UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 1, 2016September 30, 2017
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 | |
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 [X] No [_][ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [_][ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“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 [X]
The number of the registrant’s common shares outstanding as of November 4, 20163, 2017 was 85,656,820.86,707,385.
SUNOPTA INC.
FORM 10-Q
For the quarterly period ended October 1, 2016September 30, 2017
TABLE OF CONTENTS
PART I | ||
Item 1. | ||
Consolidated Statements of Operations for the quarters and three quarters ended September 30, 2017 and October 1, 2016 | 5 | |
Consolidated Statements of Comprehensive | 6 | |
Consolidated Balance Sheets as at | 7 | |
Consolidated Statements of Shareholders’ Equity as at and for the three quarters ended September 30, 2017 and October 1, 2016 | 8 | |
Consolidated Statements of Cash Flows for the quarters and three quarters ended September 30, 2017 and October 1, 2016 | 9 | |
Notes to Consolidated Financial Statements | 11 | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | |
Item 4 | Controls and Procedures | 56 |
PART II | OTHER INFORMATION | |
Item 1 | Legal Proceedings | |
Item 1A | Risk Factors | |
Item 5 | Other Information | 57 |
Item 6 | Exhibits
|
Basis of Presentation
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (“Form 10-Q”) to the “Company”, “SunOpta”, “we”, “us”, “our” or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together.
In this report, all currency amounts presented are expressed in thousands of United States (“U.S.”) dollars (“$”), except per share amounts, unless otherwise stated. Amounts expressed in Canadian dollars are expressedOther amounts may be presented in thousands of Canadian dollars (“C$”), euros (“€”), Mexican pesos (“M$”) and preceded by the symbol “Cdn $”, and amounts expressed in euros are expressed in thousands of euros and preceded by the symbol “€British pounds (“£”). As at October 1, 2016,September 30, 2017, the closing rates of exchange for the U.S.Canadian dollar, euro, Mexican peso and British pound, expressed in CanadianU.S. dollars, based on Bank of Canada exchange rates, were C$0.8013, €1.1812, M$0.0550 and euros, were $1.00 = Cdn $1.3117 and $1.00 = €0.8901.£1.3394. These rates are provided solely for convenience and do not necessarily reflect the rates used in the preparation of our financial statements.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which are based on our 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”, “continue”, “believe”, “expect”, “could”, “would”, “should”, “might”, “plan”, “will”, “may”, “predict”, the negatives of such terms, and words and phrases of similar impact and include, but are not limited to references to our acquisition of Sunrise Holdings (Delaware) Inc. (“Sunrise”); business acquisition transaction values; future financial and operating results, plans, objectives, expectations and intentions,intentions; our ability to implement the four pillars and other statements that are not historical facts;achieve the objectives of our strategic Value Creation Plan, including realizing our targeted earnings before income taxes, depreciation and amortization (“EBITDA”), expected benefits from EBITDA enhancements implemented to-date, and targeted working capital efficiencies; estimated losses and related insurance recoveries associated with the recall of certain roasted sunflower kernel products; anticipated timing for discontinuing nutrition bar product lines and operations, and the amount and timing and resultsof related exit costs; anticipated timing for completion of the expansion of our process to identify a permanent Chief Executive Officer; additional charges associated with the closure of our San Bernardino, CaliforniaMexican frozen fruit facility; possible operational consolidation; reductionrationalization of non-core assets and operations; business strategies; plant and production capacities; revenue generation potential; anticipated construction costs; competitive strengths; goals; capital expenditure plans; business and operational growth and expansion plans; anticipated operating margins and operating income targets; gains or losses associated with business transactions; cost reductions; rationalization and improved efficiency initiatives; proposed new product offerings; and references to the future growth of our business and global markets for our products.products; 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. | 2 |
Whether actual results and developments will agree with and meet our expectations and predictions is subject to many risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from our expectations and predictions. We believe these factors include, but are not limited to, the following:
• | failure or inability to complete our ongoing operational review and implement value creation strategies in a timely manner; | |
• | conflicts of interest between our significant investors and our other stakeholders; | |
• | 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 achieve expected growth rates; | |
• | impairment charges in goodwill or other intangible assets; | |
• | the highly competitive industry in which we operate; | |
• | that our customers may choose not to buy products from us; | |
• | loss of one or more key customers; | |
• | changes and difficulty in predicting consumer preferences for natural and organic food products; | |
• | the effective management of our supply chain; | |
• | volatility in the prices of raw materials and energy; | |
• | the availability of organic and non-genetically modified ingredients; | |
• | unfavorable growing and operating conditions due to adverse weather conditions; | |
• | an interruption at one or more of our manufacturing facilities; | |
• | technology failures that could disrupt our operations and negatively impact our business; | |
• | the loss of service of our key management; | |
• | labor shortages or increased labor costs; | |
• | technological innovation by our competitors; |
SUNOPTA INC. | 3 |
• | 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; | |
• | the enactment of climate change laws; | |
• | fluctuations in exchange rates, interest rates and the prices of certain commodities; | |
• | exposure to our international operations; | |
• | increased vulnerability to economic downturns and adverse industry conditions due to our level of indebtedness; | |
• | restrictions under the terms of our debt and equity instruments on how we may operate our business; | |
• | our ability to renew our revolving asset-based credit facility (the “Global Credit Facility”) when it becomes due on February 10, 2021; | |
• | ability to meet the financial covenants under the Global Credit Facility or to obtain necessary waivers from our lenders; | |
• | ability to effectively manage our growth and integrate acquired companies; | |
• | ability to achieve the estimated benefits or synergies to be realized from business acquisitions; | |
• | exposure to unknown liabilities arising from business acquisitions; | |
• | unexpected disruptions on our business resulting from business acquisitions; | |
• | ability to successfully consummate possible future divestitures of businesses; | |
• | 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 equity- based awards, 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. | 4 | September 30, 2017 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. We do not undertake any obligation to update our forward-looking statements 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 January 2,December 31, 2016. 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 year ended January 2,December 31, 2016, 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. |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SunOpta Inc. |
Consolidated Statements of Operations |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. |
Quarter ended | Three quarters ended | |||||||||||
October 1, 2016 | October 3, 2015 | October 1, 2016 | October 3, 2015 | |||||||||
$ | $ | $ | $ | |||||||||
(note 1) | (note 1) | |||||||||||
Revenues | 348,732 | 277,213 | 1,049,192 | 828,756 | ||||||||
| ||||||||||||
Cost of goods sold | 307,702 | 250,904 | 940,283 | 743,624 | ||||||||
| ||||||||||||
Gross profit | 41,030 | 26,309 | 108,909 | 85,132 | ||||||||
| ||||||||||||
Selling, general and administrative expenses | 23,915 | 21,020 | 72,676 | 61,031 | ||||||||
Intangible asset amortization | 2,826 | 786 | 8,472 | 2,105 | ||||||||
Other expense, net (note 9) | 10,312 | 3,652 | 22,723 | 4,393 | ||||||||
Foreign exchange loss (gain) | 1,068 | 404 | 3,060 | (1,046 | ) | |||||||
| ||||||||||||
Earnings from continuing operations before the following | 2,909 | 447 | 1,978 | 18,649 | ||||||||
| ||||||||||||
Interest expense, net | 12,178 | 1,103 | 34,748 | 3,171 | ||||||||
| ||||||||||||
Earnings (loss) from continuing operations before income taxes | (9,269 | ) | (656 | ) | (32,770 | ) | 15,478 | |||||
| ||||||||||||
Provision for (recovery of) income taxes (note 10) | (5,411 | ) | (568 | ) | (15,632 | ) | 4,838 | |||||
| ||||||||||||
Earnings (loss) from continuing operations | (3,858 | ) | (88 | ) | (17,138 | ) | 10,640 | |||||
| ||||||||||||
Discontinued operations(note 3) | ||||||||||||
Earnings (loss) from discontinued operations | - | 699 | (1,993 | ) | (3,551 | ) | ||||||
Gain on classification as held for sale | - | - | 560 | - | ||||||||
Recovery of (provision for) income taxes | - | (75 | ) | 599 | (964 | ) | ||||||
Loss (earnings) from discontinued operations attributable to non-controlling interests | - | (116 | ) | 264 | 1,556 | |||||||
Earnings (loss) from discontinued operations attributable to SunOpta Inc. | - | 508 | (570 | ) | (2,959 | ) | ||||||
Earnings (loss) | (3,858 | ) | 420 | (17,708 | ) | 7,681 | ||||||
Earnings (loss) attributable to non-controlling interests | (503 | ) | 106 | 4 | 84 | |||||||
Earnings (loss) attributable to SunOpta Inc. | (3,355 | ) | 314 | (17,712 | ) | 7,597 | ||||||
Earnings (loss) per share – basic(note 11) | ||||||||||||
- from continuing operations | (0.04 | ) | - | (0.20 | ) | 0.15 | ||||||
- from discontinued operations | - | 0.01 | (0.01 | ) | (0.04 | ) | ||||||
(0.04 | ) | - | (0.21 | ) | 0.11 | |||||||
Earnings (loss) per share – diluted(note 11) | ||||||||||||
- from continuing operations | (0.04 | ) | - | (0.20 | ) | 0.15 | ||||||
- from discontinued operations | - | 0.01 | (0.01 | ) | (0.04 | ) | ||||||
(0.04 | ) | - | (0.21 | ) | 0.11 |
(See accompanying notes to consolidated financial statements)
| Quarter ended | Three quarters ended | ||||||||||
| October 1, 2016 | October 3, 2015 | October 1, 2016 | October 3, 2015 | ||||||||
| $ | $ | $ | $ | ||||||||
| ||||||||||||
| (note 1) | (note 1) | ||||||||||
| ||||||||||||
Earnings (loss) from continuing operations | (3,858 | ) | (88 | ) | (17,138 | ) | 10,640 | |||||
Earnings (loss) from discontinued operations attributable to SunOpta Inc. | - | 508 | (570 | ) | (2,959 | ) | ||||||
Earnings (loss) | (3,858 | ) | 420 | (17,708 | ) | 7,681 | ||||||
| ||||||||||||
Change in fair value of interest rate swap, net of taxes | - | - | - | (129 | ) | |||||||
Reclassification adjustment for loss included in earnings | - | - | - | 339 | ||||||||
Unrealized gain on interest rate swap, net | - | - | - | 210 | ||||||||
| ||||||||||||
Currency translation adjustment | 689 | 823 | 282 | (3,009 | ) | |||||||
| ||||||||||||
Other comprehensive earnings (loss), net of income taxes | 689 | 823 | 282 | (2,799 | ) | |||||||
| ||||||||||||
Comprehensive earnings (loss) | (3,169 | ) | 1,243 | (17,426 | ) | 4,882 | ||||||
| ||||||||||||
Comprehensive earnings (loss) attributable to non-controlling interests | (482 | ) | 51 | (486 | ) | (2,072 | ) | |||||
| ||||||||||||
Comprehensive earnings (loss) attributable to SunOpta Inc. | (2,687 | ) | 1,192 | (16,940 | ) | 6,954 |
Quarter ended | Three quarters ended | |||||||||||
September 30, | September 30, | |||||||||||
2017 | October 1, 2016 | 2017 | October 1, 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Revenues | 320,713 | 348,732 | 987,198 | 1,049,192 | ||||||||
Cost of goods sold | 284,258 | 307,702 | 870,382 | 940,283 | ||||||||
Gross profit | 36,455 | 41,030 | 116,816 | 108,909 | ||||||||
Selling, general and administrative expenses | 26,102 | 23,915 | 99,413 | 72,676 | ||||||||
Intangible asset amortization | 2,817 | 2,826 | 8,429 | 8,472 | ||||||||
Other expense, net (note 12) | 5,972 | 10,312 | 12,022 | 22,723 | ||||||||
Foreign exchange loss | 2,575 | 1,068 | 4,350 | 3,060 | ||||||||
Earnings (loss) from continuing operations before thefollowing | (1,011 | ) | 2,909 | (7,398 | ) | 1,978 | ||||||
Interest expense, net | 8,371 | 12,178 | 23,820 | 34,748 | ||||||||
Loss from continuing operations before income taxes | (9,382 | ) | (9,269 | ) | (31,218 | ) | (32,770 | ) | ||||
Recovery of income taxes | (3,499 | ) | (5,411 | ) | (14,049 | ) | (15,632 | ) | ||||
Loss from continuing operations | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,138 | ) | ||||
Discontinued operations(note 4) | ||||||||||||
Loss from discontinued operations | - | - | - | (1,993 | ) | |||||||
Gain on classification as held for sale | - | - | - | 560 | ||||||||
Recovery of income taxes | - | - | - | 599 | ||||||||
Loss from discontinued operations attributable to non-controlling interests | - | - | - | 264 | ||||||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | |||||||
Loss | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,708 | ) | ||||
Earnings (loss) attributable to non-controlling interests | 144 | (503 | ) | 664 | 4 | |||||||
Loss attributable to SunOpta Inc. | (6,027 | ) | (3,355 | ) | (17,833 | ) | (17,712 | ) | ||||
Loss per share – basic(note 13) | ||||||||||||
- from continuing operations | (0.09 | ) | (0.04 | ) | (0.27 | ) | (0.20 | ) | ||||
- from discontinued operations | - | - | - | (0.01 | ) | |||||||
(0.09 | ) | (0.04 | ) | (0.27 | ) | (0.21 | ) | |||||
Loss per share – diluted(note 13) | ||||||||||||
- from continuing operations | (0.09 | ) | (0.04 | ) | (0.27 | ) | (0.20 | ) | ||||
- from discontinued operations | - | - | - | (0.01 | ) | |||||||
(0.09 | ) | (0.04 | ) | (0.27 | ) | (0.21 | ) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 6 |
SunOpta Inc. |
Consolidated |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. dollars) |
October 1, 2016 | January 2, 2016 | |||||
$ | $ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | 1,639 | 2,274 | ||||
Accounts receivable | 173,880 | 117,412 | ||||
Inventories (note 6) | 393,689 | 371,223 | ||||
Prepaid expenses and other current assets | 23,455 | 20,088 | ||||
Current income taxes recoverable | 9,390 | 21,728 | ||||
Current assets held for sale (notes 1 and 3) | - | 64,330 | ||||
Total current assets | 602,053 | 597,055 | ||||
| ||||||
Property, plant and equipment | 161,252 | 176,513 | ||||
Goodwill(note 2) | 241,585 | 241,690 | ||||
Intangible assets(note 2) | 186,603 | 195,008 | ||||
Deferred income taxes | 958 | 958 | ||||
Other assets | 11,797 | 7,979 | ||||
| ||||||
Total assets | 1,204,248 | 1,219,203 | ||||
| ||||||
LIABILITIES | ||||||
Current liabilities | ||||||
Bank indebtedness (note 7) | 226,651 | 159,773 | ||||
Accounts payable and accrued liabilities | 170,343 | 151,831 | ||||
Customer and other deposits | 1,029 | 5,322 | ||||
Income taxes payable | 4,189 | 1,720 | ||||
Other current liabilities | 1,208 | 1,521 | ||||
Current portion of long-term debt (note 7) | 2,159 | 1,773 | ||||
Current portion of long-term liabilities (note 2) | 5,365 | 5,243 | ||||
Current liabilities held for sale (notes 1 and 3) | - | 52,486 | ||||
Total current liabilities | 410,944 | 379,669 | ||||
| ||||||
Long-term debt(note 7) | 317,484 | 321,222 | ||||
Long-term liabilities(note 2) | 15,828 | 17,809 | ||||
Deferred income taxes | 54,564 | 74,324 | ||||
Total liabilities | 798,820 | 793,024 | ||||
| ||||||
EQUITY | ||||||
SunOpta Inc. shareholders’ equity | ||||||
Common shares, no par value, unlimited shares authorized, 85,653,788 shares issued and outstanding (January 2, 2016 - 85,417,849) | 299,470 | 297,987 | ||||
Additional paid-in capital | 24,931 | 22,327 | ||||
Retained earnings | 89,126 | 106,838 | ||||
Accumulated other comprehensive loss | (10,699 | ) | (6,113 | ) | ||
402,828 | 421,039 | |||||
Non-controlling interests | 2,600 | 5,140 | ||||
Total equity | 405,428 | 426,179 | ||||
Total equity and liabilities | 1,204,248 | 1,219,203 |
Quarter ended | Three quarters ended | |||||||||||
September 30, | September 30, | |||||||||||
2017 | October 1, 2016 | 2017 | October 1, 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Loss from continuing operations | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,138 | ) | ||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | |||||||
Loss | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,708 | ) | ||||
Other comprehensive earnings, net of income taxes | ||||||||||||
Changes related to cash flow hedges (note 6) | ||||||||||||
Unrealized gains | 155 | - | 1,568 | - | ||||||||
Reclassification of gains to earnings | (107 | ) | - | (1,311 | ) | - | ||||||
Net changes related to cash flow hedges | 48 | - | 257 | - | ||||||||
Currency translation adjustment | 1,459 | 689 | 4,954 | 282 | ||||||||
Other comprehensive earnings, net of income taxes | 1,507 | 689 | 5,211 | 282 | ||||||||
Comprehensive loss | (4,376 | ) | (3,169 | ) | (11,958 | ) | (17,426 | ) | ||||
Comprehensive earnings (loss) attributable to non-controlling interests | 52 | (482 | ) | 617 | (486 | ) | ||||||
Comprehensive loss attributable to SunOpta Inc. | (4,428 | ) | (2,687 | ) | (12,575 | ) | (16,940 | ) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 7 | September 30, 2017 10-Q |
SunOpta Inc. |
Consolidated Balance Sheets |
As at September 30, 2017 and December 31, 2016 |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. dollars) |
September 30, 2017 | December 31, 2016 | |||||
$ | $ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | 2,855 | 1,251 | ||||
Accounts receivable | 147,481 | 157,369 | ||||
Inventories (note 7) | 370,599 | 368,482 | ||||
Prepaid expenses and other current assets | 37,257 | 19,794 | ||||
Income taxes recoverable | 4,862 | 2,801 | ||||
Assets held for sale (note 2) | 1,250 | - | ||||
Total current assets | 564,304 | 549,697 | ||||
Property, plant and equipment | 160,100 | 162,239 | ||||
Goodwill | 224,415 | 223,611 | ||||
Intangible assets | 174,808 | 183,524 | ||||
Deferred income taxes | 1,056 | 1,045 | ||||
Other assets | 8,411 | 9,442 | ||||
Total assets | 1,133,094 | 1,129,558 | ||||
LIABILITIES | ||||||
Current liabilities | ||||||
Bank indebtedness (note 8) | 259,008 | 201,494 | ||||
Accounts payable and accrued liabilities | 156,538 | 173,745 | ||||
Customer and other deposits | 638 | 2,543 | ||||
Income taxes payable | 2,371 | 5,661 | ||||
Other current liabilities | 251 | 1,016 | ||||
Current portion of long-term debt (note 8) | 2,045 | 2,079 | ||||
Current portion of long-term liabilities | 5,304 | 5,500 | ||||
Total current liabilities | 426,155 | 392,038 | ||||
Long-term debt(note 8) | 228,761 | 229,008 | ||||
Long-term liabilities | 8,281 | 15,354 | ||||
Deferred income taxes | 31,281 | 44,561 | ||||
Total liabilities | 694,478 | 680,961 | ||||
Series A Preferred Stock(note 9) | 79,932 | 79,184 | ||||
EQUITY | ||||||
SunOpta Inc. shareholders’ equity | ||||||
Common shares, no par value, unlimited shares authorized, 86,673,271 shares issued (December 31, 2016 - 85,743,958) | 308,319 | 300,426 | ||||
Additional paid-in capital | 26,657 | 25,522 | ||||
Retained earnings | 30,157 | 53,838 | ||||
Accumulated other comprehensive loss (note 11) | (7,928 | ) | (13,104 | ) | ||
357,205 | 366,682 | |||||
Non-controlling interests | 1,479 | 2,731 | ||||
Total equity | 358,684 | 369,413 | ||||
Total equity and liabilities | 1,133,094 | 1,129,558 |
Commitments and contingencies(note 13)15)
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc. |
Consolidated Statements of Shareholders’ Equity |
As at and for the three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. dollars) |
| Accumulated | ||||||||||||||||||||
| Additional | other com- | Non- | ||||||||||||||||||
| paid-in | Retained | prehensive | controlling | |||||||||||||||||
| Common shares | capital | earnings | loss | interests | Total | |||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | ||||||||||||||
| |||||||||||||||||||||
Balance at January 2, 2016 | 85,418 | 297,987 | 22,327 | 106,838 | (6,113 | ) | 5,140 | 426,179 | |||||||||||||
| |||||||||||||||||||||
Employee stock purchase plan | 67 | 326 | - | - | - | - | 326 | ||||||||||||||
Stock incentive plan | 169 | 1,157 | (569 | ) | - | - | - | 588 | |||||||||||||
Stock-based compensation | - | - | 3,173 | - | - | - | 3,173 | ||||||||||||||
Loss from continuing operations | - | - | - | (17,142 | ) | - | 4 | (17,138 | ) | ||||||||||||
Loss from discontinued operations, net of income taxes (note 3) | - | - | - | (570 | ) | - | (264 | ) | (834 | ) | |||||||||||
Disposition of discontinued operation (note 3) | - | - | - | - | (5,094 | ) | (2,054 | ) | (7,148 | ) | |||||||||||
Currency translation adjustment | - | - | - | - | 508 | (226 | ) | 282 | |||||||||||||
| |||||||||||||||||||||
Balance at October 1, 2016 | 85,654 | 299,470 | 24,931 | 89,126 | (10,699 | ) | 2,600 | 405,428 |
Accumulated | |||||||||||||||||||||
Additional | other com- | Non- | |||||||||||||||||||
paid-in | Retained | prehensive | controlling | ||||||||||||||||||
Common shares | capital | earnings | loss | interests | Total | ||||||||||||||||
000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
Balance at December 31, 2016 | 85,744 | 300,426 | 25,522 | 53,838 | (13,104 | ) | 2,731 | 369,413 | |||||||||||||
Employee share purchase plan | 40 | 281 | - | - | - | - | 281 | ||||||||||||||
Stock incentive plan | 889 | 7,612 | (3,212 | ) | - | - | - | 4,400 | |||||||||||||
Stock-based compensation | - | - | 4,133 | - | - | - | 4,133 | ||||||||||||||
Dividends on Series A Preferred Stock (note 9) | - | - | - | (5,100 | ) | - | - | (5,100 | ) | ||||||||||||
Accretion on Series A Preferred Stock (note 9) | - | - | - | (748 | ) | - | - | (748 | ) | ||||||||||||
Loss from continuing operations | - | - | - | (17,833 | ) | - | 664 | (17,169 | ) | ||||||||||||
Currency translation adjustment | - | - | - | - | 5,001 | (47 | ) | 4,954 | |||||||||||||
Cash flow hedges, net of income taxes of $110 (note 6) | - | - | - | - | 257 | - | 257 | ||||||||||||||
Acquisitions of non-controlling interests (note 3) | - | - | 214 | - | (82 | ) | (1,869 | ) | (1,737 | ) | |||||||||||
Balance at September 30, 2017 | 86,673 | 308,319 | 26,657 | 30,157 | (7,928 | ) | 1,479 | 358,684 |
| Accumulated | ||||||||||||||||||||
| Additional | other com- | Non- | ||||||||||||||||||
| paid-in | Retained | prehensive | controlling | |||||||||||||||||
| Common shares | capital | earnings | loss | interests | Total | |||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | ||||||||||||||
| |||||||||||||||||||||
Balance at January 3, 2015 | 67,074 | 190,668 | 22,490 | 129,309 | (1,778 | ) | 12,639 | 353,328 | |||||||||||||
| |||||||||||||||||||||
Issuance of common shares, net | 16,670 | 96,544 | - | - | - | - | 96,544 | ||||||||||||||
Employee stock purchase plan | 36 | 451 | - | - | - | - | 451 | ||||||||||||||
Stock incentive plan | 704 | 4,624 | (1,597 | ) | - | - | - | 3,027 | |||||||||||||
Warrants | 850 | 6,042 | (2,163 | ) | - | - | - | 3,879 | |||||||||||||
Stock-based compensation | - | - | 4,140 | - | - | - | 4,140 | ||||||||||||||
Earnings from continuing operations | - | - | - | 10,556 | - | 84 | 10,640 | ||||||||||||||
Loss from discontinued operations, net of income taxes | - | - | - | (2,959 | ) | - | (1,556 | ) | (4,515 | ) | |||||||||||
Currency translation adjustment | - | - | - | - | (2,338 | ) | (671 | ) | (3,009 | ) | |||||||||||
Change in fair value of interest rate swap, net of income taxes | - | - | - | - | 139 | 71 | 210 | ||||||||||||||
Acquisition of non-controlling interest | - | - | (1,018 | ) | - | - | 285 | (733 | ) | ||||||||||||
| |||||||||||||||||||||
Balance at October 3, 2015 | 85,334 | 298,329 | 21,852 | 136,906 | (3,977 | ) | 10,852 | 463,962 |
Accumulated | |||||||||||||||||||||
Additional | other com- | Non- | |||||||||||||||||||
paid-in | Retained | prehensive | controlling | ||||||||||||||||||
Common shares | capital | earnings | loss | interests | Total | ||||||||||||||||
000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
Balance at January 2, 2016 | 85,418 | 297,987 | 22,327 | 106,838 | (6,113 | ) | 5,140 | 426,179 | |||||||||||||
Employee share purchase plan | 67 | 326 | - | - | - | - | 326 | ||||||||||||||
Stock incentive plan | 169 | 1,157 | (569 | ) | - | - | - | 588 | |||||||||||||
Stock-based compensation | - | - | 3,173 | - | - | - | 3,173 | ||||||||||||||
Loss from continuing operations | - | - | - | (17,142 | ) | - | 4 | (17,138 | ) | ||||||||||||
Currency translation adjustment | - | - | - | - | 508 | (226 | ) | 282 | |||||||||||||
Loss from discontinued operations, net of income taxes (note 4) | - | - | - | (570 | ) | - | (264 | ) | (834 | ) | |||||||||||
Disposition of discontinued operation (note 4) | - | - | - | - | (5,094 | ) | (2,054 | ) | (7,148 | ) | |||||||||||
Balance at October 1, 2016 | 85,654 | 299,470 | 24,931 | 89,126 | (10,699 | ) | 2,600 | 405,428 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc. |
Consolidated Statements of Cash Flows |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(Expressed in thousands of U.S. dollars) |
Quarter ended | Three quarters ended | |||||||||||
October 1, 2016 | October 3, 2015 | October 1, 2016 | October 3, 2015 | |||||||||
$ | $ | $ | $ | |||||||||
(note 1) | (note 1) | |||||||||||
CASH PROVIDED BY (USED IN) | ||||||||||||
| ||||||||||||
Operating activities | ||||||||||||
Earnings (loss) | (3,858 | ) | 420 | (17,708 | ) | 7,681 | ||||||
Earnings (loss) from discontinued operations attributable to SunOpta Inc. | - | 508 | (570 | ) | (2,959 | ) | ||||||
Earnings (loss) from continuing operations | (3,858 | ) | (88 | ) | (17,138 | ) | 10,640 | |||||
| ||||||||||||
Items not affecting cash: | ||||||||||||
Depreciation and amortization | 8,646 | 4,414 | 25,955 | 12,739 | ||||||||
Acquisition accounting adjustment on inventory sold | 1,890 | - | 13,404 | - | ||||||||
Amortization and write-off of debt issuance costs (note 7) | 3,988 | 124 | 10,210 | 327 | ||||||||
Impairment of long-lived assets (note 9) | 10,300 | - | 12,035 | - | ||||||||
Deferred income taxes | (5,252 | ) | 835 | (19,760 | ) | 697 | ||||||
Stock-based compensation | 1,181 | 1,804 | 3,173 | 3,832 | ||||||||
Unrealized gain on derivative instruments (note 5) | (749 | ) | (1,088 | ) | (1,264 | ) | (534 | ) | ||||
Fair value of contingent consideration (note 9) | 124 | 235 | (1,281 | ) | 317 | |||||||
Other | (64 | ) | (581 | ) | 343 | 1,237 | ||||||
Changes in non-cash working capital, net of businesses acquired (note 12) | 836 | 12,648 | (60,943 | ) | (28,965 | ) | ||||||
Net cash flows from operations - continuing operations | 17,042 | 18,303 | (35,266 | ) | 290 | |||||||
Net cash flows from operations - discontinued operations | - | 4,241 | 758 | 5,490 | ||||||||
| 17,042 | 22,544 | (34,508 | ) | 5,780 | |||||||
Investing activities | ||||||||||||
Purchases of property, plant and equipment | (5,463 | ) | (6,866 | ) | (14,803 | ) | (21,841 | ) | ||||
Acquisition of businesses (note 2) | - | (6,475 | ) | - | (19,775 | ) | ||||||
Payment of contingent consideration (note 5) | - | - | (4,554 | ) | - | |||||||
Proceeds from sale of assets | - | 348 | - | 1,292 | ||||||||
Other | - | 147 | 700 | (778 | ) | |||||||
Net cash flows from investing activities - continuing operations | (5,463 | ) | (12,846 | ) | (18,657 | ) | (41,102 | ) | ||||
Net cash flows from investing activities - discontinued operations | - | (785 | ) | 1,754 | (1,224 | ) | ||||||
| (5,463 | ) | (13,631 | ) | (16,903 | ) | (42,326 | ) | ||||
Financing activities | ||||||||||||
Increase (decrease) under line of credit facilities (note 7) | (13,097 | ) | (3,206 | ) | 258,475 | 31,291 | ||||||
Repayment of line of credit facilities (note 7) | - | - | (192,677 | ) | - | |||||||
Borrowings under long-term debt (note 7) | - | - | 432 | - | ||||||||
Repayment of long-term debt (note 7) | (520 | ) | (311 | ) | (11,529 | ) | (722 | ) | ||||
Payment of debt issuance costs | (1,179 | ) | (2,157 | ) | (5,545 | ) | (2,188 | ) | ||||
Proceeds from the issuance of common shares, net | - | 95,344 | - | 95,344 | ||||||||
Proceeds from the exercise of stock options and employee share purchases | 227 | 439 | 914 | 3,478 | ||||||||
Proceeds from the exercise of warrants | - | - | - | 3,879 | ||||||||
Other | 8 | (179 | ) | (126 | ) | (459 | ) | |||||
Net cash flows from financing activities - continuing operations | (14,561 | ) | 89,930 | 49,944 | 130,623 | |||||||
Net cash flows from financing activities - discontinued operations | - | (4,199 | ) | (1,180 | ) | (5,012 | ) | |||||
| (14,561 | ) | 85,731 | 48,764 | 125,611 | |||||||
| ||||||||||||
Foreign exchange gain (loss) on cash held in a foreign currency | 329 | (41 | ) | 305 | (14 | ) | ||||||
Increase (decrease) in cash and cash equivalents in the period | (2,653 | ) | 94,603 | (2,342 | ) | 89,051 | ||||||
| ||||||||||||
Discontinued operations cash activity included above: | ||||||||||||
Add: Balance included at beginning of period | - | 2,232 | 1,707 | 2,170 | ||||||||
Less: Balance included at end of period | - | (1,626 | ) | - | (1,626 | ) | ||||||
Cash and cash equivalents - beginning of the period | 4,292 | 2,154 | 2,274 | 7,768 | ||||||||
Cash and cash equivalents - end of the period | 1,639 | 97,363 | 1,639 | 97,363 |
(See accompanying notes to consolidated financial statements)
Quarter ended | Three quarters ended | |||||||||||
October 1, 2016 | October 3, 2015 | October 1, 2016 | October 3, 2015 | |||||||||
$ | $ | $ | $ | |||||||||
(note 1) | (note 1) | |||||||||||
Non-cash investing activities | ||||||||||||
Proceeds on disposition of discontinued operation, note receivable (note 3) | - | - | 1,537 | - | ||||||||
Acquisition of business, working capital adjustment (note 2) | - | (55 | ) | - | 264 | |||||||
Acquisition of business, settlement of pre-existing relationship (note 2) | - | - | - | (749 | ) | |||||||
Acquisition of business, contingent consideration at fair value (note 2) | - | (2,330 | ) | - | (20,330 | ) |
Quarter ended | Three quarters ended | |||||||||||
September 30, | September 30, | |||||||||||
2017 | October 1, 2016 | 2017 | October 1, 2016 | |||||||||
$ | $ | $ | $ | |||||||||
CASH PROVIDED BY (USED IN) | ||||||||||||
Operating activities | ||||||||||||
Loss | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,708 | ) | ||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | |||||||
Loss from continuing operations | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,138 | ) | ||||
Items not affecting cash: | ||||||||||||
Depreciation and amortization | 8,254 | 8,646 | 24,601 | 25,955 | ||||||||
Amortization and write-off of debt issuance costs | 613 | 3,988 | 1,751 | 10,210 | ||||||||
Deferred income taxes | (3,425 | ) | (5,252 | ) | (13,340 | ) | (19,760 | ) | ||||
Stock-based compensation | 1,995 | 1,181 | 4,133 | 3,173 | ||||||||
Unrealized loss (gain) on derivative instruments (note 6) | 754 | (749 | ) | (475 | ) | (1,264 | ) | |||||
Fair value of contingent consideration (note 12) | 83 | 124 | 287 | (1,281 | ) | |||||||
Impairment of long-lived assets (note 2) | 4,467 | 10,300 | 8,190 | 12,035 | ||||||||
Acquisition accounting adjustment on inventory sold | - | 1,890 | - | 13,404 | ||||||||
Other | 55 | (64 | ) | (46 | ) | 343 | ||||||
Changes in non-cash working capital (note 14) | (18,006 | ) | 836 | (25,319 | ) | (60,943 | ) | |||||
Net cash flows from operations - continuing operations | (11,093 | ) | 17,042 | (17,387 | ) | (35,266 | ) | |||||
Net cash flows from operations - discontinued operations | - | - | - | 758 | ||||||||
(11,093 | ) | 17,042 | (17,387 | ) | (34,508 | ) | ||||||
Investing activities | ||||||||||||
Purchases of property, plant and equipment | (6,527 | ) | (5,463 | ) | (22,694 | ) | (14,803 | ) | ||||
Proceeds from sale of assets | 475 | - | 776 | - | ||||||||
Acquisition of non-controlling interests (note 3) | (1,737 | ) | - | (1,737 | ) | - | ||||||
Other | 5 | - | 369 | 700 | ||||||||
Net cash flows from investing activities - continuing operations | (7,784 | ) | (5,463 | ) | (23,286 | ) | (14,103 | ) | ||||
Net cash flows from investing activities - discontinued operations | - | - | - | 1,754 | ||||||||
(7,784 | ) | (5,463 | ) | (23,286 | ) | (12,349 | ) | |||||
Financing activities | ||||||||||||
Increase (decrease) under line of credit facilities (note 8) | 19,222 | (13,097 | ) | 48,571 | 258,475 | |||||||
Repayment of line of credit facilities (note 8) | - | - | - | (192,677 | ) | |||||||
Borrowings under long-term debt (note 8) | 417 | - | 417 | 432 | ||||||||
Repayment of long-term debt (note 8) | (564 | ) | (520 | ) | (1,680 | ) | (11,529 | ) | ||||
Payment of cash dividends on Series A Preferred Stock | (1,700 | ) | - | (4,991 | ) | - | ||||||
Proceeds from the exercise of stock options and employee share purchases | 1,052 | 227 | 4,681 | 914 | ||||||||
Payment of debt issuance costs | (206 | ) | (1,179 | ) | (206 | ) | (5,545 | ) | ||||
Payment of contingent consideration (note 6) | - | - | (4,330 | ) | (4,554 | ) | ||||||
Other | 13 | 8 | (290 | ) | (126 | ) | ||||||
Net cash flows from financing activities - continuing operations | 18,234 | (14,561 | ) | 42,172 | 45,390 | |||||||
Net cash flows from financing activities - discontinued operations | - | - | - | (1,180 | ) | |||||||
18,234 | (14,561 | ) | 42,172 | 44,210 | ||||||||
Foreign exchange gain on cash held in a foreign currency | 41 | 329 | 105 | 305 | ||||||||
Increase (decrease) in cash and cash equivalents in the period | (602 | ) | (2,653 | ) | 1,604 | (2,342 | ) | |||||
Discontinued operations cash activity included above: | ||||||||||||
Add: Balance included at beginning of period | - | - | - | 1,707 | ||||||||
Less: Balance included at end of period | - | - | - | - | ||||||||
Cash and cash equivalents - beginning of the period | 3,457 | 4,292 | 1,251 | 2,274 | ||||||||
Cash and cash equivalents - end of the period | 2,855 | 1,639 | 2,855 | 1,639 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 10 |
SunOpta Inc. |
Consolidated Statements of Cash Flows (continued) |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(Expressed in thousands of U.S. dollars) |
Quarter ended | Three quarters ended | |||||||||||
September 30, | September 30, | |||||||||||
2017 | October 1, 2016 | 2017 | October 1, 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Non-cash investing and financing activities | ||||||||||||
Accrued cash dividends on Series A Preferred Stock (note 9) | - | - | (1,700 | ) | - | |||||||
Proceeds on disposition of discontinued operation, note receivable (note 4) | - | - | - | 1,537 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 11 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
1. Description of Business and Significant Accounting Policies
SunOpta Inc. (the “Company” or “SunOpta”) was incorporated under the laws of Canada on November 13, 1973. The Company operates businesses focused on a healthy products portfolio that promotes sustainable well-being. The Company’s two reportable segments, Global Ingredients and Consumer Products, operate in the natural, organic and specialty food sectors and utilize an integrated business model to bring cost-effective and quality products to market.
In addition, the Company owned approximately 66% of Opta Minerals Inc. (“Opta Minerals”) as at January 2, 2016, on a non-dilutive basis. Opta Minerals produces, distributes and recycles industrial minerals, silica-free abrasives and specialty sands. On February 12, 2016, the Company announced that Opta Minerals had entered into a definitive acquisition agreement, pursuant to which an affiliate of Speyside Equity Fund I LP (“Speyside”), agreed to acquire substantially all of the issued and outstanding shares of Opta Minerals. The acquisition of Opta Minerals by Speyside was completed on April 6, 2016, following a vote of the shareholders of Opta Minerals in favor of the transaction on March 31, 2016. For further information regarding the Company’s divestiture of its equity interest in Opta Minerals, see note 3.
Basis of Presentation
The interim consolidated financial statements of the Company 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 U.S.accounting principles generally accepted accounting principlesin 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 October 1, 2016September 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 201630, 2017 or for any other period. The interim consolidated financial statements include the accounts of the Company and its subsidiaries, and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended January 2, 2016.December 31, 2016, except as described below under “Recent Accounting Pronouncements – Adoption of New Accounting Standards”. 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 January 2, 2016.
Comparative Balances
As a result of the Company’s divestiture of Opta Minerals, the operating results and cash flows of Opta Minerals for the quarter and three quarters ended October 3, 2015 have been reclassified to discontinued operations to be consistent with presentation for the quarter and three quarters ended October 1, 2016. In addition, the assets and liabilities of Opta Minerals were reported as held for sale on the consolidated balance sheet as at January 2,December 31, 2016.
Fiscal Year-EndYear
The fiscal year of the Company consists of a 52- or 53-week period ending on the Saturday closest to December 31. Fiscal year 2017 is a 52-week period ending on December 30, 2017, with quarterly periods ending on April 1, July 1 and September 30, 2017. Fiscal year 2016 iswas a 52-week period ending on December 31, 2016, with quarterly periods ending on April 2, July 2 and October 1, 2016. Fiscal year 2015 was a 52-week period ending on January 2, 2016, with quarterly periods ending on April 4, July 4 and October 3, 2015.
Recent Accounting Pronouncements
Adoption of New Accounting Standards
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flow,flows, including contingent consideration payments made after a business combination. TheAs permitted, the Company elected to early adopt the guidance is effective for fiscal years beginning afteras at December 15, 2017, including interim periods within those fiscal years, and is to be applied31, 2016 on a retrospective basis. EarlyIn connection with the adoption is permitted. Theof ASU 2016-15, the Company is currently assessingreclassified $4.6 million of contingent consideration payments from investing activities to financing activities on the impact that this standard will have on itscomparative consolidated statement of cash flows.flows for the three quarters ended October 1, 2016.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which is intended to simplify the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Under the new guidance, companies will record excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement rather than in additional paid-in capital. In addition, the guidance permits companies to elect to recognize forfeitures of share-based payments as they occur, rather than estimating the number of awards expected to be forfeited as is currently required. This guidance is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessingadopted ASU 2016-09 effective January 1, 2017, and elected upon adoption to recognize forfeitures of stock-based awards as they occur versus estimating at the impact thattime of grant. The cumulative effect of this standard will havechange in accounting policy as at January 1, 2017, was not material to the Company’s financial statements. Commencing January 1, 2017, the Company recognizes excess tax benefits and deficiencies in the provision for income taxes on its consolidated financial statements.statements of operations and as an operating activity on the consolidated statements of cash flows.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Recently Issued Accounting Standards, Not Adopted as at September 30, 2017
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (that is, Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, companies will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (that is, measure the charge based on Step 1 of the current goodwill impairment model). The guidance is effective on a prospective basis for interim and annual goodwill impairment testing dates after January 1, 2020; however, early adoption is permitted for testing dates after January 1, 2017. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected versus incurred credit losses for most financial assets. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases”, a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right of use asset and a lease liability for leases with a duration of greater than one year. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements; however, the Company anticipates that upon adoption of the standard it will recognize additional assets and corresponding liabilities related to leases on its balance sheet.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 will require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The guidance provides a new measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the net asset practical expedient. Under this alternative, these investments can be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment with the same issuer. Additionally, ASU 2016-01 also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for interim and annual reporting periods beginning on or after December 15, 2017. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which will supersede existing revenue recognition guidance under U.S. GAAP. Under the new standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, which defers by one year the effective date of ASU 2014-09. InDuring 2016, the FASB issued additional ASUs to addressASU 2016-08, ASU 2016-10, 2016-11, 2016-12 and 2016-20, all of which clarify certain implementation issues and to clarify the guidance for identifying performance obligations, licenses and determining if a company is the principal or agent in a revenue arrangement.within ASU 2014-09. ASU 2014-09, as amended, will beis effective for annual and interim periods beginning on or after December 15, 2017, and is to be applied on either a full retrospective or modified retrospective basis. Early
With the assistance of a third party, the Company analyzed its significant customer relationships to determine the effects of ASU 2014-09. In particular, the Company assessed under the new guidance whether its existing contracts with customers to produce certain consumer-packaged goods would permit the Company to recognize revenue over time versus at a point in time, based on whether the given product has an alternative use or not and whether there is an enforceable right to payment under the contract for product produced to date. Based on its assessment to date, the Company has tentatively concluded that it does not satisfy the criteria to recognize revenue over time, and, therefore, expects to continue to recognize revenue at a point in time consistent with its current policies and processes. Consequently, the Company does not expect the adoption is permitted only as of annual and interim reporting periods beginning on or after December 15, 2016. The Company is currently assessing the impact that ASU 2014-09 as amended, willto have a material impact on its consolidated financial statements and does not intendrevenue recognition practices, or its internal controls. The Company expects to early adopt this standard.
2. Business Acquisitions
Sunrise Holdings (Delaware), Inc.
On October 9, 2015,ASU 2014-09 using the modified retrospective approach. The Company completedis currently in the acquisitionprocess of 100%finalizing its assessment, and reviewing its disclosures for revenue recognition to conform with the disclosure requirements of the issued and outstanding common shares of Sunrise Holdings (Delaware), Inc. (“Sunrise”), pursuant to a Purchase and Sale Agreement dated July 30, 2015 (the “Sunrise Acquisition”). Sunrise is a processor of conventional and organic individually quick frozen (“IQF”) fruit in the U.S. and Mexico. The acquisition of Sunrise has been accounted for as a business combination under the acquisition method of accounting. The results of Sunrise have been included in the Company’s consolidated financial statements since the date of acquisition and are reported in the Consumer Products operating segment. The acquisition of Sunrise is aligned with the Company’s strategic focus on healthy and organic foods.
Total consideration for the Sunrise Acquisition was $472.7 million in cash paid at the acquisition date, which included the repayment of all outstanding obligations under Sunrise’s senior credit facility in the amount of $171.5 million. In addition, the total consideration included $23.0 million paid by the Company to the holders of Sunrise stock options. As all outstanding Sunrise stock options vested upon the consummation of the Sunrise Acquisition, pursuant to the terms of Sunrise’s pre-existing stock option agreements, the cash consideration paid to the optionholders was attributed to services prior to the Sunrise Acquisition and included as a component of the purchase price. The total consideration also included $20.9 million paid by the Company to settle acquisition-related transaction costs incurred by Sunrise in connection with the Sunrise Acquisition. As none of these costs were incurred by Sunrise on behalf of the Company, the cash consideration paid to settle these costs was included as a component of the purchase price.standard.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
The following table summarizes2. Value Creation Plan
Overview
On October 7, 2016, the fair valuesCompany entered into a strategic partnership with Oaktree Capital Management L.P., a private equity investor (together with its affiliates, “Oaktree”). On October 7, 2016, Oaktree invested $85.0 million through the purchase of cumulative, non-participating Series A Preferred Stock (the “Preferred Stock”) of the assets acquiredCompany’s wholly-owned subsidiary, SunOpta Foods Inc. (“SunOpta Foods”) (see note 9). The Company conducted, with the assistance of Oaktree, a thorough review of its operations, management and liabilities assumedgovernance, with the objective of maximizing the Company’s ability to deliver long-term value to its shareholders. Through this review, the Company developed a Value Creation Plan built on four pillars: portfolio optimization, operational excellence, go-to-market effectiveness and process sustainability. The Company engaged management consulting firms to support the design and implementation of the Value Creation Plan.
In the fourth quarter of 2016, measures taken under the Value Creation Plan included the closure of the Company’s San Bernardino, California, juice facility and the Company’s soy extraction facility in Heuvelton, New York. In addition, effective November 11, 2016, Hendrik Jacobs stepped down as the Company’s President and Chief Executive Officer (“CEO”).
In the first three quarters of 2017, further measures were taken under the Value Creation Plan, including the exit from the San Bernardino facility and equipment leases, as well as the planned exits from flexible resealable pouch and nutrition bar product lines and operations (as described below). In addition, the Company made organizational changes within its management and executive teams, including the appointment of David Colo as President and CEO effective February 6, 2017, and the recruitment of new employees in the areas of quality, sales, marketing, operations and engineering. The Company also made capital investments at several of its manufacturing facilities to enhance food safety and production efficiencies.
Exiting Flexible Resealable Pouch and Nutrition Bar Product Lines and Operations
On July 26, 2017, SunOpta Foods entered an agreement with Skjodt-Barrett Contract Packaging LLC to sell equipment used in the production of flexible resealable pouches at the acquisition date:Company’s Allentown, Pennsylvania facility for gross proceeds of $2.0 million ($1.2 million net of costs to sell). The transaction closed on November 3, 2017. The Company continued to produce flexible resealable pouch products for existing customers until the closing date. The Company’s aseptic beverage operations were not affected by the sale of assets, and the Company will continue to produce aseptic beverages at its Allentown facility.
On September 27, 2017, the Company announced its intention to exit its nutrition bar product lines and operations in Carson City, Nevada. The Company expects to exit from these activities prior to the end of fiscal 2017, and will continue to produce nutrition bar products for existing customers until the exit date. The Company is in discussions with potential buyers interested in purchasing the nutrition bar equipment and assuming the facility lease. As the flexible resealable pouch and nutrition bar product lines and operations do not qualify for presentation as discontinued operations, operating results from these activities were reported in continuing operations on the consolidated statements of operations for the current and comparative periods. Revenues from sales of these product lines were $13.5 million and $44.1 million for the quarter and three quarters ended September 30, 2017, respectively, compared with $14.3 million and $45.0 million for the quarter and three quarters ended October 1, 2016, respectively. Losses before income taxes from these operations were $8.6 million and $12.9 million for the quarter and three quarters ended September 30, 2017, respectively, compared with $0.2 million and $0.1 million for the quarter and three quarters ended October 1, 2016, respectively. For the quarter and three quarters ended September 30, 2017, losses before income taxes from these operations included impairment charges for inventory ($1.3 million) and long-lived assets ($4.5 million) related to the exit activities, as well as employee termination costs of $1.4 million. These operations are included in the Consumer Products operating segment. | |||
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SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Niagara Natural Fruit Snack Company Inc.Continuity of Costs Incurred Under the Value Creation Plan
On August 11, 2015, the Company acquired the net operating assets of Niagara Natural Fruit Snack Company Inc. (“Niagara Natural”). Niagara Natural is a manufacturer of all-natural fruit snacks located in the Niagara Region of Ontario. The acquisition of the net operating assets of Niagara Natural has been accounted for as a business combination under the acquisition method of accounting. The results of Niagara Natural have been included in the Company’s consolidated financial statements since the date of acquisition and are reported in the Consumer Products operating segment.
The following table summarizes costs incurred since the fair valuesinception of the consideration transferred as at the acquisition date:Value Creation Plan to September 30, 2017:
| Provisional | ||||||||
| Amounts | Final Amounts | |||||||
| Recognized as at | Measurement | Recognized as at | ||||||
| the Acquisition | Period | the Acquisition | ||||||
| Date | Adjustment(1) | Date | ||||||
| $ | $ | $ | ||||||
Cash | 6,475 | - | 6,475 | ||||||
Working capital adjustment | 237 | (292 | ) | (55 | ) | ||||
Contingent consideration(2) | 2,330 | - | 2,330 | ||||||
Total consideration transferred | 9,042 | (292 | ) | 8,750 |
(a) | (b) | (c) | ||||||||||
Employee | ||||||||||||
Asset | recruitment, | Consulting | ||||||||||
impairments | retention and | fees and | ||||||||||
and facility | termination | temporary | ||||||||||
closure costs | costs | labor costs | Total | |||||||||
$ | $ | $ | $ | |||||||||
Fiscal 2016 | ||||||||||||
Costs incurred and charged to expense | 10,300 | - | 483 | 10,783 | ||||||||
Cash payments | - | - | (483 | ) | (483 | ) | ||||||
Non-cash adjustments | (10,300 | ) | - | - | (10,300 | ) | ||||||
Balance payable, October 1, 2016 | - | - | - | - | ||||||||
Costs incurred and charged to expense | 1,222 | 2,763 | 3,558 | 7,543 | ||||||||
Cash payments | - | (694 | ) | (1,901 | ) | (2,595 | ) | |||||
Non-cash adjustments | (1,222 | ) | (266 | ) | - | (1,488 | ) | |||||
Balance payable, December 31, 2016(1) | - | 1,803 | 1,657 | 3,460 | ||||||||
Fiscal 2017 | ||||||||||||
Costs incurred and charged to expense | 4,095 | 3,478 | 9,710 | 17,283 | ||||||||
Cash payments | (3,581 | ) | (2,578 | ) | (1,774 | ) | (7,933 | ) | ||||
Non-cash adjustments | (714 | ) | 276 | - | (438 | ) | ||||||
Balance payable (receivable), April 1, 2017(1) | (200 | ) | 2,979 | 9,593 | 12,372 | |||||||
Costs incurred and charged to expense | 262 | 2,550 | 4,876 | 7,688 | ||||||||
Cash payments | (262 | ) | (2,685 | ) | (9,538 | ) | (12,485 | ) | ||||
Non-cash adjustments | - | 51 | - | 51 | ||||||||
Balance payable (receivable), July 1, 2017(1) | (200 | ) | 2,895 | 4,931 | 7,626 | |||||||
Costs incurred and charged to expense | 5,754 | 3,284 | 1,218 | 10,256 | ||||||||
Cash payments | - | (2,061 | ) | (5,964 | ) | (8,025 | ) | |||||
Non-cash adjustments | (5,754 | ) | 240 | - | (5,514 | ) | ||||||
Balance payable (receivable), September 30, 2017(1) | (200 | ) | 4,358 | 185 | 4,343 |
(1) |
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(a) | Asset impairments and facility closure costs |
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For fiscal 2017, represents an additional asset impairment loss of $3.7 million recorded in the first quarter on the disposal of the San Bernardino assets, which included $3.2 million paid for the early buyout of the San Bernardino equipment leases. In exchange for the San Bernardino assets, the facility landlord agreed to release the Company from its remaining property lease obligation and to pay proceeds of $0.2 million on December 31, 2017. Facility closure costs reflect $0.4 million incurred by the |
The following table summarizes the fair values of the assets acquired and liabilities assumed as at the acquisition date:
| Provisional | ||||||||
| Amounts | Final Amounts | |||||||
| Recognized as at | Measurement | Recognized as at | ||||||
| the Acquisition | Period | the Acquisition | ||||||
| Date | Adjustment(1) | Date | ||||||
| $ | $ | $ | ||||||
Current assets | 2,220 | (292 | ) | 1,928 | |||||
Machinery and equipment | 3,414 | - | 3,414 | ||||||
Intangible assets(2) | 2,459 | - | 2,459 | ||||||
Current liabilities | (687 | ) | - | (687 | ) | ||||
Net identifiable assets acquired | 7,406 | (292 | ) | 7,114 | |||||
Goodwill(3) | 1,636 | - | 1,636 | ||||||
Net assets acquired | 9,042 | (292 | ) | 8,750 |
|
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
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Citrusource, LLC
On March 2, 2015, the Company acquired 100% of the issued and outstanding units of Citrusource, LLC (“Citrusource”), a producer of premium not-from-concentrate private label organic and conventional orange juice and citrus products in the U.S. The acquisition of Citrusource has been accounted for as a business combination under the acquisition method of accounting. The results of Citrusource have been included in the Company’s consolidated financial statements since the date of acquisition and are reported in the Consumer Products operating segment. The acquisition of Citrusource aligns with the Company’s strategy of growing its value-added consumer products portfolio and leveraging its integrated operating platform.
The following table summarizes the fair values of the consideration transferred as at the acquisition date:
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(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
The following table summarizesIn addition, represents asset impairment losses recorded in the fair valuesthird quarter of 2017 related to the assets acquiredexit from flexible resealable pouch and liabilities assumednutrition bar product lines and operations as at the acquisition date:described above.
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(c) | Consulting fees and temporary labor costs |
Represents the |
For the quarter and three quarters ended September 30, 2017, costs incurred and charged to expense were recorded in the consolidated statement of operations as follows:
Quarter ended | Three quarters ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Cost of goods sold(1) | 1,287 | - | 1,921 | - | ||||||||
Selling, general and administrative expenses(2) | 2,400 | 483 | 20,839 | 483 | ||||||||
Other expense(3) | 6,569 | 10,300 | 12,467 | 10,300 | ||||||||
10,256 | 10,783 | 35,227 | 10,783 |
(1) | Inventory write-downs and facility closure costs recorded in cost of goods sold were allocated to the Consumer Products operating | |
(2) | Consulting fees and | |
(3) | Asset impairment and employee termination costs recorded in other expense were not allocated to |
3. Discontinued OperationsThe Company estimates third-party consulting and employee recruitment, retention and termination costs related to the Value Creation Plan to be incurred and expensed during the fourth quarter of fiscal 2017 will be approximately $10 million, which includes approximately $8.0 million related to the early termination of the flexible resealable pouch equipment leases that was paid on closing of the asset sale transaction. This estimate does not include currently unforeseen asset impairment charges or employee-related costs that may arise from future actions taken under the Value Creation Plan.
Opta Minerals Inc.3. Acquisition of Non-Controlling Interests in Mexican Subsidiary
On February 11, 2016, Opta Minerals entered intoJuly 28, 2017, the Company acquired all the capital stock of Opus Foods Mexico, S.A. de C.V. (“Opus”) held by non-controlling interests for $1.7 million. This acquisition increased the Company’s equity ownership in Opus from 75% to 100%. The Company acquired its initial 75% interest in Opus through the acquisition of Sunrise Holdings (Delaware), Inc. (“Sunrise”) in October 2015. Opus owns and operates a definitive acquisition agreement, pursuant to which Speyside agreed to acquire substantially allfrozen fruit processing facility located in central Mexico. The increase in the Company’s ownership position in Opus was accounted for as an equity transaction, with the difference between the cash consideration paid and the amount of the issued and outstandingnon-controlling interest related to Opus being recognized in additional paid-in capital.
SUNOPTA INC. | 16 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
4. Discontinued Operation
On April 6, 2016, the Company completed the sale of its 66% holding of common shares of Opta Minerals. The acquisition agreement was approved by Minerals Inc. (“Opta Minerals’ Boards of Directors, which recommended that Opta Minerals’ shareholders approve the transaction. Also on February 12, 2016, the Company entered into a support agreement pursuantMinerals”) to which it irrevocably agreed to vote all of its Opta Minerals’ shares in favor of the transaction. The acquisition of Opta Minerals by Speyside was completed on April 6, 2016, following a vote of the shareholders of Opta Minerals in favor of the transaction on March 31, 2016.
Upon closing of the transaction, the Company receivedEquity Fund I LP for aggregate gross proceeds of $4.8 million (C$6.2 million), of which $3.2 million (C$4.2 million) was received in cash, and $1.5 million (C$2.0 million) was received in the form of a subordinated promissory note bearing interest at 2.0% per annum that will mature on October 6, 2018. In the first quarter of 2016, the Company recognized direct costs related to the sale of Opta Minerals of $0.8 million. The sale of Company’s equity interest in Opta Minerals was consistent with its objective of divesting its non-core assets in order to become a pure-play healthy and organic foods company. The Company does not expect to have anyhas no significant continuing involvement with Opta Minerals.
In the fourth quarter of 2015, the Company recognized a loss on the classification of Opta Minerals as a discontinued operation held for sale of $10.5 million, or $7.7 million net of non-controlling interest, to write down the carrying value of Opta Minerals’ net assets to fair value less cost to sell based on estimated net proceeds on sale of approximately $4.5 million as at January 2, 2016. In the first quarter of 2016, the Company recognized a $0.6 million gain on classification as held for sale, which reflected a $1.1 million decline in the carrying value of Opta Mineral’s net assets, partially offset by a $0.5 million reduction in the estimated net proceeds on sale. The Company has not recognized the results of operations or cash flows of Opta Minerals for the period from April 1, 2016 to the closing of the transaction on April 6, 2016, as these amounts were insignificant to the Company’s consolidated results of operations and cash flows.
As at January 2, 2016, the net assets and liabilities of Opta Minerals were reported as held for sale on the consolidated balance sheet. The following table reconciles the major classes of assets and liabilities of Opta Minerals to the amounts reported as held for sale:
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The following table reconciles the major components of the results of discontinued operations to the amounts reported in the consolidated statementsstatement of operations:operations for the three quarters ended October 1, 2016:
| Quarter ended | Three quarters ended | ||||||||||
| October 1, | October 3, | October 1, | October 3, | ||||||||
| 2016 | 2015 | 2016(1) | 2015 | ||||||||
| $ | $ | $ | $ | ||||||||
Revenues | - | 28,794 | 24,896 | 87,925 | ||||||||
Cost of goods sold(2) | - | (24,471 | ) | (22,133 | ) | (75,823 | ) | |||||
Selling, general and administrative expenses | - | (2,736 | ) | (3,024 | ) | (8,851 | ) | |||||
Intangible asset amortization | - | (498 | ) | - | (1,505 | ) | ||||||
Other expense, net(3) | - | (591 | ) | (794 | ) | (2,201 | ) | |||||
Foreign exchange gain (loss) | - | 1,017 | (454 | ) | 568 | |||||||
Interest expense | - | (816 | ) | (484 | ) | (3,664 | ) | |||||
Earnings (loss) before income taxes | - | 699 | (1,993 | ) | (3,551 | ) | ||||||
Gain on classification as held for sale before income taxes | - | - | 560 | - | ||||||||
Total pre-tax earnings (loss) from discontinued operations | - | 699 | (1,433 | ) | (3,551 | ) | ||||||
Recovery of (provision for) income taxes | - | (75 | ) | 599 | (964 | ) | ||||||
Earnings (loss) from discontinued operations | - | 624 | (834 | ) | (4,515 | ) | ||||||
Loss (earnings) from discontinued operations attributable to non-controlling interest | - | (116 | ) | 264 | 1,556 | |||||||
Earnings (loss) from discontinued operations attributable to SunOpta Inc. | - | 508 | (570 | ) | (2,959 | ) |
| $ | ||
Revenues | 24,896 | ||
Cost of goods sold | (22,133 | ) | |
Selling, general and administrative expenses | (3,024 | ) | |
Other expense, net | (794 | ) | |
Foreign exchange loss | (454 | ) | |
Interest expense | (484 | ) | |
Loss before income taxes | (1,993 | ) | |
Gain on |
560 | |||
| (1,433 | ) | |
Recovery of income taxes | 599 | ||
| (834 | ) | |
Loss from discontinued operations attributable to | 264 | ||
Loss from discontinued operations attributable to SunOpta Inc. | (570 | ) |
4.5. Product Recall
During the second quarter of 2016, the Company announced a voluntary recall of certain roasted sunflower kernel products produced at its Crookston, Minnesota facility due to potential contamination with Listeria monocytogenes bacteria. The affected sunflower products originated from the Crookston facility between May 31, 2015 and April 21, 2016. For the quarter and three quarters ended October 1, 2016, the Company recognized estimatedEstimated losses of $12.0 million and $28.0 million, respectively, related to thisthe recall reflectingtotaled $47.0 million as at September 30, 2017, compared to $40.0 million as at December 31, 2016, comprised of estimates for customer losses and direct incremental costs incurred by the estimatedCompany. The estimates for customer losses reflected the cost of the affected sunflower kernel products expected to be returned to or replaced by the Company and the estimated cost to reimburse customers for costs incurred by them related to the recall of their retail products that contain the affected sunflower kernels as an ingredient or component. However, these lossesThe incremental costs incurred directly by the Company do not reflect costsinclude lost earnings associated with the interruption of production at the Crookston facility for the period from April 21, 2016 to the time regular production resumed on or about May 15, 2016, subject to a positive release protocol,Company’s roasting facilities, or the costs to put into place corrective and preventive actions at the Company’s roastingthose facilities. The Company’s remediation efforts are ongoing, and it expects to continue to incur related costs, which may be material.
The Company’s estimates of thefor customer losses related to the recall are provisional and were determined based on an assessment of the information available up to the date of filing of this report, including a review of customer claims received as of that date and consideration of the extent of potential additional claims that have yet to be received. The Company’s estimates reflect the amount of losses that it determined as of the date of this report,at September 30, 2017 to be both probable and reasonably estimable. The Company may need to revise its estimates in subsequent periods as the Company continues to work with its customers and insurance providers to substantiate the claims received to date and any additional claims that may be received. These revisions may occur at any time and may be material.
The Company is currently unable to estimate the impact that this recall may have on our future sales of sunflower products or on its ongoing relationships with its customers, which may have an adverse impact on the recoverability of the customer relationships intangible asset associated with the Company’s sunflower operations and on the fair value of the reporting unit to which the sunflower operations relate that could result in an impairment of the associated goodwill. As at October 1, 2016, the customer relationships intangible asset and goodwill associated with the sunflower operations had carrying values of $6.6 million and $17.5 million, respectively.
The Company carrieshas general liability and product recall insurance and is expectingpolicies with aggregate limits of $47.0 million under which it expects to recover the recall-related costs, through its insurance policies, less applicable deductibles under these policies.deductibles. The Company recognizes expected insurance recoveries in the period in which the recoveries are determined to be probable of realization. Accordingly, for the quarter and three quarters ended October 1, 2016,As at September 30, 2017, the Company recorded estimated insurancehad recognized recoveries of $12.0 million and $27.4 million for the losses recognized to-date relatedup to the recall. However, the Company may not recover amounts equal to the amountlimit of the losses recognized if those losses exceed the coverage available or are excluded under its insurance policies. SubsequentConsequently, to the third quarter of 2016,extent any losses are excluded under the Company received $2.0 million from an insurance provider in relationpolicies or additional losses are recognized related to the recall.existing or new claims, these excluded or excess losses will be recognized as a charge to future earnings.
SUNOPTA INC. | 17 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
As at October 1, 2016, $27.8September 30, 2017, $12.4 million of the estimated recall-related costs were unsettled and were recorded in accounts payable and accrued liabilities on the consolidated balance sheet. These costs were offset by the corresponding estimated insurance recoveries of $27.4$11.1 million included in accounts receivable on the consolidated balance sheet as at October 1, 2016.September 30, 2017, which was net of $35.3 million of advances the Company received from its insurance providers prior to September 30, 2017. As at September 30, 2017, the Company had settled customer claims and direct costs in the amount of $34.6 million, which was fully funded under the Company’s general liability and product recall insurance policies.
5.6. 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 October 1, 2016September 30, 2017 and January 2,December 31, 2016:
October 1, 2016 | September 30, 2017 | |||||||||||||||||||||||||||
Fair value | Fair value | |||||||||||||||||||||||||||
asset (liability) | Level 1 | Level 2 | Level 3 | asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
(a) | Commodity futures and forward contracts(1) | Commodity futures and forward contracts(1) | ||||||||||||||||||||||||||
Unrealized short-term derivative asset | 1,747 | 799 | 948 | - | Unrealized short-term derivative asset | 376 | 54 | 322 | - | |||||||||||||||||||
Unrealized short-term derivative liability | (1,197 | ) | - | (1,197 | ) | - | Unrealized short-term derivative liability | (242 | ) | - | (242 | ) | - | |||||||||||||||
Unrealized long-term derivative liability | (12 | ) | - | (12 | ) | - | Unrealized long-term derivative liability | (2 | ) | - | (2 | ) | - | |||||||||||||||
(b) | Inventories carried at market(2) | 6,647 | - | 6,647 | - | Inventories carried at market(2) | 3,179 | - | 3,179 | - | ||||||||||||||||||
(c) | Forward foreign currency contracts(3) | (188 | ) | - | (188 | ) | - | Forward foreign currency contracts | ||||||||||||||||||||
| Contingent consideration(4) | (15,175 | ) | - | - | (15,175 | ) | Not designated as hedging instruments(3) | (1,237 | ) | - | (1,237 | ) | - | ||||||||||||||
Designated as a hedging instruments(4) | 368 | - | 368 | - | ||||||||||||||||||||||||
| Contingent consideration(5) | (11,236 | ) | - | - | (11,236 | ) | |||||||||||||||||||||
(e) | Embedded derivative(5) | 2,944 | - | - | 2,944 | Embedded derivative(6) | 2,690 | - | - | 2,690 | ||||||||||||||||||
| Long-lived assets(6) | 600 | - | 600 | - |
January 2, 2016 | December 31, 2016 | |||||||||||||||||||||||||||
Fair value | Fair value | |||||||||||||||||||||||||||
asset (liability) | Level 1 | Level 2 | Level 3 | asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
(a) | Commodity futures and forward contracts(1) | Commodity futures and forward contracts(1) | ||||||||||||||||||||||||||
Unrealized short-term derivative asset | 748 | - | 748 | - | Unrealized short-term derivative asset | 787 | 43 | 744 | - | |||||||||||||||||||
Unrealized long-term derivative asset | 21 | - | 21 | - | Unrealized short-term derivative liability | (916 | ) | - | (916 | ) | - | |||||||||||||||||
Unrealized short-term derivative liability | (1,417 | ) | (10 | ) | (1,407 | ) | - | Unrealized long-term derivative liability | (8 | ) | - | (8 | ) | - | ||||||||||||||
Unrealized long-term derivative liability | (36 | ) | - | (36 | ) | - | ||||||||||||||||||||||
(b) | Inventories carried at market(2) | 8,231 | - | 8,231 | - | |||||||||||||||||||||||
Inventories carried at market(2) | 5,945 | - | 5,945 | - | Forward foreign currency contracts | |||||||||||||||||||||||
Forward foreign currency contracts(3) | 311 | - | 311 | - | Not designated as hedging instruments(3) | 1,345 | - | 1,345 | - | |||||||||||||||||||
(d) | Contingent consideration(4) | (21,010 | ) | - | - | (21,010 | ) | Contingent consideration(5) | (15,279 | ) | - | - | (15,279 | ) | ||||||||||||||
(e) | Embedded derivative(5) | 3,409 | - | - | 3,409 | Embedded derivative(6) | 2,944 | - | - | 2,944 |
(1) | Unrealized short-term derivative asset | |
(2) | Inventories carried at market | |
(3) |
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SUNOPTA INC. | 18 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(4) | Forward foreign currency contracts designated as a hedge were included in other assets or other current liabilities on the consolidated balance sheets. | |
(5) | Contingent consideration obligations | |
The embedded derivative | ||
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(a) | Commodity futures and forward contracts |
The Company’s derivative contracts that are measured at fair value include exchange-traded commodity futures and forward commodity purchase and sale contracts. Exchange-traded futures are valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. Local market adjustments use observable inputs or market transactions for similar assets or liabilities, and, as a result, are classified as level 2. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk, and the Company’s knowledge of current market conditions, the Company does not view non-performance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts. |
These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains, as well as the prices of cocoa and coffee. These derivative instruments are not designated as hedges for accounting purposes. Gains and losses on changes in fair value of these derivative instruments are included in cost of goods sold on the consolidated statement of operations. For the quarter ended September 30, 2017, the Company recognized a loss of $0.1 million (October 1, 2016 |
These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains, as well as the prices of cocoa and coffee. These derivative instruments are not designated as hedges for accounting purposes. Gains and losses on changes in fair value of these derivative instruments are included in cost of goods sold on the consolidated statement of operations. For the quarter ended October 1, 2016, the Company recognized a gain of $0.7 million (October 3, 2015 – gain of $1.1 million) and for the three quarters ended October 1, 2016, the Company recognized a gain of $1.2 million (October 3, 2015 – gain of $0.5$1.3 million) related to changes in the fair value of these derivatives.
As at October 1, 2016, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows (in thousands of bushels):
| Number of bushels purchased (sold) | |||||
| Corn | Soybeans | ||||
Forward commodity purchase contracts | 414 | 596 | ||||
Forward commodity sale contracts | (75 | ) | (599 | ) | ||
Commodity futures contracts | (670 | ) | (440 | ) |
| |
As at September 30, 2017, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows (in thousands of bushels): |
Number of bushels purchased (sold) | ||||||
Corn | Soybeans | |||||
Forward commodity purchase contracts | (120 | ) | 44 | |||
Forward commodity sale contracts | (493 | ) | (676 | ) | ||
Commodity futures contracts | 365 | 495 |
In addition, as at September 30, 2017, the Company had net open forward contracts to sell 235 lots of cocoa and 4 lots of coffee.
(b) | Inventories carried at market |
Grains inventory carried at fair value is determined using quoted market prices from the Chicago Board of Trade (“CBoT”). Estimated fair market values for grains inventory quantities at period end are valued using the quoted price on the CBoT adjusted for differences in local markets, and broker or dealer quotes. These assets are placed in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on commodity grains inventory are included in cost of goods sold on the consolidated statements of operations. As at | |
(c) | 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 placed 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. |
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(i) Not designated as hedging instruments
As at September 30, 2017, the Company had open forward foreign exchange contracts to sell euros to buy U.S. dollars with a notional value of €28.4 million ($32.5 million), and to sell British pounds to buy euros with a notional value of £0.8 million (€0.9 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 30, 2017, the Company recognized a gain of $0.3 million (October 1, 2016 – loss of $0.3 million) related to changes in the fair value of these derivatives and for the three quarters ended September 30, 2017, the Company recognized a loss of $2.6 million (October 1, 2016 – loss of $0.5 million) related to changes in the fair value of these derivatives.
(ii) Designated as hedging instruments
In the first quarter of 2017, the Company initiated a foreign currency cash flow hedging program with the objective of managing the variability of cash flows associated with a portion of forecasted purchases of raw fruit inventories denominated in Mexican pesos. As at September 30, 2017, the Company had net open forward foreign exchange contracts to sell U.S. dollars to buy Mexican pesos with a notional value of $2.4 million (M$51.8 million), and to sell Mexican pesos to buy U.S. dollars with a notional value of M$46.0 million ($2.5 million). As these contracts have been designated as hedging instruments, the effective portion of the gains and losses on changes in the fair value of the derivative instruments are included in other comprehensive earnings and reclassified to cost of goods sold in the same period the hedged transaction affects earnings, which is upon the sale of the inventories. For the quarter and three quarters ended September 30, 2017, the Company recognized unrealized gains in other comprehensive earnings of $0.2 million and $2.3 million, respectively, related to changes in the fair value of these derivatives. For the quarter and three quarters ended September 30, 2017, the Company reclassified from other comprehensive earnings realized gains on these derivatives of $0.2 million and $1.0 million, respectively, to cost of goods sold. In addition, in the second quarter of 2017, the Company reclassified an unrealized gain of $0.9 million related to the ineffective portion of the hedge to foreign exchange loss on the consolidated statements of operations. During the fourth quarter of 2017, the Company expects to reclassify the $0.4 million remaining amount of the unrealized gain recorded in accumulated other comprehensive loss to earnings.
(d) | Contingent consideration |
The fair value measurement of contingent consideration arising from business acquisitions is determined using unobservable (level 3) inputs. These inputs include: (i) the estimated amount and timing of the projected cash flows on which the contingency is based; and (ii) the risk-adjusted discount rate used to calculate the present value of those cash flows. The following table presents a reconciliation of contingent consideration obligations for the quarters and three quarters ended September 30, 2017 and October 1, 2016: |
Quarter ended | Three quarters ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Balance, beginning of period | (11,153 | ) | (15,051 | ) | (15,279 | ) | (21,010 | ) | ||||
Issuances | - | - | - | - | ||||||||
Fair value adjustments(1) | (83 | ) | (124 | ) | (287 | ) | 1,281 | |||||
Payments(2) | - | - | 4,330 | 4,554 | ||||||||
Balance, end of period | (11,236 | ) | (15,175 | ) | (11,236 | ) | (15,175 | ) |
SUNOPTA INC. | 20 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(1) | For all periods presented, reflected the accretion for the time value of money, which was included in other income/expense (see note 12). In addition, for the three quarters ended October 1, |
| January 2, | Fair Value | October 1, | ||||||||||||
| 2016 | Issuances | Adjustments(1) | Payments(2) | 2016 | ||||||||||
| $ | $ | $ | $ | $ | ||||||||||
Contingent consideration | (21,010 | ) | - | 1,281 | 4,554 | (15,175 | ) |
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(2) | For the three quarters ended September 30, 2017, reflected the second installment payment of deferred consideration to the | |
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(e) | Embedded derivative |
On August 5, 2011 and August 29, 2014, the Company invested $0.5 million and $0.9 million, respectively, in convertible subordinated notes issued by Enchi Corporation (“Enchi”), a developer of advanced bioconversion products for the renewable fuels | |
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6.7. Inventories
| October 1, | January 2, | September 30, | December 31, | ||||||||
| 2016 | 2016 | 2017 | 2016 | ||||||||
| $ | $ | $ | $ | ||||||||
Raw materials and work-in-process | 283,036 | 276,434 | 271,645 | 266,072 | ||||||||
Finished goods | 104,999 | 87,215 | 102,039 | 101,585 | ||||||||
Company-owned grain | 17,098 | 14,348 | 7,675 | 15,027 | ||||||||
Inventory reserves | (11,444 | ) | (6,774 | ) | (10,760 | ) | (14,202 | ) | ||||
| 393,689 | 371,223 | 370,599 | 368,482 |
SUNOPTA INC. | 21 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
7.8. Bank Indebtedness and Long-Term Debt
October 1, | January 2, | September 30, | December 31, | |||||||||
2016 | 2016 | 2017 | 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Bank indebtedness: | ||||||||||||
Global Credit Facility(1) | 223,503 | - | 256,444 | 199,281 | ||||||||
North American credit facilities(1) | - | 70,563 | ||||||||||
European credit facilities(1) | - | 87,419 | ||||||||||
Bulgarian credit facility(2) | 3,148 | 1,791 | 2,564 | 2,213 | ||||||||
226,651 | 159,773 | 259,008 | 201,494 | |||||||||
Long-term debt: | ||||||||||||
Second Lien Loan Agreement, net of unamortized debt issuance costs of nil (January 2, 2016 - $7,757)(3) | 310,000 | 312,243 | ||||||||||
Senior Secured Second Lien Notes, net of unamortized debt issuance costs of $8,217 (December 31, 2016 - $8,835)(3) | 222,781 | 222,163 | ||||||||||
Capital lease obligations | 8,162 | 9,245 | 6,184 | 7,454 | ||||||||
Other | 1,481 | 1,507 | 1,841 | 1,470 | ||||||||
319,643 | 322,995 | 230,806 | 231,087 | |||||||||
Less: current portion | 2,159 | 1,773 | 2,045 | 2,079 | ||||||||
317,484 | 321,222 | 228,761 | 229,008 |
(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 | |
Individual borrowings under the Global Credit Facility have terms of six months or less and bear interest based on various reference rates, including prime rate and LIBOR plus an applicable margin. The applicable margin in the Global Credit Facility ranges from 1.25% to 1.75% for loans bearing interest based on LIBOR and from 0.25% to 0.75% for loans bearing interest based on the prime rate and, in each case, is set quarterly based on average borrowing availability for the preceding fiscal quarter. | |
On September 19, 2017 (the “Effective Date”), the Company entered into an amendment to the Global Credit Facility to add an additional U.S. asset-based credit subfacility of an aggregate principal amount of $15.0 million (the “New U.S. Subfacility”). | |
The | |
Borrowings under the New U.S. Subfacility bear interest at a margin over various reference rates. The applicable margin for the New U.S. Subfacility will be set quarterly based on average borrowing availability for the preceding fiscal quarter and will range 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. The initial margin for the New U.S. Subfacility is 2.50% with respect to base rate and prime rate borrowings and 3.50% with respect to eurocurrency rate borrowings. |
SUNOPTA INC. | 22 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
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.
(2) | Bulgarian credit facility |
On | |
(3) | Senior Secured Second Lien |
On October | |
Prior to October 9, 2018, SunOpta Foods may redeem some or all of the Notes at any time and from time to time at a “make-whole” redemption price set forth in the indenture governing the Notes. On or after October 9, 2018, SunOpta Foods may redeem the Notes, in whole or in part, at any time at the redemption prices equal to 107.125% through October 8, 2019, 104.750% from October 9, 2019 through October 8, 2020, 102.375% from October 9, 2020 through October 8, 2021 and at par thereafter, plus accrued and unpaid interest, if any, to but excluding the date of redemption. In addition, prior to October 9, 2018, SunOpta Foods may, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at a redemption price equal to 109.500% of the | |
The | |
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SUNOPTA INC. | 23 |
8. Stock-Based Compensation
Under the Company’s 2013 Stock Incentive Plan, the Company may grant a variety of stock-based awards including stock options, restricted stock units (“RSUs”) and performance share units (“PSUs”) to selected employees and directors of the Company.
Stock Options
For the three quarters ended October 1, 2016, the Company granted 1,087,864 options to employees that 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 these options was $1.36, which is recognized on a straight-line basis over the three-year vesting period based on the number of stock options expected to vest.
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:
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Restricted Stock Units and Performance Share Units
For the three quarters ended October 1, 2016, the Company granted 112,000 RSUs and 250,345 PSUs to certain employees and directors of the Company.
Time-based RSUs vest ratably on each of the first through third anniversaries of the grant date. The fair value of each RSU granted was estimated to be $3.27 based on the fair market value of a share of the Company’s common stock on the date of grant. The grant-date fair value is recognized on a straight-line basis over the three-year vesting period based on the number of RSUs expected to vest.
Performance-based PSUs vest three years following the grant date. The number of PSUs that ultimately vest (up to a specified maximum) will be determined based on performance relative to predetermined performance measures of the Company. If the Company’s performance is below a specified performance level, no PSUs will vest. The weighted average grant-date fair value of the PSUs granted was estimated to be $3.27 based on the fair market value of a share of the Company’s common stock on the grant dates. Each reporting period, the number of PSUs that are expected to vest is re-determined and the grant-date fair value of these PSUs is amortized on a straight-line basis over the remaining vesting period less amounts previously recognized.
Each vested RSU and PSU will be settled through the issuance of common shares of the Company and are therefore treated as equity awards.
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
9. Other Expense, Net
The components of other expense (income)Notes are as follows:
| Quarter ended | Three quarters ended | ||||||||||
| October 1, | October 3, | October 1, | October 3, | ||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||
| $ | $ | $ | $ | ||||||||
Impairment of long-lived assets(1) | 10,300 | - | 12,035 | - | ||||||||
Legal settlement(2) | - | - | 9,000 | - | ||||||||
Product withdrawal and recall costs(3) | - | - | 1,697 | - | ||||||||
Severance and rationalization costs(4) | 138 | 2,653 | 1,153 | 2,653 | ||||||||
Business development costs | 23 | 893 | 233 | 1,416 | ||||||||
Fair value of contingent consideration (see note 5) | 124 | 235 | (1,281 | ) | 317 | |||||||
Other | (273 | ) | (129 | ) | (114 | ) | 7 | |||||
| 10,312 | 3,652 | 22,723 | 4,393 |
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10. Income Taxes
For the quarters and three quarters ended October 1, 2016 and October 3, 2015, the Company’s effective tax rate was different from the Company’s statutory Canadian tax rate due to the Company’s annualized mix of earnings by jurisdiction, and the impact of discrete items including the realization of $1.3 million of previously unrecognized tax benefits in the third quarter of 2016. For the quarter and three quarters ended October 1, 2016, the Company used the actual year-to-date effective tax rate to estimate tax expense for these periods, instead of the annualized effective tax rate, as the calculated annualized effective tax rate was found to be highly sensitive to changes in estimates of total net earnings. The Company recognized a recovery of income tax of $15.6 million for the three quarters ended October 1, 2016, compared with a provision for income tax of $4.8 million for the three quarters ended October 3, 2015. Excluding the impact of the change in unrecognized tax benefits, the effective tax rate was 43.8% for the three quarters ended October 1, 2016, compared with 31.3% for the three quarters ended October 3, 2015. The effective tax rates reflected the impact of changes in the jurisdictional mix of earnings, mainly as the result of pre-tax losses in the U.S. for the quarter and three quarters ended October 1, 2016, compared with pre-tax earnings in the U.S. for the corresponding periods of 2015, reflecting the effect in the first three quarters of 2016 of higher cash interest costs related to the financing of the Sunrise Acquisition, as well as discrete costs related to business acquisitions, including the acquisition accounting adjustment to Sunrise inventory sold in the period (see note 2) and amortization of debt issuance costs related to the Second Lien Loan Agreement (see note 7), as well as the impact of other discrete items including costs associated with the legal settlement with Plum, consolidation of our frozen fruit processing facilities, and product withdrawal and recall costs (see note 9).
11. Earnings (Loss) Per Share
Earnings (loss) per share are calculated as follows:
Quarter ended | Three quarters ended | |||||||||||
October 1, 2016 | October 3, 2015 | October 1, 2016 | October 3, 2015 | |||||||||
Earnings (loss) from continuing operations attributable to SunOpta Inc. | $ | (3,355 | ) | $ | (194 | ) | $ | (17,142 | ) | $ | 10,556 | |
Earnings (loss) from discontinued operations attributable to SunOpta Inc. | - | 508 | (570 | ) | (2,959 | ) | ||||||
Earnings (loss) attributable to SunOpta Inc. | $ | (3,355 | ) | $ | 314 | $ | (17,712 | ) | $ | 7,597 | ||
Basic weighted-average number of shares outstanding | 85,618,870 | 69,180,603 | 85,528,512 | 68,198,611 | ||||||||
Dilutive potential of the following: | ||||||||||||
Employee/director stock options and RSUs | 31,582 | - | 20,534 | 207,190 | ||||||||
Diluted weighted-average number of shares outstanding | 85,650,452 | 69,180,603 | 85,549,046 | 68,405,801 | ||||||||
Earnings (loss) per share - basic: | ||||||||||||
- from continuing operations | $ | (0.04 | ) | $ | - | $ | (0.20 | ) | $ | 0.15 | ||
- from discontinued operations | - | 0.01 | (0.01 | ) | (0.04 | ) | ||||||
$ | (0.04 | ) | $ | - | $ | (0.21 | ) | $ | 0.11 | |||
Earnings (loss) per share - diluted: | ||||||||||||
- from continuing operations | $ | (0.04 | ) | $ | - | $ | (0.20 | ) | $ | 0.15 | ||
- from discontinued operations | - | 0.01 | (0.01 | ) | (0.04 | ) | ||||||
$ | (0.04 | ) | $ | - | $ | (0.21 | ) | $ | 0.11 |
For the quarter ended October 1, 2016, stock options to purchase 1,873,871 (October 3, 2015 − 870,192) common shares were excluded from the calculation of potential dilutive common shares due to their anti-dilutive effect. For the three quarters ended October 1, 2016, stock options to purchase 2,453,271 (October 3, 2015 − 405,996) common shares were excluded from the calculation of potential dilutive common shares due to their anti-dilutive effect.
For the quarter and three quarters ended October 1, 2016, all potential dilutive common shares were excluded from the calculation of diluted loss per share due to their anti-dilutive effect of reducing the loss per share.
12. Supplemental Cash Flow Information
Quarter ended | Three quarters ended | |||||||||||
October 1, | October 3, | October 1, | October 3, | |||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
$ | $ | $ | $ | |||||||||
Changes in non-cash working capital, net of businesses acquired: | ||||||||||||
Accounts receivable | (22,302 | ) | 7,250 | (56,049 | ) | (2,352 | ) | |||||
Inventories | 5,150 | 3,369 | (34,760 | ) | (29,824 | ) | ||||||
Income tax recoverable | 9,423 | (3,600 | ) | 14,807 | (6,617 | ) | ||||||
Prepaid expenses and other current assets | (1,985 | ) | 2,190 | (2,591 | ) | (922 | ) | |||||
Accounts payable and accrued liabilities | 10,999 | 2,321 | 21,943 | 9,731 | ||||||||
Customer and other deposits | (449 | ) | 1,118 | (4,293 | ) | 1,019 | ||||||
836 | 12,648 | (60,943 | ) | (28,965 | ) |
13. Commitments and Contingencies
Plum Dispute
Plum, a Delaware public benefit corporation and a subsidiary of Campbell Soup Company ("Campbell") and SunOpta Global Organic Ingredients, Inc., a wholly-owned subsidiary of the Company (“SGOI”), are parties to a manufacturing and packaging agreement dated September 21, 2011 (the “Plum Manufacturing Agreement”). Pursuant to the Plum Manufacturing Agreement, SGOI agreed to manufacture and package certain food items for Plum at SGOI’s Allentown, Pennsylvania facility in accordance with Plum’s specifications regarding, among other things, product ingredientslimit the Company’s ability to (i) incur additional debt or issue preferred stock; (ii) pay dividends and packaging, manufacturing processes,make certain types of investments and quality control standards. On November 8, 2013, Plum initiated a voluntary recallother 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 indenture provides for customary events of default (subject in certain products manufactured by SGOI at its Allentown facility. On February 3, 2015, Plum filed a complaint against SGOIcases to customary grace and cure periods), which include nonpayment, breach of covenants in the Lehigh County Courtindenture, certain payment defaults or acceleration of Common Pleas in Allentown, Pennsylvania. On April 13, 2015, Plum filed an amended complaint adding packaging manufacturer and supplier Cheer Pack North America (“Cheer Pack”) asother indebtedness, a Defendant. SGOI asserted counterclaims against Plum, crossclaims against Cheer Pack and third-party claims against Gualapack S.p.A (“Gualapack”), Hosokawa Yoko, Co. (“Hosokawa”), Secure HY Packaging Co., Ltd. (“SHY”) and CDF Corporation (“CDF”). Cheer Pack asserted cross-claims against SGOI. Plum alleged it initiated the recall in response to consumer complaints of bloated packaging and premature spoilage of certain products, which could lead to gastrointestinal symptoms and discomfort if consumed. Plum alleged that the spoilage of its products resulted from a post-processing issue at SGOI’s Allentown facility. Plum sought unspecified damages equal to the direct costs of the recall and handling of undistributed product, incidental and consequential damages, lost profits and attorneys’ fees.
On July 29, 2016, SGOI entered into a Mutual Release and Settlement Agreement (the “Settlement Agreement”) with Plum, Campbell, Cheer Pack, Gualapack, Hosokawa, CDF and SHY. The Settlement Agreement resolved the disputed issues among the parties in connection with the litigation filed by Plum against SGOI, as described above. Pursuant to the terms of the Settlement Agreement, the Company paid Campbell $5.0 million in cash and will provide Campbell with rebates of up to $4.0 million over a four-year period in connection with Plum’s purchases of pouch products and Campbell’s purchases of aseptic broth products pursuant to manufacturing and supply agreements, as amended, between the parties and their affiliates. In order for Campbell to obtain the full $4.0 million in rebates, Plum and Campbell must order certain minimum quantities of pouch products and aseptic broth products within each of the designated twelve-month periods over the four-year rebate period. In connection with the Settlement Agreement, the Company recorded a charge of $9.0 million in the second quarter of 2016, as the Company believes there is reasonable assurance that the minimum order quantities will be achieved (see note 9).
Employment Matter
On April 19, 2013, a class-action complaint, in the case titledDe Jesus, et al. v. Frozsun, Inc. d/b/a Frozsun Foods, was filed against Sunrise Growers, Inc. (then named Frozsun, Inc.) in California Superior Court, Santa Barbara County seeking damages, equitable relief and reasonable attorneys’ fees for alleged wage and hour violations. This case includes claims for failure to pay all hours worked, failure to pay overtime wages, mealcertain judgments and rest period violations, waiting-time penalties, improper wage statementscertain events of bankruptcy and unfair business practices. The putative class includes approximately 8,500 to 9,000 non-exempt hourly employees from Sunrise’s production facilitiesinsolvency. If an event of default occurs and is continuing, the trustee or holders of at least 25% in Santa Maria and Oxnard, California. The parties are currently engaged in pre-class certification discovery. The Company is unable to estimate any potential liabilities relating to this proceeding, and any such liabilities could be material.
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 theprincipal amount of potential liability,the outstanding Notes may declare the principal of and accrued and unpaid interest on, if any, all the Notes to be due and payable.
On October 19, 2017, the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or resultsrepaid $7.5 million principal amount of the Company.Notes at 103.000% .
14. Segmented Information
In connection with the Company’s divestiture of its equity interest in Opta Minerals on April 6, 2016, the Company recognized Opta Minerals as a discontinued operation for the quarter and three quarters ended October 1, 2016 and October 3, 2015 (see notes 1 and 3). Prior to being recognized as a discontinued operation, Opta Minerals was reported as a standalone operating segment within the Company. With the divestiture of Opta Minerals, the composition of the Company’s remaining reportable segments is as follows:
In addition, Corporate Services provides a variety of management, financial, information technology, treasury and administration services to each of the SunOpta Foods operating segments from the Company’s headquarters in Mississauga, Ontario and administrative office in Edina, Minnesota.
When reviewing the operating results of the Company’s operating segments, management uses segment revenues from external customers and segment operating income to assess performance and allocate resources. Segment operating income excludes other income/expense items and goodwill impairment losses. In addition, interest expense and income amounts, and provisions for income taxes are not allocated to the operating segments.
Quarter ended | |||||||||
October 1, 2016 | |||||||||
Global | Consumer | ||||||||
Ingredients | Products | Consolidated | |||||||
$ | $ | $ | |||||||
Segment revenues from external customers | 137,174 | 211,558 | 348,732 | ||||||
Segment operating income | 7,404 | 8,104 | 15,508 | ||||||
Corporate Services | (2,287 | ) | |||||||
Other expense, net | (10,312 | ) | |||||||
Interest expense, net | (12,178 | ) | |||||||
Loss from continuing operations before income taxes | (9,269 | ) |
| Quarter ended | ||||||||
| October 3, 2015 | ||||||||
| Global | Consumer | |||||||
| Ingredients | Products | Consolidated | ||||||
| $ | $ | $ | ||||||
Segment revenues from external customers | 150,500 | 126,713 | 277,213 | ||||||
Segment operating income | 4,642 | 1,863 | 6,505 | ||||||
Corporate Services | (2,406 | ) | |||||||
Other expense, net | (3,652 | ) | |||||||
Interest expense, net | (1,103 | ) | |||||||
Loss from continuing operations before income taxes | (656 | ) |
| Three quarters ended | ||||||||
| October 1, 2016 | ||||||||
| Global | Consumer | |||||||
| Ingredients | Products | Consolidated | ||||||
| $ | $ | $ | ||||||
Segment revenues from external customers | 441,694 | 607,498 | 1,049,192 | ||||||
Segment operating income | 24,256 | 6,989 | 31,245 | ||||||
Corporate Services | (6,544 | ) | |||||||
Other expense, net | (22,723 | ) | |||||||
Interest expense, net | (34,748 | ) | |||||||
Loss from continuing operations before income taxes | (32,770 | ) |
| Three quarters ended | ||||||||
| October 3, 2015 | ||||||||
| Global | Consumer | |||||||
| Ingredients | Products | Consolidated | ||||||
| $ | $ | $ | ||||||
Segment revenues from external customers | 467,405 | 361,351 | 828,756 | ||||||
Segment operating income | 23,934 | 5,115 | 29,049 | ||||||
Corporate Services | (6,007 | ) | |||||||
Other expense, net | (4,393 | ) | |||||||
Interest expense, net | (3,171 | ) | |||||||
Earnings from continuing operations before income taxes | 15,478 |
15. Subsequent Events
9. Series A Preferred Stock
On October 7, 2016 (the “Closing Date”), the Company and SunOpta Foods entered into a subscription agreement (the “Subscription Agreement”) with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund II, L.P. (collectively, the “Investors”). Pursuant to the Subscription Agreement, SunOpta Foods issued an aggregate of 85,000 shares of Preferred Stock to the Investors for consideration in the amount of $85.0 million. In connection with the issuance of the Preferred Stock, the Company incurred direct and incremental expenses of $6.0 million, which reduced the carrying value of the Preferred Stock. At any time on or after the fifth anniversary of the Closing Date, SunOpta Foods may redeem all of the Preferred Stock for an amount, per share of Preferred Stock, equal to the value of the liquidation preference at such time. The proceeds were usedcarrying value of the Preferred Stock is being accreted to repay $79.0 million principalthe redemption amount of Initial Loans outstanding under$85.0 million through charges to retained earnings over the Second Lien Loan Agreementperiod preceding the fifth anniversary of the Closing Date, which accretion amounted to $0.3 million and pay expenses associated with$0.7 million for the transaction. quarter and three quarters ended September 30, 2017, respectively.
In connection with the 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 Preferred Stock and (ii) grant each holder of Preferred Stock (the “Holder”) the right to exchange the Preferred Stock for shares of common stock of the Company (the “Common Shares”). The Preferred Stock is non-participating with the Common Shares in dividends and undistributed earnings of the Company.
The Preferred Stock has a stated value and initial liquidation preference of $1,000 per share. Cumulative preferred dividends accrue daily on the Preferred Stock at an annualized rate of 8.0% prior to October 5, 2025 and 12.5% thereafter, in each case of the liquidation preference (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 October 5, 2025, 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 liquidation preference. After October 4, 2025, the failure to pay dividends in cash will be an event of non-compliance. The Preferred Stock ranks senior to the shares of common stock of SunOpta Foods with respect to dividend rights and rights on the distribution of assets on any liquidation, winding up or dissolution of the Company or SunOpta Foods. As at September 30, 2017, the Company had accrued unpaid dividends of $1.7 million, which were recorded in accounts payable and accrued liabilities on the consolidated balance sheet.
At any time, the Holders may exchange their shares of Preferred Stock, in whole or in part, into the number of Common Shares equal to, per share of Preferred Stock, the quotient of the liquidation preference divided by $7.50 (such price, the “Exchange Price” and such quotient, the “Exchange Rate”). As at October 7, 2016,September 30, 2017, the aggregate shares of Preferred Stock outstanding were exchangeable into 11,333,333 Common Shares. The Exchange Price is subject to certain anti-dilution adjustments, including a weighted-average adjustment for issuances of Common Shares below the Exchange Price, provided that the Exchange Price may not be lower than $7.00 (subject to adjustment in certain circumstances). SunOpta Foods may cause the Holders to exchange all of the Preferred Stock into a number of Common Shares based on the applicable Exchange Price if (i) fewer than 10% of the shares of Preferred Stock issued on the Closing Date remain outstanding or (ii) on or after the third anniversary of the Closing Date, the average volume-weighted average price of the Common Shares during the then preceding 20 trading day period is greater than 200% of the Exchange Price. Prior to the receipt of applicable approval by the holderholders of Common Shares, shares of Preferred Stock arewere not exchangeable into more than 19.99% of the number of Common Shares outstanding immediately after giving effect to such exchange.
At any time on or afterexchange (the “Beneficial Ownership Exchange Cap”). On May 24, 2017, the fifth anniversaryholders of Common Shares approved the removal of the Closing Date, SunOpta Foods may redeem all of the Preferred Stock for an amount, per share of Preferred Stock, equal to the value of the liquidation preference at such time. Upon certain events involving a change of control of the Company, SunOpta Foods must use reasonable efforts to provide the Holders with the option to exchange shares of the Preferred Stock for a security in the surviving or successor entity that has the same rights, preferences and privileges as the Preferred Stock as adjusted for the change of control. SunOpta Foods will also offer to redeem the Preferred Stock at an amount per share equal to the greater of (i) the liquidation preference plus an amount equal to the value of incremental dividends that would have accrued through to the fifth anniversary of the Closing Date and (ii) the amount payable per Common Share in such change of control multiplied by theBeneficial Ownership Exchange Rate.Cap.
SUNOPTA INC. | 24 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
In connection with the Subscription Agreement, 11,333,333the Company issued Special Shares, Series 1 (the “Special Voting Shares”) of the Company were issued to the Investors, which entitle the Investors to one vote per Special Voting Share on all matters submitted to a vote of the holders of Common Shares, together as a single class, subject to certain exceptions. As of the Closing Date, the Special Voting Shares represented an 11.7% voting interest in the Company. Additional Special Voting Shares will be issued, or existing Special Voting Shares will be redeemed, as necessary to ensure that the aggregate number of Special Voting Shares outstanding is equal to the number of shares of Preferred Stock outstanding from time to time multiplied by the Exchange Rate in effect at such time. As at September 30, 2017, 11,333,333 Special Voting Shares were issued and outstanding, which represented an approximate 11.6% voting interest in the Company. The Special Voting Shares are not transferable and the voting rights associated with the Special Voting Shares will terminate upon the transfer of the Preferred Stock to a third party, other than a controlled affiliate of the Investors. The Investors will beare entitled to designate up to two nominees for election to the boardBoard of directorsDirectors 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 the Investors maintaining certain levels of beneficial ownership of Common Shares on an as-exchanged basis. For so long as the Investors beneficially own or control at least 50% of the Preferred Stock issued on the Closing Date, including any corresponding Common Shares into which such Preferred Stock are exchanged, the Investors 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.
10. Stock-Based Compensation
Stock Incentive Plan
For the three quarters ended September 30, 2017, the Company granted 872,285 stock options to selected employees that vest 100% on the third anniversary 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 $4.22. 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 | $ | 9.41 | |
Exercise price | $ | 9.41 | |
Dividend yield | 0% | ||
Expected volatility(1) | 42.3% | ||
Risk-free interest rate(2) | 2.0% | ||
Expected life of options (in years)(3) | 6.5 |
(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 (three years) and expiration (ten years). |
The aggregate grant-date fair value of stock options awarded to employees was $3.7 million, which will be recognized on a straight-line basis over the three-year vesting period.
For the three quarters ended September 30, 2017, the Company also granted 1,440,737 performance share units (“PSU”) to selected employees and 702,504 restricted stock units (“RSUs”) to selected employees and directors.
The vesting of the PSUs is subject to the satisfaction of certain stock price performance conditions during a three-year performance period ending May 24, 2020. One-third of the PSUs will vest upon achieving a stock price of $11.00, one-third will vest upon achieving a stock price of $14.00, and one-third will vest upon achieving a stock price of $18.00, in each case for 20 consecutive trading days and subject to the employee’s continued employment throughout the performance period.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Each vested PSU will entitle the employee to receive one common share of the Company without payment of additional consideration.
The fair value of the PSUs was estimated using a Monte Carlo valuation model, which simulates the potential outcomes for the Company’s stock price performance and determines the payouts that would occur under each scenario. Fair value is based on the average of those results. The grant-date weighted-average fair value of the PSUs was determined to be $5.85, based on the following inputs to the valuation model:
Grant-date stock price | $ | 9.47 | |
Dividend yield | 0% | ||
Expected volatility(1) | 42.3% | ||
Risk-free interest rate(2) | 1.5% | ||
Expected life (in years)(3) | 3.0 |
(1) | Determined based on the historical volatility of the Common Shares over 6.5 years, which is consistent with the volatility assumption for stock options granted to employees on the same date as the PSUs. |
(2) | Determined based on U.S. Treasury yields with a remaining term equal to the expected life of the PSUs. |
(3) | Determined based on vesting for the PSUs. |
The aggregate grant-date fair value of the PSUs was $8.4 million, which will be recognized on a straight-line basis over the requisite three-year performance period.
The RSUs granted to employees vest ratably on each of the first through third anniversaries of the grant date. RSUs granted to directors vest 100% on the first anniversary of the grant date. Each vested RSU will entitle the employee or director to receive one common share of the Company. The weighted-average grant-date fair value of the RSUs was estimated to be $9.26, based on the stock price of the Common Shares as of the dates of grant. The aggregate grant-date fair value of the RSUs awarded to employees and directors of $6.5 million will be recognized on a straight-line basis over the weighted-average vesting period of 2.7 years.
Senior Secured Second Lien NotesCEO Plan
On October 20, 2016, SunOpta Foods issued $231.0 million aggregate principal amount of Notes in exchange for the corresponding principal amount of Term Loans borrowed under the Second Lien Loan Agreement. The Term Loans were the resultFebruary 6, 2017, David Colo was appointed President and CEO of the automatic conversionCompany. In connection with his appointment, the Company granted Mr. Colo 473,940 performance-based stock options (the “Special Stock Options”) and 277,780 performance stock units (the “Special Performance Units”). In addition, Mr. Colo was granted 100,000 RSUs, of which 50,000 were contingent on October 9, 2016Mr. Colo purchasing Common Shares with an aggregate value of $1.0 million in the open market.
The vesting of the outstanding Initial Loans borrowed underSpecial Stock Options and Special Performance Units is subject to: (i) Mr. Colo’s continued employment with the Second Lien Loan Agreement (see note 7).Company during a three-year performance period ending February 6, 2020; and (ii) the satisfaction of certain stock price performance conditions during the performance period. One-third of the Special Stock Options and Special Performance Units will vest upon achieving a stock price of $11.00, one-third will vest upon achieving a stock price of $14.00, and one-third will vest upon achieving a stock price of $18.00, in each case for 20 consecutive trading days and subject to Mr. Colo’s continued employment through the performance period. Each vested Special Stock Option will entitle Mr. Colo to purchase one common share of the Company at an exercise price of $7.00, which was equal to the closing price of the Common Shares as at February 6, 2017. Each vested Special Performance Unit will entitle Mr. Colo to receive one common share of the Company without payment of additional consideration.
InterestThe grant-date weighted-average fair values of the Special Stock Options and Special Performance Units were estimated using a Monte Carlo valuation model and determined to be $1.84 and $2.79, respectively, based on the Notes is payable semi-annually in arrears on April 15 and October 15 at a rate of 9.5% per annum, commencing on April 15, 2017. following inputs to the valuation model:
Special | ||||||
Special Stock | Performance | |||||
Options | Units | |||||
Grant-date stock price | $ | 7.00 | $ | 7.00 | ||
Exercise price | $ | 7.00 | NA | |||
Dividend yield | 0% | 0% | ||||
Expected volatility(1) | 42.0% | 42.0% | ||||
Risk-free interest rate(2) | 2.2% | 1.5% | ||||
Expected life (in years)(3) | 6.5 | 3.0 |
SUNOPTA INC. | 26 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(1) | Determined based on the historical volatility of the Common Shares over the expected life of the Special Stock Options. | |
(2) | Determined based on U.S. Treasury yields with a remaining term equal to the respective expected lives of the Special Stock Options and Special Performance Units. | |
(3) | Determined using the simplified method for the Special Stock Options, based on the mid-point of vesting (three years) and expiration (ten years). Determined based on vesting for the Special Performance Units. |
The Notes will mature on October 9, 2022.
At any time prior to October 9, 2018, SunOpta Foods may redeem some or allaggregate grant-date fair value of the Notes at any timeSpecial Stock Options and from timeSpecial Performance Units awarded to time atMr. Colo was $1.6 million, which will be recognized on a “make-whole” redemptionstraight-line basis over the requisite three-year performance period.
The RSUs granted to Mr. Colo vest in three equal installments beginning on February 6, 2018. Each vested RSU will entitle Mr. Colo to receive one common share of the Company. The grant-date fair value of the RSUs was estimated to be $7.00 based on the stock price set forth inof the indenture governing the Notes. On or after October 9, 2018, SunOpta Foods may redeem the Notes, in whole or in part, at any time at the redemption prices equal to 107.125% through October 8, 2019, 104.750% from October 9, 2019 through October 8, 2020, 102.375% from October 9, 2020 through October 8, 2021 and at par thereafter, plus accrued and unpaid interest, if any, to but excludingCommon Shares as of the date of redemption.grant. The aggregate grant-date fair value of the RSUs awarded to Mr. Colo of $0.7 million will be recognized on a straight-line basis over the three-year vesting period.
11. Accumulated Other Comprehensive Loss
Net unrealized gains/(losses) recorded in accumulated other comprehensive loss were as follows:
September 30, | December 31, | |||||
2017 | 2016 | |||||
$ | $ | |||||
Currency translation adjustment | (8,185 | ) | (13,104 | ) | ||
Cash flow hedges, net of income taxes | 257 | - | ||||
(7,928 | ) | (13,104 | ) |
12. Other Expense, Net
The components of other expense (income) were as follows:
Quarter ended | Three quarters ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Impairment of long-lived assets(1) | 4,467 | 10,300 | 8,190 | 12,035 | ||||||||
Employee termination costs(2) | 2,052 | 138 | 4,227 | 1,153 | ||||||||
Product withdrawal and recall costs(3) | 134 | - | 413 | 1,697 | ||||||||
Increase (decrease) in fair value of contingent consideration(4) | 83 | 124 | 287 | (1,281 | ) | |||||||
Legal settlement(5) | (1,024 | ) | - | (1,024 | ) | 9,000 | ||||||
Other | 260 | (250 | ) | (71 | ) | 119 | ||||||
5,972 | 10,312 | 12,022 | 22,723 |
SUNOPTA INC. | 27 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(1) | Impairment of long-lived assets |
For the quarter ended September 30, 2017, represented the impairment of assets associated with the exit from flexible resealable pouch and nutrition bar product lines and operations, and, for the three quarters ended September 30, 2017, included $3.2 million paid for the early buyout of the San Bernardino equipment leases (see note 2).
For the quarter ended October 1, 2016, represented the impairment of equipment and leasehold improvements in connection with the closure of the San Bernardino facility. In addition, priorfor the three quarters ended October 1, 2016, included the impairment of leasehold improvements at the Company’s Buena Park, California, facility on the consolidation of Company’s frozen fruit processing operations following the acquisition of Sunrise in October 2015.
(2) | Employee termination costs |
For the quarter and three quarters ended September 30, 2017, represented severance benefits, net of forfeitures of stock- based awards, and legal costs incurred in connection with the Value Creation Plan (see note 2), including employees affected by the exit from flexible resealable pouch and nutrition bar product lines and operations. | |
For the quarter and three quarters ended October 1, 2016, primarily represented severance benefits for employees affected by the consolidation of the Company’s frozen fruit processing operations. | |
(3) | Product withdrawal and recall costs |
For the three quarters ended September 30, 2017, represented product withdrawal and recall costs that were not eligible for reimbursement under the Company’s insurance policies. | |
For the quarter and three quarters ended October 1, 2016, the Company recognized estimated costs of $1.1 million related to the voluntary withdrawal of a consumer-packaged product due to a quality-related issue, and the $0.6 million for insurance deductibles related to the sunflower recall (see note 5). | |
(4) | Increase (decrease) in fair value of contingent consideration |
For all periods presented, reflected the accretion of contingent consideration obligations to reflect the time value of money. In addition, for the three quarters ended October 1, 2016, included a gain of $1.7 million on the settlement of the contingent consideration obligation related to the acquisition of Niagara Natural in August 2015. | |
(5) | Legal settlement |
In the second quarter of 2016, the Company recorded a charge of $9.0 million related to the settlement of a product recall dispute with a customer involving certain flexible resealable pouch products manufactured by the Company in 2013. The settlement amount included up to $4.0 million in rebates payable to the customer over a four-year period. In connection with the exit from the flexible resealable pouch product lines and operations, the Company agreed to an upfront cash settlement of the remaining rebate obligation, resulting in a recovery of $1.0 million recognized in the third quarter of 2017. |
SUNOPTA INC. | 28 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
13. Loss Per Share
Basic and diluted loss per share were calculated as follows (shares in thousands):
Quarter ended | Three quarters ended | |||||||||||
September | October 1, | September | October 1, | |||||||||
30, 2017 | 2016 | 30, 2017 | 2016 | |||||||||
Numerator for basic loss per share: | ||||||||||||
Loss from continuing operations, less amount attributable to non-controlling interests | $ | (6,027 | ) | $ | (3,355 | ) | $ | (17,833 | ) | $ | (17,142 | ) |
Less: dividends and accretion on Series A Preferred Stock | (1,954 | ) | - | (5,848 | ) | - | ||||||
Loss from continuing operations available to common shareholders | (7,981 | ) | (3,355 | ) | (23,681 | ) | (17,142 | ) | ||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | |||||||
Loss available to common shareholders | $ | (7,981 | ) | $ | (3,355 | ) | $ | (23,681 | ) | $ | (17,712 | ) |
Denominator for basic loss per share: | ||||||||||||
Basic weighted-average number of shares outstanding | 86,541 | 85,619 | 86,232 | 85,529 | ||||||||
Basic loss per share: | ||||||||||||
- from continuing operations | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.27 | ) | $ | (0.20 | ) |
- from discontinued operations | - | - | - | (0.01 | ) | |||||||
$ | (0.09 | ) | $ | (0.04 | ) | $ | (0.27 | ) | $ | (0.21 | ) | |
Numerator for diluted loss per share: | ||||||||||||
Loss from continuing operations, less amount attributable to non-controlling interests | $ | (6,027 | ) | $ | (3,355 | ) | $ | (17,833 | ) | $ | (17,142 | ) |
Less: dividends and accretion on Series A Preferred Stock(1) | (1,954 | ) | - | (5,848 | ) | - | ||||||
Loss from continuing operations available to common shareholders | (7,981 | ) | (3,355 | ) | (23,681 | ) | (17,142 | ) | ||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | |||||||
Loss available to common shareholders | $ | (7,981 | ) | $ | (3,355 | ) | $ | (23,681 | ) | $ | (17,712 | ) |
Denominator for diluted loss per share: | ||||||||||||
Basic weighted-average number of shares outstanding | 86,541 | 85,619 | 86,232 | 85,529 | ||||||||
Dilutive effect of the following: | ||||||||||||
Series A Preferred Stock(1) | - | - | - | - | ||||||||
Stock options and RSUs(2) | - | - | - | - | ||||||||
Diluted weighted-average number of shares outstanding | 86,541 | 85,619 | 86,232 | 85,529 | ||||||||
Diluted loss per share: | ||||||||||||
- from continuing operations | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.27 | ) | $ | (0.20 | ) |
- from discontinued operations | - | - | - | (0.01 | ) | |||||||
$ | (0.09 | ) | $ | (0.04 | ) | $ | (0.27 | ) | $ | (0.21 | ) |
SUNOPTA INC. | 29 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(1) | For the quarter and three quarters ended September 30, 2017, it was more dilutive to assume the Preferred Stock was not converted into Common Shares and, therefore, the numerator of the diluted loss per share calculation was not adjusted to add back the dividends and accretion on the Preferred Stock and the denominator was not adjusted to include 11,333,333 Common Shares issuable on an if-converted basis. |
(2) | For the quarter and three quarters ended September 30, 2017, stock options and RSUs to purchase or receive 917,702 (October 1, 2016 – 31,582) and 850,013 (October 1, 2016 – 20,534) 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 30, 2017, options to purchase 1,518,129 (October 1, 2016 – 1,873,871) and 2,488,826 (October 1, 2016 – 2,453,271) Common Shares, respectively, were anti-dilutive because the exercise prices of these options were greater than the average market price. |
14. Supplemental Cash Flow Information
Quarter ended | Three quarters ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Changes in non-cash working capital: | ||||||||||||
Accounts receivable | 5,113 | (22,302 | ) | 12,754 | (56,049 | ) | ||||||
Inventories | 15,100 | 5,150 | 9,187 | (34,760 | ) | |||||||
Income tax recoverable/payable | (552 | ) | 9,423 | (5,351 | ) | 14,807 | ||||||
Prepaid expenses and other current assets | (6,695 | ) | (1,985 | ) | (16,241 | ) | (2,591 | ) | ||||
Accounts payable and accrued liabilities | (30,455 | ) | 10,999 | (23,760 | ) | 21,943 | ||||||
Customer and other deposits | (517 | ) | (449 | ) | (1,908 | ) | (4,293 | ) | ||||
(18,006 | ) | 836 | (25,319 | ) | (60,943 | ) |
15. Commitments and Contingencies
Employment Matter
On April 19, 2013, a class-action complaint, in the case titled De Jesus, et al. v. Frozsun, Inc. d/b/a Frozsun Foods, was filed against Sunrise Growers, Inc. (then named Frozsun, Inc.) in California Superior Court, Santa Barbara County seeking damages, equitable relief and reasonable attorneys’ fees for alleged wage and hour violations. This case includes claims for failure to pay all hours worked, failure to pay overtime wages, meal and rest period violations, waiting-time penalties, improper wage statements and unfair business practices. The putative class includes approximately 10,000 non-exempt hourly employees from Sunrise’s production facilities in Santa Maria and Oxnard, California. The parties attended mediation on October 9, 2018, SunOpta Foods may,12, 2017 and reached a general agreement to resolve the matter on one or more occasions, redeem up to 35%a class-wide basis. The parties are negotiating the remaining details of the aggregate principalsettlement which is subject to court approval. It is anticipated that the parties will seek preliminary approval of the settlement from the court in December 2017 or January 2018. The Company expects to recover the full amount payable under the settlement through insurance coverage and an escrow account established in connection with the Company’s acquisition of Sunrise.
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 the Notes with the proceeds of certain equity offerings at a redemption price equal to 109.500% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to but excluding the date of redemption. At any time prior to October 9, 2018, SunOpta Foods may also redeem, during each twelve-month period beginning on October 20, 2016, up to 10% of the aggregate principal amount of the Notes at a price equal to 103% of the aggregate principal amount of the Notes being redeemed, plus accrued and unpaid interest, if any, to but excluding the date of redemption. In the event of a change of control, SunOpta Foods will be required to make an offer to repurchase the Notes at 101% of their principal amount, plus accrued and unpaid interest,potential liability, if any, to the dateCompany is not determinable. Management believes the final determination of purchase.these claims or potential claims will not materially affect the financial position or results of the Company.
SUNOPTA INC. | 30 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
16. Segmented Information
The Notes are secured by second-priority liens on substantially allcomposition of the assets that secure the credit facilities provided under the Global Credit Facility, subjectCompany’s reportable segments is as follows:
• | Global Ingredients aggregates our North American-based Raw Material Sourcing and Supply and European-based International Sourcing and Supply operating segments focused on the procurement and sale of specialty and organic grains and seeds, raw material ingredients, value-added grain- and cocoa-based ingredients, and organic commodities. | |
• | Consumer Products consists of three main commercial platforms: Healthy Beverages, Healthy Fruit and Healthy Snacks. Healthy Beverages includes aseptic packaged products including non-dairy and dairy beverages, broths and teas; refrigerated premium juices; and shelf-stable juices and functional waters. Healthy Fruit includes individually quick frozen (“IQF”) fruits for retail; IQF and bulk frozen fruit for foodservice; and custom fruit preparations for industrial use. Healthy Snacks includes fruit snacks; nutrition bars; and flexible resealable pouch products. |
In addition, Corporate Services provides a variety of management, financial, information technology, treasury and administration services 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 abilityoperating segments from the Company’s headquarters in Mississauga, Ontario and administrative office in Edina, Minnesota.
When reviewing the operating results of the Company’s operating segments, management uses segment revenues from external customers and segment operating income/loss to (i) incur additional debt or issue preferred stock; (ii) pay dividendsassess performance and make certain types of investmentsallocate resources. Segment operating income/loss excludes other income/expense items and other restricted payments; (iii) create liens; (iv) enter into transactions with affiliates; (v) sell assets;goodwill impairment losses. In addition, interest expense and (vi) create restrictions on the ability of restricted subsidiaries to pay dividends, make loans or advances or transfer assetsincome amounts, and provisions for income taxes are not allocated to the Company, SunOpta Foods or any Guarantor. 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.operating segments.
Quarter ended | |||||||||
September 30, 2017 | |||||||||
Global | Consumer | ||||||||
Ingredients | Products | Consolidated | |||||||
$ | $ | $ | |||||||
Segment revenues from external customers | 140,533 | 180,180 | 320,713 | ||||||
Segment operating income | 5,265 | 4,528 | 9,793 | ||||||
Corporate Services | (4,832 | ) | |||||||
Other expense, net (see note 12) | (5,972 | ) | |||||||
Interest expense, net | (8,371 | ) | |||||||
Loss from continuing operations before income taxes | (9,382 | ) |
Quarter ended | |||||||||
October 1, 2016 | |||||||||
Global | Consumer | ||||||||
Ingredients | Products | Consolidated | |||||||
$ | $ | $ | |||||||
Segment revenues from external customers | 137,174 | 211,558 | 348,732 | ||||||
Segment operating income | 7,404 | 8,104 | 15,508 | ||||||
Corporate Services | (2,287 | ) | |||||||
Other expense, net (see note 12) | (10,312 | ) | |||||||
Interest expense, net | (12,178 | ) | |||||||
Loss from continuing operations before income taxes | (9,269 | ) |
SUNOPTA INC. | 31 | September 30, 2017 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and three quarters ended September 30, 2017 and October 1, 2016 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Three quarters ended | |||||||||
September 30, 2017 | |||||||||
Global | Consumer | ||||||||
Ingredients | Products | Consolidated | |||||||
$ | $ | $ | |||||||
Segment revenues from external customers | 420,247 | 566,951 | 987,198 | ||||||
Segment operating income | 18,388 | 14,696 | 33,084 | ||||||
Corporate Services | (28,460 | ) | |||||||
Other expense, net (see note 12) | (12,022 | ) | |||||||
Interest expense, net | (23,820 | ) | |||||||
Loss from continuing operations before income taxes | (31,218 | ) |
Three quarters ended | |||||||||
October 1, 2016 | |||||||||
Global | Consumer | ||||||||
Ingredients | Products | Consolidated | |||||||
$ | $ | $ | |||||||
Segment revenues from external customers | 441,694 | 607,498 | 1,049,192 | ||||||
Segment operating income | 24,256 | 6,989 | 31,245 | ||||||
Corporate Services | (6,544 | ) | |||||||
Other expense, net (see note 12) | (22,723 | ) | |||||||
Interest expense, net | (34,748 | ) | |||||||
Loss from continuing operations before income taxes | (32,770 | ) |
SUNOPTA INC. | 32 |
Item 2. Management’sManagement'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 October 1, 2016September 30, 2017 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 January 2,December 31, 2016 (“Form 10-K”). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to November 9, 2016.8, 2017.
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”, “continue”, “believe”, “expect”, “could”, “would”, “should”, “might”, “plan”, “will”, “may”, “predict”, or other similar expressions concerning matters that are not historical facts. 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. Forward-looking statements are also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what we currently expect. 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. 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.
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.
SUNOPTA INC. | 33 | September 30, 2017 10-Q |
Overview
In connection withSunOpta is a global company focused on sourcing organic and non-genetically modified (“non-GMO”) ingredients, and manufacturing healthy food and beverage products. Our global sourcing platform makes us one of the saleleading suppliers of organic and non-GMO raw materials and ingredients in the food industry. Our consumer products portfolio utilizes internally and externally sourced raw materials and ingredients to manufacture healthy food and beverage products for supply to retail, foodservice and branded food customers. We operate our equity interestbusiness in Opta Minerals Inc. (“Opta Minerals”) on April 6, 2016 (as described below under “Recent Developments – Sale of Opta Minerals”), the results of operations of Opta Minerals for the current and prior fiscal periods have been reported in discontinued operations in our consolidated statements of operations and cash flows. Prior to being recognized as a discontinued operation, Opta Minerals was reported as a standalone operating segment within SunOpta.following reportable segments:
• | Global Ingredients aggregates our North American-based Raw Material Sourcing and Supply and European-based International Sourcing and Supply operating segments focused on the procurement and sale of specialty and organic grains and seeds, raw material ingredients, value-added grain- and cocoa-based ingredients, and organic commodities. | |
• | Consumer Products consists of three main commercial platforms: Healthy Beverages, Healthy Fruit and Healthy Snacks. Healthy Beverages includes aseptic packaged products including non-dairy and dairy beverages, broths and teas; refrigerated premium juices; and shelf-stable juices and functional waters. Healthy Fruit includes individually quick frozen (“IQF”) fruits for retail; IQF and bulk frozen fruit for foodservice; and custom fruit preparations for industrial use. Healthy Snacks includes fruit snacks; nutrition bars; and flexible resealable pouch products. | |
SUNOPTA INC. | 34 | September 30, 2017 10-Q |
CalendarFiscal Year
We operate on a fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to December 31. Fiscal year 2017 is a 52-week period ending on December 30, 2017, with quarterly periods ending on April 1, July 1 and September 30, 2017. Fiscal year 2016 iswas a 52-week period ending on December 31, 2016, with quarterly periods ending on April 2, July 2 and October 1, 2016. Fiscal year 2015 was a 52-week period ending on January 2, 2016, with quarterly periods ending on April 4, July 4 and October 3, 2015.
Recent Developments
Strategic ReviewValue Creation Plan
On June 27, 2016, we announced that we had engaged external financial and legal advisors to review our operating plan and to evaluate a range of strategic and financial actions that we could undertake to maximize shareholder value. The strategic review arose out of discussions with our largest shareholders, some of which had advocated that we examine value maximization strategies. We also announced that we had engaged a global executive search firm to assist in identifying candidates who can add additional operating, industry and capital markets experience and expertise to our Board of Directors (the “Board”). The strategic review was concluded on October 7, 2016, with our announcement ofwe entered into a strategic partnership with Oaktree Capital Management L.P., a private equity investor (together with its affiliates, “Oaktree”).
On October 7, 2016, Oaktree invested $85.0 million inthrough the purchase of cumulative, non-participating Series A Preferred Stock (the “Preferred Stock”) of our wholly-owned subsidiary, SunOpta Foods Inc. (“SunOpta Foods”). The shares of Preferred Stock are exchangeable into common shares of SunOpta Inc. in accordance with certain terms and conditions. Net proceeds from
Following the issuance of the Preferred Stock were used to repay $79.0 of borrowings made under our second lien loan agreement (the “Second Lien Loan Agreement”), as described below under “Liquidity and Capital Resources”.
For more information regarding the terms of the Preferred Stock investment by Oaktree, see note 15 to the unaudited consolidated financial statements included in this report.
Governance and Management Transitions
On October 7, 2016, we increased the size of the Board to nine directors and appointed two Oaktree-nominated independent directors, Dean Hollis and Al Bolles, Ph.D., to the Board. In addition, on October 7, 2016, Brendan Springstubb was appointed to the Board to replace Douglas Greene who resigned as a director. Mr. Springstubb is a Principal at Engaged Capital LLC, one of our largest shareholders.
On November 9, 2016, we announced that Rik Jacobs, President and Chief Executive Officer (“CEO”), and Alan Murray, Chair of the Board, will be stepping down from their respective positions. Mr. Jacobs’ last day with the Company will be November 11, 2016, and Mr. Murray’s departure from the board was effective concurrent with the announcement.
Director Dean Hollis has been appointed Chair of the Board, and director Katrina L. Houde will serve as interim CEO. The Board has initiated a search process for a permanent CEO.
Operational Review and Value Creation Strategy
We are conducting,strategic partnership, with the assistance of Oaktree, we conducted a thorough review of our operations, management and governance, with the objective of maximizing our ability to deliver long-term value to our shareholders. ThroughAs a product of this review we haveour management and the Board of Directors developed a value creation strategyValue Creation Plan built on four pillars: portfolio optimization, operational excellence, go-to-market effectiveness and process sustainability. Key actions include:
Portfolio Optimization
As part of the first phase of the Value Creation Plan, we are targeting implementation of $30 million of productivity-driven annualized enhancements of earnings before income taxes, depreciation and amortization (“EBITDA”), to be implemented over 2017 and 2018. For fiscal 2017, these EBITDA benefits will investbe offset by expenses associated with the Value Creation Plan, including structural investments made in the areas of quality, sales, marketing, operations and engineering resources, as well as non-structural third-party consulting support, severance, and recruiting costs. The plan also calls for increased investment in capital upgrades at several manufacturing facilities to enhance food safety and manufacturing efficiencies. Over time, these investments are expected to yield additional improvement in EBITDA beyond the $30 million of initial productivity-driven savings. For the third quarter of 2017, we continued to achieve progress against each of the four pillars of the Value Creation Plan and we believe we are on track to achieve targeted productivity enhancements, while continuing to make the necessary structural investments we believe will accelerate growth and drive long-term value. Recent progress on each of the four pillars of the Value Creation Plan is highlighted below:
Portfolio Optimization
The focus of the portfolio optimization pillar is to simplify the business, investing where we have a structural advantage and will assess the impact ofadvantages exist, while exiting businesses or product lines where we are not effectively positioned.
• | Announced the exit from nutrition bar product lines and operations in Carson City, Nevada, targeting substantial completion by the end of the fourth quarter of 2017. | |
• | Announced the discontinuation of flexible resealable pouch products along with an agreement to sell the associated pouch equipment for $2.0 million, which closed on November 3, 2017. | |
• | Continued progress on an expansion project to add incremental freezing capacity, storage, and retail bagging capabilities to our Mexican frozen fruit facility, which is expected to be ready in time for the 2018 fruit season. | |
• | Continued progress on an expansion project to add increased roasting and press capacity to our specialty cocoa processing facility in the Netherlands. |
Since the initiation of Juice Operations”,the Value Creation Plan, we have announced our intentionimplemented portfolio changes that are expected to close our juice processingyield approximately $6.0 million of annualized EBITDA benefits. The increase from the previously disclosed target of $5.0 million reflects the planned exit of the flexible resealable pouch and packaging facility located in San Bernardino, California.
SUNOPTA INC. | 35 | September 30, 2017 10-Q |
Operational Excellence
The focus of the operational excellence pillar is to ensure food quality and safety, coupled with improved operational performance and improve operational excellenceefficiency. We expect these efforts to generate productivity improvements and have also identified significantcost savings opportunities in procurement and logistics.
• | Continued to enhance food safety and quality across the manufacturing platform at the plant level and supplier level with a focus on ensuring raw materials meet strict food safety and quality standards before entering our facilities. | |
• | Continued to identify and implement productivity initiatives focusing on manufacturing efficiencies, purchasing synergies and effective freight management. | |
• | Under the direction of a new continuous improvement leader, rolled out “SunOpta 360” across the network of aseptic beverage facilities, establishing a sustainable continuous improvement methodology for the Company and adding to the pipeline of opportunities. |
Since the initiation of the Value Creation Plan, we have implemented process improvements and cost savings that are expected to enhance quality and capture savings.
Go-to-MarketGo-To-Market Effectiveness
The focus of the go-to-market effectiveness pillar is to optimize the customer and product mix in existing sales channels, and identify and penetrate new high-potential sales channels. We expect efforts under this pillar to improve revenue growth and profitability over time. Recent highlights include:
• | Continued to grow the pipeline of commercial opportunities across the beverage, aseptic and fruit snack categories with recent private label, foodservice, and contract manufacturing account wins across several consumer products categories. | |
• | Hired a new Chief Customer Officer for the Consumer Products segment, as well as a new head of marketing, and other new commercial talent that will focus efforts on growing the topline. |
Since the initiation of the Value Creation Plan, we have implemented go-to-market improvements through strategic pricing actions that are also exploring opportunities across new channelsexpected to identify unmet market demand.
Process Sustainability
Rationalization of Juice OperationsProcess Sustainability
On November 8,The focus of the process sustainability pillar is to ensure we have the infrastructure, systems and skills to sustain the business improvements and value captured from the Value Creation Plan. Broadening the skillset and experience of SunOpta’s leadership team is a critical component to the process sustainability pillar of the Value Creation Plan. Recent highlights include:
• | Appointed a new General Manager to lead the frozen fruit platform. | |
• | Upgraded several plant manager positions across the Company. | |
• | Continued focus on customer service and working capital levels as sales and operations planning processes and support systems are refined. | |
• | Initiated enterprise resource planning at our Mexican frozen fruit facility. |
The statements we make in this report about the expected results of the Value Creation Plan, including expected improvements in earnings, EBITDA, working capital efficiencies, expected cash flows, and expected costs, are forward-looking statements. See “Forward-Looking Statements” above. EBITDA is a non-GAAP measure that management uses when assessing the performance of our operations and our ability to generate cash flows to fund our cash requirements, including debt service and capital expenditures. See footnote (3) to the “Consolidated Results of Operations for the Quarters Ended September 30, 2017 and October 1, 2016” table below for a reconciliation of EBITDA and adjusted EBITDA from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC. | 36 | September 30, 2017 10-Q |
In the second half of 2016 and first three quarters of 2017, we incurred significant costs in connection with measures taken under the Board approvedValue Creation Plan. These costs included inventory and long-lived asset impairment charges and facility closure costs primarily related to the closure of our San Bernardino, California, juice facility after determining that it would be more beneficial to transfer our juice production from the facility to contract manufacturers with whom we have ongoing relationships, rather than make further capital investments($10.3 million in support of the bottling or extraction areas of the facility. These capital investments would have been necessary to satisfy packaging format changes demanded by the facility’s largest customer and to address shortfalls in contracting sufficient supply of raw citrus fruit for the upcoming season to allow for effective and efficient use of the facility’s extraction capabilities. In the third quarter of 2016 and $4.4 million in the first three quarters of 2017), and the exit from flexible resealable pouch and nutrition bar product lines and operations ($5.8 million in the third quarter of 2017), as well as employee recruitment, relocation, retention and severance costs related to exit activities and organizational changes within management and executive teams, and recruiting efforts in the areas of quality, sales, marketing, operations and engineering ($3.3 million and $9.3 million in the third quarter and first three quarters of 2017, respectively). In addition, we recorded an impairment loss of $10.3 million to write down the carrying valueincurred third-party legal advisory, consulting and temporary labor costs in support of the long-lived assets associated withValue Creation Plan of $0.5 million in the facility. third quarter of 2016, and $1.2 million and $15.8 million in the third quarter and first three quarters of 2017, respectively. We also made capital investments at several of our manufacturing facilities to enhance food safety and production efficiency.
Costs incurred and charged to expense in the quarters and three quarters ended September 30, 2017 and October 1, 2016 were recorded in the consolidated statement of operations as follows:
Quarter ended | Three quarters ended | |||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Cost of goods sold(1) | 1,287 | - | 1,921 | - | ||||||||
Selling, general and administrative expenses(2) | 2,400 | 483 | 20,839 | 483 | ||||||||
Other expense(3) | 6,569 | 10,300 | 12,467 | 10,300 | ||||||||
10,256 | 10,783 | 35,227 | 10,783 |
(1) | Inventory write-downs and facility closure costs recorded in cost of goods sold were allocated to the Consumer Products operating segment. | |
(2) | Consulting fees and temporary labor costs, and employee recruitment, relocation and retention costs recorded in selling, general and administrative expenses were allocated to Corporate Services. | |
(3) | Asset impairment and employee termination costs recorded in other expense were not allocated to the Company’s operating segments or Corporate Services. |
We estimate third-party consulting and employee recruitment, retention and termination costs related to the Value Creation Plan to be incurred and expensed during the fourth quarter of fiscal 2017 will be approximately $10 million, which includes approximately $8.0 million related to the early termination of the flexible resealable pouch equipment leases that was paid on closing of the asset sale transaction. This estimate does not include currently unforeseen asset impairment charges or employee-related costs that may arise from future actions taken under the Value Creation Plan.
For more information regarding the impairment of long-lived assets,Value Creation Plan, see note 92 to the unaudited consolidated financial statements included in this report.
In the fourth quarter of 2016, we expect to incur additional facility closure costs of approximately $4.0 million to $5.0 million including lease termination and employee severance costs. In addition, it is reasonably possible that we may need to further adjust the estimated fair value of the long-lived assets based on the final disposition of the facility.
Recall of Certain Roasted Sunflower Kernel Products
During the second quarter of 2016, we announced a voluntary recall of certain roasted sunflower kernel products produced at our Crookston, Minnesota facility due to potential contamination with Listeria monocytogenes bacteria. During the third quarter and first three quarters of 2016, we recognized estimatedEstimated losses of $12.0 million and $28.0 million, respectively, related to this recall.the recall totaled $47.0 million as at September 30, 2017, compared to $40.0 million as at December 31, 2016, comprised of estimates for customer losses and direct incremental costs that we incurred. Our estimates for customer losses are provisional and were determined based on an assessment of the information available up to the date of filing of this report, including a review of customer claims received as of that date and consideration of the extent of potential additional claims that have yet to be received. For the third quarterWe have general liability and first three quartersproduct recall insurance policies with aggregate limits of 2016,$47.0 million under which we recorded estimated insuranceexpect to recover recall-related costs, less applicable deductibles. As at September 30, 2017, we had recognized recoveries of $12.0 million and $27.4 million for the losses recognized to-date relatedup to the recall. However, we may not recover the amountlimit of losses recognized to the extent those losses exceed the coverage available or are excluded under our insurance policies. TheConsequently, to the extent any losses are excluded under the insurance policies or additional losses are recognized related to existing or new claims, these excluded or excess losses will be recognized as a charge to future earnings. As at September 30, 2017, we had settled customer claims and direct costs in the amount of $34.6 million, which settlements were fully funded under our general liability and product recall may also have an adverse impact on the value of the customer relationships intangible asset and goodwill associated with our sunflower operations, which had carrying values of $6.6 million and $17.5 million, respectively, as at October 1, 2016. insurance policies.
SUNOPTA INC. | 37 | September 30, 2017 10-Q |
For more information regarding the recall, see note 4 to the unaudited consolidated financial statements included in this report.
Settlement of Plum Dispute
On July 29, 2016, we entered into a Mutual Release and Settlement Agreement (the “Settlement Agreement”) with Plum, PBC (“Plum”), Campbell Soup Company (“Campbell”), and various other parties. The Settlement Agreement resolved the disputed issues among the parties in connection with the litigation filed by Plum against our wholly-owned subsidiary, SunOpta Global Organic Ingredients, Inc. (“SGOI”), which arose out of a voluntary recall by Plum of certain products manufactured at our Allentown, Pennsylvania facility in 2013 (see Part II, Item 1 “Legal Proceedings” and note 13 to the unaudited consolidated financial statements included in this report).
Pursuant to the terms of the Settlement Agreement, we paid Campbell $5.0 million in cash and will provide Campbell with rebates of up to $4.0 million over a four-year period in connection with Plum’s purchases of pouch products and Campbell’s purchases of aseptic broth products pursuant to manufacturing and supply agreements between the parties and their affiliates. In order for Campbell to obtain the full $4.0 million in rebates, Plum and Campbell must order certain minimum quantities of pouch products and aseptic broth products within each of the designated twelve-month periods over the four-year rebate period. In connection with the Settlement Agreement, we recorded a charge of $9.0 million in the second quarter of 2016, as we believe there is reasonable assurance that the minimum order quantities will be achieved.
Sale of Opta Minerals
On February 11, 2016, Opta Minerals entered into a definitive acquisition agreement, pursuant to which an affiliate of Speyside Equity Fund I LP (“Speyside”) agreed to acquire substantially all of the issued and outstanding shares of Opta Minerals. The acquisition of Opta Minerals by Speyside was completed on April 6, 2016, following a vote of the shareholders of Opta Minerals in favor of the transaction on March 31, 2016.
Upon closing of the transaction, we received aggregate gross proceeds of $4.8 million (C$6.2 million), of which $3.2 million (C$4.2 million) was received in cash, with the remainder received in the form of a $1.5 million (C$2.0 million) subordinated promissory note bearing interest at 2.0% per annum that will mature on October 6, 2018. We incurred direct costs related to the sale of Opta Minerals of $0.8 million. The sale of our equity interest in Opta Minerals was consistent with our objective of divesting our non-core assets in order to become a pure-play healthy and organic foods company. We do not expect to have any significant continuing involvement with Opta Minerals.
In the fourth quarter of 2015, we recognized a loss on classification of Opta Minerals as a discontinued operation held for sale of $10.5 million, or $7.7 million net of non-controlling interest, to write down the carrying value of Opta Minerals’ net assets to fair value less cost to sell based on estimated net proceeds on sale of approximately $4.5 million as at January 2, 2016. In the first quarter of 2016, we recognized a $0.6 million gain on classification as held for sale which reflected a $1.1 million decline in the carrying value of Opta Minerals’ net assets, partially offset by a $0.5 million reduction in the estimated net proceeds on sale. We have not recognized the results of operations or cash flows of Opta Minerals for the period from April 1, 2016 to the closing of the transaction on April 6, 2016, as these amounts were insignificant to our consolidated results of operations and cash flows. For more information regarding the sale of Opta Minerals, see note 3 to the unaudited consolidated financial statements included in this report.
Five-Year Global Revolving Asset-Based Credit Facility
On February 11, 2016, we entered into a five-year credit agreement for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $350 million, subject to borrowing base capacity (the “Global Credit Facility”), as described below under “Liquidity and Capital Resources” and in note 7 to the unaudited consolidated financial statements included in this report.
Sunrise Holdings (Delaware), Inc.
On October 9, 2015, we completed the acquisition of 100% of the issued and outstanding common shares of Sunrise Holding (Delaware), Inc. (“Sunrise”), pursuant to a Purchase and Sale Agreement dated July 30, 2015 (the “Sunrise Acquisition”), for total consideration of $472.7 million in cash. Sunrise is a processor of conventional and organic individually quick frozen fruit in the U.S. The acquisition of Sunrise is aligned with our strategic focus on healthy and organic foods. Sunrise has been included in the Consumer Products operating segment since the date of acquisition. For more information regarding the Sunrise Acquisition, see note 2 to the unaudited consolidated financial statements included in this report.
In January 2016, we initiated the consolidation of our frozen fruit processing facilities following the Sunrise Acquisition. Consequently, we transferred all production volume from our Buena Park, California facility into Sunrise’s facilities located in Kansas and California. In the first three quarters of 2016, we recognized severance and rationalization costs of $2.4 million related to closure of the Buena Park facility and associated corporate office located in Cerritos, California. This operational consolidation is expected to provide a large part of our targeted cost synergies from the Sunrise Acquisition for 2016.
Niagara Natural Fruit Snack Company Inc.
On August 11, 2015, we acquired the net operating assets of Niagara Natural Fruit Snack Company Inc. (“Niagara Natural”), a manufacturer of all-natural fruit snacks. Niagara Natural’s operations are located in the Niagara Region of Ontario. The transaction included a cash purchase price of $6.5 million, subject to certain post-closing adjustments, plus contingent consideration of up to approximately $2.8 million based on specific performance targets. The fair value of the contingent consideration obligation was determined to be $2.3 million as at the acquisition date. Niagara Natural is a strong strategic fit within our core consumer products strategy and has been included in the Consumer Products operating segment since the date of acquisition. For more information regarding the acquisition of Niagara Natural, see note 2 to the unaudited consolidated financial statements included in this report.
On May 5 2016, we entered an agreement with the owners of Niagara Natural to settle the contingent consideration obligation in exchange for a one-time cash payment of $0.6 million. In the second quarter of 2016, we recognized a gain of $1.7 million in connection with this settlement, based on the difference between the fair value of the contingent consideration obligation of $2.3 million as at April 2, 2016 and the cash payment.
Citrusource, LLC
On March 2, 2015, we acquired Citrusource, LLC (“Citrusource”), a producer of premium not-from-concentrate private label organic and conventional orange juice and citrus products in the U.S. We paid $13.3 million in cash at closing and we may pay additional consideration based on the incremental growth in Citrusource’s base business. The fair value of the total consideration transferred to acquire Citrusource was $31.7 million as at the acquisition date. The acquisition of Citrusource aligns with our strategy of growing our value-added consumer products portfolio. Citrusource has been included in the Consumer Products operating segment since the date of acquisition. For more information regarding the acquisition of Citrusource, see note 2 to the unaudited consolidated financial statements included in this report.
SUNOPTA INC. |
Consolidated Results of Operations for the quarters endedQuarters Ended September 30, 2017 and October 1, 2016 and October 3, 2015
October 1, | October 3, | September 30, | October 1, | |||||||||||||||||||||
For the quarter ended | 2016 | 2015 | Change | Change | 2017 | 2016 | Change | Change | ||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||
Revenues | ||||||||||||||||||||||||
Global Ingredients | 137,174 | 150,500 | (13,326 | ) | -8.9% | 140,533 | 137,174 | 3,359 | 2.4% | |||||||||||||||
Consumer Products | 211,558 | 126,713 | 84,845 | 67.0% | 180,180 | 211,558 | (31,378 | ) | -14.8% | |||||||||||||||
Total revenues | 348,732 | 277,213 | 71,519 | 25.8% | 320,713 | 348,732 | (28,019 | ) | -8.0% | |||||||||||||||
Gross profit | ||||||||||||||||||||||||
Global Ingredients | 16,796 | 15,327 | 1,469 | 9.6% | 16,064 | 16,796 | (732 | ) | -4.4% | |||||||||||||||
Consumer Products | 24,234 | 10,982 | 13,252 | 120.7% | 20,391 | 24,234 | (3,843 | ) | -15.9% | |||||||||||||||
Total gross profit | 41,030 | 26,309 | 14,721 | 56.0% | 36,455 | 41,030 | (4,575 | ) | -11.2% | |||||||||||||||
Segment operating income (loss)(1) | ||||||||||||||||||||||||
Global Ingredients | 7,404 | 4,642 | 2,762 | 59.5% | 5,265 | 7,404 | (2,139 | ) | -28.9% | |||||||||||||||
Consumer Products | 8,104 | 1,863 | 6,241 | 335.0% | 4,528 | 8,104 | (3,576 | ) | -44.1% | |||||||||||||||
Corporate Services | (2,287 | ) | (2,406 | ) | 119 | 4.9% | (4,832 | ) | (2,287 | ) | (2,545 | ) | -111.3% | |||||||||||
Total segment operating income | 13,221 | 4,099 | 9,122 | 222.5% | 4,961 | 13,221 | (8,260 | ) | -62.5% | |||||||||||||||
Other expense, net | 10,312 | 3,652 | 6,660 | 182.4% | 5,972 | 10,312 | (4,340 | ) | -42.1% | |||||||||||||||
Earnings from continuing operations before thefollowing | 2,909 | 447 | 2,462 | 550.8% | ||||||||||||||||||||
Earnings (loss) from continuing operations before thefollowing | (1,011 | ) | 2,909 | (3,920 | ) | -134.8% | ||||||||||||||||||
Interest expense, net | 12,178 | 1,103 | 11,075 | 1004.1% | 8,371 | 12,178 | (3,807 | ) | -31.3% | |||||||||||||||
Recovery of income taxes | (5,411 | ) | (568 | ) | (4,843 | ) | -852.6% | (3,499 | ) | (5,411 | ) | 1,912 | 35.3% | |||||||||||
Loss from continuing operations | (3,858 | ) | (88 | ) | (3,770 | ) | -4284.1% | (5,883 | ) | (3,858 | ) | (2,025 | ) | -52.5% | ||||||||||
Earnings (loss) attributable to non-controlling interests | (503 | ) | 106 | (609 | ) | -574.5% | 144 | (503 | ) | 647 | 128.6% | |||||||||||||
Earnings from discontinued operations attributable to SunOpta Inc. | - | 508 | (508 | ) | -100.0% | |||||||||||||||||||
Earnings (loss) attributable to SunOpta Inc.(2) | (3,355 | ) | 314 | (3,669 | ) | -1168.5% | ||||||||||||||||||
Loss attributable to SunOpta Inc.(2) | (6,027 | ) | (3,355 | ) | (2,672 | ) | -79.6% |
(1) | When assessing the financial performance of our operating segments, we use an internal measure of operating income that excludes other income/expense items and goodwill impairments determined in accordance with U.S. |
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 core 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 |
Global | Consumer | Corporate | ||||||||||
Ingredients | Products | Services | Consolidated | |||||||||
For the quarter ended | $ | $ | $ | $ | ||||||||
October 1, 2016 | ||||||||||||
Segment operating income (loss) | 7,404 | 8,104 | (2,287 | ) | 13,221 | |||||||
Other expense, net | (14 | ) | (10,218 | ) | (80 | ) | (10,312 | ) | ||||
Earnings (loss) from continuing operations before the following | 7,390 | (2,114 | ) | (2,367 | ) | 2,909 | ||||||
| ||||||||||||
October 3, 2015 | ||||||||||||
Segment operating income (loss) | 4,642 | 1,863 | (2,406 | ) | 4,099 | |||||||
Other expense, net | (86 | ) | (399 | ) | (3,167 | ) | (3,652 | ) | ||||
Earnings (loss) from continuing operations before the following | 4,556 | 1,464 | (5,573 | ) | 447 |
Global | Consumer | Corporate | |||||||||||
Ingredients | Products | Services | Consolidated | ||||||||||
For the quarter ended | $ | $ | $ | $ | |||||||||
September 30, 2017 | |||||||||||||
Segment operating income (loss) | 5,265 | 4,528 | (4,832 | ) | 4,961 | ||||||||
Other income (expense), net | (233 | ) | (5,969 | ) | 230 | (5,972 | ) | ||||||
Earnings (loss) from continuing operations before the following | 5,032 | (1,441 | ) | (4,602 | ) | (1,011 | ) | ||||||
October 1, 2016 | |||||||||||||
Segment operating income (loss) | 7,404 | 8,104 | (2,287 | ) | 13,221 | ||||||||
Other expense, net | (14 | ) | (10,218 | ) | (80 | ) | (10,312 | ) | |||||
Earnings (loss) from continuing operations before the following | 7,390 | (2,114 | ) | (2,367 | ) | 2,909 |
We believe that investors’ understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income. However, any measure of operating income excluding any or all of these items is not, and should not be viewed as, a substitute for operating income prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
SUNOPTA INC. |
(2) | When assessing our financial performance, we use an internal measure |
The following table presents a reconciliation of |
Per Diluted Share | ||||||
For the quarter ended | $ | $ | ||||
October 1, 2016 | ||||||
Loss from continuing operations attributable to SunOpta Inc. | (3,355 | ) | (0.04 | ) | ||
| ||||||
Adjusted for: | ||||||
Costs related to rationalization of juice operations(a) | 10,300 | |||||
Costs related to business acquisitions(b) | 5,515 | |||||
Product withdrawal and recall costs(c) | 683 | |||||
Costs related to strategic review(d) | 483 | |||||
Legal settlement and litigation-related legal fees(e) | 564 | |||||
Other(f) | 12 | |||||
Net income tax effect on adjusted earnings(g) | (6,629 | ) | ||||
Change in unrecognized tax benefits(h) | (1,268 | ) | ||||
Adjusted earnings | 6,305 | 0.07 | ||||
| ||||||
October 3, 2015 | ||||||
Earnings attributable to SunOpta Inc. | 314 | - | ||||
Earnings from discontinued operations attributable to SunOpta Inc. | (508 | ) | (0.01 | ) | ||
Loss from continuing operations attributable to SunOpta Inc. | (194 | ) | - | |||
| ||||||
Adjusted for: | ||||||
Demurrage, detention and other related expenses(i) | 1,858 | |||||
Plant expansion and start-up costs(j) | 1,525 | |||||
Litigation-related legal fees(d) | 383 | |||||
Other expense, net(k) | 3,652 | |||||
Net income tax effect on adjusted earnings(g) | (2,485 | ) | ||||
Adjusted earnings | 4,739 | 0.07 |
|
Excluding flexible | Flexible | ||||||||||||||||||
resealable pouch | resealable pouch | ||||||||||||||||||
and nutrition bar | and nutrition bar | Consolidated | |||||||||||||||||
Per Diluted | Per Diluted | Per Diluted | |||||||||||||||||
Share | Share | Share | |||||||||||||||||
For the quarter ended | $ | $ | $ | $ | $ | $ | |||||||||||||
September 30, 2017 | |||||||||||||||||||
Loss from continuing operations | (639 | ) | (5,244 | ) | (5,883 | ) | |||||||||||||
Less: earnings attributable to non-controlling interests | (144 | ) | - | (144 | ) | ||||||||||||||
Less: dividends and accretion of Series A Preferred Stock | (1,954 | ) | - | (1,954 | ) | ||||||||||||||
Loss from continuing operations available to common shareholders | (2,737 | ) | (0.03 | ) | (5,244 | ) | (0.06 | ) | (7,981 | ) | (0.09 | ) | |||||||
Adjusted for: | |||||||||||||||||||
Costs related to the Value Creation Plan(a) | 3,050 | 7,206 | 10,256 | ||||||||||||||||
Product withdrawal and recall costs(b) | 134 | - | 134 | ||||||||||||||||
Recovery of legal settlement(c) | (1,024 | ) | - | (1,024 | ) | ||||||||||||||
Other(d) | 293 | - | 293 | ||||||||||||||||
Net income tax effect(e) | (774 | ) | (2,810 | ) | (3,584 | ) | |||||||||||||
Adjusted loss | (1,058 | ) | (0.01 | ) | (848 | ) | (0.01 | ) | (1,906 | ) | (0.02 | ) | |||||||
October 1, 2016 | |||||||||||||||||||
Loss from continuing operations | (3,759 | ) | (99 | ) | (3,858 | ) | |||||||||||||
Add: loss attributable to non-controlling interests | 503 | - | 503 | ||||||||||||||||
Loss from continuing operations available to common shareholders | (3,256 | ) | (0.04 | ) | (99 | ) | (0.00 | ) | (3,355 | ) | (0.04 | ) | |||||||
Adjusted for: | |||||||||||||||||||
Costs related to the Value Creation Plan(f) | 10,783 | - | 10,783 | ||||||||||||||||
Costs related to business acquisitions(g) | 5,515 | - | 5,515 | ||||||||||||||||
Product withdrawal and recall costs(h) | 683 | - | 683 | ||||||||||||||||
Litigation-related legal fees(i) | 564 | - | 564 | ||||||||||||||||
Other(d) | 12 | - | 12 | ||||||||||||||||
Net income tax effect(e) | (6,629 | ) | - | (6,629 | ) | ||||||||||||||
Change in unrecognized tax benefits(j) | (1,268 | ) | - | (1,268 | ) | ||||||||||||||
Adjusted earnings (loss) | 6,404 | 0.07 | (99 | ) | (0.00 | ) | 6,305 | 0.07 |
(a) | Reflects inventory write-downs of $1.3 million recorded in cost of goods sold; and consulting fees, temporary labor, employee recruitment, relocation and retention costs of $2.4 million recorded in selling, general and administrative (“SG&A”) expenses; and asset impairment charges and employee termination costs of $6.6 million recorded in other expense (as described above under “Value Creation Plan”). | |
(b) | Reflects product withdrawal costs not eligible for reimbursement under our insurance policies, which were recorded in other expense. | |
(c) | Reflects a recovery on the early extinguishment of a rebate obligation that arose from the prior settlement of a flexible resealable pouch product recall dispute with a customer, which was recorded in other income. | |
(d) | Other included fair value adjustments related to contingent consideration arrangements and gain/loss on the sale of assets, which were 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% on adjusted earnings before tax. | |
(f) | Reflects legal advisory costs of $0.5 million recorded in SG&A expenses; and asset impairment charges of $10.3 million recorded in other expense (as described above under “Value Creation Plan”). | |
(g) | Reflects costs related to |
SUNOPTA INC. | 40 | September 30, 2017 10-Q |
Reflects | ||
Reflects legal | ||
| ||
| ||
| ||
Reflects the realization of previously unrecognized tax | ||
| ||
| ||
|
We believe that investors’ understanding of our financial performance is enhanced by disclosing the specific items that we exclude from earnings/loss attributable to SunOpta Inc. to compute adjusted earnings.earnings/loss. However, adjusted earningsearnings/loss is not, and should not be viewed as, a substitute for earnings prepared under U.S. GAAP. Adjusted earningsearnings/loss is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) | We use measures of EBITDA when assessing the performance of our operations and our ability to generate cash flows to fund our cash requirements, including debt service and capital expenditures. We also use these measures to review and assess our progress under the Value Creation Plan (as described above under “Value Creation Plan”) and to assess operating performance in connection with our employee incentive programs. In addition, we are subject to certain debt covenants that restrict our ability to incur additional indebtedness unless we meet certain ratios based on EBITDA. We define EBITDA as segment operating income/loss plus depreciation, amortization and non-cash stock-based compensation, and adjusted EBITDA as EBITDA excluding other unusual items that affect the comparability of operating performance as identified in the determination of adjusted earnings (refer above to footnote (2)). The following table presents a reconciliation of segment operating income/loss, EBITDA and adjusted EBITDA from loss from continuing operations, 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 flexible resealable pouch and nutrition bar operations on our consolidated results for the current and comparative periods. We believe this presentation assists investors in assessing the results of the operations we intend to exit and the effect of those operations on our financial performance and cash-generating ability. |
Excluding flexible | Flexible | |||||||||
resealable pouch | resealable pouch | |||||||||
and nutrition bar | and nutrition bar | Consolidated | ||||||||
For the quarter ended | $ | $ | $ | |||||||
September 30, 2017 | ||||||||||
Loss from continuing operations | (639 | ) | (5,244 | ) | (5,883 | ) | ||||
Recovery of income taxes | (146 | ) | (3,353 | ) | (3,499 | ) | ||||
Interest expense, net | 8,371 | - | 8,371 | |||||||
Other expense, net | 53 | 5,919 | 5,972 | |||||||
Total segment operating income (loss) | 7,639 | (2,678 | ) | 4,961 | ||||||
Depreciation and amortization | 8,055 | 199 | 8,254 | |||||||
Stock-based compensation(a) | 2,235 | - | 2,235 | |||||||
EBITDA | 17,929 | (2,479 | ) | 15,450 | ||||||
Adjusted for: | ||||||||||
Costs related to Value Creation Plan(b) | 2,400 | 1,287 | 3,687 | |||||||
Adjusted EBITDA | 20,329 | (1,192 | ) | 19,137 | ||||||
October 1, 2016 | ||||||||||
Loss from continuing operations | (3,759 | ) | (99 | ) | (3,858 | ) | ||||
Recovery of income taxes | (5,348 | ) | (63 | ) | (5,411 | ) | ||||
Interest expense, net | 12,178 | - | 12,178 | |||||||
Other expense, net | 10,312 | - | 10,312 | |||||||
Total segment operating income (loss) | 13,383 | (162 | ) | 13,221 | ||||||
Depreciation and amortization | 8,436 | 210 | 8,646 | |||||||
Stock-based compensation(a) | 1,181 | - | 1,181 | |||||||
EBITDA | 23,000 | 48 | 23,048 | |||||||
Adjusted for: | ||||||||||
Costs related to Value Creation Plan(b) | 483 | - | 483 | |||||||
Costs related to business acquisitions(c) | 1,890 | - | 1,890 | |||||||
Product withdrawal and recall costs(d) | 683 | - | 683 | |||||||
Litigation-related legal fees(e) | 564 | - | 564 | |||||||
Adjusted EBITDA | 26,620 | 48 | 26,668 |
(a) | For the third quarter of 2017, stock-based compensation of $2.2 million was recorded in SG&A expenses, and the reversal of $0.2 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees was recognized in other expense. For the third quarter of 2016, stock-based compensation of $1.2 million was recorded in SG&A. | |
(b) | For the third quarter of 2017, reflects inventory write-downs of $1.3 million recorded in cost of goods sold and consulting fees, temporary labor, employee recruitment, relocation and retention costs of $2.4 million recorded in SG&A expenses. For the third quarter of 2016, reflects legal advisory costs recorded in SG&A expenses. (As described above under “Value Creation Plan”). | |
(c) | Reflects the acquisition accounting adjustment related to Sunrise’s inventory sold in the third quarter of 2016 of $1.9 million, which was recorded in cost of goods sold. | |
(d) | Reflects the estimated lost gross profit caused by the recall of certain sunflower kernel products of $0.7 million, which reflected the shortfall in revenues against anticipated volumes of approximately $2.9 million, less associated cost of goods sold of approximately $2.2 million. |
SUNOPTA INC. |
(e) | Reflects legal costs related to the settlement of a flexible resealable pouch product recall dispute with a customer, which were recorded in SG&A expenses. |
Although we use EBITDA and adjusted EBITDA as measures to assess the performance of our business and for the other purposes set forth above, these measures have limitations as analytic tools, 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:
• | neither EBITDA nor adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service interest payments on our indebtedness; | |
• | neither EBITDA nor adjusted EBITDA includes the 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 neither EBITDA nor adjusted EBITDA reflects any cash requirements for such replacements; and | |
• | neither EBITDA nor adjusted EBITDA includes non-cash stock-based compensation, which is an important component of our total compensation program for employees and directors. |
Because of these limitations, EBITDA and adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA or adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income, earnings and adjusted earnings to measure our operating performance. Neither EBITDA nor adjusted EBITDA is a measurement of financial performance under U.S. GAAP and neither should be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculations of EBITDA and adjusted EBITDA may not be comparable to the calculation of similarly titled measures 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 year-over-year 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 considered in isolation of, or as substitutes for an analysis of our results as reported under U.S. GAAP. |
Revenues for the quarter ended September 30, 2017 decreased by 8.0% to $320.7 million from $348.7 million for the quarter ended October 1, 2016 increased by 25.8% to $348.7 million from $277.2 million for the quarter ended October 3, 2015.2016. Excluding the impact on revenues infor the third quarter of 20162017 of business acquisitions and associated product rationalizations (an increase in revenues of approximately $85.0 million), estimated impact of the recall of certain sunflower kernel products based on shortfall against anticipated volumes (a decrease in revenues of approximately $3.0 million), estimated impact on west coast pouch operations as a result of a fire at a third-party facility (a decrease in revenues of approximately $2.0 million) and changes in commodity-related pricing and foreign exchange rates (a decrease in revenues of approximately $6.0$2.7 million) and sales of flexible resealable pouch and nutrition bar products (a decrease in revenues of $0.8 million), revenues decreased 0.9% in the third quarter of 2016,2017 decreased by 7.4%, compared with the third quarter of 2015.2016. This decrease in revenues on an adjusted basis reflected lower volumes of specialty raw materials driven by a reduction in contracted acres, and the timing of sales of frozen fruit into the foodservice channel. In addition, the decrease in revenues reflected lower volumes of fruit snacks and specialty barsproducts due to lower consumer demand and lost customer turnovervolumes, and lower sales of non-dairy aseptic beverage products related to customer order patterns and the ramp-uppreviously announced loss of new product offerings. These unfavorable factors were partially offset by higher demand for organic ingredients and growth in aseptic beverage volumes with the added output from our Allentown, Pennsylvania facility and new product launches.a significant customer.
Gross profit increased $14.7decreased $4.6 million, or 56.0%11.2%, to $36.5 million for the quarter ended September 30, 2017, compared with $41.0 million for the quarter ended October 1, 2016, compared with $26.3 million for the quarter ended October 3, 2015.2016. As a percentage of revenues, gross profit for the quarter ended October 1, 2016September 30, 2017 was 11.8%11.4% compared to 9.5%11.8% for the quarter ended October 3, 2015, an increase1, 2016, a decrease of 2.3%0.4% . The gross profit percentage for the third quarter of 2017 would have been approximately 11.8%, excluding the impact of a $1.3 million write-down of flexible resealable pouch and nutrition bar inventories as a result of the plan to exit these product lines. The gross profit percentage for the third quarter of 2016 would have been approximately 12.3%, excluding the impact of ancosts related to the acquisition accounting adjustment related to Sunrise’sthe Sunrise inventory sold insubsequent to the third quarter of 2016 ($1.9 million), and estimated lost margin as a result of the recall of certain sunflower kernel products ($0.7 million), compared with approximately 10.7% for the third quarter of 2015, excluding the impact of demurrage, detention and other related expensesacquisition date ($1.9 million) and costs related tolost margin caused by the retrofit of our San Bernardino, California juice facility and expansion of Allentown, Pennsylvania facility to add aseptic beverage production capabilitiessunflower recall ($1.50.7 million). Excluding these items, the gross marginprofit percentage increased 1.6%decreased 0.5% on an adjusted basis in the third quarter of 2016,2017, compared with the third quarter of 2015,2016, which was driven mainly by increased efficiencyreflected higher losses within our flexible resealable pouch and nutrition bar operations, due to the closure of west coast pouch operations following a fire in the third quarter of 2016, and higher plant costs and production inefficiencies related to the introduction of new nutrition bar offerings. In addition, we experienced lower costs atproduction volumes and operating efficiencies within our aseptic beverage operations and improved pricing spreads on organic ingredients.related to the shortfall in sales volumes. These factors were partially offset by lower productionraw material pricing within our healthy fruit operations and operational savings following the closure of fruit snacks and specialty bars driven by lower sales volumes.the San Bernardino premium juice facility.
Total segment operating income for the quarter ended October 1, 2016 increasedSeptember 30, 2017 decreased by $9.1$8.3 million, or 222.5%62.5%, to $13.2$5.0 million, compared with $4.1$13.2 million for the quarter ended October 3, 2015.1, 2016. As a percentage of revenues, segment operating income was 1.5% for the quarter ended September 30, 2017, compared with 3.8% for the quarter ended October 1, 2016, compared with 1.5% for the quarter ended October 3, 2015.2016. The increasedecrease in segment operating income reflected higherthe lower overall gross profit as described above partially offset byand a $2.9$2.2 million increase in SG&A expenses. The increase in SG&A expenses mainly reflectingreflected incremental expenses from acquired businesses,employee recruitment, relocation and retention costs ($1.2 million) and consulting fees and temporary labor costs ($1.2 million) associated with the Value Creation Plan. Excluding these items, as well as higher costs related to the strategic review. Asthose items identified above affecting gross profit, segment operating income as a percentage of revenues on an adjusted basis would have been 2.7% for the third quarter of 2017, compared with 4.8% for the third quarter of 2016. In addition, SG&A expenses were 6.9%reflected higher employee compensation-related costs related to structural investments in new quality, sales, marketing, engineering and accounting resources, offset by a reversal in the third quarter of 2016, compared with 7.6%2017 of employee short-term incentives tied to operating performance. Segment operating income included a foreign exchange loss of $2.6 million in the third quarter of 2015, which reflected efficiencies gained following the Sunrise Acquisition. Partially offsetting the increase in segment operating income was an increase in intangible asset amortization of $2.02017, compared with $1.1 million in the third quarter of 2016, compared withwhich mainly reflected the third quarterimpact of 2015, reflectingmovements in the incremental amortization of identified intangible assets of acquired businesses, as well as a $0.7 million increase in foreign exchange losses mainly related to our Mexican frozen fruit operations due to a weakening of the pesoU.S. dollar relative to the U.S. dollar.euro and Mexican peso on our international organic ingredient and frozen fruit operations.
SUNOPTA INC. | 42 | September 30, 2017 10-Q |
Further details on revenue, gross marginprofit and segment operating income variances are provided below under “Segmented Operations Information”.
Other expense for the quarter ended September 30, 2017 of $6.0 million reflected the impairment of long-lived assets related to the exit from our flexible resealable pouch and nutrition bar product lines and operations ($4.5 million) and employee termination costs ($2.1 million) associated with the Value Creation Plan, partially offset by a $1.0 million recovery on the early extinguishment of a rebate obligation that arose from the prior settlement of a recall dispute with a customer related to flexible resealable pouch products. Other expense for the quarter ended October 1, 2016 wasof $10.3 million which reflected the impairment of long-lived assets associated with the closure of San Bernardino juice facility. Otherfacility of $10.3 million.
Interest expense decreased by $3.8 million to $8.4 million for the quarter ended October 3, 2015 of $3.7 million included severance costs of $2.7 million mainly for our former CEO, and $0.9 million of business development costs mainly related to the Sunrise Acquisition and the divestiture of Opta Minerals.
The increase in interest expense of $11.1 million toSeptember 30, 2017, compared with $12.2 million for the quarter ended October 1, 2016, compared with $1.1 million for2016. Interest expense included the quarter ended October 3, 2015, primarily reflected increased costs associated with borrowings under the Second Lien Loan Agreementamortization and our credit facilities in order to finance the Sunrise Acquisition, which included $2.2 million of non-cash amortizationwrite-off of debt issuance costs associated with the Second Lien Loan Agreement. In addition,of $0.6 million and $3.6 million in the third quarterquarters of 2017 and 2016, we recognized $1.4respectively. The quarter-over-quarter decrease in interest expense primarily reflected the reduction in non-cash amortization following the one-year maturity of the initial second lien loans used to partially fund the Sunrise Acquisition, and the repayment of $79.0 million of costssecond lien debt with the net proceeds from the Preferred Stock offering in connection with proposed alternative financing arrangements intended to repay in full the term loans outstanding under the Second Lien Loan Agreement.October 2016.
We recognized a recovery of income tax of $3.5 million for the quarter ended September 30, 2017, compared with $5.4 million for the quarter ended October 1, 2016 (including(which included the realization of $1.3 million of previously unrecognized tax benefits). The effective tax rate for the third quarter of 2017 was 37.3%, compared with a recovery of income tax of $0.6 million44.7% for the quarter ended October 3, 2015, which reflected the impact of changes in the jurisdictional mix of earnings, mainly as the result of pre-tax losses in the U.S. in the third quarter of 2016 compared with(excluding the impact of the change in unrecognized tax benefits). The effective tax rates reflected the effect of a mix of pre-tax losses projected in the U.S. and pre-tax earnings in certain other jurisdictions. In fiscal years 2017 and 2016, pre-tax losses projected in the U.S. inreflected anticipated costs associated with the corresponding period of 2015, which reflected the effect in the third quarter of 2016 of higher cash interestValue Creation Plan, including asset impairment charges and employee termination costs related to the financingexit from flexible resealable pouch and nutrition bar product lines and operations, and closure of the Sunrise Acquisition, as well as costs related to business acquisitions, including the acquisition accounting adjustment to Sunrise inventory sold in the period and the amortization of debt issuance costs related to the Second Lien Loan Agreement, as well as the impact of other discrete items including costs associated with the Plum legal settlement, consolidation of our frozen fruit processing facilities and product withdrawal and recall costs. For fiscal 2016, we expect our effective tax rate to be in the range of 29% to 32%, excluding discrete items.
Loss from continuing operations attributable to SunOpta Inc. for the quarter ended October 1, 2016 was $3.4 million, compared with a loss of $0.2 million for the quarter ended October 3, 2015, a decrease of $3.2 million. Diluted loss per share from continuing operations was $0.04 for the quarter ended October 1, 2016, compared with diluted loss per share from continuing operations of $0.00 for the quarter ended October 3, 2015.San Bernardino facility.
On a consolidated basis, we realized a loss of $6.0 million (diluted loss per share of $0.09) for the quarter ended September 30, 2017, compared with a loss of $3.4 million (diluted loss per share of $0.04) for the quarter ended October 1, 2016, compared with earnings of $0.3 million (diluted earnings per share of $0.00) for the quarter ended October 3, 2015.2016.
For the quarter ended October 1, 2016,September 30, 2017, adjusted loss was $1.9 million, or $0.02 per diluted share, on a consolidated basis, compared with adjusted earnings wereof $6.3 million, or $0.07 per diluted share, on a consolidated basis for the quarter ended October 1, 2016. Excluding flexible resealable pouch and nutrition bar product lines and operations, which we plan to exit, adjusted loss was $1.1 million, or $0.01 per diluted share, for the quarter ended September 30, 2017, compared with adjusted earnings of $4.7$6.4 million, or $0.07 per diluted share, for the quarter ended October 3, 2015.1, 2016. Adjusted EBITDA for the quarter ended September 30, 2017 was $19.1 million on a consolidated basis, compared with $26.7 million on a consolidated basis for the quarter ended October 1, 2016. Excluding flexible resealable pouch and nutrition bar product lines and operations, adjusted EBITDA for the quarter ended September 30, 2017 was $20.3 million, compared with $26.6 million for the quarter ended October 1, 2016. Adjusted earnings is aand adjusted EBITDA are non-GAAP financial measure.measures. See footnotefootnotes (2) and (3) to the table above for a reconciliation of “adjusted earnings”adjusted earnings/loss and adjusted EBITDA from “earnings attributable to SunOpta Inc.”,loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC. | 43 | September 30, 2017 10-Q |
Segmented Operations Information
Global Ingredients | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
For the quarter ended | October 1, 2016 | October 3, 2015 | Change | % Change | 2017 | October 1, 2016 | Change | % Change | ||||||||||||||||
Revenues | $ | 137,174 | $ | 150,500 | $ | (13,326 | ) | -8.9% | $ | 140,533 | $ | 137,174 | $ | 3,359 | 2.4% | |||||||||
Gross Margin | 16,796 | 15,327 | 1,469 | 9.6% | ||||||||||||||||||||
Gross Margin % | 12.2% | 10.2% | 2.0% | |||||||||||||||||||||
Gross Profit | 16,064 | 16,796 | (732 | ) | -4.4% | |||||||||||||||||||
Gross Profit % | 11.4% | 12.2% | -0.8% | |||||||||||||||||||||
Operating Income | $ | 7,404 | $ | 4,642 | $ | 2,762 | 59.5% | $ | 5,265 | $ | 7,404 | $ | (2,139 | ) | -28.9% | |||||||||
Operating Income % | 5.4% | 3.1% | 2.3% | 3.7% | 5.4% | -1.7% |
Global Ingredients contributed $137.2$140.5 million in revenues for the quarter ended October 1, 2016,September 30, 2017, compared to $150.5$137.2 million for the quarter ended October 3, 2015, a decrease1, 2016, an increase of $13.3$3.4 million, or 8.9%2.4% . Excluding the estimatedThe impact on revenues of the recall of certain sunflower kernel products and the impact of changes including foreign exchange rates and commodity-related pricing had a negligible impact on the quarter-over-quarter change in Global Ingredients revenues decreased approximately 3.1% .revenues. The table below explains the decreaseincrease in revenue:
Global Ingredients Revenue Changes | |
Revenues for the quarter ended October | $ |
| 4,589 |
Favorable foreign exchange impact on euro-denominated sales due to a weaker average U.S. dollar quarter-over-quarter | 2,709 |
Increased volumes of domestically-sourced organic feed and specialty soy, partially offset by lower volumes of specialty corn | |
Increased commodity pricing for internationally-sourced organic ingredients | 1,161 |
Decreased commodity pricing for domestically-sourced specialty and organic grains and seeds | (3,855) |
Lower roasted volumes due to reduced customer demand following the sunflower recall, and lower raw sunflower volumes | |
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Revenues for the quarter ended | $ |
Gross marginprofit in Global Ingredients increaseddecreased by $1.5$0.7 million to $16.1 million for the quarter ended September 30, 2017 compared to $16.8 million for the quarter ended October 1, 2016, compared to $15.3 million for the quarter ended October 3, 2015, and the gross marginprofit percentage increaseddecreased by 2.0%0.8% to 12.2%11.4% . The increasedecrease in gross marginprofit as a percentage of revenue was primarily due to the impact of favorable salesan unfavorable product mix of, higher marginand reduced pricing spreads on, certain internationally-sourced organic raw materials, as well as the impact in the prior year of demurrage, detention and other costs associated with transloading capacity constraints in the quarter. These wereingredients, partially offset by the reduced throughput from the roasted sunflower kernel and unfavorable impact of a weaker euro relative to U.S. dollar.improved pricing spread on domestically-sourced organic feed. The table below explains the increasedecrease in gross margin:profit:
Global Ingredients Gross | |
Gross | |
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$16,796 | |
Reduced pricing spreads and lower volumes of certain higher-margin internationally- sourced organic ingredients, and lower sales volumes of raw sunflower and roasted products | (1,605) |
Improved pricing spread on domestically-sourced organic feed, partially offset by lower commodity pricing on specialty soy | 873 |
Gross profit for the quarter ended September 30, 2017 | $16,064 |
SUNOPTA INC. | 44 | September 30, 2017 10-Q |
Operating income in Global Ingredients increaseddecreased by $2.8$2.1 million, or 59.5%28.9%, to $5.3 million for the quarter ended September 30, 2017, compared to $7.4 million for the quarter ended October 1, 2016, compared to $4.6 million for the quarter ended October 3, 2015.2016. The table below explains the increasedecrease in operating income:
Global Ingredients Operating Income Changes | |
Operating income for the quarter ended October | $ |
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Lower employee-related compensation costs due to the reversal of short-term incentive accruals, mostly offset by increased headcount within our international organic ingredient operations | 82 |
Operating income for the quarter ended | $ |
Looking forward, we believe Global Ingredients is well positioned in growing non-GMO and organic food categories. However, performance of Global Ingredients in the near-term could continue to be affected by reduced customer demand due to the sunflower recall. We intend to focus our efforts on (i) growing our organic sourcing and supply capabilities, making certified organic ingredients a larger proportion of our overall sales; (ii) leveraging our international sourcing and supply capabilities internally, and forward and backward integrating where opportunities exist; and (iii) expandinginitiating a global desk coordination program between our international sales base via strategic relationships for procurement of productNorth American and International sourcing and supply operations to capitalize on global opportunities and drive incremental sales volume. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Increased supply pressure in the commodity-based markets in which we operate, increased competition, volume decreases or loss of customers, unexpected delays in our expansion or desk coordination plans, or our inability to secure quality inputs or achieve our product mix or cost reduction goals, along with the other factors described above under “Forward-Looking Statements”, could adversely impact our ability to meet these forward-looking expectations.
Consumer Products | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
For the quarter ended | October 1, 2016 | October 3, 2015 | Change | % Change | 2017 | October 1, 2016 | Change | % Change | ||||||||||||||||
Revenues | $ | 211,558 | $ | 126,713 | $ | 84,845 | 67.0% | $ | 180,180 | $ | 211,558 | $ | (31,378 | ) | -14.8% | |||||||||
Gross Margin | 24,234 | 10,982 | 13,252 | 120.7% | ||||||||||||||||||||
Gross Margin % | 11.5% | 8.7% | 2.8% | |||||||||||||||||||||
Gross Profit | 20,391 | 24,234 | (3,843 | ) | -15.9% | |||||||||||||||||||
Gross Profit % | 11.3% | 11.5% | -0.2% | |||||||||||||||||||||
Operating Income | $ | 8,104 | $ | 1,863 | $ | 6,241 | 335.0% | $ | 4,528 | $ | 8,104 | $ | (3,576 | ) | -44.1% | |||||||||
Operating Income % | 3.8% | 1.5% | 2.3% | 2.5% | 3.8% | -1.3% |
Consumer Products contributed $211.6$180.2 million in revenues for the quarter ended October 1, 2016,September 30, 2017, compared to $126.7$211.6 million for the quarter ended October 3, 2015, an $84.81, 2016, a $31.4 million, or a 67.0% increase.14.8% decrease. Excluding the impact on revenues of business acquisitionschanges in raw fruit commodity-related pricing (a decrease in revenues of $2.7 million) and associated product rationalizations, as well as the estimated impact on west coastsales of flexible resealable pouch operations as a resultand nutrition bar products (a decrease in revenues of a fire at a third-party facility,$0.8 million), Consumer Products revenues increased 0.6%decreased 14.2% . The table below explains the increasedecrease in revenues:
SUNOPTA INC. | 45 | September 30, 2017 10-Q |
Consumer Products Revenue Changes | |
Revenues for the quarter ended October | $ |
| (19,138) |
Lower volumes of non-dairy aseptic beverage products related to customer order patterns and the previously announced loss of a | |
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| (11,470) |
Lower sales of flexible resealable pouch | |
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Revenues for the quarter ended | $ |
Gross marginprofit in Consumer Products increaseddecreased by $13.3$3.8 million to $20.4 million for the quarter ended September 30, 2017 compared to $24.2 million for the quarter ended October 1, 2016, compared to $11.0 million for the quarter ended October 3, 2015, and the gross marginprofit percentage increaseddecreased by 2.8%0.2% to 11.5%11.3% . For the quarter ended October 1, 2016September 30, 2017, gross marginprofit as a percentage of revenue was impacted by a $1.9write-down of $1.3 million of flexible resealable pouch and nutrition bar inventories as a result of the plan to exit these operations. For the quarter ended October 1, 2016, gross profit as a percentage of revenue was impacted by the acquisition accounting adjustment related to Sunrise inventory sold.sold of $1.9 million. Excluding these costs, the gross marginprofit percentage in the consumer products segmentConsumer Products would have been 12.7%12.0% and 12.3% for the quarterquarters ended September 30, 2017 and October 1, 2016.2016, respectively. The increasedecrease in gross marginprofit percentage primarily reflected the higher margin profile of 2015 acquisitions, and increased facility utilization and operating efficiencieslower production volumes within theour aseptic beverage operations, and higher losses within our flexible resealable pouch and nutrition bar operations. These factors were partially offset by lower production volumesimproved raw material pricing within our healthy fruit operations and operational savings from the closure of fruit snacks and specialty bars due to lower sales demand.the San Bernardino premium juice facility. The table below explains the increasedecrease in gross margin:profit:
Consumer Products Gross | |
Gross | $ |
| (2,624) |
Higher losses within flexible resealable pouch and nutrition bar operations (including the write-down of inventories related to exit activities), which reflected the impact of the third-party facility in the third quarter of 2016, and of new nutrition bar offerings | (2,516) |
Lower sales volumes of frozen fruit, and | |
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Gross | $ |
Operating income in Consumer Products increaseddecreased by $6.2$3.6 million, or 335.0%44.1%, to $4.5 million for the quarter ended September 30, 2017, compared to $8.1 million for the quarter ended October 1, 2016, compared to $1.9 million for the quarter ended October 3, 2015.2016. The table below explains the increasedecrease in operating income:
SUNOPTA INC. | 46 | September 30, 2017 10-Q |
Consumer Products Operating Income Changes | |
Operating income for the quarter ended October | $ |
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| (1,578) |
Lower employee-related compensation costs due and | |
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Operating income for the quarter ended | $ |
During 2015, we completed three strategic acquisitions in each of our primary consumer product commercial platforms; healthy beverage, healthy fruit, and healthy snacks. In addition, we completed a significant capacity expansion at our West Coast aseptic beverage facility, and in the fourth quarter opened a new East Coast aseptic beverage facility. All of these acquisitions and investments are designed to expand our ability to address fast growing markets, provide a strategic east-west footprint, strengthen our revenue growth, and drive improvements in our margin profile and operating income. Looking forward we believe our Consumer Products segment remains well-positioned in markets with attractive growth potential. However, a continued decline in consumer consumption of frozen fruit could adversely affect the near-term performance of the Consumer Products segment. We intend to leverage thesefocus our efforts on (i) continuing to invest in new assets, as well assales and marketing resources creating greater channel specific focus on retail and foodservice to bolster our pipeline of opportunities to drive incremental sales volume; (ii) investing in our facilities to enhance quality, safety, and manufacturing efficiency to drive both incremental sales and cost reduction; (iii) executing procurement and supply chain cost reduction initiatives focused on leveraging our buying power and creating increased network efficiency in our planning and logistics efforts; and (iv) leveraging our innovation capabilities to bring new value-added packaged products and processes to market and to increase our capacity utilization across the Consumer Products segment. In addition, we believe the Sunrise Acquisition will allow us to further leverage our global sourcing expertise, as it provides us with a leading market positon in conventional and organic private label IQF fruit. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Unfavorable shifts in consumer preferences, increased competition, availability of raw material supply, volume decreases or loss of customers, unexpected delays in our expansion and integration plans, inefficiencies in our manufacturing processes, lack of consumer product acceptance, or our inability to successfully implement the particular goals and strategies indicated above, along with the other factors described above under “Forward-Looking Statements”, could have an adverse impact on these forward-looking expectations.
Corporate Services | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
For the quarter ended | October 1, 2016 | October 3, 2015 | Change | % Change | 2017 | October 1, 2016 | Change | % Change | ||||||||||||||||
Operating Loss | $ | (2,287 | ) | $ | (2,406 | ) | $ | 119 | 4.9% | $ | (4,832 | ) | $ | (2,287 | ) | $ | (2,545 | ) | -111.3% |
Operating loss at Corporate Services decreasedincreased by $0.1$2.5 million to $4.8 million for the quarter ended September 30, 2017, from a loss of $2.3 million for the quarter ended October 1, 2016, from a loss of $2.4 million for the quarter ended October 3, 2015.2016. The table below explains the decreaseincrease in operating loss:
Corporate Services Operating Loss Changes | |
Operating loss for the quarter ended October | $ |
Third-party consulting costs and employee recruitment, relocation and retention costs associated | (1,917) |
Higher non-compensation-related costs, including the unfavorable impact on Canadian dollar-denominated corporate headquarter expenses of a weaker average U.S. dollar quarter-over-quarter | (838) |
Decrease in foreign exchange gains on foreign currency transactions | (740) |
Higher employee-related compensation costs, including stock-based compensation, associated with the Value Creation Plan, partially offset by the reversal of short-term incentive accruals | (703) |
Increase in corporate cost allocations | |
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Operating loss for the quarter ended | $ |
Management feesCorporate cost allocations mainly consist of salaries of corporate personnel who perform back office functions fordirectly support the operating segments, as well as costs related to the enterprise resource management system. These expenses are allocated to the operating segments based on (1) specific identification of allocable costs that represent a service provided to each segment and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and number of people employed within each segment. The 2016 management fee allocations reflect the additional revenues and head count added as a result of the acquisitions of Sunrise, Citrusource, and Niagara Natural. These acquisitions added approximately $350.0 million in annualized revenues all to the Consumer Products segment.
SUNOPTA INC. |
Consolidated Results of Operations for the three quarters ended September 30, 2017 and October 1, 2016 and October 3, 2015
October 1, | October 3, | September 30, | October 1, | |||||||||||||||||||||
For the three quarters ended | 2016 | 2015 | Change | Change | 2017 | 2016 | Change | Change | ||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||
Revenues | ||||||||||||||||||||||||
Global Ingredients | 441,694 | 467,405 | (25,711 | ) | -5.5% | 420,247 | 441,694 | (21,447 | ) | -4.9% | ||||||||||||||
Consumer Products | 607,498 | 361,351 | 246,147 | 68.1% | 566,951 | 607,498 | (40,547 | ) | -6.7% | |||||||||||||||
Total revenues | 1,049,192 | 828,756 | 220,436 | 26.6% | 987,198 | 1,049,192 | (61,994 | ) | -5.9% | |||||||||||||||
Gross profit | ||||||||||||||||||||||||
Global Ingredients | 54,716 | 53,225 | 1,491 | 2.8% | 52,453 | 54,716 | (2,263 | ) | -4.1% | |||||||||||||||
Consumer Products | 54,193 | 31,907 | 22,286 | 69.8% | 64,363 | 54,193 | 10,170 | 18.8% | ||||||||||||||||
Total gross profit | 108,909 | 85,132 | 23,777 | 27.9% | 116,816 | 108,909 | 7,907 | 7.3% | ||||||||||||||||
Segment operating income (loss)(1) | ||||||||||||||||||||||||
Global Ingredients | 24,256 | 23,934 | 322 | 1.3% | 18,388 | 24,256 | (5,868 | ) | -24.2% | |||||||||||||||
Consumer Products | 6,989 | 5,115 | 1,874 | 36.6% | 14,696 | 6,989 | 7,707 | 110.3% | ||||||||||||||||
Corporate Services | (6,544 | ) | (6,007 | ) | (537 | ) | -8.9% | (28,460 | ) | (6,544 | ) | (21,916 | ) | -334.9% | ||||||||||
Total segment operating income | 24,701 | 23,042 | 1,659 | 7.2% | 4,624 | 24,701 | (20,077 | ) | -81.3% | |||||||||||||||
Other expense, net | 22,723 | 4,393 | 18,330 | 417.3% | 12,022 | 22,723 | (10,701 | ) | -47.1% | |||||||||||||||
Earnings from continuing operations before thefollowing | 1,978 | 18,649 | (16,671 | ) | -89.4% | |||||||||||||||||||
Earnings (loss) from continuing operations before thefollowing | (7,398 | ) | 1,978 | (9,376 | ) | -474.0% | ||||||||||||||||||
Interest expense, net | 34,748 | 3,171 | 31,577 | 995.8% | 23,820 | 34,748 | (10,928 | ) | -31.4% | |||||||||||||||
Provision for (recovery of) income taxes | (15,632 | ) | 4,838 | (20,470 | ) | -423.1% | ||||||||||||||||||
Earnings (loss) from continuing operations | (17,138 | ) | 10,640 | (27,778 | ) | -261.1% | ||||||||||||||||||
Recovery of income taxes | (14,049 | ) | (15,632 | ) | 1,583 | 10.1% | ||||||||||||||||||
Loss from continuing operations | (17,169 | ) | (17,138 | ) | (31 | ) | -0.2% | |||||||||||||||||
Earnings attributable to non-controlling interests | 4 | 84 | (80 | ) | -95.2% | 664 | 4 | 660 | 16500.0% | |||||||||||||||
Loss from discontinued operations, net of taxes | (570 | ) | (2,959 | ) | 2,389 | 80.7% | ||||||||||||||||||
Loss from discontinued operations attributable to SunOpta Inc. | - | (570 | ) | 570 | 100.0% | |||||||||||||||||||
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Earnings (loss) attributable to SunOpta Inc.(2) | (17,712 | ) | 7,597 | (25,309 | ) | -333.1% | ||||||||||||||||||
Loss attributable to SunOpta Inc.(2) | (17,833 | ) | (17,712 | ) | (121 | ) | -0.7% |
(1) |
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Global | Consumer | Corporate | Consol- | |||||||||
Ingredients | Products | Services | idated | |||||||||
For the three quarters ended | $ | $ | $ | $ | ||||||||
October 1, 2016 | ||||||||||||
Segment operating income (loss) | 24,256 | 6,989 | (6,544 | ) | 24,701 | |||||||
Other expense, net | (779 | ) | (21,472 | ) | (472 | ) | (22,723 | ) | ||||
Earnings (loss) from continuing operations before the following | 23,477 | (14,483 | ) | (7,016 | ) | 1,978 | ||||||
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October 3, 2015 | ||||||||||||
Segment operating income (loss) | 23,934 | 5,115 | (6,007 | ) | 23,042 | |||||||
Other expense, net | (379 | ) | (534 | ) | (3,480 | ) | (4,393 | ) | ||||
Earnings (loss) from continuing operations before the following | 23,555 | 4,581 | (9,487 | ) | 18,649 |
We believe that investors’ understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income. However, any measure of operating income excluding any or all of these items is not, and should not be viewed as, a substitute for operating income prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
Global | Consumer | Corporate | |||||||||||
Ingredients | Products | Services | Consolidated | ||||||||||
For the three quarters ended | $ | $ | $ | $ | |||||||||
September 30, 2017 | |||||||||||||
Segment operating income (loss) | 18,388 | 14,696 | (28,460 | ) | 4,624 | ||||||||
Other expense, net | (346 | ) | (10,714 | ) | (962 | ) | (12,022 | ) | |||||
Earnings (loss) from continuing operations before the following | 18,042 | 3,982 | (29,422 | ) | (7,398 | ) | |||||||
October 1, 2016 | |||||||||||||
Segment operating income (loss) | 24,256 | 6,989 | (6,544 | ) | 24,701 | ||||||||
Other expense, net | (779 | ) | (21,472 | ) | (472 | ) | (22,723 | ) | |||||
Earnings (loss) from continuing operations before the following | 23,477 | (14,483 | ) | (7,016 | ) | 1,978 |
SUNOPTA INC. |
(2) |
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Per Diluted Share | ||||||
For the three quarters ended | $ | $ | ||||
October 1, 2016 | ||||||
Loss attributable to SunOpta Inc. | (17,712 | ) | (0.21 | ) | ||
Loss from discontinued operations, attributable to SunOpta Inc. | 570 | 0.01 | ||||
Loss from continuing operations attributable to SunOpta Inc. | (17,142 | ) | (0.20 | ) | ||
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Adjusted for: | ||||||
Costs related to business acquisitions(a) | 25,931 | |||||
Legal settlement and litigation-related legal fees(b) | 10,850 | |||||
Costs related to rationalization of juice operations(c) | 10,300 | |||||
Product withdrawal and recall costs(d) | 2,680 | |||||
Plant start-up costs(e) | 1,565 | |||||
Costs related to strategic review(f) | 483 | |||||
Write-off of debt issuance costs(g) | 215 | |||||
Other(h) | 1,199 | |||||
Gain on settlement of contingent consideration(i) | (1,715 | ) | ||||
Net income tax effect on adjusted earnings(j) | (19,985 | ) | ||||
Change in unrecognized tax benefits(k) | (1,268 | ) | ||||
Adjusted earnings | 13,113 | 0.15 | ||||
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October 3, 2015 | ||||||
Earnings attributable to SunOpta Inc. | 7,597 | 0.11 | ||||
Loss from discontinued operations, attributable to SunOpta Inc. | 2,959 | 0.04 | ||||
Earnings from continuing operations attributable to SunOpta Inc. | 10,556 | 0.15 | ||||
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Adjusted for: | ||||||
Plant expansion and start-up costs(l) | 2,220 | |||||
Demurrage, detention and other related expenses(m) | 1,858 | |||||
Litigation-related legal fees(b) | 1,177 | |||||
Other expense, net(n) | 4,393 | |||||
Net income tax effect on adjusted earnings(j) | (3,658 | ) | ||||
Adjusted earnings | 16,546 | 0.24 |
Excluding flexible | Flexible | ||||||||||||||||||
resealable pouch | resealable pouch | ||||||||||||||||||
and nutrition bar | and nutrition bar | Consolidated | |||||||||||||||||
Per Diluted | Per Diluted | Per Diluted | |||||||||||||||||
Share | Share | Share | |||||||||||||||||
For the three quarters ended | $ | $ | $ | $ | $ | $ | |||||||||||||
September 30, 2017 | |||||||||||||||||||
Loss from continuing operations | (9,304 | ) | (7,865 | ) | (17,169 | ) | |||||||||||||
Less: earnings attributable to non-controlling interests | (664 | ) | - | (664 | ) | ||||||||||||||
Less: dividends and accretion of Series A Preferred Stock | (5,848 | ) | - | (5,848 | ) | ||||||||||||||
Loss from continuing operations available to common shareholders | (15,816 | ) | (0.18 | ) | (7,865 | ) | (0.09 | ) | (23,681 | ) | (0.27 | ) | |||||||
Adjusted for: | |||||||||||||||||||
Costs related to the Value Creation Plan(a) | 28,021 | 7,206 | 35,227 | ||||||||||||||||
Product withdrawal and recall costs(b) | 1,142 | - | 1,142 | ||||||||||||||||
Recovery of legal settlement(c) | (1,024 | ) | - | (1,024 | ) | ||||||||||||||
Other(d) | 166 | - | 166 | ||||||||||||||||
Net income tax effect(e) | (12,560 | ) | (2,810 | ) | (15,370 | ) | |||||||||||||
Adjusted loss | (71 | ) | (0.00 | ) | (3,469 | ) | (0.04 | ) | (3,540 | ) | (0.04 | ) | |||||||
October 1, 2016 | |||||||||||||||||||
Loss from continuing operations | (17,101 | ) | (37 | ) | (17,138 | ) | |||||||||||||
Less: earnings attributable to non-controlling interests | (4 | ) | - | (4 | ) | ||||||||||||||
Loss from continuing operations available to common shareholders | (17,105 | ) | (0.20 | ) | (37 | ) | (0.00 | ) | (17,142 | ) | (0.20 | ) | |||||||
Adjusted for: | |||||||||||||||||||
Costs related to business acquisitions(f) | 25,931 | - | 25,931 | ||||||||||||||||
Legal settlement and litigation-related legal fees(g) | 10,850 | - | 10,850 | ||||||||||||||||
Costs related to the Value Creation Plan(h) | 10,783 | - | 10,783 | ||||||||||||||||
Product withdrawal and recall costs(i) | 2,680 | - | 2,680 | ||||||||||||||||
Plant start-up costs(j) | 1,565 | - | 1,565 | ||||||||||||||||
Write-off of debt issuance costs(k) | 215 | - | 215 | ||||||||||||||||
Other(l) | 1,199 | - | 1,199 | ||||||||||||||||
Gain on settlement of contingent consideration(m) | (1,715 | ) | - | (1,715 | ) | ||||||||||||||
Net income tax effect(e) | (19,985 | ) | - | (19,985 | ) | ||||||||||||||
Change in unrecognized tax benefits(n) | (1,268 | ) | - | (1,268 | ) | ||||||||||||||
Adjusted earnings (loss) | 13,150 | 0.15 | (37 | ) | (0.00 | ) | 13,113 | 0.15 |
(a) | Reflects inventory write-downs and facility closure costs of $1.9 million recorded in cost of goods sold; consulting fees, temporary labor, employee recruitment, relocation and retention costs of $20.8 million recorded in SG&A expenses; and asset impairment charges and employee termination costs of $12.5 million recorded in other expense (as described above under “Value Creation Plan”). | |
(b) | Reflects costs related to | |
(c) | Reflects a recovery on the early extinguishment of a rebate obligation that arose from the prior settlement of a flexible resealable pouch product recall dispute with a customer (see (g) below), which was recorded in other income. | |
(d) | Other included fair value adjustments related to contingent consideration arrangements; severance costs unrelated to the Value Creation Plan; and gain/loss on the sale of assets, which were 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% on adjusted earnings before tax. |
SUNOPTA INC. | 49 | September 30, 2017 10-Q |
(f) | Reflects costs related to the Sunrise Acquisition, including an acquisition accounting adjustment related to Sunrise’s inventory sold in the first three quarters of 2016 of $13.4 million, which | |
Reflects | ||
(h) | Reflects legal advisory costs of $0.5 million recorded in SG&A expenses; and asset impairment charges of $10.3 million recorded in other expense (as described above under | |
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Reflects costs of $1.1 million | ||
Plant start-up costs relate to the ramp-up of production at our Allentown, Pennsylvania, facility following the completion of the addition of aseptic beverage processing and filling capabilities in the fourth quarter of 2015, which | ||
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Reflects the write-off to interest expense of $0.2 million of remaining unamortized debt issuance costs related to our former North American credit facilities, which were replaced by the Global Credit Facility. | ||
Other includes severance costs of $0.6 million and fair value adjustments related to contingent consideration arrangements of $0.6 million, which |
Reflects | ||
| ||
Reflects the realization of previously unrecognized tax |
(3) | The following table presents a reconciliation of segment operating income/loss, EBITDA and adjusted EBITDA from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (3) to the “Consolidated Results of Operations for the Quarters Ended September 30, 2017 and October 1, 2016” table regarding the use of this non-GAAP measure). In addition, as described above under footnote (2), we have prepared this table in a columnar format to present the effect of flexible resealable pouch and nutrition bar operations on our consolidated results for the current and comparative periods. We believe this presentation assists investors in assessing the results of the operations we intend to exit and the effect of those operations on our financial performance and cash-generating ability. |
Excluding flexible | Flexible | |||||||||
resealable pouch | resealable pouch | |||||||||
and nutrition bar | and nutrition bar | Consolidated | ||||||||
For the three quarters ended | $ | $ | $ | |||||||
September 30, 2017 | ||||||||||
Loss from continuing operations | (9,304 | ) | (7,865 | ) | (17,169 | ) | ||||
Recovery of income taxes | (9,021 | ) | (5,028 | ) | (14,049 | ) | ||||
Interest expense, net | 23,820 | - | 23,820 | |||||||
Other expense, net | 6,103 | 5,919 | 12,022 | |||||||
Total segment operating income (loss) | 11,598 | (6,974 | ) | 4,624 | ||||||
Depreciation and amortization | 23,951 | 650 | 24,601 | |||||||
Stock-based compensation(a) | 4,700 | - | 4,700 | |||||||
EBITDA | 40,249 | (6,324 | ) | 33,925 | ||||||
Adjusted for: | ||||||||||
Costs related to Value Creation Plan(b) | 21,473 | 1,287 | 22,760 | |||||||
Product withdrawal and recall costs(c) | 729 | - | 729 | |||||||
Adjusted EBITDA | 62,451 | (5,037 | ) | 57,414 | ||||||
October 1, 2016 | ||||||||||
Loss from continuing operations | (17,101 | ) | (37 | ) | (17,138 | ) | ||||
Recovery of income taxes | (15,608 | ) | (24 | ) | (15,632 | ) | ||||
Interest expense, net | 34,748 | - | 34,748 | |||||||
Other expense, net | 22,723 | - | 22,723 | |||||||
Total segment operating income (loss) | 24,762 | (61 | ) | 24,701 | ||||||
Depreciation and amortization | 25,300 | 655 | 25,955 | |||||||
Stock-based compensation(a) | 3,173 | - | 3,173 | |||||||
EBITDA | 53,235 | 594 | 53,829 | |||||||
Adjusted for: | ||||||||||
Costs related to Value Creation Plan(b) | 483 | - | 483 | |||||||
Product withdrawal and recall costs(c) | 983 | - | 983 | |||||||
Costs related to business acquisitions(d) | 13,554 | - | 13,554 | |||||||
Litigation-related legal fees(e) | 1,850 | - | 1,850 | |||||||
Plant expansion and start-up costs(f) | 1,565 | - | 1,565 | |||||||
Adjusted EBITDA | 71,670 | 594 | 72,264 |
(a) | For the first three quarters of 2017, stock-based compensation of $4.7 million was recorded in SG&A expenses, and the reversal of $0.6 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees was recognized in other expense. For the first three quarters of 2016, stock-based compensation of $3.2 million was recorded in SG&A expenses. |
SUNOPTA INC. | 50 | September 30, 2017 10-Q |
(b) | For the first three quarters of 2017, reflects inventory write-downs and facility closure costs of $1.9 million recorded in cost of goods sold, and consulting fees, temporary labor, employee recruitment, relocation and retention costs of $20.8 million recorded in SG&A expenses. For the third quarter of 2016, reflects legal advisory costs of $0.5 million recorded in SG&A expenses. (As described above under “Value Creation Plan”). | |
For the first three quarters of 2017, reflects the estimated lost gross profit caused by the recall of certain sunflower kernel products of $0.7 million, which reflected the shortfall in revenues in the first quarter of 2017 against first quarter of 2016 volumes of approximately $3.3 million, less associated cost of goods sold of approximately $2.6 million. For the first three quarters of 2016, reflects estimated lost gross profit of $1.0 million, which reflected a shortfall in revenues in the first three quarters of 2016 against anticipated volumes of approximately $6.4 million, less associated cost of goods sold of approximately $5.4 million. | ||
(d) | Reflects costs related to the | |
Reflects | ||
|
(4) | Refer to footnote (4) to the |
We believe that investors’ understanding of our financial performance is enhancedRevenues for the three quarters ended September 30, 2017 decreased by disclosing the specific items that we exclude5.9% to $987.2 million from earnings/loss attributable to SunOpta Inc. to compute adjusted earnings. However, adjusted earnings is not, and should not be viewed as, a substitute for earnings prepared under U.S. GAAP. Adjusted earnings is presented solely to allow investors to more fully understand how we assess our financial performance.
Revenues$1,049.2 million for the three quarters ended October 1, 2016 increased by 26.6% to $1,049.2 million from $828.8 million for the three quarters ended October 3, 2015.2016. Excluding the impact on revenues infor the first three quarters of 20162017 of business acquisitionschanges in commodity-related pricing and associated product rationalizations (an increaseforeign exchange rates (a decrease in revenues of approximately $231.0$14.6 million), estimated impact of the recall of certain sunflower kernel products based on shortfall against anticipatedprior year volumes (a decrease in revenues of approximately $6.0$3.3 million), estimated impact on west coastand sales of flexible resealable pouch operations as a result of a fire at a third-party facilityand nutrition bar products (a decrease in revenues of approximately $2.0$0.9 million), and changes in commodity-related pricing and foreign exchange rates (a decrease in revenues of approximately $21.0 million), revenues increased 1.7% in the first three quarters of 2016,2017 decreased by 4.3%, compared with the first three quarters of 2015.2016. This increasedecrease in revenues was driven primarily by increased demand for organic ingredients and growth in aseptic beverage volumes with the added output from our Allentown, Pennsylvania facility and new product launches. These factors were largely offset byon an adjusted basis reflected a lower volumes of specialty raw materials driven by a reduction in contracted acres, as well as the negative impact on sales of frozen fruit products due to lower consumer demand and lost customer volumes, lower sales of crop shortages stemming fromnon-dairy aseptic beverage products related to customer order patterns and the previously announced loss of a late strawberry harvestsignificant customer, and lower raw and roasted sunflower volumes, sold intodue to global competition and reduced customer demand following the foodservice channel.sunflower recall. These factors were partially offset by increased volumes of domestically-sourced grains and of premium juice products.
Gross profit increased $23.8$7.9 million, or 27.9%7.3%, to $116.8 million for the three quarters ended September 30, 2017, compared with $108.9 million for the three quarters ended October 1, 2016, compared with $85.1 million for the three quarters ended October 3, 2015.2016. As a percentage of revenues, gross profit for the three quarters ended October 1, 2016September 30, 2017 was 10.4%11.8% compared to 10.3%10.4% for the three quarters ended October 3, 2015,1, 2016, an increase of 0.1%1.5% . The gross profit percentage for the first three quarters of 20162017 would have been approximately 12.1%, excluding the impact of the write-down of flexible resealable pouch and nutrition bar inventories as a result of the plan to exit these product lines ($1.3 million), lost margin caused by the sunflower recall ($0.7 million), and facility closure costs under the Value Creation Plan ($0.6 million). For the first three quarters of 2016, the gross profit percentage would have been 11.8%, excluding the impact of ancosts related to the acquisition accounting adjustment related to Sunrise’sthe Sunrise inventory sold insubsequent to the first three quarters of 2016acquisition date ($13.4 million), start-up costs related to the ramp-up of production at ourthe Allentown Pennsylvania aseptic beverage processing facility ($1.6 million), and lost margin caused by the sunflower recall of certain sunflower kernel products ($1.0 million), compared with approximately 10.7% for the first three quarters of 2015, excluding the impact of demurrage, detention and other related expenses ($1.9 million) and costs related to the retrofit of our San Bernardino, California juice facility and expansion of Allentown, Pennsylvania facility to add aseptic beverage production capabilities ($1.5 million). Excluding these items, the gross marginprofit percentage increased 1.1%0.3% on an adjusted basis in the first three quarters of 2016,2017, compared with the first three quarters of 2015, driven mainly2016, which reflected improved operating efficiencies and raw material pricing within our healthy fruit operations and operational savings following the closure of the San Bernardino premium juice facility, as well as a favorable foreign exchange impact on U.S. dollar-denominated raw material sourcing within our international organic ingredient operations. These factors were partially offset by increased efficiencyhigher losses within our flexible resealable pouch and nutrition bar operations, due to the closure of west coast pouch operations following a fire in the third quarter of 2016, and higher plant costs and production inefficiencies related to the introduction of new nutrition bar offerings. In addition, we experienced lower costs atproduction volumes and operating efficiencies within our aseptic beverage operations related to the shortfall in sales volumes, and improved pricing spreads on organic ingredients, partially offset by increased raw material costs for frozen strawberries that could not be passed on immediatelyreduced operating efficiencies in our sunflower and roasting operations, due to customers, as well asthe lower production inefficiencies within our frozen fruit operations involumes following the first half of 2016 caused by a late harvest and resultant shortage of strawberries.recall.
Total segment operating income for the three quarters ended October 1, 2016 increasedSeptember 30, 2017 decreased by $1.7$20.1 million, or 7.2%81.3%, to $24.7$4.6 million, compared with $23.0$24.7 million for the three quarters ended October 3, 2015.1, 2016. As a percentage of revenues, segment operating income was 0.5% for the three quarters ended September 30, 2017, compared with 2.4% for the three quarters ended October 1, 2016, compared with 2.8% for the three quarters ended October 3, 2015.2016. The increasedecrease in segment operating income reflected a $26.7 million increase in SG&A expenses that more than offset the higher overall gross profit as described above, partially offset by an $11.6 millionabove. The increase in SG&A expenses mainly reflectingreflected incremental expenses from acquired businesses,consulting fees and temporary labor costs ($15.8 million) and employee recruitment, relocation and retention costs ($5.1 million) associated with the Value Creation Plan. Excluding these items, as well as higher litigation-related legal costs mainly related to the Plum dispute, partially offset by lower employee compensation-related expenses. Asthose items identified above affecting gross profit, segment operating income as a percentage of revenues SG&A expenses were 6.9% inon an adjusted basis would have been 2.8% for the first three quarters of 2016,2017, compared with 7.4% in4.1% for the first three quarters of 2015, which reflected efficiencies gained following the Sunrise Acquisition. Partially offsetting the increase in operating income was an increase in intangible asset amortization of $6.4 million in the first three quarters of 2016, compared with the first three quarters of 2015, reflecting the incremental amortization of identified intangible assets of acquired businesses.2016. In addition, the increase in segmentSG&A expenses reflected higher employee compensation-related costs related to structural investments in new quality, sales, marketing, engineering and accounting resources. Segment operating income was offset by aincluded foreign exchange losslosses of $4.3 million and $3.1 million in the first three quarters of 2017 and 2016, compared with a foreign exchange gain of $1.0 million in the first three quarters of 2015,respectively, which mainly reflectingreflected the impact of a weakening ofmovements in the U.S. dollar relative to the euro on forward foreign exchange contracts within our international sourcing and supply operations, compared with a strengthening of the U.S. dollar relative to the euro in the corresponding period of 2015, as well as the negative impact of a strengthening of the U.S. dollar relative to theMexican peso on our Mexicaninternational organic ingredient and frozen fruit operations.
SUNOPTA INC. |
Further details on revenue, gross marginprofit and segment operating incomeincome/loss variances are provided below under “Segmented Operations Information”.
Other expense for the three quarters ended September 30, 2017 of $12.0 million reflected the impairment of long-lived assets related to the exit from our flexible resealable pouch and nutrition bar product lines and operations and closure of the San Bernardino facility ($8.2 million), and employee termination costs ($4.2 million) associated with the Value Creation Plan, partially offset by a $1.0 million recovery on the early extinguishment of a rebate obligation that arose from the prior settlement of a recall dispute with a customer related to flexible resealable pouch products. Other expense for the three quarters ended October 1, 2016 of $22.7 million included charges related toreflected the impairment of long-lived assets associated with the San Bernardino juice facility ($10.3 million), the cost of the settlement of the Plumaforementioned flexible resealable pouch product recall dispute with a customer ($9.0 million)million, which included up to $4.0 million in rebates payable to the customer over a four-year period), as well as facility rationalization and severance costs primarily related to the consolidation of our frozen fruit processing facilities following the Sunrise Acquisition ($2.92.2 million), and voluntary withdrawal of private label orange juicecosts associated with product withdrawals and voluntary recall of certain sunflower kernel productsrecalls ($1.7 million). These chargesOther expenses in the first three quarters of 2016 were partially offset by the $1.7 million gain on settlement of the contingent consideration obligation related to the acquisition of Niagara Natural. Other
Interest expense decreased by $10.9 million to $23.8 million for the three quarters ended October 3, 2015 of $4.4 million included severance costs of $2.7 million mainly for our former CEO and $1.4 million of business development costs mainly related to the acquisitions of Sunrise and Citrusource, as well as the divestiture of Opta Minerals.
The increase in interest expense of $31.6 million toSeptember 30, 2017, compared with $34.7 million for the three quarters ended October 1, 2016, compared with $3.2 million for2016. Interest expense included the three quarters ended October 3, 2015, primarily reflected increased costs associated with borrowings under the Second Lien Loan Agreementamortization and our credit facilities in order to finance the Sunrise Acquisition, which included $7.6 million of non-cash amortizationwrite-off of debt issuance costs associated with the Second Lien Loan Agreement. In addition,of $1.8 million and $10.2 million in the first three quarters of 2017 and 2016, we recognized $2.4respectively. The period-over-period decrease in interest expense primarily reflected the reduction in non-cash amortization following the one-year maturity of the initial second lien loans used to partially fund the Sunrise Acquisition, and the repayment of $79.0 million of costssecond lien debt with the net proceeds from the Preferred Stock offering in connection with proposed alternative financing arrangements intended to repay in full the term loans outstanding under the Second Lien Loan Agreement, and we wrote-off $0.2 million of remaining unamortized debt issuance costs related to our former North American credit facilities, which were replaced by the Global Credit Facility.October 2016.
We recognized a recovery of income tax of $14.0 million for the three quarters ended September 30, 2017, compared with $15.6 million (includingfor the three quarters ended October 1, 2016 (which included the realization of $1.3 million of previously unrecognized tax benefits) for the three quarters ended October 1, 2016, compared with a provision for income tax of $4.8 million for the three quarters ended October 3, 2015. Excluding the impact of the change in unrecognized tax benefits, the. The effective tax rate for the first three quarters of 20162017 was 43.8% of the loss before income taxes,45.0%, compared with 31.3% of earnings before income taxes43.8% for the first three quarters of 2015.2016 (excluding the impact of the change in unrecognized tax benefits). The effective tax rates reflected the impacteffect of changesa mix of pre-tax losses projected in the jurisdictional mixU.S. and pre-tax earnings in certain other jurisdictions. In fiscal 2017, pre-tax losses projected in the U.S. reflect anticipated costs associated with the Value Creation Plan, including asset impairment charges and employee termination costs related to the exit from flexible resealable pouch and nutrition bar product lines and operations, and closure of earnings, mainly as the result ofSan Bernardino facility. In fiscal 2016, pre-tax losses in the U.S. in the first three quarters of 2016, compared with pre-tax earnings in the U.S. in the corresponding period of 2015, which reflected the effect in the first three quarters of 2016 of higher cash interest costs related to the financing of the Sunrise Acquisition, as well as costs related to business acquisitions, including the acquisition accounting adjustment to Sunrise inventory sold in the period and the amortization of debt issuance costs related to the Second Lien Loan Agreement, as well as the impact of other discrete items including costs associated with the Plum legalValue Creation Plan (including the asset impairment charge related to the closure of the San Bernardino facility), Sunrise Acquisition, settlement consolidation of our frozen fruit processing facilitiesthe product recall dispute, and product withdrawal and recall costs. For fiscal 2016, we expect our effective tax rate to be in the range of 29% to 32%, excluding discrete items.
Loss from continuing operations attributable to SunOpta Inc. for the three quarters ended October 1, 2016September 30, 2017 was $17.1$17.8 million, compared with earningsa loss of $10.6 million for the three quarters ended October 3, 2015. Diluted loss per share from continuing operations was $0.20 for the three quarters ended October 1, 2016, compared with diluted earnings per share from continuing operations of $0.15 for the three quarters ended October 3, 2015.
Loss from discontinued operations of $0.6$17.1 million for the three quarters ended October 1, 2016, reflecteda decrease of $0.7 million. Diluted loss per share from continuing operations was $0.27 for the three quarters ended September 30, 2017, compared with diluted loss per share from continuing operations of Opta Minerals of $2.0 million, which included an asset impairment charge of $1.2 million, partially offset by a $0.6 million gain on classification as held for sale, net of recovery of income taxes and non-controlling interest of $0.9 million. Loss from discontinued operations of $3.0 million$0.20 for the three quarters ended October 3, 2015 mainly reflected an after-tax1, 2016.
The loss from discontinued operations of $0.6 million in the first three quarters of 2016 was related our investment in Opta Minerals of $4.3 million, net of non-controlling interest of $1.6 million.Inc., which we sold in April 2016.
On a consolidated basis, we realized a loss of $17.8 million (diluted loss per share of $0.27) for the three quarters ended September 30, 2017, compared with a loss of $17.7 million (diluted loss per share of $0.21) for the three quarters ended October 1, 2016, compared with earnings of $7.6 million (diluted earnings per share of $0.11) for the three quarters ended October 3, 2015.2016.
For the three quarters ended October 1, 2016,September 30, 2017, adjusted loss was $3.5 million, or $0.04 per diluted share, on a consolidated basis, compared with adjusted earnings wereof $13.1 million, or $0.15 per diluted share, compared withon a consolidated basis for the three quarters ended October 1, 2016. Excluding flexible resealable pouch and nutrition bar product lines and operations, which we plan to exit, adjusted earnings of $16.5was $0.1 million, or $0.24$0.00 per diluted share, for the three quarters ended October 3, 2015.1, 2016, compared with $13.2 million, or $0.15 per diluted share, for the three quarters ended September 30, 2017. Adjusted EBITDA for the three quarters ended September 30, 2017 was $57.4 million on a consolidated basis, compared with $72.3 million on a consolidated basis for the three quarters ended October 1, 2016. Excluding flexible resealable pouch and nutrition bar product lines and operations, adjusted EBITDA for the three quarters ended September 30, 2017 was $62.5 million, compared with $71.7 million for the quarter ended October 1, 2016. Adjusted earnings is aand adjusted EBITDA are non-GAAP financial measure.measures. See footnotefootnotes (2) and (3) to the table above for a reconciliation of “adjusted earnings”adjusted earnings/loss and adjusted EBITDA from “earnings attributable to SunOpta Inc.”,loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC. |
Segmented Operations Information
Global Ingredients | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
For the three quarters ended | October 1, 2016 | October 3, 2015 | Change | % Change | 2017 | October 1, 2016 | Change | % Change | ||||||||||||||||
Revenues | $ | 441,694 | $ | 467,405 | $ | (25,711 | ) | -5.5% | $ | 420,247 | $ | 441,694 | $ | (21,447 | ) | -4.9% | ||||||||
Gross Margin | 54,716 | 53,225 | 1,491 | 2.8% | ||||||||||||||||||||
Gross Margin % | 12.4% | 11.4% | 1.0% | |||||||||||||||||||||
Gross Profit | 52,453 | 54,716 | (2,263 | ) | -4.1% | |||||||||||||||||||
Gross Profit % | 12.5% | 12.4% | 0.1% | |||||||||||||||||||||
Operating Income | $ | 24,256 | $ | 23,934 | $ | 322 | 1.3% | $ | 18,388 | $ | 24,256 | $ | (5,868 | ) | -24.2% | |||||||||
Operating Income % | 5.5% | 5.1% | 0.4% | 4.4% | 5.5% | -1.1% |
Global Ingredients contributed $441.7$420.2 million in revenues for the three quarters ended October 1, 2016,September 30, 2017, compared to $467.4$441.7 million for the three quarters ended October 3, 2015,1, 2016, a decrease of $25.7$21.4 million, or 5.5%4.9% . Excluding the estimated impact of the recall of certain sunflower kernel products and the impacton revenues of changes including foreign exchange rates and commodity-related pricing (a decrease in revenues of $12.0 million), and the recall of certain sunflower kernel products announced in the second quarter of 2016 (a decrease in revenues of $3.3 million), Global Ingredients revenues increaseddecreased approximately 0.4%1.4% . The table below explains the decrease in revenue:
Global Ingredients Revenue Changes | |
Revenues for the three quarters ended October | $ |
Lower roasted volumes due to reduced customer demand following the sunflower recall, and lower raw | (16,618) |
Decreased commodity pricing for domestically-sourced specialty and organic grains and seeds | (9,954) |
Decreased commodity pricing for internationally-sourced organic ingredients | (1,703) |
Decreased volumes of | |
| |
| |
| |
| |
| |
Increased volumes of domestically-sourced specialty soy and organic feed, partially offset by lower volumes of specialty corn and crop inputs | 8,651 |
Revenues for the three quarters ended | $ |
Gross marginprofit in Global Ingredients remained unchanged atdecreased by $2.3 million to $52.5 million for the three quarters ended September 30, 2017 compared to $54.7 million for the three quarters ended October 1, 2016, and the gross marginprofit percentage increased by 1.0%0.1% to 12.4%12.5% . The increase in gross marginprofit as a percentage of revenue was primarily due to a favorable sales mix driven by higher marginforeign exchange impact on U.S. dollar-denominated raw material sourcing within our international organic raw materials and improved mix in domestic raw materials as a result of a decline in acres contracted of low margin seed and grain varieties, mark-to-market gains on commodity futures contracts, and improved transloading operating efficiencies from the prior year, partiallyingredient operations, mostly offset by the impactan unfavorable product mix of, the sunflower recall on operations and lowerreduced pricing spreads on, non-GMO soy, corncertain organic commodities, and organic feed.reduced operating efficiencies within our sunflower and roasting operations due to lower volumes following the recall. The table below explains the increasedecrease in gross margin:profit:
SUNOPTA INC. |
Global Ingredients Gross | |
Gross | |
| |
| |
| |
| |
$54,716 | |
Lower sales volumes of raw sunflower and roasted products, and reduced operating efficiencies due to lower production volumes | (4,746) |
Favorable foreign exchange impact on U.S. dollar-denominated raw material sourcing within our international organic ingredient operations (partially offset by losses on forward currency contracts included below in operating income), as well as improved operating efficiencies at our European production facilities, partially offset by reduced pricing spreads and lower volumes of certain higher-margin internationally-sourced organic ingredients | 2,173 |
Increased specialty soy and grain ingredient volumes, partially offset by reduced pricing spread on domestically-sourced organic feed and reduced volumes of higher-margin crop inputs due to a reduction in contracted acres | 310 |
Gross profit for the three quarters ended September 30, 2017 | $52,453 |
Operating income in Global Ingredients increaseddecreased by $0.3$5.9 million, or 1.3%24.2%, to $18.4 million for the three quarters ended September 30, 2017, compared to $24.3 million for the three quarters ended October 1, 2016, compared to $23.9 million for the three quarters ended October 3, 2015.2016. The table below explains the increasedecrease in operating income:
Global Ingredients Operating Income Changes | |
Operating income for the three quarters ended October | $ |
| |
| (2,966) |
Higher employee-related compensation costs due to increased headcount within our international organic ingredient operations, partially offset by lower non-compensation- related costs | (413) |
Increase in corporate cost allocations | |
| |
| |
Operating income for the three quarters ended | $ |
Consumer Products | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
For the three quarters ended | October 1, 2016 | October 3, 2015 | Change | % Change | 2017 | October 1, 2016 | Change | % Change | ||||||||||||||||
Revenues | $ | 607,498 | $ | 361,351 | $ | 246,147 | 68.1% | $ | 566,951 | $ | 607,498 | $ | (40,547 | ) | -6.7% | |||||||||
Gross Margin | 54,193 | 31,907 | 22,286 | 69.8% | ||||||||||||||||||||
Gross Margin % | 8.9% | 8.8% | 0.1% | |||||||||||||||||||||
Gross Profit | 64,363 | 54,193 | 10,170 | 18.8% | ||||||||||||||||||||
Gross Profit % | 11.4% | 8.9% | 2.5% | |||||||||||||||||||||
Operating Income | $ | 6,989 | $ | 5,115 | $ | 1,874 | 36.6% | |||||||||||||||||
Operating Income % | 1.2% | 1.4% | -0.2% | $ | 14,696 | $ | 6,989 | $ | 7,707 | 110.3% | ||||||||||||||
Operating Income % | 2.6% | 1.2% | 1.4% |
Consumer Products contributed $607.5$567.0 million in revenues for the three quarters ended October 1, 2016,September 30, 2017, compared to $361.4$607.5 million for the three quarters ended October 3, 2015,1, 2016, a $246.1$40.5 million, or 68.1% increase.6.7% decrease. Excluding the impact on revenues of business acquisitionschanges in raw fruit commodity-related pricing (a decrease in revenues of $2.7 million) and associated product rationalizations, as well as the estimated impact on west coastsales of flexible resealable pouch operations as a resultand nutrition bar products (a decrease in revenues of a fire at a third-party facility,$0.9 million), Consumer Products revenues increased 2.7%decreased 6.6% . The table below explains the increasedecrease in revenues:
SUNOPTA INC. |
SUNOPTA INC. | 55 | September 30, 2017 10-Q |
Consumer Products Revenue Changes | |
Revenues for the three quarters ended October | $ |
| (34,592) |
Lower retail sales of non-dairy aseptic beverages related to customer order patterns and the previously announced loss of a significant customer, partially offset by increased volumes of non-dairy aseptic beverage products into the foodservice channel, and higher volumes of premium juice and fruit snack products | (5,013) |
Lower volumes of flexible resealable pouch volumes (including the impact pouch operations due to the | |
| |
| |
| |
Revenues for the three quarters ended | $ |
Gross marginprofit in Consumer Products increased by $22.3$10.2 million to $64.4 million for the three quarters ended September 30, 2017 compared to $54.2 million for the three quarters ended October 1, 2016, comparedand the gross profit percentage increased by 2.5% to $31.9 million for11.4% . For the three quarters ended October 3, 2015, and theSeptember 30, 2017, gross margin percentage increased by 0.1% to 8.9% . For the quarter ended July 2, 2016 gross marginprofit as a percentage of revenue was impacted by a $13.4 millionwrite-down of flexible resealable pouch and nutrition bar inventories as a result of the plan to exit these product lines ($1.3 million), as well as costs associated with the closure of the San Bernardino facility ($0.4 million). For the three quarters ended October 1, 2016, gross profit as a percentage of revenue was impacted by the acquisition accounting adjustment related to Sunrise inventory sold as well as($13.4 million) and costs associated with the expansion activities at ourthe Allentown aseptic beverage facility of $1.6 million.($1.6 million). Excluding these costs, the gross marginprofit percentage in the consumer products segmentConsumer Products would have been 11.5%11.7% for the three quarters ended September 30, 2017, compared with 11.4% for the three quarters ended October 1, 2016. The increase in gross marginprofit percentage primarily reflected improved operating efficiencies and raw material pricing within our healthy fruit operations and operational savings from the higher margin profileclosure of 2015 acquisitions, and increasedthe San Bernardino facility, utilization and operating costs within the beverage operations, partiallylargely offset by higher costslosses within healthy fruit operations due to a delayed 2016 fruit harvest that led to increased labor costsour flexible resealable pouch and higher raw material prices that were not yet built into customer pricing.nutrition bar operations. The table below explains the increase in gross margin:profit:
Consumer Products Gross | |
Gross | |
| |
| |
| |
| |
$54,193 | |
Acquisition accounting adjustment related to Sunrise inventory sold in the first three quarters of 2016 | 13,404 |
Increased contribution on sales of frozen fruit, based on operating efficiencies due to the timing of the fruit harvest (which was delayed in fiscal 2016, resulting in higher labor costs and reduced supply) and favorable pricing on sourced raw fruit, as well as increased volumes of fruit ingredients, and productivity and cost reduction initiatives within fruit ingredient operations | 5,784 |
Higher losses within flexible resealable pouch and nutrition bar operations (including the write-down of inventories related to exit activities), which reflected the impact of the closure of west coast pouch operations following the fire at a third-party facility in the third quarter of 2016, and higher plant costs and production inefficiencies related to the introduction of new nutrition bar offerings | (6,913) |
Lower sales volumes of non-dairy aseptic beverages, partially offset by higher sales volumes of premium juice and fruit snack products, and operational savings following the closure of the San Bernardino facility | (2,105) |
Gross profit for the three quarters ended September 30, 2017 | $64,363 |
Operating income in Consumer Products increased by $1.9$7.7 million or 36.6%, to an operating income of$14.7 million for the three quarters ended September 30, 2017, compared to $7.0 million for the three quarters ended October 1, 2016, compared to operating income of $5.1 million for the three quarters ended October 3, 2015.2016. The table below explains the increase in operating income:
SUNOPTA INC. |
Consumer Products Operating Income Changes | |
| |
| |
| |
Operating loss for the three quarters ended October 1, 2016 | $6,989 |
Increase in gross profit, as explained above | 10,170 |
Lower foreign exchange losses on international operations, and lower non- compensation-related costs | 2,271 |
Increase in corporate cost allocations | (4,734) |
Operating income for the three quarters ended September 30, 2017 | $14,696 |
Corporate Services | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
For the three quarters ended | October 1, 2016 | October 3, 2015 | Change | % Change | 2017 | October 1, 2016 | Change | % Change | ||||||||||||||||
Operating Loss | $ | (6,544 | ) | $ | (6,007 | ) | $ | (537 | ) | -8.9% | $ | (28,460 | ) | $ | (6,544 | ) | $ | (21,916 | ) | -334.9% |
Operating loss at Corporate Services increased by $0.5$21.9 million to $28.5 million for the three quarters ended September 30, 2017, from a loss of $6.5 million for the three quarters ended October 1, 2016, from a loss of $6.0 million for the three quarters ended October 3, 2015.2016. The table below explains the increase in operating loss:
Corporate Services Operating Loss Changes | |
Operating loss for the three quarters ended October | $ |
| |
Higher | |
Decrease in foreign exchange gains on foreign currency transactions | (92) |
Increase in corporate cost allocations | |
corporate headquarter expenses of a weaker average U.S. dollar period-over-period | |
Operating loss for the three quarters ended | $ |
Management fees mainly consist of salaries of corporate personnel who perform back office functions for operating segments, as well as costs related to the enterprise resource management system. These expenses are allocated to the operating segments based on (1) specific identification of allocable costs that represent a service provided to each segment and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and number of people employed within each segment. The 2016 management fee allocations reflect the additional revenues and head count added as a result of the acquisitions of Sunrise, Citrusource, and Niagara Natural. These acquisitions added approximately $350.0 million in annualized revenues all to the Consumer Products segment.
Liquidity and Capital Resources
We have the following sources from which we can fund our operating cash requirements:
• | Existing cash and cash equivalents; | |
• | Available operating lines of credit; | |
• | Cash flows generated from operating activities, including working capital efficiency efforts; | |
• | Cash flows generated from the exercise, if any, of stock options during the year; | |
• | Potential additional long-term financing, including the offer and sale of debt and/or equity securities; and | |
• | Potential sales of non-core divisions, or assets. |
SUNOPTA INC. | 57 | September 30, 2017 10-Q |
On February 11, 2016, we entered into a five-year $350.0credit agreement for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $350 million, Globalsubject to borrowing base capacity (the “Global Credit Facility, which replaced our previous North American credit facilities, which were comprised of a $165.0 million facility and a C$10.0 million facility, that were set to expire January 27, 2017, and our €92.5 million multipurpose European credit facilities that were due on demand with no set maturity date.Facility”). The Global Credit Facility will be used to supportsupports the working capital and general corporate needs of our global operations, in addition to funding future strategic initiatives. In addition, subject to customary borrowing conditions and the agreement of any such lenders to provide such increased commitments, we may request to increase the total lending commitments under this facility to a maximum aggregate principal amount not to exceed $450.0$450 million. The applicable margin in the Global Credit Facility ranges from 1.25% to 1.75% for loans bearing interest based on LIBOR and from 0.25% to 0.75% for loans bearing interest based on the prime rate and, in each case, is set quarterly based on average borrowing availability for the preceding fiscal quarter.
On September 19, 2017, we entered into an amendment to the Global Credit Facility to add an additional U.S. asset-based credit subfacility of an aggregate principal amount of $15.0 million. The principal amount of this subfacility is repayable in quarterly instalments of $2.5 million, commencing with the fiscal quarter ending March 31, 2019. Borrowings repaid under this subfacility may not be borrowed again. The applicable margin for this subfacility ranges 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 October 1, 2016,September 30, 2017, we had outstanding borrowings of $223.5$256.4 million and approximately $105.0$69.0 million of available borrowing capacity under the Global Credit Facility. For more information on the Global Credit Facility, see note 78(1) to the unaudited consolidated financial statements included in this report.
On October 9, 2015,20, 2016, SunOpta Foods and certain of our other subsidiaries entered into the Second Lien Loan Agreement with a group of lenders, pursuant to which we borrowed an aggregate principal amount of $330.0 million of term loans (the “Initial Loans”). The net proceeds of the Second Lien Loan Agreement were used to partially fund the Sunrise Acquisition, as described above under “Recent Developments – Sunrise Holdings (Delaware), Inc.” As at October 1, 2016, we had repaid $20.0 million of the outstanding principal of the Initial Loans. On October 7, 2016, we used the net proceeds from the issuance of the Preferred Stock to repay an additional $79.0 million principal amount of the Initial Loans, as described above under “Recent Developments – Strategic Review”. The remainingissued $231.0 million aggregate principal amount of Initial Loans matured on October 9, 2016 and automatically converted into a like principal amount of term loans (such converted loans, the “Term Loans”), with a maturity date of October 9, 2022. The Term Loans bore interest at 9.5% per annum. On October 20, 2016, all of the outstanding Term Loans were exchanged for a corresponding amount of 9.5% Senior Secured Second Lien Notes due October 9, 2022 (the “Notes”) issued by SunOpta Foods.. The issuance of the Notes represented the culmination of the financing arrangements associated with the Sunrise Acquisition. For more information on the Notes, see note 158(3) to the unaudited consolidated financial statements included in this report. The Second Lien Loan Agreement was terminated in connection with the issuance of the Notes.
We have an effective registration statement on file with the U.S. Securities and Exchange Commission, pursuant to which we may offer up to $200.0 million of debt, equity and other securities. We also have a prospectus on file with Canadian securities regulators covering the offer and sale of up to $200.0 million of debt, equity and other securities. As described above under “Recent Developments – Sunrise Holdings (Delaware), Inc.”, we issued 16.7 million of our common shares for gross proceeds of $100.0 million under the U.S. registration statement and the Canadian prospectus. The remaining amount of $100.0 million available under U.S. registration statement and the Canadian prospectus could be used by us for a public offering of debt, equity or other securities to raise additional capital. Our ability to conduct any such future offerings will be subject to market conditions.
In order to finance significant acquisitions, if any, that may arise in the future, we may need additional sources of cash that we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering of debt or equity securities, or the issuance of common stock as consideration in an acquisition. There can be no assurance that these types of financing would be available at all or, if so, on terms that are acceptable to us.
In the event that we require additional liquidity due to market conditions, unexpected actions by our lenders, changes to our growth strategy, or other factors, our ability to obtain any additional financing on favourable terms, if at all, could be limited.
Cash Flows
Cash flows for theQuarter ended September 30, 2017 Compared to quarter ended October 1, 2016
Net cash and cash equivalents decreased $2.7 million in the third quarter of 2016 to $1.6 million as at October 1, 2016, compared with $4.3 million as at July 2, 2016, which primarily reflected cash provided by continuing operating activities of $17.0 million, which was more than offset by the repayment of $13.1 million of borrowings under our line of credit facilities and capital expenditures of $5.5 million.
Cash provided by operating activities of continuing operations was $17.0 million in the third quarter of 2016, compared with $18.3 million in the third quarter of 2015, a decrease in cash provided of $1.3 million. The decrease in cash used in operating activities in the third quarter of 2016, compared with the third quarter of 2015, reflected the receipt of income tax refunds related to 2015, mostly offset by an increase in accounts receivable, mainly reflecting higher sales of frozen fruit in the third quarter of 2016, compared with the second quarter of 2016.
Cash used in investing activities of continuing operations was $5.5 million in the third quarter of 2016, compared with $12.8 million in the third quarter of 2015, a decrease in cash used of $7.3 million, which mainly reflected the upfront payment of $6.5 million to acquire Niagara Natural in the third quarter of 2015, and a third-quarter-over-third-quarter decrease in capital expenditures of $1.4 million, reflecting higher spending in the third quarter of 2015 related to the expansion of our Allentown, Pennsylvania aseptic facility.
Cash used in financing activities of continuing operations was $14.6 million in the third quarter of 2016, compared with cash provided of $89.9 million in the third quarter of 2015, an increase in cash used of $104.5 million, which mainly reflected the net proceeds from the issuance of common shares of $95.3 million in the third quarter of 2015. In addition, repayments under our line of credit facilities were higher by $9.9 million in the third quarter of 2016, compared with the third quarter of 2015, mainly reflecting the upfront payment to acquire Niagara Natural in the third quarter of 2015.
Cash flows for the three quarters ended October 1, 2016
Net cash and cash equivalents decreased $0.6 million in the first three quartersthird quarter of 20162017 to $1.6$2.9 million as at October 1, 2016,September 30, 2017, compared with $2.3$3.5 million as at January 2, 2016,July 1, 2017, which primarily reflected net borrowings under our line of credit facilities of $65.8 million, that were more than offset by the following uses of cash:
Cash used in operating activities of continuing operations was $35.3$11.1 million in the first three quartersthird quarter of 2016,2017, compared with cash provided of $0.3$17.0 million in the first three quartersthird quarter of 2015,2016, an increase in cash used of $35.6$28.1 million. The increase in cash used inby operating activities in the first three quartersthird quarter of 2016,2017, compared with the first three quarters of 2015, reflected the increased working capital requirements related to acquired businesses, including the seasonal fruit purchases to support the Sunrise business that occurred largely in the secondthird quarter of 2016, partially offset byreflected the receiptrelative timing of income tax refunds related to 2015.fruit purchases and the cash payment of $8.0 million of costs incurred under the Value Creation Plan.
Cash used in investing activities of continuing operations was $18.7$7.8 million in the first three quartersthird quarter of 2016,2017, compared with $41.1cash used of $5.5 million in the first three quartersthird quarter of 2015, a decrease in cash used2016, an increase of $22.4$2.3 million, which mainly reflected the total upfront paymentsacquisition of $19.8the non-controlling interest in our Mexican frozen fruit operations for $1.7 million, to acquire Citrusource and Niagara Natural in the first three quarters of 2015, as well as a decreasean increase in capital expenditures of $7.0$1.1 million reflecting higher spending in the first three quarters of 2015 related to add a retrofit ofsecond processing line at our San Bernardino, California juiceDutch cocoa facility, as well as to implement food safety and the expansion ofproduction enhancements across our Allentown, Pennsylvania aseptic facility. These factors were partially offset by contingent consideration payments of $4.6 million in the first three quarters of 2016 related to the acquisitions of Citrusource and Niagara Natural. Cash provided by investing activities of discontinued operations reflected cash proceeds from the sale of Opta Minerals of $3.2 million, net of cash sold.manufacturing facilities.
Cash provided by financing activities of continuing operations was $49.9 million in the first three quarters of 2016, compared with $130.6 million in the first three quarters of 2015, a decrease in cash provided of $80.7 million, which mainly reflected the net proceeds from the issuance of common shares of $95.3$18.2 million in the third quarter of 2015.2017, compared with cash used of $14.6 million in the third quarter of 2016, an increase in cash provided of $33.8 million. Net borrowings under our line of credit facilities increased $34.5$19.2 million in the third quarter of 2017, compared with a decrease of $13.1 million the third quarter of 2016. The quarter-over-quarter increase in borrowings of $32.3 million mainly reflected the increase in working capital requirements in the third quarter of 2017.
SUNOPTA INC. | 58 | September 30, 2017 10-Q |
Three quarters ended September 30, 2017 Compared to three quarters ended October 1, 2016
Net cash and cash equivalents increased $1.6 million in the first three quarters of 2017 to $2.9 million as at September 30, 2017, compared with $1.3 million as at December 31, 2016, which primarily reflected $48.6 million of borrowings under our line of credit facilities, partially offset by capital expenditures of $22.7 million, cash used by continuing operating activities of $17.4 million and preferred stock dividends of $5.0 million.
Cash used in operating activities of continuing operations was $17.4 million in the first three quarters of 2017, compared with cash used of $35.3 million in the first three quarters of 2016, a decrease in cash used of $17.9 million. The decrease in cash used by operating activities in the first three quarters of 2017, compared with the first three quarters of 2015, including2016, reflected cash generated through working capital efficiency initiatives, which were focused on lowering inventory positions, maximizing purchasing terms, and augmenting collection efforts for accounts receivable. These positive efforts were partially offset by the cash settlement of $28.4 million of costs incurred under the Value Creation Plan.
Cash used in investing activities of continuing operations was $23.3 million in the first three quarters of 2017, compared with $14.1 million in the first three quarters of 2016, an increase in cash used of $9.2 million, which mainly reflected an increase in capital expenditures of $7.8 million related to new capabilities within our aseptic beverage operations and expansion of our Dutch cocoa facility, as well as food safety and production enhancements. In addition, capital expenditures in the first three quarters of 2017 included $3.2 million related to the early buyout of equipment leases associated with the closure of the San Bernardino facility.
Cash provided by financing activities of continuing operations was $42.2 million in the first three quarters of 2017, compared with $45.4 million in the first three quarters of 2016, a decrease in cash provided of $3.2 million. Net borrowings under our line of credit facilities increased $48.6 million in the first three quarters of 2017, compared with an increase of $65.8 million the first three quarters of 2016, a period-over-period decrease in borrowings of $17.2 million, which reflected the reduction in working capital requirements in the first three quarters of 2017, and the repayment of $10.0 million of second lien debt in the first three quarters of 2016, partially offset by the period-over-period increase in capital spending. Net borrowings under our line of credit facilities in the first three quarters of 2016 reflected the repayment in full of outstanding borrowings of $192.7 million under our former North American and European credit facilities with new borrowings under the Global Credit Facility. The increase in borrowings under our credit facilities mainly reflected increased working capital requirements and repayment of $10.0 million of borrowings under the Second Lien Loan Agreement, as well as lower proceeds from the exercise of stock options and warrants, partially offset by reduced business acquisition spending.
Off-Balance Sheet Arrangements
There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition.
Contractual Obligations
Except as described below, thereThere have been no material changes outside the normal course of business in our contractual obligations since January 2, 2016:December 31, 2016.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. The estimates and assumptions made require us to exercise our judgment and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the information that forms the basis of our estimates and assumptions as our business and the business environment generally changes. The use of estimates is pervasive throughout our financial statements. There have been no material changes to the critical accounting estimates disclosed under the heading “Critical Accounting Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of the Form 10-K.
SUNOPTA INC. | 59 | September 30, 2017 10-Q |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 January 2,December 31, 2016.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission’s rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we conducted an evaluation of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of October 1, 2016.September 30, 2017.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our CEO and CFO, has evaluated whether any change in our internal control over financial reporting (as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act) occurred during the quarter ended October 1, 2016.September 30, 2017. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the quarter ended October 1, 2016September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
SUNOPTA INC. |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Plum Dispute
Plum, PBC ("Plum"), a Delaware public benefit corporation and a subsidiary of Campbell Soup Company ("Campbell"), and SunOpta Global Organic Ingredients, Inc., a wholly-owned subsidiary of the Company (“SGOI”), are parties to a manufacturing and packaging agreement dated September 21, 2011 (the “Plum Manufacturing Agreement”). Pursuant to the Plum Manufacturing Agreement, SGOI agreed to manufacture and package certain food items for Plum at SGOI’s Allentown, Pennsylvania facility in accordance with Plum’s specifications regarding, among other things, product ingredients and packaging, manufacturing processes, and quality control standards. On November 8, 2013, Plum initiated a voluntary recall of certain products manufactured by SGOI at its Allentown facility. On February 3, 2015, Plum filed a complaint against SGOI in the Lehigh County Court of Common Pleas in Allentown, Pennsylvania. On April 13, 2015, Plum filed an amended complaint adding packaging manufacturer and supplier Cheer Pack North America (“Cheer Pack”) as a Defendant. SGOI asserted counterclaims against Plum, crossclaims against Cheer Pack and third-party claims against Gualapack S.p.A (“Gualapack”), Hosokawa Yoko, Co. (“Hosokawa”), Secure HY Packaging Co., Ltd. (“SHY”) and CDF Corporation (“CDF”). Cheer Pack asserted cross-claims against SGOI. Plum alleged it initiated the recall in response to consumer complaints of bloated packaging and premature spoilage of certain products, which could lead to gastrointestinal symptoms and discomfort if consumed. Plum alleged that the spoilage of its products resulted from a post-processing issue at SGOI’s Allentown facility. Plum sought unspecified damages equal to the direct costs of the recall and handling of undistributed product, incidental and consequential damages, lost profits and attorneys’ fees.
On July 29, 2016, SGOI entered into a Mutual Release and Settlement Agreement (the “Settlement Agreement”) with Plum, Campbell, Cheer Pack, Gualapack, Hosokawa, CDF and SHY. The Settlement Agreement resolved the disputed issues among the parties in connection with the litigation filed by Plum against SGOI, as described above. Pursuant to the terms of the Settlement Agreement, the Company paid Campbell $5.0 million in cash and will provide Campbell with rebates of up to $4.0 million over a four-year period in connection with Plum’s purchases of pouch products and Campbell’s purchases of aseptic broth products pursuant to manufacturing and supply agreements, as amended, between the parties and their affiliates. In order for Campbell to obtain the full $4.0 million in rebates, Plum and Campbell must order certain minimum quantities of pouch products and aseptic broth products within each of the designated twelve-month periods over the four-year rebate period.
Employment Matter
On April 19, 2013, a class-action complaint, in the case titledDe Jesus, et al. v. Frozsun, Inc. d/b/a Frozsun Foods,, was filed against Sunrise Growers, Inc. (then named Frozsun, Inc.) in California Superior Court, Santa Barbara County seeking damages, equitable relief and reasonable attorneys’ fees for alleged wage and hour violations. This case includes claims for failure to pay all hours worked, failure to pay overtime wages, meal and rest period violations, waiting-time penalties, improper wage statements and unfair business practices. The putative class includes approximately 8,500 to 9,00010,000 non-exempt hourly employees from Sunrise’s production facilities in Santa Maria and Oxnard, California. The parties attended mediation on October 12, 2017 and reached a general agreement to resolve the matter on a class-wide basis. The parties are currently engagednegotiating the remaining details of the settlement which is subject to court approval. It is anticipated that the parties will seek preliminary approval of the settlement from the court in pre-class certification discovery.December 2017 or January 2018. The Company is unableexpects to estimate any potential liabilities relating to this proceeding,recover the full amount payable under the settlement through insurance coverage and any such liabilities could be material.an escrow account established in connection with the Company’s acquisition of Sunrise Holdings (Delaware), Inc. in October 2015.
From time to time, we are involved in other litigation incident to the ordinary conduct of our business. For a discussion of legal proceedings, see note 1315 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 January 2,December 31, 2016. Except as described below, thereThere 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. However, we have updated
Item 5. Other Information
Election of Director
On November 6, 2017, the risk factor below for items disclosed in this report.
Risks RelatedBoard of Directors of the Company (the “Board”) appointed Derek Briffett as a director of the Company, increasing the size of the Board to Our Businessnine directors. Mr. Briffett is expected to serve on the Board’s Audit Committee.
Product liability suits, recallsMr. Briffett was not selected as a director pursuant to any arrangements or understandings with the Company or with any other person and threatened market withdrawals, could have a material adverse effect on our business
Many of our productsthere are susceptible to harmful bacteria,no transactions between Mr. Briffett and the saleCompany that would require disclosure under Item 404(a) of food productsRegulation S-K.
Mr. Briffett will be compensated for human consumption involveshis service on the risk of injury or illness to consumers. Such injuries may result from inadvertent mislabeling, tampering by unauthorized third parties, faulty packaging materials, product contamination, or spoilage. Under certain circumstances, we or our customers may be required to recall or withdraw products, which may lead to a material and adverse effectBoard on our business, financial condition or result of operations. Our customers may also voluntarily recall or withdraw a product we manufactured or packaged, even without consulting us, which could increase our potential liability, costs or and result in lost sales. A product recall or withdrawal could result in significant losses due to the costs of the recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. In addition, we could be forced to temporarily close one or more production facilities. Even if a situation does not necessitate a recall or market withdrawal, product liability claims might be asserted against us. If a product recall or withdrawal were to lead to a decline in sales of a similar or related product sold by a customer or other third party, that party could also initiate litigation against us. While we are subject to governmental inspection and regulations and believe our facilities and those of our co-packers comply in all material respects with all applicable laws and regulations, if the consumption of any of our products causes, or is alleged to have caused, a health-related illness in the future, we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or physical harm could adversely affect our reputation with existing and potential customers and consumers and our corporate and brand image.
For example, on July 29, 2016, one of our wholly-owned subsidiaries agreed to pay $5.0 million in cash and up to $4.0 million in rebates to one of our customers to settle litigation filed by the customer in connection with a voluntary recall of certain products manufactured at our subsidiary’s Allentown, Pennsylvania facility.
On May 3, 2016, we announced a voluntary recall of certain sunflower kernel products produced at our Crookston, Minnesota facility that have the potential to be contaminated with Listeria monocytogenes bacteria, and a number of our customers initiated recalls of their products that contain the affected sunflower kernelssame basis as an ingredient or component. While we have recognized estimated losses of $28.0 million related to this recall, we may need to revise our estimates to be materially larger as we continue to work with our customers to substantiate the claims received to date and any additional claims that may be received. We may also incur costs that are significantly greater than our previous estimates. These revisions of our estimated losses and costs may occur at any time as we continue this process.
Additionally, these losses do not reflect costs associated with the interruption of production at the Crookston facility for the period from April 21, 2016 to the time regular production resumed on or about May 15, 2016, subject to a positive release protocol, or the costs to put into place corrective and preventive actions at our roasting facilities. Our remediation efforts are ongoing, and we expect to continue to incur related costs, which may be material. Further, we are currently unable to estimate the impact that this recall may have on our future sales of sunflower products or on our ongoing relationships with our customers. The recall may cause us to lose future revenues from, or relationships with, one or more material customers, and the impact of the recall could affect our customers’ willingness to continue to purchase other unrelated products from us or could hinder our ability to grow our business with those customers. We may not be able to determine the full extent of the losses related to the recall for some time and certain factors impacting these losses, such as our customers’ processes for developing their claims, the timing of submission of any such claims and the terms of our customers’ insurance policies and related coverage, are beyond our control.
Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. Although we maintain product liability insurance, we may incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a further product recall could have a material and adverse effect on our business, financial condition or results of operations.
Risks Related to Our Ongoing Operational Review and Our Business Acquisitions
We are conducting a thorough revieweach of the Company’s operations, management and governance. Both the process of conducting this review and its outcome and implementation could pose a number of risks that could have an adverse impact on our business, financial condition or results of operations
We are conducting a thorough review of our operations, management and governance in partnership with representatives of Oaktree Capital Management L.P. (together with its affiliates, “Oaktree”). Among other things, our Board of Directors (the “Board”) has committed to a further review of governance and leadership with a particular focus on continuing to add independent directors with significant operating and supply chain expertise in the food industry and continuing to ensure that we have the management resources to implement our strategy and the action items that emerge from our operational review. We are also considering a number of operational actions to improve our profitability and streamline our operations for long-term success. These actions may include rationalization or consolidation of certain of our operations or facilities, reinvestment in certain of our operations or facilities, investments in personnel, processes and tools, as well as other cost saving initiatives. These actions could consume capital resources and could also give rise to impairment and other restructuring charges that would be both cash and non-cash in nature, and these charges could be material.
In connection with our operational review, we may decide to take actions that could have a material impact on our operations, strategy, governance, management and future prospects. Certain actions that we take may lead to write-downs of assets and/or charges in future periods.non-employee directors. In addition we cannot predict whether the actions we take will be successful in achieving our goalsto annual grants of improving our profitability and financial performance and delivering long-term value to our shareholders. Our ongoing review could expose us to a number of other risks, including the following:
The above risks could have an adverse impact on our business, financial results, liquidity and financial condition.
Our significant investors may have interests that conflict with those of our debtholders and other stakeholders
Under the agreements executed in connection with the strategic partnership with Oaktree, Oaktree initially may acquire common stock of SunOpta Inc. representing up to 19.99% of SunOpta Inc.’s outstanding common stock. This percentage may be increased to 27% under certain circumstances, subject to shareholder approval.
Oaktree has nominated two membersunits, directors who are not employees of the Company receive an annual cash retainer of $50,000 and reimbursement for reasonable travel and related expenses to attend meetings and to manage Board and is entitled to designate two nominees for election to the Board so long as it beneficially owns or controls at least 11.1% of SunOpta Inc.’s common stock on an as-exchanged basis. If Oaktree beneficially owns or controls less than 11.1% but more than 5% of SunOpta Inc.’s common stock on an as-exchanged basis, it will be entitled to designate one nominee. In addition, Engaged Capital LLC (“Engaged Capital”), SunOpta Inc.’s second largest shareholder, has nominated one member of our Board.responsibilities.
Oaktree is participating in our ongoing review of our operations, management and governance. Oaktree’s objectives and perspectives during this review may not always be aligned with those of other stakeholders, including our debtholders and smaller shareholders.
The interests of Oaktree and Engaged Capital, as well as their affiliates, may differ from the interests of our other stakeholders in material respects. For example, our large investors and their affiliates may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their other equity investments, even though such transactions might involve risks to us, including risks to our liquidity and financial condition. Our large investors and their affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
A concentration of ownership within our large investors could potentially be disadvantageous to, or conflict with, interests of our debtholders or smaller shareholders. In addition, if any significant shareholder were to sell or otherwise transfer all or a large percentage of its holdings, we could find it difficult to raise capital, if needed, through the sale of additional equity securities.
Item 6. Exhibits
The listfollowing exhibits are included as part of exhibits in the Exhibit Index is incorporated herein by reference.this report.
10.1† | |
10.2 | |
31.1* | |
31.2* | |
32* | |
101.INS* | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
SUNOPTA INC. | 61 |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
† | Indicates management contract or compensatory plan or arrangement. |
* | Filed herewith. |
SUNOPTA INC. | 62 | September 30, 2017 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: November | /s/ Robert McKeracher |
Robert McKeracher | |
Vice President and Chief Financial Officer | |
(Authorized Signatory and Principal Financial Officer) |
SUNOPTA INC. |
EXHIBIT INDEX
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