SunOpta Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2019

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 001-34198

SUNOPTA INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Securities registered pursuant to Section 12(b) of the Act:

The number of the registrant's common shares outstanding as of November 1, 2019 was 88,003,987. 

SUNOPTA INC.

FORM 10-Q

For the Quarterly Period Ended September 28, 2019

TABLE OF CONTENTS

Basis of Presentation

Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q ("Form 10-Q") to the "Company," "SunOpta," "we," "us," "our" or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together.

In this report, all currency amounts presented are expressed in thousands of United States ("U.S.") dollars ("$"), except per share amounts, unless otherwise stated. Other amounts may be presented in thousands of Canadian dollars ("C$"), euros ("€") and Mexican pesos ("M$"). As at September 28, 2019, the closing rates of exchange for the Canadian dollar, euro and Mexican peso, expressed in U.S. dollars, based on Bank of Canada exchange rates, were C$0.7548, €1.0941 and M$0.0509. These rates are provided solely for convenience and do not necessarily reflect the rates used in the preparation of our financial statements.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements which are based on management's current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," the negatives of such terms, and words and phrases of similar impact and include, but are not limited to references to future financial and operating results, plans, objectives, expectations and intentions; our ability to rationalize certain expenses and redeploy capital to enhance our focus on growing our consumer products and international organic ingredients operations following the sale of our soy and corn business; our intention to implement business strategies and operational actions and make structural investments under the Value Creation Plan, and the associated timing and costs of these actions; expected cost savings from actions completed under the Value Creation Plan; expected synergies, opportunities, revenues and earnings related to business acquisitions; expectations regarding throughput from our organic cocoa operations and ramp-up of our organic avocado oil facility; our plans to expand our plant-based beverage ingredient extraction capabilities and related project timing; the anticipated impact of the strawberry freezer crop shortfall on revenues and margins for frozen fruit prior to the 2020 crop cycle; our expectation regarding profitability improvements in our frozen fruit business in the fourth quarter of 2019 and first half of 2020, including our ability to secure additional supply and recover increased commodity costs; our expectations regarding the fruit optimization plan, including unexpected issues or delays with our automation investments; our expectations regarding customer demand, consumer preferences, competition, sales pricing, and availability and pricing of raw material inputs; other expectations related to our businesses, including operational growth and expansion plans, plans to reduce costs and improve profitability, intent and ability to bring new products and processes to market through innovation, and the exploration of the sale of selected businesses or assets; and other statements that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on certain assumptions, expectations and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments, as well as other factors that we believe are appropriate in the circumstances.

Whether actual results and developments will be consistent with and meet our expectations and predictions is subject to many risks and uncertainties. Accordingly, there are important factors that could cause our actual results to differ materially from our expectations and predictions. We believe these factors include, but are not limited to, the following:

• failure or inability to implement our value creation strategies to achieve anticipated benefits;

• conflicts of interest between our significant investors and our other stakeholders;

• disruptions to our business caused by shareholder activism;

• product liability suits, recalls and threatened market withdrawals that may arise or be brought against us;

• food safety concerns and instances of food-borne illnesses that could harm our business;

• litigation and regulatory enforcement concerning marketing and labeling of food products;

• significant food and health regulations to which we are subject;

• ability to obtain additional capital as required to maintain current growth rates;

• the potential for impairment charges for goodwill or other intangible assets;

• the highly competitive industry in which we operate;

• that our customers may choose not to buy products from us;

• the potential loss of one or more key customers;

• changes and difficulty in predicting consumer preferences for natural and organic food products;

• our ability to effectively manage our supply chain;

• volatility in the prices of raw materials, freight and energy;

• the availability of organic and non-genetically modified ingredients;

• unfavorable growing and operating conditions due to adverse weather conditions;

• an interruption at one or more of our manufacturing facilities;

• technology failures that could disrupt our operations and negatively impact our business;

• the potential for data breaches and the need to comply with data privacy and protection laws and regulations;

• the loss of service of our key management;

• labor shortages or increased labor costs;

• technological innovation by our competitors;

• ability to protect our intellectual property and proprietary rights;

• changes in laws or regulations governing foreign trade or taxation;

• agricultural policies that influence our operations;

• substantial environmental regulation and policies to which we are subject;

• changes in laws or regulations governing climate change;

• the enactment of new climate change laws;

• fluctuations in exchange rates, interest rates and the prices of certain commodities;

• exposure to our international operations;

• increased vulnerability to economic downturns and adverse industry conditions due to our level of indebtedness;

• restrictions under the terms of our debt and equity instruments on how we may operate our business;

• our ability to renew our revolving asset-based credit facility (the "Global Credit Facility") when it becomes due on February 10, 2021;

• our ability to meet the financial covenants under the Global Credit Facility or to obtain necessary waivers from our lenders;

• our ability to effectively manage our growth and integrate acquired companies;

• our ability to achieve the estimated benefits or synergies to be realized from business acquisitions;

• exposure to unknown liabilities arising from business acquisitions;

• unexpected disruptions in our business, including disruptions resulting from business acquisitions;

• our ability to successfully consummate possible future divestitures of businesses;

• the volatility of our operating results and share price;

• that we do not currently intend to, and are restricted in our ability to, pay any cash dividends on our common shares in the foreseeable future;

• dilution in the value of our common shares through the exchange of convertible preferred stock, exercise of stock options, participation in our employee stock purchase plan and issuance of additional securities; and

• impact of the publication of industry analyst research or reports about our business on the value of our common shares.

All forward-looking statements made herein are qualified by these cautionary statements, and our actual results or the developments we anticipate may not be realized. Our forward-looking statements are based only on information currently available to us and speak only as of the date on which they are made. We do not undertake any obligation to publicly update our forward-looking statements, whether written or oral, after the date of this report for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities laws. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and our Annual Report on Form 10-K for the fiscal year ended December 29, 2018. Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found under Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, and in our other filings with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators.

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

2. Revenue

The Company sources, processes and packages organic and natural food products, including specialty and organic raw commodities and value-added ingredients, and consumer-ready beverage, frozen fruit and fruit snack products. The Company's customers include retailers, foodservice operators, branded food companies and food manufacturers.

The following table presents a disaggregation of the Company's revenues based on categories used by the Company to evaluate sales performance:

(1) Includes revenues from the specialty and organic soy and corn business prior to the sale of this business in the first quarter of 2019 (see note 4).

(2) Includes aseptically-packaged products including non-dairy plant-based beverages, broths and teas; refrigerated premium juices; shelf-stable juices and functional waters, and extraction of plant-based beverage ingredients.

(3) Includes individually quick frozen ("IQF") fruit for retail; IQF and bulk frozen fruit for foodservice; and custom fruit preparations for industrial use.

(4) Comprises fruit snack offerings, as well as the sale of flexible resealable pouch and nutrition bar products in the third quarter and first three quarters of 2018 of $0.0 million and $3.1 million, respectively. The Company exited the flexible resealable pouch and nutrition bar product lines and operations in the fourth quarter of 2017 but continued to deliver remaining inventories to customers during 2018.

4.  Sale of Soy and Corn Business

On February 22, 2019, the Company's subsidiary, SunOpta Grains and Foods Inc., completed the sale of its specialty and organic soy and corn business to Pipeline Foods, LLC ("Pipeline Foods") for $66.5 million, which was subject to certain post-closing adjustments recognized in the third quarter of 2019.  The soy and corn business engaged in seed and grain conditioning and corn milling and formed part of the Company's Global Ingredients reportable segment.  The business included five facilities located in Hope, Minnesota, Blooming Prairie, Minnesota, Ellendale, Minnesota, Moorhead, Minnesota, and Cresco, Iowa.  The net proceeds from this transaction were initially used to repay borrowings under the Company's Global Credit Facility (see note 9).

The Company recognized a net gain on sale of the soy and corn business, which was recognized in other income, as follows:

As the soy and corn business did not qualify for presentation as discontinued operations, operating results for this business prior to February 22, 2019 were reported in continuing operations on the consolidated statements of operations for the current and comparative periods.  For the period ended February 22, 2019, the soy and corn business generated revenues of $10.3 million and reported a loss before income taxes of $0.2 million.  For the quarter and three quarters ended September 29, 2018, the soy and corn business generated revenues of $27.0 million and $77.9 million, respectively, and reported earnings before income taxes of $0.8 million and $5.5 million, respectively.  The reported pre-tax results exclude management fees charged by Corporate Services and do not reflect other cost reduction measures associated with the sale of the soy and corn business that were taken in connection with the Value Creation Plan (see note 5).