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 July 1,September 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 [X] | |
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 August 4,November 3, 2017 was 86,496,106.86,707,385.
SUNOPTA INC.
FORM 10-Q
For the quarterly period ended July 1,September 30, 2017
TABLE OF CONTENTS
PART I | ||
Item 1. | ||
5 | ||
6 | ||
Consolidated Balance Sheets as at | 7 | |
8 | ||
9 | ||
11 | ||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3 | ||
Item 4 | ||
PART II | OTHER INFORMATION | |
| 57 | |
Item |
| |
Item |
| |
Item 6 |
Basis of Presentation
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (“Form 10-Q”) to the “Company”, “SunOpta”, “we”, “us”, “our” or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together.
In this report, all currency amounts presented are expressed in thousands of United States (“U.S.”) dollars (“$”), except per share amounts, unless otherwise stated. Other amounts may be presented in thousands of Canadian dollars (“C$”), euros (“€”) and, Mexican pesos (“M$”) and British pounds (“£”). As at July 1,September 30, 2017, the closing rates of exchange for the Canadian dollar, euro, and Mexican peso and British pound, expressed in U.S. dollars, based on Bank of Canada exchange rates, were C$0.7706, €1.14150.8013, €1.1812, M$0.0550 and M$0.0553.£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 future financial and operating results, plans, objectives, expectations and intentions; our ability to implement the four pillars and 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 flexible resealable pouch productsnutrition bar product lines and expected loss onoperations, and the saleamount and timing of related equipment;exit costs; anticipated timing for completion of the expansion of our Mexican frozen fruit facility; possible operational consolidation; rationalization of 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; future growth of our business and global markets for our 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 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 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 |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. dollars, except per share amounts) |
Quarter ended | Three quarters ended | |||||||||||||||||||||||
Quarter ended | Two quarters ended | September 30, | September 30, | |||||||||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | 2017 | October 1, 2016 | 2017 | October 1, 2016 | |||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Revenues | 336,454 | 348,146 | 666,485 | 700,460 | 320,713 | 348,732 | 987,198 | 1,049,192 | ||||||||||||||||
| ||||||||||||||||||||||||
Cost of goods sold | 294,792 | 312,168 | 586,124 | 632,581 | 284,258 | 307,702 | 870,382 | 940,283 | ||||||||||||||||
| ||||||||||||||||||||||||
Gross profit | 41,662 | 35,978 | 80,361 | 67,879 | 36,455 | 41,030 | 116,816 | 108,909 | ||||||||||||||||
| ||||||||||||||||||||||||
Selling, general and administrative expenses | 35,039 | 24,489 | 73,311 | 48,761 | 26,102 | 23,915 | 99,413 | 72,676 | ||||||||||||||||
Intangible asset amortization | 2,809 | 2,824 | 5,612 | 5,646 | 2,817 | 2,826 | 8,429 | 8,472 | ||||||||||||||||
Other expense, net (note 11) | 607 | 8,433 | 6,050 | 12,411 | ||||||||||||||||||||
Foreign exchange loss (gain) | 1,195 | (180 | ) | 1,775 | 1,992 | |||||||||||||||||||
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 the following | 2,012 | 412 | (6,387 | ) | (931 | ) | (1,011 | ) | 2,909 | (7,398 | ) | 1,978 | ||||||||||||
| ||||||||||||||||||||||||
Interest expense, net | 7,695 | 11,548 | 15,449 | 22,570 | 8,371 | 12,178 | 23,820 | 34,748 | ||||||||||||||||
| ||||||||||||||||||||||||
Loss from continuing operations before income taxes | (5,683 | ) | (11,136 | ) | (21,836 | ) | (23,501 | ) | (9,382 | ) | (9,269 | ) | (31,218 | ) | (32,770 | ) | ||||||||
| ||||||||||||||||||||||||
Recovery of income taxes | (5,581 | ) | (7,135 | ) | (10,550 | ) | (10,221 | ) | (3,499 | ) | (5,411 | ) | (14,049 | ) | (15,632 | ) | ||||||||
| ||||||||||||||||||||||||
Loss from continuing operations | (102 | ) | (4,001 | ) | (11,286 | ) | (13,280 | ) | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,138 | ) | ||||||||
| ||||||||||||||||||||||||
Discontinued operations(note 3) | ||||||||||||||||||||||||
Discontinued operations(note 4) | ||||||||||||||||||||||||
Loss from discontinued operations | - | - | - | (1,993 | ) | - | - | - | (1,993 | ) | ||||||||||||||
Gain on classification as held for sale | - | - | - | 560 | - | - | - | 560 | ||||||||||||||||
Recovery of income taxes | - | - | - | 599 | - | - | - | 599 | ||||||||||||||||
Loss from discontinued operations attributable to non-controlling interests | - | - | - | 264 | - | - | - | 264 | ||||||||||||||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | - | - | - | (570 | ) | ||||||||||||||
Loss | (102 | ) | (4,001 | ) | (11,286 | ) | (13,850 | ) | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,708 | ) | ||||||||
Earnings attributable to non-controlling interests | 306 | 123 | 520 | 507 | ||||||||||||||||||||
Earnings (loss) attributable to non-controlling interests | 144 | (503 | ) | 664 | 4 | |||||||||||||||||||
Loss attributable to SunOpta Inc. | (408 | ) | (4,124 | ) | (11,806 | ) | (14,357 | ) | (6,027 | ) | (3,355 | ) | (17,833 | ) | (17,712 | ) | ||||||||
Loss per share – basic(note 12) | ||||||||||||||||||||||||
Loss per share – basic(note 13) | ||||||||||||||||||||||||
- from continuing operations | (0.03 | ) | (0.05 | ) | (0.18 | ) | (0.16 | ) | (0.09 | ) | (0.04 | ) | (0.27 | ) | (0.20 | ) | ||||||||
- from discontinued operations | - | - | - | (0.01 | ) | - | - | - | (0.01 | ) | ||||||||||||||
(0.03 | ) | (0.05 | ) | (0.18 | ) | (0.17 | ) | (0.09 | ) | (0.04 | ) | (0.27 | ) | (0.21 | ) | |||||||||
Loss per share – diluted(note 12) | ||||||||||||||||||||||||
Loss per share – diluted(note 13) | ||||||||||||||||||||||||
- from continuing operations | (0.03 | ) | (0.05 | ) | (0.18 | ) | (0.16 | ) | (0.09 | ) | (0.04 | ) | (0.27 | ) | (0.20 | ) | ||||||||
- from discontinued operations | - | - | - | (0.01 | ) | - | - | - | (0.01 | ) | ||||||||||||||
(0.03 | ) | (0.05 | ) | (0.18 | ) | (0.17 | ) | (0.09 | ) | (0.04 | ) | (0.27 | ) | (0.21 | ) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc. |
Consolidated Statements of Comprehensive |
For the quarters and |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. dollars) |
Quarter ended | Three quarters ended | |||||||||||||||||||||||
Quarter ended | Two quarters ended | September 30, | September 30, | |||||||||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | 2017 | October 1, 2016 | 2017 | October 1, 2016 | |||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Loss from continuing operations | (102 | ) | (4,001 | ) | (11,286 | ) | (13,280 | ) | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,138 | ) | ||||||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | - | - | - | (570 | ) | ||||||||||||||
Loss | (102 | ) | (4,001 | ) | (11,286 | ) | (13,850 | ) | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,708 | ) | ||||||||
| ||||||||||||||||||||||||
Other comprehensive earnings (loss), net of income taxes | ||||||||||||||||||||||||
Changes related to cash flow hedges (note 5) | ||||||||||||||||||||||||
Other comprehensive earnings, net of income taxes | ||||||||||||||||||||||||
Changes related to cash flow hedges (note 6) | ||||||||||||||||||||||||
Unrealized gains | 171 | - | 1,413 | - | 155 | - | 1,568 | - | ||||||||||||||||
Reclassification of gains to earnings | (1,204 | ) | - | (1,204 | ) | - | (107 | ) | - | (1,311 | ) | - | ||||||||||||
Net changes related to cash flow hedges | (1,033 | ) | - | 209 | - | 48 | - | 257 | - | |||||||||||||||
Currency translation adjustment | 2,897 | (2,346 | ) | 3,495 | (407 | ) | 1,459 | 689 | 4,954 | 282 | ||||||||||||||
Other comprehensive earnings (loss), net of income taxes | 1,864 | (2,346 | ) | 3,704 | (407 | ) | ||||||||||||||||||
Other comprehensive earnings, net of income taxes | 1,507 | 689 | 5,211 | 282 | ||||||||||||||||||||
Comprehensive earnings (loss) | 1,762 | (6,347 | ) | (7,582 | ) | (14,257 | ) | |||||||||||||||||
Comprehensive loss | (4,376 | ) | (3,169 | ) | (11,958 | ) | (17,426 | ) | ||||||||||||||||
Comprehensive earnings (loss) attributable to non-controlling interests | 47 | (245 | ) | 565 | (4 | ) | 52 | (482 | ) | 617 | (486 | ) | ||||||||||||
Comprehensive earnings (loss) attributable to SunOpta Inc. | 1,715 | (6,102 | ) | (8,147 | ) | (14,253 | ) | |||||||||||||||||
Comprehensive loss attributable to SunOpta Inc. | (4,428 | ) | (2,687 | ) | (12,575 | ) | (16,940 | ) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc. |
Consolidated Balance Sheets |
As at |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. dollars) |
July 1, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||
$ | $ | $ | $ | |||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | 3,457 | 1,251 | 2,855 | 1,251 | ||||||||
Accounts receivable | 152,406 | 157,369 | 147,481 | 157,369 | ||||||||
Inventories (note 6) | 381,979 | 368,482 | ||||||||||
Inventories (note 7) | 370,599 | 368,482 | ||||||||||
Prepaid expenses and other current assets | 31,193 | 19,794 | 37,257 | 19,794 | ||||||||
Income taxes recoverable | 2,815 | 2,801 | 4,862 | 2,801 | ||||||||
Assets held for sale (note 2) | 1,250 | - | ||||||||||
Total current assets | 571,850 | 549,697 | 564,304 | 549,697 | ||||||||
Property, plant and equipment | 164,131 | 162,239 | 160,100 | 162,239 | ||||||||
Goodwill | 224,161 | 223,611 | 224,415 | 223,611 | ||||||||
Intangible assets | 178,030 | 183,524 | 174,808 | 183,524 | ||||||||
Deferred income taxes | 3,060 | 1,045 | 1,056 | 1,045 | ||||||||
Other assets | 8,563 | 9,442 | 8,411 | 9,442 | ||||||||
Total assets | 1,149,795 | 1,129,558 | 1,133,094 | 1,129,558 | ||||||||
LIABILITIES | ||||||||||||
Current liabilities | ||||||||||||
Bank indebtedness (note 7) | 237,107 | 201,494 | ||||||||||
Bank indebtedness (note 8) | 259,008 | 201,494 | ||||||||||
Accounts payable and accrued liabilities | 182,841 | 173,745 | 156,538 | 173,745 | ||||||||
Customer and other deposits | 1,155 | 2,543 | 638 | 2,543 | ||||||||
Income taxes payable | 876 | 5,661 | 2,371 | 5,661 | ||||||||
Other current liabilities | 433 | 1,016 | 251 | 1,016 | ||||||||
Current portion of long-term debt (note 7) | 2,062 | 2,079 | ||||||||||
Current portion of long-term debt (note 8) | 2,045 | 2,079 | ||||||||||
Current portion of long-term liabilities | 6,300 | 5,500 | 5,304 | 5,500 | ||||||||
Total current liabilities | 430,774 | 392,038 | 426,155 | 392,038 | ||||||||
Long-term debt(note 7) | 228,514 | 229,008 | ||||||||||
Long-term debt(note 8) | 228,761 | 229,008 | ||||||||||
Long-term liabilities | 10,374 | 15,354 | 8,281 | 15,354 | ||||||||
Deferred income taxes | 36,751 | 44,561 | 31,281 | 44,561 | ||||||||
Total liabilities | 706,413 | 680,961 | 694,478 | 680,961 | ||||||||
Series A Preferred Stock(note 8) | 79,678 | 79,184 | ||||||||||
Series A Preferred Stock(note 9) | 79,932 | 79,184 | ||||||||||
EQUITY | ||||||||||||
SunOpta Inc. shareholders’ equity | ||||||||||||
Common shares, no par value, unlimited shares authorized, 86,467,070 shares issued (December 31, 2016 - 85,743,958) | 306,827 | 300,426 | ||||||||||
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 | 24,726 | 25,522 | 26,657 | 25,522 | ||||||||
Retained earnings | 38,138 | 53,838 | 30,157 | 53,838 | ||||||||
Accumulated other comprehensive loss (note 10) | (9,527 | ) | (13,104 | ) | ||||||||
Accumulated other comprehensive loss (note 11) | (7,928 | ) | (13,104 | ) | ||||||||
360,164 | 366,682 | 357,205 | 366,682 | |||||||||
Non-controlling interests | 3,540 | 2,731 | 1,479 | 2,731 | ||||||||
Total equity | 363,704 | 369,413 | 358,684 | 369,413 | ||||||||
Total equity and liabilities | 1,149,795 | 1,129,558 | 1,133,094 | 1,129,558 |
Commitments and contingencies(note 14)15)
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc. |
Consolidated Statements of Shareholders’ Equity |
As at and for the |
(Unaudited) |
(All dollar amounts expressed in thousands of U.S. dollars) |
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||
Additional | other com- | Non- | Additional | other com- | Non- | |||||||||||||||||||||||||||||||||||||
paid-in | Retained | prehensive | controlling | paid-in | Retained | prehensive | controlling | |||||||||||||||||||||||||||||||||||
Common shares | capital | earnings | loss | interests | Total | Common shares | capital | earnings | loss | interests | Total | |||||||||||||||||||||||||||||||
000s | $ | $ | $ | $ | $ | $ | 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Balance at December 31, 2016 | 85,744 | 300,426 | 25,522 | 53,838 | (13,104 | ) | 2,731 | 369,413 | 85,744 | 300,426 | 25,522 | 53,838 | (13,104 | ) | 2,731 | 369,413 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
Employee share purchase plan | 25 | 182 | - | - | - | - | 182 | 40 | 281 | - | - | - | - | 281 | ||||||||||||||||||||||||||||
Stock incentive plan | 698 | 6,219 | (2,772 | ) | - | - | - | 3,447 | 889 | 7,612 | (3,212 | ) | - | - | - | 4,400 | ||||||||||||||||||||||||||
Stock-based compensation | - | - | 2,138 | - | - | - | 2,138 | - | - | 4,133 | - | - | - | 4,133 | ||||||||||||||||||||||||||||
Dividends and accretion on Series A Preferred Stock (note 8) | - | - | - | (3,894 | ) | - | - | (3,894 | ) | |||||||||||||||||||||||||||||||||
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 | - | - | - | (11,806 | ) | - | 520 | (11,286 | ) | - | - | - | (17,833 | ) | - | 664 | (17,169 | ) | ||||||||||||||||||||||||
Currency translation adjustment | - | - | - | - | 3,502 | (7 | ) | 3,495 | - | - | - | - | 5,001 | (47 | ) | 4,954 | ||||||||||||||||||||||||||
Cash flow hedges, net of income taxes of $90 (note 5) | - | - | - | - | 157 | 52 | 209 | |||||||||||||||||||||||||||||||||||
Acquisition of non-controlling interest | - | - | (162 | ) | - | (82 | ) | 244 | - | |||||||||||||||||||||||||||||||||
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 July 1, 2017 | 86,467 | 306,827 | 24,726 | 38,138 | (9,527 | ) | 3,540 | 363,704 | ||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | 86,673 | 308,319 | 26,657 | 30,157 | (7,928 | ) | 1,479 | 358,684 |
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||
Additional | other com- | Non- | Additional | other com- | Non- | |||||||||||||||||||||||||||||||||||||
paid-in | Retained | prehensive | controlling | paid-in | Retained | prehensive | controlling | |||||||||||||||||||||||||||||||||||
Common shares | capital | earnings | loss | interests | Total | Common shares | capital | earnings | loss | interests | Total | |||||||||||||||||||||||||||||||
000s | $ | $ | $ | $ | $ | $ | 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Balance at January 2, 2016 | 85,418 | 297,987 | 22,327 | 106,838 | (6,113 | ) | 5,140 | 426,179 | 85,418 | 297,987 | 22,327 | 106,838 | (6,113 | ) | 5,140 | 426,179 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||
Employee share purchase plan | 50 | 200 | - | - | - | - | 200 | 67 | 326 | - | - | - | - | 326 | ||||||||||||||||||||||||||||
Stock incentive plan | 143 | 941 | (418 | ) | - | - | - | 523 | 169 | 1,157 | (569 | ) | - | - | - | 588 | ||||||||||||||||||||||||||
Stock-based compensation | - | - | 1,992 | - | - | - | 1,992 | - | - | 3,173 | - | - | - | 3,173 | ||||||||||||||||||||||||||||
Loss from continuing operations | - | - | - | (13,787 | ) | - | 507 | (13,280 | ) | - | - | - | (17,142 | ) | - | 4 | (17,138 | ) | ||||||||||||||||||||||||
Currency translation adjustment | - | - | - | - | (160 | ) | (247 | ) | (407 | ) | - | - | - | - | 508 | (226 | ) | 282 | ||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||||||||||||||
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 July 2, 2016 | 85,611 | 299,128 | 23,901 | 92,481 | (11,367 | ) | 3,082 | 407,225 | ||||||||||||||||||||||||||||||||||
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 |
(Unaudited) |
(Expressed in thousands of U.S. dollars) |
Quarter ended | Three quarters ended | |||||||||||||||||||||||
Quarter ended | Two quarters ended | September 30, | September 30, | |||||||||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | 2017 | October 1, 2016 | 2017 | October 1, 2016 | |||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
CASH PROVIDED BY (USED IN) | ||||||||||||||||||||||||
| ||||||||||||||||||||||||
Operating activities | ||||||||||||||||||||||||
Loss | (102 | ) | (4,001 | ) | (11,286 | ) | (13,850 | ) | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,708 | ) | ||||||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | - | - | - | (570 | ) | ||||||||||||||
Loss from continuing operations | (102 | ) | (4,001 | ) | (11,286 | ) | (13,280 | ) | (5,883 | ) | (3,858 | ) | (17,169 | ) | (17,138 | ) | ||||||||
Items not affecting cash: | ||||||||||||||||||||||||
Depreciation and amortization | 8,167 | 8,549 | 16,347 | 17,309 | 8,254 | 8,646 | 24,601 | 25,955 | ||||||||||||||||
Amortization and write-off of debt issuance costs | 652 | 2,854 | 1,138 | 6,222 | 613 | 3,988 | 1,751 | 10,210 | ||||||||||||||||
Deferred income taxes | (3,823 | ) | (10,821 | ) | (9,915 | ) | (14,508 | ) | (3,425 | ) | (5,252 | ) | (13,340 | ) | (19,760 | ) | ||||||||
Stock-based compensation | 1,286 | 953 | 2,138 | 1,992 | 1,995 | 1,181 | 4,133 | 3,173 | ||||||||||||||||
Unrealized gain on derivative instruments (note 5) | (1,267 | ) | (306 | ) | (1,229 | ) | (515 | ) | ||||||||||||||||
Fair value of contingent consideration (note 11) | 204 | (1,603 | ) | 204 | (1,405 | ) | ||||||||||||||||||
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) | - | - | 3,723 | 1,735 | 4,467 | 10,300 | 8,190 | 12,035 | ||||||||||||||||
Acquisition accounting adjustment on inventory sold | - | 3,888 | - | 11,514 | - | 1,890 | - | 13,404 | ||||||||||||||||
Other | (244 | ) | 367 | (101 | ) | 407 | 55 | (64 | ) | (46 | ) | 343 | ||||||||||||
Changes in non-cash working capital (note 13) | (30,648 | ) | (34,294 | ) | (7,313 | ) | (61,779 | ) | ||||||||||||||||
Changes in non-cash working capital (note 14) | (18,006 | ) | 836 | (25,319 | ) | (60,943 | ) | |||||||||||||||||
Net cash flows from operations - continuing operations | (25,775 | ) | (34,414 | ) | (6,294 | ) | (52,308 | ) | (11,093 | ) | 17,042 | (17,387 | ) | (35,266 | ) | |||||||||
Net cash flows from operations - discontinued operations | - | - | - | 758 | - | - | - | 758 | ||||||||||||||||
| (25,775 | ) | (34,414 | ) | (6,294 | ) | (51,550 | ) | (11,093 | ) | 17,042 | (17,387 | ) | (34,508 | ) | |||||||||
Investing activities | ||||||||||||||||||||||||
Purchases of property, plant and equipment | (7,143 | ) | (4,793 | ) | (16,167 | ) | (9,340 | ) | (6,527 | ) | (5,463 | ) | (22,694 | ) | (14,803 | ) | ||||||||
Proceeds from sale of assets | 51 | - | 301 | - | 475 | - | 776 | - | ||||||||||||||||
Acquisition of non-controlling interests (note 3) | (1,737 | ) | - | (1,737 | ) | - | ||||||||||||||||||
Other | 254 | 700 | 364 | 700 | 5 | - | 369 | 700 | ||||||||||||||||
Net cash flows from investing activities - continuing operations | (6,838 | ) | (4,093 | ) | (15,502 | ) | (8,640 | ) | (7,784 | ) | (5,463 | ) | (23,286 | ) | (14,103 | ) | ||||||||
Net cash flows from investing activities - discontinued operations | - | 1,945 | - | 1,754 | - | - | - | 1,754 | ||||||||||||||||
| (6,838 | ) | (2,148 | ) | (15,502 | ) | (6,886 | ) | (7,784 | ) | (5,463 | ) | (23,286 | ) | (12,349 | ) | ||||||||
| ||||||||||||||||||||||||
Financing activities | ||||||||||||||||||||||||
Increase under line of credit facilities (note 7) | 36,690 | 39,029 | 29,349 | 271,572 | ||||||||||||||||||||
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) | (589 | ) | (523 | ) | (1,116 | ) | (11,009 | ) | ||||||||||||||||
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 | ) | - | (3,291 | ) | - | (1,700 | ) | - | (4,991 | ) | - | ||||||||||||
Proceeds from the exercise of stock options and employee share purchases | 2,535 | 575 | 3,629 | 687 | 1,052 | 227 | 4,681 | 914 | ||||||||||||||||
Payment of contingent consideration (note 5) | (4,330 | ) | (4,554 | ) | (4,330 | ) | (4,554 | ) | ||||||||||||||||
Payment of debt issuance costs | - | (256 | ) | - | (4,366 | ) | (206 | ) | (1,179 | ) | (206 | ) | (5,545 | ) | ||||||||||
Payment of contingent consideration (note 6) | - | - | (4,330 | ) | (4,554 | ) | ||||||||||||||||||
Other | (101 | ) | (119 | ) | (303 | ) | (134 | ) | 13 | 8 | (290 | ) | (126 | ) | ||||||||||
Net cash flows from financing activities - continuing operations | 32,505 | 34,152 | 23,938 | 59,951 | 18,234 | (14,561 | ) | 42,172 | 45,390 | |||||||||||||||
Net cash flows from financing activities - discontinued operations | - | - | - | (1,180 | ) | - | - | - | (1,180 | ) | ||||||||||||||
32,505 | 34,152 | 23,938 | 58,771 | 18,234 | (14,561 | ) | 42,172 | 44,210 | ||||||||||||||||
Foreign exchange gain (loss) on cash held in a foreign currency | 54 | (61 | ) | 64 | (24 | ) | ||||||||||||||||||
Foreign exchange gain on cash held in a foreign currency | 41 | 329 | 105 | 305 | ||||||||||||||||||||
Increase (decrease) in cash and cash equivalents in the period | (54 | ) | (2,471 | ) | 2,206 | 311 | (602 | ) | (2,653 | ) | 1,604 | (2,342 | ) | |||||||||||
Discontinued operations cash activity included above: | ||||||||||||||||||||||||
Add: Balance included at beginning of period | - | 1,288 | - | 1,707 | - | - | - | 1,707 | ||||||||||||||||
Less: Balance included at end of period | - | - | - | - | - | - | - | - | ||||||||||||||||
Cash and cash equivalents - beginning of the period | 3,511 | 5,475 | 1,251 | 2,274 | 3,457 | 4,292 | 1,251 | 2,274 | ||||||||||||||||
Cash and cash equivalents - end of the period | 3,457 | 4,292 | 3,457 | 4,292 | 2,855 | 1,639 | 2,855 | 1,639 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc. |
Consolidated Statements of Cash Flows (continued) |
For the quarters and |
(Unaudited) |
(Expressed in thousands of U.S. dollars) |
Quarter ended | Two quarters ended | |||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Non-cash investing and financing activities | ||||||||||||
Accrued cash dividends on Series A Preferred Stock (note 8) | (1,700 | ) | - | (1,700 | ) | - | ||||||
Proceeds on disposition of discontinued operation, note receivable (note 3) | - | 1,537 | - | 1,537 |
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. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(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.
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 accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and twothree quarters ended July 1,September 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 30, 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 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 December 31, 2016.
Fiscal Year
The fiscal year of the Company consists of a 52- or 53-week period ending on the Saturday closest to December 31. Fiscal year 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 was a 52-week period ending on December 31, 2016, with quarterly periods ending on April 2, July 2 and October 1, 2016.
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 flows, including contingent consideration payments made after a business combination. As permitted, the Company elected to early adopt the guidance as at December 31, 2016 on a retrospective basis. In connection with the adoption of ASU 2016-15, the Company reclassified $4.6 million of contingent consideration payments from investing activities to financing activities on the comparative consolidated statement of cash flows for the quarter and twothree quarters ended July 2,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. The Company adopted 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 time of grant. The cumulative effect of this change 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 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 |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Recently Issued Accounting Standards, Not Adopted as at July 1,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 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. During 2016, the FASB issued ASU 2016-08, ASU 2016-10, 2016-11, 2016-12 and 2016-20, all of which clarify certain implementation guidance 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 adoption is permitted only as of annual and interim reporting periods beginning on or after December 15, 2016; however, the Company has elected not to early adopt the standard.
The Company currently expects to adopt the standard using the modified retrospective approach; however, that expectation is subject to change once the Company completes its evaluation and quantification of the impact of the guidance. With the assistance of a third party, the Company is analyzinganalyzed its significant customer relationships to determine the effects of ASU 2014-09. In particular, the Company is assessingassessed under the new guidance whether its existing contracts with customers to produce private label consumer productscertain consumer-packaged goods would permit the Company to recognize revenue over time versus at a point in time, based on whether athe 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. TheBased on its assessment to date, the Company has tentatively concluded that it does not completed its assessment or determined whether a changesatisfy the criteria to recognizingrecognize revenue over time, if required, wouldand, 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 of ASU 2014-09 to have a significantmaterial impact on its consolidated financial statements and revenue recognition practices, or its internal controls. The Company expects to adopt ASU 2014-09 using the Company’s reported revenuesmodified retrospective approach. The Company is currently in the process of finalizing its assessment, and earnings. Once this assessment is completed, the Company will work towards establishing policies, updatingreviewing its processes, and implementing necessary changesdisclosures for revenue recognition to be able to complyconform with the new requirements.disclosure requirements of the standard.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
2. Value Creation Plan
Overview
On October 7, 2016, the Company 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 Company’s wholly-owned subsidiary, SunOpta Foods Inc. (“SunOpta Foods”) (see note 8)9). The Company conducted, with the assistance of Oaktree, a thorough review of its operations, management and governance, 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 twothree quarters of 2017, further measures were taken under the Value Creation Plan, including the exit from the San Bernardino facility and equipment leases.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. In the first half of 2017, theThe 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 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.
SUNOPTA INC. | 14 | 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) |
Continuity of Costs Incurred Under the Value Creation Plan
The following table summarizes actual costs incurred since the inception of the Value Creation Plan to July 1,September 30, 2017:
(a) | (b) | (c) | ||||||||||||||||||||||
(a) | (b) | (c) | Employee | |||||||||||||||||||||
Impairment of | Employee | Asset | recruitment, | Consulting | ||||||||||||||||||||
long-lived assets | recruitment, | Consulting fees | impairments | retention and | fees and | |||||||||||||||||||
and facility | retention and | and temporary | and facility | termination | temporary | |||||||||||||||||||
closure costs | termination costs | labor costs | Total | closure costs | costs | labor costs | Total | |||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Fiscal 2016 | ||||||||||||||||||||||||
Costs incurred and charged to expense | 11,522 | 2,763 | 4,041 | 18,326 | 10,300 | - | 483 | 10,783 | ||||||||||||||||
Cash payments | - | (694 | ) | (2,384 | ) | (3,078 | ) | - | - | (483 | ) | (483 | ) | |||||||||||
Non-cash adjustments | (11,522 | ) | (266 | ) | - | (11,788 | ) | (10,300 | ) | - | - | (10,300 | ) | |||||||||||
Balance payable, December 31, 2016 | - | 1,803 | 1,657 | 3,460 | ||||||||||||||||||||
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 | 4,095 | 3,478 | 9,710 | 17,283 | ||||||||||||||||
Cash payments | (3,581 | ) | (2,578 | ) | (1,774 | ) | (7,933 | ) | (3,581 | ) | (2,578 | ) | (1,774 | ) | (7,933 | ) | ||||||||
Non-cash adjustments | (714 | ) | 276 | - | (438 | ) | (714 | ) | 276 | - | (438 | ) | ||||||||||||
Balance payable (receivable), April 1, 2017 | (200 | ) | 2,979 | 9,593 | 12,372 | |||||||||||||||||||
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 | 262 | 2,550 | 4,876 | 7,688 | ||||||||||||||||
Cash payments | (262 | ) | (2,685 | ) | (9,538 | ) | (12,485 | ) | (262 | ) | (2,685 | ) | (9,538 | ) | (12,485 | ) | ||||||||
Non-cash adjustments | - | 51 | - | 51 | - | 51 | - | 51 | ||||||||||||||||
Balance payable (receivable), July 1, 2017 | (200 | ) | 2,895 | 4,931 | 7,626 | |||||||||||||||||||
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) | Balance payable was included in accounts payable and accrued liabilities and balance receivable was included in accounts receivable on the consolidated balance sheets. |
(a) |
|
| |
For fiscal 2017, represents an additional asset impairment loss of $3.7 million recorded in the first quarter |
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
In addition, represents asset impairment losses recorded in the third quarter of 2017 related to the exit from flexible resealable pouch and nutrition bar product lines and operations as described above.
(b) | Employee recruitment, retention and termination costs |
Represents third-party recruiting fees incurred to identify and retain new employees; reimbursement of relocation costs for new employees; retention and signing bonuses accrued for certain existing and new employees; and severance benefits, net of forfeitures of stock-based awards, and legal costs related to employee terminations. Some employee termination costs will be paid out in periods after termination. Retention bonuses will be paid out to employees who remain employed by the Company through specified retention dates. Certain employees will be entitled to pro-rata payouts of their retention bonuses if their employment terminates earlier than their retention payment date. | |
(c) | Consulting fees and temporary labor costs |
Represents the cost for third-party consultants and temporary labor engaged to support the design and implementation of the Value Creation Plan. |
For the quarter and twothree quarters ended July 1,September 30, 2017, costs incurred and charged to expense were recorded in the consolidated statement of operations as follows:
Two quarters | Quarter ended | Three quarters ended | ||||||||||||||||
Quarter ended | ended | September 30, | October 1, | September 30, | October 1, | |||||||||||||
July 1, 2017 | July 1, 2017 | 2017 | 2016 | 2017 | 2016 | |||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Cost of goods sold(1) | 262 | 634 | 1,287 | - | 1,921 | - | ||||||||||||
Selling, general and administrative expenses(2) | 7,001 | 18,439 | 2,400 | 483 | 20,839 | 483 | ||||||||||||
Other expense(3) | 425 | 5,898 | 6,569 | 10,300 | 12,467 | 10,300 | ||||||||||||
7,688 | 24,971 | 10,256 | 10,783 | 35,227 | 10,783 |
(1) |
| |
(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. |
The Company estimates remaining third-party consulting and employee recruitment, retention and termination costs related to the Value Creation Plan to be incurred and expensed during the second halffourth quarter of fiscal 2017 will be approximately $4 million.$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. Costs incurred through the second quarter
3. Acquisition of 2017 related to the Value Creation Plan were higher than expected, due to the extended support of third-party consultants to assist with certain initiatives, including food safety and quality, procurement, and enhancements to our enterprise resource planning systems.Non-Controlling Interests in Mexican Subsidiary
In the fourth quarter ofOn July 28, 2017, the Company intendsacquired 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 discontinue flexible resealable pouch products as part of the Value Creation Plan and to sell the related production equipment (see note 16)100%. The Company expects to incuracquired its initial 75% interest in Opus through the acquisition of Sunrise Holdings (Delaware), Inc. (“Sunrise”) in October 2015. Opus owns and operates a lossfrozen 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 $8.0 million to $9.0 millionthe non-controlling interest related to the sale of the flexible resealable pouch assets.Opus being recognized in additional paid-in capital.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
3.4. Discontinued Operation
On April 6, 2016, the Company completed the sale of its 66% holding of common shares of Opta Minerals Inc. (“Opta Minerals”) to Speyside Equity 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. The Company has no significant continuing involvement with Opta Minerals.
The following table reconciles the major components of the results of discontinued operations to the amounts reported in the consolidated statement of operations for the twothree quarters ended July 2,October 1, 2016:
$ | |||
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 classification as held for sale before income taxes | 560 | ||
Total pre-tax loss from discontinued operations | (1,433 | ) | |
Recovery of income taxes | 599 | ||
Loss from discontinued operations | (834 | ) | |
Loss from discontinued operations attributable to non-controlling interest | 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. As at July 1, 2017 and December 31, 2016, the Company recognized estimatedEstimated losses related to the recall oftotaled $47.0 million andas at September 30, 2017, compared to $40.0 million respectively, whichas at December 31, 2016, comprised of estimates for customer losses and direct incremental costs incurred by the Company. The estimates for customer losses reflected the cost of the affected sunflower kernel products 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. The incremental costs incurred directly by the Company do not include lost earnings associated with the interruption of production at the Company’s roasting facilities, or the costs to put into place corrective and preventive actions at those facilities.
The Company’s estimates for 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 at July 1,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 has general liability and product recall insurance policies with aggregate limits of $47.0 million under which it is expectingexpects to recover recall-related costs, less applicable deductibles. The Company recognizes expected insurance recoveries in the period in which the recoveries are determined to be probable of realization. As at July 1,September 30, 2017, the Company hashad recognized recoveries up to the limit of the coverage available under its insurance policies. Consequently, 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.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
As at July 1,September 30, 2017, $23.2$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 $20.8$11.1 million included in accounts receivable on the consolidated balance sheet as at July 1,September 30, 2017, which iswas net of $25.6$35.3 million of advances the Company received from its insurance providers prior to July 1,September 30, 2017. As at July 1,September 30, 2017, the Company had settled customer claims and direct costs in the amount of $23.8$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 July 1,September 30, 2017 and December 31, 2016:
July 1, 2017 | 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 | 544 | 5 | 539 | - | Unrealized short-term derivative asset | 376 | 54 | 322 | - | |||||||||||||||||||
Unrealized long-term derivative asset | 3 | - | 3 | - | Unrealized short-term derivative liability | (242 | ) | - | (242 | ) | - | |||||||||||||||||
Unrealized short-term derivative liability | (323 | ) | - | (323 | ) | - | Unrealized long-term derivative liability | (2 | ) | - | (2 | ) | - | |||||||||||||||
Unrealized long-term derivative liability | (9 | ) | - | (9 | ) | - | ||||||||||||||||||||||
(b) | Inventories carried at market(2) | 3,179 | - | 3,179 | - | |||||||||||||||||||||||
Inventories carried at market(2) | 4,107 | - | 4,107 | - | Forward foreign currency contracts | |||||||||||||||||||||||
Forward foreign currency contracts | Not designated as hedging instruments(3) | (1,237 | ) | - | (1,237 | ) | - | |||||||||||||||||||||
Not designated as hedging instruments(3) | (1,579 | ) | - | (1,579 | ) | - | Designated as a hedging instruments(4) | 368 | - | 368 | - | |||||||||||||||||
Designated as a hedging instruments(4) | 1,176 | - | 1,176 | - | ||||||||||||||||||||||||
(d) | Contingent consideration(5) | (11,236 | ) | - | - | (11,236 | ) | |||||||||||||||||||||
Contingent consideration(5) | (11,153 | ) | - | - | (11,153 | ) | Embedded derivative(6) | 2,690 | - | - | 2,690 | |||||||||||||||||
(e) | Embedded derivative(6) | 2,690 | - | - | 2,690 |
December 31, 2016 | |||||||||||||||
Fair value | |||||||||||||||
asset (liability) | Level 1 | Level 2 | Level 3 | ||||||||||||
$ | $ | $ | $ | ||||||||||||
(a) | Commodity futures and forward contracts(1) | ||||||||||||||
Unrealized short-term derivative asset | 787 | 43 | 744 | - | |||||||||||
Unrealized short-term derivative liability | (916 | ) | - | (916 | ) | - | |||||||||
Unrealized long-term derivative liability | (8 | ) | - | (8 | ) | - | |||||||||
(b) | Inventories carried at market(2) | 8,231 | - | 8,231 | - | ||||||||||
(c) | Forward foreign currency contracts | ||||||||||||||
Not designated as hedging instruments(3) | 1,345 | - | 1,345 | - | |||||||||||
(d) | Contingent consideration(5) | (15,279 | ) | - | - | (15,279 | ) | ||||||||
(e) | Embedded derivative(6) | 2,944 | - | - | 2,944 |
(1) | Unrealized short-term derivative asset | |
(2) | Inventories carried at market | |
(3) | Forward foreign currency contracts not designated as a hedge | |
| ||
| ||
|
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(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 were included in long-term liabilities (including the current portion thereof) on the consolidated balance sheets. | |
(6) | The embedded derivative was included in other assets (long-term) on the consolidated balance sheets. |
(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 | |
As at |
Number of bushels purchased (sold) | ||||||
Corn | Soybeans | |||||
Forward commodity purchase contracts | 49 | 119 | ||||
Forward commodity sale contracts | (261 | ) | (782 | ) | ||
Commodity futures contracts | (100 | ) | 375 |
SUNOPTA INC. | 23 | 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) |
The Notes are subject to covenants that, among other things, limit the Company’s ability to (i) incur additional debt or issue preferred stock; (ii) pay dividends and make certain types of investments and other restricted payments; (iii) create liens; (iv) enter into transactions with affiliates; (v) sell assets; and (vi) create restrictions on the ability of restricted subsidiaries to pay dividends, make loans or advances or transfer assets to the Company, SunOpta Foods or any guarantor of the Notes. The 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.
8.On October 19, 2017, the Company repaid $7.5 million principal amount of the Notes at 103.000% .
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 carrying value of the Preferred Stock is being accreted to the redemption amount of $85.0 million through charges to retained earnings over the period preceding the fifth anniversary of the Closing Date, which accretion amounted to $0.5$0.3 million and $0.7 million for the twoquarter and three quarters ended July 1,September 30, 2017, and $0.7 million from the Closing Date.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 July 1,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 shares of common stock of the Company (the “Common Shares”)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 July 1,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 holders of Common Shares, shares of Preferred Stock were not exchangeable into more than 19.99% of the number of Common Shares outstanding immediately after giving effect to such exchange (the “Beneficial Ownership Exchange Cap”). On May 24, 2017, the holders of Common Shares approved the removal of the Beneficial Ownership Exchange Cap.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
In connection with the Subscription Agreement, the Company issued Special Shares, Series 1 (the “Special Voting Shares”) 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. 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 July 1,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 are entitled to designate up to two nominees for election to the Board of Directors of the Company (the “Board”) and have the right to designate one individual to attend meetings of the Board as a non-voting observer, subject to 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.
9.10. Stock-Based Compensation
Stock Incentive Plan
For the twothree quarters ended July 1,September 30, 2017, the Company granted 823,236872,285 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 $4.24.$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 | $ | | |
Exercise price | $ | | |
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 $3.5$3.7 million, which will be recognized on a straight-line basis over the three-year vesting period.
For the twothree quarters ended July 1,September 30, 2017, the Company also granted 1,386,3351,440,737 performance share units (“PSU”) to selected employees and 653,982702,504 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. | 25 | 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) |
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 $5.90,$5.85, based on the following inputs to the valuation model:
Grant-date stock price | $ | | |
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 $8.2$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 $9.31,$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 $6.1$6.5 million will be recognized on a straight-line basis over the weighted-average vesting period of 2.7 years.
CEO Plan
On February 6, 2017, David Colo was appointed President and CEO of the Company. 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 of the RSUs granted were contingent on Mr. Colo purchasing Common Shares with an aggregate value of $1.0 million of Common Shares in the open market.
The vesting of the Special Stock Options and Special Performance Units is subject to: (i) Mr. Colo’s continued employment with the 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.
The 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 following inputs to the valuation model:
Special | Special | |||||||||||
Special Stock | Performance | Special Stock | Performance | |||||||||
Options | Units | Options | Units | |||||||||
Grant-date stock price | $ | 7.00 $ | 7.00 | $ | 7.00 | $ | 7.00 | |||||
Exercise price | $ | 7.00 | NA | $ | 7.00 | NA | ||||||
Dividend yield | 0% | 0% | 0% | 0% | ||||||||
Expected volatility(1) | 42.0% | 42.0% | 42.0% | 42.0% | ||||||||
Risk-free interest rate(2) | 2.2% | 1.5% | 2.2% | 1.5% | ||||||||
Expected life (in years)(3) | 6.5 | 3.0 | 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 aggregate grant-date fair value of the Special Stock Options and Special Performance Units awarded to Mr. Colo was $1.6 million, which will be recognized on a straight-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 of the Common Shares as of the date of 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.
10.11. Accumulated Other Comprehensive Loss
Net unrealized gains/(losses) recorded in accumulated other comprehensive loss were as follows:
September 30, | December 31, | |||||||||||
July 1, 2017 | December 31, 2016 | 2017 | 2016 | |||||||||
$ | $ | $ | $ | |||||||||
Currency translation adjustment | (9,684 | ) | (13,104 | ) | (8,185 | ) | (13,104 | ) | ||||
Cash flow hedges, net of income taxes | 157 | - | 257 | - | ||||||||
(9,527 | ) | (13,104 | ) | (7,928 | ) | (13,104 | ) |
11.12. Other Expense, Net
The components of other expense (income) were as follows:
Quarter ended | Three quarters ended | |||||||||||||||||||||||
Quarter ended | Two quarters ended | September 30, | October 1, | September 30, | October 1, | |||||||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Impairment of long-lived assets(1) | - | - | 3,723 | 1,735 | 4,467 | 10,300 | 8,190 | 12,035 | ||||||||||||||||
Employee severance costs(2) | 425 | 543 | 2,175 | 1,015 | ||||||||||||||||||||
Employee termination costs(2) | 2,052 | 138 | 4,227 | 1,153 | ||||||||||||||||||||
Product withdrawal and recall costs(3) | - | 229 | 279 | 1,697 | 134 | - | 413 | 1,697 | ||||||||||||||||
Increase (decrease) in fair value of contingent consideration(4) | 84 | (1,603 | ) | 204 | (1,405 | ) | 83 | 124 | 287 | (1,281 | ) | |||||||||||||
Legal settlement(5) | - | 9,000 | - | 9,000 | (1,024 | ) | - | (1,024 | ) | 9,000 | ||||||||||||||
Other | 98 | 264 | (331 | ) | 369 | 260 | (250 | ) | (71 | ) | 119 | |||||||||||||
607 | 8,433 | 6,050 | 12,411 | 5,972 | 10,312 | 12,022 | 22,723 |
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(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, for 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 Holdings (Delaware), Inc. (“Sunrise”) in October 2015.
(2) | Employee |
For the quarter and | |
For the quarter and | |
(3) | Product withdrawal and recall costs |
For the | |
For the quarter and | |
(4) |
|
For all periods presented, reflected the | |
(5) | Legal settlement |
|
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
12.13. Loss Per Share
Basic and diluted loss per share were calculated as follows (shares in thousands):
Quarter ended | Three quarters ended | |||||||||||||||||||||||
Quarter ended | Two quarters ended | September | October 1, | September | October 1, | |||||||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | 30, 2017 | 2016 | 30, 2017 | 2016 | |||||||||||||||||
Numerator for basic loss per share: | ||||||||||||||||||||||||
Loss from continuing operations, less amount attributable to non-controlling interests | $ | (408 | ) | $ | (4,124 | ) | $ | (11,806 | ) | $ | (13,787 | ) | $ | (6,027 | ) | $ | (3,355 | ) | $ | (17,833 | ) | $ | (17,142 | ) |
Less: dividends and accretion on Series A Preferred Stock | (1,954 | ) | - | (3,894 | ) | - | (1,954 | ) | - | (5,848 | ) | - | ||||||||||||
Loss from continuing operations available to common shareholders | (2,362 | ) | (4,124 | ) | (15,700 | ) | (13,787 | ) | (7,981 | ) | (3,355 | ) | (23,681 | ) | (17,142 | ) | ||||||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | - | - | - | (570 | ) | ||||||||||||||
Loss available to common shareholders | $ | (2,362 | ) | $ | (4,124 | ) | $ | (15,700 | ) | $ | (14,357 | ) | $ | (7,981 | ) | $ | (3,355 | ) | $ | (23,681 | ) | $ | (17,712 | ) |
Denominator for basic loss per share: | ||||||||||||||||||||||||
Basic weighted-average number of shares outstanding | 86,213 | 85,541 | 86,062 | 85,483 | 86,541 | 85,619 | 86,232 | 85,529 | ||||||||||||||||
Basic loss per share: | ||||||||||||||||||||||||
- from continuing operations | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.18 | ) | $ | (0.16 | ) | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.27 | ) | $ | (0.20 | ) |
- from discontinued operations | - | - | - | (0.01 | ) | - | - | - | (0.01 | ) | ||||||||||||||
$ | (0.03 | ) | $ | (0.05 | ) | $ | (0.18 | ) | $ | (0.17 | ) | $ | (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 | $ | (408 | ) | $ | (4,124 | ) | $ | (11,806 | ) | $ | (13,787 | ) | $ | (6,027 | ) | $ | (3,355 | ) | $ | (17,833 | ) | $ | (17,142 | ) |
Less: dividends and accretion on Series A Preferred Stock(1) | (1,954 | ) | - | (3,894 | ) | - | (1,954 | ) | - | (5,848 | ) | - | ||||||||||||
Loss from continuing operations available to common shareholders | (2,362 | ) | (4,124 | ) | (15,700 | ) | (13,787 | ) | (7,981 | ) | (3,355 | ) | (23,681 | ) | (17,142 | ) | ||||||||
Loss from discontinued operations attributable to SunOpta Inc. | - | - | - | (570 | ) | - | - | - | (570 | ) | ||||||||||||||
Loss available to common shareholders | $ | (2,362 | ) | $ | (4,124 | ) | $ | (15,700 | ) | $ | (14,357 | ) | $ | (7,981 | ) | $ | (3,355 | ) | $ | (23,681 | ) | $ | (17,712 | ) |
Denominator for diluted loss per share: | ||||||||||||||||||||||||
Basic weighted-average number of shares outstanding | 86,213 | 85,541 | 86,062 | 85,483 | 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 | 86,213 | 85,541 | 86,062 | 85,483 | 86,541 | 85,619 | 86,232 | 85,529 | ||||||||||||||||
Diluted loss per share: | ||||||||||||||||||||||||
- from continuing operations | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.18 | ) | $ | (0.16 | ) | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.27 | ) | $ | (0.20 | ) |
- from discontinued operations | - | - | - | (0.01 | ) | - | - | - | (0.01 | ) | ||||||||||||||
$ | (0.03 | ) | $ | (0.05 | ) | $ | (0.18 | ) | $ | (0.17 | ) | $ | (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 |
(2) | For the quarter and |
13.14. Supplemental Cash Flow Information
Quarter ended | Three quarters ended | |||||||||||||||||||||||
Quarter ended | Two quarters ended | September 30, | October 1, | September 30, | October 1, | |||||||||||||||||||
July 1, 2017 | July 2, 2016 | July 1, 2017 | July 2, 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Changes in non-cash working capital: | ||||||||||||||||||||||||
Accounts receivable | 18,768 | (16,910 | ) | 7,641 | (33,747 | ) | 5,113 | (22,302 | ) | 12,754 | (56,049 | ) | ||||||||||||
Inventories | (32,271 | ) | (49,777 | ) | (5,913 | ) | (39,910 | ) | 15,100 | 5,150 | 9,187 | (34,760 | ) | |||||||||||
Income tax recoverable/payable | (3,339 | ) | 4,353 | (4,799 | ) | 5,384 | (552 | ) | 9,423 | (5,351 | ) | 14,807 | ||||||||||||
Prepaid expenses and other current assets | (4,813 | ) | 1,707 | (9,546 | ) | (606 | ) | (6,695 | ) | (1,985 | ) | (16,241 | ) | (2,591 | ) | |||||||||
Accounts payable and accrued liabilities | (5,715 | ) | 29,114 | 6,695 | 10,944 | (30,455 | ) | 10,999 | (23,760 | ) | 21,943 | |||||||||||||
Customer and other deposits | (3,278 | ) | (2,781 | ) | (1,391 | ) | (3,844 | ) | (517 | ) | (449 | ) | (1,908 | ) | (4,293 | ) | ||||||||
(30,648 | ) | (34,294 | ) | (7,313 | ) | (61,779 | ) | (18,006 | ) | 836 | (25,319 | ) | (60,943 | ) |
14.15. 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 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.
Other Claims
In addition, various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.
15. Segmented Information
The composition of the Company’s reportable segments is as follows:
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
16. Segmented Information
The composition of the Company’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 each of the Company’s 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/loss to assess performance and allocate resources. Segment operating income/loss 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 | Quarter ended | |||||||||||||||||
July 1, 2017 | September 30, 2017 | |||||||||||||||||
Global | Consumer | Global | Consumer | |||||||||||||||
Ingredients | Products | Consolidated | Ingredients | Products | Consolidated | |||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Segment revenues from external customers | 149,423 | 187,031 | 336,454 | 140,533 | 180,180 | 320,713 | ||||||||||||
Segment operating income | 8,372 | 4,220 | 12,592 | 5,265 | 4,528 | 9,793 | ||||||||||||
Corporate Services | (9,973 | ) | (4,832 | ) | ||||||||||||||
Other expense, net (see note 11) | (607 | ) | ||||||||||||||||
Other expense, net (see note 12) | (5,972 | ) | ||||||||||||||||
Interest expense, net | (7,695 | ) | (8,371 | ) | ||||||||||||||
Loss from continuing operations before income taxes | (5,683 | ) | (9,382 | ) |
Quarter ended | |||||||||
July 2, 2016 | |||||||||
Global | Consumer | ||||||||
Ingredients | Products | Consolidated | |||||||
$ | $ | $ | |||||||
Segment revenues from external customers | 158,498 | 189,648 | 348,146 | ||||||
Segment operating income | 10,411 | 663 | 11,074 | ||||||
Corporate Services | (2,229 | ) | |||||||
Other expense, net (see note 11) | (8,433 | ) | |||||||
Interest expense, net | (11,548 | ) | |||||||
Loss from continuing operations before income taxes | (11,136 | ) |
Two quarters ended | Quarter ended | |||||||||||||||||
July 1, 2017 | October 1, 2016 | |||||||||||||||||
Global | Consumer | Global | Consumer | |||||||||||||||
Ingredients | Products | Consolidated | Ingredients | Products | Consolidated | |||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Segment revenues from external customers | 279,714 | 386,771 | 666,485 | 137,174 | 211,558 | 348,732 | ||||||||||||
Segment operating income | 13,123 | 10,168 | 23,291 | 7,404 | 8,104 | 15,508 | ||||||||||||
Corporate Services | (23,628 | ) | (2,287 | ) | ||||||||||||||
Other expense, net (see note 11) | (6,050 | ) | ||||||||||||||||
Other expense, net (see note 12) | (10,312 | ) | ||||||||||||||||
Interest expense, net | (15,449 | ) | (12,178 | ) | ||||||||||||||
Loss from continuing operations before income taxes | (21,836 | ) | (9,269 | ) |
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters and |
(Unaudited) |
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Two quarters ended | |||||||||
July 2, 2016 | |||||||||
Global | Consumer | ||||||||
Ingredients | Products | Consolidated | |||||||
$ | $ | $ | |||||||
Segment revenues from external customers | 304,520 | 395,940 | 700,460 | ||||||
Segment operating income (loss) | 16,852 | (1,115 | ) | 15,737 | |||||
Corporate Services | (4,257 | ) | |||||||
Other expense, net (see note 11) | (12,411 | ) | |||||||
Interest expense, net | (22,570 | ) | |||||||
Loss from continuing operations before income taxes | (23,501 | ) |
16. Subsequent Events
Acquisition of Non-Controlling Interests in Mexican Subsidiary
On July 28, 2017, the Company acquired all of the capital stock of Opus Foods Mexico, S.A. de C.V. (“Opus”) held by the non-controlling interests for $1.9 million. This acquisition increased the Company’s equity ownership in Opus from 75% to 100%. Opus owns and operates a frozen fruit processing facility located in central Mexico. The Company acquired its initial 75% interest in Opus through the acquisition of Sunrise.
Rationalization of Flexible Resealable Pouch 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 Company’s Allentown, Pennsylvania facility for gross proceeds of $2.0 million. The asset sale is in conjunction with the Company’s decision to discontinue flexible resealable pouch products as part of its ongoing portfolio optimization strategy and Value Creation Plan. The transaction is expected to close during the fourth quarter of 2017. The Company will continue 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.
Revenues from sales of flexible resealable pouch products were $9.3 million and $19.2 million for the quarter and two quarters ended July 1, 2017, respectively, compared with $11.2 million and $24.6 million for the quarter and two quarters ended July 2, 2016, respectively. The production and sale of these products resulted in gross profit losses of $1.2 million and $2.7 million for the quarter and two quarters ended July 1, 2017, respectively, compared with gross profit of $0.2 million and $0.4 million for the quarter and two quarters ended July 2, 2016, respectively. Revenues and gross profit losses from sales of flexible resealable pouch products during the third quarter of 2017 are expected to be similar to those recorded during the second quarter. Depending on the closing date of the sale of the resealable pouch assets, the Company also expects to record a proportionate amount of revenue and gross profit losses from sales of flexible resealable pouch products during the fourth quarter of 2017.
The Company expects to record a loss on the sale of the flexible resealable pouch assets of $8.0 million to $9.0 million, including costs related to the early termination of the related equipment leases at the closing date. The flexible resealable pouch operations are included in the Consumer Products operating segment. As the flexible resealable pouch operations do not qualify for presentation as discontinued operations, operating results from these operations will continue to be reported in continuing operations on the consolidated statements of operations for the year ended December 30, 2017.
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. |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended July 1,September 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 December 31, 2016 (“Form 10-K”). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to August 9,November 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
SunOpta 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 leading 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 business in the 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. |
Fiscal 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 was a 52-week period ending on December 31, 2016, with quarterly periods ending on April 2, July 2 and October 1, 2016.
Value Creation Plan
On October 7, 2016, we 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 our wholly-owned subsidiary, SunOpta Foods Inc. (“SunOpta Foods”).
Following the 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. As a product of this review our management and the Board of Directors developed a Value Creation Plan built on four pillars: portfolio optimization, operational excellence, go-to-market effectiveness and process sustainability. The Value Creation Plan is a broad-based initiative focused on increasing shareholder value through strategic investments made to the people and assets of the Company to deliver sustained profitable growth. We expect the Value Creation Plan to be implemented in phases, and span several years.
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 be 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 secondthird 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 structural advantages exist, while exiting businesses or product lines where we are not effectively positioned. Recent highlights include:
• | 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 the Value Creation Plan, we have implemented portfolio changes that are expected to yield $4.2approximately $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 nutrition bar product lines.
SUNOPTA INC. |
Operational Excellence
The focus of the operational excellence pillar is to ensure food quality and safety, coupled with improved operational performance and efficiency. TheseWe expect these efforts are expected to generate productivity improvements and cost savings in manufacturing, procurement and logistics. Recent highlights include:
• | 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 yield $3.1approximately $5.3 million of annualized EBITDA benefits.
Go-To-Market Effectiveness
The focus of the go-to-market effectiveness pillar is to optimize 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 expected to yield $2.0approximately $1.2 million of annualized EBITDA benefits. We have lowered this estimate from $2.0 million, as previously disclosed, to reflect improvements associated with our flexible resealable pouch and nutrition bar product lines, which we now intend to exit.
Process Sustainability
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 ourSunOpta’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 July 1,September 30, 2017 and July 2,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. |
In the second half of 2016 and first halfthree quarters of 2017, we incurred significant costs in connection with measures taken under the Value Creation Plan, whichPlan. 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 ($4.4 million);10.3 million 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 our management and executive teams, and recruitment of new employeesrecruiting efforts in the areas of quality, sales, marketing, operations and engineering ($6.4 million)3.3 million and $9.3 million in the third quarter and first three quarters of 2017, respectively). In addition, we incurred third-party legal advisory, consulting and temporary labor costs in support of the Value Creation Plan of $14.6 million. In$0.5 million in the third quarter of 2016, and $1.2 million and $15.8 million in the third quarter and first halfthree quarters of 2017, werespectively. We also made capital investments at several of our manufacturing facilities to enhance food safety and production efficiencies.efficiency.
Costs incurred and charged to expense in the quarterquarters and twothree quarters ended JulySeptember 30, 2017 and October 1, 20172016 were recorded in the consolidated statement of operations as follows:
Quarter ended | Three quarters ended | |||||||||||||||||
Quarter ended | Two quarters ended | September 30, | October 1, | September 30, | October 1, | |||||||||||||
July 1, 2017 | July 1, 2017 | 2017 | 2016 | 2017 | 2016 | |||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Cost of goods sold(1) | 262 | 634 | 1,287 | - | 1,921 | - | ||||||||||||
Selling, general and administrative expenses(2) | 7,001 | 18,439 | 2,400 | 483 | 20,839 | 483 | ||||||||||||
Other expense(3) | 425 | 5,898 | 6,569 | 10,300 | 12,467 | 10,300 | ||||||||||||
7,688 | 24,971 | 10,256 | 10,783 | 35,227 | 10,783 |
(1) |
| |
(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 remaining third-party consulting and employee recruitment, retention and termination costs related to the Value Creation Plan to be incurred and expensed during the second halffourth quarter of fiscal 2017 will be approximately $4 million.$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. Costs incurred to-date related to the Value Creation Plan have been higher than expected, due to the extended support of third-party consultants to assist with certain initiatives, including food safety and quality, procurement, and enhancements to our ERP systems. We also expect to record a loss of $8.0 million to $9.0 million in the second half of 2017, related to the sale of the flexible resealable pouch assets.
For more information regarding the Value Creation Plan, see note 2 to the unaudited consolidated financial statements included in this report.
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. As at July 1, 2017 and December 31, 2016, we recognized estimatedEstimated losses related to the recall oftotaled $47.0 million andas at September 30, 2017, compared to $40.0 million respectively, whichas 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. We have general liability and product recall insurance policies with aggregate limits of $47.0 million under which we are expectingexpect to recover recall-related costs, less applicable deductibles. As at July 1,September 30, 2017, we havehad recognized recoveries up to the limit of the coverage available under our insurance policies. Consequently, 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 July 1,September 30, 2017, we had settled customer claims and direct costs in the amount of $23.8$34.6 million, which settlements were fully funded under our general liability and product recall insurance policies.
SUNOPTA INC. |
For more information regarding the recall, see note 45 to the unaudited consolidated financial statements included in this report.
SUNOPTA INC. | 38 | September 30, 2017 10-Q |
Consolidated Results of Operations for the Quarters Ended July 1,September 30, 2017 and July 2,October 1, 2016
September 30, | October 1, | |||||||||||||||||||||||
For the quarter ended | July 1, 2017 | July 2, 2016 | Change | Change | 2017 | 2016 | Change | Change | ||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||
Revenues | ||||||||||||||||||||||||
Global Ingredients | 149,423 | 158,498 | (9,075 | ) | -5.7% | 140,533 | 137,174 | 3,359 | 2.4% | |||||||||||||||
Consumer Products | 187,031 | 189,648 | (2,617 | ) | -1.4% | 180,180 | 211,558 | (31,378 | ) | -14.8% | ||||||||||||||
Total revenues | 336,454 | 348,146 | (11,692 | ) | -3.4% | 320,713 | 348,732 | (28,019 | ) | -8.0% | ||||||||||||||
Gross profit | ||||||||||||||||||||||||
Global Ingredients | 20,743 | 19,828 | 915 | 4.6% | 16,064 | 16,796 | (732 | ) | -4.4% | |||||||||||||||
Consumer Products | 20,919 | 16,150 | 4,769 | 29.5% | 20,391 | 24,234 | (3,843 | ) | -15.9% | |||||||||||||||
Total gross profit | 41,662 | 35,978 | 5,684 | 15.8% | 36,455 | 41,030 | (4,575 | ) | -11.2% | |||||||||||||||
Segment operating income (loss)(1) | ||||||||||||||||||||||||
Global Ingredients | 8,372 | 10,411 | (2,039 | ) | -19.6% | 5,265 | 7,404 | (2,139 | ) | -28.9% | ||||||||||||||
Consumer Products | 4,220 | 663 | 3,557 | 536.5% | 4,528 | 8,104 | (3,576 | ) | -44.1% | |||||||||||||||
Corporate Services | (9,973 | ) | (2,229 | ) | (7,744 | ) | -347.4% | (4,832 | ) | (2,287 | ) | (2,545 | ) | -111.3% | ||||||||||
Total segment operating income | 2,619 | 8,845 | (6,226 | ) | -70.4% | 4,961 | 13,221 | (8,260 | ) | -62.5% | ||||||||||||||
Other expense, net | 607 | 8,433 | (7,826 | ) | -92.8% | 5,972 | 10,312 | (4,340 | ) | -42.1% | ||||||||||||||
Earnings from continuing operations before thefollowing | 2,012 | 412 | 1,600 | 388.3% | ||||||||||||||||||||
Earnings (loss) from continuing operations before thefollowing | (1,011 | ) | 2,909 | (3,920 | ) | -134.8% | ||||||||||||||||||
Interest expense, net | 7,695 | 11,548 | (3,853 | ) | -33.4% | 8,371 | 12,178 | (3,807 | ) | -31.3% | ||||||||||||||
Recovery of income taxes | (5,581 | ) | (7,135 | ) | 1,554 | 21.8% | (3,499 | ) | (5,411 | ) | 1,912 | 35.3% | ||||||||||||
Loss from continuing operations | (102 | ) | (4,001 | ) | 3,899 | 97.5% | (5,883 | ) | (3,858 | ) | (2,025 | ) | -52.5% | |||||||||||
Earnings attributable to non-controlling interests | 306 | 123 | 183 | 148.8% | ||||||||||||||||||||
Earnings (loss) attributable to non-controlling interests | 144 | (503 | ) | 647 | 128.6% | |||||||||||||||||||
Loss attributable to SunOpta Inc.(2) | (408 | ) | (4,124 | ) | 3,716 | 90.1% | (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. generally accepted accounting principles (“GAAP”). This measure is the basis on which management, including the Chief Executive Officer, assesses the underlying performance of our operating segments. |
We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our 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 segment operating income/loss to earnings (loss) from continuing operations before the following, which we consider to be the most directly comparable U.S. GAAP financial measure. |
Global | Consumer | Corporate | |||||||||||
Ingredients | Products | Services | Consolidated | ||||||||||
For the quarter ended | $ | $ | $ | $ | |||||||||
July 1, 2017 | |||||||||||||
Segment operating income (loss) | 8,372 | 4,220 | (9,973 | ) | 2,619 | ||||||||
Other expense, net | (2 | ) | (265 | ) | (340 | ) | (607 | ) | |||||
Earnings (loss) from continuing operations before the following | 8,370 | 3,955 | (10,313 | ) | 2,012 | ||||||||
| |||||||||||||
July 2, 2016 | |||||||||||||
Segment operating income (loss) | 10,411 | 663 | (2,229 | ) | 8,845 | ||||||||
Other expense, net | (105 | ) | (8,163 | ) | (165 | ) | (8,433 | ) | |||||
Earnings (loss) from continuing operations before the following | 10,306 | (7,500 | ) | (2,394 | ) | 412 |
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.
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:
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.
Revenues for the quarter ended Gross profit Total segment operating income for the quarter ended
Further details on revenue, gross profit and segment operating income variances are provided below under “Segmented Operations Information”. Other expense for the quarter ended Interest expense decreased by We recognized a recovery of income tax of On a consolidated basis, we realized a loss of For the quarter ended
Segmented Operations Information
Global Ingredients contributed
Gross profit in Global Ingredients
Operating income in Global Ingredients decreased by
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) initiating a global desk coordination program between our North 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 contributed
Gross profit in Consumer Products
Operating income in Consumer Products
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 focus our efforts on (i) continuing to invest in new sales 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. 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.
Operating loss at Corporate Services increased by
Corporate cost allocations mainly consist of salaries of corporate personnel who directly 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.
Consolidated Results of Operations for the
Revenues for the Gross profit increased Total segment operating
Further details on revenue, gross profit and segment operating income/loss variances are provided below under “Segmented Operations Information”. Other expense for the Interest expense decreased by We recognized a recovery of income tax of Loss from continuing operations attributable to SunOpta Inc. for the The loss from discontinued operations of $0.6 million in the first On a consolidated basis, we realized a loss of For the
Segmented Operations Information
Global Ingredients contributed
Gross profit in Global Ingredients decreased by
Operating income in Global Ingredients decreased by
Consumer Products contributed
Gross profit in Consumer Products increased by
Operating income in Consumer Products increased by
Operating loss at Corporate Services increased by
Liquidity and Capital Resources We have the following sources from which we can fund our operating cash requirements:
On February 11, 2016, we entered 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”). The Global Credit Facility supports the working capital and general corporate needs of our global operations, in addition to funding 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 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 On October 20, 2016, SunOpta Foods issued $231.0 million of 9.5% Senior Secured Second Lien Notes due October 9, 2022 (the “Notes”). 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 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 Quarter Net cash and cash equivalents Cash used in operating activities of continuing operations was Cash used in investing activities of continuing operations was $7.8 million in the third quarter of 2017, compared with cash used of Cash provided by financing activities of continuing operations was $18.2 million in the third quarter of 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 $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.
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 Cash used in investing activities of continuing operations was
Cash provided by financing activities of continuing operations was 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 There have been no material changes outside the normal course of business in our contractual obligations since 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.
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 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 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
PART II - OTHER INFORMATION Item 1. Legal Proceedings On April 19, 2013, a class-action complaint, in the case titledDe Jesus, et al. v. Frozsun, Inc. d/b/a Frozsun Foods, 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 Item 1A. Risk Factors Certain risks associated with our operations are discussed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to the previously-reported risk factors as of the date of this quarterly report. Our previously reported risk factors should be carefully reviewed in connection with an evaluation of our Company. Item 5. Other Information Election of Director On November 6, 2017, the Board of Directors of the Company (the “Board”) appointed Derek Briffett as a director of the Company, increasing the size of the Board to nine directors. Mr. Briffett is expected to serve on the Board’s Audit Committee. Mr. Briffett was not selected as a director pursuant to any arrangements or understandings with the Company or with any other person and there are no transactions between Mr. Briffett and the Company that would require disclosure under Item 404(a) of Regulation S-K. Mr. Briffett will be compensated for his service on the Board on the same basis as each of the Company’s other non-employee directors. In addition to annual grants of restricted stock units, 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 responsibilities. Item 6. Exhibits The 10.1†
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.
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