this increases inventory on our balance sheet, it results in higher income and profitability due to the negotiated lower cost product. 

In 2010, we established a joint venture between High Liner and an European raw material supplier. The joint venture, along with an Asian company, established a processing facility in China and began operations in 2010. This facility processes products from raw material primarily sourced from our European joint venture partner and sold to us. In addition to helping us contain costs, the joint venture allows us to better control quality and availability of products. 

We acquired a primary processing plant in China as part of the Icelandic USA Acquisition. This subsidiary produces raw material and finished goods for our Newport News operations. 

## 8.3 LOSS OF CUSTOMER AND CREDIT RISk 

Senior management accountability:  Kelly Nelson, Executive Vice President, CFO & Secretary; Mario Marino, President and Chief Operating Officer Canadian Operations; Keith Decker, President and Chief Operating Officer High Liner Foods (USA) 

Board oversight accountability:  Audit Committee 

We sell the vast majority of our products to large food retailers, supercentres and club stores, and food service distributors in North America. The food distribution industry is consolidating. Our customers are getting larger, more sophisticated and want to conduct business with experienced, reliable suppliers. We are an important supplier to our customers because we can transact business on their terms. We must continue to grow and stay ahead of customer expectations in order to continue to be important to them. We have one customer that represents approximately 15% of our sales. When we include the expected annual Icelandic USA sales, this customer will represent 1  approximately 17% of our sales. We focus on ensuring that our supply chain management and technology infrastructure keep pace with the service delivery expectations of our customers. 

We do not currently insure our accounts receivable risk as our bad debt expense has been nominal. Although economic conditions are not as positive as they were prior to the downturn, we believe 1  the worst is behind us and expect 1 most of our customers will see improvements in business results. As of the filing of this report, we are not aware of any customer who is in financial trouble that would result in a loss to the Company, and our receivables are substantially current at year-end. 

## 8.4 FOREIgN CURRENCy 

Senior management accountability: Kelly Nelson, Executive Vice President, CFO & Secretary 

Board oversight accountability:  Audit Committee 

## Overview 

High Liner Foods’ income statement and balance sheet are both affected by foreign currency fluctuations in a number of ways. Generally, a stronger Canadian dollar is beneficial to earnings and working capital requirements but can reduce shareholders' equity as discussed below. Conversely, a weakening Canadian dollar increases costs and working capital and decreases sales and related profit. 

## Income Statement Effects of Foreign Currency 

The average Canadian dollar in 2011 (at an exchange rate of $0.9891 for each U.S. dollar) has strengthened approximately 4% over the average of 2010. More than 55% of the Company’s sales and expenses are denominated in U.S. dollars. As such, fluctuations in exchange rates impact the translated value of sales, costs and expenses. Secondly, most of the items we sell in Canada have U.S.-dollar-denominated raw material costs as we procure these on world markets in U.S. dollars. Thirdly, items we produce in one country and sell in another are affected by exchange fluctuations. 

High Liner Foods has a self-sustaining operating subsidiary in the U.S. Its domestic currency is U.S. dollars. In addition, a small amount of sales of the Canadian company are transacted in U.S. dollars. Because we report our financial results in Canadian dollars, a strengthening Canadian dollar has the immediate effect of decreasing the Canadian dollar value of U.S.-dollar-denominated sales, costs and expenses. In 2011, U.S.-dollar-denominated sales comprised approximately 55% of our total ongoing sales in domestic currency. In 2012, our U.S.-dollar-denominated sales revenue is expected 1  to grow to approximately 67% of our total sales due to the Icelandic USA Acquisition. 

In looking at the effect on net income, the majority of sales in U.S. dollars, being those of our U.S. subsidiary, have U.S.- dollar-denominated input costs and, therefore, changes in exchange rate only affect the conversion to Canadian dollars of profit earned in the U.S. operations. For products produced in Canada destined for the U.S. market, raw material is also purchased in U.S. dollars. However, labour, packaging and overhead for these products are purchased in Canadian dollars and, therefore, a strengthening Canadian dollar increases these costs in U.S.-dollar terms and decreases the related profit. Conversely, a weakening Canadian dollar decreases these costs in U.S. dollar terms and increases the related profit. For products produced in the U.S. for the Canadian market, the full product cost is subject to changes in exchange rates. 

