UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended | |
OR | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from |
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.) | |
7078 Shady Oak Road Eden Prairie, Minnesota, 55344 | (952) 820-2518 | |
(Address of principal executive offices) | (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☐ |
(Do not check if a smaller reporting company) | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares | STKL | The Nasdaq Stock Market |
Common Shares | SOY | The Toronto Stock Exchange |
The number of the registrant's common shares outstanding as of NovemberAugust 4, 20222023 was 107,866,566.115,607,935.
SUNOPTA INC.
FORM 10-Q
For the Quarterly Period Ended OctoberJuly 1, 20222023
TABLE OF CONTENTS
Basis of Presentation
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q ("Form 10-Q") to the "Company," "SunOpta," "we," "us," "our" or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together.
In this report, all currency amounts presented are expressed in thousands of United States ("U.S.") dollars ("$"), except per share amounts, unless otherwise stated. Other amounts may be presented in thousands of Canadian dollars ("C$") and Mexican pesos ("M$").
Forward-Looking Statements
This Form 10-Q contains forward-looking statements that are based on management's current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," the negatives of such terms, and words and phrases of similar impact. Forward-looking statementsimpact and include, but are not limited to, references to future financial and operating results, plans, objectives, expectations, and intentions; the effects of the global macroeconomic environment, including inflationary pressures and rising interest rates, on our operational and financial performance in future periods; our expectations regarding the future profitability of our plant-based and fruit-based businesses, including anticipated results of operations, revenue trends, and profitgross margin profiles; the expected impact of the inflationary cost environment on our business, including raw material, packaging, labor, energy, fuel and transportation costs; the expected impact of pricing actions on sales volumes and gross margins; the expected impact of cost containment measures and productivity initiatives; our estimates for losses and related insurance recoveries associated with the recall of specific frozen fruit products in the second quarter of 2023; our expectations regarding customer demand, consumer preferences, competition, sales pricing, availability and pricing of raw material inputs, and timing and costscost to complete capital expansion projects; our ability to successfully execute on our capital investment plans, and the viability of those plans; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of debt, working capital needs, planned capital expenditures; and our ability to obtain additional financing or issue additional debt or equity securities; our intentions related to the potential sale of selected businesses, operations, or assets; adequacy of existing sources of funds to meet financing needs, and availability of alternative financing sources; the outcome of litigation to which we may, from time to time, be a party;party; and other statements that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on certain assumptions, expectations and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments, as well as other factors that we believe are appropriate in the circumstances.
Whether actual results and developments will be consistent with and meet our expectations and predictions is subject to many risks and uncertainties. Accordingly, there are important factors that could cause our actual results to differ materially from our expectations and predictions. We believe these factors include, but are not limited to, the following:
SUNOPTA INC. |
All forward-looking statements made herein are qualified by these cautionary statements, and our actual results or the developments we anticipate may not be realized. Our forward-looking statements are based only on information currently available to us and speak only as of the date on which they are made. We do not undertake any obligation to publicly update our forward-looking statements, whether written or oral, after the date of this report for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities laws. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. A more detailed discussion of the principal factors that could cause actual results to be materially different and additional information about the material factors or assumptions underlying our forward-looking statements may be found under Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, 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 threetwo quarters ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021
2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars, except per share amounts)
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Revenues (note 12) | 229,665 | 198,479 | 713,369 | 608,392 | ||||||||
Cost of goods sold | 198,282 | 175,123 | 619,097 | 528,711 | ||||||||
Gross profit | 31,383 | 23,356 | 94,272 | 79,681 | ||||||||
Selling, general and administrative expenses | 20,654 | 16,487 | 66,893 | 60,081 | ||||||||
Intangible asset amortization | 2,612 | 2,612 | 7,836 | 7,338 | ||||||||
Other expense, net (note 8) | 20,200 | 1,172 | 22,027 | 7,448 | ||||||||
Foreign exchange loss (gain) | 473 | 336 | (126 | ) | 533 | |||||||
Earnings (loss) from continuing operations before the following | (12,556 | ) | 2,749 | (2,358 | ) | 4,281 | ||||||
Interest expense, net | 4,342 | 2,854 | 10,004 | 6,145 | ||||||||
Loss from continuing operations before income taxes | (16,898 | ) | (105 | ) | (12,362 | ) | (1,864 | ) | ||||
Income tax expense (benefit) | (4,259 | ) | 2,929 | (2,875 | ) | 416 | ||||||
Loss from continuing operations | (12,639 | ) | (3,034 | ) | (9,487 | ) | (2,280 | ) | ||||
Earnings from discontinued operations (note 11) | - | - | 2,752 | - | ||||||||
Net loss | (12,639 | ) | (3,034 | ) | (6,735 | ) | (2,280 | ) | ||||
Dividends and accretion on preferred stock (note 6) | (764 | ) | (748 | ) | (2,279 | ) | (3,445 | ) | ||||
Loss attributable to common shareholders | (13,403 | ) | (3,782 | ) | (9,014 | ) | (5,725 | ) | ||||
Basic and diluted earnings (loss) per share (note 9) | ||||||||||||
Loss from continuing operations | (0.12 | ) | (0.04 | ) | (0.11 | ) | (0.06 | ) | ||||
Earnings from discontinued operations | - | - | 0.03 | - | ||||||||
Loss attributable to common shareholders | (0.12 | ) | (0.04 | ) | (0.08 | ) | (0.06 | ) | ||||
Weighted-average common shares outstanding (000s) (note 9) | ||||||||||||
Basic | 107,752 | 107,255 | 107,566 | 103,017 | ||||||||
Diluted | 107,752 | 107,255 | 107,566 | 103,017 |
Quarter ended | Two quarters ended | ||||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
$ | $ | $ | $ | ||||||||||
Revenues (note 13) | 207,809 | 243,531 | 431,689 | 483,704 | |||||||||
Cost of goods sold | 191,430 | 208,633 | 387,107 | 420,450 | |||||||||
Gross profit | 16,379 | 34,898 | 44,582 | 63,254 | |||||||||
Selling, general and administrative expenses | 19,573 | 24,304 | 45,003 | 46,514 | |||||||||
Intangible asset amortization | 2,446 | 2,612 | 4,892 | 5,224 | |||||||||
Other expense (income), net | (227 | ) | 1,540 | (192 | ) | 1,827 | |||||||
Foreign exchange gain | (2,377 | ) | (127 | ) | (4,588 | ) | (599 | ) | |||||
Earnings (loss) from continuing operations before the following | (3,036 | ) | 6,569 | (533 | ) | 10,288 | |||||||
Interest expense, net | 6,969 | 3,132 | 12,781 | 5,662 | |||||||||
Earnings (loss) from continuing operations before income taxes | (10,005 | ) | 3,437 | (13,314 | ) | 4,626 | |||||||
Income tax expense (note 9) | 8,833 | 1,152 | 4,147 | 1,339 | |||||||||
Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | (17,461 | ) | 3,287 | |||||||
Earnings (loss) from discontinued operations | - | (814 | ) | - | 2,752 | ||||||||
Net earnings (loss) | (18,838 | ) | 1,471 | (17,461 | ) | 6,039 | |||||||
Dividends and accretion on preferred stock (note 7) | (422 | ) | (760 | ) | (1,126 | ) | (1,515 | ) | |||||
Earnings (loss) attributable to common shareholders | (19,260 | ) | 711 | (18,587 | ) | 4,524 | |||||||
Basic and diluted earnings (loss) per share (note 10) | |||||||||||||
Earnings (loss) from continuing operations | (0.17 | ) | 0.01 | (0.16 | ) | 0.02 | |||||||
Earnings (loss) from discontinued operations | - | (0.01 | ) | - | 0.03 | ||||||||
Earnings (loss) attributable to common shareholders(1) | (0.17 | ) | 0.01 | (0.16 | ) | 0.04 | |||||||
Weighted-average common shares outstanding (000s) (note 10) | |||||||||||||
Basic | 115,471 | 107,622 | 112,743 | 107,510 | |||||||||
Diluted | 115,471 | 108,667 | 112,743 | 108,495 |
(1) The sum of the individual per share amounts may not add due to rounding.
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 5 | July 1, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Balance Sheets
As at July 1, 2023 and December 31, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
July 1, 2023 | December 31, 2022 | |||||
$ | $ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | 981 | 679 | ||||
Accounts receivable, net of allowance for credit losses of $474 and $584, respectively | 72,776 | 74,903 | ||||
Inventories (note 2) | 220,752 | 207,047 | ||||
Prepaid expenses and other current assets | 15,734 | 15,688 | ||||
Income taxes recoverable | 4,133 | 4,040 | ||||
Total current assets | 314,376 | 302,357 | ||||
Property, plant and equipment, net | 342,679 | 322,391 | ||||
Operating lease right-of-use assets (note 3) | 90,454 | 82,564 | ||||
Intangible assets, net | 130,754 | 135,646 | ||||
Goodwill | 3,998 | 3,998 | ||||
Deferred income taxes | - | 3,712 | ||||
Other assets | 4,864 | 5,184 | ||||
Total assets | 887,125 | 855,852 | ||||
LIABILITIES | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities (note 4) | 124,826 | 108,511 | ||||
Notes payable (note 5) | 19,727 | - | ||||
Income taxes payable | 180 | 957 | ||||
Current portion of long-term debt (note 6) | 45,394 | 38,491 | ||||
Current portion of operating lease liabilities (note 3) | 14,231 | 13,074 | ||||
Total current liabilities | 204,358 | 161,033 | ||||
Long-term debt (note 6) | 270,717 | 269,993 | ||||
Operating lease liabilities (note 3) | 85,427 | 77,557 | ||||
Deferred income taxes | 266 | - | ||||
Total liabilities | 560,768 | 508,583 | ||||
Series B-1 preferred stock (note 7) | 14,264 | 28,062 | ||||
SHAREHOLDERS' EQUITY | ||||||
Common shares, no par value, unlimited shares authorized, 115,579,546 shares issued (December 31, 2022 - 107,909,792) | 462,290 | 440,348 | ||||
Additional paid-in capital | 22,715 | 33,184 | ||||
Accumulated deficit | (174,275 | ) | (155,688 | ) | ||
Accumulated other comprehensive income | 1,363 | 1,363 | ||||
Total shareholders' equity | 312,093 | 319,207 | ||||
Total liabilities and shareholders' equity | 887,125 | 855,852 | ||||
Commitments and contingencies (note 12) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 6 |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity
As at and for the quarters ended July 1, 2023 and July 2, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at April 1, 2023 | 115,380 | 461,132 | 21,874 | (155,015 | ) | 1,363 | 329,354 | |||||||||||
Share issuance costs (note 7) | - | (36 | ) | - | - | - | (36 | ) | ||||||||||
Employee stock purchase plan | 25 | 149 | - | - | - | 149 | ||||||||||||
Stock incentive plan | 175 | 1,045 | (907 | ) | - | - | 138 | |||||||||||
Withholding taxes on stock-based awards | - | - | (281 | ) | - | - | (281 | ) | ||||||||||
Stock-based compensation | - | - | 2,029 | - | - | 2,029 | ||||||||||||
Net loss | - | - | - | (18,838 | ) | - | (18,838 | ) | ||||||||||
Dividends on preferred stock | - | - | - | (304 | ) | - | (304 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (118 | ) | - | (118 | ) | ||||||||||
Balance at July 1, 2023 | 115,580 | 462,290 | 22,715 | (174,275 | ) | 1,363 | 312,093 |
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at April 2, 2022 | 107,579 | 437,451 | 24,042 | (143,925 | ) | 1,363 | 318,931 | |||||||||||
Employee stock purchase plan | 22 | 145 | - | - | - | 145 | ||||||||||||
Stock incentive plan | 86 | 1,072 | (876 | ) | - | - | 196 | |||||||||||
Withholding taxes on stock-based awards | - | - | (882 | ) | - | - | (882 | ) | ||||||||||
Stock-based compensation | - | - | 3,970 | - | - | 3,970 | ||||||||||||
Net earnings | - | - | - | 1,471 | - | 1,471 | ||||||||||||
Dividends on preferred stock | - | - | - | (609 | ) | - | (609 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (151 | ) | - | (151 | ) | ||||||||||
Balance at July 2, 2022 | 107,687 | 438,668 | 26,254 | (143,214 | ) | 1,363 | 323,071 |
SUNOPTA INC. | 7 | July 1, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Balance Sheets
Statements of Shareholders' Equity (continued)
As at Octoberand for the two quarters ended July 1, 20222023 and January 1,July 2, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
October 1, 2022 | January 1, 2022 | |||||
$ | $ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | 459 | 227 | ||||
Accounts receivable, net of allowance for credit losses of $579 and $889, respectively | 75,460 | 84,702 | ||||
Inventories (note 2) | 225,059 | 220,143 | ||||
Prepaid expenses and other current assets | 16,413 | 16,638 | ||||
Income taxes recoverable | 7,258 | 8,259 | ||||
Assets held for sale (note 3) | 16,151 | - | ||||
Total current assets | 340,800 | 329,969 | ||||
Property, plant and equipment, net | 292,407 | 219,537 | ||||
Operating lease right-of-use assets (note 4) | 78,167 | 47,245 | ||||
Intangible assets, net | 138,092 | 148,440 | ||||
Goodwill | 3,998 | 3,998 | ||||
Other assets | 5,486 | 5,930 | ||||
Total assets | 858,950 | 755,119 | ||||
LIABILITIES | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | 117,578 | 121,430 | ||||
Income taxes payable | 44 | - | ||||
Current portion of long-term debt (note 5) | 31,374 | 9,760 | ||||
Current portion of operating lease liabilities (note 4) | 12,601 | 12,203 | ||||
Liabilities held for sale (note 3) | 7,005 | - | ||||
Total current liabilities | 168,602 | 143,393 | ||||
Long-term debt (note 5) | 274,888 | 214,843 | ||||
Operating lease liabilities (note 4) | 71,016 | 39,028 | ||||
Long-term liabilities | - | 2,241 | ||||
Deferred income taxes | 10,585 | 22,485 | ||||
Total liabilities | 525,091 | 421,990 | ||||
Series B-1 preferred stock (note 6) | 28,597 | 28,145 | ||||
SHAREHOLDERS' EQUITY | ||||||
Common shares, no par value, unlimited shares authorized, 107,827,577 shares issued (January 1, 2022 - 107,359,826) | 439,670 | 436,463 | ||||
Additional paid-in capital | 29,325 | 23,240 | ||||
Accumulated deficit | (165,096 | ) | (156,082 | ) | ||
Accumulated other comprehensive income | 1,363 | 1,363 | ||||
Total shareholders' equity | 305,262 | 304,984 | ||||
Total liabilities and shareholders' equity | 858,950 | 755,119 |
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at December 31, 2022 | 107,910 | 440,348 | 33,184 | (155,688 | ) | 1,363 | 319,207 | |||||||||||
Exchange of Series B-1 preferred stock, net of share issuance costs of $123 (note 7) | 6,089 | 13,983 | - | - | - | 13,983 | ||||||||||||
Employee stock purchase plan | 50 | 309 | - | - | - | 309 | ||||||||||||
Stock incentive plan | 1,531 | 7,650 | (7,383 | ) | - | - | 267 | |||||||||||
Withholding taxes on stock-based awards | - | - | (9,007 | ) | - | - | (9,007 | ) | ||||||||||
Stock-based compensation | - | - | 5,921 | - | - | 5,921 | ||||||||||||
Net loss | - | - | - | (17,461 | ) | - | (17,461 | ) | ||||||||||
Dividends on preferred stock | - | - | - | (818 | ) | - | (818 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (308 | ) | - | (308 | ) | ||||||||||
Balance at July 1, 2023 | 115,580 | 462,290 | 22,715 | (174,275 | ) | 1,363 | 312,093 | |||||||||||
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at January 1, 2022 | 107,360 | 436,463 | 23,240 | (147,738 | ) | 1,363 | 313,328 | |||||||||||
Employee stock purchase plan | 53 | 279 | - | - | - | 279 | ||||||||||||
Stock incentive plan | 274 | 1,926 | (1,614 | ) | - | - | 312 | |||||||||||
Withholding taxes on stock-based awards | - | - | (971 | ) | - | - | (971 | ) | ||||||||||
Stock-based compensation | - | - | 5,599 | - | - | 5,599 | ||||||||||||
Net earnings | - | - | - | 6,039 | - | 6,039 | ||||||||||||
Dividends on preferred stock | - | - | - | (1,218 | ) | - | (1,218 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (297 | ) | - | (297 | ) | ||||||||||
Balance at July 2, 2022 | 107,687 | 438,668 | 26,254 | (143,214 | ) | 1,363 | 323,071 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity
As at and for the quarters ended October 1, 2022 and October 2, 2021
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at July 2, 2022 | 107,687 | 438,668 | 26,254 | (151,693 | ) | 1,363 | 314,592 | |||||||||||
Employee stock purchase plan | 17 | 152 | - | - | - | 152 | ||||||||||||
Stock incentive plans | 124 | 850 | (390 | ) | - | - | 460 | |||||||||||
Withholding taxes on stock-based awards | - | - | (631 | ) | - | - | (631 | ) | ||||||||||
Stock-based compensation | - | - | 4,092 | - | - | 4,092 | ||||||||||||
Net loss | - | - | - | (12,639 | ) | - | (12,639 | ) | ||||||||||
Dividends on preferred stock | - | - | - | (609 | ) | - | (609 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (155 | ) | - | (155 | ) | ||||||||||
Balance at October 1, 2022 | 107,828 | 439,670 | 29,325 | (165,096 | ) | 1,363 | 305,262 | |||||||||||
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at July 3, 2021 | 107,126 | 435,425 | 24,966 | (149,684 | ) | 1,363 | 312,070 | |||||||||||
Employee stock purchase plan | 18 | 140 | - | - | - | 140 | ||||||||||||
Stock incentive plans | 179 | 654 | (490 | ) | - | - | 164 | |||||||||||
Withholding taxes on stock-based awards | - | - | (1,576 | ) | - | - | (1,576 | ) | ||||||||||
Stock-based compensation | - | - | 1,250 | - | - | 1,250 | ||||||||||||
Net loss | - | - | - | (3,034 | ) | - | (3,034 | ) | ||||||||||
Dividends on preferred stock | - | - | - | (609 | ) | - | (609 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (139 | ) | - | (139 | ) | ||||||||||
Balance at October 2, 2021 | 107,323 | 436,219 | 24,150 | (153,466 | ) | 1,363 | 308,266 |
8 |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity (continued)
As atCash Flows
For the quarters and for the threetwo quarters ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021
2022
(Unaudited)
(All dollar amounts expressedExpressed in thousands of U.S. dollars)
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at January 1, 2022 | 107,360 | 436,463 | 23,240 | (156,082 | ) | 1,363 | 304,984 | |||||||||||
Employee stock purchase plan | 70 | 431 | - | - | - | 431 | ||||||||||||
Stock incentive plans | 398 | 2,776 | (2,004 | ) | - | - | 772 | |||||||||||
Withholding taxes on stock-based awards | - | - | (1,602 | ) | - | - | (1,602 | ) | ||||||||||
Stock-based compensation | - | - | 9,691 | - | - | 9,691 | ||||||||||||
Net loss | - | - | - | (6,735 | ) | - | (6,735 | ) | ||||||||||
Dividends on preferred stock | - | - | - | (1,827 | ) | - | (1,827 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (452 | ) | - | (452 | ) | ||||||||||
Balance at October 1, 2022 | 107,828 | 439,670 | 29,325 | (165,096 | ) | 1,363 | 305,262 | |||||||||||
Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income | Total | ||||||||||||||
000s | $ | $ | $ | $ | $ | |||||||||||||
Balance at January 2, 2021 | 90,194 | 326,545 | 37,862 | (147,741 | ) | 1,363 | 218,029 | |||||||||||
Exchange of Series A preferred stock, net of | ||||||||||||||||||
share issuance costs of $287 | 12,633 | 87,188 | - | - | - | 87,188 | ||||||||||||
Employee stock purchase plan | 46 | 473 | - | - | - | 473 | ||||||||||||
Stock incentive plans | 4,450 | 22,013 | (14,992 | ) | - | - | 7,021 | |||||||||||
Withholding taxes on stock-based awards | - | - | (8,313 | ) | - | - | (8,313 | ) | ||||||||||
Stock-based compensation | - | - | 9,593 | - | - | 9,593 | ||||||||||||
Net loss | - | - | - | (2,280 | ) | - | (2,280 | ) | ||||||||||
Dividends on preferred stock | - | - | - | (2,869 | ) | - | (2,869 | ) | ||||||||||
Accretion on preferred stock | - | - | - | (576 | ) | - | (576 | ) | ||||||||||
Balance at October 2, 2021 | 107,323 | 436,219 | 24,150 | (153,466 | ) | 1,363 | 308,266 |
Quarter ended | Two quarters ended | ||||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
$ | $ | $ | $ | ||||||||||
CASH PROVIDED BY (USED IN) | |||||||||||||
Operating activities | |||||||||||||
Net earnings (loss) | (18,838 | ) | 1,471 | (17,461 | ) | 6,039 | |||||||
Earnings (loss) from discontinued operations | - | (814 | ) | - | 2,752 | ||||||||
Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | (17,461 | ) | 3,287 | |||||||
Items not affecting cash: | |||||||||||||
Depreciation and amortization | 10,787 | 9,372 | 20,785 | 18,785 | |||||||||
Amortization of debt issuance costs | 388 | 396 | 795 | 771 | |||||||||
Deferred income taxes | 8,828 | 2,341 | 3,978 | 2,163 | |||||||||
Stock-based compensation | 2,029 | 3,970 | 5,921 | 5,599 | |||||||||
Other | (97 | ) | 1,634 | 506 | 1,745 | ||||||||
Changes in operating assets and liabilities (note 11) | 12,781 | (22,452 | ) | 5,221 | (19,261 | ) | |||||||
Net cash provided by (used in) operating activities of continuing operations | 15,878 | (2,454 | ) | 19,745 | 13,089 | ||||||||
Investing activities | |||||||||||||
Additions to property, plant and equipment | (8,057 | ) | (37,038 | ) | (33,899 | ) | (62,760 | ) | |||||
Proceeds from sale of sunflower business (note 11) | - | - | 385 | - | |||||||||
Proceeds from sale of property, plant and equipment | - | 2,978 | - | 4,182 | |||||||||
Net cash used in investing activities of continuing operations | (8,057 | ) | (34,060 | ) | (33,514 | ) | (58,578 | ) | |||||
Net cash used in investing activities of discontinued operations | - | (6,324 | ) | - | (6,324 | ) | |||||||
Net cash used in investing activities of continuing operations | (8,057 | ) | (40,384 | ) | (33,514 | ) | (64,902 | ) | |||||
Financing activities | |||||||||||||
Increase (decrease) in borrowings under revolving credit facilities (note 6) | (3,112 | ) | 31,067 | 5,700 | 20,762 | ||||||||
Borrowings of long-term debt (notes 3 and 6) | 640 | 18,206 | 19,333 | 41,103 | |||||||||
Repayment of long-term debt (note 3) | (10,964 | ) | (5,174 | ) | (21,012 | ) | (7,569 | ) | |||||
Proceeds from notes payable (note 5) | 24,433 | - | 35,095 | - | |||||||||
Repayment of notes payable (note 5) | (9,935 | ) | - | (15,368 | ) | - | |||||||
Proceeds from the exercise of stock options and employee share purchases | 287 | 341 | 576 | 591 | |||||||||
Payment of withholding taxes on stock-based awards | (8,758 | ) | (882 | ) | (9,007 | ) | (971 | ) | |||||
Payment of cash dividends on preferred stock (note 7) | (305 | ) | (609 | ) | (1,123 | ) | (1,218 | ) | |||||
Payment of share issuance costs | (36 | ) | - | (123 | ) | - | |||||||
Payment of debt issuance costs | - | (53 | ) | - | (559 | ) | |||||||
Net cash provided by (used in) financing activities of continuing operations | (7,750 | ) | 42,896 | 14,071 | 52,139 | ||||||||
Increase in cash and cash equivalents in the period | 71 | 58 | 302 | 326 | |||||||||
Cash and cash equivalent, beginning of the period | 910 | 495 | 679 | 227 | |||||||||
Cash and cash equivalents, end of the period | 981 | 553 | 981 | 553 | |||||||||
Non-cash investing and financing activities (notes 3 and 11) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 9 |
Consolidated Statements of Cash Flows
For the quarters and three quarters ended October 1, 2022 and October 2, 2021
(Unaudited)
(Expressed in thousands of U.S. dollars)
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
CASH PROVIDED BY (USED IN) | ||||||||||||
Operating activities | ||||||||||||
Net loss | (12,639 | ) | (3,034 | ) | (6,735 | ) | (2,280 | ) | ||||
Earnings from discontinued operations | - | - | 2,752 | - | ||||||||
Loss from continuing operations | (12,639 | ) | (3,034 | ) | (9,487 | ) | (2,280 | ) | ||||
Items not affecting cash: | ||||||||||||
Depreciation and amortization | 9,730 | 8,837 | 28,515 | 25,790 | ||||||||
Amortization of debt issuance costs | 413 | 359 | 1,184 | 993 | ||||||||
Deferred income taxes | (2,925 | ) | 3,315 | (717 | ) | (179 | ) | |||||
Stock-based compensation | 4,092 | 1,250 | 9,691 | 9,593 | ||||||||
Loss on classification of sunflower business as held for sale (note 3) | 23,227 | - | 23,227 | - | ||||||||
Gain on sale of frozen fruit processing facility (note 8) | (3,779 | ) | - | (3,779 | ) | - | ||||||
Impairment of long-lived assets (note 8) | - | - | - | 2,962 | ||||||||
Other | (149 | ) | (168 | ) | 1,596 | (504 | ) | |||||
Changes in operating assets and liabilities (note 10) | 2,003 | (5,494 | ) | (17,168 | ) | (77,472 | ) | |||||
Net cash provided by (used in) operating activities of continuing operations | 19,973 | 5,065 | 33,062 | (41,097 | ) | |||||||
Investing activities | ||||||||||||
Additions to property, plant and equipment | (38,019 | ) | (18,386 | ) | (100,779 | ) | (34,989 | ) | ||||
Proceeds from sale of property, plant and equipment | 16,111 | 950 | 20,293 | 2,300 | ||||||||
Additions to intangible assets | - | - | - | (25,073 | ) | |||||||
Net cash used in investing activities of continuing operations | (21,908 | ) | (17,436 | ) | (80,486 | ) | (57,762 | ) | ||||
Net cash used in investing activities of discontinued operations | - | - | (6,324 | ) | (13,380 | ) | ||||||
Net cash used in investing activities | (21,908 | ) | (17,436 | ) | (86,810 | ) | (71,142 | ) | ||||
Financing activities | ||||||||||||
Increase (decrease) in borrowings under revolving credit facilities (note 5) | (24,247 | ) | 11,348 | (3,485 | ) | 123,177 | ||||||
Borrowings of long-term debt (notes 4 and 5) | 33,094 | 4,739 | 74,197 | 9,380 | ||||||||
Repayment of long-term debt (note 4) | (6,265 | ) | (1,849 | ) | (13,834 | ) | (11,789 | ) | ||||
Payment of debt issuance costs | (113 | ) | (181 | ) | (672 | ) | (2,552 | ) | ||||
Proceeds from the exercise of stock options and employee share purchases | 612 | 304 | 1,203 | 7,494 | ||||||||
Payment of withholding taxes on stock-based awards | (631 | ) | (1,576 | ) | (1,602 | ) | (8,313 | ) | ||||
Payment of cash dividends on preferred stock (note 6) | (609 | ) | (609 | ) | (1,827 | ) | (4,638 | ) | ||||
Payment of share issuance costs | - | - | - | (287 | ) | |||||||
Net cash provided by financing activities of continuing operations | 1,841 | 12,176 | 53,980 | 112,472 | ||||||||
Net cash used in financing activities of discontinued operations | - | - | - | (200 | ) | |||||||
Net cash provided by financing activities | 1,841 | 12,176 | 53,980 | 112,272 | ||||||||
Increase (decrease) in cash and cash equivalents in the period | (94 | ) | (195 | ) | 232 | 33 | ||||||
Cash and cash equivalent, beginning of the period | 553 | 479 | 227 | 251 | ||||||||
Cash and cash equivalents, end of the period | 459 | 284 | 459 | 284 |
Non-cash investing and financing activities (notes 4 and 10)
(See accompanying notes to consolidated financial statements)
SunOpta Inc. Notes to Consolidated Financial Statements
|
1. Significant Accounting Policies
Basis of Presentation
These interim consolidated financial statements of SunOpta Inc. (the "Company" or "SunOpta") have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with United States ("U.S.") generally accepted accounting principles ("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 threetwo quarters ended OctoberJuly 1, 20222023 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 202230, 2023 or for any other period. The interim consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended January 1,December 31, 2022. 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 JanuaryDecember 31, 2022 (the "2022 Form 10-K").
As described in notes 1 2022.and 23 to the consolidated financial statements included in the 2022 Form 10-K, certain amounts previously reported for the quarter and two quarters ended July 2, 2022 have been revised.
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 2023 is a 52-week period ending on December 30, 2023, with quarterly periods ending on April 1, 2023, July 1, 2023 and September 30, 2023. Fiscal year 2022 iswas a 52-week period ending on December 31, 2022, with quarterly periods ending on April 2, 2022, July 2, 2022, and October 1, 2022. Fiscal year 2021 was a 52-week period ending on January 1, 2022, with quarterly periods ending on April 3, 2021, July 3, 2021, and October 2, 2021.
2. Inventories
October 1, 2022 | January 1, 2022 | |||||
$ | $ | |||||
Raw materials and work-in-process | 126,530 | 143,381 | ||||
Finished goods | 106,523 | 81,546 | ||||
Inventory reserves | (7,994 | ) | (4,784 | ) | ||
225,059 | 220,143 |
3. Assets and Liabilities Held for Sale
Sunflower Business
On October 11, 2022, the Company completed the sale of 100% of the assets and liabilities of its sunflower business and related roasted snacks operations, for cash consideration of $16.0 million, subject to closing debt and working capital adjustments. The sunflower business operates from three processing facilities located in Minnesota and North Dakota and is reported in the Company's Plant-Based Foods and Beverages operating segment.
As at October 1, 2022, the Company recognized a pre-tax loss of $23.2 million on the classification of the sunflower business as held for sale, including $22.3 million to write down the carrying value of the net assets sold to the fair value of the net proceeds received, and $0.9 million for accrued costs to sell. The loss on classification as held for sale is recorded in other expense, net, on the consolidated statements of operations for the quarter and three quarters ended October 1, 2022. The assets and liabilities of the sunflower business have been reclassified and reported as held for sale on the consolidated balance sheet as at October 1, 2022, as follows:2. Inventories
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The disposal of the sunflower business does not have a major effect on the Company’s operations or financial results and, therefore, does not qualify for presentation as discontinued operations on a standalone basis. Revenues and earnings (loss) before income taxes of the sunflower business for the periods ended October 1, 2022 and October 2, 2021 were as follows:
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Revenues | 17,309 | 16,102 | 55,774 | 48,510 | ||||||||
Earnings (loss) before income taxes(1) | (514 | ) | (20 | ) | 1,025 | 1,230 |
(1) ForAs at July 1, 2023, inventory reserves included $3.0 million for unsaleable inventory associated with the recall of specific frozen fruit products in the second quarter and three quarters ended October 1, 2022, excludes the loss on classification as held for sale. In addition, for all periods presented, excludes the allocation of corporate costs.2023 (see note 12).
4.3. Leases
The Company leases certain manufacturing plants, warehouses, offices, machinery and equipment, and vehicles. At the lease commencement date, the Company classifies a lease as a finance lease if it has the right to obtain substantially all of the economic benefits from the right-of-use assets, otherwise the lease is classified as an operating lease.
The following tables present supplemental information related to leases:
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Lease Costs | ||||||||||||
Operating lease cost | 3,912 | 3,496 | 10,216 | 10,248 | ||||||||
Finance lease cost: | ||||||||||||
Depreciation of right-of-use assets | 2,527 | 1,555 | 7,092 | 4,366 | ||||||||
Interest on lease liabilities | 1,678 | 773 | 3,503 | 2,013 | ||||||||
Sublease income | - | - | - | (281 | ) | |||||||
Net lease cost | 8,117 | 5,824 | 20,811 | 16,346 |
SUNOPTA INC. |
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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) |
The following tables present supplemental information related to leases:
Quarter ended | Two quarters ended | ||||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
$ | $ | $ | $ | ||||||||||
Lease Costs | |||||||||||||
Operating lease cost | 3,960 | 3,093 | 7,370 | 6,304 | |||||||||
Finance lease cost: | |||||||||||||
Depreciation of right-of-use assets | 4,589 | 2,677 | 8,349 | 4,565 | |||||||||
Interest on lease liabilities | 2,581 | 1,052 | 5,002 | 1,825 | |||||||||
Net lease cost | 11,130 | 6,822 | 20,721 | 12,694 |
July 1, 2023 | December 31, 2022 | ||||||
$ | $ | ||||||
Balance Sheet Classification | |||||||
Operating leases: | |||||||
Operating lease right-of-use assets | 90,454 | 82,564 | |||||
Current portion of operating lease liabilities | 14,231 | 13,074 | |||||
Operating lease liabilities | 85,427 | 77,557 | |||||
Total operating lease liabilities | 99,658 | 90,631 | |||||
Finance leases: | |||||||
Property, plant and equipment, gross | 166,964 | 157,801 | |||||
Accumulated depreciation | (28,843 | ) | (20,494 | ) | |||
Property, plant and equipment, net | 138,121 | 137,307 | |||||
Current portion of long-term debt | 37,246 | 33,283 | |||||
Long-term debt | 77,543 | 90,796 | |||||
Total finance lease liabilities | 114,789 | 124,079 |
Quarter ended | Two quarters ended | ||||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
$ | $ | $ | $ | ||||||||||
Cash Flow Information | |||||||||||||
Cash paid (received) for amounts included in measurement of lease liabilities: | |||||||||||||
Operating cash flows from operating leases | 3,528 | 2,963 | 6,933 | 6,045 | |||||||||
Operating cash flows from finance leases | 2,581 | 1,052 | 5,002 | 1,825 | |||||||||
Financing cash flows from finance leases: | |||||||||||||
Cash paid under finance leases(1) | 8,927 | 5,175 | 18,296 | 7,569 | |||||||||
Cash received under finance leases(2) | (639 | ) | (14,554 | ) | (6,046 | ) | (33,277 | ) | |||||
Right-of-use assets obtained in exchange for lease liabilities: | |||||||||||||
Operating leases | 11,436 | 317 | 11,662 | 716 | |||||||||
Finance leases | 2,962 | 2,746 | 2,962 | 17,426 | |||||||||
Right-of-use assets and liabilities reduced through lease terminations or modifications: | |||||||||||||
Operating leases | - | - | - | (1,949 | ) |
SUNOPTA INC. | 11 | July 1, 2023 Form 10-Q |
October 1, 2022 | January 1, 2022 | |||||
$ | $ | |||||
Balance Sheet Classification | ||||||
Operating leases: | ||||||
Operating lease right-of-use assets | 78,167 | 47,245 | ||||
Current portion of operating lease liabilities | 12,601 | 12,203 | ||||
Operating lease liabilities | 71,016 | 39,028 | ||||
Total operating lease liabilities | 83,617 | 51,231 | ||||
Finance leases: | ||||||
Property, plant and equipment, gross | 139,081 | 66,060 | ||||
Accumulated depreciation | (17,440 | ) | (10,348 | ) | ||
Property, plant and equipment, net | 121,641 | 55,712 | ||||
Current portion of long-term debt | 28,255 | 9,760 | ||||
Long-term debt | 83,728 | 43,034 | ||||
Total finance lease liabilities | 111,983 | 52,794 |
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Cash Flow Information | ||||||||||||
Cash paid (received) for amounts included in measurement of lease liabilities: | ||||||||||||
Operating cash flows from operating leases | 3,909 | 3,127 | 9,954 | 10,079 | ||||||||
Operating cash flows from finance leases | 1,678 | 588 | 3,503 | 2,013 | ||||||||
Financing cash flows from finance leases: | ||||||||||||
Cash paid under finance leases(1) | 6,265 | 1,663 | 13,834 | 6,916 | ||||||||
Cash received under finance leases(2) | (15,101 | ) | - | (48,378 | ) | - | ||||||
Right-of-use assets obtained in exchange for lease liabilities: | ||||||||||||
Operating leases(3) | 42,669 | 8,522 | 43,385 | 25,811 | ||||||||
Finance leases | 7,217 | - | 24,643 | 29,906 | ||||||||
Right-of-use assets and liabilities reduced through lease terminations or modifications: | ||||||||||||
Operating leases | (277 | ) | - | (2,226 | ) | - | ||||||
Finance leases | - | - | - | (686 | ) |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(1) Represents repayments under finance leases recorded as a reduction of the lease liability and reported in repayment of long-term debt on the consolidated statements of cash flows.
(2) Represents cash advances received by the Company under finance leases for the construction of right-of-use assets controlled by the Company, which related to the buildoutsbuildout of the Company's new plant-based beverage facility under construction in Midlothian, Texas, in the first two quarters of 2023 and 2022, as well as the buildout of the Company's executive office and innovation center located in Eden Prairie, Minnesota, as well as cash proceeds under sale and leaseback transactions accounted for as financings.in the first two quarters of 2022. Cash received under finance leases is reported in borrowings of long-term debt on the consolidated statements of cash flows.
July 1, 2023 | December 31, 2022 | |||||
Other Information | ||||||
Weighted-average remaining lease term (years): | ||||||
Operating leases | 12.3 | 12.8 | ||||
Finance leases | 3.2 | 3.5 | ||||
Weighted-average discount rate: | ||||||
Operating leases | 8.6% | 8.7% | ||||
Finance leases | 8.1% | 8.2% |
Operating leases | Finance leases | |||||
$ | $ | |||||
Maturities of Lease Liabilities | ||||||
Remainder of 2023 | 7,439 | 18,786 | ||||
2024 | 14,021 | 44,492 | ||||
2025 | 13,277 | 38,492 | ||||
2026 | 12,392 | 25,577 | ||||
2027 | 11,383 | 4,301 | ||||
Thereafter | 162,267 | 236 | ||||
Total lease payments | 220,779 | 131,884 | ||||
Less: imputed interest | (121,121 | ) | (17,095 | ) | ||
Total lease liabilities | 99,658 | 114,789 |
(3)4. Accounts Payable
ForThe Company is party to a supplier finance program with a third-party financial institution, which is offered to certain of the quarter and three quarters ended October, 1, 2022, includesCompany's major suppliers. Under this arrangement, the additionCompany agrees with a supplier on the contractual payment terms for the goods the Company procures regardless of whether the supplier elects to participate in the program. If a $39.9 million operating lease right-of-use asset and corresponding operating lease liability relatedsupplier does participate in the program, the supplier determines, at its own discretion, which invoices, if any, it wants to sell to the premises lease forfinancial institution in order to be paid earlier than the Midlothian, Texas, facility,contractual payment terms provide. A supplier's voluntary inclusion of an invoice in the program has no bearing on the Company's payment terms, which commencedremain the original due date of the supplier invoice, or the amounts it pays the financial institution, and the Company has no economic interest in a supplier's decision to participate in the program. In addition, the Company has not pledged any assets to the financial institution as it relates to the program. Amounts due to suppliers that elected to participate in the program are included in accounts payable and accrued liabilities on Octoberthe Company's consolidated balance sheets. As at July 1, 2022, following substantial completion2023, the Company had outstanding payment obligations to these suppliers of construction by$7.8 million confirmed under the landlord. program. Payments of obligations associated with the program are reported as operating cash flows on the Company's consolidated statements of cash flows.
The noncancellable lease term is 15 years from5. Notes Payable
Commencing in the lease commencement date, together with three five-year extension options thatfirst quarter of 2023, the Company is reasonablyfinancing certain purchases of trade goods and services through third-party extended payables facilities. Under these facilities, third-party intermediaries advance the amount of the scheduled payment to exercise. At the lease commencementsupplier based on the invoice due date and issue a short-term note payable to the estimated lease payments, netCompany for the face amount of leasehold incentives, were discountedthe supplier invoice. Interest accrues on the note payable from the contractual payment date of the supplier invoice to the extended due date of the note payable, as specified by the negotiated terms of each facility. The Company does not maintain any form of security with the third-party intermediaries. As at July 1, 2023, the Company had outstanding principal payment obligations to the third-party intermediaries of $19.7 million in the aggregate, which is recorded as notes payable on the Company's estimated incremental borrowing rate applicable toconsolidated balance sheet. Proceeds from, and repayments of the 30-year lease termnotes payable associated with, these facilities are reported as financing cash flows on the Company's consolidated statements of 10.3%.cash flows.
SUNOPTA INC. |
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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) |
October 1, 2022 | January 1, 2022 | |||||
Other Information | ||||||
Weighted-average remaining lease term (years): | ||||||
Operating leases | 13.0 | 7.4 | ||||
Finance leases | 2.7 | 4.3 | ||||
Weighted-average discount rate: | ||||||
Operating leases | 8.6% | 5.0% | ||||
Finance leases | 7.5% | 6.6% |
Operating leases | Finance leases | |||||
$ | $ | |||||
Maturities of Lease Liabilities | ||||||
Remainder of 2022 | 2,035 | 5,242 | ||||
2023 | 11,460 | 37,487 | ||||
2024 | 11,572 | 36,165 | ||||
2025 | 10,313 | 31,385 | ||||
2026 | 9,355 | 19,088 | ||||
Thereafter | 156,480 | 185 | ||||
Total lease payments | 201,215 | 129,552 | ||||
Less: imputed interest | (117,598 | ) | (17,569 | ) | ||
Total lease liabilities | 83,617 | 111,983 |
October 1, 2022 | January 1, 2022 | July 1, 2023 | December 31, 2022 | ||||||||||
$ | $ | $ | $ | ||||||||||
Asset-based credit facilities: | Asset-based credit facilities: | ||||||||||||
Revolving credit facilities | 154,032 | 153,293 | |||||||||||
Term loan facility | 37,425 | 11,606 | |||||||||||
Total asset-based credit facilities | 191,457 | 164,899 | |||||||||||
Finance lease liabilities (see note 4) | 111,983 | 52,794 | |||||||||||
Revolving credit facilities | 138,504 | 137,253 | |||||||||||
Term loan facility | 54,319 | 43,748 | |||||||||||
Total asset-based credit facilities | 192,823 | 181,001 | |||||||||||
Finance lease liabilities (see note 3) | Finance lease liabilities (see note 3) | 114,789 | 124,079 | ||||||||||
Other | 2,822 | 6,910 | Other | 8,499 | 3,404 | ||||||||
Total debt | 306,262 | 224,603 | Total debt | 316,111 | 308,484 | ||||||||
Less: current portion | 31,374 | 9,760 | Less: current portion | 45,394 | 38,491 | ||||||||
Total long-term debt | 274,888 | 214,843 | Total long-term debt | 270,717 | 269,993 |
Asset-Based Credit Facilities
On December 31, 2020, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement"), as amended by the First Amendment, dated as of April 15, 2021, the Second Amendment, dated as of July 2, 2021, and the Third Amendment, dated as of February 25, 2022, and the Fourth Amendment, dated as of September 2, 2022, among the Company, SunOpta Foods Inc. ("SunOpta Foods"), the other borrowers and guarantors party thereto, and the lenders party thereto (the "Lenders"). As part of the Credit Agreement, the Lenders provided a five-year, $230 million asset-based revolving credit facility, subject to borrowing base capacity (the "Tranche A Subfacility"), a two-year, $20 million first-in-last-out tranche, subject to a separate borrowing base applicable to certain eligible accounts receivable and inventory with advance rates separate from the Tranche A Subfacility (the "Tranche B Subfacility", and together with the Tranche A Subfacility, the "Revolving Credit Facilities"), and a five-year, up to $75 million delayed draw term loan facility which cancould be used for borrowings on or prior to March 31, 2023 (the "Term Loan Facility," and together with the Revolving Credit Facilities, the "Asset-Based Credit Facilities"), to finance certain capital expenditures. The Tranche A Subfacility includes borrowing capacity for letters of credit and provides for borrowings on same-day notice, including in the form of swingline loans.
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The Tranche A Subfacility and Term Loan Facility mature on December 31, 2025. Commencing in March 2023, the Term Loan Facility is repayable in monthly installments equal to 1/84th of the then-outstanding principal amount of the Term Loan Facility outstanding as at March 31, 2023, with the remaining amount payable at the maturity thereof. The Tranche B Subfacility matures on April 15, 2024, with amortization payments of $2.5 million, payable at the end of each fiscal quarter, commencing with the fiscalfirst quarter ending March 31,of 2023, with the remaining amount payable at the maturity thereof. Each repayment of Tranche B Subfacility loans will resultresults in an increase of the Lenders' commitments under the Tranche A Subfacility, provided that such increases will not cause the aggregate Lenders' commitments under the Tranche A Subfacility to exceed $250 million.
Borrowings under the Asset-Based Credit Facilities bear interest based on various reference rates, including the Secured Overnight Financing Rate, plus applicable margins, which are set quarterly based on average borrowing availability for the preceding fiscal quarter. For the threetwo quarters ended OctoberJuly 1, 2022,2023, the weighted-average interest rate on all outstanding borrowings under the Asset-Based Credit Facilities was 3.83%7.17% (July 2, 2022 - 2.99%).
As at OctoberJuly 1, 2022,2023, the Company was in compliance with all covenants of the Credit Agreement.
SUNOPTA INC. | 13 | July 1, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
6.7. Series B-1 Preferred Stock
As at October 1, 2022,On April 15, 2020, the Company and SunOpta Foods had 30,000entered into a subscription agreement (the "Series B Subscription Agreement") with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund II, L.P. (collectively, "Oaktree") and Engaged Capital, LLC, Engaged Capital Flagship Master Fund, LP and Engaged Capital Co-Invest IV-A, LP (collectively, "Engaged"). On April 24, 2020, pursuant to the Series B Subscription Agreement, SunOpta Foods issued 15,000 shares of Series B-1 preferred stock issuedPreferred Stock to each of Oaktree and outstanding, with a current liquidation preferenceEngaged for aggregate consideration of $1,015 per share, or $30.4$30.0 million in the aggregate. At any time, the Seriesand 30,000 shares total (the "Series B-1 preferred stock may be exchanged, in whole or in part, into the number of shares of the Company's common stock ("Common Shares"Preferred Stock") equal to, per share of Series B-1 preferred stock, the quotient of the liquidation preference divided by an exchange price of $2.50. On or after April 24, 2023, SunOpta Foods may cause the holders of the Series B-1 preferred stock to exchange all of their shares of Series B-1 preferred stock if the volume-weighted average price of the Common Shares during the then preceding 20 trading day period is greater than 200% of the exchange price then in effect.. Preferred dividends accrue daily on the Series B-1 preferred stock at an annualized rate of 8.0% of the liquidation preference prior to September 30, 2029, and 10.0% of the liquidation preference thereafter. In eachFor the second quarter of the first three quarters of 2022, the Company paid quarterly cash2020, SunOpta Foods elected to pay dividends on the Series B-1 preferred stock of $0.6 million,in kind and, as a result, the aggregate liquidation preference increased to $30.4 million, or approximately $1,015 per share.
As at July 1, 2023, SunOpta Foods had 15,000 shares of Series B-1 Preferred Stock issued and outstanding to Oaktree. At any time, Oaktree may exchange the Series B-1 Preferred Stock, in accounts payable and accrued liabilities onwhole or in part, into the consolidated balance sheet. Atnumber of Common Shares equal to, per share of Series B-1 Preferred Stock, the quotient of the liquidation preference divided by the exchange price of $2.50. On or after April 24, 2023, SunOpta Foods may cause Oaktree to exchange all of their shares of Series B-1 Preferred Stock if the volume-weighted average price of the Common Shares during the then preceding 20 trading day period is greater than 200% of the exchange price then in effect. In addition, at any time on or after April 24, 2025, SunOpta Foods may redeem all of the Series B-1 preferred stockPreferred Stock for an amount per share equal to the value of the liquidation preference at such time, plus accrued and unpaid dividends.
On May 19, 2023, the Company issued 2,932,453 Special Shares, Series 2, to Oaktree. As a result of a permanent voting cap, the number of Special Shares, Series 2 issued to Oaktree at any time, when taken together with any other voting securities Oaktree then controls, cannot exceed 19.99% of the votes eligible to be cast by all security holders of the Company.
In the first quarter of 2023, the Company paid cash dividends on the Series B-1 Preferred Stock of $0.6 million in the aggregate to Oaktree and Engaged related to the fourth quarter of 2022, together with a cash dividend $0.2 million paid to Engaged for the period from January 1, 2023 to March 3, 2023. In the second quarter of 2023, the Company paid a quarterly cash dividend of $0.3 million to Oaktree on the Series B-1 Preferred Stock, and, as at July 1, 2023, the Company accrued unpaid dividends to Oaktree of $0.3 million for the second quarter of 2023, which are recorded in accounts payable and accrued liabilities on the consolidated balance sheet. The carrying value of the Series B-1 preferred stockPreferred Stock, net of unamortized issuance costs, is being accreted to the redemption value through charges to accumulated deficit, which amounted to $0.5$0.3 million for the threetwo quarters ended OctoberJuly 1, 2023 (July 2, 2022 (October 2, 2021 - $0.4$0.3 million).
SUNOPTA INC. | 14 | July 1, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
7.8. Stock-Based Compensation
During the three quarters ended October 1, 2022, 1,750,935second quarter of 2023, the Company granted 1,107,650 performance share units ("PSUs") were granted to certainselected employees under the Company's 20222023 Short-Term Incentive Plan ("STIP"), which vest subject to the Company achieving a predetermined measure of adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") for fiscal 20222023 and subject to eachthe employee's continued employment with the Company through March 31, 2023April 1, 2024 (the requisite service period) (the "EBITDA PSUs"). The weighted-average grant-date fair value of each EBITDA PSU was estimated to be $5.27$6.99 based on the closing price of the Common Shares on the datesdate of grant. As at OctoberJuly 1, 2022,2023, the remaining compensation cost related to outstandingthese EBITDA PSUs granted under the 2022 STIP not yet recognized as an expense was determined to be $4.2$7.4 million, which will be amortized over the remaining requisite service period.
On March 30, 2022, all outstandingDuring the first quarter of 2023, the Company issued 1,242,659 Common Shares, net of 1,057,041 Common Shares withheld for taxes, in connection with the vesting of 2,299,700 EBITDA PSUs previously granted to certain employeesselected employees. The total intrinsic value of the Company in connection with the Company's 2021 STIP were cancelled because the fiscal year 2021 performance conditionthese vested EBITDA PSUs was not achieved. No compensation expense was recognized related to these EBITDA PSUs.
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Weighted- | ||||||
average grant- | ||||||
EBITDA PSUs | date fair value | |||||
Non-vested, beginning of period | 670,171 | $ | 11.77 | |||
Granted | 1,750,935 | 5.27 | ||||
Vested | (58,235 | ) | 4.91 | |||
Cancelled | (715,435 | ) | 11.87 | |||
Non-vested, end of period | 1,647,436 | $ | 5.07 |
Weighted- | ||||||
average grant- | ||||||
EBITDA PSUs | date fair value | |||||
Non-vested, beginning of period | 2,355,431 | $ | 4.80 | |||
Granted | 1,109,309 | 6.99 | ||||
Vested | (2,299,700 | ) | 4.78 | |||
Cancelled | (60,157 | ) | 5.59 | |||
Non-vested, end of period | 1,104,883 | $ | 6.99 |
DuringSubsequent to the three quarters ended October 1, 2022, 117,069second quarter of 2023, on July 10, 2023, the Company granted 186,906 restricted stock units ("RSUs"), 547,071384,330 PSUs and 1,800,007498,299 stock options were granted to selected employees under the Company's 20222023 Long-Term Incentive Plan ("LTIP"). The RSUs vest in three equal annual installments beginning on May 5, 2023,July 10, 2024, and each vested RSU entitles the employee to receive one Common Share without payment of additional consideration. The vesting of the PSUs is dependent on the Company's total shareholder return ("TSR") performance relative to food and beverage companies in a designated index during the three-year period commencing January 1, 20222023 and continuing through December 31, 2024,2025, and subject to the employee's continued employment with the Company through May 5, 2025.April 15, 2026. The TSR for the Company and each of the companies in the designated index will be calculated using a 20-trading day average closing price as of December 31, 2024.2025. The percentage of vested PSUs may range from 0% to 200% based on the Company's achievement of predetermined TSR thresholds. Each vested PSU entitles the employee to receive one Common Share without payment of additional consideration, with the Board of Directors having the option to settle vested PSUs in whole or part in cash in lieu of Common Shares. As at October 1, 2022, the Company had the intent and ability to settle the PSUs in Common Shares.consideration. The stock options vest ratably on each of the first through third anniversaries of the grant date and expire on the tenth anniversary of the grant date. Each vested stock option entitles the employee to purchase one Common Share at an exercise price of $5.91,$6.35, which was the closing price of the Common Shares on May 5, 2022.July 10, 2023.
9. Income Taxes
The weighted-average grant-date fair valueeffective tax rates recognized for the quarter and two quarters ended July 1, 2023 were (88.3)% (July 2, 2022 - 33.5%) and (31.1)% (July 2, 2022 - 28.9%), respectively. The change in the effective tax rates for the quarter and two quarters ended July 1, 2023, compared with the corresponding periods of each RSU2022, was estimatedprimarily due to be $6.57the recognition of a full valuation allowance against U.S. deferred tax assets in the second quarter of 2023, based on the closing prices ofCompany's assessment that the Common Shares on the dates of grant. A grant-date fair value of $8.48 was estimated for each PSU using a Monte Carlo valuation model, and a weighted-average grant-date fair value of $3.49 was estimated for each stock option using the Black-Scholes option pricing model. The following table summarizes the assumptions used to determine the fair values of the PSUs and stock options granted under the 2022 LTIP.
PSUs | Stock options | |||||
Grant-date stock price | $ | 5.91 | $ | 5.91 | ||
Exercise price | NA | $ | 5.91 | |||
Dividend yield | 0% | 0% | ||||
Expected volatility(a) | 67.8% | 61.6% | ||||
Risk-free interest rate(b) | 2.8% | 3.0% | ||||
Expected life (in years)(c) | 2.7 | 6.0 |
(a)Determined based on the historical volatility of the Common Shares over the performance period of the PSUs and expected life of the stock options.
(b)Determined based on U.S. Treasury yields with a remaining term equal to the performance period of the PSUs and expected life of the stock options.
(c)Determined based on the performance period of the PSUs and the mid-point of vesting (three years) and expiration (ten years) for the stock options.
As at October 1, 2022, the remaining compensation cost related to outstanding RSUs, PSUs and stock options granted under the 2022 LTIPtax benefits were no longer more likely than not yet recognized as an expense was determined to be $10.0 million, which will be recognized on a straight-line basis overrealized in the remaining requisite service period ending May 5, 2025.future.
SUNOPTA INC. |
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SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and
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8. Other Expense, Net
The components of other expense (income) were as follows:
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Loss on classification of sunflower business as held for sale (see note 3) | 23,227 | - | 23,227 | - | ||||||||
Gain on sale of frozen fruit processing facility(1) | (3,779 | ) | - | (3,779 | ) | - | ||||||
Facility closure costs(2) | 526 | 479 | 1,813 | 4,873 | ||||||||
Settlement losses, net(3) | - | - | 283 | 163 | ||||||||
Employee termination costs(4) | - | 499 | - | 1,660 | ||||||||
Divestiture costs(5) | - | 154 | - | 628 | ||||||||
Other | 226 | 40 | 483 | 124 | ||||||||
20,200 | 1,172 | 22,027 | 7,448 |
(1)Gain on sale of frozen fruit processing facility
For the quarter and three quarters ended October 1, 2022 the Company recognized a $3.8 million pre-tax gain on the sale of its frozen fruit processing facility located in Oxnard, California. Net cash proceeds on the sale were $16.1 million.
(2)Facility closure costs
For the quarter and three quarters ended October 1, 2022, expense primarily relates to the relocation of certain equipment from the Company's sold Oxnard facility.
For the quarter ended October 2, 2021, expense represents costs incurred to relocate inventory and equipment following the closure of the Company's former South Gate, California, fruit ingredient processing facility. For the three quarters ended October 2, 2021, facility closure costs also include asset impairment charges of $3.0 million recorded in connection with the closure of the South Gate facility and costs to complete the exit from the Company's former Santa Maria, California, frozen fruit processing facility.
(3)Settlement losses, net
For the three quarters ended October 1, 2022 and October 2, 2021, expense represents net losses incurred on the settlement of certain legal and contractual matters.
(4)Employee termination costs
For the quarter and three quarters ended October 2, 2021, expense represents termination costs for employees impacted by the closure of the Company's fruit ingredient processing facility and a workforce reduction in the Company's frozen fruit operations.
(5)Divestiture costs
For the quarter and three quarters ended October 2, 2021, expense relates to professional fees incurred in connection with post-closing matters related to the 2020 divestiture of the Company's global ingredients business, Tradin Organic.
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9. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows (shares in thousands):
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
Basic Earnings (Loss) Per Share | ||||||||||||
Numerator for basic earnings (loss) per share: | ||||||||||||
Loss from continuing operations | $ | (12,639 | ) | $ | (3,034 | ) | $ | (9,487 | ) | $ | (2,280 | ) |
Less: dividends and accretion on preferred stock | (764 | ) | (748 | ) | (2,279 | ) | (3,445 | ) | ||||
Loss from continuing operations attributable to common shareholders | (13,403 | ) | (3,782 | ) | (11,766 | ) | (5,725 | ) | ||||
Earnings from discontinued operations | - | - | 2,752 | - | ||||||||
Loss attributable to common shareholders | $ | (13,403 | ) | $ | (3,782 | ) | $ | (9,014 | ) | $ | (5,725 | ) |
Denominator for basic earnings (loss) per share: | ||||||||||||
Basic weighted-average number of shares outstanding | 107,752 | 107,255 | 107,566 | 103,017 | ||||||||
Basic earnings (loss) per share: | ||||||||||||
From continuing operations | $ | (0.12 | ) | $ | (0.04 | ) | $ | (0.11 | ) | $ | (0.06 | ) |
From discontinued operations | - | - | 0.03 | - | ||||||||
Basic earnings (loss) per share | $ | (0.12 | ) | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.06 | ) |
Diluted Earnings (Loss) Per Share | ||||||||||||
Numerator for diluted earnings (loss) per share: | ||||||||||||
Loss from continuing operations | $ | (12,639 | ) | $ | (3,034 | ) | $ | (9,487 | ) | $ | (2,280 | ) |
Less: dividends and accretion on preferred stock | (764 | ) | (748 | ) | (2,279 | ) | (3,445 | ) | ||||
Loss from continuing operations attributable to common shareholders | (13,403 | ) | (3,782 | ) | (11,766 | ) | (5,725 | ) | ||||
Earnings from discontinued operations | - | - | 2,752 | - | ||||||||
Loss attributable to common shareholders | $ | (13,403 | ) | $ | (3,782 | ) | $ | (9,014 | ) | $ | (5,725 | ) |
Denominator for diluted earnings (loss) per share: | ||||||||||||
Basic weighted-average number of shares outstanding | 107,752 | 107,255 | 107,566 | 103,017 | ||||||||
Dilutive effect of the following: | ||||||||||||
Stock options, restricted stock units and performance share units(1) | - | - | - | - | ||||||||
Preferred stock(2) | - | - | - | - | ||||||||
Diluted weighted-average number of shares outstanding | 107,752 | 107,255 | 107,566 | 103,017 | ||||||||
Diluted earnings (loss) per share: | ||||||||||||
From continuing operations | $ | (0.12 | ) | $ | (0.04 | ) | $ | (0.11 | ) | $ | (0.06 | ) |
From discontinued operations | - | - | 0.03 | - | ||||||||
Diluted earnings (loss) per share | $ | (0.12 | ) | $ | (0.04 | ) | $ | (0.08 | ) | $ | (0.06 | ) |
(1)For the quarter and three quarters ended October 1, 2022, 1,486,560 (October 2, 2021 - 1,576,776) and 1,165,008 (October 2, 2021 - 3,412,854) potential common shares, respectively, were excluded from the calculation of diluted loss per share due to their effect of reducing the loss per share. Dilutive potential common shares consist of stock options, RSUs, and certain contingently issuable PSUs. In addition, for the quarter and three quarters ended October 1, 2022, stock options and RSUs to purchase or receive 339,798 (October 2, 2021 - 443,308) and 2,440,184 (October 2, 2021 - 259,245) potential common shares, respectively, were anti-dilutive because the assumed proceeds exceeded the average market price of the Common Shares for the respective periods.
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(Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
10. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows (shares in thousands):
Quarter ended | Two quarters ended | ||||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
Basic Earnings (Loss) Per Share | |||||||||||||
Numerator for basic earnings (loss) per share: | |||||||||||||
Earnings (loss) from continuing operations | $ | (18,838 | ) | $ | 2,285 | $ | (17,461 | ) | $ | 3,287 | |||
Less: dividends and accretion on preferred stock | (422 | ) | (760 | ) | (1,126 | ) | (1,515 | ) | |||||
Earnings (loss) from continuing operations attributable to common shareholders | (19,260 | ) | 1,525 | (18,587 | ) | 1,772 | |||||||
Earnings (loss) from discontinued operations | - | (814 | ) | - | 2,752 | ||||||||
Earnings (loss) attributable to common shareholders | $ | (19,260 | ) | $ | 711 | $ | (18,587 | ) | $ | 4,524 | |||
Denominator for basic earnings (loss) per share: | |||||||||||||
Basic weighted-average number of shares outstanding | 115,471 | 107,622 | 112,743 | 107,510 | |||||||||
Basic earnings (loss) per share: | |||||||||||||
Earnings (loss) from continuing operations | $ | (0.17 | ) | $ | 0.01 | $ | (0.16 | ) | $ | 0.02 | |||
Earnings (loss) from discontinued operations | - | (0.01 | ) | - | 0.03 | ||||||||
Earnings (loss) attributable to common shareholders(1) | $ | (0.17 | ) | $ | 0.01 | $ | (0.16 | ) | $ | 0.04 | |||
Diluted Earnings (Loss) Per Share | |||||||||||||
Numerator for diluted earnings (loss) per share: | |||||||||||||
Earnings (loss) from continuing operations | $ | (18,838 | ) | $ | 2,285 | $ | (17,461 | ) | $ | 3,287 | |||
Less: dividends and accretion on preferred stock | (422 | ) | (760 | ) | (1,126 | ) | (1,515 | ) | |||||
Earnings (loss) from continuing operations attributable to common shareholders | (19,260 | ) | 1,525 | (18,587 | ) | 1,772 | |||||||
Earnings (loss) from discontinued operations | - | (814 | ) | - | 2,752 | ||||||||
Earnings (loss) attributable to common shareholders | $ | (19,260 | ) | $ | 711 | $ | (18,587 | ) | $ | 4,524 | |||
Denominator for diluted earnings (loss) per share: | |||||||||||||
Basic weighted-average number of shares outstanding | 115,471 | 107,622 | 112,743 | 107,510 | |||||||||
Dilutive effect of the following: | |||||||||||||
Stock options, restricted stock units and performance share units(2) | - | 1,045 | - | 985 | |||||||||
Series B-1 Preferred Stock(3) | - | - | - | - | |||||||||
Diluted weighted-average number of shares outstanding | 115,471 | 108,667 | 112,743 | 108,495 | |||||||||
Diluted earnings (loss) per share: | |||||||||||||
Earnings (loss) from continuing operations | $ | (0.17 | ) | $ | 0.01 | $ | (0.16 | ) | $ | 0.02 | |||
Earnings (loss) from discontinued operations | - | (0.01 | ) | - | 0.03 | ||||||||
Earnings (loss) attributable to common shareholders(1) | $ | (0.17 | ) | $ | 0.01 | $ | (0.16 | ) | $ | 0.04 |
(1)The sum of the individual per share amounts may not add due to rounding.
(2) For the quarter and threetwo quarters ended OctoberJuly 1, 2023, 1,024,173 and 1,974,484 potential common shares, respectively, were excluded from the calculation of diluted loss per share due to their effect of reducing the loss per share from continuing operations. Dilutive potential common shares consist of stock options, RSUs, and certain contingently issuable PSUs. For the quarter and two quarters ended July 1, 2023, stock options and RSUs to purchase or receive 2,204,546 (July 2, 2022 - 2,544,112) and October2,192,755 (July 2, 2021,2022 - 2,551,746) potential common shares, respectively, were anti-dilutive because the assumed proceeds exceeded the average market price of the Common Shares for the respective periods.
SUNOPTA INC. | 16 | July 1, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(3)For the quarter and two quarters ended July 1, 2023 and July 2, 2022, it was more dilutive to assume the Series B-1 preferred stockPreferred Stock was not converted into Common Shares and, therefore, the numerator of the diluted earnings (loss) per share calculation was not adjusted to add back the dividends and accretion on the Series B-1 preferred stockPreferred Stock and the denominator was not adjusted to include the 6,089,333 and 12,178,667 Common Shares issuable on an if-converted basis as at OctoberJuly 1, 2023 and July 2, 2022, and October 2, 2021.respectively.
10.11. Supplemental Cash Flow Information
Quarter ended | Two quarters ended | |||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
$ | $ | $ | $ | |||||||||
Changes in Operating Assets and Liabilities | ||||||||||||
Accounts receivable | 13,348 | 14,416 | 1,742 | (1,019 | ) | |||||||
Inventories | (20,195 | ) | (43,924 | ) | (13,705 | ) | (42,121 | ) | ||||
Accounts payable and accrued liabilities | 19,887 | 13,571 | 17,300 | 27,386 | ||||||||
Other operating assets and liabilities | (259 | ) | (6,515 | ) | (116 | ) | (3,507 | ) | ||||
12,781 | (22,452 | ) | 5,221 | (19,261 | ) | |||||||
Non-Cash Investing and Financing Activities | ||||||||||||
Change in additions to property, plant and equipment included in accounts payable and accrued liabilities | 472 | 337 | (680 | ) | (5,439 | ) | ||||||
Change in accrued withholding taxes on stock-based awards included in accounts payable and accrued liabilities | (8,477 | ) | - | - | - | |||||||
Change in accrued dividends on preferred stock included in accounts payable and accrued liabilities | - | - | (305 | ) | - | |||||||
Change in proceeds receivable from sale of sunflower business(1) | - | - | 385 | - | ||||||||
Change in accounts payable and accrued liabilities related to discontinued operations | - | (6,324 | ) | - | - |
(1)On October 11, 2022, the Company completed the sale of 100% of the assets and liabilities of its sunflower business and related roasted snacks operations for net proceeds of $8.2 million, of which $0.4 million was related to the settlement of the final working capital adjustment, which was received in the first quarter of 2023.
Quarter ended | Three quarters ended | |||||||||||
October 1, | October 2, | October 1, | October 2, | |||||||||
$ | $ | $ | $ | |||||||||
Changes in Operating Assets and Liabilities | ||||||||||||
Accounts receivable | (1,033 | ) | (3,665 | ) | (2,052 | ) | (14,050 | ) | ||||
Inventories | 22,593 | (1,035 | ) | (19,163 | ) | (83,143 | ) | |||||
Accounts payable and accrued liabilities | (22,572 | ) | (9 | ) | 4,539 | 14,911 | ||||||
Other operating assets and liabilities | 3,015 | (785 | ) | (492 | ) | 4,810 | ||||||
2,003 | (5,494 | ) | (17,168 | ) | (77,472 | ) | ||||||
Non-Cash Investing and Financing Activities | ||||||||||||
Change in additions to property, plant and equipment included in accounts payable and accrued liabilities | 668 | (1,358 | ) | (4,771 | ) | (1,975 | ) | |||||
Change in accounts payable and accrued liabilities related to discontinued operations | - | - | - | (13,380 | ) | |||||||
Change in accrued dividends on preferred stock | - | - | - | (1,769 | ) | |||||||
Change in accrued debt issuance costs | - | - | - | (1,690 | ) |
11.12. Commitments and Contingencies
Legal Proceedings
Various current and potential claims and litigation arising in the ordinary course of business are pending against the Company. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable that may be incurred in connection with any such currently pending matter. In the Company's opinion, the eventual resolution of such matters, either individually or in the aggregate, is not expected to have a material impact on the Company's financial position, results of operations, or cash flows. However, litigation is inherently unpredictable and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on the Company's financial position, results of operations, and cash flows for the reporting period in which any such resolution or disposition occurs.
Arbitration Proceedings
On January 31, 2022, Amsterdam Commodities N.V. ("Acomo") submitted a Request for Summary Arbitral Proceedings to the Netherlands Arbitration Institute, which was later amended on February 16, 2022, asserting alleged claims against the Company and its subsidiaries, Coöperatie SunOpta U.A. and SunOpta Holdings LLC, relating to a dispute regarding the allocation of the purchase price Acomo paid to acquire the shares of The Organic Corporation B.V. and the membership interests of Tradin Organics USA LLC in connection with the closing of the transactions contemplated by the Master Purchase Agreement entered into by Acomo, the Company and the aforementioned subsidiaries on November 25, 2020 (the "Transaction"). On May 25, 2022, the parties entered into a definitive Settlement Agreement to resolve all outstanding matters related to the Master Purchase Agreement, following which the Request for Summary Arbitral Proceedings was withdrawn. In connection with the Settlement Agreement, the Company recognized earnings from discontinued operations of $2.8 million for the three quarters ended October 1, 2022, which reflected the estimated tax benefits resulting from the final allocation of the purchase price between the share capital of The Organic Corporation B.V. and the membership interests of Tradin Organics USA LLC, partially offset by a cash payment of $5.9 million from the Company to Acomo to settle certain post-closing adjustments related to the Transaction, as well as professional fees incurred in connection with the arbitration proceedings.
SUNOPTA INC. |
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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) |
Product Recall
On June 21, 2023, the Company announced its subsidiary, Sunrise Growers Inc., had issued a voluntary recall of specific frozen fruit products linked to pineapple provided by a third-party supplier due to possible contamination by Listeria monocytogenes. For the quarter ended July 1, 2023, the Company recognized a reduction to revenues of $0.2 million for customer returns of the recalled products and a $3.0 million reserve for inventory on-hand, which was charged to cost of goods sold. The Company is seeking to recover a portion of the recall-related costs through its insurance coverage, and such recoveries are recorded in the period in which the recoveries are determined to be probable of realization. For the quarter ended July 1, 2023, the Company recognized estimated insurance recoveries of $0.7 million, net of deductibles, in other income, with the corresponding amount included in accounts receivable on the consolidated balance sheet as at July 1, 2023.
The Company expects to incur additional costs related to the recall during the second half of 2023, including product warehousing, transportation and destruction costs, as well as administrative costs. In addition, the Company may be subject to additional claims for damages from customers and end-consumers related to the recall. The Company expects that these additional costs and potential claims will be generally covered under its insurance policies; however, as of the date of this filing, the Company cannot be certain of its ability to recover recall-related costs through its insurance coverage or the extent of any such recovery.
The Company is currently unable to assess the impact that this recall may have on its future sales of frozen fruit products or on its relationships with its frozen fruit customers, which may have an adverse impact on the fair values of the property, plant and equipment and finite-lived customer relationship intangible assets associated with the frozen fruit business, which had carrying values of $29.6 million and $108.0 million, respectively, as at July 1, 2023. However, based on an assessment of the information available up to the filing date of this report, the Company determined that the carrying values of these long-lived assets were recoverable as at July 1, 2023, and, therefore, testing for impairment was not required.
12.13. Segment Information
The composition of the Company's operating and reportable segments is as follows:
Corporate Services provides a variety of management, financial, information technology, treasury, and administration services to each of the Company's operating segments.
When reviewing the operating results of the Company's operating segments, management uses segment revenues from external customers and segment operating income/loss to assess performance and allocate resources. Total segment operating income/loss includes general and administrative expenses incurred by Corporate Services and excludes other income/expense items. In addition, interest on corporate debt and income taxes are not allocated to the operating segments.
Segment Revenues and Operating Income
Operating segment results for the quarters and three quarters ended October 1, 2022 and October 2, 2021 were as follows:
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Revenues from external customers | ||||||||||||
Plant-Based Foods and Beverages | 137,726 | 114,870 | 419,149 | 345,680 | ||||||||
Fruit-Based Foods and Beverages | 91,939 | 83,609 | 294,220 | 262,712 | ||||||||
Total revenues from external customers | 229,665 | 198,479 | 713,369 | 608,392 | ||||||||
Segment operating income (loss) | ||||||||||||
Plant-Based Foods and Beverages | 8,814 | 8,056 | 29,106 | 30,014 | ||||||||
Fruit-Based Foods and Beverages | 2,870 | (3,517 | ) | 6,865 | (6,858 | ) | ||||||
Corporate Services | (4,040 | ) | (618 | ) | (16,302 | ) | (11,427 | ) | ||||
Total segment operating income | 7,644 | 3,921 | 19,669 | 11,729 | ||||||||
Other expense, net (see note 8) | (20,200 | ) | (1,172 | ) | (22,027 | ) | (7,448 | ) | ||||
Interest expense, net | (4,342 | ) | (2,854 | ) | (10,004 | ) | (6,145 | ) | ||||
Loss from continuing operations before income taxes | (16,898 | ) | (105 | ) | (12,362 | ) | (1,864 | ) |
SUNOPTA INC. |
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|
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) |
Segment Revenues and Operating Income (Loss)
Operating segment results for the quarters and two quarters ended July 1, 2023 and July 2, 2022 were as follows:
Quarter ended | Two quarters ended | |||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
$ | $ | $ | $ | |||||||||
Revenues from external customers | ||||||||||||
Plant-Based Foods and Beverages | 114,492 | 145,912 | 243,842 | 281,423 | ||||||||
Fruit-Based Foods and Beverages | 93,317 | 97,619 | 187,847 | 202,281 | ||||||||
Total revenues from external customers | 207,809 | 243,531 | 431,689 | 483,704 | ||||||||
Segment operating income (loss) | ||||||||||||
Plant-Based Foods and Beverages | 1,903 | 12,196 | 10,180 | 20,657 | ||||||||
Fruit-Based Foods and Beverages | (4,278 | ) | 3,211 | (2,493 | ) | 3,995 | ||||||
Corporate Services | (888 | ) | (7,298 | ) | (8,412 | ) | (12,537 | ) | ||||
Total segment operating income (loss) | (3,263 | ) | 8,109 | (725 | ) | 12,115 | ||||||
Other income (expense), net | 227 | (1,540 | ) | 192 | (1,827 | ) | ||||||
Interest expense, net | (6,969 | ) | (3,132 | ) | (12,781 | ) | (5,662 | ) | ||||
Earnings (loss) from continuing operations before income taxes | (10,005 | ) | 3,437 | (13,314 | ) | 4,626 |
Disaggregation of Revenue
The following table presents a disaggregation of revenues by operating segment based on categories used by the Company to evaluate sales performance:
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Plant-Based Foods and Beverages | ||||||||||||
Beverages and broths | 112,785 | 91,385 | 336,305 | 274,365 | ||||||||
Plant-based ingredients | 7,632 | 7,383 | 27,070 | 22,805 | ||||||||
Sunflower and roasted snacks (see note 3) | 17,309 | 16,102 | 55,774 | 48,510 | ||||||||
Total Plant-Based Foods and Beverages | 137,726 | 114,870 | 419,149 | 345,680 | ||||||||
Fruit-Based Foods and Beverages | ||||||||||||
Frozen fruit and fruit-based ingredients | 68,333 | 68,029 | 225,990 | 214,919 | ||||||||
Fruit snacks and smoothie bowls | 23,606 | 15,580 | 68,230 | 47,793 | ||||||||
Total Fruit-Based Foods and Beverages | 91,939 | 83,609 | 294,220 | 262,712 | ||||||||
Total revenues | 229,665 | 198,479 | 713,369 | 608,392 |
Quarter ended | Two quarters ended | |||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
$ | $ | $ | $ | |||||||||
Plant-Based Foods and Beverages | ||||||||||||
Beverages and broths | 112,949 | 114,898 | 240,268 | 223,520 | ||||||||
Plant-based ingredients | 1,543 | 9,712 | 3,574 | 19,438 | ||||||||
Sunflower and roasted snacks(1) | - | 21,302 | - | 38,465 | ||||||||
Total Plant-Based Foods and Beverages | 114,492 | 145,912 | 243,842 | 281,423 | ||||||||
Fruit-Based Foods and Beverages | ||||||||||||
Frozen fruit and fruit-based ingredients | 66,646 | 74,164 | 135,557 | 157,657 | ||||||||
Fruit snacks and smoothie bowls | 26,671 | 23,455 | 52,290 | 44,624 | ||||||||
Total Fruit-Based Foods and Beverages | 93,317 | 97,619 | 187,847 | 202,281 | ||||||||
Total revenues | 207,809 | 243,531 | 431,689 | 483,704 |
(1)Reflects revenues of the Company's former sunflower business and related roasted snacks operations, which were sold on October 11, 2022.
SUNOPTA INC. | 19 | July 1, 2023 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Segment Assets
Total assets by operating segment as at OctoberJuly 1, 20222023 and January 1,December 31, 2022 were as follows:
October 1, 2022 | January 1, 2022 | |||||
$ | $ | |||||
Plant-Based Foods and Beverages | 362,003 | 301,065 | ||||
Fruit-Based Foods and Beverages | 362,167 | 368,976 | ||||
Corporate Services | 118,629 | 85,078 | ||||
Assets held for sale (see note 3) | 16,151 | - | ||||
Total assets | 858,950 | 755,119 |
July 1, 2023 | December 31, 2022 | |||||
$ | $ | |||||
Plant-Based Foods and Beverages | 402,183 | 384,507 | ||||
Fruit-Based Foods and Beverages | 359,553 | 347,678 | ||||
Corporate Services | 125,389 | 123,667 | ||||
Total assets | 887,125 | 855,852 |
Segment Depreciation and Amortization
Depreciation and amortization by operating segment for the quarters and threetwo quarters ended OctoberJuly 1, 20222023 and OctoberJuly 2, 20212022 was as follows:
Quarter ended | Three quarters ended | |||||||||||
October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
$ | $ | $ | $ | |||||||||
Plant-Based Foods and Beverages | 4,750 | 3,951 | 13,756 | 10,966 | ||||||||
Fruit-Based Foods and Beverages | 3,541 | 3,625 | 10,602 | 11,255 | ||||||||
Corporate Services | 1,439 | 1,261 | 4,157 | 3,569 | ||||||||
Total depreciation and amortization | 9,730 | 8,837 | 28,515 | 25,790 |
Quarter ended | Two quarters ended | |||||||||||
July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
$ | $ | $ | $ | |||||||||
Plant-Based Foods and Beverages | 6,326 | 4,572 | 11,766 | 9,006 | ||||||||
Fruit-Based Foods and Beverages | 3,274 | 3,380 | 6,490 | 7,061 | ||||||||
Corporate Services | 1,187 | 1,420 | 2,529 | 2,718 | ||||||||
Total depreciation and amortization | 10,787 | 9,372 | 20,785 | 18,785 |
SUNOPTA INC. | 20 | July 1, 2023 Form 10-Q |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended OctoberJuly 1, 20222023 contained under Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended January 1,December 31, 2022 (the "Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to NovemberAugust 10, 2022.2023.
Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," or other similar expressions concerning matters that are not historical facts, or the negative of such terms are intended to identify forward-looking statements; however, the absence of these words does not necessarily mean that a statement is not forward-looking. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable based on information currently available, they may prove to be incorrect. These factors are more fully described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current estimates, expectations, and projections, which we believe are reasonable as of the date of this report. Forward-looking statements are not guarantees of future performance or events. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements, and we hereby qualify all our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S. dollars, except per share amounts.
Overview
We procure, process, and package plant-based and fruit-based food and beverage products for sale to retailers, foodservice operators, branded food companies, and food manufacturers. The composition of our operating and reportable segments is as follows:
Plant-Based Foods and Beverages - We offer a full line of plant-based beverages and liquid and powder ingredients, (utilizingutilizing oat, almond, soy, coconut, rice, hemp, and other bases),bases, as well as broths, teas, and nutritional beverages. In addition, theour former sunflower business, which packaged dry- and oil-roasted inshell sunflower and sunflower kernels and processed raw sunflower inshell and kernel for food and feed applications, was part of this segment until it was solddivested on October 11, 2022 (see below - "Sale of Sunflower Business").2022.
Fruit-Based Foods and Beverages - We offer individually quick frozen ("IQF") fruit for retail, (includingincluding strawberries, blueberries, mango, pineapple, and other berries and blends)blends, and IQF and bulk frozen fruit for foodservice, (includingincluding toppings, purées, and smoothies).smoothies. In addition, we offer fruit snacks, including bars, twists, ropes, and bite-sized varieties, as well as fruit smoothie bowls.
SUNOPTA INC. |
Current MacroeconomicGlobal Economic Conditions and Inflationary Cost Environment
Our businesses continue to be exposed to the effects of the current global macroeconomic environment, including elevated inflation, and risinghigher interest rates. Inflationary pressures on household spending, together with general economic uncertainty, is impacting purchasing behaviors, as consumers reduce discretionary spendingrates, and shift to lower priced product alternatives, and our customers manage inventories in reaction to these shifts in consumer behavior.demand.
Sale of Sunflower BusinessFrozen Fruit Product Recall
On October 11, 2022,June 21, 2023, we completed the saleannounced that our subsidiary, Sunrise Growers Inc., had issued a voluntary recall of 100%specific frozen fruit products linked to pineapple provided by a third-party supplier due to possible contamination by Listeria monocytogenes. In July 2023, we began restocking each of the assetsaffected retail customers and liabilities of our sunflower business and related roasted snacks operations, for cash consideration of $16.0 million, subject to closing debt and working capital adjustments. The sale of the sunflower commodity businessthese efforts will continue as replacement product is consistentproduced with our strategic priority of optimizing our non-core businesses and focusing our plant-based beverage and fruit snacks portfolios on high-growth, high-return opportunities. sourced from new suppliers.
For the quarter and three quarters ended OctoberJuly 1, 2022,2023, we recognized net expenses of $2.5 million related to this recall, equal to the self-insured retention amount under our insurance policies, which included a $23.2reduction to revenues of $0.2 million pre-tax loss on sale in connection with the classificationfor customer returns and a $3.0 million charge to cost of the sunflower business as heldgoods sold for sale. The pre-tax loss on sale is includedunsaleable inventory, partially offset by estimated insurance recoveries of $0.7 million, recorded in other expense, net, onincome. We expect to incur additional recall-related costs during the statementssecond half of operations.2023, which we expect will be generally covered under our insurance policies.
For more information regarding this transaction,the frozen fruit product recall, see note 312 to the unaudited consolidated financial statements included in this report.
Sale of Frozen Fruit Processing Facility
On August 26, 2022, we completed the sale of our frozen fruit processing facility located in Oxnard, California, for net cash proceeds of $16.1 million, resulting in a pre-tax gain on sale of $3.8 million, which is included in other expense, net, on the statements of operations for the quarter and three quarters ended October 1, 2022. We continue to process frozen fruit at a leased facility in Oxnard, California. The sale of the Oxnard facility was facilitated by the expansion of our frozen fruit operations in Mexico and diversification of our fruit sourcing from California to Central and South America.
SUNOPTA INC. |
Consolidated Results of Operations for the Quarters Ended OctoberJuly 1, 20222023 and OctoberJuly 2, 20212022
October 1, 2022 | October 2, 2021 | Change | Change | |||||||||
For the quarter ended | $ | $ | $ | % | ||||||||
Revenues | ||||||||||||
Plant-Based Foods and Beverages | 137,726 | 114,870 | 22,856 | 19.9% | ||||||||
Fruit-Based Foods and Beverages | 91,939 | 83,609 | 8,330 | 10.0% | ||||||||
Total revenues | 229,665 | 198,479 | 31,186 | 15.7% | ||||||||
Gross Profit | ||||||||||||
Plant-Based Foods and Beverages | 20,106 | 18,697 | 1,409 | 7.5% | ||||||||
Fruit-Based Foods and Beverages | 11,277 | 4,659 | 6,618 | 142.0% | ||||||||
Total gross profit | 31,383 | 23,356 | 8,027 | 34.4% | ||||||||
Gross Margin | ||||||||||||
Plant-Based Foods and Beverages | 14.6% | 16.3% | -1.7% | |||||||||
Fruit-Based Foods and Beverages | 12.3% | 5.6% | 6.7% | |||||||||
Total gross margin | 13.7% | 11.8% | 1.9% | |||||||||
Segment operating income (loss)(1) | ||||||||||||
Plant-Based Foods and Beverages | 8,814 | 8,056 | 758 | 9.4% | ||||||||
Fruit-Based Foods and Beverages | 2,870 | (3,517 | ) | 6,387 | 181.6% | |||||||
Corporate Services | (4,040 | ) | (618 | ) | (3,422 | ) | -553.7% | |||||
Total segment operating income | 7,644 | 3,921 | 3,723 | 95.0% | ||||||||
Other expense, net | 20,200 | 1,172 | 19,028 | 1623.5% | ||||||||
Earnings (loss) before the following | (12,556 | ) | 2,749 | (15,305 | ) | -556.7% | ||||||
Interest expense, net | 4,342 | 2,854 | 1,488 | 52.1% | ||||||||
Income tax expense (benefit) | (4,259 | ) | 2,929 | (7,188 | ) | -245.4% | ||||||
Net loss(2),(3) | (12,639 | ) | (3,034 | ) | (9,605 | ) | -316.6% | |||||
Dividends and accretion on preferred stock | (764 | ) | (748 | ) | (16 | ) | -2.1% | |||||
Loss attributable to common shareholders(4) | (13,403 | ) | (3,782 | ) | (9,621 | ) | -254.4% |
July 1, 2023 | July 2, 2022 | Change | Change | ||||||||||
For the quarter ended | $ | $ | $ | % | |||||||||
Revenues | |||||||||||||
Plant-Based Foods and Beverages | 114,492 | 145,912 | (31,420 | ) | -21.5% | ||||||||
Fruit-Based Foods and Beverages | 93,317 | 97,619 | (4,302 | ) | -4.4% | ||||||||
Total revenues | 207,809 | 243,531 | (35,722 | ) | -14.7% | ||||||||
Gross Profit | |||||||||||||
Plant-Based Foods and Beverages | 14,405 | 23,940 | (9,535 | ) | -39.8% | ||||||||
Fruit-Based Foods and Beverages | 1,974 | 10,958 | (8,984 | ) | -82.0% | ||||||||
Total gross profit | 16,379 | 34,898 | (18,519 | ) | -53.1% | ||||||||
Gross Margin(1) | |||||||||||||
Plant-Based Foods and Beverages | 12.6% | 16.4% | -3.8% | ||||||||||
Fruit-Based Foods and Beverages | 2.1% | 11.2% | -9.1% | ||||||||||
Total gross margin | 7.9% | 14.3% | -6.4% | ||||||||||
Segment operating income (loss)(2) | |||||||||||||
Plant-Based Foods and Beverages | 1,903 | 12,196 | (10,293 | ) | -84.4% | ||||||||
Fruit-Based Foods and Beverages | (4,278 | ) | 3,211 | (7,489 | ) | * | |||||||
Corporate Services | (888 | ) | (7,298 | ) | 6,410 | 87.8% | |||||||
Total segment operating income (loss) | (3,263 | ) | 8,109 | (11,372 | ) | * | |||||||
Other expense (income), net | (227 | ) | 1,540 | (1,767 | ) | * | |||||||
Earnings (loss) from continuing operations before the following | (3,036 | ) | 6,569 | (9,605 | ) | * | |||||||
Interest expense, net | 6,969 | 3,132 | 3,837 | 122.5% | |||||||||
Income tax expense | 8,833 | 1,152 | 7,681 | 666.8% | |||||||||
Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | (21,123 | ) | * | |||||||
Loss from discontinued operations | - | (814 | ) | 814 | 100.0% | ||||||||
Net earnings (loss)(3),(4) | (18,838 | ) | 1,471 | (20,309 | ) | * | |||||||
Dividends and accretion on preferred stock | (422 | ) | (760 | ) | 338 | 44.5% | |||||||
Earnings (loss) attributable to common shareholders(5) | (19,260 | ) | 711 | (19,971 | ) | * |
* Percentage not meaningful due to figures being positive and negative.
(1)Gross margin is a measure of gross profit (equal to revenues less cost of goods sold) as a percentage of revenues. We use a measure of gross margin that excludes non-capitalizable start-up costs included in cost of goods sold that are incurred in connection with capital expansion projects. Start-up costs have had, and are expected to continue to have, a significant impact on the comparability of reported gross margins, which may obscure trends in our margin performance. Additionally, in the second quarter of 2023, we recorded an inventory reserve in cost of goods sold for unsaleable product related to the frozen fruit product recall, which we have excluded from our measure of adjusted gross margin due to the size and specific nature of this reserve.
We use the measure of adjusted gross margin to evaluate the underlying profitability of our revenue-generating activities within each reporting period. We believe that disclosing this non-GAAP measure provides investors with a meaningful, consistent comparison of our profitability measure for the periods presented. However, the non-GAAP measure of adjusted gross margin should not be considered in isolation or as a substitute for gross margin calculated based on gross profit determined in accordance with U.S. GAAP. The following table presents a reconciliation of adjusted gross margin from reported gross margin calculated in accordance with U.S. GAAP.
SUNOPTA INC. | 23 | July 1, 2023 Form 10-Q |
July 1, 2023 | July 2, 2022 | |||||||||||||||||
Plant-Based | Fruit-Based | Plant-Based | Fruit-Based | |||||||||||||||
Foods and | Foods and | Foods and | Foods and | |||||||||||||||
For the quarter ended | Beverages | Beverages | Consolidated | Beverages | Beverages | Consolidated | ||||||||||||
Reported gross margin | 12.6% | 2.1% | 7.9% | 16.4% | 11.2% | 14.3% | ||||||||||||
Start-up costs(a) | 4.9% | 0.2% | 2.8% | 0.2% | - | 0.1% | ||||||||||||
Product recall costs(b) | - | 3.2% | 1.5% | - | - | 0.0% | ||||||||||||
Adjusted gross margin | 17.5% | 5.6% | 12.1% | 16.6% | 11.2% | 14.4% |
Note: percentages may not add due to rounding.
(a)Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the second quarter of 2023, start-up costs included in cost of goods sold related to the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, and the start-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington. For the second quarter of 2022, start-up costs included in cost of goods sold related to the hiring and training of new employees for the Midlothian facility.
(b)Represents the reserve for unsaleable inventory associated with the frozen fruit product recall in the second quarter of 2023.
(2) When assessing the financial performance of our operating segments, we use an internal measure of operating income/loss that excludes other income/expense items determined in accordance with U.S. GAAP. This measure is the basis on which management, including the CEO, assesses the underlying performance of our operating segments.
We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our operating performance. However, the non-GAAP measure of operating income/loss 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/lossincome (loss) to "earnings (loss) from continuing operations before the following" on the consolidated statements of operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
Plant-Based | Fruit-Based | Plant-Based | Fruit-Based | |||||||||||||||||||||
Foods and | Foods and | Corporate | Foods and | Foods and | Corporate | |||||||||||||||||||
Beverages | Beverages | Services | Consolidated | Beverages | Beverages | Services | Consolidated | |||||||||||||||||
For the quarter ended | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
October 1, 2022 | ||||||||||||||||||||||||
July 1, 2023 | ||||||||||||||||||||||||
Segment operating income (loss) | 8,814 | 2,870 | (4,040 | ) | 7,644 | 1,903 | (4,278 | ) | (888 | ) | (3,263 | ) | ||||||||||||
Other income (expense), net | (22,292 | ) | 3,199 | (1,107 | ) | (20,200 | ) | 113 | (73 | ) | 187 | 227 | ||||||||||||
Earnings (loss) before the following | (13,478 | ) | 6,069 | (5,147 | ) | (12,556 | ) | |||||||||||||||||
Earnings (loss) from continuing operations before the following | 2,016 | (4,351 | ) | (701 | ) | (3,036 | ) | |||||||||||||||||
October 2, 2021 | ||||||||||||||||||||||||
July 2, 2022 | ||||||||||||||||||||||||
Segment operating income (loss) | 8,056 | (3,517 | ) | (618 | ) | 3,921 | 12,196 | 3,211 | (7,298 | ) | 8,109 | |||||||||||||
Other expense, net | (10 | ) | (1,029 | ) | (133 | ) | (1,172 | ) | (203 | ) | (1,145 | ) | (192 | ) | (1,540 | ) | ||||||||
Earnings (loss) before the following | 8,046 | (4,546 | ) | (751 | ) | 2,749 | ||||||||||||||||||
Earnings (loss) from continuing operations before the following | 11,993 | 2,066 | (7,490 | ) | 6,569 |
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income/loss. However, any measure of segment operating income/loss excluding any or all of these items is not, and should not be viewed as, a substitute for operating income/loss prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
(2)(3) When assessing our financial performance, we use an internal measure of adjusted earningsearnings/loss that excludes specific items recognized in other income/income or expense, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of the financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations. The following table presents a reconciliation of adjusted earnings (loss) from net loss,earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
October 1, 2022 | October 2, 2021 | |||||||||||
Per Share | Per Share | |||||||||||
For the quarter ended | $ | $ | $ | $ | ||||||||
Net loss | (12,639 | ) | (3,034 | ) | ||||||||
Dividends and accretion on preferred stock | (764 | ) | (748 | ) | ||||||||
Loss attributable to common shareholders | (13,403 | ) | (0.12 | ) | (3,782 | ) | (0.04 | ) | ||||
Adjusted for: | ||||||||||||
Loss on classification of sunflower business as held for sale(a) | 23,227 | - | ||||||||||
Gain on sale of frozen fruit processing facility(b) | (3,779 | ) | - | |||||||||
Start-up costs(c) | 608 | - | ||||||||||
Facility closure costs(d) | 525 | - | ||||||||||
Business development costs(e) | 75 | 1,782 | ||||||||||
Workforce reduction charges(f) | - | 499 | ||||||||||
Costs related to exit from fruit ingredient processing facility(g) | - | 479 | ||||||||||
Other(h) | 227 | 40 | ||||||||||
Net income tax effect(i) | (5,491 | ) | 2,121 | |||||||||
Adjusted earnings | 1,989 | 0.02 | 1,139 | 0.01 |
SUNOPTA INC. | 24 | July 1, 2023 Form 10-Q |
July 1, 2023 | July 2, 2022 | ||||||||||||
Per Share | Per Share | ||||||||||||
For the quarter ended | $ | $ | $ | $ | |||||||||
Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | ||||||||||
Dividends and accretion on preferred stock | (422 | ) | (760 | ) | |||||||||
Earnings (loss) from continuing operations attributable to common shareholders shareholders | (19,260 | ) | (0.17 | ) | 1,525 | 0.01 | |||||||
Adjusted for: | |||||||||||||
Start-up costs(a) | 6,697 | 281 | |||||||||||
Product recall costs, net of insurance recoveries(b) | 2,500 | - | |||||||||||
Business development costs(c) | 731 | 616 | |||||||||||
Facility closure costs(d) | - | 1,287 | |||||||||||
Other(e) | 443 | 253 | |||||||||||
Net income tax on adjusting items(f) | 1,873 | (640 | ) | ||||||||||
Change in valuation allowance for deferred tax assets(g) | 3,978 | - | |||||||||||
Adjusted earnings (loss) | (3,038 | ) | (0.03 | ) | 3,322 | 0.03 |
(a) ReflectsFor the loss onsecond quarter of 2023, start-up costs included the classificationramp-up of production at our new plant-based beverage facility in Midlothian, Texas, the sunflower business as held for salestart-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington, and professional fees related to productivity initiatives within our plant-based beverage operations, which were recorded in cost of goods sold ($5.8 million) and SG&A expenses ($0.9 million). For the end of the thirdsecond quarter of 2022, start-up costs included the hiring and training of new employees for the Midlothian facility, which waswere recorded in other expense.cost of goods sold ($0.2 million) and SG&A expenses ($0.1 million).
(b) Reflects estimated costs related to the gain on sale of our frozen fruit processing facility locatedproduct recall in Oxnard, California,the second quarter of 2023, which waswere recorded as a reduction to revenues ($0.2 million) for customer returns and as an addition to cost of goods sold ($3.0 million) for unsaleable inventory. These costs are reflected in the table above net of estimated insurance recoveries of $0.7 million, which were recorded in other income.
(c) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the third quarter of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, which were recorded in cost of goods sold ($0.5 million) and SG&A expenses ($0.1 million).
(d)For the third quarter of 2022, facility closure costs mainly related to the relocation of certain equipment from the sold Oxnard facility to our Mexican facility, which were recorded in other expense.
(e)Represents third-party costs associated with business development activities, includingwhich are inclusive of costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. For the third quarter of 2022, theseThese costs related to actions undertaken to optimize non-core assets, which were recorded in SG&A expenses.
(d)For the thirdsecond quarter of 2021, these2022, facility closure costs were mainly related to the transitionrelocation of the Dream and WestSoy brands, acquired in April 2021, and project development activities related to our new plant in Midlothian, Texas, which were recorded in SG&A expenses ($1.6 million), together with professional fees incurred in connection with post-closing matters related to the 2020 divestiture of our global ingredients business, Tradin Organic, which were recorded in other expense ($0.2 million).
(f)For the third quarter of 2021, represents employee termination costs related to workforce reduction actions in our frozen fruit operations, which were recorded in other expense.
(g)For the third quarter of 2021, these costs related to the exitcertain equipment from our former South Gate,Oxnard, California, frozen fruit ingredient processing facility to our Mexican facility, which were recorded in other expense.
(h)(e) For the thirdsecond quarters of 20222023 and 2021,2022, other mainly reflects losses on the disposal of assets andreserves for the settlement of certain legal and contractual matters.
(i)(f) Reflects the tax effect of the preceding adjustments to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment.adjustment, net of deferred tax valuation allowances.
(g)Reflects an increase to the valuation allowance for U.S. deferred tax assets that originated prior to fiscal 2023, based on an assessment of the future realizability of the related tax benefits.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings.earnings (loss). However, adjusted earnings (loss) is not, and should not be viewed as, a substitute for net earnings (loss) from continuing operations prepared under U.S. GAAP. Adjusted earnings (loss) is presented solely to allow investors to more fully understand how we assess our financial performance.
(3)(4) We use a measure of adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA")EBITDA when assessing the performance of our operations, which we believe is useful to investors' understanding of our operating profitability because it excludes non-operating expenses, such as interest and income taxes, and non-cash expenses, such as depreciation, amortization, and stock-based compensation, as well as other unusual items that affect the comparability of operating performance. We also use this measure to assess operating performance in connection with our employee incentive programs. We define adjusted EBITDA as segment operating income (loss) plus depreciation, amortization, and stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings (loss) (refer above to footnote (2)(3)). The following table presents a reconciliation of segment operating income (loss) and adjusted EBITDA from net loss,earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC. | 25 |
October 1, 2022 | October 2, 2021 | July 1, 2023 | July 2, 2022 | |||||||||
For the quarter ended | $ | $ | $ | $ | ||||||||
Net loss | (12,639 | ) | (3,034 | ) | ||||||||
Income tax expense (benefit) | (4,259 | ) | 2,929 | |||||||||
Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | |||||||||
Income tax expense | 8,833 | 1,152 | ||||||||||
Interest expense, net | 4,342 | 2,854 | 6,969 | 3,132 | ||||||||
Other expense, net | 20,200 | 1,172 | ||||||||||
Total segment operating income | 7,644 | 3,921 | ||||||||||
Other expense (income), net | (227 | ) | 1,540 | |||||||||
Total segment operating income (loss) | (3,263 | ) | 8,109 | |||||||||
Depreciation and amortization | 9,730 | 8,837 | 10,787 | 9,372 | ||||||||
Stock-based compensation | 4,092 | 1,250 | 2,029 | 3,970 | ||||||||
Start-up costs(a) | 608 | - | 6,697 | 281 | ||||||||
Business development costs(b) | 75 | 1,628 | ||||||||||
Product recall costs(b) | 3,170 | - | ||||||||||
Business development costs(c) | 731 | 616 | ||||||||||
Adjusted EBITDA | 22,149 | 15,636 | 20,151 | 22,348 |
(a) ForRefer to footnote (3)(a) above.
(b)Reflects estimated costs related to the thirdfrozen fruit product recall in the second quarter of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas,2023, which were recorded inas a reduction to revenues ($0.2 million) and an addition to cost of goods sold ($0.5 million) and SG&A expenses ($0.13.0 million).
(b)(c) For the third quarter of 2022, business development costs relatedRefer to actions undertaken to optimize non-core assets, which were recorded in SG&A expenses. For the third quarter of 2021, these costs related to the integration of the Dream and WestSoy brands and project development activities related to our new plant in Midlothian, Texas, which were recorded in SG&A expenses.footnote (3)(c) above.
Although we use adjusted EBITDA as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income/loss, net earnings,earnings/loss, and adjusted earningsearnings/loss to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4)(5) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. For example, as described above under footnote (1), we evaluate our gross margins on a basis that excludes the impact of start-up and product recall costs. In particular,addition, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2)(3), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for an analysis of our results as reported under U.S. GAAP.
SUNOPTA INC. | 26 | July 1, 2023 Form 10-Q |
RevenuesInclusive of the impact of the divestiture of our sunflower business in the fourth quarter of 2022, total revenues for the quarter ended OctoberJuly 1, 2022 increased2023 decreased by 15.7%14.7% to $229.7$207.8 million from $198.5$243.5 million for the quarter ended OctoberJuly 2, 2021,2022, reflecting 19.9%a 21.5% revenue growthdecline in the Plant-Based Foods and Beverages segment and 10.0%a 4.4% revenue growthdecline in the Fruit-Based Foods and Beverages segment. The change in revenues from the thirdsecond quarter of 20212022 to the thirdsecond quarter of 20222023 was due to the following:
Plant-Based | Fruit-Based | Plant-Based | Fruit-Based | |||||||||||||||||||||||||||||||||
Foods and Beverages | Foods and Beverages | Consolidated | Foods and Beverages | Foods and Beverages | Consolidated | |||||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
2021 revenues | 114,870 | 83,609 | 198,479 | |||||||||||||||||||||||||||||||||
2022 revenues | 145,912 | 97,619 | 243,531 | |||||||||||||||||||||||||||||||||
Price | 18,625 | 16.2% | 8,868 | 10.6% | 27,493 | 13.9% | 4,741 | 3.2% | 283 | 0.3% | 5,024 | 2.1% | ||||||||||||||||||||||||
Volume/Mix | 4,231 | 3.7% | (538 | ) | -0.6% | 3,693 | 1.9% | (14,859 | ) | -10.2% | (4,431 | ) | -4.5% | (19,290 | ) | -7.9% | ||||||||||||||||||||
2022 revenues | 137,726 | 19.9% | 91,939 | 10.0% | 229,665 | 15.7% | ||||||||||||||||||||||||||||||
Divestiture of sunflower business | (21,302 | ) | -14.6% | - | - | (21,302 | ) | -8.7% | ||||||||||||||||||||||||||||
Product recall costs | - | - | (154 | ) | -0.2% | (154 | ) | -0.1% | ||||||||||||||||||||||||||||
2023 revenues | 114,492 | -21.5% | 93,317 | -4.4% | 207,809 | -14.7% |
Note: percentages may not add due to rounding.
For the quarter ended OctoberJuly 1, 2022,2023, the 19.9% increase21.5% decrease in revenues for the Plant-Based Foods and Beverages segment reflected a 16.2%14.6% revenue loss related to the divestiture of the sunflower business, together with an unfavorable volume/mix impact of 10.2%, partially offset by an 3.2% overall increase in pricingpricing. The unfavorable volume/mix reflected lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base (an $8.2 million decrease to revenues), together with softer demand for almond beverages in the current period and lower sales volumes of everyday broths. Additionally, our co-manufactured tea volumes were negatively impacted in the second quarter of 2023 by raw material supply issues with a favorable volume/mix impact of 3.7%.customer. On the other hand, we saw sales volume growth from our oat milks and creamers, and newly introduced 330-milliliter protein shakes. The increase in pricing was driven bymainly reflected the wrap-around benefit of pricing actions taken with customers in 2022 to offset inflationary cost increases, together with the pass-through effect of higher sunflower commodity pricing. Volume/mix was favorable mainly due to growth from our oat-based product offerings and teas, partially offset by softer volumes of sunflower and lower demand for everyday broths.increases.
For the quarter ended OctoberJuly 1, 2022,2023, the 10.0% increase4.4% decrease in revenues for the Fruit-Based Foods and Beverages segment reflected a 10.6% overall increase in pricing, reflecting pricing actions taken to offset commodity inflation incurred on fruit inventories and other inflationary cost increases. The increase in pricing was partially offset by an unfavorable volume/mix impact of 0.6%4.5%, whichslightly offset by a 0.3% increase in pricing. The volume/mix impact reflected the volume impactlower volumes of our frozen fruit portfolio rationalization efforts, together with lower consumer demand for retail frozen fruit, due to higher prices resulting from inflation,lower retail consumption trends, constraints on certain fruit varieties impacting blends, and lost foodservice volumes, partially offset by strong demandincreased volumes of fruit snacks. For the quarter ended July 1, 2023, we recorded a reserve of $0.2 million (0.2% impact on revenues) for estimated customer returns associated with the frozen fruit snacks and the introduction of smoothie bowls.product recall.
Consolidated gross profit increased $8.0decreased $18.5 million, or 34.4%53.1%, to $31.4$16.4 million for the quarter ended OctoberJuly 1, 2022,2023, compared with $23.4$34.9 million for the quarter ended OctoberJuly 2, 2021.2022. Consolidated gross margin for the quarter ended OctoberJuly 1, 20222023 was 13.7%7.9% compared to 11.8%14.3% for the quarter ended OctoberJuly 2, 2021, an increase2022, a decrease of 190640 basis points. Adjusted gross margin on a consolidated basis for the quarter ended July 1, 2023 was 12.1% compared to 14.4% for the quarter ended July 2, 2022, a decrease of 230 basis points. See footnote (1) to the table above for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
Gross profit for the Plant-Based Foods and Beverages segment increased $1.4decreased $9.5 million to $20.1$14.4 million for the quarter ended OctoberJuly 1, 2022,2023, compared with $18.7$23.9 million for the quarter ended OctoberJuly 2, 2021, while2022, and gross margin decreased 380 basis points to 14.6%12.6% in the thirdsecond quarter of 20222023 from 16.3%16.4% in the thirdsecond quarter of 2021. The 170-basis point decrease in gross margin reflected an estimated 225 basis-point decline due to2022. In the dilutive effectsecond quarter of pass-through pricing to recover cost inflation on raw materials and packaging, together with the impacts of higher labor and utility costs, increased inventory reserves, and higher depreciation expense. In addition,2023, we incurred start-up costs included in cost of $0.5goods sold of $5.6 million (0.4%(4.9% gross margin impact) in connection withrelated to our new plant in Midlothian, Texas. AllTexas, compared with $0.2 million (0.2% gross margin impact) of start-up costs incurred in the second quarter of 2022. Excluding the impact of these costs, adjusted gross margin for the Plant-Based Food and Beverages segment was 17.5% in the second quarter of 2023, compared to 16.6% in the second quarter of 2022. The 90-basis point increase in adjusted gross margin reflected the wrap-around benefit of pricing actions taken in 2022 to recover input cost inflation, together with the positive margin impacts of the divestiture of our lower-margin sunflower commodity business, and a mix shift in our plant-based ingredient operations, with increased internal use of oat base to support our beverage business and lower external sales. These factors were partially absorbed throughoffset by incremental depreciation of new production equipment for capital expansion projects ($2.4 million or 2.1% gross margin impact), together with the negative impacts of higher input costs and lower production volumes and plant utilization inwithin our plant-based beverage and ingredient operations.
Gross profit for the Fruit-Based Foods and Beverages segment increased $6.6decreased $9.0 million to $11.3$2.0 million for the quarter ended OctoberJuly 1, 2022,2023, compared with $4.7$11.0 million for the quarter ended OctoberJuly 2, 2021,2022, and gross margin increaseddecreased 910 basis points to 12.3%2.1% in the thirdsecond quarter of 20222023 from 11.2% in the second quarter of 2022. In the second quarter of 2023, we recorded a reserve for unsaleable inventory associated with the frozen fruit product recall of $3.0 million (3.2% gross margin impact). Excluding the impact of these costs, adjusted gross margin for the Fruit-Based Food and Beverages segment was 5.6% in the thirdsecond quarter of 2021.2023, compared to 11.2% in the second quarter of 2022. The 670-basis560-basis point improvementdecrease in adjusted gross margin reflected the benefits of portfolio rationalizations for frozen fruithigher manufacturing costs and manufacturing cost savings from the consolidation of our fruit processing facilities,unfavorable plant utilization due to lower production volumes, together with increased production volumesa higher mix of lower margin bulk fruit sales to right-size inventories and plant efficiencies in our fruit snack operations, partially offset by an estimated 50 basis-point declineimprove working capital efficiency, and a higher cost of inventory from Mexico due to the dilutive effectimpact of pass-through pricing to recover commodity cost inflationa strengthening Mexican peso (approximately $2.4 million or 2.6% gross margin impact).
SUNOPTA INC. | 27 | July 1, 2023 Form 10-Q |
For the quarter ended OctoberJuly 1, 2022,2023, we realized a total segment operating loss of $3.3 million, compared with total segment operating income of $7.6 million, compared with $3.9$8.1 million for the quarter ended OctoberJuly 2, 2021.2022. The $3.7$11.4 million increasedecrease in total segment operating income reflected higherlower gross profit, as described above, partially offset by a $4.2$4.7 million increasedecrease in SG&A expenses.expenses and a favorable year-over-year foreign exchange impact related to the remeasurement of our Mexican operations into U.S. dollars of $2.3 million. The increasedecrease in SG&A expenses was mainly due to higherlower employee compensation costs, including incremental 2022 incentive plancompensation accruals based on performance, together with lower stock-based compensation expense related to the timing of our annual equity grants, partially offset by a reduction in expenses related to the integration of the acquired Dream and WestSoy brands, which were primarily incurred in 2021.higher business development costs.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Operating Segment Information."
Other expense was $20.2income of $0.2 million for the quarter ended OctoberJuly 1, 2022, compared2023 mainly reflected estimated insurance recoveries associated with otherthe frozen fruit product recall, partially offset by a reserve for the settlement of an unrelated legal matter. Other expense of $1.2$1.5 million for the quarter ended OctoberJuly 2, 2021. Other expense in the third quarter of 2022 mainly reflected a pre-tax loss of $23.2 million recognized on the classification of the sunflower business as held for sale, partially offset by a pre-tax gain of $3.8 million realized on the sale ofcosts to relocate certain equipment from our former Oxnard, California, frozen fruit processing facility located in Oxnard, California. Other expense in the third quarter of 2021 mainly reflected employee termination costs related to a workforce reduction in our frozen fruit operations, together with plant closure costs related to the consolidation of our fruit processing facilities.Mexican facility.
Net interest expense increased by $1.4$3.9 million to $4.3$7.0 million for the quarter ended OctoberJuly 1, 2022,2023, compared with $2.9$3.1 million for the quarter ended OctoberJuly 2, 2021,2022, resulting from an increase in outstanding debt to finance capital expansion projects, and fund working capital requirements, together with the impact of higher interest rates.
Income tax benefit was $4.3 million on pre-tax loss of $16.9 million for the quarter ended October 1, 2022, compared with anWe recognized income tax expense of $2.9$8.8 million on a pre-tax loss of $0.1$10.0 million for the quarter ended October 2, 2021. Excluding the impactJuly 1, 2023, compared with income tax expense of stock-based compensation and other non-deductible expenses$1.2 million on pre-tax earnings ourof $3.4 million for the quarter ended July 2, 2022. The change in the effective tax rate was approximately 26%from 33.5% for the thirdsecond quarter of 2022 to (88.3)% for the second quarter of 2023, was mainly due to the recognition of a full valuation allowance against U.S. deferred tax assets in the second quarter of 2023, based on our assessment that the related tax benefits were no longer more likely than not to be realized in the future.
Loss from continuing operations for the quarter ended July 1, 2023 was $18.8 million, compared with approximately 27%earnings of $2.3 million for the third quarter ended July 2, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.17 for the quarter ended July 1, 2023, compared with a diluted earnings per share of 2021.$0.01 for the quarter ended July 2, 2022.
We recognized a loss from discontinued operations of $0.8 million (diluted loss per share of $0.01) for the quarter ended July 2, 2022, which was related to the settlement of the purchase price allocation and other post-closing matters in connection with the 2020 divestiture of our global ingredients business, Tradin Organic.
We realized a loss attributable to common shareholders of $13.4$19.3 million (diluted loss per share of $0.12)$0.17) for the quarter ended OctoberJuly 1, 2022, which was inclusive of an after-tax loss on the held-for-sale sunflower business of $16.9 million and an after-tax gain on the sale of the Oxnard facility of $2.7 million,2023, compared with a lossearnings attributable to common shareholders of $3.8$0.7 million (diluted lossearnings per share of $0.04)$0.01) for the quarter ended OctoberJuly 2, 2021. The loss2022. Earnings (loss) attributable to common shareholders included dividends and accretion on our Series B-1 preferred stock of $0.8$0.4 million and $0.7$0.8 million in the thirdsecond quarters of 20222023 and 2021,2022, respectively.
For the quarter ended OctoberJuly 1, 2022,2023, adjusted earnings were $2.0loss was $3.0 million, or $0.02$0.03 loss per diluted share, compared with adjusted earnings of $1.1$3.3 million, or $0.01$0.03 earnings per diluted share for the quarter ended OctoberJuly 2, 2021.2022. Adjusted EBITDA decreased $2.2 million, or 9.8%, for the quarter ended OctoberJuly 1, 2022 was $22.12023 to $20.2 million, compared with $15.6$22.3 million for the quarter ended OctoberJuly 2, 2021.2022, which was inclusive of $2.4 million of adjusted EBITDA attributable to the divested sunflower business. Adjusted earnings (loss) and adjusted EBITDA are non-GAAP financial measures. See footnotes (2)(3) and (3)(4) to the table above for a reconciliation of adjusted earnings (loss) and adjusted EBITDA from net loss,earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC. | 28 | July 1, 2023 Form 10-Q |
Operating Segment Information
Plant-Based Foods and Beverages For the quarter ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||||||||||||||
Plant-Based Foods and Beverages | ||||||||||||||||||||||||
For the quarter ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||||||||||||||
Revenues | $ | 137,726 | $ | 114,870 | $ | 22,856 | 19.9% | $ | 114,492 | $ | 145,912 | $ | (31,420 | ) | -21.5% | |||||||||
Gross profit | 20,106 | 18,697 | 1,409 | 7.5% | 14,405 | 23,940 | (9,535 | ) | -39.8% | |||||||||||||||
Gross margin | 14.6% | 16.3% | -1.7% | 12.6% | 16.4% | -3.8% | ||||||||||||||||||
Operating income | $ | 8,814 | $ | 8,056 | $ | 758 | 9.4% | $ | 1,903 | $ | 12,196 | $ | (10,293 | ) | -84.4% | |||||||||
Operating margin | 6.4% | 7.0% | -0.6% | 1.7% | 8.4% | -6.7% |
Plant-Based Foods and Beverages contributed $137.7$114.5 million in revenues for the quarter ended OctoberJuly 1, 2022,2023, compared to $114.9$145.9 million for the quarter ended OctoberJuly 2, 2021, an increase2022, a decrease of $22.9$31.4 million, or 19.9%21.5%. The table below explains the increasedecrease in revenues:
Plant-Based Foods and Beverages Revenue Changes | |
Revenues for the quarter ended | $ |
(21,302) | |
Lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base | (8,169) |
Softer demand for almond beverages and lower sales volumes of everyday broths, together with lower co-manufactured tea volumes due to raw material supply issues with a customer, partially offset by sales volume growth for oat-based milks and creamers, and newly introduced 330-milliliter protein shakes, together with the wrap-around benefit of pricing actions taken in 2022 to offset input cost inflation | |
Revenues for the quarter ended | $ |
Gross profit in Plant-Based Foods and Beverages increaseddecreased by $1.4$9.5 million to $20.1$14.4 million for the quarter ended OctoberJuly 1, 2022,2023, compared to $18.7$23.9 million for the quarter ended OctoberJuly 2, 2021.2022. The table below explains the increasedecrease in gross profit:
Plant-Based Foods and Beverages Gross Profit Changes | |
Gross profit for the quarter ended | $ |
(5,375) | |
Impact of the divestiture of the sunflower business | (2,377) |
Incremental depreciation of new production equipment for capital expansion projects ($2.4 million), together with the impacts of higher input costs, lower production volumes and | |
Gross profit for the quarter ended | $ |
SUNOPTA INC. | 29 | July 1, 2023 Form 10-Q |
Operating income in Plant-Based Foods and Beverages increaseddecreased by $0.8$10.3 million to $8.8$1.9 million for the quarter ended OctoberJuly 1, 2022,2023, compared to $8.1$12.2 million for the quarter ended OctoberJuly 2, 2021.2022. The table below explains the increasedecrease in operating income:
Plant-Based Foods and Beverages Operating Income Changes | |
Operating income for the quarter ended | $ |
Increase in corporate cost allocation | |
Increased professional fees related to operational productivity initiatives, together with higher sales and marketing expenses, partially offset by lower employee compensation costs | (248) |
Operating income for the quarter ended | $ |
FollowingOur current fiscal 2023 expectations for the sale of our sunflower business in October 2022, we are focusing our core plant-based operations on the development, manufacture, and sale of value-added, non-dairy beverage alternatives. Looking forward, assuming economic conditions, including inflation, do not significantly worsen, we anticipate year-over-year revenue growth for our Plant-Based Foods and Beverages operating segment are lower than our initial projections for the year, as a result of a number of factors including softening market trends for plant-based beverages driven by current economic conditions, lower external sales volumes of plant-based ingredients, customer-driven delays in the fourth quarterstart-up of 2022, driven by capacity gains acrossnew business, and a slower than expected ramp-up of production at our aseptic network, together withMidlothian, Texas, facility. However, despite these revenue headwinds and the expected benefitimpact of pricing actions to offset input cost inflation. We expect these pricing actions, together with the divestiture of the lower-margin sunflower commodity business to drivein 2022, we are still anticipating year-over-year gross margin improvements inrevenue growth for our plant-based operations in fiscal 2023, with a return to revenue growth expected in the third and fourth quarterquarters of 2022, excluding2023, as 330-milliliter protein shake production continues to accelerate, and planned new business is commercialized. Excluding the impact of start-up costs related to the Midlothian facility, we expect year-over-year improvement in the gross margin performance of our new plantplant-based operations in Midlothian, Texas,2023, reflecting the divestiture of our lower-margin sunflower business, together with the impact of anticipated increased sales and other capital projects.production volumes. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. SeveralVarious factors could adversely impact our ability to meet these forward-looking expectations, including the extent and duration of inflation headwinds; our ability to continue to pass through price increases to our customers to offset inflationary pressures; the impact of price inflationcurrent economic conditions on consumer buying behavior and demand for plant-based beverage alternatives to dairy;beverages; our ability to successfully execute on our capital expansion projects, andincluding the viabilitycontinued ramp-up of those projects;commercial production at our Midlothian facility; our ability to successfully commercialize new business; and other factors described above under "Forward-Looking Statements."
Fruit-Based Foods and Beverages For the quarter ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||||||||||||||
Fruit-Based Foods and Beverages | ||||||||||||||||||||||||
For the quarter ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||||||||||||||
Revenues | 91,939 | $ | 83,609 | $ | 8,330 | 10.0% | $ | 93,317 | $ | 97,619 | $ | (4,302 | ) | -4.4% | ||||||||||
Gross profit | 11,277 | 4,659 | 6,618 | 142.0% | 1,974 | 10,958 | (8,984 | ) | -82.0% | |||||||||||||||
Gross margin | 12.3% | 5.6% | 6.7% | 2.1% | 11.2% | -9.1% | ||||||||||||||||||
Operating income (loss) | 2,870 | $ | (3,517 | ) | $ | 6,387 | 181.6% | $ | (4,278 | ) | $ | 3,211 | $ | (7,489 | ) | -233.2% | ||||||||
Operating margin | 3.1% | -4.2% | 7.3% | -4.6% | 3.3% | -7.9% |
Fruit-Based Foods and Beverages contributed $91.9$93.3 million in revenues for the quarter ended OctoberJuly 1, 2022,2023, compared to $83.6$97.6 million for the quarter ended OctoberJuly 2, 2021, an increase2022, a decrease of $8.3$4.3 million, or 10.0%4.4%. The table below explains the increasedecrease in revenues:
Fruit-Based Foods and Beverages Revenue Changes | |
Revenues for the quarter ended | $ |
Lower retail sales volumes of frozen fruit, due to unfavorable consumption trends and constraints on certain fruit varieties, together with lost foodservice volumes | (7,364) |
Increase in reserves for customer returns associated with the frozen fruit product recall | (154) |
Higher sales volumes and pricing for fruit snacks | |
Revenues for the quarter ended | $ |
SUNOPTA INC. | 30 | July 1, 2023 Form 10-Q |
Gross profit in Fruit-Based Foods and Beverages increaseddecreased by $6.6$9.0 million to $11.3$2.0 million for the quarter ended OctoberJuly 1, 2022,2023, compared to $4.7$11.0 million for the quarter ended OctoberJuly 2, 2021.2022. The table below explains the increasedecrease in gross profit:
Fruit-Based Foods and Beverages Gross Profit Changes | |
Gross profit for the quarter ended | $ |
Higher | |
Increases in the reserves for customer returns and unsaleable inventory associated with the frozen fruit product recall | (3,170) |
Gross profit for the quarter ended | $ |
Operating income in Fruit-Based Foods and Beverages increaseddecreased by $6.4$7.5 million to $2.9an operating loss of $4.3 million for the quarter ended OctoberJuly 1, 2022,2023, compared to an operating lossincome of $3.5$3.2 million for the quarter ended OctoberJuly 2, 2021.2022. The table below explains the increasedecrease in operating income:
Fruit-Based Foods and Beverages Operating Income Changes | |
Operating income for the quarter ended July 2, 2022 | $3,211 |
Decrease in gross profit, as explained above | (8,984) |
Increase in corporate cost allocation | (654) |
Favorable foreign exchange impact related to the remeasurement of our frozen fruit operations in Mexico into U.S. dollars, partially offset by higher SG&A expenses | 2,149 |
Operating loss for the quarter ended | $ |
Looking forward, assuming economic conditions, including inflation, do not significantly worsen, weWe anticipate year-over-yearfull year revenues and gross margin improvementprofit for our Fruit-Based Foods and Beverages operating segment in the fourth quarter offor fiscal 2023 to be comparable to fiscal 2022, driven by the pricing actions taken onexpected completion of capacity expansion projects within our fruit snacks operations in the second half of 2023 to address unfilled demand, which is expected to offset our lowered expectations for frozen fruit performance due to offset commodity inflationsofter retail market demand and other inflationary cost increases, together withlost foodservice volumes. However, we cannot currently assess the benefitextent of a reduced manufacturing cost base within ourthe revenue headwinds that may result from the frozen fruit operations. In addition, we expect strong year-over-year revenue and profit growthproduct recall in the fourthsecond quarter of 2022, driven by volume gains2023, and pricing actions for corethe effect of this recall on our ability to retain existing frozen fruit snack products,customers and further expansion of our smoothie bowl line.attract new business. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. SeveralVarious factors could adversely impact our ability to meet these forward-looking expectations, including the extent and durationimpact of inflation headwinds, and the impactcurrent economic conditions on consumer buying behavior and overall demand for frozen fruit; the outcome of our pricing actions with customers, including the softening of consumer demand due to higher retail prices; our ability to achieve the anticipated cost savings and efficiencies from our manufacturing network consolidation;fruit-based products; our ability to successfully expandexecute on our smoothie bowlcapital expansion projects within our fruit snacks operations; the financial and reputational impacts of the frozen fruit product line;recall; and other factors described above under "Forward-Looking Statements."
Corporate Services For the quarter ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
Operating loss | $ | (4,040 | ) | $ | (618 | ) | $ | (3,422 | ) | -553.7% |
SUNOPTA INC. | 31 | July 1, 2023 Form 10-Q |
Corporate Services | ||||||||||||
For the quarter ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
Operating loss | $ | (888 | ) | $ | (7,298 | ) | $ | 6,410 | 87.8% |
Operating loss at Corporate Services increaseddecreased by $3.4$6.4 million to $4.0$0.9 million for the quarter ended OctoberJuly 1, 2022,2023, compared to a loss of $0.6$7.3 million for the quarter ended OctoberJuly 2, 2021.2022. The table below explains the increasedecrease in operating loss:
Corporate Services Operating Loss Changes | |
Operating loss for the quarter ended | $ |
Lower variable stock-based compensation expense, related to the timing of annual equity grants under our incentive plans | 1,941 |
Increase in corporate cost allocations, mainly related to | |
Operating loss for the quarter ended | $ |
Corporate cost allocations mainly consist of salaries of corporate personnel who directly support the operating segments, as well as costs related to our 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 the number of people employed within each segment.
SUNOPTA INC. | 32 | July 1, 2023 Form 10-Q |
Consolidated Results of Operations for the threetwo quarters ended OctoberJuly 1, 20222023 and OctoberJuly 2, 20212022
October 1, 2022 | October 2, 2021 | Change | Change | July 1, 2023 | July 2, 2022 | Change | Change | |||||||||||||||||||
For the three quarters ended | $ | $ | $ | % | ||||||||||||||||||||||
For the two quarters ended | For the two quarters ended | $ | $ | $ | % | |||||||||||||||||||||
Revenues | Revenues | Revenues | ||||||||||||||||||||||||
Plant-Based Foods and Beverages | 419,149 | 345,680 | 73,469 | 21.3% | Plant-Based Foods and Beverages | 243,842 | 281,423 | (37,581 | ) | -13.4% | ||||||||||||||||
Fruit-Based Foods and Beverages | 294,220 | 262,712 | 31,508 | 12.0% | Fruit-Based Foods and Beverages | 187,847 | 202,281 | (14,434 | ) | -7.1% | ||||||||||||||||
Total revenues | Total revenues | 713,369 | 608,392 | 104,977 | 17.3% | Total revenues | 431,689 | 483,704 | (52,015 | ) | -10.8% | |||||||||||||||
Gross Profit | Gross Profit | Gross Profit | ||||||||||||||||||||||||
Plant-Based Foods and Beverages | 64,026 | 61,751 | 2,275 | 3.7% | Plant-Based Foods and Beverages | 34,570 | 44,285 | (9,715 | ) | -21.9% | ||||||||||||||||
Fruit-Based Foods and Beverages | 30,246 | 17,930 | 12,316 | 68.7% | Fruit-Based Foods and Beverages | 10,012 | 18,969 | (8,957 | ) | -47.2% | ||||||||||||||||
Total gross profit | Total gross profit | 94,272 | 79,681 | 14,591 | 18.3% | Total gross profit | 44,582 | 63,254 | (18,672 | ) | -29.5% | |||||||||||||||
Gross Margin | Gross Margin | Gross Margin | ||||||||||||||||||||||||
Plant-Based Foods and Beverages | 15.3% | 17.9% | -2.6% | Plant-Based Foods and Beverages | 14.2% | 15.7% | -1.5% | |||||||||||||||||||
Fruit-Based Foods and Beverages | 10.3% | 6.8% | 3.5% | Fruit-Based Foods and Beverages | 5.3% | 9.4% | -4.1% | |||||||||||||||||||
Total gross margin | Total gross margin | 13.2% | 13.1% | 0.1% | Total gross margin | 10.3% | 13.1% | -2.8% | ||||||||||||||||||
Segment operating income (loss) | Segment operating income (loss) | Segment operating income (loss) | ||||||||||||||||||||||||
Plant-Based Foods and Beverages | 29,106 | 30,014 | (908 | ) | -3.0% | Plant-Based Foods and Beverages | 10,180 | 20,657 | (10,477 | ) | -50.7% | |||||||||||||||
Fruit-Based Foods and Beverages | 6,865 | (6,858 | ) | 13,723 | 200.1% | Fruit-Based Foods and Beverages | (2,493 | ) | 3,995 | (6,488 | ) | * | ||||||||||||||
Corporate Services | (16,302 | ) | (11,427 | ) | (4,875 | ) | -42.7% | Corporate Services | (8,412 | ) | (12,537 | ) | 4,125 | 32.9% | ||||||||||||
Total segment operating income | 19,669 | 11,729 | 7,940 | 67.7% | ||||||||||||||||||||||
Total segment operating income (loss) | Total segment operating income (loss) | (725 | ) | 12,115 | (12,840 | ) | * | |||||||||||||||||||
Other expense, net | Other expense, net | 22,027 | 7,448 | 14,579 | 195.7% | Other expense, net | (192 | ) | 1,827 | (2,019 | ) | * | ||||||||||||||
Earnings (loss) from continuing operations before the following | Earnings (loss) from continuing operations before the following | (2,358 | ) | 4,281 | (6,639 | ) | -155.1% | Earnings (loss) from continuing operations before the following | (533 | ) | 10,288 | (10,821 | ) | * | ||||||||||||
Interest expense, net | Interest expense, net | 10,004 | 6,145 | 3,859 | 62.8% | Interest expense, net | 12,781 | 5,662 | 7,119 | 125.7% | ||||||||||||||||
Income tax expense (benefit) | (2,875 | ) | 416 | (3,291 | ) | -791.1% | ||||||||||||||||||||
Loss from continuing operations(2),(3) | (9,487 | ) | (2,280 | ) | (7,207 | ) | -316.1% | |||||||||||||||||||
Income tax expense | Income tax expense | 4,147 | 1,339 | 2,808 | 209.7% | |||||||||||||||||||||
Earnings (loss) from continuing operations(3),(4) | Earnings (loss) from continuing operations(3),(4) | (17,461 | ) | 3,287 | (20,748 | ) | * | |||||||||||||||||||
Earnings from discontinued operations | Earnings from discontinued operations | 2,752 | - | 2,752 | - | Earnings from discontinued operations | - | 2,752 | (2,752 | ) | -100.0% | |||||||||||||||
Net loss | (6,735 | ) | (2,280 | ) | (4,455 | ) | -195.4% | |||||||||||||||||||
Net earnings (loss) | Net earnings (loss) | (17,461 | ) | 6,039 | (23,500 | ) | * | |||||||||||||||||||
Dividends and accretion on preferred stock | Dividends and accretion on preferred stock | (2,279 | ) | (3,445 | ) | 1,166 | 33.8% | Dividends and accretion on preferred stock | (1,126 | ) | (1,515 | ) | 389 | 25.7% | ||||||||||||
Loss attributable to common shareholders(4) | (9,014 | ) | (5,725 | ) | (3,289 | ) | -57.4% | |||||||||||||||||||
Earnings (loss) attributable to common shareholders(5) | Earnings (loss) attributable to common shareholders(5) | (18,587 | ) | 4,524 | (23,111 | ) | * |
* Percentage not meaningful due to figures being positive and negative.
(1) The following table presents a reconciliation of segment operating income/loss to "earnings (loss)adjusted gross margin from continuing operations before the following" on the consolidated statements of operations, which we consider to be the most directly comparablereported gross margin calculated in accordance with U.S. GAAP financial measure (refer to footnote (1) to the "Consolidated Results of Operations for the Quarters Ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021"2022" table regarding the use of this non-GAAP measure).
Plant-Based | Fruit-Based | |||||||||||
Foods and | Foods and | Corporate | ||||||||||
Beverages | Beverages | Services | Consolidated | |||||||||
For the three quarters ended | $ | $ | $ | $ | ||||||||
October 1, 2022 | ||||||||||||
Segment operating income (loss) | 29,106 | 6,865 | (16,302 | ) | 19,669 | |||||||
Other income (expense), net | (22,538 | ) | 2,044 | (1,533 | ) | (22,027 | ) | |||||
Earnings (loss) from continuing operations before the following | 6,568 | 8,909 | (17,835 | ) | (2,358 | ) | ||||||
October 2, 2021 | ||||||||||||
Segment operating income (loss) | 30,014 | (6,858 | ) | (11,427 | ) | 11,729 | ||||||
Other expense, net | (90 | ) | (6,506 | ) | (852 | ) | (7,448 | ) | ||||
Earnings (loss) from continuing operations before the following | 29,924 | (13,364 | ) | (12,279 | ) | 4,281 |
July 1, 2023 | July 2, 2022 | |||||||||||||||||
Plant-Based | Fruit-Based | Plant-Based | Fruit-Based | |||||||||||||||
Foods and | Foods and | Foods and | Foods and | |||||||||||||||
For the two quarters ended | Beverages | Beverages | Consolidated | Beverages | Beverages | Consolidated | ||||||||||||
Reported gross margin | 14.2% | 5.3% | 10.3% | 15.7% | 9.4% | 13.1% | ||||||||||||
Start-up costs(a) | 4.7% | 0.1% | 2.7% | 0.2% | - | 0.1% | ||||||||||||
Product recall costs(b) | - | 1.6% | 0.7% | - | - | 0.0% | ||||||||||||
Adjusted gross margin | 18.8% | 7.1% | 13.7% | 16.0% | 9.4% | 13.2% |
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 isNote: percentages may not and should not be viewed as, a substitute for operating income prepared under U.S. GAAP. These items are presented solelyadd due to allow investors to more fully understand how we assess financial performance.rounding.
(2)The following table presents a reconciliation of adjusted earnings from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (2) to the "Consolidated Results of Operations for the Quarters Ended October 1, 2022 and October 2, 2021" table regarding the use of this non-GAAP measure).
October 1, 2022 | October 2, 2021 | |||||||||||
Per Share | Per Share | |||||||||||
For the three quarters ended | $ | $ | $ | $ | ||||||||
Loss from continuing operations | (9,487 | ) | (2,280 | ) | ||||||||
Dividends and accretion on preferred stock | (2,279 | ) | (3,445 | ) | ||||||||
Loss from continuing operations attributable to common shareholders | (11,766 | ) | (0.11 | ) | (5,725 | ) | (0.06 | ) | ||||
Adjusted for: | ||||||||||||
Loss on classification of sunflower business as held for sale(a) | 23,227 | - | ||||||||||
Gain on sale of frozen fruit processing facility(b) | (3,779 | ) | - | |||||||||
Facility closure costs(c) | 1,812 | - | ||||||||||
Start-up costs(d) | 1,329 | - | ||||||||||
Business development costs(e) | 874 | 3,568 | ||||||||||
Costs related to exit from fruit ingredient processing facility(f) | - | 4,602 | ||||||||||
Restructuring costs(g) | - | 1,432 | ||||||||||
Workforce reduction charges(h) | - | 499 | ||||||||||
Other(i) | 767 | 287 | ||||||||||
Net income tax effect(j) | (6,370 | ) | (2,141 | ) | ||||||||
Adjusted earnings | 6,094 | 0.06 | 2,522 | 0.02 |
(a)Reflects the loss on the classification of the sunflower business as held for sale at the end of the third quarter of 2022, which was recorded in other expense.
(b)Reflects the gain on sale of our frozen fruit processing facility located in Oxnard, California, which was recorded in other income.
(c)Facility closure costs mainly related to the relocation of certain equipment from the sold Oxnard facility to our Mexican facility, which were recorded in other expense.
(d) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the first threetwo quarters of 2023, start-up costs included in cost of goods sold related to the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, and the start-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington. For the first two quarters of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, and the integration of the Dream and WestSoy brands, which were recordedincluded in cost of goods sold ($1.1 million) and SG&A expenses ($0.2 million).
(e)Represents third-party costs associated with business development activities, including costs related to the evaluation, execution,hiring and training of new employees for the Midlothian facility, together with the integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. For the first three quarters of 2022, these costs related to actions undertaken to optimize non-core assets, including the sale of the sunflower business, as well as costs related to our inaugural Investor Day held in June 2022, which were recorded in SG&A expenses. For the first three quarters of 2021, these costs were mainly related to the transition of theacquired Dream and WestSoy brands, acquired in April 2021, and project development activities related to our new plant in Midlothian, Texas, which were recorded in SG&A expenses ($2.9 million), together with professional fees incurred in connection with post-closing matters related to the 2020 divestiture of our global ingredients business, Tradin Organic, which were recorded in other expense ($0.7 million).
(f)For the first three quarters of 2021, represents asset impairment charges, together with employee termination and asset relocation costs related to the exit from our former South Gate, California, fruit ingredient processing facility, which were recorded in other expense.
(g)For the first three quarters of 2021, represents costs to complete the exit from our former Santa Maria, California, frozen fruit processing facility, which were recorded in other expense.West Life brands.
SUNOPTA INC. |
(h)(b) ForRepresents the first three quarters of 2021, represents employee termination costs related to workforce reduction actions in ourreserve for unsaleable inventory associated with the frozen fruit operations, which were recordedproduct recall in other expense.the second quarter of 2023.
(i)(2) ForThe following table presents a reconciliation of segment operating income (loss) to "earnings (loss) from continuing operations before the first three quarters of 2022 and 2021, other mainly reflects the settlement of certain legal and contractual matters, together with lossesfollowing" on the disposalconsolidated statements of assets,operations, which were recorded in other expense.we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (2) to the "Consolidated Results of Operations for the Quarters Ended July 1, 2023 and July 2, 2022" table regarding the use of this non-GAAP measure).
Plant-Based | Fruit-Based | |||||||||||
Foods and | Foods and | Corporate | ||||||||||
Beverages | Beverages | Services | Consolidated | |||||||||
For the two quarters ended | $ | $ | $ | $ | ||||||||
July 1, 2023 | ||||||||||||
Segment operating income (loss) | 10,180 | (2,493 | ) | (8,412 | ) | (725 | ) | |||||
Other income (expense), net | 113 | (66 | ) | 145 | 192 | |||||||
Earnings (loss) from continuing operations before the following | 10,293 | (2,559 | ) | (8,267 | ) | (533 | ) | |||||
July 2, 2022 | ||||||||||||
Segment operating income (loss) | 20,657 | 3,995 | (12,537 | ) | 12,115 | |||||||
Other expense, net | (246 | ) | (1,155 | ) | (426 | ) | (1,827 | ) | ||||
Earnings (loss) from continuing operations before the following | 20,411 | 2,840 | (12,963 | ) | 10,288 |
(j)ReflectsWe believe that investors' understanding of our financial performance is enhanced by disclosing the tax effectspecific items that we exclude from segment operating income/loss. However, any measure of the preceding adjustmentsoperating income/loss excluding any or all of these items is not, and should not be viewed as, a substitute for operating income/loss prepared under U.S. GAAP. These items are presented solely to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment.allow investors to more fully understand how we assess financial performance.
(3) The following table presents a reconciliation of segment operating income and adjusted EBITDAearnings from lossearnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (3) to the "Consolidated Results of Operations for the Quarters Ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021"2022" table regarding the use of this non-GAAP measure).
October 1, 2022 | October 2, 2021 | ||||||
For the three quarters ended | $ | $ | |||||
Loss from continuing operations | (9,487 | ) | (2,280 | ) | |||
Income tax expense (benefit) | (2,875 | ) | 416 | ||||
Interest expense, net | 10,004 | 6,145 | |||||
Other expense, net | 22,027 | 7,448 | |||||
Total segment operating income | 19,669 | 11,729 | |||||
Depreciation and amortization | 28,515 | 25,790 | |||||
Stock-based compensation | 9,691 | 9,593 | |||||
Start-up costs(a) | 1,329 | - | |||||
Business development costs(b) | 874 | 2,940 | |||||
Adjusted EBITDA | 60,078 | 50,052 |
July 1, 2023 | July 2, 2022 | |||||||||||
Per Share | Per Share | |||||||||||
For the two quarters ended | $ | $ | $ | $ | ||||||||
Earnings (loss) from continuing operations | (17,461 | ) | 3,287 | |||||||||
Dividends and accretion on preferred stock | (1,126 | ) | (1,515 | ) | ||||||||
Earnings (loss) from continuing operations attributable to common shareholders | (18,587 | ) | (0.16 | ) | 1,772 | 0.02 | ||||||
Adjusted for: | ||||||||||||
Start-up costs(a) | 13,122 | 721 | ||||||||||
Product recall costs, net of insurance recoveries(b) | 2,500 | - | ||||||||||
Business development costs(c) | 1,462 | 799 | ||||||||||
Facility closure costs(d) | - | 1,287 | ||||||||||
Other(e) | 478 | 540 | ||||||||||
Net income tax on adjusting items(f) | - | (879 | ) | |||||||||
Change in valuation allowance for deferred tax assets(g) | 3,978 | - | ||||||||||
Adjusted earnings | 2,953 | 0.03 | 4,240 | 0.04 |
SUNOPTA INC. | 34 | July 1, 2023 Form 10-Q |
(a) For the first threetwo quarters of 2023, start-up costs included the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, the start-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington, and professional fees related to productivity initiatives within our plant-based beverage operations, which were recorded in cost of goods sold ($11.6 million) and SG&A expenses ($1.5 million). For the first two quarters of 2022, start-up costs mainly related to the hiring and training of new employee hiresemployees for our plant-based beveragethe Midlothian facility, under construction in Midlothian, Texas, and the integration of the Dream and WestSoyWest Life brands, acquired in April 2021, which were recorded in cost of goods sold ($1.10.6 million) and SG&A expenses ($0.20.1 million).
(b) For the first three quarters of 2022, business developmentReflects estimated costs related to actions undertakenthe frozen fruit product recall in the second quarter of 2023, which were recorded as a reduction to optimize non-core assets, includingrevenues ($0.2 million) for customer returns and as an addition to cost of goods sold ($3.0 million) for unsaleable inventory. These costs are reflected in the saletable above net of the sunflowerestimated insurance recoveries of $0.7 million, which were recorded in other income.
(c)Represents third-party costs associated with business as well asdevelopment activities, which are inclusive of costs related to our Investor Day, whichthe evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. These costs were recorded in SG&A expenses. For the first threetwo quarters of 2021, these2022, facility closure costs mainly related to the integrationrelocation of the Dream and WestSoy brands and project development activities relatedcertain equipment from our former Oxnard, California, frozen fruit processing facility to our new plant in Midlothian, Texas,Mexican facility, which were recorded in SG&A expenses.other expense.
(d)For the first two quarters of 2022, facility closure costs mainly related to the relocation of certain equipment from our former Oxnard, California, frozen fruit processing facility to our Mexican facility, which were recorded in other expense.
(e)For the first two quarters of 2023 and 2022, other mainly reflects reserves for the settlement of certain legal and contractual matters.
(f)Reflects the tax effect of the preceding adjustments to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment, net of deferred tax valuation allowances.
(g)Reflects an increase to the valuation allowance for U.S. deferred tax assets that originated prior to fiscal 2023, based on an assessment of the future realizability of the related tax benefits.
(4) ReferThe following table presents a reconciliation of segment operating income (loss) and adjusted EBITDA from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (4) to the "Consolidated Results of Operations for the Quarters Ended OctoberJuly 1, 20222023 and OctoberJuly 2, 2021"2022" table regarding the use of this non-GAAP measure).
July 1, 2023 | July 2, 2022 | |||||
For the two quarters ended | $ | $ | ||||
Earnings (loss) from continuing operations | (17,461 | ) | 3,287 | |||
Income tax expense | 4,147 | 1,339 | ||||
Interest expense, net | 12,781 | 5,662 | ||||
Other expense (income), net | (192 | ) | 1,827 | |||
Total segment operating income (loss) | (725 | ) | 12,115 | |||
Depreciation and amortization | 20,785 | 18,785 | ||||
Stock-based compensation | 5,921 | 5,599 | ||||
Start-up costs(a) | 13,122 | 721 | ||||
Product recall costs(b) | 3,170 | - | ||||
Business development costs(c) | 1,462 | 799 | ||||
Adjusted EBITDA | 43,735 | 38,019 |
(a)Refer to footnote (3)(a) above.
(b)Reflects estimated costs related to the recall of specific frozen fruit products in the second quarter of 2023, which were recorded as a reduction to revenues ($0.2 million) and an addition to cost of goods sold ($3.0 million).
(c)Refer to footnote (3)(c) above.
(5)Refer to footnote (5) to the "Consolidated Results of Operations for the Quarters Ended July 1, 2023 and July 2, 2022" table regarding the use of certain other non-GAAP measures in the discussion of our results of operations below.
RevenuesInclusive of the impact of the divestiture of our sunflower business in the fourth quarter of 2022, total revenues for the threetwo quarters ended OctoberJuly 1, 2022 increased2023 decreased by 17.3%10.8% to $713.4$431.7 million from $608.4$483.7 million for the threetwo quarters ended OctoberJuly 2, 2021,2022, reflecting 21.3%a 13.4% revenue growthdecline in the Plant-Based Foods and Beverages segment and 12.0%a 7.1% revenue growthdecline in the Fruit-Based Foods and Beverages segment. The change in revenues from the first threetwo quarters of 20212022 to the first threetwo quarters of 20222023 was due to the following:
Plant-Based | Fruit-Based | |||||||||||||||||
Foods and Beverages | Foods and Beverages | Consolidated | ||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||
2021 revenues | 345,680 | 262,712 | 608,392 | |||||||||||||||
Price | 43,542 | 12.6% | 29,550 | 11.2% | 73,092 | 12.0% | ||||||||||||
Volume/Mix | 26,192 | 7.6% | 1,958 | 0.7% | 28,150 | 4.6% | ||||||||||||
Acquisition | 3,735 | 1.1% | - | - | 3,735 | 0.6% | ||||||||||||
2022 revenues | 419,149 | 21.3% | 294,220 | 12.0% | 713,369 | 17.3% |
SUNOPTA INC. | 35 | July 1, 2023 Form 10-Q |
Plant-Based | Fruit-Based | |||||||||||||||||
Foods and Beverages | Foods and Beverages | Consolidated | ||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||
2022 revenues | 281,423 | 202,281 | 483,704 | |||||||||||||||
Price | 16,805 | 6.0% | 1,622 | 0.8% | 18,427 | 3.8% | ||||||||||||
Volume/Mix | (15,921 | ) | -5.7% | (15,902 | ) | -7.9% | (31,823 | ) | -6.6% | |||||||||
Divestiture of sunflower business | (38,465 | ) | -13.7% | - | - | (38,465 | ) | -8.0% | ||||||||||
Product recall costs | - | - | (154 | ) | -0.1% | (154 | ) | 0.0% | ||||||||||
2023 revenues | 243,842 | -13.4% | 187,847 | -7.1% | 431,689 | -10.8% |
Note: percentages may not add due to rounding.
For the threetwo quarters ended OctoberJuly 1, 2022,2023, the 21.3% increase13.4% decrease in revenues for the Plant-Based Foods and Beverages segment reflected a 12.6%13.7% revenue loss related to the divestiture of the sunflower business, together with an unfavorable volume/mix impact of 5.7%, partially offset by an 6.0% overall increase in pricing,pricing. The unfavorable volume/mix reflected lower external sales of plant-based ingredients due to a favorable volume/mix impactcustomer transferring part of 7.6%its business to a second-source supplier and increased internal demand for oat base (a $15.9 million decrease to revenues), and 1.1% of incremental revenuetogether with softer demand for almond beverages in the first quartercurrent period and lower sales volumes of 2022 related toeveryday broths. On the acquisition of the Dreamother hand, we saw sales volume growth from our oat milks and WestSoy brands in April 2021.creamers, teas, and newly introduced 330-milliliter protein shakes. The increase in pricing was driven bymainly reflected the wrap-around benefit of pricing actions taken with customers in 2022 to offset inflationary cost increases, together with the pass-through effect of higher sunflower commodity pricing. Volume/mix was favorable mainly due to growth from our oat-based product offerings and teas, partially offset by softer volumes of sunflower and lower demand for everyday broths.increases.
For the threetwo quarters ended OctoberJuly 1, 2022,2023, the 12.0% increase7.1% decrease in revenues for the Fruit-Based Foods and Beverages segment reflected an 11.2% overall increase in pricing and a favorableunfavorable volume/mix impact of 0.7%.7.9%, slightly offset by a 0.8% increase in pricing. The increased pricing reflected pricing actions taken to offset commodity inflation incurred on fruit inventories and other inflationary cost increases. The favorable volume/mix impact reflected strong demand for fruit snacks and the introductionlower volumes of smoothie bowls, which reflected the volume impact of our frozen fruit portfolio rationalization efforts, together with lower consumer demand for retail frozen fruit, due to higher prices resultinglower retail consumption trends, constraints on certain fruit varieties impacting blends, and lost foodservice volumes, together with the impact of one-time incremental volumes from inflation.a frozen fruit customer in the first quarter of 2022 that did not recur, partially offset by increased volumes of fruit snacks and smoothie bowls. For the two quarters ended July 1, 2023, we recorded a reserve of $0.2 million (0.1% impact on revenues) for estimated customer returns associated with the frozen fruit product recall.
Consolidated gross profit increased $14.6decreased $18.7 million, or 18.3%29.5%, to $94.3$44.6 million for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared with $79.7$63.3 million for the threetwo quarters ended OctoberJuly 2, 2021.2022. Consolidated gross margin for the threetwo quarters ended OctoberJuly 1, 20222023 was 13.2%10.3% compared to 13.1% for the threetwo quarters ended OctoberJuly 2, 2021,2022, a decrease of 280 basis points. Adjusted gross margin on a consolidated basis for the two quarters ended July 1, 2023 was 13.7% compared to 13.2% for the two quarters ended July 2, 2022, an increase of 1050 basis points. See footnote (1) to the table above for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
Gross profit for the Plant-Based Foods and Beverages segment increased $2.3decreased $9.7 million to $64.0$34.6 million for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared with $61.8$44.3 million for the threetwo quarters ended OctoberJuly 2, 2021, while2022, and gross margin decreased 150 basis points to 15.3%14.2% in the first threetwo quarters of 20222023 from 17.9%15.7% in the first threetwo quarters of 2021. The 260-basis point decrease in gross margin reflected an estimated 200 basis-point decline due to2022. In the dilutive effectfirst two quarters of pass-through pricing to recover cost inflation on raw materials and packaging, together with the impacts of higher labor and utility costs, increased inventory reserves, and higher depreciation expense. In addition,2023, we incurred start-up costs included in cost of $1.2goods sold of $11.4 million (0.3%(4.7% gross margin impact) in connection withrelated to our new plant in Midlothian, Texas, compared with $0.6 million (0.2% gross margin impact) of start-up costs incurred in the first two quarters of 2022. Excluding the impact of these costs, adjusted gross margin for the Plant-Based Food and Beverages segment was 18.8% in the integrationfirst two quarters of 2023, compared to 16.0% in the first two quarters of 2022. The 280-basis point increase in adjusted gross margin reflected the wrap-around benefit of pricing actions taken in 2022 to recover input cost inflation, together with the positive margin impacts of the Dreamdivestiture of our lower-margin sunflower commodity business, and WestSoy brands. Alla mix shift in our plant-based ingredient operations, with increased internal use of theseoat base to support our beverage business and lower external sales. These factors were partially absorbed throughoffset by incremental depreciation of new production equipment for capital expansion projects ($4.0 million or 1.6% gross margin impact), together with the negative impacts of higher input costs and lower production volumes and plant utilization inwithin our plant-based beverage and ingredient operations.
Gross profit for the Fruit-Based Foods and Beverages segment increased $12.3decreased $9.0 million to $30.2$10.0 million for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared with $17.9$19.0 million for the threetwo quarters ended OctoberJuly 2, 2021,2022, and gross margin increaseddecreased 410 basis points to 10.3%5.3% in the first threetwo quarters of 20222023 from 6.8%9.4% in the first threetwo quarters of 2021.2022. In the first two quarters of 2023, we recorded a reserve for unsaleable inventory associated with the frozen fruit product recall of $3.0 million (1.6 % gross margin impact). Excluding the impact of these costs, adjusted gross margin for the Fruit-Based Food and Beverages segment was 7.1% in the first two quarters of 2023, compared to 9.4% in the first two quarters of 2022. The 350-basis230-basis point improvementdecease in adjusted gross margin reflected the benefits of portfolio rationalizations for frozen fruithigher manufacturing costs and manufacturing cost savings from the consolidation of our fruit processing facilities. These factors were partially offset by an estimated 70 basis-point declineunfavorable plant utilization due to the dilutive effect of pass-through pricing to recover commodity cost inflation,lower production volumes, together with increases in freight and storage rates, a higher mix of low-marginlower margin bulk fruit juice sales to right-size inventories and improve working capital efficiency, and a higher cost of frozen fruit inventory lossesfrom Mexico due to excess spoilage during handling.the impact of a strengthening Mexican peso (approximately $3.6 million or 1.9% gross margin impact).
SUNOPTA INC. | 36 | July 1, 2023 Form 10-Q |
For the threetwo quarters ended OctoberJuly 1, 2022,2023, we realized a total segment operating incomeloss of $19.7$0.7 million, compared with $11.7total operating income of $12.1 million for the threetwo quarters ended OctoberJuly 2, 2021.2022. The $7.9$12.8 million increasedecrease in total segment operating income reflected higherlower gross profit, as described above, partially offset by a $6.8favorable year-over-year foreign exchange impact related to the remeasurement of our Mexican operations into U.S. dollars of $4.0 million increaseand a $1.5 million decrease in SG&A expenses and a $0.5 million increase in amortization expense related to the acquired Dream and WestSoy brand name intangible assets.expenses. The increasedecrease in SG&A expenses was mainly due to higherlower employee compensation costs, including incremental 2022 incentive plancompensation accruals based on performance, and a one-time bonus of $1.6 million recognized in the first quarter of 2022 to reward employees for improved performance, partially offset by cost savings related to headcount reductions in our frozen fruit operations in August 2021. In addition, we recognized a favorable year-over-year foreign exchange impact related to our Mexican operations of $0.7 million.higher business development costs.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Operating Segment Information."
Other expense was $22.0income of $0.2 million for the threetwo quarters ended OctoberJuly 1, 2022, compared2023 mainly reflected estimated insurance recoveries associated with otherthe frozen fruit product recall, partially offset by a reserve for the settlement of an unrelated legal matter. Other expense of $7.4$1.8 million for the threetwo quarters ended OctoberJuly 2, 2021. Other expense in the first three quarters of 2022 mainly reflected a pre-tax loss of $23.2 million recognized on the classification of the sunflower business as held for sale, together with costs to relocate certain equipment from our soldformer Oxnard, California, frozen fruit processing facility to our Mexican facility, partially offset by a pre-tax gain of $3.8 million realized on the sale of the Oxnard facility. Other expense in the first three quarters of 2021 mainly reflected plant closure costs related to the consolidation of our fruit processing facilities, together with employee termination costs related to the workforce reduction in our frozen fruit operations.
Net interest expense increased by $3.9$7.1 million to $10.0$12.8 million for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared with $6.1$5.7 million for the threetwo quarters ended OctoberJuly 2, 2021,2022, resulting from an increase in outstanding debt to finance capital expansion projects, and fund working capital requirements, together with the impact of higher interest rates.
Income tax benefit was $2.9 million on pre-tax loss of $12.4 million for the three quarters ended October 1, 2022, compared with anWe recognized income tax expense of $0.4$4.1 million on a pre-tax loss of $1.9$13.3 million for the threetwo quarters ended October 2, 2021. Excluding the impactJuly 1, 2023, compared with income tax expense of stock-based compensation and other non-deductible expenses$1.3 million on pre-tax earnings ourof $4.6 million for the two quarters ended July 2, 2022. The change in the effective tax rate was approximately 26%from 28.9% for the first threetwo quarters of 2022 compared with approximately 27%to (31.1)% for the first threetwo quarters of 2021.2023, was mainly due to the recognition of a full valuation allowance against U.S. deferred tax assets in the second quarter of 2023, based on our assessment that the related tax benefits were no longer more likely than not to be realized in the future.
Loss from continuing operations for the threetwo quarters ended OctoberJuly 1, 20222023 was $9.5 million, which was inclusive of an after-tax loss on the held-for-sale sunflower business of $16.9 million and an after-tax gain on the sale of the Oxnard facility of $2.7$17.5 million, compared with a lossearnings of $2.3$3.3 million for the threetwo quarters ended October 1,July 2, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.11$0.16 for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared with a lossdiluted earnings per share $0.06of $0.02 for the threetwo quarters ended OctoberJuly 2, 2021.2022.
Earnings from discontinued operations of $2.8 million (diluted earnings per share of $0.03) for the threetwo quarters ended October 1,July 2, 2022, werewhich was related to the settlement of the purchase price allocation and other post-closing matters in connection with the 2020 divestiture of our global ingredients business, Tradin Organic.
We realized a loss attributable to common shareholders of $9.0$18.6 million (diluted loss per share of $0.08)$0.16) for the threetwo quarters ended OctoberJuly 1, 2022, inclusive of the after-tax loss on the held-for-sale sunflower business of $16.9 million and after-tax gain on the sale of the Oxnard facility of $3.2 million,2023, compared with a lossearnings attributable to common shareholders of $5.7$4.5 million (diluted lossearnings per share of $0.06)$0.04) for the threetwo quarters ended OctoberJuly 2, 2021. The loss2022. Earnings (loss) attributable to common shareholders included dividends and accretion on our Series B-1 preferred stock of $2.3$1.1 million and $3.4$1.5 million in the first threetwo quarters of 2023 and 2022, and 2021, respectively. The decline in preferred stock dividends and accretion reflected the exchange of all of the shares of Series A preferred stock for shares of our common stock in February 2021. Outstanding preferred stock since February 2021 consists entirely of our Series B-1 preferred stock.
For the threetwo quarters ended OctoberJuly 1, 2022,2023, adjusted earnings were $6.1$3.0 million, or $0.06$0.03 earnings per diluted share, compared with adjusted earnings of $2.5$4.2 million, or $0.02$0.04 earnings per diluted share for the threetwo quarters ended OctoberJuly 2, 2021.2022. Adjusted EBITDA increased $5.7 million, or 15.0%, for the threetwo quarters ended OctoberJuly 1, 2022 was $60.12023 to $43.7 million, compared with $50.1$38.0 million for the threetwo quarters ended OctoberJuly 2, 2021.2022, which was inclusive of $2.7 million of adjusted EBITDA attributable to the divested sunflower business. Adjusted EBITDA increased 23.9% year-over-year excluding the contribution from the sunflower business in the first two quarters of 2022. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2)(3) and (3)(4) to the table above for a reconciliation of adjusted earnings and adjusted EBITDA from lossearnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC. | 37 | July 1, 2023 Form 10-Q |
Segmented Operations Information
Plant-Based Foods and Beverages For the three quarters ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||||||||||||||
Plant-Based Foods and Beverages | ||||||||||||||||||||||||
For the two quarters ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||||||||||||||
Revenues | $ | 419,149 | $ | 345,680 | $ | 73,469 | 21.3% | $ | 243,842 | $ | 281,423 | $ | (37,581 | ) | -13.4% | |||||||||
Gross profit | 64,026 | 61,751 | 2,275 | 3.7% | 34,570 | 44,285 | (9,715 | ) | -21.9% | |||||||||||||||
Gross margin | 15.3% | 17.9% | -2.6% | 14.2% | 15.7% | -1.5% | ||||||||||||||||||
Operating income | $ | 29,106 | $ | 30,014 | $ | (908 | ) | -3.0% | $ | 10,180 | $ | 20,657 | $ | (10,477 | ) | -50.7% | ||||||||
Operating margin | 6.9% | 8.7% | -1.8% | 4.2% | 7.3% | -3.1% |
Plant-Based Foods and Beverages contributed $419.1$243.8 million in revenues for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared to $345.7$281.4 million for the threetwo quarters ended OctoberJuly 2, 2021, an increase2022, a decrease of $73.5$37.6 million, or 21.3%13.4%. The table below explains the increasedecrease in revenues:
Plant-Based Foods and Beverages Revenue Changes | |
Revenues for the | $ |
(38,465) | |
Lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base | (15,864) |
Wrap-around benefit of pricing actions taken in 2022 to offset input cost inflation, together with sales volume growth for | |
Revenues for the | $ |
Gross profit in Plant-Based Foods and Beverages increaseddecreased by $2.3$9.7 million to $64.0$34.6 million for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared to $61.8$44.3 million for the threetwo quarters ended OctoberJuly 2, 2021.2022. The table below explains the increasedecrease in gross profit:
Plant-Based Foods and Beverages Gross Profit Changes | |
Gross profit for the | $ |
Increase in start-up costs related to our new plant in Midlothian, Texas | (10,729) |
Impact of the divestiture of the sunflower business | (2,616) |
Higher | |
Gross profit for the | $ |
SUNOPTA INC. | 38 | July 1, 2023 Form 10-Q |
Operating income in Plant-Based Foods and Beverages decreased by $0.9$10.5 million to $29.1$10.2 million for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared to $30.0$20.7 million for the threetwo quarters ended OctoberJuly 2, 2021.2022. The table below explains the decrease in operating income:
Plant-Based Foods and Beverages Operating Income Changes | |
Operating income for the | $ |
Decrease in gross profit, as explained above | (9,715) |
Increase in corporate cost allocation | |
Operating income for the | $ |
Fruit-Based Foods and Beverages For the three quarters ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||||||||||||||
Fruit-Based Foods and Beverages | ||||||||||||||||||||||||
For the two quarters ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||||||||||||||
Revenues | $ | 294,220 | $ | 262,712 | $ | 31,508 | 12.0% | $ | 187,847 | $ | 202,281 | $ | (14,434 | ) | -7.1% | |||||||||
Gross profit | 30,246 | 17,930 | 12,316 | 68.7% | 10,012 | 18,969 | (8,957 | ) | -47.2% | |||||||||||||||
Gross margin | 10.3% | 6.8% | 3.5% | 5.3% | 9.4% | -4.1% | ||||||||||||||||||
Operating income (loss) | $ | 6,865 | $ | (6,858 | ) | $ | 13,723 | 200.1% | $ | (2,493 | ) | $ | 3,995 | $ | (6,488 | ) | -162.4% | |||||||
Operating margin | 2.3% | -2.6% | 4.9% | -1.3% | 2.0% | -3.3% |
Fruit-Based Foods and Beverages contributed $294.2$187.8 million in revenues for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared to $262.7$202.3 million for the threetwo quarters ended OctoberJuly 2, 2021, an increase2022, a decrease of $31.5$14.5 million, or 12.0%7.1%. The table below explains the increasedecrease in revenues:
Fruit-Based Foods and Beverages Revenue Changes | |
Revenues for the | $ |
Lower retail sales volumes of frozen fruit, due to unfavorable consumption trends and constraints on certain fruit varieties, together with lost foodservice volumes and the impact of one-time incremental volumes from a frozen fruit customer in the first quarter of 2022 that did not recur | (21,946) |
Increase in the reserves for customer returns associated with the frozen fruit product recall | (154) |
Higher sales volumes and pricing for fruit snacks and incremental | |
Revenues for the | $ |
SUNOPTA INC. | 39 | July 1, 2023 Form 10-Q |
Gross profit in Fruit-Based Foods and Beverages increaseddecreased by $12.3$9.0 million to $30.2$10.0 million for the threetwo quarters ended OctoberJuly 1, 2022,2023, compared to $17.9$19.0 million for the threetwo quarters ended OctoberJuly 2, 2021.2022. The table below explains the increasedecrease in gross profit:
Fruit-Based Foods and Beverages Gross Profit Changes | |
Gross profit for the | $ |
Higher | |
Increases in the reserves for customer returns and unsaleable inventory associated with the frozen fruit product recall | (3,170) |
Gross profit for the | $ |
Operating income in Fruit-Based Foods and Beverages increaseddecreased by $13.7$6.5 million to $6.9 million for the quarter ended October 1, 2022, compared to an operating loss of $6.9$2.5 million for the quartertwo quarters ended OctoberJuly 1, 2023, compared to operating income of $4.0 million for the two quarters ended July 2, 2021.2022. The table below explains the increasedecrease in operating income:
Fruit-Based Foods and Beverages Operating Income Changes | |
Operating | $ |
Increase in corporate cost allocation | |
Corporate Services For the three quarters ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
Operating loss | $ | (16,302 | ) | $ | (11,427 | ) | $ | (4,875 | ) | -42.7% |
Operating loss at Corporate Services increased by $4.9 million to $16.3 million for the three quarters ended October 1, 2022, compared to a loss of $11.4 million for the three quarters ended October 2, 2021. The table below explains the increase in operating loss:
3,777 | |
Operating loss for the | $ |
Corporate Services | ||||||||||||
For the two quarters ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
Operating loss | $ | (8,412 | ) | $ | (12,537 | ) | $ | 4,125 | 32.9% |
Operating loss at Corporate Services decreased by $4.1 million to $8.4 million for the two quarters ended July 1, 2023, compared to a loss of $12.5 million for the two quarters ended July 2, 2022. The table below explains the decrease in operating loss:
Corporate Services Operating Loss Changes | |
Increase in corporate cost allocations, mainly related to | |
Lower employee incentive compensation accruals based on performance, partially offset by higher business development costs and variable stock-based compensation expense | 1,797 |
Operating loss for the | $ |
SUNOPTA INC. | 40 | July 1, 2023 Form 10-Q |
Liquidity and Capital Resources
From time to time, as part of our ongoing efforts to improve working capital efficiency, we utilize, at our sole discretion, supplier finance programs offered by some of our major customers that allow us to sell our receivables from the customers to such customers' financial institutions, on a non-recourse basis, in order to be paid earlier than our payment terms with the customer provide at a discount rate that leverages those customers' favorable credit ratings. Utilizing these programs reduces our accounts receivable balances, improves our cash flows, and reduces the cost of servicing these receivables with our revolving credit facility.
In connection with our efforts to extend payment terms with our major suppliers to enhance cash flows, we facilitate our own voluntary supplier finance program through a third-party financial institution, by which a participating supplier may elect to sell an invoice to the financial institution in order to be paid earlier than the contractual payment terms provide (see note 4 to the unaudited consolidated financings statements included in this report.) Additionally, we are financing certain other purchases of goods and services through extended payables facilities, by which third-party intermediaries settle the supplier invoice on the contractual due date, and we pay the intermediaries the face amount of the invoice, together with interest, at a later date (see note 5 to the unaudited consolidated financial statements included in this report.)
On December 31, 2020, we entered into a five-year credit agreement, as amended, for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $250 million, subject to borrowing base capacity. As at OctoberJuly 1, 2022,2023, we had outstanding borrowings under the revolving credit facility of $154.0$138.5 million (January 1,(December 31, 2022 - $153.3$137.3 million), including a $15.0 million first-in-last-out ("FILO") term loan (December 31, 2022 - $20.0 million), and available borrowing capacity of approximately $75$29 million (January 1, 2022 - $67$50 million). Commencing with the first quarter of 2023, we are making amortization payments on the principal amount of the FILO term loan of $2.5 million each quarter, with the remaining amount payable at the maturity thereof on April 15, 2024.
The credit agreement also providesprovided a five-year, up to $75 million delayed draw term loan, to be used for capital expenditures, which maycould be drawn upon up to March 31, 2023. As at October 1, 2022,March 31, 2023, we had $37.4utilized $57.0 million drawn on the term loan facility mainly to partially finance the purchase of equipment for our new plant-based beverage facility under construction in Midlothian, Texas. Texas, as well as certain other equipment purchases. Commencing in March 2023, we are repaying the term loan facility in monthly installments of $0.7 million, with the remaining amount payable at the maturity thereof on December 31, 2025. As at July 1, 2023, the principal amount outstanding under the term loan facility was $54.3 million (December 31, 2022 - $43.7 million).
For the two quarters ended July 1, 2023, the weighted-average interest rate on all outstanding borrowings under our asset-based credit facilities was 7.17% (July 2, 2022 - 2.42%), reflecting increases in short-term interest rates.
For more information on our asset-based credit facilities, see note 56 to the unaudited consolidated financial statements included in this report.
During the first three quarters of 2022,As at July 1, 2023, we recognized additionalhad outstanding finance lease liabilities of $114.8 million (December 31, 2022 - $124.1 million), with a weighted-average implicit interest rate of 8.12% and a weighted-average remaining lease term of 3.2 years. Additions to finance leases in the amountfirst two quarters of $73.0 million, mainly2023 were related to the buildoutsfinal buildout of our Midlothian, Texas, facility, and our executive office and innovation center located in Eden Prairie, Minnesota, together with the addition of a new processing equipmenthigh-speed packaging line at our Allentown, Pennsylvania, plant-based beveragefruit snacks facility and plant improvements at our Alexandria, Minnesota, plant-based beverage facility.in Omak, Washington. For more information on our operating and finance lease obligations, including maturity dates, see note 43 to the unaudited consolidated financial statements included in this report.
As at OctoberJuly 1, 2022,2023, our subsidiary, SunOpta Foods Inc., ("SunOpta Foods") had 30,00015,000 shares of Series B-1 preferred stock issued and outstanding. The Series B-1 preferred stock currently has a liquidation preference of approximately $1,015 per share and is exchangeable into shares of our common stock at an exchange price of $2.50 per share.share, which presently equates to approximately 6,089,333 common shares. Cumulative preferred dividends accrue daily on the Series B-1 preferred stock at an annualized rate of 8.0% of the liquidation preference, prior to September 30, 2029, which presently equates to quarterly dividend distributions of approximately $0.6 million, and 10.0%$0.3 million. At any time, the holders of the liquidation preference thereafter. Series B-1 preferred stock may elect to exchange their shares of Series B-1 preferred stock into shares of our common stock. In addition, since April 24, 2023, SunOpta Foods may cause the holders of the Series B-1 Preferred Stock to exchange all of their shares of Series B-1 preferred stock into shares of our common stock if the volume-weighted average trading price of our common shares during the then preceding 20 trading day period is greater than 200% of the $2.50 exchange price per share.
For more information on the Series B-1 preferred stock, see note 67 to the unaudited consolidated financial statements included in this report.
SUNOPTA INC. | 41 | July 1, 2023 Form 10-Q |
There have been no material changes outside the normal courseWe estimate cash expenditures of businessapproximately $45 million on identified capital projects in fiscal 2023, including $33.9 million spent in the naturefirst two quarters of 2023, mainly related to the completion of our contractual obligations since January 1, 2022.Midlothian, Texas, facility. We funded our cash capital expenditures in the first two quarters of 2023 using our term loan facility, together with cash advances under finance leases and our revolving credit facility. In addition, we estimate approximately $10 million of finance leases commencing in fiscal 2023, including $3.0 million in the first two quarters of 2023.
We believe that our operating cash flows, including the selective use of supplier finance programs and proceeds from the sale of businesses and assets,extended payables facility to improve payment terms, together with our revolving and term loan credit facilities,facility, and access to lease financing, will be adequate to meet our operating, investing, and financing needs for the foreseeable future, including the 12-month period following the issuancefiscal period end of our financial statements.statements included in this report. However, in order to finance significant investments in our existing businesses, or significant business 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. 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 addition, we may explore other salesthe sale of selected businessesoperations or assets from time to time to improve our profitability, reduce our indebtedness, and/or improve our position to obtain additional financing.
Cash Flows
Summarized cash flow information for the periods ended OctoberJuly 1, 20222023 and OctoberJuly 2, 20212022 is as follows:
For the quarter ended | For the three quarters ended | For the quarter ended | For the two quarters ended | |||||||||||||||||||||||||||||||||
October 1, 2022 | October 2, 2021 | Change | October 1, 2022 | October 2, 2021 | Change | July 1, 2023 | July 2, 2022 | Change | July 1, 2023 | July 2, 2022 | Change | |||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Net cash flows provided by (used in): | ||||||||||||||||||||||||||||||||||||
Operating activities of continuing operations | 19,973 | 5,065 | 14,908 | 33,062 | (41,097 | ) | 74,159 | 15,878 | (2,454 | ) | 18,332 | 19,745 | 13,089 | 6,656 | ||||||||||||||||||||||
Investing activities of continuing operations | (21,908 | ) | (17,436 | ) | (4,472 | ) | (80,486 | ) | (57,762 | ) | (22,724 | ) | (8,057 | ) | (34,060 | ) | 26,003 | (33,514 | ) | (58,578 | ) | 25,064 | ||||||||||||||
Financing activities of continuing operations | 1,841 | 12,176 | (10,335 | ) | 53,980 | 112,472 | (58,492 | ) | (7,750 | ) | 42,896 | (50,646 | ) | 14,071 | 52,139 | (38,068 | ) | |||||||||||||||||||
Discontinued operations | - | - | - | (6,324 | ) | (13,580 | ) | 7,256 | - | (6,324 | ) | 6,324 | - | (6,324 | ) | 6,324 |
Operating Activities of Continuing Operations
Cash provided by operating activities of continuing operations increased $14.9$18.3 million and $74.2$6.7 million forfrom the second quarter and threefirst two quarters ended October 1,of 2022 respectively, compared withto the correspondingcomparable periods of 2021.2023. The increases in cash provided mainly reflected a normalizationlower year-over-year purchases of frozen fruit inventory purchases in the current year periods, comparedto align with a need to replenish those inventories in the corresponding periods of 2021, following a shortfall in supply in 2020,demand, partially offset by the year-over-year impact of higher commodity prices for frozen fruit,start-up costs related to our Midlothian, Texas, facility, and higher inventory levelscash interest expense on borrowings to support the growth in our fruit snacks operations. In addition, the increases in cash provided reflected our improved operating performance in the current year periods, together with increased workingfinance capital efficiency through the selective use of early payment programs offered by some of our major customers, and improved payment terms with certain of our suppliers.expenditures.
Investing Activities of Continuing Operations
Cash used in investing activities of continuing operations increased $4.5decreased $26.0 million and $22.7$25.1 million forfrom the quarter and three quarters ended October 1, 2022, respectively, compared with the corresponding periods of 2021. Investing cash flows reflected additions to property, plant and equipment of $38.0 million and $100.8 million in the thirdsecond quarter and first threetwo quarters of 2022 compared with additions of $18.4 million and $35.0 million into the correspondingcomparable periods of 2021. Capital expenditures2023. The year-over-year decreases in 2022 were mainly related toinvesting cash outflows reflected the completion of certain major capital projects, including the construction of our new plant-based beverage facility in Midlothian, Texas, together with the completion of our executive office and innovation center in Eden Prairie, Minnesota, and other expansion projects within our plant-based and fruit snacks operations. Investing cash inflows for the quarter and three quarters ended October 1, 2022, included net proceeds of $16.1 million received on the sale of our Oxnard, California, frozen fruit processing facility, while investing cash outflows for the first three quarters of 2021 included $25.1 million paid to acquire the Dream and WestSoy brand name intangible assets.Texas.
Financing Activities of Continuing Operations
Cash used in financing activities of continuing operations increased $50.6 million from the second quarter of 2022 to the second quarter of 2023, and cash provided by financing activities of continuing operations decreased $10.3$38.1 million and $58.5 million forfrom the quarter and threefirst two quarters ended October 1,of 2022 respectively, compared withto the corresponding periodsfirst two quarters of 2021.2023. The decreasesyear-over-year movements in financing cash providedflows mainly reflected reduced levelsa decreased level of revolver borrowings requiredunder our revolving credit facility to fund changes in working capital, in the current year periods,together with higher net repayments of long-term debt as capital projects are completed, partially offset by increased borrowingsnet proceeds from notes payable associated with our use of long-term debt related to term loanextended payables facilities in the second quarter and lease financing for capital projects.first two quarters of 2023.
SUNOPTA INC. | 42 | July 1, 2023 Form 10-Q |
Discontinued Operations
Cash used in investing activities of discontinued operations of $6.3 million forin the threesecond quarter and first two quarters ended October 1,of 2022, related to the settlement of the purchase price allocation and other post-closing matters in connection with the 2020 divestiture of Tradin Organic, while cash used in investing activities of discontinued operations of $13.4 million for the three quarters ended October 2, 2021, related to the settlement of transaction costs accrued in connection with the Tradin Organic sale.Organic.
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.
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 January 1,December 31, 2022.
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 our 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. BasedAs a result of the material weaknesses in internal control over financial reporting identified and described in Item 9A of our Annual Report on this evaluation, our CEO and our CFO concluded thatForm 10-K for the fiscal year ended December 31, 2022, our disclosure controls and procedures were not effective as of OctoberJuly 1, 2022.2023.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
ChangesRemediation Plan for Material Weaknesses in Internal Control Overover Financial Reporting
OurThe Company is in the process of improving its policies and procedures relating to the preparation and review of the consolidated income tax provision and recognition of deferred tax assets related to stock-based compensation. Management plans to enhance its internal controls by adding controls to ensure proper review and assessment of business activities impacting the provision and completeness and accuracy of data used in preparing the consolidated tax provision and deferred tax assets.
The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management withhas concluded, through testing, that these controls are operating effectively. As a result of the participationmaterial weakness relating to the annual consolidated income tax provision and recognition of our CEOdeferred tax assets, we believe the remediation will occur in the fourth quarter of fiscal 2023 and CFO, has evaluated whether any change inwill strengthen our internal control over financial reporting (as such term is definedand will prevent a reoccurrence of the material weaknesses described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
SUNOPTA INC. | 43 | July 1, 2023 Form 10-Q |
Changes in Internal Control over Financial Reporting
Other than the actions taken under Rule 13a-15(f) promulgated under the Exchange Act) occurred during the quarter ended October 1, 2022. Based on that evaluation, management concluded that"Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting"discussed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended OctoberJuly 1, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
SUNOPTA INC. |
Item 1. Legal Proceedings
For a discussion of legal proceedings, see note 1112 to the unaudited consolidated financial statements included under Part I, Item 1 of this report.
Item 1A. Risk Factors
Certain risks associated with our operations are discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended January 1,December 31, 2022. 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
On August 9, 2023, the Company provided a written notice of termination to Mr. Michael Buick, Senior Vice President and General Manager of Plant-Based Foods and Beverages, with an effective termination date of October 9, 2023.
In connection with Mr. Buick's separation from the Company, the Company expects to enter into a Separation Agreement and Full and Final Release (the “Separation Agreement”) with Mr. Buick honoring the terms of Mr. Buick’s employment agreement. Mr. Buick’s separation from the Company constitutes an involuntary termination by the Company “without cause” under Mr. Buick’s employment agreement, entitling him to receive:
The Company will apply standard tax and other applicable withholdings to payments made to Mr. Buick. The Company also will pay Mr. Buick accrued but unused vacation, regardless of whether Mr. Buick signs the Separation Agreement.
Mr. Buick’s right to receive the consideration and benefits is contingent upon Mr. Buick’s agreeing to (and not revoking) a release of claims against the Company; to that end, the Separation Agreement contains a release and waiver of claims for the benefit of the Company, pursuant to which Mr. Buick agrees to release the Company and certain other parties from any and all claims, charges, causes of action and damages arising on or prior to his execution of the Separation Agreement.
Mr. Buick is also subject to certain confidentiality provisions as well as restrictions preventing him from competing with the Company and soliciting the customers or employees of the Company.
Mr. Buick shall have the right to revoke the Separation Agreement by giving written notice to the Company within fifteen (15) days after signing the Separation Agreement. In the event of any such revocation, the Separation Agreement will no longer be effective and Mr. Buick will not receive the payment and benefits listed above.
The foregoing summary of the Separation Agreement is qualified in its entirety by the text of the Separation Agreement, which the Company expects to file as an exhibit to its Quarterly Report on Form 10-Q for the quarter ending September 30, 2023.
Item 6. Exhibits
The following exhibits are included as part of this report.
† Indicates management contract or compensatory plan or arrangement.
* Filed herewith.
SUNOPTA INC. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SUNOPTA INC. | |
Date: | /s/ Scott Huckins |
Scott Huckins | |
Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
SUNOPTA INC. |