SunOpta Inc. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
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)
| Canada | Not Applicable |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 2233 Argentia Road, Suite 401 Mississauga, Ontario L5N 2X7, Canada | (905) 821-9669 |
| (Address of principal executive offices) | (Registrant's telephone number, including area code) |
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 ☒ 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 ☒ 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):
| Large accelerated filer ☐ | Accelerated filer ☒ |
| Non-accelerated filer ☐ | Smaller reporting company ☐ |
| (Do not check if a smaller reporting company) | Emerging growth company ☐ |
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 ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | STKL | The Nasdaq Stock Market |
Common Shares | SOY | The Toronto Stock Exchange |
The number of the registrant's common shares outstanding as of October 28, 2020 was 89,937,726.
Basis of Presentation
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; changes in customer demand resulting from or related to the COVID-19 pandemic, as well as supply chain, logistics and other disruptions, the cancellation or delay of new product launches, the availability and pricing of our raw materials, fluctuations in foreign currency exchange rates and commodity pricing, and general economic and political conditions globally and in the markets in which we do business; our plans and ability to expand capacity in our plant-based food and beverage business, and timing to complete expansion projects in 2020; our expectations regarding profitability in our frozen fruit business in the fourth quarter of 2020; our expectations regarding the availability and commodity pricing for frozen strawberry supply, and potential impacts to our revenues and margins; 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 anticipated results of operations, operational growth and expansion plans, plans to reduce costs and improve profitability, and intent and ability to bring new products and processes to market through innovation; our plans and ability to enter into a new long-term asset-backed lending facility, and our expectations for timing of completion; our intentions related to potential sale of selected businesses or assets; liquidity constraints and the availability of alternative financing sources; 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.
| SUNOPTA INC. | 3 | September 26, 2020 10-Q |
- 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;
- the impact of the COVID-19 pandemic on our business and financial results;
- 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;
| SUNOPTA INC. | 4 | September 26, 2020 10-Q |
- 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 March 31, 2022, and/or refinance our senior secured second lien notes when they mature on October 9, 2022;
- 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.
| SUNOPTA INC. | 5 | September 26, 2020 10-Q |
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 28, 2019. 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 28, 2019, under Item 1A. "Risk Factors" of this report, and in our other filings with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators.
| SUNOPTA INC. | 6 | September 26, 2020 10-Q |
| Quarter ended | Three quarters ended | ||||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| Revenues (note 2) | 314,981 | 295,941 | 961,874 | 894,220 | |||||||||
| Cost of goods sold | 273,102 | 269,616 | 836,583 | 812,362 | |||||||||
| Gross profit | 41,879 | 26,325 | 125,291 | 81,858 | |||||||||
| Selling, general and administrative expenses | 29,278 | 27,674 | 84,783 | 81,184 | |||||||||
| Intangible asset amortization | 2,543 | 2,768 | 7,869 | 8,202 | |||||||||
| Other expense (income), net (note 10) | 1,030 | 3,323 | (601 | ) | (39,744 | ) | |||||||
| Foreign exchange loss (gain) | 679 | (590 | ) | 2,969 | (1,784 | ) | |||||||
| Earnings (loss) before the following | 8,349 | (6,850 | ) | 30,271 | 34,000 | ||||||||
| Interest expense, net | 8,017 | 8,864 | 24,233 | 25,857 | |||||||||
| Earnings (loss) before income taxes | 332 | (15,714 | ) | 6,038 | 8,143 | ||||||||
| Provision for (recovery of) income taxes | 41 | (3,935 | ) | 1,623 | 3,239 | ||||||||
| Net earnings (loss) | 291 | (11,779 | ) | 4,415 | 4,904 | ||||||||
| Earnings (loss) attributable to non-controlling interests | 202 | (30 | ) | (42 | ) | 59 | |||||||
| Earnings (loss) attributable to SunOpta Inc. | 89 | (11,749 | ) | 4,457 | 4,845 | ||||||||
| Dividends and accretion on preferred stock (note 8) | (2,844 | ) | (2,009 | ) | (7,473 | ) | (6,005 | ) | |||||
| Loss attributable to common shareholders | (2,755 | ) | (13,758 | ) | (3,016 | ) | (1,160 | ) | |||||
| Loss per share (note 11) | |||||||||||||
| Basic | (0.03 | ) | (0.16 | ) | (0.03 | ) | (0.01 | ) | |||||
| Diluted | (0.03 | ) | (0.16 | ) | (0.03 | ) | (0.01 | ) | |||||
| Weighted-average common shares outstanding (000s) (note 11) | |||||||||||||
| Basic | 89,635 | 87,928 | 88,962 | 87,695 | |||||||||
| Diluted | 89,635 | 87,928 | 88,962 | 87,695 | |||||||||
| SUNOPTA INC. | 7 | September 26, 2020 10-Q |
| Quarter ended | Three quarters ended | |||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Net earnings (loss) | 291 | (11,779 | ) | 4,415 | 4,904 | |||||||
| Currency translation adjustment | 875 | (1,265 | ) | 976 | (2,104 | ) | ||||||
| Comprehensive earnings (loss) | 1,166 | (13,044 | ) | 5,391 | 2,800 | |||||||
| Comprehensive earnings (loss) attributable to non-controlling interests | 184 | (20 | ) | (67 | ) | 71 | ||||||
| Comprehensive earnings (loss) attributable to SunOpta Inc. | 982 | (13,024 | ) | 5,458 | 2,729 | |||||||
| SUNOPTA INC. | 8 | September 26, 2020 10-Q |
| September 26, 2020 | December 28, 2019 | ||||||
| $ | $ | ||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | 938 | 1,498 | |||||
| Accounts receivable, net of allowance for credit losses of $1,891 and $1,386, respectively | 138,968 | 121,445 | |||||
| Inventories (note 6) | 310,344 | 323,546 | |||||
| Prepaid expenses and other current assets | 30,112 | 35,985 | |||||
| Income taxes recoverable | 8,409 | 7,480 | |||||
| Total current assets | 488,771 | 489,954 | |||||
| Property, plant and equipment | 194,141 | 184,550 | |||||
| Operating lease right-of-use assets | 61,071 | 68,433 | |||||
| Goodwill | 28,799 | 28,422 | |||||
| Intangible assets | 142,136 | 150,009 | |||||
| Deferred income taxes | 3,650 | — | |||||
| Other assets | 2,794 | 1,991 | |||||
| Total assets | 921,362 | 923,359 | |||||
| LIABILITIES | |||||||
| Current liabilities | |||||||
| Bank indebtedness (note 7) | 199,908 | 245,536 | |||||
| Accounts payable and accrued liabilities | 144,477 | 133,529 | |||||
| Customer and other deposits | 98 | 37 | |||||
| Income taxes payable | 753 | 1,272 | |||||
| Other current liabilities | 733 | 802 | |||||
| Current portion of long-term debt (note 7) | 3,292 | 2,987 | |||||
| Current portion of operating lease liabilities | 15,593 | 17,215 | |||||
| Current portion of long-term liabilities | 600 | 4,286 | |||||
| Total current liabilities | 365,454 | 405,664 | |||||
| Long-term debt (note 7) | 240,582 | 242,204 | |||||
| Operating lease liabilities | 45,984 | 52,020 | |||||
| Long-term liabilities | 1,929 | 2,011 | |||||
| Deferred income taxes | 18,188 | 9,027 | |||||
| Total liabilities | 672,137 | 710,926 | |||||
| Series A Preferred Stock (note 8) | 86,956 | 82,524 | |||||
| Series B Preferred Stock (note 8) | 27,467 | — | |||||
| EQUITY | |||||||
| SunOpta Inc. shareholders' equity | |||||||
| Common shares, no par value, unlimited shares authorized, 89,893,515 shares issued (December 28, 2019 - 88,089,733) | 325,471 | 318,456 | |||||
| Additional paid-in capital | 35,726 | 35,767 | |||||
| Accumulated deficit | (217,947 | ) | (214,931 | ) | |||
| Accumulated other comprehensive loss | (10,270 | ) | (11,271 | ) | |||
| 132,980 | 128,021 | ||||||
| Non-controlling interests | 1,822 | 1,888 | |||||
| Total equity | 134,802 | 129,909 | |||||
| Total equity and liabilities | 921,362 | 923,359 | |||||
| Commitments and contingencies (note 13) | |||||||
(See accompanying notes to consolidated financial statements) |
| SUNOPTA INC. | 9 | September 26, 2020 10-Q |
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at June 27, 2020 | 89,403 | 323,412 | 34,610 | (215,192 | ) | (11,163 | ) | 1,637 | 133,304 | ||||||||||||
| Employee stock purchase plan | 26 | 149 | — | — | — | — | 149 | ||||||||||||||
| Stock incentive plan | 465 | 1,910 | (1,195 | ) | — | — | — | 715 | |||||||||||||
| Withholding taxes on stock-based awards | — | — | (1,225 | ) | — | — | — | (1,225 | ) | ||||||||||||
| Stock-based compensation | — | — | 3,536 | — | — | — | 3,536 | ||||||||||||||
| Dividends on preferred stock | — | — | — | (2,378 | ) | — | — | (2,378 | ) | ||||||||||||
| Accretion on preferred stock | — | — | — | (466 | ) | — | — | (466 | ) | ||||||||||||
| Net earnings | — | — | — | 89 | — | 202 | 291 | ||||||||||||||
| Currency translation adjustment | — | — | — | — | 893 | (18 | ) | 875 | |||||||||||||
| Capital contribution to majority-owned subsidiary | — | — | — | — | — | 67 | 67 | ||||||||||||||
| Dividend paid by subsidiary to non- controlling interest | — | — | — | — | — | (66 | ) | (66 | ) | ||||||||||||
| Balance at September 26, 2020 | 89,894 | 325,471 | 35,726 | (217,947 | ) | (10,270 | ) | 1,822 | 134,802 | ||||||||||||
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at June 29, 2019 | 87,857 | 317,735 | 31,518 | (193,553 | ) | (10,508 | ) | 1,798 | 146,990 | ||||||||||||
| Employee stock purchase plan | 57 | 114 | — | — | — | — | 114 | ||||||||||||||
| Stock incentive plan | 86 | 347 | (295 | ) | — | — | — | 52 | |||||||||||||
| Withholding taxes on stock-based awards | — | — | (2 | ) | — | — | — | (2 | ) | ||||||||||||
| Stock-based compensation | — | — | 2,558 | — | — | — | 2,558 | ||||||||||||||
| Dividends on preferred stock | — | — | — | (1,700 | ) | — | — | (1,700 | ) | ||||||||||||
| Accretion on preferred stock | — | — | — | (309 | ) | — | — | (309 | ) | ||||||||||||
| Net loss | — | — | — | (11,749 | ) | — | (30 | ) | (11,779 | ) | |||||||||||
| Currency translation adjustment | — | — | — | — | (1,275 | ) | 10 | (1,265 | ) | ||||||||||||
| Capital contribution to majority-owned subsidiary | — | — | — | — | — | 68 | 68 | ||||||||||||||
| Dividend paid by subsidiary to non- controlling interest | — | — | — | — | — | (31 | ) | (31 | ) | ||||||||||||
| Balance at September 28, 2019 | 88,000 | 318,196 | 33,779 | (207,311 | ) | (11,783 | ) | 1,815 | 134,696 | ||||||||||||
| SUNOPTA INC. | 10 | September 26, 2020 10-Q |
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at December 28, 2019 | 88,090 | 318,456 | 35,767 | (214,931 | ) | (11,271 | ) | 1,888 | 129,909 | ||||||||||||
| Employee stock purchase plan | 99 | 344 | — | — | — | — | 344 | ||||||||||||||
| Stock incentive plan | 1,705 | 6,671 | (5,580 | ) | — | — | — | 1,091 | |||||||||||||
| Withholding taxes on stock-based awards | — | — | (2,376 | ) | — | — | — | (2,376 | ) | ||||||||||||
| Stock-based compensation | — | — | 7,915 | — | — | — | 7,915 | ||||||||||||||
| Dividends on preferred stock | — | — | — | (6,259 | ) | — | — | (6,259 | ) | ||||||||||||
| Accretion on preferred stock | — | — | — | (1,214 | ) | — | — | (1,214 | ) | ||||||||||||
| Net earnings | — | — | — | 4,457 | — | (42 | ) | 4,415 | |||||||||||||
| Currency translation adjustment | — | — | — | — | 1,001 | (25 | ) | 976 | |||||||||||||
| Capital contribution to majority-owned subsidiary | — | — | — | — | — | 67 | 67 | ||||||||||||||
| Dividend paid by subsidiary to non- controlling interest | — | — | — | — | — | (66 | ) | (66 | ) | ||||||||||||
| Balance at September 26, 2020 | 89,894 | 325,471 | 35,726 | (217,947 | ) | (10,270 | ) | 1,822 | 134,802 | ||||||||||||
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at December 29, 2018 | 87,423 | 314,357 | 31,796 | (206,151 | ) | (9,667 | ) | 1,504 | 131,839 | ||||||||||||
| Employee stock purchase plan | 153 | 399 | — | — | — | — | 399 | ||||||||||||||
| Stock incentive plan | 424 | 3,440 | (3,026 | ) | — | — | — | 414 | |||||||||||||
| Withholding taxes on stock-based awards | — | — | (384 | ) | — | — | — | (384 | ) | ||||||||||||
| Stock-based compensation | — | — | 5,393 | — | — | — | 5,393 | ||||||||||||||
| Dividends on preferred stock | — | — | — | (5,100 | ) | — | — | (5,100 | ) | ||||||||||||
| Accretion on preferred stock | — | — | — | (905 | ) | — | — | (905 | ) | ||||||||||||
| Net earnings | — | — | — | 4,845 | — | 59 | 4,904 | ||||||||||||||
| Currency translation adjustment | — | — | — | — | (2,116 | ) | 12 | (2,104 | ) | ||||||||||||
| Capital contribution to majority-owned subsidiary | — | — | — | — | — | 271 | 271 | ||||||||||||||
| Dividend paid by subsidiary to non- controlling interest | — | — | — | — | — | (31 | ) | (31 | ) | ||||||||||||
| Balance at September 28, 2019 | 88,000 | 318,196 | 33,779 | (207,311 | ) | (11,783 | ) | 1,815 | 134,696 | ||||||||||||
| SUNOPTA INC. | 11 | September 26, 2020 10-Q |
| Quarter ended | Three quarters ended | |||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| CASH PROVIDED BY (USED IN) | ||||||||||||
| Operating activities | ||||||||||||
| Net earnings (loss) | 291 | (11,779 | ) | 4,415 | 4,904 | |||||||
| Items not affecting cash: | ||||||||||||
| Depreciation and amortization | 8,669 | 8,517 | 26,342 | 25,005 | ||||||||
| Amortization of debt issuance costs | 1,019 | 683 | 3,023 | 2,022 | ||||||||
| Deferred income taxes | 2,293 | (2,732 | ) | 5,511 | 2,239 | |||||||
| Stock-based compensation | 3,536 | 2,558 | 7,915 | 5,393 | ||||||||
| Unrealized loss on derivative contracts (note 5) | 629 | 865 | 779 | 577 | ||||||||
| Gain on settlement of contingent consideration | ||||||||||||
| obligation (note 10) | — | — | (2,286 | ) | — | |||||||
| Loss (gain) on sale of business (note 3) | — | 1,109 | — | (44,269 | ) | |||||||
| Other | 219 | 26 | 118 | (108 | ) | |||||||
| Changes in non-cash working capital, net of businesses | ||||||||||||
| acquired or sold (note 12) | 3,505 | 5,042 | 11,758 | (22,146 | ) | |||||||
| Net cash flows from operating activities | 20,161 | 4,289 | 57,575 | (26,383 | ) | |||||||
| Investing activities | ||||||||||||
| Purchases of property, plant and equipment | (11,842 | ) | (7,592 | ) | (27,901 | ) | (24,907 | ) | ||||
| Net proceeds from sale of business (note 3) | — | (3 | ) | — | 64,672 | |||||||
| Acquisition of business, net of cash acquired | — | — | — | (3,341 | ) | |||||||
| Other | 67 | — | 108 | — | ||||||||
| Net cash flows from investing activities | (11,775 | ) | (7,595 | ) | (27,793 | ) | 36,424 | |||||
| Financing activities | ||||||||||||
| Increase (decrease) under line of credit facilities (note 7) | (7,549 | ) | 4,603 | (48,560 | ) | (6,691 | ) | |||||
| Borrowings under long-term debt (note 7) | — | 565 | 155 | 2,441 | ||||||||
| Repayment of long-term debt (note 7) | (809 | ) | (556 | ) | (2,150 | ) | (1,913 | ) | ||||
| Payment of debt issuance costs | (3 | ) | — | (2,491 | ) | (395 | ) | |||||
| Proceeds on issuance of preferred stock, net of issuance costs (note 8) | — | — | 26,804 | — | ||||||||
| Payment of cash dividends on preferred stock (note 8) | — | (1,700 | ) | (1,700 | ) | (5,100 | ) | |||||
| Proceeds from the exercise of stock options and employee share purchases | 864 | 166 | 1,435 | 813 | ||||||||
| Payment of withholding taxes on stock-based awards | (1,225 | ) | (2 | ) | (2,376 | ) | (384 | ) | ||||
| Payment of contingent consideration (note 10) | (300 | ) | — | (1,400 | ) | — | ||||||
| Dividend paid by subsidiary to non-controlling interest | (66 | ) | (31 | ) | (66 | ) | (31 | ) | ||||
| Other | — | (5 | ) | (4 | ) | 211 | ||||||
| Net cash flows from financing activities | (9,088 | ) | 3,040 | (30,353 | ) | (11,049 | ) | |||||
| Foreign exchange gain (loss) on cash held in a foreign currency | 15 | (55 | ) | 11 | (63 | ) | ||||||
| Decrease in cash and cash equivalents in the period | (687 | ) | (321 | ) | (560 | ) | (1,071 | ) | ||||
| Cash and cash equivalents - beginning of the period | 1,625 | 2,530 | 1,498 | 3,280 | ||||||||
| Cash and cash equivalents - end of the period | 938 | 2,209 | 938 | 2,209 | ||||||||
| Non-cash investing and financing activities (note 12) | ||||||||||||
1. Significant Accounting Policies
Basis of Presentation
These interim consolidated financial statements of SunOpta Inc. (the "Company" or "SunOpta") have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and three quarters ended September 26, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ending January 2, 2021 or for any other period. The interim consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended December 28, 2019. For further information, refer to the consolidated financial statements, and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
As described in note 14, in the fourth quarter of 2019, the Company changed its segment reporting to reflect changes to its operating structure. All segment information presented in these consolidated financial statements for the quarter and three quarters ended September 28, 2019 has been restated to reflect the new segment reporting structure.
Fiscal Year
The fiscal year of the Company consists of a 52- or 53-week period ending on the Saturday closest to December 31. Fiscal year 2020 is a 53-week period ending on January 2, 2021, with quarterly periods ending on March 28, June 27 and September 26, 2020. Fiscal year 2019 was a 52-week period ending on December 28, 2019, with quarterly periods ending on March 30, June 29 and September 28, 2019.
Recent Accounting Pronouncements
Effective the first quarter of 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments," which requires the immediate recognition of expected versus incurred credit losses for most financial assets. The Company adopted ASU 2016-13 under the modified retrospective approach and applied the new guidance to its short-term accounts receivable. The adoption of this new guidance did not result in the recognition of additional allowances for credit losses. The Company closely monitors receivable balances and estimates the allowance for credit losses based on historical collection experience, and account aging analysis and trends. The Company evaluates the adequacy of the allowance each reporting period, considering individual customer account reviews, write-offs recorded in the period, sales forecasts and trends, and current and expected economic conditions.
2. Revenue
The Company procures, processes and sells organic and non-GMO ingredients, and processes and packages plant-based and fruit-based foods and beverages. The Company's customers include retailers, foodservice operators, branded food companies and food manufacturers.
| SUNOPTA INC. | 13 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
The following table presents a disaggregation of the Company's revenues based on categories used by the Company to evaluate sales performance:
| Quarter ended | Three quarters ended | |||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Global Ingredients | ||||||||||||
| Organic and non-GMO ingredients | 101,889 | 95,320 | 311,805 | 303,142 | ||||||||
| Premium juice | 21,433 | 18,036 | 66,412 | 55,602 | ||||||||
| Soy and corn (see note 3) | — | — | — | 10,346 | ||||||||
| Total Global Ingredients | 123,322 | 113,356 | 378,217 | 369,090 | ||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Beverages and broths | 80,974 | 72,873 | 236,195 | 198,691 | ||||||||
| Plant-based ingredients | 6,828 | 6,403 | 19,024 | 16,920 | ||||||||
| Sunflower and roasted snacks | 11,236 | 12,535 | 41,766 | 39,416 | ||||||||
| Total Plant-Based Foods and Beverages | 99,038 | 91,811 | 296,985 | 255,027 | ||||||||
| Fruit-Based Foods and Beverages | ||||||||||||
| Frozen fruit | 68,692 | 67,384 | 218,978 | 198,528 | ||||||||
| Fruit-based ingredients | 11,015 | 12,189 | 30,853 | 36,445 | ||||||||
| Fruit snacks | 12,914 | 11,201 | 36,841 | 35,130 | ||||||||
| Total Fruit-Based Foods and Beverages | 92,621 | 90,774 | 286,672 | 270,103 | ||||||||
| Total revenues | 314,981 | 295,941 | 961,874 | 894,220 | ||||||||
3. 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 for $66.5 million, subject to certain post-closing adjustments. The soy and corn business engaged in seed and grain conditioning and corn milling and formed part of the Company's Global Ingredients segment. The business included five facilities located in Hope, Minnesota, Blooming Prairie, Minnesota, Ellendale, Minnesota, Moorhead, Minnesota, and Cresco, Iowa. For the three quarters ended September 28, 2019, the Company recognized a net gain on sale of the soy and corn business of $44.3 million, which was recognized in other income. 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 (excluding management fees charged by Corporate Services).
4. Value Creation Plan
The Value Creation Plan is a broad-based initiative focused on increasing shareholder value through structural investments in people and assets, together with restructuring activities to streamline operations. In the first three quarters of 2020, measures taken under the Value Creation Plan included the consolidation of the Company's corporate office functions, the closure of an organic ingredient warehousing facility located in China, and other business development activities. In the first three quarters of 2019, actions taken under the Value Creation Plan related to the sale of the soy and corn business, a workforce reduction affecting approximately 30 employees, and transitions of the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). The following table summarizes costs incurred by type under the Value Creation Plan for the three quarters ended September 26, 2020 and September 28, 2019:
| SUNOPTA INC. | 14 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| Employee | ||||||||||||
| Asset | recruitment, | |||||||||||
| impairments | retention and | |||||||||||
| and facility | termination | Professional | ||||||||||
| closure costs | costs | fees | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| September 26, 2020 | ||||||||||||
| Balance payable, December 28, 2019(1) | 201 | 4,026 | — | 4,227 | ||||||||
| Costs incurred and charged to expense | 365 | 1,524 | 1,574 | 3,463 | ||||||||
| Cash payments, net | (438 | ) | (5,690 | ) | (1,574 | ) | (7,702 | ) | ||||
| Non-cash adjustments | (78 | ) | 894 | — | 816 | |||||||
| Balance payable, September 26, 2020(1) | 50 | 754 | — | 804 | ||||||||
| September 28, 2019 | ||||||||||||
| Balance payable, December 29, 2018 | 477 | 436 | — | 913 | ||||||||
| Costs incurred and charged to expense | 308 | 7,098 | 964 | 8,370 | ||||||||
| Cash payments, net | (533 | ) | (6,220 | ) | (901 | ) | (7,654 | ) | ||||
| Non-cash adjustments | — | 2,872 | — | 2,872 | ||||||||
| Balance payable, September 28, 2019 | 252 | 4,186 | 63 | 4,501 |
(1) Balance payable was included in accounts payable and accrued liabilities on the consolidated balance sheet.
The following table summarizes costs incurred since the inception of the Value Creation Plan in 2016 to September 26, 2020:
| Employee | ||||||||||||
| Asset | recruitment, | Professional | ||||||||||
| impairments | retention and | fees and | ||||||||||
| and facility | termination | temporary | ||||||||||
| closure costs | costs | labor costs | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| Costs incurred and charged to expense | 35,325 | 24,493 | 23,906 | 83,724 | ||||||||
| Cash payments, net | (10,700 | ) | (29,187 | ) | (23,906 | ) | (63,793 | ) | ||||
| Non-cash adjustments | (24,575 | ) | 5,448 | — | (19,127 | ) | ||||||
| Balance payable, September 26, 2020 | 50 | 754 | — | 804 |
For the quarters and three quarters ended September 26, 2020 and September 28, 2019, costs incurred and charged to expense were recorded in the consolidated statement of operations as follows:
| Quarter ended | Three quarters ended | |||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Selling, general and administrative expenses(1) | 935 | 1,615 | 2,434 | 2,772 | ||||||||
| Other expense(2) | 54 | 3,222 | 1,029 | 5,598 | ||||||||
| 989 | 4,837 | 3,463 | 8,370 | |||||||||
(1) Professional fees and employee retention, recruitment and relocation costs recorded in selling general and administrative expenses were allocated to Corporate Services.
(2) For the quarter ended September 26, 2020, costs recorded in other expense were allocated as follows: Global Ingredients - $ (September 28, 2019 - $); Plant-Based Foods and Beverages - $ (September 28, 2019 - $); Fruit-Based Foods and Beverages - $(0.0) million (September 28, 2019 - $0.2 million); and Corporate Services - $0.1 million (September 28, 2019 - $3.0 million). For the three quarters ended September 26, 2020, costs recorded in other expense were allocated as follows: Global Ingredients - $0.8 million (September 28, 2019 - $0.0 million); Plant-Based Foods and Beverages - $0.0 million (September 28, 2019 - $0.5 million); Fruit-Based Foods and Beverages - $0.8 million (September 28, 2019 - $1.0 million); and Corporate Services - $(0.5) million (September 28, 2019 - $4.1 million).
| SUNOPTA INC. | 15 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
5. Derivative Financial Instruments and Fair Value Measurements
The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of September 26, 2020 and December 28, 2019:
| September 26, 2020 | ||||||||||||
| Fair value | ||||||||||||
| asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||
| $ | $ | $ | $ | |||||||||
| Commodity futures contracts(1) | ||||||||||||
| Unrealized short-term derivative liability | (495 | ) | (495 | ) | — | — | ||||||
| Forward foreign currency contracts(2) | ||||||||||||
| Not designated as hedging instruments | (670 | ) | — | (670 | ) | — | ||||||
| December 28, 2019 | ||||||||||||
| Fair value | ||||||||||||
| asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||
| $ | $ | $ | $ | |||||||||
| Commodity futures contracts(1) | ||||||||||||
| Unrealized short-term derivative asset | 284 | 284 | — | — | ||||||||
| Forward foreign currency contracts(2) | ||||||||||||
| Not designated as hedging instruments | (73 | ) | — | (73 | ) | — | ||||||
(1) Commodity futures contracts
As part of its risk management strategy, the Company enters into exchange-traded commodity futures to limit the risk related to fluctuations in the price for certain commodities. These contracts are not designated as hedges for accounting purposes. Exchange-traded futures are fair valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Gains and losses on changes in the fair value of these contracts are included in cost of goods sold on the consolidated statement of operations. For the quarter ended September 26, 2020, the Company recognized an unrealized loss of $0.6 million (September 28, 2019 - unrealized loss of $0.9 million), and for the three quarters ended September 26, 2020, the Company recognized an unrealized loss of $0.8 million (September 28, 2019 - unrealized loss of $0.6 million), related to changes in the fair value of these contracts. On the consolidated balance sheets, unrealized gains and losses on these contracts are included in other current assets and other current liabilities, respectively.
As at September 26, 2020, the Company had net open futures contracts to sell 5,810 metric tons ("MT") of cocoa (December 28, 2019 - to sell 3,210 MT of cocoa), and no open contracts to buy or sell coffee (December 28, 2019 - to sell 306 MT of coffee).
(2) Foreign forward currency contracts
As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are included in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. These contracts typically represent economic hedges that are not designated as hedging instruments; however, certain of these contracts may be designated as cash flow hedges for accounting purposes.
| SUNOPTA INC. | 16 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
As at September 26, 2020, the Company had open forward foreign exchange contracts to sell euros to buy U.S. dollars with a notional value of €22.3 million ($25.4 million), to sell British pounds to buy euros with a notional value of £0.2 million (€0.2 million), and to sell Swiss francs to buy U.S. dollars with a notional value of CHF 3.0 million ($3.1 million). As these contracts were not designated as hedging instruments, gains and losses on changes in the fair value of the derivative instruments are included in foreign exchange loss or gain on the consolidated statement of operations. For the quarter ended September 26, 2020, the Company recognized an unrealized loss of $0.6 million (September 28, 2019 - unrealized gain of $0.1 million), and for the three quarters ended September 26, 2020, the Company recognized an unrealized loss of $0.6 million (September 28, 2019 - unrealized loss of $0.3 million), related to changes in the fair value of these open contracts. Unrealized gains and losses on these contracts are included in accounts receivable and accounts payable, respectively, on the consolidated balance sheets.
In April 2020, the Company entered into a combination of foreign currency put and call option contracts (a zero-cost collar) to hedge its exposure to fluctuations in the Mexican peso related to purchases of fruit inventory from Mexico. The aggregate notional amount of these contracts was $21.5 million at inception, which reduces to zero through December 2020, with contracts in the notional amount of $5.8 million remaining open as at September 26, 2020. This collar has a ceiling rate of 25.23 Mexican pesos to the U.S. dollar and a floor rate of 23.50 Mexican pesos to the U.S. dollar. In September 2020, the Company entered into additional put and call option contracts with an aggregate notional amount of $11.8 million at inception, which reduces to zero between January 2021 and July 2021. This collar has a ceiling rate of 24.00 Mexican pesos to the U.S. dollar and a floor rate of 21.14 Mexican pesos to the U.S. dollar. If the spot rate is between the ceiling and floor rates on the date of maturity of each of the contracts, then the Company does not recognize any gain or loss under these contracts. If the spot rate goes below the floor rate of the collar, the Company will recognize a foreign exchange gain, and if the spot rate goes above the ceiling rate of the collar, the Company will recognize a foreign exchange loss. For the quarter and three quarters ended September 26, 2020, the Company did not recognize any amount of unrealized gain or loss on the open contracts.
6. Inventories
| September 26, 2020 | December 28, 2019 | |||||
| $ | $ | |||||
| Raw materials and work-in-process | 238,198 | 259,658 | ||||
| Finished goods | 82,940 | 75,112 | ||||
| Inventory reserves | (10,794 | ) | (11,224 | ) | ||
| 310,344 | 323,546 |
| SUNOPTA INC. | 17 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
7. Bank Indebtedness and Long-Term Debt
September 26, | December 28, | |||||
2020 | 2019 | |||||
$ | $ | |||||
| Bank Indebtedness | ||||||
| Global Credit Facility(1) | 199,654 | 241,666 | ||||
| Bulgarian credit facility(2) | 254 | 3,870 | ||||
| 199,908 | 245,536 | |||||
| Long-Term Debt | ||||||
| Senior Secured Second Lien Notes, net of unamortized debt issuance costs of $3,964 (December 28, 2019 - $5,094)(3) | 219,534 | 218,404 | ||||
| Finance lease liabilities(4) | 14,518 | 16,223 | ||||
| Asset-backed term loan | 4,173 | 4,386 | ||||
| Other | 5,649 | 6,178 | ||||
| 243,874 | 245,191 | |||||
| Less: current portion | 3,292 | 2,987 | ||||
| 240,582 | 242,204 |
(1) Global Credit Facility
On February 11, 2016, the Company entered into a five-year credit agreement for a senior secured asset-based revolving credit facility with a syndicate of banks in the maximum aggregate principal amount of $350.0 million, subject to borrowing base capacity (the "Global Credit Facility"). The Global Credit Facility is used to support the working capital and general corporate needs of the Company's global operations, in addition to funding future strategic initiatives. The Global Credit Facility also includes borrowing capacity available for letters of credit and provides for borrowings on same-day notice, including in the form of swingline loans. On January 28, 2020, the credit agreement was amended to, among other things, extend the maturity date of the Global Credit Facility to March 31, 2022.
Individual borrowings under the Global Credit Facility have terms of six months or less and bear interest based on various reference rates plus an applicable margin. The margin ranges from 0.25% to 0.75% with respect to base rate and prime rate borrowings and from 1.25% to 1.75% for eurocurrency rate and bankers' acceptance rate borrowings. In connection with the amendment of the credit agreement on January 28, 2020, the applicable margin rate on any loans under the Global Credit Facility (including the U.S. Subfacility, as described below) is increased by an additional 0.50% while the Company's total leverage ratio exceeds a specific threshold.
In September 2017 and October 2018, the Global Credit Facility was amended to add an additional U.S. asset-based credit subfacility (the "U.S. Subfacility") in the aggregate principal amount of $20.0 million, which was fully repaid through quarterly amortization payments of $3.33 million commencing on March 31, 2019 and ending on June 30, 2020. Amounts repaid under the U.S. Subfacility may not be borrowed again. Interest on the U.S. Subfacility was based on various reference rates plus an applicable margin ranging from 2.00% to 2.50% with respect to base rate and prime rate borrowings and from 3.00% to 3.50% for eurocurrency rate and bankers' acceptance rate borrowings.
As at September 26, 2020, the weighted-average interest rate on all borrowings under the Global Credit Facility was 2.84%.
Obligations under the Global Credit Facility are guaranteed by substantially all of the Company's subsidiaries and, subject to certain exceptions, such obligations are secured by first priority liens on substantially all of the assets of the Company.
The Global Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company's ability to create liens on assets; sell assets and enter into sale and leaseback transactions; pay dividends, prepay junior lien and unsecured indebtedness and make other restricted payments; incur additional indebtedness and make guarantees; make investments, loans or advances, including acquisitions; and engage in mergers or consolidations. The foregoing covenants are subject to certain threshold amounts and exceptions as set forth in the credit agreement.
| SUNOPTA INC. | 18 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(2) Bulgarian credit facility
Borrowings under this €6.0 million revolving credit facility are used to cover the working capital needs of the Bulgarian operations of The Organic Corporation B.V. ("TOC"), a wholly-owned subsidiary of the Company, and are secured by the accounts receivable and inventories of the Bulgarian operations and fully guaranteed by TOC. Interest accrues under the facility based on EURIBOR plus a margin of 2.75%. The maturity date for this annual facility is April 30, 2021.
(3) Senior Secured Second Lien Notes
On October 20, 2016, the Company's subsidiary, SunOpta Foods Inc. ("SunOpta Foods"), issued $231.0 million of 9.5% Senior Secured Second Lien Notes due 2022 (the "Notes"). As at September 26, 2020, the outstanding principal amount of the Notes was $223.5 million, reflecting the redemption of $7.5 million principal amount by SunOpta Foods in October 2017. Debt issuance costs are recorded as a reduction against the principal amount of the Notes and are being amortized over the six-year term of the Notes. Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 at a rate of 9.5% per annum. The Notes will mature on October 9, 2022. Giving effect to the amortization of debt issuance costs, the effective interest rate on the Notes is approximately 10.4% per annum.
At any time between October 9, 2020 and October 8, 2021, SunOpta Foods may redeem the Notes, in whole or in part, at a redemption price equal to 102.375%, and at par thereafter, plus accrued and unpaid interest, if any, to but excluding the date of redemption. Certain additional redemption rights were applicable prior to October 9, 2020. In the event of a change of control, SunOpta Foods will be required to make an offer to repurchase the Notes at 101.000% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The Notes are secured by second-priority liens on substantially all of the assets that secure the credit facilities provided under the Global Credit Facility, subject to certain exceptions and permitted liens. The Notes are senior secured obligations and rank equally in right of payment with SunOpta Foods' existing and future senior debt and senior in right of payment to any future subordinated debt. The Notes are effectively subordinated to debt under the Global Credit Facility and any future indebtedness secured on a first-priority basis. The Notes are initially guaranteed on a senior secured second-priority basis by the Company and each of its subsidiaries (other than SunOpta Foods) that guarantees indebtedness under the Global Credit Facility, subject to certain exceptions.
The Notes are subject to covenants that, among other things, limit the Company's ability to (i) incur additional debt or issue preferred stock; (ii) pay dividends and make certain types of investments and other restricted payments; (iii) create liens; (iv) enter into transactions with affiliates; (v) sell assets; and (vi) create restrictions on the ability of restricted subsidiaries to pay dividends, make loans or advances or transfer assets to the Company, SunOpta Foods or any guarantor of the Notes. The foregoing covenants are subject to certain threshold amounts and exceptions as set forth in the indenture governing the Notes. In addition, the indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture, certain payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. If an event of default occurs and is continuing, the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued and unpaid interest on, if any, all the Notes to be due and payable.
As at September 26, 2020, the estimated fair value of the outstanding Notes was approximately $228 million, based on quoted prices of the most recent over-the-counter transactions (level 2).
| SUNOPTA INC. | 19 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(4) Finance lease obligations
The Company has commitments under certain master lease agreements that provide for up to approximately $35 million of financing in the aggregate related to the addition of new plant-based beverage and ingredient extraction processing and packaging equipment. As at September 26, 2020, the related finance leases had not commenced, and no amount of right-of-use assets, or lease liabilities, were recognized on the consolidated balance sheet as of that date.
8. Preferred Stock
Series A Preferred Stock
On October 7, 2016, the Company and SunOpta Foods entered into a subscription agreement (the "Series A Subscription Agreement") with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund II, L.P. (collectively, "Oaktree"). Pursuant to the Series A Subscription Agreement, SunOpta Foods issued an aggregate of 85,000 shares of Series A Preferred Stock to Oaktree for consideration in the amount of $85.0 million. In connection with the issuance of the Series A Preferred Stock, the Company incurred direct and incremental expenses of $6.0 million, which reduced the carrying value of the Series A Preferred Stock. The carrying value of the Series A Preferred Stock is being accreted through charges to accumulated deficit over the period preceding October 7, 2021. For the quarter and three quarters ended September 26, 2020, these accretion charges amounted to $0.3 million (September 28, 2019 - $0.3 million) and $1.0 million (September 28, 2019 - $0.9 million), respectively.
In connection with the Series A Subscription Agreement, the Company agreed to, among other things (i) ensure SunOpta Foods has sufficient funds to pay its obligations under the terms of the Series A Preferred Stock and (ii) grant each holder of Series A Preferred Stock the right to exchange the Series A Preferred Stock for shares of common stock of the Company (the "Common Shares"). The Series A Preferred Stock is non-participating with the Common Shares in dividends and undistributed earnings of the Company.
At any time, the holders of Series A Preferred Stock may exchange their shares of Series A Preferred Stock, in whole or in part, into the number of Common Shares equal to, per share of Series A Preferred Stock, the quotient of the Series A Liquidation Preference divided by the Series A exchange price (such price, the "Series A Exchange Price" and such quotients, the "Series A Exchange Rate"). The Series A Exchange Price is subject to certain anti-dilution adjustments, including a weighted-average adjustment for issuances of Common Shares below the Series A Exchange Price, provided that the Series A Exchange Price may not be lower than $7.00 (subject to adjustment in certain circumstances). On April 24, 2020, in connection with the issuance of Series B-1 Preferred Stock pursuant to the Series B Subscription Agreement (see below), the Series A Exchange Price was reduced from $7.50 to $7.00. As at September 26, 2020 and December 28, 2019, the aggregate shares of Series A Preferred Stock outstanding were exchangeable into 12,633,429 and 11,333,333 Common Shares, respectively.
SunOpta Foods may cause the holders of Series A Preferred Stock to exchange all of their shares of Series A Preferred Stock into a number of Common Shares equal to the number of shares of Series A Preferred Stock outstanding multiplied by the Series A Exchange Rate if (i) fewer than 10% of the shares of Series A Preferred Stock issued on October 7, 2016 remain outstanding, or (ii) on or after October 7, 2019, the average volume-weighted average price of the Common Shares during the then preceding 20 trading day period is greater than 200% of the Series A Exchange Price then in effect. At any time on or after October 7, 2021, SunOpta Foods may redeem all of the Series A Preferred Stock for an amount per share equal to the value of the Series A Liquidation Preference at such time, plus accrued and unpaid dividends.
| SUNOPTA INC. | 20 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
In connection with the Series A Subscription Agreement, the Company issued 11,333,333 Special Shares, Series 1 to Oaktree, which entitles Oaktree to one vote per Special Share, Series 1 on all matters submitted to a vote of the holders of Common Shares, together as a single class, subject to certain exceptions. Additional Special Shares, Series 1 will be issued, or existing Special Shares, Series 1 will be redeemed, as necessary to ensure that the aggregate number of Special Shares, Series 1 outstanding is equal to the number of shares of Series A Preferred Stock outstanding from time to time multiplied by the Series A Exchange Rate in effect at such time. As at September 26, 2020 and December 28, 2019, 12,633,429 and 11,333,333 Special Shares, Series 1 were issued and outstanding.
The Special Shares, Series 1 are not transferable, and the voting rights associated with the Special Shares, Series 1 will terminate upon the transfer of the Series A Preferred Stock to a third party, other than a controlled affiliate of Oaktree. Oaktree is entitled to designate up to two nominees for election to the Board of Directors of the Company (the "Board") and have the right to designate one individual to attend meetings of the Board as a non-voting observer, subject to Oaktree maintaining certain levels of beneficial ownership of Common Shares on an as-exchanged basis. For so long as Oaktree beneficially owns or controls at least 50% of the Series A Preferred Stock issued on October 7, 2016, including any corresponding Common Shares into which such Series A Preferred Stock are exchanged, Oaktree will be entitled to (i) participation rights with respect to future equity offerings of the Company, and (ii) governance rights, including the right to approve certain actions proposed to be taken by the Company and its subsidiaries.
Series B Preferred Stock
On April 15, 2020, the Company and SunOpta Foods entered into a subscription agreement (the "Series B Subscription Agreement") with Oaktree and Engaged Capital, LLC, Engaged Capital Flagship Master Fund, LP and Engaged Capital Co-Invest IV-A, LP (collectively, "Engaged"), which contemplated the issuance by SunOpta Foods of shares of exchangeable, voting Series B-1 Preferred Stock and exchangeable, voting Series B-2 Preferred Stock (together with the Series B-1 Preferred Stock, the "Series B Preferred Stock"). The Series B Preferred Stock ranks on par with the Series A Preferred Stock.
On April 24, 2020, pursuant to the Series B Subscription Agreement, SunOpta Foods issued 15,000 shares of Series B-1 Preferred Stock to each of Oaktree and Engaged for aggregate consideration of $30.0 million and 30,000 shares total. In connection with the issuance of the Series B-1 Preferred Stock, the Company incurred direct and incremental expenses of $3.2 million, which reduced the carrying value of the Series B-1 Preferred Stock. The carrying value of the Series B-1 Preferred Stock is being accreted through charges to accumulated deficit over the period preceding April 24, 2025. For the quarter and three quarters ended September 26, 2020, this accretion charge amounted to $0.1 million and $0.2 million, respectively.
The Series B-1 Preferred Stock has an initial stated value and liquidation preference of $1,000 per share, as adjusted for non-cash dividends declared on the Series B-1 Preferred Stock (the "Series B-1 Liquidation Preference"). Cumulative preferred dividends accrue daily on the Series B-1 Preferred Stock at an annualized rate of 8.0% of the Series B-1 Liquidation Preference prior to September 30, 2029, and 10.0% of the liquidation preference thereafter (subject to an increase of 1.0% per quarter, up to a maximum rate of 5.0% per quarter on the occurrence of certain events of non-compliance). Prior to September 30, 2029, SunOpta Foods may pay dividends in cash or elect, in lieu of paying cash, to add the amount that would have been paid to the Series B-1 Liquidation Preference. The failure to pay dividends in cash for any quarter ending after September 30, 2029 will be an event of non-compliance. For the second quarter of 2020, SunOpta Foods elected to declare dividends on the Series B-1 Preferred Stock to be paid in kind and, as a result, the aggregate Series B-1 Liquidation Preference increased by $0.4 million to $30.4 million. For the third quarter of 2020, the Company accrued unpaid dividends of $0.6 million on the Series B-1 Preferred Stock, which were recorded in accounts payable and accrued liabilities on the consolidated balance sheet as at September 26, 2020.
At any time, the Series B-1 Preferred Stock may be exchanged, in whole or in part, into the number of Common Shares equal to, per share of Series B-1 Preferred Stock, the quotient of the Series B Liquidation Preference divided by $2.50 (such price, the "Series B-1 Exchange Price" and such quotient, the "Series B-1 Exchange Rate"). As at September 26, 2020, the aggregate shares of Series B-1 Preferred Stock outstanding were exchangeable into 12,178,667 Common Shares. The Series B-1 Exchange Price is subject to certain anti-dilution adjustments, including a weighted-average adjustment for issuances of Common Shares below the Series B-1 Exchange Price, provided that the Series B-1 Exchange Price may not be lower than $2.00 (subject to adjustment in certain circumstances).
| SUNOPTA INC. | 21 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
SunOpta Foods may cause the holders of the Series B-1 Preferred Stock to exchange all of their shares of Series B-1 Preferred Stock into a number of Common Shares equal to the number of shares of Series B-1 Preferred Stock outstanding multiplied by the Series B-1 Exchange Rate if (i) fewer than 10% of the shares of Series B-1 Preferred Stock issued on April 24, 2020 remain outstanding, or (ii) on or after April 24, 2023, the average volume-weighted average price of the Common Shares during the then preceding 20 trading day period is greater than 200% of the Series B-1 Exchange Price then in effect.
At any time, if a holder of Series B Preferred Stock elects to exchange, or SunOpta Foods causes an exchange of Series B Preferred Stock, the number of Common Shares delivered to each applicable holder may not cause such holder's beneficial ownership to exceed 19.99% of the Common Shares that would be outstanding immediately following such exchange (the "Series B Exchange Cap").
At any time on or after April 24, 2025, SunOpta Foods may redeem all of the Series B-1 Preferred Stock for an amount per share equal to the value of the Series B-1 Liquidation Preference at such time, plus accrued and unpaid dividends.
Oaktree and Engaged will be entitled to vote the Series B Preferred Stock with the Common Shares on an as-exchanged basis, subject to a permanent 19.99% voting cap. As a result of the voting cap, each of Oaktree and Engaged will only be able to vote its Series B Preferred Stock to the extent that, when taken together with any other voting securities each investor controls, such votes do not exceed 19.99% of the votes eligible to be cast by all security holders of the Company. On April 24, 2020, the Company designated Special Shares, Series 2 to serve as the mechanism for attaching exchanged voting to the Series B Preferred Stock. The Special Shares, Series 2 entitle the holder thereof to one vote per Special Share, Series 2 on all matters submitted to a vote of the holders of Common Shares, voting together as a single class, subject to certain exceptions. The Special Shares, Series 2 are not transferrable and the voting rights associated with the Special Shares, Series 2 will terminate upon the transfer of the shares of Series B Preferred Stock to a third party, other than an affiliate of Oaktree or Engaged, as applicable. As at September 26, 2020, 6,089,333 Special Shares, Series 2 were issued to Engaged, equal to the number of Common Shares issuable to Engaged on the exchange of all of the shares of Series B-1 Preferred Stock held by it, and no Special Shares, Series 2 were issued to Oaktree, as Oaktree was subject to the Series B Exchange Cap.
Prior to July 15, 2020, the Company had the right to require each of Oaktree and Engaged to purchase its proportionate share of up to 15,000 shares of Series B-2 Preferred Stock for aggregate consideration of up to $30.0 million, and up to 30,000 shares total. The Company elected not to exercise this option, and no shares of Series B-2 Preferred Stock have been issued.
9. Stock-Based Compensation
Short-Term Incentive Plan
On April 12, 2020, the Company issued 773,875 Common Shares, net of 368,938 Common Shares withheld for taxes, in connection with the vesting of outstanding performance share units ("PSUs") previously granted to certain employees under the Company's 2019 Short-Term Incentive Plan.
On April 22, 2020, the Company granted a total of 1,827,435 PSUs to certain employees of the Company under its 2020 Short-Term Incentive Plan. The vesting of these PSUs is subject to the Company achieving a predetermined measure of adjusted EBITDA for fiscal 2020 and subject to each employee's continued employment with the Company through April 22, 2021 (the requisite service period). The aggregate grant-date fair value of these PSUs was estimated to be $4.6 million based on a closing price of $2.52 for the Common Shares on the date of grant. Each reporting period, the number of PSUs that are expected to vest is redetermined and the aggregate grant-date fair value of the redetermined number of PSUs is amortized on a straight-line basis over the remaining requisite service period less amounts previously recognized. For the quarter and three quarters ended September 26, 2020, the Company recognized compensation expense of $1.1 million and $1.9 million, respectively, related to the number of these PSUs expected to vest, and the remaining compensation cost related to these PSUs not yet recognized as an expense was determined to be $2.5 million as at September 26, 2020.
| SUNOPTA INC. | 22 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
On June 30, 2020, the Company granted an additional total of 876,181 PSUs to certain other employees of the Company under the 2020 Short-Term Incentive Plan. The vesting date and conditions of these PSUs are the same as the PSUs above granted on April 22, 2020. The aggregate grant-date fair value of these PSUs was estimated to be $4.1 million based on a closing price of $4.70 for the Common Shares on the date of grant. The compensation cost related to these PSUs will be recognized over the requisite service period through April 22, 2021, based on the number of PSUs that are expected to vest. For the quarter ended September 26, 2020, the Company recognized compensation expense of $1.2 million related to the number of these PSUs expected to vest, and the remaining compensation cost related to these PSUs not yet recognized as an expense was determined to be $2.9 million as at September 26, 2020.
Long-Term Incentive Plan
On July 10, 2020, the Company granted 486,919 stock options to selected employees. These stock options vest ratably on each of the first through third anniversaries of the grant date and expire on the tenth anniversary of the grant date. The weighted-average grant-date fair value of the stock options was estimated to be $2.56. The following table summarizes the weighted-average assumptions used in the Black-Scholes option-pricing model to determine the fair value of the stock options granted:
| Grant-date stock price | $ | 4.73 | |
| Exercise price | $ | 4.73 | |
| Dividend yield | 0% | ||
| Expected volatility(1) | 59.9% | ||
| Risk-free interest rate(2) | 0.4% | ||
| Expected life of options (in years)(3) | 6.0 |
(1) Determined based on the historical volatility of the Common Shares over the expected life of the stock options.
(2) Determined based on U.S. Treasury yields with a remaining term equal to the expected life of the stock options.
(3) Determined based on the mid-point of vesting ( through three years) and expiration (ten years).
The aggregate grant-date fair value of stock options awarded to these employees was $1.2 million, which will be recognized on a straight-line basis over the three-year vesting period.
On July 10, 2020, the Company also granted 254,487 PSUs and 130,080 restricted stock units ("RSUs") to these employees. The vesting of the PSUs is subject to the Company achieving predetermined measures of adjusted earnings before interest, taxes, depreciation and amortization for fiscal years ending 2020 through 2022. The RSUs vest ratably on each of the first through third anniversaries of the grant date. Each vested PSU and RSU will entitle the employee to receive one common share of the Company without payment of additional consideration.
The grant-date fair value of each of the PSUs and RSUs was estimated to be $4.91 based on the closing price of the Common Shares on the date of grant. The aggregate grant-date fair values of the PSUs and RSUs were $1.2 million and $0.6 million, respectively. The compensation cost related to the PSUs will be recognized on a straight-line basis over the performance period ending December 31, 2022, based on the number of PSUs that are expected to vest. The compensation cost related to the RSUs will be recognized on a straight-line basis over the three-year vesting period.
| SUNOPTA INC. | 23 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
10. Other Expense (Income), Net
The components of other expense (income) were as follows:
| Quarter ended | Three quarters ended | |||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Contingent consideration(1) | — | — | (2,286 | ) | — | |||||||
| Product withdrawal and recall costs(2) | — | — | (322 | ) | 260 | |||||||
| Settlement loss (gain), net(3) | 721 | (1,332 | ) | 721 | (1,839 | ) | ||||||
| Employee termination and recruitment costs(4) | 54 | 3,222 | 664 | 5,290 | ||||||||
| Facility closure costs(5) | — | — | 365 | 308 | ||||||||
| Loss (gain) on sale of soy and corn business (see note 3) | — | 1,109 | — | (44,269 | ) | |||||||
| Other | 255 | 324 | 257 | 506 | ||||||||
| 1,030 | 3,323 | (601 | ) | (39,744 | ) | |||||||
(1) Contingent consideration
For the three quarters ended September 26, 2020, income represents a gain on the settlement of the final contingent consideration obligation payable under an earn-out arrangement with the former unitholders of Citrusource, LLC, which was acquired by the Company in March 2015. On May 5, 2020, the parties agreed to settle the obligation for $2.0 million, of which $1.0 million was paid at the time of settlement and the remainder is being paid over the subsequent 10 months. As at September 26, 2020, the remaining $0.6 million obligation (December 28, 2019 - $4.3 million) was recorded in the current portion of long-term liabilities on the consolidated balance sheets.
(2) Product withdrawal and recall costs
For the three quarters ended September 26, 2020, income represents the reversal of previously accrued costs related to a withdrawal of certain consumer-packaged products. These costs were recognized in other expense in 2016.
For the three quarters ended September 28, 2019, expense represents product withdrawal and recall costs that were not eligible for reimbursement under the Company's insurance policies or exceeded the limits of those policies, including certain costs related to the recall of certain sunflower products in 2016.
(3) Settlement loss (gain)
For the quarter and three quarters ended September 26, 2020, the Company recognized a $2.4 million loss on the settlement of a customer claim related to the 2016 sunflower product recall (see note 13), which included a cash settlement payment of $4.4 million, partially offset by the receipt of related insurance proceeds. In addition, the Company recognized a $1.7 million gain on the settlement of an unrelated legal matter.
For the quarter and three quarters ended September 28, 2019, the Company recognized gains resulting from settlements related to a legal matter and a project cancellation.
(4) Employee termination and recruitment costs
For the quarter and three quarters ended September 26, 2020, expense represents severance benefits of $0.1 million and $1.6 million, respectively, for employees terminated in connection with the consolidation of the Company's corporate office functions and other headcount reductions under the Value Creation Plan. For the three quarters ended, severance benefits were offset by the reversal of $0.9 million of previously recognized stock-based compensation expense related to forfeited awards previously granted to terminated employees.
| SUNOPTA INC. | 24 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
For the quarter and three quarters ended September 28, 2019, expense represents severance benefits of $3.4 million and $6.9 million, respectively, for employees terminated in connection with the Value Creation Plan, including the Company's former CEO and CFO, partially offset by the reversal of $0.8 million and $2.9 million, respectively, of previously recognized stock-based compensation expense related to forfeited awards previously granted to those employees. In addition, expenses include recruitment and relocation costs related to the Company's CEO and CFO transitions.
(5) Facility closure costs
For the three quarters ended September 26, 2020, expense relates to the costs to close an organic ingredient warehousing facility located in China.
For the three quarters ended September 28, 2019, expense includes the costs to dismantle and move equipment from a former soy extraction facility located in Heuvelton, New York, which was sold in April 2019.
| SUNOPTA INC. | 25 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
11. Loss Per Share
Basic and diluted loss per share were calculated as follows (shares in thousands):
| Quarter ended | Three quarters ended | |||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| Basic Loss Per Share | ||||||||||||
| Numerator for basic earnings (loss) per share | ||||||||||||
| Earnings (loss) attributable to SunOpta Inc. | $89 | $(11,749) | $4,457 | $4,845 | ||||||||
| Less: dividends and accretion on Series A Preferred Stock | (2,110) | (2,009) | (6,201) | (6,005) | ||||||||
| Less: dividends and accretion on Series B Preferred Stock | (734) | — | (1,272) | — | ||||||||
| Loss attributable to common shareholders | $(2,755) | $(13,758) | $(3,016) | $(1,160) | ||||||||
| Denominator for basic earnings (loss) per share | ||||||||||||
| Basic weighted-average number of shares outstanding | 89,635 | 87,928 | 88,962 | 87,695 | ||||||||
| Basic loss per share | $(0.03) | $(0.16) | $(0.03) | $(0.01) | ||||||||
| Diluted Loss Per Share | ||||||||||||
| Numerator for diluted earnings (loss) per share | ||||||||||||
| Earnings (loss) attributable to SunOpta Inc. | $ | 89 | $ | (11,749 | ) | $ | 4,457 | $ | 4,845 | |||
| Less: dividends and accretion on Series A Preferred Stock | (2,110 | ) | (2,009 | ) | (6,201 | ) | (6,005 | ) | ||||
| Less: dividends and accretion on Series B Preferred Stock | (734 | ) | — | (1,272 | ) | — | ||||||
| Loss attributable to common shareholders | $ | (2,755 | ) | $ | (13,758 | ) | $ | (3,016 | ) | $ | (1,160 | ) |
| Denominator for diluted loss per share | ||||||||||||
| Basic weighted-average number of shares outstanding | 89,635 | 87,928 | 88,962 | 87,695 | ||||||||
| Dilutive effect of the following: | ||||||||||||
| Stock options and restricted stock units(1) | — | — | — | — | ||||||||
| Series B Preferred Stock(2) | — | — | — | — | ||||||||
| Series A Preferred Stock(3) | — | — | — | — | ||||||||
| Diluted weighted-average number of shares outstanding | 89,635 | 87,928 | 88,962 | 87,695 | ||||||||
| Diluted loss per share | $ | (0.03 | ) | $ | (0.16 | ) | $ | (0.03 | ) | $ | (0.01 | ) |
(1) For the quarter and three quarters ended September 26, 2020, stock options and restricted stock units to purchase or receive 1,360,975 (September 28, 2019 - 59,981) and 975,742 (September 28, 2019 - 105,486) Common Shares, respectively, were excluded from the calculation of diluted loss per share due to their anti-dilutive effect of reducing the loss per share. In addition, for the quarter and three quarters ended September 26, 2020, stock options to purchase 1,767,856 (September 28, 2019 - 4,248,761) and 3,286,487 (September 28, 2019 - 3,318,583) Common Shares, respectively, were anti-dilutive because the exercise prices of these options were greater than the average market price.
(2) For the quarter and three quarters ended September 26, 2020, it was more dilutive to assume the Series B Preferred Stock was not converted into Common Shares and, therefore, the numerator of the diluted earnings per share calculation was not adjusted to add back the dividends and accretion on the Series B Preferred Stock and the denominator was not adjusted to include 12,178,667 Common Shares issuable on an if-converted basis as at September 26, 2020.
| SUNOPTA INC. | 26 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(3) For the quarters and three quarters ended September 26, 2020 and September 28, 2019, it was more dilutive to assume the Series A Preferred Stock was not converted into Common Shares and, therefore, the numerator of the diluted earnings per share calculation was not adjusted to add back the dividends and accretion on the Series A Preferred Stock and the denominator was not adjusted to include 12,633,429 and 11,333,333 Common Shares issuable on an if-converted basis as at September 26, 2020 and September 28, 2019, respectively.
12. Supplemental Cash Flow Information
| Quarter ended | Three quarters ended | |||||||||||
| September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Changes in Non-Cash Working Capital, Net of Businesses Acquired or Sold | ||||||||||||
| Accounts receivable | (13,822 | ) | (7,822 | ) | (16,799 | ) | (2,086 | ) | ||||
| Inventories | 10,187 | 28,722 | 15,433 | (1,499 | ) | |||||||
| Income tax recoverable/payable | (3,606 | ) | (963 | ) | (1,448 | ) | (1,811 | ) | ||||
| Prepaid expenses and other current assets | (2,451 | ) | (1,856 | ) | 4,726 | (9,827 | ) | |||||
| Accounts payable and accrued liabilities | 13,265 | (12,556 | ) | 9,785 | (5,715 | ) | ||||||
| Customer and other deposits | (68 | ) | (483 | ) | 61 | (1,208 | ) | |||||
| 3,505 | 5,042 | 11,758 | (22,146 | ) | ||||||||
| Non-Cash Investing and Financing Activities | ||||||||||||
| Operating lease right-of-use assets obtained in exchange for | ||||||||||||
| operating lease liabilities | 1,782 | — | 1,975 | — | ||||||||
| Accrued dividends on preferred stock | 2,378 | 1,700 | 2,378 | 1,700 | ||||||||
| Dividend paid in kind on preferred stock | 2,181 | — | 3,881 | — | ||||||||
13. Commitments and Contingencies
Product Recall
On November 20, 2017, Treehouse Foods, Inc., several of its related entities, and its insurer filed a lawsuit against the Company in the Circuit Court of Cook County, Illinois, titled TreeHouse Foods, Inc. et al. ("TreeHouse") v. SunOpta Grains and Food, Inc. The Company was served with the Summons and Complaint on January 24, 2018. After the Company removed the case to the United States District Court for the Northern District of Illinois, the plaintiffs filed an Amended Complaint on April 23, 2018, and a second Amended Complaint on October 12, 2018. The plaintiffs alleged economic damages resulting from the Company's 2016 voluntary recall of certain roasted sunflower kernel products due to the potential for listeria monocytogenes contamination. The plaintiffs brought claims for breach of contract, express and implied warranties and product guarantees, negligence, strict liability, negligent misrepresentation, and indemnity seeking $16.2 million in damages. There were no allegations of personal injury. On March 29, 2019, the court dismissed the plaintiffs' claims for negligence, strict liability, negligent misrepresentation, and common law indemnity. On May 31, 2020, the court granted summary judgment to the Company on TreeHouse's claims for breach of contract and breach of product guarantees, but denied summary judgment on TreeHouse's claims for breach of express and implied warranties. On the remaining claims, the court limited TreeHouse's damages to the purchase price of the product the Company sold to TreeHouse. On September 14, 2020, the Company entered into a Confidential Settlement Agreement and Mutual Release (the "Settlement Agreement") with TreeHouse. The Settlement Agreement resolved the disputed issues among the parties in connection with the litigation filed by TreeHouse against the Company, as described above. Pursuant to the terms of the Settlement Agreement, the Company paid TreeHouse $4.4 million. On September 18, 2020, the parties filed a Stipulation of Dismissal with prejudice and the court entered a corresponding order dismissing the litigation with prejudice.
| SUNOPTA INC. | 27 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Other Claims
In addition, various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.
14. Segmented Information
Effective the fourth quarter of 2019, the Company implemented changes to its organization and leadership structure to align with the operational and strategic objectives established by the Company's CEO. As a result, the Company established two new segments - a Plant-Based Foods and Beverages segment and a Fruit-Based Foods and Beverages segment - based on the synergistic nature of the underlying principal product ingredients. In addition, the Company realigned the Global Ingredients segment to combine its international organic ingredients operations and its co-manufactured premium juice program, based on shared raw material sourcing. Each segment has dedicated management, sales, marketing, plant operations, product development and business support teams, with full accountability to the CEO.
With these changes, the composition of the Company's three operating segments is as follows:
- Global Ingredients includes the sourcing and sale of organic and non-GMO ingredients, including fruits, vegetables, oils, fats, coffee, nuts, dried fruits, sugars, liquid sweeteners, seeds, grains, rice and pulses, and the processing of value-added ingredients including cocoa liquor, butter and powder, sunflower kernel, oil and cakes, sesame seeds, and avocado oil. In addition, it includes third-party co-manufacturing arrangements to produce consumer-packaged premium juice products (including private label orange juices, lemonades, and functional waters), utilizing internally-sourced raw materials. It also included the operations of the soy and corn business that was sold in 2019.
- Plant-Based Foods and Beverages includes plant-based beverages and liquid and dry ingredients (utilizing almond, soy, coconut, oat, hemp, and other bases), as well as broths, teas and nutritional beverages. In addition, it includes packaged dry- and oil-roasted inshell sunflower and sunflower kernels, as well as corn-, soy- and legume-based roasted snacks, and the processing and sale of raw sunflower inshell and kernel for food and feed applications.
- Fruit-Based Foods and Beverages includes individually quick frozen ("IQF") fruit for retail (including strawberries, blueberries, mango, pineapple, blends, and other berries), IQF and bulk frozen fruit for foodservice (including purées, fruit cups and smoothies), and custom fruit preparations for industrial use. In addition, it includes fruit snacks, including bars, twists, ropes and bite-sized varieties.
Corporate Services provides a variety of management, financial, information technology, treasury and administration services to each of the Company's operating segments.
When reviewing the operating results of the Company's operating segments, management uses segment revenues from external customers and segment operating income/loss to assess performance and allocate resources. Segment operating income/loss excludes other income/expense items. In addition, interest expense and income taxes are not allocated to the operating segments.
| SUNOPTA INC. | 28 | September 26, 2020 10-Q |
SunOpta Inc. |
Segment Revenues and Operating Income
Reportable segment operating results for the quarters and three quarters ended September 26, 2020 and September 28, 2019 were as follows:
| Quarter ended | ||||||||||||
| September 26, 2020 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | 123,322 | 99,038 | 92,621 | 314,981 | ||||||||
| Segment operating income (loss) | 5,851 | 13,119 | (1,788 | ) | 17,182 | |||||||
| Corporate Services | (7,803 | ) | ||||||||||
| Other expense, net (see note 10) | (1,030 | ) | ||||||||||
| Interest expense, net | (8,017 | ) | ||||||||||
| Earnings before income taxes | 332 | |||||||||||
| ||||||||||||
| Quarter ended | ||||||||||||
| September 28, 2019 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | 113,356 | 91,811 | 90,774 | 295,941 | ||||||||
| Segment operating income (loss) | 3,400 | 8,707 | (10,639 | ) | 1,468 | |||||||
| Corporate Services | (4,995 | ) | ||||||||||
| Other expense, net (see note 10) | (3,323 | ) | ||||||||||
| Interest expense, net | (8,864 | ) | ||||||||||
| Loss before income taxes | (15,714 | ) | ||||||||||
| Three quarters ended | ||||||||||||
| September 26, 2020 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | 378,217 | 296,985 | 286,672 | 961,874 | ||||||||
| Segment operating income (loss) | 22,003 | 37,456 | (8,506 | ) | 50,953 | |||||||
| Corporate Services | (21,283 | ) | ||||||||||
| Other income, net (see note 10) | 601 | |||||||||||
| Interest expense, net | (24,233 | ) | ||||||||||
| Earnings before income taxes | 6,038 | |||||||||||
| SUNOPTA INC. | 29 | September 26, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended September 26, 2020 and September 28, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| Three quarters ended | ||||||||||||
| September 28, 2019 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | 369,090 | 255,027 | 270,103 | 894,220 | ||||||||
| Segment operating income (loss) | 13,610 | 15,731 | (22,204 | ) | 7,137 | |||||||
| Corporate Services | (12,881 | ) | ||||||||||
| Other income, net (see note 10) | 39,744 | |||||||||||
| Interest expense, net | (25,857 | ) | ||||||||||
| Earnings before income taxes | 8,143 | |||||||||||
Segment Depreciation and Amortization
Depreciation and amortization by reportable segment for the quarters and three quarters ended September 26, 2020 and September 28, 2019 was as follows:
| Quarter ended | Three quarters ended | |||||||||||
September 26, 2020 | September 28, 2019 | September 26, 2020 | September 28, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Global Ingredients | 1,156 | 1,339 | 3,449 | 4,145 | ||||||||
| Plant-Based Foods and Beverages | 2,371 | 1,928 | 7,119 | 4,931 | ||||||||
| Fruit-Based Foods and Beverages | 4,047 | 4,080 | 12,293 | 12,474 | ||||||||
| Total segment depreciation and amortization | 7,574 | 7,347 | 22,861 | 21,550 | ||||||||
| Corporate Services | 1,095 | 1,170 | 3,481 | 3,455 | ||||||||
| Total depreciation and amortization | 8,669 | 8,517 | 26,342 | 25,005 | ||||||||
| SUNOPTA INC. | 30 | September 26, 2020 10-Q |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended September 26, 2020 contained under Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended December 28, 2019 ("Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to October 30, 2020.
Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," or other similar expressions concerning matters that are not historical facts, or the negative of such terms are intended to identify forward-looking statements; however, the absence of these words does not necessarily mean that a statement is not forward-looking. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. These factors are more fully described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current estimates, expectations and projections, which we believe are reasonable as of the date of this report. Forward-looking statements are not guarantees of future performance or events. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements, and we hereby qualify all our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S. dollars, except per share amounts.
Overview
We are a leading global company focused on the manufacture of plant-based and fruit-based foods and beverage products for sale to retail, foodservice and branded food customers. In addition, our global ingredient sourcing and production platform makes us one of the leading suppliers of organic and non-GMO ingredients to the food industry.
Effective the fourth quarter of 2019, we changed our segment reporting to reflect changes to our operating structure. As a result, we established two new segments - a Plant-Based Foods and Beverages segment and a Fruit-Based Foods and Beverages segment - based on the synergistic nature of the underlying principal product ingredients. In addition, we realigned the Global Ingredients segment to combine our international organic ingredients operations and our co-manufactured premium juice program, based on shared raw material sourcing. With these changes, the following is a summary of the principal activities and products that comprise each of our three operating segments:
- Global Ingredients - We sell organic and non-GMO ingredients sourced from over 60 origins around the world. Our portfolio includes fruits, vegetables, oils, fats, coffee, nuts, dried fruits, sugars, liquid sweeteners, seeds, grains, rice and pulses. In addition, utilizing our own production facilities, we process value-added ingredients including cocoa liquor, butter and powder, sunflower kernel, oil and cakes, sesame seeds, and avocado oil. We also engage with third-party co-manufacturers to produce consumer-packaged premium juice products (including private label orange juices, lemonades, and functional waters), utilizing internally-sourced raw materials.
| SUNOPTA INC. | 31 | September 26, 2020 10-Q |
- Plant-Based Foods and Beverages - We offer a full line of plant-based beverages and liquid and dry ingredients (utilizing almond, soy, coconut, oat, hemp, and other bases), as well as broths, teas and nutritional beverages. In addition, we package dry- and oil-roasted inshell sunflower and sunflower kernels, as well as corn-, soy- and legume-based roasted snacks, and we process and sell raw sunflower inshell and kernel for food and feed applications.
- Fruit-Based Foods and Beverages - We offer individually quick frozen ("IQF") fruit for retail (including strawberries, blueberries, mango, pineapple, blends, and other berries), IQF and bulk frozen fruit for foodservice (including purées, fruit cups and smoothies), and custom fruit preparations for industrial use. In addition, we offer fruit snacks, including bars, twists, ropes and bite-sized varieties.
The segment information presented in this MD&A for the quarter and three quarters ended September 28, 2019 has been restated to conform with the preceding changes to our operating structure.
Update on Impact of COVID-19
We continue to actively address the impacts of the COVID-19 pandemic on our global operations. We began to experience impacts to our business and results of operations late in the first quarter of 2020, and these impacts continued through the second and third quarters of 2020. As a result, we saw significant shifts in the mix of our business, resulting in lower demand for our food and beverage products from the foodservice channel due to the full or partial closure of many foodservice outlets, and an increase in demand from retail customers as consumers increased their at-home food and beverage consumption. We saw a return towards normalized levels beginning at the end of the second quarter of 2020, as more foodservice outlets reopened and consumers adapted to the evolving environment, and this trend continued through the third quarter of 2020. However, overall foodservice demand for our products remains below 2019 volume levels and short of our expectations for 2020. In addition, we cannot be certain that the positive trend we have seen since the end of the second quarter of 2020 will continue due to uncertain scope and duration of the pandemic.
To date, we have not experienced any material interruptions in our plant operations due to employee absences, or to our supply chains as a result of the pandemic. Our facilities have largely been exempt from government closure orders where applicable. For the quarter and three quarters ended September 26, 2020, we incurred incremental costs of approximately $0.3 million and $1.7 million, respectively, to provide wage premiums and personal protective equipment for our plant employees, and to implement additional cleaning and disinfecting protocols at our facilities.
In March 2020, we experienced a significant foreign exchange impact from a more than 20% depreciation of the Mexican peso against the U.S. dollar. Subsequently, we entered into a combination of foreign currency put and call option contracts (a zero-cost collar) to hedge our exposure to fluctuations in the Mexican peso on fruit inventory purchases and operating costs in Mexico.
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources.
Overall, based on information available to us as of the date of this report, we believe that we will continue to be able to deliver our products to our customers on a timely basis, while meeting our financial obligations. However, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its ultimate impact on the global economy and our business.
Value Creation Plan
The following table summarizes costs incurred by type under the Value Creation Plan that were charged to expense for the quarters and three quarters ended September 26, 2020 and September 28, 2019:
| SUNOPTA INC. | 32 | September 26, 2020 10-Q |
| Employee | ||||||||||||
| Asset | recruitment, | |||||||||||
| impairments | retention and | |||||||||||
| and facility | termination | Professional | ||||||||||
| closure costs | costs | fees | Total | |||||||||
| For the quarter ended | $ | $ | $ | $ | ||||||||
| September 26, 2020 | ||||||||||||
| Selling, general and administrative expenses | — | 150 | 785 | 935 | ||||||||
| Other expense | — | 54 | — | 54 | ||||||||
| Total | — | 204 | 785 | 989 | ||||||||
| September 28, 2019 | ||||||||||||
| Selling, general and administrative expenses | — | 929 | 686 | 1,615 | ||||||||
| Other expense | — | 3,222 | — | 3,222 | ||||||||
| Total | — | 4,151 | 686 | 4,837 |
| Employee | ||||||||||||
| Asset | recruitment, | |||||||||||
| impairments | retention and | |||||||||||
| and facility | termination | Professional | ||||||||||
| closure costs | costs | fees | Total | |||||||||
| For the three quarters ended | $ | $ | $ | $ | ||||||||
| September 26, 2020 | ||||||||||||
| Selling, general and administrative expenses | — | 860 | 1,574 | 2,434 | ||||||||
| Other expense | 365 | 664 | — | 1,029 | ||||||||
| Total | 365 | 1,524 | 1,574 | 3,463 | ||||||||
| September 28, 2019 | ||||||||||||
| Selling, general and administrative expenses | — | 1,808 | 964 | 2,772 | ||||||||
| Other expense | 308 | 5,290 | — | 5,598 | ||||||||
| Total | 308 | 7,098 | 964 | 8,370 |
For more information regarding the Value Creation Plan, see note 4 to the unaudited consolidated financial statements included in this report.
Acquisition of Sanmark B.V.
On April 1, 2019, we acquired 100% of the outstanding shares of Sanmark B.V. ("Sanmark") for $3.3 million, net of cash acquired, which was financed through existing credit facilities. Sanmark is a sourcing and trading business focused on organic oils for the food, pharmacy, and cosmetic industries, generating most of its sales in the European and Asia-Pacific markets. The operations of Sanmark have been integrated into our organic ingredients operations based in the Netherlands, and the results of operations of Sanmark have been included in Global Ingredients since the date of acquisition.
Sale of Soy and Corn Business
On February 22, 2019, our subsidiary, SunOpta Grains and Foods Inc., completed the sale of our specialty and organic soy and corn business to Pipeline Foods, LLC for $66.5 million, subject to certain post-closing adjustments, which resulted in a pre-tax gain on sale of $44.3 million recognized in the first three quarters of 2019. The soy and corn business engaged in seed and grain conditioning and corn milling and formed part of the Global Ingredients segment. For the period ended February 22, 2019, the soy and corn business generated revenues and gross profit of $10.3 million and $0.2 million, respectively, and reported an operating loss of $0.2 million (excluding management fees charged by Corporate Services). The net proceeds from this transaction were used to repay borrowings and increase availability under our Global Credit Facility (as described below under the heading "Liquidity and Capital Resources").
| SUNOPTA INC. | 33 | September 26, 2020 10-Q |
Consolidated Results of Operations for the Quarters Ended September 26, 2020 and September 28, 2019
| September 26, 2020 | September 28, 2019 | Change | Change | ||||||||||
| For the quarter ended | $ | $ | $ | % | |||||||||
| Revenues | |||||||||||||
| Global Ingredients | 123,322 | 113,356 | 9,966 | 8.8% | |||||||||
| Plant-Based Foods and Beverages | 99,038 | 91,811 | 7,227 | 7.9% | |||||||||
| Fruit-Based Foods and Beverages | 92,621 | 90,774 | 1,847 | 2.0% | |||||||||
| Total revenues | 314,981 | 295,941 | 19,040 | 6.4% | |||||||||
| Gross Profit | |||||||||||||
| Global Ingredients | 15,041 | 11,975 | 3,066 | 25.6% | |||||||||
| Plant-Based Foods and Beverages | 19,715 | 16,321 | 3,394 | 20.8% | |||||||||
| Fruit-Based Foods and Beverages | 7,123 | (1,971 | ) | 9,094 | 461.4% | ||||||||
| Total gross profit | 41,879 | 26,325 | 15,554 | 59.1% | |||||||||
| Segment operating income (loss)(1) | |||||||||||||
| Global Ingredients | 5,851 | 3,400 | 2,451 | 72.1% | |||||||||
| Plant-Based Foods and Beverages | 13,119 | 8,707 | 4,412 | 50.7% | |||||||||
| Fruit-Based Foods and Beverages | (1,788 | ) | (10,639 | ) | 8,851 | 83.2% | |||||||
| Corporate Services | (7,803 | ) | (4,995 | ) | (2,808 | ) | -56.2% | ||||||
| Total segment operating income (loss) | 9,379 | (3,527 | ) | 12,906 | 365.9% | ||||||||
| Other expense, net | 1,030 | 3,323 | (2,293 | ) | -69.0% | ||||||||
| Earnings (loss) before the following | 8,349 | (6,850 | ) | 15,199 | 221.9% | ||||||||
| Interest expense, net | 8,017 | 8,864 | (847 | ) | -9.6% | ||||||||
| Provision for (recovery of) income taxes | 41 | (3,935 | ) | 3,976 | 101.0% | ||||||||
| Net earnings (loss)(2),(3) | 291 | (11,779 | ) | 12,070 | 102.5% | ||||||||
| Earnings (loss) attributable to non-controlling interests | 202 | (30 | ) | 232 | 773.3% | ||||||||
| Earnings (loss) attributable to SunOpta Inc. | 89 | (11,749 | ) | 11,838 | 100.8% | ||||||||
| Dividends and accretion on preferred stock | (2,844 | ) | (2,009 | ) | (835 | ) | -41.6% | ||||||
| Loss attributable to common shareholders(4) | (2,755 | ) | (13,758 | ) | 11,003 | 80.0% | |||||||
(1) When assessing the financial performance of our operating segments, we use an internal measure of operating income/loss that excludes other income/expense items and goodwill impairments determined in accordance with U.S. GAAP. This measure is the basis on which management, including the CEO, assesses the underlying performance of our operating segments.
We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our operating performance. However, the non-GAAP measure of operating income should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. The following table presents a reconciliation of segment operating income/loss to earnings/loss before the following, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 34 | September 26, 2020 10-Q |
| Plant-Based | Fruit-Based | ||||||||||||||
| Global | Foods and | Foods and | Corporate | ||||||||||||
| Ingredients | Beverages | Beverages | Services | Consolidated | |||||||||||
| For the quarter ended | $ | $ | $ | $ | $ | ||||||||||
| September 26, 2020 | |||||||||||||||
| Segment operating income (loss) | 5,851 | 13,119 | (1,788 | ) | (7,803 | ) | 9,379 | ||||||||
| Other income (expense), net | 39 | (1,270 | ) | 13 | 188 | (1,030 | ) | ||||||||
| Earnings (loss) before the following | 5,890 | 11,849 | (1,775 | ) | (7,615 | ) | 8,349 | ||||||||
| September 28, 2019 | |||||||||||||||
| Segment operating income (loss) | 3,400 | 8,707 | (10,639 | ) | (4,995 | ) | (3,527 | ) | |||||||
| Other expense, net | (1,335 | ) | (9 | ) | (212 | ) | (1,767 | ) | (3,323 | ) | |||||
| Earnings (loss) before the following | 2,065 | 8,698 | (10,851 | ) | (6,762 | ) | (6,850 | ) |
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income/loss. However, any measure of operating income/loss excluding any or all of these items is not, and should not be viewed as, a substitute for operating income/loss prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
(2) When assessing our financial performance, we use an internal measure of earnings/loss attributable to common shareholders determined in accordance with U.S. GAAP that excludes specific items recognized in other income/expense, impairment losses on goodwill and long-lived assets, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of our financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations.
The following table presents a reconciliation of adjusted loss from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, in recognition of the sale of the soy and corn business (as described above under the heading "Sale of Soy and Corn Business"), we have prepared this table in a columnar format to present the effect of the disposal of this business on our consolidated results for the quarter ended September 28, 2019. We believe this presentation assists investors in assessing the results of the operations we have disposed of and the effect of those operations on our financial performance.
| SUNOPTA INC. | 35 | September 26, 2020 10-Q |
| Excluding | |||||||||||||||||||
| disposed operations | Disposed operations | Consolidated | |||||||||||||||||
| Per Diluted Share | Per Diluted Share | Per Diluted Share | |||||||||||||||||
| For the quarter ended | $ | $ | $ | $ | $ | $ | |||||||||||||
| September 26, 2020 | |||||||||||||||||||
| Net earnings | 291 | — | 291 | ||||||||||||||||
| Earnings attributable to non-controlling interests | (202 | ) | — | (202 | ) | ||||||||||||||
| Dividends and accretion on preferred stock | (2,844 | ) | — | (2,844 | ) | ||||||||||||||
| Loss attributable to common shareholders | (2,755 | ) | (0.03 | ) | — | — | (2,755 | ) | (0.03 | ) | |||||||||
| Adjusted for: | |||||||||||||||||||
| Costs related to the Value Creation Plan(a) | 989 | — | 989 | ||||||||||||||||
| Legal settlements(b) | 721 | — | 721 | ||||||||||||||||
| Plant expansion costs(c) | 245 | — | 245 | ||||||||||||||||
| Other(d) | 255 | — | 255 | ||||||||||||||||
| Net income tax effect(e) | (721 | ) | — | (721 | ) | ||||||||||||||
| Adjusted loss | (1,266 | ) | (0.01 | ) | — | — | (1,266 | ) | (0.01 | ) | |||||||||
| September 28, 2019 | |||||||||||||||||||
| Net loss | (10,974 | ) | (805 | ) | (11,779 | ) | |||||||||||||
| Loss attributable to non-controlling interests | 30 | — | 30 | ||||||||||||||||
| Dividends and accretion on preferred stock | (2,009 | ) | — | (2,009 | ) | ||||||||||||||
| Loss attributable to common shareholders | (12,953 | ) | (0.15 | ) | (805 | ) | (0.01 | ) | (13,758 | ) | (0.16 | ) | |||||||
| Adjusted for: | |||||||||||||||||||
| Costs related to Value Creation Plan(f) | 4,837 | — | 4,837 | ||||||||||||||||
| Post-closing adjustments and other costs related to sale of soy and corn business(g) | — | 1,109 | 1,109 | ||||||||||||||||
| Contract manufacturer transition costs(h) | 159 | — | 159 | ||||||||||||||||
| Other(i) | (1,166 | ) | — | (1,166 | ) | ||||||||||||||
| Net income tax effect(e) | (764 | ) | (304 | ) | (1,068 | ) | |||||||||||||
| Adjusted loss | (9,887 | ) | (0.11 | ) | — | — | (9,887 | ) | (0.11 | ) | |||||||||
(a) Reflects professional fees of $0.8 million and employee retention costs of $0.1 million recorded in SG&A expenses, and employee termination costs of $0.1 million recorded in other expense.
(b) Reflects a loss of $2.4 million on the settlement of a customer claim related to the recall of certain sunflower products in 2016, net of a $1.7 million gain on the settlement of an unrelated legal matter, which were recorded in other expense/income.
(c) Reflects costs related to the expansion of our plant-based extraction capabilities at our Alexandria, Minnesota, facility, which were recorded in cost of goods sold.
(d) Other includes a loss on the disposal of assets, which was recorded in other expense.
(e) Reflects the tax effect of the preceding adjustments to earnings and reflects an overall estimated annual effective tax rate of approximately 30% for the quarter ended September 26, 2020 (September 28, 2019 - 27%) on adjusted loss before tax.
(f) Reflects employee retention and relocation costs of $0.9 million, and professional fees of $0.7 million recorded in SG&A expenses; and employee termination costs of $3.4 million (offset by a reversal of $0.8 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees), and CFO recruitment costs of $0.6 million recorded in other expense.
(g) Reflects post-closing adjustments and transaction costs incurred in connection with the sale of the soy and corn business, which reduced the gain on sale recorded in other income.
(h) Reflects the write-down of assets related to the transition of premium juice production activities to new contract manufacturers, which was recorded in other expense.
(i) Other includes a legal settlement gain of $1.3 million, offset by losses on disposal of assets, which were recorded in other income/expense.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings/loss. However, adjusted earnings/loss is not, and should not be viewed as, a substitute for earnings prepared under U.S. GAAP. Adjusted earnings/loss is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) We use a measure of adjusted EBITDA when assessing the performance of our operations, which we believe is useful to investors' understanding of our operating profitability because it excludes non-operating expenses, such as interest and income taxes, and non-cash expenses, such as depreciation, amortization, stock-based compensation and asset impairment charges, as well as other unusual items that affect the comparability of operating performance. We also use this measure to review and assess our progress under the Value Creation Plan and to assess operating performance in connection with our employee incentive programs. In addition, we are subject to certain restrictions on incurring additional indebtedness based on availability and metrics that include in their calculation a measure of EBITDA. We define adjusted EBITDA as segment operating income/loss plus depreciation, amortization and non-cash stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings/loss (refer above to footnote (2)). The following table presents a reconciliation of segment operating income/loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, as described above under footnote (2), we have prepared this table in a columnar format to present the effect of the disposal of the soy and corn business on our consolidated results for the quarter ended September 28, 2019. We believe this presentation assists investors in assessing the results of the operations we have disposed of and the effect of those operations on our financial performance.
| SUNOPTA INC. | 36 | September 26, 2020 10-Q |
| Excluding | ||||||||||
| disposed operations | Disposed operations | Consolidated | ||||||||
| For the quarter ended | $ | $ | $ | |||||||
| September 26, 2020 | ||||||||||
| Net earnings | 291 | — | 291 | |||||||
| Provision for income taxes | 41 | — | 41 | |||||||
| Interest expense, net | 8,017 | — | 8,017 | |||||||
| Other expense, net | 1,030 | — | 1,030 | |||||||
| Total segment operating income | 9,379 | — | 9,379 | |||||||
| Depreciation and amortization | 8,669 | — | 8,669 | |||||||
| Stock-based compensation | 3,536 | — | 3,536 | |||||||
| Costs related to Value Creation Plan(a) | 935 | — | 935 | |||||||
| Plant expansion costs(b) | 245 | — | 245 | |||||||
| Adjusted EBITDA | 22,764 | — | 22,764 | |||||||
| September 28, 2019 | ||||||||||
| Net loss | (10,974 | ) | (805 | ) | (11,779 | ) | ||||
| Recovery of income taxes | (3,631 | ) | (304 | ) | (3,935 | ) | ||||
| Interest expense, net | 8,864 | — | 8,864 | |||||||
| Other expense, net | 2,214 | 1,109 | 3,323 | |||||||
| Total segment operating loss | (3,527 | ) | — | (3,527 | ) | |||||
| Depreciation and amortization | 8,517 | — | 8,517 | |||||||
| Stock-based compensation | 3,327 | — | 3,327 | |||||||
| Costs related to Value Creation Plan(a) | 1,615 | — | 1,615 | |||||||
| Adjusted EBITDA | 9,932 | — | 9,932 | |||||||
(a) For the third quarters of 2020 and 2019, reflects professional fees and employee retention costs of $0.9 million and $1.6 million, respectively, recorded in SG&A expenses.
(b) For the third quarter of 2020, reflects costs related to the expansion of our plant-based extraction capabilities at our Alexandria, Minnesota, facility, which were recorded in cost of goods sold.
Although we use adjusted EBITDA as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
- adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest payments on our indebtedness;
- adjusted EBITDA does not include the recovery/payment of taxes, which is a necessary element of our operations;
- although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and
- adjusted EBITDA does not include non-cash stock-based compensation, which is an important component of our total compensation program for employees and directors.
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income/loss, earnings and adjusted earnings/loss to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. In particular, we evaluate our revenues on a basis that excludes the effects of fluctuations in commodity pricing and foreign exchange rates. In addition, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for, an analysis of our results as reported under U.S. GAAP.
| SUNOPTA INC. | 37 | September 26, 2020 10-Q |
| SUNOPTA INC. | 38 | September 26, 2020 10-Q |
| Global Ingredients | ||||||||||||
| For the quarter ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Revenues | $ | 123,322 | $ | 113,356 | $ | 9,966 | 8.8% | |||||
| Gross profit | 15,041 | 11,975 | 3,066 | 25.6% | ||||||||
| Gross profit % | 12.2% | 10.6% | 1.6% | |||||||||
| Operating income | $ | 5,851 | $ | 3,400 | $ | 2,451 | 72.1% | |||||
| Operating income % | 4.7% | 3.0% | 1.7% |
Global Ingredients Revenue Changes | ||
Revenues for the quarter ended September 28, 2019 | $113,356 | |
Increased sales volumes of organic ingredients including coffee (reflecting a rebound in volumes to foodservice customers following COVID-19-related impacts in the first half of 2020), fruits and vegetables (reflecting higher volume, lower priced sales to reduce inventory positions), nuts (reflecting increased availability of raw material supply), and cocoa (reflecting increased production volumes of cocoa ingredients), partially offset by lower volumes of animal feed and grains (due to the exit from underperforming bulk categories) | 6,043 | |
Higher sales volumes and pricing for premium juice products | 3,397 | |
Favorable foreign exchange impact on euro-denominated sales due to a weaker U.S. dollar period-over-period | 1,763 | |
Decreased commodity pricing for organic ingredients | (1,237) | |
Revenues for the quarter ended September 26, 2020 | $123,322 | |
| SUNOPTA INC. | 39 | September 26, 2020 10-Q |
Global Ingredients Gross Profit Changes | ||
Gross profit for the quarter ended September 28, 2019 | $11,975 | |
Higher pricing spreads on seeds, animal feed and grains, and increased sales volumes of organic ingredients, including coffee, cocoa and nuts, together with increased production volumes and manufacturing efficiencies in our cocoa and sunflower operations, partially offset by an increase in cocoa commodity hedging losses ($1.0 million), lower-margin sales to reduce certain inventory positions, and manufacturing inefficiencies at our organic avocado oil facility | 2,172 | |
Higher sales volumes and pricing, and lower bottling costs for premium juice products | 894 | |
Gross profit for the quarter ended September 26, 2020 | $15,041 | |
Global Ingredients Operating Income Changes | ||
Operating income for the quarter ended September 28, 2019 | $3,400 | |
Increase in gross profit, as explained above | 3,066 | |
Lower employee compensation costs due to lower headcount, and reduced spending associated with travel and marketing activities, partially offset by an unfavorable foreign exchange impact on euro-denominated SG&A expenses and higher employee-related variable compensation | 1,100 | |
Decrease in corporate cost allocations | 304 | |
Decrease in mark-to-market gains related to forward currency contracts ($1.4 million), together with net foreign exchange losses on the revaluation of U.S. dollar-denominated receivable and payable balances | (2,019) | |
Operating income for the quarter ended September 26, 2020 | $5,851 | |
| Plant-Based Foods and Beverages | ||||||||||||
| For the quarter ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Revenues | $ | 99,038 | $ | 91,811 | $ | 7,227 | 7.9% | |||||
| Gross profit | 19,715 | 16,321 | 3,394 | 20.8% | ||||||||
| Gross profit % | 19.9% | 17.8% | 2.1% | |||||||||
| Operating income | $ | 13,119 | $ | 8,707 | $ | 4,412 | 50.7% | |||||
| Operating income % | 13.2% | 9.5% | 3.7% |
| SUNOPTA INC. | 40 | September 26, 2020 10-Q |
Plant-Based Foods and Beverages Revenue Changes | ||
Revenues for the quarter ended September 28, 2019 | $91,811 | |
Higher retail sales volumes of plant-based beverages and everyday broth offerings, and increased demand for plant-based ingredients, partially offset by reduced sales volumes of plant-based beverage products to foodservice customers | 8,526 | |
Increased commodity pricing for sunflower | 1,170 | |
Lower volumes of sunflower inshell and kernel, and roasted snacks and ingredients, partially offset by higher volumes of birdfeed | (2,469) | |
Revenues for the quarter ended September 26, 2020 | $99,038 | |
Plant-Based Foods and Beverages Gross Profit Changes | ||
Gross profit for the quarter ended September 28, 2019 | $16,321 | |
Higher sales volumes, plant utilization and productivity improvements within our plant-based beverage and ingredient extraction operations | 3,712 | |
Lower volumes of sunflower inshell and kernel, partially offset by higher volumes of birdfeed | (318) | |
Gross profit for the quarter ended September 26, 2020 | $19,715 | |
Plant-Based Foods and Beverages Operating Income Changes | ||
Operating income for the quarter ended September 28, 2019 | $8,707 | |
Increase in gross profit, as explained above | 3,394 | |
Decrease in corporate cost allocations | 675 | |
Lower employee compensation costs due to headcount reductions, together with reduced travel and marketing costs, partially offset by higher product development spending and employee-related variable compensation | 343 | |
Operating income for the quarter ended September 26, 2020 | $13,119 | |
| SUNOPTA INC. | 41 | September 26, 2020 10-Q |
| Fruit-Based Foods and Beverages | ||||||||||||
| For the quarter ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Revenues | $ | 92,621 | $ | 90,774 | $ | 1,847 | 2.0% | |||||
| Gross profit | 7,123 | (1,971 | ) | 9,094 | 461.4% | |||||||
| Gross profit % | 7.7% | -2.2% | 9.9% | |||||||||
| Operating loss | $ | (1,788 | ) | $ | (10,639 | ) | $ | 8,851 | 83.2% | |||
| Operating loss % | -1.9% | -11.7% | 9.8% |
Fruit-Based Foods and Beverages Revenue Changes | ||
Revenues for the quarter ended September 28, 2019 | $90,774 | |
Higher sales volumes of fruit snack products | 1,713 | |
Increased commodity pricing for raw fruit | 1,232 | |
Lower demand for frozen fruit and fruit preparations from foodservice customers, together with sales volume constraints due to a short supply of frozen strawberries from California, partially offset by increased volumes of frozen fruit into the retail channel | (1,098) | |
Revenues for the quarter ended September 26, 2020 | $92,621 | |
| SUNOPTA INC. | 42 | September 26, 2020 10-Q |
Fruit-Based Foods and Beverages Gross Profit Changes | ||
Gross profit for the quarter ended September 28, 2019 | $(1,971) | |
Impact of higher sales volumes and pricing for frozen fruit, including a favorable mix of higher-margin retail versus foodservice sales, together with lower processing costs and productivity improvements for frozen fruit | 8,536 | |
Higher sales volumes and favorable product mix for fruit snacks | 558 | |
Gross profit for the quarter ended September 26, 2020 | $7,123 | |
Fruit-Based Foods and Beverages Operating Loss Changes | ||
Operating loss for the quarter ended September 28, 2019 | $(10,639) | |
Increase in gross profit, as explained above | 9,094 | |
Decrease in corporate cost allocations | 737 | |
Impact of reserves for credit losses due to weaker economic conditions, together with increased employee compensation related to new management hires and employee-related variable compensation, partially offset by a favorable foreign exchange impact on Mexican peso-denominated SG&A expenses | (980) | |
Operating loss for the quarter ended September 26, 2020 | $(1,788) | |
| Corporate Services | ||||||||||||
| For the quarter ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Operating loss | $ | (7,803 | ) | $ | (4,995 | ) | $ | (2,808 | ) | -56.2% |
| SUNOPTA INC. | 43 | September 26, 2020 10-Q |
Corporate Services Operating Loss Changes | ||
Operating loss for the quarter ended September 28, 2019 | $(4,995) | |
Decrease in corporate cost allocations to SunOpta operating segments, as a result of lower corporate headcount and overhead costs | (1,716) | |
Higher employee-related variable compensation and benefit costs, partially offset by the impact of headcount reductions and reduced travel costs, together with favorable foreign exchange impact on Canadian dollar-denominated SG&A expenses, and realized gains on Mexican peso hedging activities | (1,565) | |
Increased stock-based compensation costs related to equity-based annual bonus and long-term incentive plans for certain employees | (207) | |
Lower employee retention costs associated with the Value Creation Plan, partially offset by higher professional fees | 680 | |
Operating loss for the quarter ended September 26, 2020 | $(7,803) | |
| SUNOPTA INC. | 44 | September 26, 2020 10-Q |
| September 26, 2020 | September 28, 2019 | Change | Change | ||||||||||
| For the three quarters ended | $ | $ | $ | % | |||||||||
| Revenues | |||||||||||||
| Global Ingredients | 378,217 | 369,090 | 9,127 | 2.5% | |||||||||
| Plant-Based Foods and Beverages | 296,985 | 255,027 | 41,958 | 16.5% | |||||||||
| Fruit-Based Foods and Beverages | 286,672 | 270,103 | 16,569 | 6.1% | |||||||||
| Total revenues | 961,874 | 894,220 | 67,654 | 7.6% | |||||||||
| Gross Profit | |||||||||||||
| Global Ingredients | 48,021 | 38,744 | 9,277 | 23.9% | |||||||||
| Plant-Based Foods and Beverages | 57,517 | 38,931 | 18,586 | 47.7% | |||||||||
| Fruit-Based Foods and Beverages | 19,753 | 4,183 | 15,570 | 372.2% | |||||||||
| Total gross profit | 125,291 | 81,858 | 43,433 | 53.1% | |||||||||
| Segment operating income (loss)(1) | |||||||||||||
| Global Ingredients | 22,003 | 13,610 | 8,393 | 61.7% | |||||||||
| Plant-Based Foods and Beverages | 37,456 | 15,731 | 21,725 | 138.1% | |||||||||
| Fruit-Based Foods and Beverages | (8,506 | ) | (22,204 | ) | 13,698 | 61.7% | |||||||
| Corporate Services | (21,283 | ) | (12,881 | ) | (8,402 | ) | -65.2% | ||||||
| Total segment operating income (loss) | 29,670 | (5,744 | ) | 35,414 | 616.5% | ||||||||
| Other income, net | (601 | ) | (39,744 | ) | 39,143 | 98.5% | |||||||
| Earnings before the following | 30,271 | 34,000 | (3,729 | ) | -11.0% | ||||||||
| Interest expense, net | 24,233 | 25,857 | (1,624 | ) | -6.3% | ||||||||
| Provision for income taxes | 1,623 | 3,239 | (1,616 | ) | -49.9% | ||||||||
| Net earnings(2),(3) | 4,415 | 4,904 | (489 | ) | -10.0% | ||||||||
| Earnings (loss) attributable to non-controlling interests | (42 | ) | 59 | (101 | ) | -171.2% | |||||||
| Earnings attributable to SunOpta Inc. | 4,457 | 4,845 | (388 | ) | -8.0% | ||||||||
| Dividends and accretion on preferred stock | (7,473 | ) | (6,005 | ) | (1,468 | ) | -24.4% | ||||||
| Loss attributable to common shareholders(4) | (3,016 | ) | (1,160 | ) | (1,856 | ) | -160.0% | ||||||
| Plant-Based | Fruit-Based | ||||||||||||||
| Global | Foods and | Foods and | Corporate | ||||||||||||
| Ingredients | Beverages | Beverages | Services | Consolidated | |||||||||||
| For the three quarters ended | $ | $ | $ | $ | $ | ||||||||||
| September 26, 2020 | |||||||||||||||
| Segment operating income (loss) | 22,003 | 37,456 | (8,506 | ) | (21,283 | ) | 29,670 | ||||||||
| Other income (expense), net | 1,371 | (1,262 | ) | (428 | ) | 920 | 601 | ||||||||
| Earnings (loss) before the following | 23,374 | 36,194 | (8,934 | ) | (20,363 | ) | 30,271 | ||||||||
| September 28, 2019 | |||||||||||||||
| Segment operating income (loss) | 13,610 | 15,731 | (22,204 | ) | (12,881 | ) | (5,744 | ) | |||||||
| Other income (expense), net | 43,993 | (405 | ) | (974 | ) | (2,870 | ) | 39,744 | |||||||
| Earnings (loss) before the following | 57,603 | 15,326 | (23,178 | ) | (15,751 | ) | 34,000 |
| SUNOPTA INC. | 45 | September 26, 2020 10-Q |
| Excluding | |||||||||||||||||||
| disposed operations | Disposed operations | Consolidated | |||||||||||||||||
| Per Diluted Share | Per Diluted Share | Per Diluted Share | |||||||||||||||||
| For the three quarters ended | $ | $ | $ | $ | $ | $ | |||||||||||||
| September 26, 2020 | |||||||||||||||||||
| Net earnings | 4,415 | — | 4,415 | ||||||||||||||||
| Loss attributable to non-controlling interests | 42 | — | 42 | ||||||||||||||||
| Dividends and accretion on preferred stock | (7,473 | ) | — | (7,473 | ) | ||||||||||||||
| Loss attributable to common shareholders | (3,016 | ) | (0.03 | ) | — | — | (3,016 | ) | (0.03 | ) | |||||||||
| Adjusted for: | |||||||||||||||||||
| Costs related to the Value Creation Plan(a) | 3,463 | — | 3,463 | ||||||||||||||||
| Legal settlements(b) | 721 | — | 721 | ||||||||||||||||
| Plant expansion costs(c) | 337 | — | 337 | ||||||||||||||||
| Contingent consideration settlement(d) | (2,286 | ) | — | (2,286 | ) | ||||||||||||||
| Other(e) | (65 | ) | — | (65 | ) | ||||||||||||||
| Net income tax effect(f) | (839 | ) | — | (839 | ) | ||||||||||||||
| Adjusted loss | (1,685 | ) | (0.02 | ) | — | — | (1,685 | ) | (0.02 | ) | |||||||||
| September 28, 2019 | |||||||||||||||||||
| Net earnings (loss) | (26,941 | ) | 31,845 | 4,904 | |||||||||||||||
| Earnings attributable to non-controlling interests | (59 | ) | — | (59 | ) | ||||||||||||||
| Dividends and accretion on preferred stock | (6,005 | ) | — | (6,005 | ) | ||||||||||||||
| Earnings (loss) attributable to common shareholders | (33,005 | ) | (0.38 | ) | 31,845 | 0.36 | (1,160 | ) | (0.01 | ) | |||||||||
| Adjusted for: | |||||||||||||||||||
| Gain on sale of soy and corn business(g) | — | (44,269 | ) | (44,269 | ) | ||||||||||||||
| Costs related to Value Creation Plan(h) | 8,370 | — | 8,370 | ||||||||||||||||
| Contract manufacturer transition costs(i) | 448 | — | 448 | ||||||||||||||||
| Plant expansion costs(j) | 311 | — | 311 | ||||||||||||||||
| Product withdrawal and recall costs(k) | 260 | — | 260 | ||||||||||||||||
| Other(l) | (1,491 | ) | — | (1,491 | ) | ||||||||||||||
| Net income tax effect(f) | (1,379 | ) | 12,130 | 10,751 | |||||||||||||||
| Adjusted loss | (26,486 | ) | (0.30 | ) | (294 | ) | (0.00 | ) | (26,780 | ) | (0.31 | ) | |||||||
| SUNOPTA INC. | 46 | September 26, 2020 10-Q |
| Excluding | ||||||||||
| disposed operations | Disposed operations | Consolidated | ||||||||
| For the three quarters ended | $ | $ | $ | |||||||
| September 26, 2020 | ||||||||||
| Net earnings | 4,415 | — | 4,415 | |||||||
| Provision for income taxes | 1,623 | — | 1,623 | |||||||
| Interest expense, net | 24,233 | — | 24,233 | |||||||
| Other income, net | (601 | ) | — | (601 | ) | |||||
| Total segment operating income | 29,670 | — | 29,670 | |||||||
| Depreciation and amortization | 26,342 | — | 26,342 | |||||||
| Stock-based compensation(a) | 8,810 | — | 8,810 | |||||||
| Costs related to Value Creation Plan(b) | 2,434 | — | 2,434 | |||||||
| Plant expansion costs(c) | 337 | — | 337 | |||||||
| Adjusted EBITDA | 67,593 | — | 67,593 | |||||||
| September 28, 2019 | ||||||||||
| Net earnings (loss) | (26,941 | ) | 31,845 | 4,904 | ||||||
| Provision for (recovery of) income taxes | (8,779 | ) | 12,018 | 3,239 | ||||||
| Interest expense, net | 25,857 | — | 25,857 | |||||||
| Other expense (income), net | 4,525 | (44,269 | ) | (39,744 | ) | |||||
| Total segment operating loss | (5,338 | ) | (406 | ) | (5,744 | ) | ||||
| Depreciation and amortization | 24,876 | 129 | 25,005 | |||||||
| Stock-based compensation(a) | 8,265 | — | 8,265 | |||||||
| Costs related to Value Creation Plan(b) | 2,772 | — | 2,772 | |||||||
| Plant expansion costs(c) | 311 | — | 311 | |||||||
| Contract manufacturer transition costs(d) | 289 | — | 289 | |||||||
| Adjusted EBITDA | 31,175 | (277 | ) | 30,898 | ||||||
| SUNOPTA INC. | 47 | September 26, 2020 10-Q |
| SUNOPTA INC. | 48 | September 26, 2020 10-Q |
| Global Ingredients | ||||||||||||
| For the three quarters ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Revenues | $ | 378,217 | $ | 369,090 | $ | 9,127 | 2.5% | |||||
| Gross profit | 48,021 | 38,744 | 9,277 | 23.9% | ||||||||
| Gross profit % | 12.7% | 10.5% | 2.2% | |||||||||
| Operating income | $ | 22,003 | $ | 13,610 | $ | 8,393 | 61.7% | |||||
| Operating income % | 5.8% | 3.7% | 2.1% |
Global Ingredients Revenue Changes | ||
Revenues for the three quarters ended September 28, 2019 | $369,090 | |
Increased sales volumes of organic ingredients including cocoa (reflecting increased production volumes of cocoa ingredients and sales of cocoa beans), oils (including incremental revenues from Sanmark and increased production volumes of sunflower oil), and fruits and vegetables (reflecting higher volume, lower priced sales to reduce inventory positions), partially offset by lower volumes of animal feed and grains (due to the exit from underperforming bulk categories), and coffee (reflecting the impact of COVID-19 on foodservice customers in the first half of 2020) | 17,164 | |
Higher sales volumes and pricing for premium juice products | 10,810 | |
Impact of the sale of soy and corn business | (10,346) | |
Decreased commodity pricing for organic ingredients | (8,228) | |
Unfavorable foreign exchange impact on euro-denominated sales due to a stronger U.S. dollar period-over-period | (273) | |
Revenues for the three quarters ended September 26, 2020 | $378,217 | |
| SUNOPTA INC. | 49 | September 26, 2020 10-Q |
Global Ingredients Gross Profit Changes | ||
Gross profit for the three quarters ended September 28, 2019 | $38,744 | |
Higher pricing spreads on seed, nuts, animal feed and grains, and increased sales volumes of organic ingredients, including cocoa and oils, together with increased production volumes and manufacturing efficiencies in our cocoa and sunflower operations, and an increase in cocoa commodity hedging gains ($0.8 million), partially offset by lower volumes and pricing for coffee, lower-margin sales to reduce certain inventory positions, and manufacturing inefficiencies at our organic avocado oil facility | 6,257 | |
Higher sales volumes and pricing, and lower bottling costs for premium juice products | 3,200 | |
Impact of the sale of the soy and corn business | (180) | |
Gross profit for the three quarters ended September 26, 2020 | $48,021 | |
Global Ingredients Operating Income Changes | ||
Operating income for the three quarters ended September 28, 2019 | $13,610 | |
Increase in gross profit, as explained above | 9,277 | |
Lower employee compensation costs due to lower headcount, and reduced spending associated with travel and marketing activities, together with SG&A reductions from the sale of the soy and corn business, partially offset by higher employee-related variable compensation | 1,843 | |
Decrease in corporate cost allocations | 919 | |
Decrease in mark-to-market gains related to forward currency contracts ($2.2 million), together with net foreign exchange losses on the revaluation of U.S. dollar-denominated receivable and payable balances | (3,646) | |
Operating income for the three quarters ended September 26, 2020 | $22,003 | |
| Plant-Based Foods and Beverages | ||||||||||||
| For the three quarters ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Revenues | $ | 296,985 | $ | 255,027 | $ | 41,958 | 16.5% | |||||
| Gross profit | 57,517 | 38,931 | 18,586 | 47.7% | ||||||||
| Gross profit % | 19.4% | 15.3% | 4.1% | |||||||||
| Operating income | $ | 37,456 | $ | 15,731 | $ | 21,725 | 138.1% | |||||
| Operating income % | 12.6% | 6.2% | 6.4% |
| SUNOPTA INC. | 50 | September 26, 2020 10-Q |
Plant-Based Foods and Beverages Revenue Changes | ||
Revenues for the three quarters ended September 28, 2019 | $255,027 | |
Higher retail sales volumes of plant-based beverages and everyday broth offerings, including output from additional aseptic processing capacity that came on-line in the third quarter of 2019, as well as increased demand for plant-based ingredients, partially offset by reduced sales volumes of plant-based beverage products to foodservice customers | 39,608 | |
Increased commodity pricing for sunflower | 3,929 | |
Lower volumes of sunflower inshell and kernel, and roasted ingredients, partially offset by higher volumes of birdfeed and roasted snacks | (1,579) | |
Revenues for the three quarters ended September 26, 2020 | $296,985 | |
Plant-Based Foods and Beverages Gross Profit Changes | ||
Gross profit for the three quarters ended September 28, 2019 | $38,931 | |
Higher sales volumes, plant utilization and productivity improvements within our plant-based beverage and ingredient extraction operations | 18,210 | |
Higher sales volumes of birdfeed and roasted snacks and improved plant utilization within our sunflower and roasting operations, partially offset by lower volumes of sunflower inshell and kernel | 376 | |
Gross profit for the three quarters ended September 26, 2020 | $57,517 | |
Plant-Based Foods and Beverages Operating Income Changes | ||
Operating income for the three quarters ended September 28, 2019 | $15,731 | |
Increase in gross profit, as explained above | 18,586 | |
Decrease in corporate cost allocations | 2,024 | |
Lower employee compensation costs due to headcount reductions and reduced travel and marketing costs, partially offset by higher product development spending and employee-related variable compensation | 1,115 | |
Operating income for the three quarters ended September 26, 2020 | $37,456 | |
| SUNOPTA INC. | 51 | September 26, 2020 10-Q |
| Fruit-Based Foods and Beverages | ||||||||||||
| For the three quarters ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Revenues | $ | 286,672 | $ | 270,103 | $ | 16,569 | 6.1% | |||||
| Gross profit | 19,753 | 4,183 | 15,570 | 372.2% | ||||||||
| Gross profit % | 6.9% | 1.5% | 5.4% | |||||||||
| Operating loss | $ | (8,506 | ) | $ | (22,204 | ) | $ | 13,698 | 61.7% | |||
| Operating loss % | -3.0% | -8.2% | 5.2% |
Fruit-Based Foods and Beverages Revenue Changes | ||
Revenues for the three quarters ended September 28, 2019 | $270,103 | |
Increased volumes of frozen fruit into the retail channel, partially offset by lower demand for frozen fruit and fruit preparations from foodservice customers, together with sales volume constraints due to a short supply of frozen strawberries from California | 7,735 | |
Increased commodity pricing for raw fruit | 7,123 | |
Higher sales volumes of fruit snacks products | 1,711 | |
Revenues for the three quarters ended September 26, 2020 | $286,672 | |
Fruit-Based Foods and Beverages Gross Profit Changes | ||
Gross profit for the three quarters ended September 28, 2019 | $4,183 | |
Impact of higher sales volumes and pricing for frozen fruit, including a favorable mix of higher-margin retail versus foodservice sales, together with lower processing costs and productivity improvements for frozen fruit, partially offset by lower sales volumes and plant utilization for fruit ingredients | 15,853 | |
Lower production volumes and plant utilization for fruit snacks due to the timing of customer promotions, partially offset by higher sales volumes | (283) | |
Gross profit for the three quarters ended September 26, 2020 | $19,753 | |
| SUNOPTA INC. | 52 | September 26, 2020 10-Q |
Fruit-Based Foods and Beverages Operating Loss Changes | ||
Operating loss for the three quarters ended September 28, 2019 | $(22,204) | |
Increase in gross profit, as explained above | 15,570 | |
Decrease in corporate cost allocations | 2,211 | |
Unfavorable foreign exchange impact on our frozen fruit operations in Mexico due to a decline in the value of the Mexican peso in the first quarter of 2020, and the impact of reserves for credit losses due to weaker economic conditions, together with increased employee compensation related to new management hires and higher employee-related variable compensation | (4,083) | |
Operating loss for the three quarters ended September 26, 2020 | $(8,506) | |
| Corporate Services | ||||||||||||
| For the three quarters ended | September 26, 2020 | September 28, 2019 | Change | % Change | ||||||||
| Operating loss | $ | (21,283 | ) | $ | (12,881 | ) | $ | (8,402 | ) | -65.2% |
Corporate Services Operating Loss Changes | ||
Operating loss for the three quarters ended September 28, 2019 | $(12,881) | |
Decrease in corporate cost allocations to SunOpta operating segments, as a result of lower corporate headcount and overhead costs | (5,154) | |
Higher employee-related variable compensation and benefit costs, partially offset by the impact of headcount reductions and reduced travel costs, together with favorable foreign exchange impact on Canadian dollar-denominated SG&A expenses, and realized gains on Mexican peso hedging activities | (3,043) | |
Increased stock-based compensation costs related to equity-based annual bonus and long-term incentive plans for certain employees | (543) | |
Lower employee retention costs associated with the Value Creation Plan, partially offset by higher professional fees | 338 | |
Operating loss for the three quarters ended September 26, 2020 | $(21,283) | |
| SUNOPTA INC. | 53 | September 26, 2020 10-Q |
| SUNOPTA INC. | 54 | September 26, 2020 10-Q |
| SUNOPTA INC. | 55 | September 26, 2020 10-Q |
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of the Form 10-K. There have been no material changes to our exposures to market risks since December 28, 2019.
| SUNOPTA INC. | 56 | September 26, 2020 10-Q |
| SUNOPTA INC. | 57 | September 26, 2020 10-Q |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see note 13 to the unaudited consolidated financial statements included under Part I, Item 1 of this report.
Item 1A. Risk Factors
Certain risks associated with our operations are discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 28, 2019. Except as described below, there have been no material changes to the previously reported risk factors as of the date of this quarterly report. Our previously reported risk factors, together with the information below, should be carefully reviewed in connection with an evaluation of our Company.
Risks Related to Our Business
The COVID-19 pandemic has significantly impacted worldwide economic conditions and could have a material adverse effect on our business and financial results
Our business and financial results may be negatively impacted by the 2019 novel coronavirus (COVID-19) pandemic, including causing significant volatility in customer demand for our products, changes in consumer behaviour and preference, disruptions in our supply chain operations, disruptions to our business expansion plans, limitations on our employees' ability to work and travel, significant changes in the economic conditions in markets in which we operate and related currency and commodity volatility, and pressure on our liquidity. In addition, while we have not experienced any material interruptions in our plant operations to date, and our facilities have largely been exempt from government closure orders where applicable, it is possible during the pandemic that we could experience employee absences that cause interruptions in our plant operations, and we may not be exempt from future government closure orders depending on the specific circumstances. Despite our efforts to manage these impacts, they also depend on factors beyond our knowledge or control, including the duration and severity of the COVID-19 pandemic and actions taken to contain its spread and mitigate its public health effects. As a result, we cannot reasonably estimate the negative impact of the COVID-19 pandemic on our business and financial results, but the impact could be material and last for an extended period.
Item 6. Exhibits
The following exhibits are included as part of this report.
| SUNOPTA INC. | 58 | September 26, 2020 10-Q |
* Filed herewith.
† Indicates management contract or compensatory plan or arrangement.
| SUNOPTA INC. | 59 | September 26, 2020 10-Q |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SUNOPTA INC. | |
| Date: October 30, 2020 | /s/ Scott Huckins |
| Scott Huckins | |
| Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
| SUNOPTA INC. | 60 | September 26, 2020 10-Q |