borrowings of debt designated to fund such expenditures), scheduled payments on long term debt and distributions to non-controlling interests. Items excluded from the free cash flow include discretionary items such as debt refinancing and repayments changes in the asset backed loan and discretionary financing and investing activities. Reconciliation for the 13 weeks ended and the year ended December 31, 2012 and 2011 is as follows:
Free cash flows December 31,
2012 December
31, 2011 December 31,
2012 December 31,
2011
Adjusted EBITDA 18,812 16,115 72,243 61,188
Less:Cash interest (4,471) (5,257) (20,347) (20,995) Cash taxes (399) (1,053) (2,154) (4,833) Other income and expense items 5,539 (4,826) (1,601) (8,223) Operating cash flow before changes in working capital 19,481 4,979 48,141 27,137
Change in working capital 26,948 14,605 (741) (9,258) Cash flows from operating activities 46,429 19,584 47,400 17,879
Purchase of property, plant, equipment, quota and other assets (4,219) (2,104) (16,574) (21,237) Less: Designated borrowings - - 2,056 19,223 Scheduled payments on long-term debt (1,629) (14) (6,338) (4,467) Distributions to non-controlling interests (2,780) (2,327) (9,491) (7,537) Other debt borrowings and repayments 718 (1,664)
Free cash flows 37,801 15,857 17,053 2,197
Add/(less):Other debt borrowings (repayments) of debt (10,597) (13,862) 13,593 5,883 Other investing activities (459) (1,152) 1,360 (2,429) Other financing activities - (748) - (1,197)
Change in cash flows for the period per statement of cash flows 26,745 95 32,006 4,454
13 weeks ended Year Ended
Uses of cash:
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Return on Assets
Return on assets is not a recognized measure under IFRS, and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes that return on assets measures the efficiency of the use of total assets to generate income. Return on assets should not be construed as an alternative to net earnings determined in accordance with IFRS. Return on assets is defined as the ratio of earnings before interest and taxes (“EBIT”) to average total assets including all working capital assets.
2012 2011
49,746 41,685
Total Assets 412,150 387,892
12.1% 10.7%
In (000's) of Canadian dollarsYear ended December 31Return on Assets
Earnings before interest and taxes
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KPMG LLP 1959 Upper Water Street Suite 1500 Purdy’s Wharf Tower 1 Halifax NS B3J 3N2
Telephone (902) 492-6000 Fax (902) 429-1307 www.kpmg.ca
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP. KPMG Confidential
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Clearwater Seafoods Incorporated
We have audited the accompanying consolidated financial statements of Clearwater Seafoods Incorporated, which comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, the consolidated statements of earnings, comprehensive income, shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Clearwater Seafoods Incorporated as at December 31, 2012 and December 31, 2011, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Accountants March 11, 2013 Halifax, Canada
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Clearwater Seafoods Incorporated Management’s Statement of Responsibility for Financial Reporting The consolidated financial statements and all related financial information contained in this annual report, including Management’s Discussion and Analysis, are the responsibility of the Management of Clearwater Seafoods Incorporated. They have been prepared in accordance with generally accepted accounting principles, using management's best estimates and judgments, where appropriate. Management is responsible for the reliability and integrity of the consolidated financial statements, the notes to the consolidated financial statements, and other financial information contained in this report. In the preparation of these statements, estimates are sometimes necessary because a precise determination of certain assets and liabilities is dependent on future events. Management believes such estimates have been based on careful judgments and have been properly reflected in the accompanying consolidated financial statements. Management is also responsible for maintaining a system of internal control designed to provide reasonable assurance that assets are safeguarded and that accounting systems provide timely, accurate and reliable financial information. The Board of Directors of Clearwater Seafoods Incorporated is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board is assisted in exercising its responsibilities through the Audit Committee of the Board, which is composed of non-management directors. The Committee meets periodically with management and the auditors to satisfy itself that management's responsibilities are properly discharged, to review the consolidated financial statements and to recommend approval of the consolidated financial statements to the Board. KPMG LLP, the independent auditors appointed by the Board, have audited Clearwater Seafoods Incorporated’s consolidated financial statements in accordance with generally accepted auditing standards and their report follows. The independent auditors have full and unrestricted access to the Audit committee to discuss their audit and their related findings as to the integrity of the financial reporting process. March 11, 2013
Ian Smith Robert Wight Chief Executive Officer Vice-President, Finance and Chief Financial Officer
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Approved by the Board:
John Risley Colin MacDonald Director Chairman
CLEARWATER SEAFOODS INCORPORATEDConsolidated Statements of Financial Position
(In thousands of Canadian dollars)December 31, December 31,
2012 2011
ASSETS
Current assetsCash 41,731$ 9,725$ Trade and other receivables (Note 6) 43,204 41,719 Inventories (Note 7) 51,909 61,755 Prepaids and other (Note 8) 7,729 11,549 Derivative financial instruments (Note 14) 4,185 1,075
148,758 125,823 Non-current assets
Long term receivables (Note 9) 10,647 10,293 Other assets (Note 10) 1,245 2,066 Property, plant and equipment (Note 11) 126,707 129,373 Licences and fishing rights (Note 12) 108,543 111,700 Goodwill (Note 12) 7,043 7,043 Deferred tax assets (Note 19) 9,207 1,594
263,392 262,069
TOTAL ASSETS 412,150$ 387,892$
LIABILITIES
Current liabilitiesTrade and other payables 44,633$ 40,767$ Income tax payable (Note 19) 370 1,984 Current portion of long-term debt (Note 13) 15,527 42,766 Derivative financial instruments (Note 14) 3,639 1,097
64,169 86,614 Non-current liabilities
Long-term debt (Note 13) 238,264 204,334 Deferred tax liabilities (Note 19) 3,196 2,892
241,460 207,226
SHAREHOLDERS' EQUITY
Share capital (Note 15) 64,867 65,309 Retained earnings (deficit) 14,616 (835) Cumulative translation account (3,866) (3,122)
75,617 61,352 Non-controlling interest 30,904 32,700
106,521 94,052
412,150$ 387,892$ TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES
See accompanying notes to consolidated financial statements
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CLEARWATER SEAFOODS INCORPORATEDConsolidated Statements of Earnings
(In thousands of Canadian dollars)Year ended December 31 2012 2011
Sales 350,447$ 332,785$ Cost of goods sold 276,190 263,220
74,257 69,565
Administrative and selling 32,837 33,345 Net finance costs (Note 16) 24,388 38,604 Other income (Note 17) (2,412) (5,893) Research and development 1,759 707 Gain on settlement of Glitnir transaction (Note 13(f)) - (12,445) Gain on change in control of joint venture (Note 4) - (11,571)
56,572 42,747
Earnings before income taxes 17,685 26,818
Income tax (recovery) expense (Note 19) (5,019) 3,863
Earnings for the year 22,704$ 22,955$
Earnings attributable to:Non-controlling interest 7,695$ 6,619$ Shareholders of Clearwater 15,009 16,336
22,704$ 22,955$
Basic earnings per share (Note 18) 0.29$ 0.32$ Diluted earnings per share (Note 18) 0.29$ 0.32$
See accompanying notes to consolidated financial statements
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CLEARWATER SEAFOODS INCORPORATED
(In thousands of Canadian dollars)
Year ended December 31 2012 2011
Earnings for the year 22,704$ 22,955$
(744) (1,686)
Total comprehensive income 21,960$ 21,269$
Total comprehensive income attributable to:Non-controlling interest 7,695$ 6,619$ Shareholders of Clearwater 14,265 14,650
21,960$ 21,269$
Consolidated Statements of Comprehensive Income
Other comprehensive income - foreign currency translationdifferences of foreign operations
See accompanying notes to consolidated financial statements
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CLEARWATER SEAFOODS INCORPORATED
(In thousands of Canadian dollars)
Trust UnitsCommon Shares
Retained earnings (deficit)
Contributed Surplus
Cumulative Translation
AccountNon-
controlling interest Total
Balance at January 1, 2011 162,517$ -$ (115,551)$ 1,816$ (1,436)$ 4,018$ 51,364$
Total comprehensive income for the year - - 16,336 - (1,686) 6,619 21,269
Transactions recorded directly in equity Distributions to non-controlling interest - - - - - (7,537) (7,537) Purchase and cancellation of shares (571) - - - - - (571) Change in control on acquisition of joint venture - - (73) - - 29,600 29,527 Total transactions with unitholders (571) - (73) - - 22,063 21,419
Trust conversion, October 2, 2011 (Note 2(a)) (161,946) 65,309 98,453 (1,816) - - -
Balance at December 31, 2011 -$ 65,309$ (835)$ -$ (3,122)$ 32,700$ 94,052$
Total comprehensive income for the year - - 15,009 - (744) 7,695 21,960
Transactions recorded directly in equity Distributions to non-controlling interest - - - - - (9,491) (9,491) Redemption of 2013 convertible debentures (Note 15) - (442) 442 - - - - Total transactions with shareholders - (442) 442 - - (9,491) (9,491)
Balance at December 31, 2012 -$ 64,867$ 14,616$ -$ (3,866)$ 30,904$ 106,521$
Consolidated Statement of Shareholders' Equity
Shareholders' Equity
See accompanying notes to consolidated financial statements
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CLEARWATER SEAFOODS INCORPORATEDConsolidated Statement of Cash Flows
(In thousands of Canadian dollars)
Year ended December 31 2012 2011
NET INFLOW (OUTFLOW) OF CASH RELATED TO THEFOLLOWING ACTIVITIES:
Operating
Earnings for the year 22,704$ 22,955$ Items not involving cash:
Depreciation and amortization 22,498 20,603 Gain on acquisition of joint venture - (11,571) Gain on settlement of Glitnir Transaction - (12,445) Net finance costs 3,367 8,726 Impairment of property, plant and equipment and other assets - 552 Gain on disposal of licenses, property, plant and equipment, and quota (479) (554) Other 51 (1,129)
48,141 27,137
Change in operating working capital (Note 25) 5,723 (6,096) Interest expense 20,347 20,899 Interest paid (17,137) (22,654) Income tax (recovery) expense (5,019) 3,863 Income tax paid (4,655) (5,270)
47,400$ 17,879$
Financing
Repayment of long-term debt (189,259)$ (96,715)$ Proceeds from long-term debt 216,084 122,094 Repayment of asset based revolving credit facility (17,513) (9,740) Cash received on change in control of joint venture - 2,646 Distributions to non-controlling interest (9,491) (7,537) Amounts paid to purchase and cancel units - (508)
(179)$ 10,240$
Investing
Purchase of property, plant, equipment, quota and other (16,574)$ (21,237)$ Proceeds on disposal of property, plant, equipment, quota and other 509 841 Net receipts in other assets - 152 Net receipts (advances) in long term receivables 850 (3,421)
(15,215)$ (23,665)$
INCREASE IN CASH 32,006$ 4,454$ CASH, BEGINNING OF YEAR 9,725 5,271 CASH, END OF YEAR 41,731$ 9,725$
See accompanying notes to consolidated financial statements
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
1. DESCRIPTION OF THE BUSINESS
Clearwater Seafoods Incorporated (“Clearwater”) was incorporated on July 7, 2011 under the provisions of the Canada Business Corporations Act to facilitate the reorganization of Clearwater Seafoods Income Fund (the “Fund") from an income trust to a corporate structure (the “Conversion”). Clearwater’s sole investment is the ownership of 100% of the units of Clearwater Seafoods Limited Partnership (“CSLP”). Clearwater is domiciled at 757 Bedford Highway, Bedford, Nova Scotia, Canada. The consolidated financial statements of Clearwater as at and for the years ended December 31, 2012 and 2011 comprise the company, its subsidiaries and jointly control entity. Clearwater’s business includes the ownership and operation of assets and property in connection with the harvesting, processing, distribution and marketing of seafood.
2. BASIS OF PREPARATION
(a) Conversion to a Corporation Effective October 2, 2011 the Fund was reorganized from an income trust structure into a public corporation named “Clearwater Seafoods Incorporated”. The business of the Fund has been carried on by Clearwater and the underlying seafood business operated by CSLP remains unchanged. Under the reorganization, unitholders of the Fund received one common share of Clearwater, for each trust unit of the Fund held. As a result, as of October 2, 2011, Clearwater had 50,947,160 common shares issued and outstanding, representing one common share for each of the 27,565,943 Fund Units and the 23,381,217 Special Trust Units of the Fund that were outstanding immediately prior to the reorganization. 7914091 Canada Inc., a newly formed holding company owned by Clearwater Fine Foods Incorporated (“CFFI”) and a major shareholder (related to the Chairman of Clearwater) consolidated their shareholdings in the Fund such that upon conversion of the Fund units into common shares, it owned 29,636,076 or 58% of the issued and outstanding common shares of Clearwater. As a result of the Conversion, Clearwater controls CSLP with a 100% ownership and Clearwater began consolidating CSLP. As the original owners of the Fund and CSLP have the same proportionate interest in the same underlying assets and liabilities, albeit through a different legal structure, the Conversion has been accounted for as a combination of entities under common control using the book values of the assets and liabilities as recorded in CSLP. Therefore, the carrying amounts recorded as at October 2, 2011 are those of CSLP rather than those of the Fund.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
As Clearwater and CSLP were subject to common control for all periods included in the consolidated financial statements, the comparative financial information as at and for the year ended December 31, 2011 are represented on a consolidated basis. Consequently, any references to trust units, unitholders, and per unit amounts relate to periods prior to the conversion October 2, 2011 and any references to common shares, shareholders, and per share amounts relate to periods subsequent to October 2, 2011.
(b) Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board. The financial statements were authorized for issue by Clearwater’s Board of Directors on March 11, 2013.
(c) Basis of Measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following material items measured at fair value through profit or loss:
Derivative financial instruments Financial instruments Liabilities for cash settled share-based compensation arrangements
The fair value measurements have been described in the notes.
(d) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is Clearwater’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand except as otherwise noted.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(e) Critical judgments and estimates in applying accounting policies
The preparation of financial statements requires management to make estimates, judgments and assumptions that materially affect the amounts reported in the consolidated financial statements and accompanying notes. Management bases assumptions, estimates and judgments on historical experience, current trends and events, and all available information that management believes is relevant at the time it prepares the financial statements. Actual results could ultimately differ materially from these estimates. The following are the most important accounting policies subject to such judgment and sources of key estimation uncertainty that Clearwater believes they could have the most significant impact on the reported results and financial position:
The information in this note is grouped by accounting policy to include: Key sources of estimation uncertainty Judgments management made in the process of applying Clearwater’s accounting
policies
i. Income taxes Key sources of estimation uncertainty Accounting for income taxes is based upon evaluation of income tax rules in all jurisdictions where Clearwater performs activities. In determining the provision for current and deferred income taxes, Clearwater makes assumptions about temporary and permanent differences between accounting and taxable income, and substantively enacted income tax rates. Changes in tax law, the level and geographical mix of earnings impact the effective tax rate. With respect to deferred taxes, Clearwater makes assumptions about when deferred tax assets are likely to reverse, the extent to which it is probable that temporary differences will reverse and whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. Clearwater recognizes deferred tax assets only to the extent that it considers it probable that those assets will be recoverable. For further discussion on deferred income taxes refer to note 19.
ii. Goodwill and intangible assets Key sources of estimation uncertainty Clearwater conducts impairment testing on its goodwill and intangible assets annually in the third quarter and whenever events or changes in circumstances indicate that carrying value may not be recoverable. Clearwater determines the recoverable amount of the goodwill and intangible assets using the value in use method, which estimates fair value using a discounted five-year forecasted cash flow estimate with a terminal value. The determination of the recoverable amount involves estimates and assumptions for future sales, product margins, market conditions, allowable catch rates, foreign exchange rates, and appropriate discount rates.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
Judgments made in relation to accounting policies applied In performing its impairment testing, Clearwater makes judgments in determining its cash generating units, and the allocation of working capital assets and liabilities and corporate assets to the cash generating units. For further discussion on goodwill and intangible assets, refer to note 12.
iii. Share-based compensation Key sources of estimation uncertainty Clearwater determines costs for share-based compensation using market-based valuation techniques. Clearwater determines the fair value of the market-based and performance-based non-vested share awards at the date of grant using generally accepted valuation techniques. Certain performance-based share awards require Management to make estimates on the likelihood of achieving company and corporate peer group performance goals. Clearwater makes assumptions in applying valuation techniques including estimating the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee shared based plan option exercise behaviors and corporate performance. Such assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates. For further discussion on share-based compensation, refer to note 24.
iv. Derivative financial instruments Key sources of estimation uncertainty Clearwater records the fair value of certain financial liabilities using appropriate valuation models where the fair value cannot be determined in active markets. The inputs used in the fair value models contain inherent uncertainties, estimates and use of judgment. Fair value is taken from observable markets where possible and estimated as necessary. Assumptions underlying the valuations require estimation of costs and prices over time, discount rates, inflation rates, defaults and other relevant variables such as foreign exchange volatility. For further discussion on derivative financial instruments, refer to note 14.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
3. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements.
(a) Basis of consolidation
i) Business Combinations
Clearwater measures goodwill as the excess of the fair value of the consideration transferred, the amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss. Clearwater elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date.
Transaction costs, other than those associated with the issue of debt or equity securities, that Clearwater incurs in connection with a business combination are expensed as incurred.
ii) Subsidiaries
Subsidiaries are entities controlled by Clearwater. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
iii) Jointly controlled entity
A joint venture is an entity over whose activities Clearwater has joint control, established by contractual agreement. The consolidated financial statements include Clearwater’s proportionate share of the entity’s assets, liabilities, revenue and expenses from the date that control commences until the date that control ceases.
iv) Transactions eliminated on consolidation
Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(b) Inventories Inventories consist primarily of finished goods and are stated at the lower of cost and net realizable value. Cost includes the cost of materials plus direct labour applied to the product and the applicable share of manufacturing overheads, administration and depreciation, determined on a first-in, first-out basis. Net realizable value is estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses.
(c) Property, plant and equipment
Property, plant and equipment is measured at cost, less government assistance received, accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use and location, and borrowing costs. Additions are depreciated commencing in the month that they are available for use. Vessel refits are capitalized when incurred and amortized over the period between scheduled refits. Construction in progress assets are capitalized during the construction period and depreciation commences when the asset is available for use. Depreciation is provided on a straight line basis to depreciate the cost of each of the components of an item of property, plant and equipment over their estimated useful lives. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Estimated useful lives are the following:
The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to Clearwater and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognized in profit or loss as incurred. Gains and losses on disposal of an item of property, plant and equipment are determined as the difference between the proceeds from disposal and the carrying amount of property, plant and equipment, and are recognized net within other income in profit or loss. Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted prospectively if appropriate.
Asset Component Rate
Buildings and wharves 10 to 40 yearsPlant equipment 3 to 20 yearsVessels 15 to 30 yearsVessel equipment 1 to 7 years
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(d) Intangible assets
i) Goodwill Goodwill is the residual amount that results when the purchase of a business exceeds the sum of the amounts allocated to the net assets acquired based on their fair values. Goodwill is allocated to Clearwater’s cash generating units that are expected to benefit from the acquisition synergies. Goodwill is measured at cost less impairment losses.
ii) Licenses and fishing rights
Licenses represent intangible assets acquired directly or in a business combination that meet the specified criteria for recognition apart from goodwill and are recorded at their fair value at the date of acquisition and are subsequently carried at cost. Licenses that have indefinite lives are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Fishing rights arise from contractual rights to fish quotas, have definite lives and are amortized over the term of the related operating agreement.
(e) Revenue recognition
Clearwater sells seafood in a fresh or frozen state to customers. These sales are evidenced by purchase orders/invoices, which set out the terms of the sale, including pricing and shipping terms. Revenue is recognized when persuasive evidence exists that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of the goods can be estimated reliably, there is no continuing managerial involvement with the goods, and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable, net of returns and discounts.
(f) Government assistance
Government assistance received by Clearwater relates to items of property, plant and equipment. Government assistance is deducted from the carrying amount of the related asset and amortized over the same estimated useful life of the particular asset to which it relates. Clearwater does not have any government assistance that could potentially be required to be repaid, nor are there any forgivable loans.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(g) Financial instruments
Clearwater has the following non-derivative and derivative financial assets and liabilities that are classified into the following categories:
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognized at their fair values plus any attributable transaction costs, and are subsequently measured at amortized cost using the effective interest rate method, with gains and losses recognized in profit or loss in the period in which they arise. Non-derivative liabilities Non-derivative liabilities are debt securities and subordinated liabilities that are initially measured at fair value plus attributable transaction costs, and subsequently measured at amortized cost, with gains and losses recognized in profit or loss in the period in which they arise. Compound instruments Clearwater has compound financial instruments in the form of convertible debentures. At the time of the Conversion, as described in note 2(a), the convertible debentures were amended to provide the conversion of the debentures into common shares of Clearwater rather than Trust Units. This was not determined to be a substantial modification of the instrument. Following the Conversion, the convertible debentures were determined to be a compound financial instrument with the conversion option recorded in equity. The debt component of the convertible debenture continues to be recorded at fair value through profit or loss following the Conversion as the original instrument was accounted for in its entirety at fair value with the changes being recorded in the consolidated statements of earnings and comprehensive income.
Financial instrument Category Measurement MethodCash Loans and receivablesTrade and other receivables Loans and receivablesLong term accounts receivable Loans and receivablesTrade and other payables Non-derivative financial liabilitiesLong-term debt Non-derivative financial liabilities
Convertible debentures Derivative financial instrumentsForward foreign exchange contracts Derivative financial instrumentsEmbedded derivative Derivative financial instrumentsInterest rate swaps Derivative financial instruments
Initial: Fair valueSubsequent: Amortized cost through profit or loss
Fair value through profit or loss
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
Derivative financial instruments Clearwater enters into a variety of derivative financial instruments to manage its exposure to foreign exchange and interest rate risks, including foreign exchange forward contracts, interest rate swaps and floors. Embedded derivatives are contained in non-derivative host contracts and are treated as separate derivatives when they meet the definition of a derivative, and their risks and characteristics are not closely related to those of the host contracts. Derivative financial instruments are recorded at fair value with mark to market adjustments recorded in profit or loss.
(h) Impairment
i) Financial assets
Financial assets are assessed at each reporting date to determine whether there is objective evidence that of impairment. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to Clearwater on terms that Clearwater would not consider otherwise or indications that a debtor will enter bankruptcy. Clearwater considers evidence of impairment for receivables on a customer specific basis. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.
ii) Non-financial assets
Clearwater reviews non-financial assets each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. In addition, for goodwill and intangible assets that have indefinite useful lives an annual impairment test is performed. .
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generate cash inflows from continuing use that
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit” or “CGU”). Goodwill and the intangible assets acquired in a business combination are allocated to the CGU, or the group of CGUs, that are expected to benefit from the synergies of the combination. This allocation is subject to an operating segment ceiling test and reflects the lowest level at which that asset is monitored for internal reporting purposes. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGUs, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates and assumptions used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
(i) Translation of foreign currency
i) Foreign currency transactions
Transactions in foreign currencies are translated to an entity’s functional currency at the exchange rate at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the entity’s functional currency at the exchange rate at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
ii) Foreign operations
The assets and liabilities of foreign operations, including goodwill, other intangible assets and fair value adjustments arising on acquisition, are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at average exchange rates. Foreign currency differences are recognized in other comprehensive income in the cumulative translation account. When a foreign operation is disposed of, all relevant amounts in the cumulative translation account are transferred to profit or loss as part of the profit or loss on disposal. On the partial disposal of a subsidiary that does not result in loss of control the relevant proportion of such cumulative translation account is reattributed to non-controlling interest and not recognized in profit or loss.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(j) Income taxes
Prior to the Conversion (as described in Note 2(a)) the portion of Clearwater’s income earned through a partnership was not subject to tax. As a corporation, all of Clearwater’s income is subject to tax. Income tax expense is comprised of current and deferred income tax. Current tax and deferred income tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustments to tax payable in respect of previous years. Taxable earnings differs from earnings as reported in the consolidated income statement because of items of income or expense that are taxable or deductible in years other than the current reporting period or items that are never taxable or deductible. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses, and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
(k) Borrowing costs
Clearwater capitalizes borrowing costs attributable to the acquisition, or construction of its qualifying assets, which are assets that necessarily take a substantial period of time to ready for their intended use, as they are being constructed. Other borrowing costs are recognized as an expense of the period in which they are incurred.
(l) Finance costs
Finance costs comprise interest expense on borrowings, changes in the fair value of financial assets and liabilities at fair value through profit or loss, impairment losses recognized on derivative financial assets and liabilities, gains and losses on financial instruments that are
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
recognized in profit or loss. Borrowing costs determined to be period costs, or the amortization of such costs are recorded through profit or loss. Foreign currency gains and losses are reported on a net basis.
(m) Share-based compensation
Clearwater has a phantom share plan that provides for the granting of share appreciation rights (“SARs”). SARs provide the holder a cash payment equal to the fair market value of Clearwater’s shares less the grant price. SARs vest over a three year period and have no expiry. During 2012 Clearwater implemented deferred share unit plans (“DSU”) and a performance share unit plan (“PSU”). The DSU plans provide the holder a cash payment equal to the fair market value of Clearwater’s shares on the date of settlement. For the retirement DSU plan the awards vest once the holder reaches the age of 65 with continued employment by Clearwater, or death. For the director DSU plan the awards vest immediately. The PSU plan provides the holder with the opportunity to receive a cash payment based upon the relative performance of Clearwater shares to its pre-defined peer group. Performance is measured by comparing the relative total shareholder return. The PSU’s vest over a three year performance period at the end of which there is a cash settlement based on the relative performance of Clearwater’s shares to the peer group. The cash settled plans are recorded as liabilities at fair market value at each reporting period with changes in fair value recorded to profit and loss. The fair value of the SAR and DSU plans are calculated using a black-scholes valuation model and the PSU plan a Monte Carlo simulation model to estimate performance. Compensation expense is recognized based on the fair value of the awards that are expected to vest and remain outstanding at the end of the reporting period. The share-based compensation liability is included in trade and other payables in the consolidated statement of financial position and the related compensation expense in administrative expense in the statement of earnings.
(n) Earnings per share
Basic earnings per share is calculated by dividing earnings for the year attributable to the shareholders of Clearwater by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing earnings for the year attributable to the shareholders of Clearwater by the weighted average number of common shares outstanding and the voting rights attributable to the outstanding convertible debentures during the year. The calculation of the potential dilutive common shares assumes the exercise of all convertible debentures outstanding.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(o) New accounting standards and interpretations
The IASB and International Financial Reporting Interpretations Committee (IFRIC) have issued the following standards that have not been applied in preparing these consolidated financial statements as their effective dates fall within annual periods beginning subsequent to the current reporting period.
Effective date (i) Proposed standards Description Previous standard2013January 1, 2013 IFRS 11 – Joint Arrangements Focuses on the rights and obligations of an
arrangement rather than its legal form andrequires a single method to account for interestsin jointly controlled entities.
IAS 31 – Interests inJoint Ventures
January 1, 2013 IFRS 12 – Disclosure ofInterests in Other Entities
A new standard detailing disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates, and/or unconsolidated structured entities.
Various - no direct replacement
January 1, 2013 IFRS 10 - Consolidated Financial Statements
Builds on the existing principles of control andelaborates on the definition of control whendetermining whether an entity should beconsolidated or not.
IAS 27 – Consolidatedand Separate FinancialStatements
January 1, 2013 IFRS 13 – Fair ValueMeasurement
Sets out a single source of guidance for fair value measurements and disclosure requirements surrounding the inputs and assumptions used in determining fair value.
Various - no direct replacement
January 1, 2013 Amendments to IFRS 7 – Offsetting Financial Assets and Financial Liabilities and related disclosures
IFRS 7 - Requires entities to disclose information about rights of offset and related arrangements.
Various - no direct replacement
January 1, 2013 Annual improvement to IFRS - Issued in May 2012
IAS 16 - Property, Plant and Equipment - Clarifies that spare parts, stand-by equipment and servicing equipment should be classified as property, plant and equipment when they meet the definition of property, plant and equipment.
IAS 32 - Clarifies that income tax relating to distributions to holders of equity instruments and transaction costs of an equity transaction should be accounted for in accordance with IAS 12 Income Taxes.
Various - no direct replacement
2014January 1, 2014 Amendments to IAS 32 –
Offsetting Financial Assets and Financial Liabilities and related disclosures
IAS 32 - Clarifies existing application issues relating to the offset of financial assets and financial liabilities requirements.
Various - no direct replacement
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
IFRS 11 Joint Arrangements Clearwater anticipates that the application of IFRS 11 - Joint Arrangements will have an impact on amounts reported in respect of the assets, liabilities and presentation of earnings. The application of this Standard will change the classification and subsequent accounting for Clearwater’s investment in an entity proportionately consolidated which is classified as a jointly controlled entity under IAS 31. Under IFRS 11 the entity will be classified as a joint venture and accounted for using the equity method resulting in the aggregation of Clearwater’s proportionate share of the entity’s net assets and items of profit or loss into single line items which will be presented in the consolidated statement of financial position and in the consolidated statement of earnings, respectively. Impact of application of IFRS 11 on Consolidated Statement of Financial Position
Impact of application of IFRS 11 on Consolidated Statement of Earnings
The impact of the application of IFRS 11 on the consolidated statement of earnings for the jointly controlled entity is the aggregation of Clearwater’s share of earnings into a single line item that will be included in other income. For December 31, 2012 the reclassified amount is $1.0 million.
Effective date (i) Proposed standards Description Previous standard2015January 1, 2015 IFRS 9 – Financial Instruments Initially issued in November 2009 to address the
classification and measurement of financialassets. Additional guidance issued in October2010 on the classification and measurement offinancial liabilities.
IAS 39 – FinancialInstruments: Recognitionand Measurement
(i) Effective for annual periods on or after the stated date
Consolidated Statement of financial
position
Carrying values of entity
proptionately consolidated
Presentation of proptionately
consolidated entity using equity method
as of January 1, 2013
Consolidated Statement of
financial positionTransitioned to
IFRS 11ASSETS
Current assets 148,758 (1,146) - 147,612 Non-current assets 263,392 (4,102) 3,868 263,158
TOTAL ASSETS 412,150$ (5,248) 3,868 410,770$
LIABILITIES
Current liabilities 64,169 (148) - 64,021 Non-current liabilities 241,460 (1,232) - 240,228
SHAREHOLDERS' EQUITY 75,617 - - 75,617 Non-controlling interest 30,904 30,904
106,521 - - 106,521
412,150$ (1,380) - 410,770$
In 000's of Canadian dollarsYear ended December 31, 2012
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
For the IFRS standards effective for annual periods beginning on or after January 1, 2013 management has evaluated the potential qualitative and quantitative impact of these new standards on Clearwater’s financial statement measurements and disclosures and does not anticipate that the application of these new Standards will affect amounts reported in the financial statements beyond more extensive note disclosures.
For the IFRS standards effective for annual periods beginning after 2013 management continues to evaluate the potential qualitative and quantitative impact of these new standards on Clearwater’s financial statement measurements and disclosure. Management does not anticipate early adopting these standards at this time.
4. ACQUISITION OF SUBSIDAIRY AND NON-CONTROLLING INTERESTS
Business combination Effective January 1, 2011 Clearwater obtained control of a joint venture, Clearwater Ocean Prawns Venture, that operates its frozen-at-sea shrimp and turbot harvesting operations in which it has a 53.66% interest. Clearwater obtained control as a result of changes in the partnership agreement that provide Clearwater the power to govern the financial and operating policies of the entity. As a result, Clearwater accounted for this transaction as an acquisition by contract alone and effective January 1, 2011 began to fully consolidate the results. For the year ending December 31, 2011 consolidating this business increased revenue by $28.1 million and net earnings by $4.9 million.
The receivables comprise gross contractual amounts of $6.7 million and no amounts were determined to be uncollectible subsequent to the acquisition date. No cash consideration was transferred as part of this transaction. The carrying value of Clearwater’s previous net investment in this operation was $22.9 million.
Identifiable assets acquired and liabilities assumed(in thousands of dollars)Cash 5,710$ Receivables 6,749Inventories 4,966Prepaids 1,466Property, plant and equipment 31,512Fishing rights 24,094Trade payables (4,356)Long-term debt (5,843)Non-controlling interest in net assets (29,600)Total identifiable assets 34,698$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
The difference between the carrying value of Clearwater’s net investment and the fair value of the net assets assumed, being $11.6 million, was recorded as a gain on change in control of joint venture. Non-controlling interest has been measured at its proportionate share of the fair value of the net assets acquired. Fair value for the fishing rights was measured through a value in use approach by determining discounted future cash flows generated from the earnings from operations of the related fishing rights. The cash flows from operations were based on a combination of past experience for royalty fees and discount rates of 7.25% representing the weighted average cost of capital. Fair values for all other assets were based upon carrying values.
5. EMPLOYEE COMPENSATION Employee compensation is classified in the consolidated statement of earnings based on the related nature of the service performed. The following table reconciles Clearwater's compensation expense items to where the amounts are presented on the consolidated statement of earnings:
6. TRADE AND OTHER RECEIVABLES
Included in other receivables is $5.5 million of input tax receivables and $2.3 million of other receivables
Year ended December 31 2012 2011Salaries and benefits 88,063$ 93,700$ Share-based compensation 2,331 904
90,394$ 94,604$
Cost of goods sold 64,360$ 69,902$ Administrative and selling 26,034 24,702
90,394$ 94,604$
December 31 December 312012 2011
Trade receivables 35,453$ 32,480$
Other receivables 7,751 9,239 43,204$ 41,719$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
7. INVENTORIES
In 2012 inventory costs of $257.5 million (2011 - $243.1 million) were recognized in cost of goods sold. Clearwater incurred $0.7 million (2011 - $1.7 million) in inventory write-downs included in cost of goods sold. Refer to note 13 for assets pledged as security for long term debt.
8. PREPAIDS AND OTHER
9. LONG TERM RECEIVABLES
Notes receivable and advances to non-controlling interest consists of funds that are advanced to a shareholder in an incorporated subsidiary. The advances are unsecured and have a value of $3.0 million at December 31, 2012 (2011 - $4.8 million). The notes bear interest at 10% - 12% (2011 – 12%) and are secured by shares held by the non-controlling interest in an incorporated subsidiary. The notes had a value of $4.6 million at December 31, 2012 (2011 – $3.5 million) and have no set terms of repayment.
Advances to fishermen are payable from proceeds of the related catches. Certain of the advances bear interest at prime plus 2% - 3% (2011- 3%), are due on demand, and are secured by an assignment of catch, a marine mortgage on the related vessels, equipment and licenses. They are presented as non-current as the entire balances are not expected to be repaid in the current year and it is not Clearwater’s intention to demand payment unless the terms of the advance agreements are not met.
December 31 December 312012 2011
Goods for resale 41,960$ 53,189$
Supplies and other 9,949 8,566
51,909$ 61,755$
December 31 December 312012 2011
Prepaids 6,133$ 4,438$ Due from related parties (Note 21(c)) 1,596 2,111 Restricted funds on deposit - 5,000
7,729$ 11,549$
December 31 December 31
2012 2011Notes receivable from non-controlling interest holder in subsidiary $ 4,630 $ 3,514 Advances to non-controlling interest holder in subsidiary 3,022 4,802 Advances to fishermen 2,995 1,977
$ 10,647 $ 10,293
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
10. OTHER ASSETS
December 31 December 312012 2011
Income taxes receivable 847$ $ - Other 398 525 Deferred transaction costs on revolving debt - 1,448 Restricted funds on deposit - 93
$ 1,245 $ 2,066
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
11. PROPERTY, PLANT AND EQUIPMENT (“PPE”)
Total depreciation and amortization expense related to property, plant and equipment and definite-life intangible assets for 2012 was $22.5 million (2011 - $20.6 million). In 2012 $21.8 million (2011 - $20.1 million) of depreciation and amortization expense for assets used in the harvesting and production of goods was classified as cost of goods sold and $0.7 million (2011 – $0.5 million) was recorded in administrative and selling for assets used in administrative activities. Refer to note 13 for assets pledged as security for long term debt.
Building and Construction Total Deferred Gov't Total Land wharves Equipment Vessels in progress PPE Assistance
Cost Balance at January 1, 2012 $ 2,803 $ 63,698 $ 75,238 $ 203,858 $ 4,129 $ 349,726 $ (9,667) $340,059
Additions 20 94 776 1,366 14,318 16,574 - $ 16,574
Disposals - - (439) (6,948) (20) (7,407) - $ (7,407)
Reclassifications and replacement assets - 2,389 2,406 9,457 (12,391) 1,861 - $ 1,861
Effect of movements in exchange rates (2) (7) (32) (453) (205) (699) - $ (699)
Balance at December 31, 2012 $ 2,821 $ 66,174 $ 77,949 $ 207,280 $ 5,831 $ 360,055 $ (9,667) $350,388
Depreciation and impairment lossesBalance at January 1, 2012 $ 987 $ 47,897 $ 67,956 $ 100,728 $ - $ 217,568 $ (6,882) $210,686
Depreciation for the year 11 1,547 1,863 17,631 - 21,052 (406) 20,646
Disposals - - (439) (6,948) - (7,387) - (7,387)
Other adjustments - - - - - - - -
Effect of movements in exchange rates - (3) (7) (254) - (264) - (264)
Balance at December 31, 2012 $ 998 $ 49,441 $ 69,373 $ 111,157 $ - $ 230,969 $ (7,288) $223,681
Carrying amounts
At January 1, 2012 $ 1,816 $ 15,801 $ 7,282 $ 103,130 $ 4,129 $ 132,158 $ (2,785) $129,373
At December 31, 2012 $ 1,823 $ 16,733 $ 8,576 $ 96,123 $ 5,831 $ 129,086 $ (2,379) $126,707
Building and Construction Total Deferred Gov't Total Land wharves Equipment Vessels in progress PPE Assistance
Cost
Balance at January 1, 2011 $ 2,870 $ 64,481 $ 74,261 $ 170,277 2,568$ $ 314,457 $ (9,667) $304,790
Additions - 334 1,385 17,675 1,843 21,237 - 21,237
Disposals - (847) (439) (6,861) - (8,147) - (8,147)
Change in control of a subsidary - - 305 23,443 - 23,748 - 23,748
Other adjustments (62) (254) (229) 473 - (72) - (72)
Effect of movements in exchange rates (5) (16) (45) (1,149) (282) (1,497) - (1,497)
Balance at December 31, 2011 $ 2,803 $ 63,698 $ 75,238 $ 203,858 $ 4,129 $ 349,726 $ (9,667) $340,059
Depreciation and impairment losses
Balance at January 1, 2011 $ 976 $ 46,818 $ 66,383 $ 83,336 $ - $ 197,513 $ (6,473) $191,040
Depreciation for the year 11 1,558 1,785 15,803 - 19,157 (409) 18,748
Disposals - (621) (405) (6,861) - (7,887) - (7,887)
Change in control of a subsidary - - 184 8,961 - 9,145 - 9,145
Other adjustments - 148 26 277 - 451 - 451
Effect of movements in exchange rates - (6) (17) (788) - (811) - (811)
Balance at December 31, 2011 $ 987 $ 47,897 $ 67,956 $ 100,728 $ - $ 217,568 $ (6,882) $210,686
Carrying amounts At January 1, 2011 $ 1,894 $ 17,663 $ 7,878 $ 86,941 $ 2,568 $ 116,944 $ (3,194) $113,750
At December 31, 2011 $ 1,816 $ 15,801 $ 7,282 $ 103,130 $ 4,129 $ 132,158 $ (2,785) $129,373
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
12. INTANGIBLE ASSETS AND GOODWILL
Clearwater maintains fishing licenses and rights to ensure continued access to the underlying resource. Except for fishing rights, licenses have an indefinite life as they have nominal annual renewal fees, which are expensed as incurred, and the underlying species are healthy. The licenses and goodwill are tested for impairment annually and when circumstances indicate the carrying value may be impaired. Indefinite life licenses and Goodwill Annual impairment testing for each cash generating unit (“CGU”) is performed using a value in use approach as of September 29, 2012. The recoverable amounts for all CGU’s were determined to be higher than their carrying amounts and no impairments were recorded during 2012 or 2011. The value in use approach was determined by discounting the future cash flows generated from the continuing earnings from operations for the applicable CGU. Unless otherwise indicated, the assumptions used in the value in use approach for 2012 were determined similarly to 2011.
Indefinite life Goodwill licenses Fishing rights Total
Cost
Balance at January 1, 2011 $ 7,043 $ 90,303 $ 7,285 104,631$ Change in ownership on change in control - - 16,809 16,809 Foreign currency exchange translation - (948) - (948)
Balance at December 31, 2011 7,043 89,355 24,094 120,492
Disposal - (910) - (910) Foreign currency exchange translation - (445) - (445) Balance at December 31, 2012 $ 7,043 $ 88,000 $ 24,094 $ 119,137
Accumulated amortization Balance at January 1, 2011 $ - $ - $ 2,459 2,459$ Amortization expense - - 1,802 1,802 Change in ownership on change in control - - (2,512) (2,512)
Balance at December 31, 2011 - - 1,749 1,749
Amortization expense - - 1,802 1,802 Balance at December 31, 2012 $ - $ - $ 3,551 $ 3,551
Carrying amounts As at December 31, 2011 $ 7,043 $ 89,355 $ 22,345 $ 118,743 As at December 31, 2012 $ 7,043 $ 88,000 $ 20,543 $ 115,586
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
The carrying value of the intangible assets and goodwill by CGU was as follows:
The discounted cash flows used in determining the recoverable amounts for the Scallops and other CGU’s were based on the following key assumptions:
i) Cash flows from operations were projected for a period of five years based on a combination of past experience, actual operating results and Board approved 2013 forecasted earnings. Terminal values and forecasts for future periods were extrapolated using inflation rates of 1.0% (2011: 1.0%). Gross margins for all future periods were determined using forecasted rates for 2013.
ii) Pre-tax discount rates ranging from 12% - 17% (2011: 11% - 17%) were applied in
determining the recoverable amount of the CGU’s. The discount rates were estimated based upon weighted average cost of capital, and associated risk for the CGU.
iii) Free cash flow adjustments for capital expenditures were based upon 2013 sustaining capital
expenditures, and required refits over the period of the fishing license. The values assigned to the key assumptions represent management’s assessment of future trends in the industry and the global market and are based on both internal and external sources. For 2012 the recoverable amount for the cooked and peeled CGU exceeds the carrying value by approximately $4.3 million. If expected annual cash flow used in the calculation of the discounted terminal amount declines by more than 28% the CGU’s recoverable amount will approximate the carrying value. Definite life fishing rights and licenses Amortization of licenses relates to fishing rights. Amortization is allocated to the cost of inventory and is recognized in cost of goods sold as inventory is sold.
In 2012 Clearwater disposed of non-core groundfish and snow crab fishing quotas with a net book value of $0.9 million for proceeds of $2.0 million resulting in a gain of $1.1 million. In 2011 Clearwater did not dispose of any fishing quotas. There were no additions to licenses during 2012 or 2011. Refer to note 13 for assets pledged as security for long term debt.
December 31, December 31,2012 2011
Scallops 61,824 62,219 33,219 34,179 95,043 96,398
All other CGU's individually without significant carrying value
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
13. LONG-TERM DEBT
(a) The revolving loan is limited to 90% of eligible receivables and up to 75% of eligible inventory
to a maximum of $65.0 million, denominated in both CDN of $ nil million at December 31, 2012 ($2.9 million CDN at December 31, 2011) and USD of $ nil million at December 31, 2012 ($14.4 million USD at December 31, 2011) and maturing in June 2017. The CDN balances bear interest at the banker’s acceptance rate plus 2.5%. The USD balances bear interest at the US Libor rate plus 2.5%. As of December 31, 2012 this results in effective rates of 4.5% for CDN balances and 4.7% for USD balances. The loan is secured by a first charge on accounts receivable, cash and cash equivalents subject to certain limitations, and inventory as well as a second charge on marine vessels, licenses and quotas and Clearwater’s investments in certain subsidiaries. The full amount of this loan would be included in the current portion of long-term debt as it would be typically drawn using short-term instruments that mature within 1-3 months. The loan has an accordion provision that, subject to certain conditions, allows Clearwater to expand the facility by a maximum of CDN $20.0 million.
(b) Term loans consist of a CDN $75.0 million Term Loan A facility and a USD $134.0 million
Term Loan B facility.
Term Loan A - The principal outstanding on December 31, 2012 is CDN $74.1 million. The balance is shown net of deferred financing charges of CDN $1.8 million. The loan is repayable in quarterly installments of $0.5 million to June 2015, $1.4 million from September 2015 to June
December 31, December 31,2012 2011
Revolving loan, due in 2017 (a) $ - $ 17,513
Term loans (b)
Term loan A, due 2017 72,259 -
Term loan B, due 2018 125,781 -
Term loan B, embedded derivative 4,205 -
Senior first lien loan - repaid in June 2012 - 77,250
Senior second lien loan - repaid in June 2012 - 43,822
2013 Convertible Debentures (c) - 43,573
2014 Convertible Debentures (c) 44,722 41,632
Marine mortgage, due in 2017 (d) 2,697 4,470
Term loan, due in 2091 (e) 3,500 3,500
Glitnir payable (f) - 14,500
Other loans 627 840 253,791 247,100
Less: current portion (15,527) (42,766) $ 238,264 $ 204,334
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
2016 and $2.3 million from September 2016 to March 2017 with the balance of $52.7 million due at maturity in June 2017. Bears interest payable monthly at an annual rate of banker’s acceptance plus 4.5%. As of December 31, 2012 this resulted in an effective rate of 5.8%. The loan is secured by a second charge on accounts receivable, cash and cash equivalents subject to certain limitations, and inventory as well as a first charge on marine vessels, licenses and quotas and Clearwater’s investments in certain subsidiaries. The loan has an accordion provision that subject to certain conditions allows Clearwater to expand the facility by a maximum of CDN $25.0 million. As required by the Term Loan A agreement Clearwater entered into an interest rate swap to effectively swap the variable interest rate for a fixed rate for 40% or $30 million of the outstanding Term Loan A debt facility. This interest rate swap effectively locks in the interest rate on $30 million of the Term Loan A facility at an effective interest rate of 6.29%. As principal balances for the Term Loan A decline due to scheduled repayments, the balance of the swap will also decline proportionately. Term loan B - The principal outstanding on December 31, 2012 is USD $133.3 million. The balance is shown net of deferred financing charges of USD $2.6 million. The loan is repayable in quarterly installments of USD $0.3 million with the balance of USD $119.0 million due at maturity in June 2018. Bears interest payable monthly at an annual rate of US Libor plus 5.5% with a Libor interest rate floor of 1.2%. As of December 31, 2012 this resulted in an effective rate of 6.75%. The loan is secured by a second charge on accounts receivable, cash and cash equivalents subject to certain limitations, and inventory as well as a first charge on marine vessels, licenses and quotas and Clearwater’s investments in certain subsidiaries. The loan has an accordion provision that, subject to certain conditions allows Clearwater to expand the facility by a maximum of USD $50.0 million. The embedded derivative represents the fair market value of the Libor interest rate floor of 1.2%. The change in fair market value of the embedded derivative is recorded through profit or loss. In addition to the minimum principal payments for Term Loan A and B, the loan agreement requires between 25% and 50% of excess cash flow (as defined in the loan agreement) to be repaid based on the previous fiscal year’s results upon approval of the annual financial statements. Payments are allocated on a pro rata basis. Based on the terms of the agreement, in 2013, Clearwater is required to repay approximately $11.3 million of its principal outstanding balance.
(c) The 2014 Convertible debentures accrue interest at 7.25%, mature in March 2014 and are
convertible at a price of $5.90 per share at the option of the holder. They are redeemable by Clearwater at face value plus accrued interest. The debt component of the debentures is recorded at estimated fair value through profit or loss, the equity component is recorded in share capital. The principal amount outstanding as of December 31, 2012 was $44.4 million (December 31, 2011 - $44.4 million).
To redeem the debentures, in whole or in part, Clearwater must issue a notice of the redemption not more than 60 days and not less than 30 days prior to the date of redemption. Any debenture holder that wishes to convert the debentures held, rather than to have them redeemed, must complete and deliver a Notice of Conversion prior to the redemption date.
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
The convertible debentures are unsecured and subordinated. The 2014 debentures pay interest semi-annually in arrears on March 31 and September 30. Subject to regulatory approval, Clearwater may satisfy its obligation to repay the principal amount of the debentures on redemption or at maturity, in whole or in part, by delivering that number of shares equal to the amount due divided by 95.0% of the market price of the shares at that time, plus accrued interest in cash.
The 2013 Convertible debentures accrued interest at 10.5% and were convertible at a price of $3.25 per share at the option of the holder. The debentures paid interest semi annually in arrears on June 30 and December 31. The outstanding principal balance of $43.4 million for the debentures was redeemed on July 10, 2012.
(d) Marine mortgage - The mortgage is payable in the principal amount of:
The mortgage bears interest at UNIBOR plus 1% payable semi-annually. Principal payments are required annually as follows:
The loan matures in 2017 and is secured by a first mortgage over the related vessel.
(e) Term loan, payable in 2091. In connection with this loan, Clearwater makes a royalty payment
of $0.3 million per annum in lieu of interest. This equates to an effective interest rate of approximately 8.0%. This loan is measured at amortized cost.
(f) Glitnir payable. On February 28, 2012 Clearwater reported that it had reached an agreement with Glitnir. The agreement reached with Glitnir provided for the settlement and release of all outstanding claims for CSLP, the Fund and its successor, Clearwater, and Glitnir in exchange for an immediate cash payment by Clearwater of $14.5 million.
The Icelandic Financial Services Authority took control of Glitnir and subsequently placed it into receivership on October 7, 2008. Prior to Glitnir’s receivership, CSLP had derivative contracts with Glitnir including foreign exchange contracts and cross currency and interest rate swaps. During the course of refinancing debt facilities in June 2009, CSLP and Glitnir reached an agreement whereby all outstanding foreign exchange contracts were closed and the potential liability under those contracts was capped at $14.0 million plus interest.
December 31, December 31,2012 2011
YEN 128,991 158,758 DKK 6,044 8,131 CDN 154 929
2013 2014 2015 2016 2017YEN 29,767 29,767 29,767 29,767 9,922 DKK 2,087 2,087 1,870 - - CDN 154 - - - -
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
14. FINANCIAL INSTRUMENTS Summary of derivative financial instrument position
(a) At December 31, 2012 Clearwater had outstanding forward contracts as follows:
At December 31, 2011, Clearwater had outstanding forward contracts as follows:
December 31 December 312012 2011
Derivative financial assets
Forward foreign exchange contracts $ 4,185 $ 1,075
Derivative financial liabilities Forward foreign exchange contracts (3,439) (1,097) Interest rate swap contracts (200) -
$ (3,639) $ (1,097)
Currency Notional Amount (in 000's)
Average Contract
Exchange Amount Maturity
Fair Value Asset
(Liability)
Yen 2,705,000 0.013 2013 4,185$
USD 82,500 0.988 2013 $ (640)Euro 56,100 1.270 2013 (2,799)
$ (3,439)
Currency Notional Amount (in 000's)
Average Contract
Exchange Amount Maturity
Fair Value Asset
(Liability)
Euro 15,200 1.394 2012 $ 1,075
Yen 1,095,000 0.012 2012 $ (1,097)
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(b) At December 31, 2012 Clearwater had an interest rate swap contract outstanding as follows:
The interest rate swap declines proportionately with scheduled principal repayments of Term Loan A (Note 13 (b)). The outstanding balance of the swap is due upon maturity in May 2017.
(c) Foreign exchange and derivative contract gains and losses:
(d) Credit risk: Credit risk refers to the risk of losses due to failure of Clearwater’s customers or other counterparties to meet their contractual obligations. Clearwater is exposed to credit risk in the event of non-performance by counter parties to its derivative financial instruments but does not anticipate non-performance of any of the counter parties as Clearwater only deals with highly rated financial institutions. Clearwater has significant accounts receivable from customers operating in Canada, United States, Europe and Asia. Significant portions of Clearwater’s customers from a sales dollar perspective have been transacting with Clearwater in excess of five years and bad debt losses have been minimal. Clearwater has a policy of utilizing a combination of credit reporting agencies, credit insurance, letters of credit and secured forms of payment to mitigate customer specific credit risk and country specific credit risk. As a result Clearwater does not have any significant concentration of credit risk. As at December 31, 2012, Clearwater’s trade accounts receivable aging based on the invoice due date is as follows: 99.0% 0-30 days, 0.2% 31-60 days, and 0.8% over 60 days. As at December
Average contracted
fixed interest rate
Notional Amount (in
000's)
Fair Value Asset
(Liability)
Term Loan A - Interest rate swap 6.29% 30,000 $ (200)
Year ended December 31 2012 2011
Realized loss (income)Foreign exchange contracts (3,991)$ 2,578$ Realized gain on interest and currency swaps - 1,048 Working capital 1,359 2,712
(2,632) 6,338 Unrealized (gain) loss
Foreign exchange on long term debt and other assets (3,013) 932 Mark-to-market on foreign exchange contracts (663) (287) Mark-to-market on interest rate swap 200 -
(3,476) 645
(Note 16) (6,108)$ 6,983$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
31, 2011, Clearwater’s trade accounts receivable aging based on the invoice due date is as follows: 98.2% 0-30 days, 0.5% 31-60 days, and 1.3% over 60 days. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts of $0.5 million (2011 - $0.8 million). Clearwater reviews accounts past due on a regular basis and provides an allowance on a specific account basis. Accounts are only written off completely when it becomes virtually certain that collection will not occur. Changes in the allowance for doubtful accounts are summarized in the table below:
(e) Foreign currency exchange rate risk Foreign exchange risk refers to the risk that the value of financial instruments or cash flows associated with the instruments will fluctuate due to changes in foreign exchange rates. Approximately 80% of Clearwater's sales are in currencies other than Canadian dollars, whereas the majority of expenses are in Canadian dollars. As a result fluctuations in foreign exchange rates may have a material impact on Clearwater's financial results. Risks associated with foreign exchange are partially mitigated by the fact that Clearwater operates internationally which reduces the impact of any country-specific economic risks on its business. The carrying amounts of Clearwater’s foreign currency denominated monetary assets and monetary liabilities (excluding derivative financial instruments) as at December 31, 2012 and December 31, 2011 was as follows (as converted to Canadian dollars):
December 31 2012 2011
Balance at January 1 838$ 521$
Allowance recognized 381 510 Amounts recovered (728) (133) Amounts written off as uncollectible (15) (79) Foreign exchange revaluation (10) (9) Foreign exchange translation (7) 28 Balance at December 31 459$ 838$
December 31 2012 2011
Cash $ 17,596 $ 9,780
Accounts receivable 30,770 28,831
Other accounts receivable 4,944 3,984
Property, plant and equipment 6,691 6,465
Long term accounts receivable 7,577 7,841
Accounts payable and accrued liabilities (19,421) (11,617)
Long-term debt (132,529) (56,898)
Net balance sheet exposure $ (84,372) $ (11,614)
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
The components of this net exposure by currency are as follows (in local currency ‘000’s) at December 31, 2012:
The components of this net exposure by currency are as follows (in local currency ‘000’s) at December 31, 2011:
The following table details Clearwater’s sensitivity to a 10% change in the exchange rates against the Canadian dollar. The sensitivity analysis includes outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The change below is calculated based on the net balance sheet exposure.
(f) Interest rate risk
Interest rate risk refers to the risk that the value of a financial instrument or cash flow associated with the instrument fluctuate due to changes in market interest rates. Clearwater’s interest rate risk arises from long term borrowings issued at fixed rates that create fair value interest rate risk and variable rate borrowings that create cash flow interest rate risk. Clearwater’s debt is carried
ArgentineDecember 31, 2012 GBP USD Yen Euros RMB DKK Peso
Cash 86 11,058 48,445 157 343 31,958 92
Accounts receivable 679 13,138 249,273 8,728 - 12,404 24
Other accounts receivable (76) 159 - 2,028 - 2,594 8,743
Property, plant and equipment 107 88 - - - - 31,786
Long term accounts receivable - 4,606 - - - - 14,798
Accounts payable and accrued liabilities (149) (3,549) (204) (1,132) - (2,245) (67,960)
Long-term debt - (130,652) (128,991) - - (6,044) - Net balance sheet exposure 647 (105,152) 168,523 9,781 343 38,667 (12,517)
ArgentineDecember 31, 2011 GBP USD Yen Euros RMB DKK Peso
Cash 168 5,973 233 168 458 17,630 48
Accounts receivable 1,236 13,171 206,566 7,604 312 3,479 20
Other accounts receivable (150) 159 - 2,330 - (52) 4,569
Property, plant and equipment 2 117 - - - - 29,525
Long term accounts receivable - 3,390 - - - - 20,453
Accounts payable and accrued liabilities (168) (1,717) (362) (748) - (3,267) (37,383)
Long-term debt - (52,465) (158,758) - - (8,131) - Net balance sheet exposure 1,088 (31,372) 47,679 9,354 770 9,659 17,232
2012 2011GBP 105 172 USD (10,462) (3,191) Yen 193 63 Euros 1,283 1,234 RMB 5 12 DKK 680 171 Argentine Peso (253) 370
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
at amortized cost with the exception of the convertible debentures. The convertible debentures are recorded at fair market value through profit and loss.
Clearwater manages its interest rate risk exposure by using a mix of fixed and variable rate debt. At December 31, 2012, excluding the interest rate swap approximately 19.0% (2011 – 58.9%) of the $253.8 million (2011 - $247.1 million) of Clearwater’s debt was fixed rate debt with a weighted average interest rate of 6.5% (2011 – 9.5%)
A 1% change in interest rates for variable rate borrowings would result in $2.0 million increase (or decrease) in interest expense. As required by the Term Loan A agreement Clearwater entered into an interest rate swap to effectively swap the variable interest rate for a fixed rate for 40% or $30 million of the outstanding Term Loan A debt facility. This interest rate swap effectively locks in the interest rate on $30 million of the Term Loan A facility at an effective interest rate of 6.29%. As principal balances for the Term Loan A decline due to scheduled repayments the balance of the swap will also decline proportionately.
The fair value of interest rate swap at the end of the reporting period is determined by discounting the future cash flows using the yield curves at the end of the reporting period.
(g) Liquidity risk
Liquidity risk is the risk that Clearwater will encounter difficulty in meeting obligations associated with financial liabilities. Clearwater manages liquidity risk by monitoring forecasted and actual cash flows, minimizing reliance on any single source of credit, maintaining sufficient undrawn committed credit facilities and matching the maturity profiles of financial assets and financial liabilities.
The following are the contractual maturities of non-derivative financial liabilities, derivative financial instruments, and operating lease commitments. The table includes undiscounted cash flows of financial liabilities, operating lease commitments, interest and principal cash flows based on the earliest date on which Clearwater is required to pay.
Included in the above commitments for operating leases are amounts that Clearwater is committed directly and indirectly through its joint venture for various licenses and lease
December 31, 2012Carrying Amount
Contractual Cash Flow 2013 2014 2015 2016 >2017
Interest - Long Term Debt 88,079 16,185 13,363 12,330 11,934 34,267 Principal repayments - Long-Term debt 258,209 15,527 48,728 5,817 9,230 178,907 Total Long-Term debt 253,791 346,288 31,712 62,091 18,147 21,164 213,174
Trade and Other Payables 44,633 44,633 44,633 - - - -
Operating Leases - 18,199 3,612 3,131 1,843 1,432 8,181
Derivative financial instruments - asset (4,185) (4,185) (4,185) - - - -
Derivative financial instruments - liability 3,639 3,639 3,639 - - - -
297,878$ 408,574$ 79,411$ 65,222$ 19,990$ 22,596$ 221,355$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
agreements, office, machinery and vehicle leases. These commitments require approximate minimum annual payments in each of the next five years as shown above. Also included in commitments for operating leases are amounts to be paid to a company controlled by a director of Clearwater over a period of years ending in 2013 for vehicle leases, which aggregate approximately $0.04 million (2011 - $0.2 million).
(h) Fair Value Hierarchy Assets and liabilities carried at fair value must be classified using a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. The different levels are defined as follows:
Level 1: Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3: Fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs)
The table below sets out fair value measurements of financial instruments using the fair value hierarchy:
There were no transfers between levels during the years ended December 31, 2012 and 2011.
December 31, 2012 Level 1 Level 2 Level 3Financial Assets:Derivative financial instruments - 4,185 -
-$ 4,185$ -$
Financial Liabilities:Derivative financial instruments - 3,439 - Convertible debentures 44,722 - - Embedded derivative - 4,205 - Interest rate swap - 200 -
44,722$ 7,844$ -$
December 31, 2011 Level 1 Level 2 Level 3Financial Assets:Derivative financial instruments - 1,075 -
-$ 1,075$ -$
Financial Liabilities:Derivative financial instruments - 1,097 - Convertible debentures 85,205 - -
85,205$ 1,097$ -$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
Fair value of financial instruments carried at amortized cost.
Except as detailed below Clearwater considers that the carrying amounts of financial assets and financial liabilities recognized in the consolidated financial statements materially approximate their fair values:
At December 31, 2012 the estimated fair value of Clearwater’s financial liabilities whose carrying value does not approximate fair value is $7.2 million and the carrying value is $6.6 million.
15. SHARE CAPITAL
Authorized: Clearwater is authorized to issue an unlimited number of common shares. Share capital movement:
The conversion option on the 2013 convertible debentures remained unexercised on redemption in July 2012 and the balance of $ 0.4 million was transferred from share capital to retained earnings. Included in share capital as at December 31, 2012 is $0.09 million related to the equity component of the 2014 convertible debentures
Share capital: # $ # $Balance at January 1 50,948,698 65,309 - - Shares issued pursuant to the conversion arrangement - - 50,947,160 64,780 Conversion option embedded in convertible debentures - - - 529 Issuance of shares on redemption of convertible debentures - - 1,538 - Redemption of 2013 convertible debentures - (442) - - Balance at December 31 50,948,698 64,867 50,948,698 65,309
December 31, 2012 December 31, 2011
Trust units and special trust units: # $Balance at January 1 51,126,912 162,517 Purchase of units for cancellation (179,752) (571) Trust units cancelled on conversion (50,947,160) (161,946) Balance at October 2 - -
December 31, 2011
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
16. FINANCE COSTS
17. OTHER INCOME
18. EARNINGS PER SHARE
The computations for earnings per share are as follows (in thousands except per share data):
The interest on the 2013 and 2014 convertible debentures results in anti-dilutive earnings per share for December 31, 2012 and 2011. As a result, for the year ended December 31, 2012, 7,523,559 options (2011- 20,882,942) were not included in the calculation of dilutive potential shares.
Year ended December 31 2012 2011
Interest expense on financial liabilities measured at amortized cost $ 20,347 $ 20,899
Amortization of deferred financing charges 1,158 3,112 21,505 24,011
Fair value adjustment on convertible debentures and embedded derivative 2,898 5,717
Foreign exchange and derivative contracts (Note 14(c)) (6,108) 6,983
Debt settlement and refinancing fees 6,093 1,893
Finance costs $ 24,388 $ 38,604
Year ended December 31 2012 2011
Royalties, interest, and other fees (1,443) (2,415)
Other fees (645) (1,749)
Insurance claims (324) (1,729)
Other income $ (2,412) $ (5,893)
2012 2011Basic
Earnings for the period 15,009$ 16,336$
Weighted average number of shares outstanding 50,948,698 51,064,503
Earnings per share 0.29$ 0.32$
Diluted
Earnings for the period 15,009$ 16,336$
Weighted average number of shares oustanding 50,948,698 51,064,503
Earnings per share 0.29$ 0.32$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
19. INCOME TAXES
The 2011 disclosures for income taxes are reflective of Clearwater after the conversion as described in Note 2(a).
(a) Reconciliation of current income tax
The effective rate on Clearwater's earnings before income taxes differs from the expected amount that would arise using the combined Canadian federal and provincial statutory income tax rates. The reduction in the 2012 combined rate is a result of a reduction in the federal statutory income tax rate. A reconciliation of the difference is as follows:
(b) Income tax expense The components of the income tax expense for the year are as follows:
Year ended December 31 2012 % 2011 %Earnings before income taxes 17,685 26,818Combined tax rates 30.5% 32.0%Income tax provision at statutory rates 5,394 31% 8,582 32.0%
Add (deduct): Income of Partnership distributed directly to partners (2,085) -12% (1,642) -6% Permanent differences 766 4% 3,332 12% Recognition of previously unrecorded deferred tax assets (8,498) -48% (4,174) -16% Income of foreign subsidiary not subject to tax (1,779) -10% (3,302) -12% Other 1,183 7% 1,067 4%Actual provision (5,019) -28.4% 3,863 14.4%
Year ended December 31 2012 2011
Current 2,155$ 4,833$ Deferred recovery (7,174) (970)
(5,019)$ 3,863$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(c) Deferred tax assets and liabilities Breakdown of recognized temporary differences:
The net change in deferred income taxes is reflected in deferred income tax recovery of $7.2 million (2011 - $1.0 million) plus the foreign exchange effect of deferred taxes of foreign subsidiaries totaling $0.1 million (2011 - $0.2 million), the effect of which was recorded through foreign exchange. Recognized deferred tax assets During 2012 Clearwater recognized previously unrecognized deferred tax assets of $8.0 million relating to its loss carry-forward balances. These deferred tax assets are recognized based on Clearwater's estimate that it will earn sufficient taxable profits to utilize these losses.
December 31 December 312012 2011
Deferred income tax asset:
Loss carry-forwards and future deductible expenses of subsidiaries 9,207 1,594$
Deferred income tax liabilities:
Licenses 2,674 2,763
Property, plant and equipment 403 8
Other 119 121
3,196$ 2,892$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
Clearwater has the following temporary differences and unused tax losses:
(d) Losses and Investment Tax Credits
Clearwater, along with its subsidiary corporations have non-capital losses and investment tax credits available as follows:
The non-capital losses in Clearwater will expire from 2026 to 2032. The non-capital losses in the subsidiary corporations will expire from 2014 to 2032. The investment tax credits will expire from 2023 to 2032.
(e) Temporary differences associated with investments in subsidiaries
The aggregate temporary difference associated with investments in subsidiaries for which no deferred tax liabilities have been recorded is $ 68.0 million. It is not expected that the aggregate temporary difference will reverse in the foreseeable future.
December 31 December 312012 2011
Deductible temporary differencesNon-capital loss carryforwards 48,705$ 73,234$ Financing fees and long-term debt 7,223 3,436 Donations 961 505 Property, plant and equipment 802 5,637 Licences 75 5,380 Foreign exchange - 22
57,766 88,214 Taxable Temporary differences:
Refit Accrual (5,669) (6,377) Inventory (2,889) (2,516) Foreign exchange (547) -
(9,105) (8,893)
Net Deductible Temporary differences 48,661$ 79,321$
Clearwater Seafoods Inc
Subsidiary Corporations Total
Non-capital losses 67,190$ 7,777$ 74,967$ Investment tax credits 3,460 1,866 5,326
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
20. SEGMENTED INFORMATION Clearwater has one reportable segment which includes its’ integrated operations for harvesting, processing and distribution of seafood products. (a) Sales by Species
(b) Sales by Geographic Region
Year ended December 31 2012 2011
Scallops 109,899$ 115,843$
Coldwater shrimp 77,497 61,946
Clams 71,894 61,705
Lobster 61,458 64,073
Crab 15,628 13,831
Ground fish and other 14,071 15,387
350,447$ 332,785$
Year ended December 31 2012 2011 China 59,624$ 46,069$ Japan 46,366 42,649 Other 17,693 15,034 Asia 123,683 103,752
United States 54,157 55,457 Canada 47,553 44,332 North America 101,710 99,789
France 41,363 47,958 UK 16,631 17,751 Russia 11,759 14,067 Other 53,131 46,921 Europe 122,884 126,697
Other 2,170 2,547 350,447$ 332,785$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(c) Non-current Assets by Geographic Region
21. RELATED PARTY TRANSACTIONS
(a) Subsidiaries, partnerships, and joint venture Clearwater’s consolidated financial statements include the accounts of the Corporation and its subsidiaries, partnerships and joint ventures, as follows:
(b) Key management personnel Clearwater has defined key management personnel as senior executive officers, as well as the Board of Directors, as they have the collective authority and responsibility for planning, directing and controlling the activities of the Corporation. The following table outlines the total compensation expense for key management personnel for the years ended December 31, 2012 and 2011.
December 31, December 31,2012 2011
Property, plant and equipment, licences, fishing rights and goodwillCanada 229,150$ 234,805$ Argentina 12,886 13,190 Other 257 121
242,293$ 248,116$
Entity AccountsClearwater Seafoods Limited Partnership ConsolidatedClearwater Ocean Prawns Venture ConsolidatedSt. Anthony Seafoods Limited Partnership ConsolidatedAdams and Knickle Limited Proportionately consolidatedClearwater Seafoods Holdings Incorporated ConsolidatedClearwater Fine Foods Europe Limited ConsolidatedClearwater Fine Foods USA Incorporated ConsolidatedGlaciar Pesquera S.A. Consolidated
Year ended December 31 2012 2011
Wages and Salaries 3,023$ 2,771$
Share-based compensation 2,331 904
Bonuses 1,380 1,029
Other Benefits 371 587 7,105$ 5,291$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(c) Transactions with other related parties Clearwater rents office space to CFFI (the controlling shareholder of Clearwater) and provides computer network support services to CFFI. CFFI charges management fees to Clearwater for legal, finance, and administration services provided to Clearwater by certain CFFI staff. These fees apportion the salaries of the individuals providing the services based on estimated time spent. CFFI charges Clearwater for its use of CFFI aircraft at market rates per hour of use. Clearwater had the following transactions and balances with CFFI, for the year ended December 31, 2012 and December 31, 2011:
The amount due from CFFI is unsecured and has no set terms of repayment. CFFI has undertaken to pay the balance of the account in 2013 and the account has been classified as a current asset included in trade and other receivables. No interest was charged for the periods prior to December 31, 2011; however, beginning in January 2012 the intercompany loan account is bearing interest at a rate of 5%. No guarantee fees were charged by CFFI to Clearwater for periods prior to December 31, 2011; however, beginning in January 2012 fees amounting to 1% of the guarantees were being charged to Clearwater. With the debt refinancing on June 6, 2012 CFFI no longer provides a guarantee on the senior debt facilities for Clearwater. In addition Clearwater expensed approximately $0.11 million for vehicle leases in 2012 (2011 - $0.01 million) and approximately $0.17 million for other services in 2012 (2011 - $0.1 million) by a company related to its parent. The transactions are recorded at the exchange amount and the balance due to this company was $0.02 million in 2012 ($0.01 million - 2011) At December 31, 2012 Clearwater had a long-term receivable of $7.7 million (December 31, 2011 - $8.3 million), included in other receivables, for advances and loans made to a non-controlling interest shareholder in a subsidiary (refer to Note 9).
22. JOINT VENTURES
The financial statements include Clearwater’s proportionate share of the assets, liabilities, sales and expenses of a joint venture, the material elements of which are as follows:
December 31, December 31,2012 2011
Opening balance due from CFFI 2,111$ 1,778$ Management fees charged to Clearwater (198) (342) Rent and IT service fees charged to CFFI 184 184 Interest on intercompany account 103 - Guarantee fee (62) - Aircraft charges to Clearwater (38) (41) Payments from CFFI (925) - Advances to CFFI 166 953 Other charges to CFFI 255 74 Purchase of partner note receivable from CFFI - (495)
1,596$ 2,111$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
(a) Proportionate share of assets, liabilities, sales, expenses and earnings before taxes as at December 31:
(b) Transactions with joint venture partners as at December 31:
The following is a summary of the transactions included in the financial statements as at December 31:
The following is a summary of the cash flows from operating, financing and investing for the year ended December 31:
23. CAPITAL MANAGEMENT Clearwater’s objectives when managing capital are as follows:
Ensure liquidity Minimize cost of capital Support business functions and corporate strategy
Clearwater’s capital structure includes a combination of equity and various classes of long-term debt. Clearwater’s objective when managing its capital structure is to obtain the lowest cost of capital available, while maintaining flexibility and reducing exchange risk and refinancing risk as appropriate.
Year ended December 31 2012 2011
Current assets $ 1,146 2,073
Property, plant, equipment and other long-term assets 2,512 2,533
Current liabilities 113 367
Long-term liabilities 206 203
Sales 145 144
Commissions 2,155 2,777
Expenses (803) (890)
Earnings before taxes 1,497 2,031
Year ended December 31 2012 2011
Commissions paid to joint ventures $ 2,155 $ 2,777
Year ended December 31 2012 2011
Cash flow from operating activities $ 1,470 $ 1,333 Cash flow used in financing activities (1,750) (1,000)Cash flow used in investing activities (2) (29)
$ (282) $ 304
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
Clearwater uses leverage, in particular senior revolving and term debt, to lower its cost of capital. The amount of senior debt available to Clearwater is a function of earnings that can be impacted by known and unknown risks, uncertainties, and other factors outside Clearwater’s control including, but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs. Clearwater maintains flexibility in its capital structure by regularly reviewing forecasts of future results and making any required changes on a timely basis. These changes can include early repayment of debt, repurchasing shares, issuing new debt or equity, extending the term of existing debt, selling assets to repay debt and if required, limiting dividends paid. The capital structure is as follows:
In 000’s of Canadian dollarsAs at December 31 2012 2011
Equity
Common shares 64,867$ 65,309$ Retained earnings (deficit) 14,616 (835) Cumulative translation account (3,866) (3,122)
75,617 61,352 Non-controlling interest 30,904 32,700
106,521 94,052 Long term debt
Subordinated debt 2013 convertible debentures - 43,573 2014 convertible debentures 44,722 41,632
44,722 85,205
Senior debt, non-amortizing Term loan, due in 2091 3,500 3,500 Second lien loan - 43,822 Glitnir liability - 14,500
3,500 61,822
Senior debt, amortizing Term Loan A, due 2017 72,259 - Term Loan B, due 2018 129,986 - First lien loan - 77,250 Revolving debt, due in 2017 - 17,513 Marine mortgage, due in 2017 2,697 4,470 Other loans 627 840
205,569 100,073
Total long term debt 253,791 247,100
Total capital structure 360,312$ 341,152$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
24. SHARE-BASED COMPENSATION
Clearwater’s share-based compensation plans are detailed in Note 3(m).
The number of share-based awards outstanding and vested as of December 31, 2012 and December 31, 2011 were as follows:
There is no limit to the number of awards that can be issued as awards are expected to be cash settled. Fair value of share based plans Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.
Exercise price
Number outstanding
Number vested
GrantDate
0.01 255 255 May 2010
0.80 250 167 May 20101.00 200 133 May 2010
PSU 0.00 423 - May 2012
0.00 375 100 September 20120.00 26 26 June - December 2012
Total 1,529 681
SARS
DSU
As at December 31, 2012In thousands
Exercise price
Number outstanding
Number vested
Grant Date
0.01 255 255 May 20100.80 250 83 May 20101.00 200 67 May 2010
Total 705 405
As at December 31, 2011In thousands
SARS
SARS PSU DSUWeighted average fair value per option 3.68$ 5.22$ 4.00$ Weighted average risk-free interest rate 1.59% 0.37% - 2.65% 1.32% - 1.50%Weighted average expected volatility 69.99% 31.5% - 67.9% 50.79% - 83.70%Expected life of options (years) 0.5 2 4.3 - 6.8 Weighted average dividend yield Nil Nil NilWeighted average share price 4.00$ 5.22$ 4.00$ Weighted average exercise price 0.57$ -$ -$
2012
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
The following reconciles the share based awards outstanding at the beginning and end of the year:
Share-based compensation expense included in the income statement for the year ended December 31, 2012 is $2.3 million (December 31, 2011 - $0.9 million).
The liability for share based compensation is $3.6 million at December 31, 2012 (December 31, 2011 - $1.3 million). The vested portion of the liability for share based compensation is $2.5 million at December 31, 2012 (December 31, 2011 – $0.7 million)
25. ADDITIONAL CASH FLOW INFORMATION
SARS PSU DSUWeighted average fair value per option 2.12$ - - Weighted average risk-free interest rate 1.73% - - Weighted average expected volatility 64.98% - - Weighted average dividend yield Nil - - Weighted average share price 2.39$ - - Weighted average exercise price 0.57$ - -
2011
In thousands 2012 2011
Balance at January 1 705 705
Granted 824 -
Balance at December 31 1,529 705
Vested at January 1 405 255
Vested 276 150
Vested at December 31 681 405
December 31 December 31Changes in operating working capital 2012 2011Decreases (increases) in inventory 9,581 (11,936) Increases in accounts payable 4 6,690 Increases in accounts receivable (2,273) (1,515) (Increases) decreases in prepaids (1,695) 679 Increases (decreases) in income taxes payable 39 (14) Increase in deferred income taxes 67 -
5,723$ (6,096)$
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CLEARWATER SEAFOODS INCORPORATED Notes to Consolidated Financial Statements (In thousands of Canadian dollars)
26. CONTINGENT LIABILITIES
From time to time, Clearwater is subject to claims and lawsuits arising in the ordinary course of operations. In the opinion of management, the ultimate resolution of such pending legal proceedings will not have a material effect on Clearwater’s consolidated financial position.
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Quarterly and share (unit) information
Clearwater Seafoods Incorporated ($000's except per share (unit) amounts)
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Sales 92,957 101,640 84,966 70,884 87,140 97,590 78,820 69,235
Net earnings (loss) 10,518 17,618 (2,505) (2,927) 16,390 5,058 (327) 1,832
Per share (unit) dataBasic net earnings (loss) 0.17 0.30 (0.08) (0.09) 0.28 0.05 (0.02) 0.01
Diluted net earnings (loss) 0.15 0.27 (0.08) (0.09) 0.23 0.05 (0.02) 0.01
Trading information, Clearwater Seafoods Incorporated, symbol CLR
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Trading price range of shares (units) (board lots)High 4.15 2.90 2.70 2.40 2.85 3.32 1.73 1.58 Low 2.50 2.36 2.02 1.85 2.10 1.31 1.35 0.99 Close 4.00 2.50 2.48 2.27 2.39 2.35 1.47 1.52
Tranding volumes (000's)Total 1,906 1,265 1,350 1,089 831 3,907 1,544 2,669 Average daily 31 21 22 18 13 63 26 44
Shares (Units) outstanding at end of quarterUnits/Shares 50,948,698 50,948,698 50,948,698 50,948,698 50,948,698 27,565,943 27,745,695 27,745,695Special - - - - - 23,381,217 23,381,217 23,381,217Total 50,948,698 50,948,698 50,948,698 50,948,698 50,948,698 50,947,160 51,126,912 51,126,912
2012 2011
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Selected Annual Information
2012 2011 2010 2009 2008(Audited) (Audited)* (Audited)* (Audited) (Audited)
Sales 350,447$ 332,785$ 291,116$ 284,066$ 301,204$ Cost of goods sold 276,190 263,220 234,854 240,215 261,443
Gross margin 74,257 69,565 56,262 43,851 39,761
Administrative and selling 32,837 33,345 28,557 25,724 25,926 Research and development 1,759 707 1,623 - - Gain on settlement of Glitnir transaction - (12,445) - - - Gain on change in control of joint venture - (11,571) - - - Other income (2,412) (5,893) (2,477) (6,567) 8,858 Finance costs 24,388 38,604 42,482 - - Foreign exchange loss (income) - - - (30,642) 80,210 Interest on long-term debt and bank charges - - - 25,342 19,113 Bank interest and charges - 627 838 Interest on long-term debt - 24,715 18,275 Depreciation and amortization - - - 236 586 Reduction in foreign currency translation account - - - 703 -
56,572 42,747 70,185 14,796 134,693
Earnings (loss) before income taxes 17,685 26,818 (13,923) 29,055 (94,932)
Income taxes (5,019) 3,863 3,564 1,868 4,595
Earnings (loss) before non-controlling interest 22,704 22,955 (17,487) 27,187 (99,527)
Non-controlling interest 7,695 6,619 1,704 1,039 2,878
Earnings (loss) attributable to shareholders 15,009$ 16,336$ (19,191)$ 26,148$ (102,405)$
* 2011 and 2010 results have been adjusted to reflect International Financial Reporting Standards ("IFRS") and the conversion to a Corporation.
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CORPORATE INFORMATION
DIRECTORS OF CLEARWATER SEAFOODS INCORPORATED
EXECUTIVE OF CLEARWATER SEAFODS INCORPORATED
Colin E. MacDonald, Chairman of the Board John C. Risley President, Clearwater Fine Foods Inc. Harold Giles, Chair of Corporate Governance and Compensation Committee Independent Consultant Larry Hood, Chair of Audit Committee Director, Former Partner, KPMG Thomas D. Traves President and Vice-Chancellor, Dalhousie University Mickey MacDonald President, Micco Companies Brendan Paddick Chief Executive Officer, Columbus Communications Inc. Stan Spavold Executive Vice President, Clearwater Fine Foods Inc. Jim Dickson Partner, Stewart McKelvey
Ian Smith Chief Executive Officer Eric R. Roe Vice-President, Chief Operating Officer
Robert D. Wight Vice-President, Finance and Chief Financial Officer Michael D. Pittman Vice-President, Fleet Greg Morency Chief Commercial Officer & Executive Vice-President David Rathbun Vice-President, Chief Talent Officer
Christine Penney Vice-President, Sustainability & Public Affairs Rob O’Sullivan Vice-President Sales – Americas Paul Broderick Vice-President of International Sales David Kavanagh Vice-President and General Counsel John Burwash Vice-President, Chief Information Officer INVESTOR RELATIONS
Tyrone D. Cotie, CA Treasurer (902) 457-8181 [email protected] AUDITORS
KPMG LLP Halifax, Nova Scotia SHARES LISTED
Toronto Stock Exchange SHARE Symbol CLR Convertible Debenture symbol: CLR.DB.A TRANSFER AGENT
Computershare Investor Services Inc.
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Clearwater Seafoods Incorporated 757 Bedford Highway, Bedford, Nova Scotia, Canada, B4A 3Z7 Tel. (902) 443-0550 Fax. (902) 443-7797 www.clearwater.ca