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 March 30, 2024 contained under Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended December 30, 2023 (the "Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to May 8, 2024.
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 operate as a manufacturer for leading natural and private label brands and also produce our own brands, including SOWN®, Dream® and West LifeTM. Our consumer product portfolio includes plant-based beverages and creamers, nutritional beverages, teas, and broths packaged in shelf-stable formats, together with fruit snacks, which are sold through retail, club, foodservice and e-commerce channels. We also produce liquid and dry ingredients for internal use and for sale to other food and beverage manufacturers.
On March 4, 2024, we completed the sale of the net assets related to our smoothie bowls product line and exited the category.
Fiscal 2024 Outlook
Building on our first quarter of 2024 performance, we are projecting higher year-over-year revenues for fiscal 2024 driven by organic volume growth from our beverages and snacks categories, partially offset by the impact of our exit from the smoothie bowls category. We anticipate an improved gross margin profile on a reported basis, compared with the prior year, reflecting higher production volumes and plant utilization to support sales, together with lower start-up costs and improved operating efficiencies at our Midlothian, Texas, facility. The resulting increase in gross profit, together with stable selling, general and administrative ("SG&A") spending as a percentage of revenue, is expected to drive year-over-year operating income growth and improved cash flows.
| SUNOPTA INC. | 18 | March 30, 2024 Form 10-Q |
Consolidated Results of Operations for the Quarters Ended March 30, 2024 and April 1, 2023
| | | March 30, | | | April 1, | | | | | | | |
| | | 2024 | | | 2023 | | | Change | | | Change | |
| For the quarter ended | | $ | | | $ | | | $ | | | % | |
| Revenues | | 182,848 | | | 154,969 | | | 27,879 | | | 18.0% | |
| Cost of goods sold | | 151,101 | | | 130,890 | | | 20,211 | | | 15.4% | |
| | | | | | | | | | | | | |
| Gross profit | | 31,747 | | | 24,079 | | | 7,668 | | | 31.8% | |
| | | | | | | | | | | | | |
| Gross margin(1) | | 17.4% | | | 15.5% | | | | | | 1.9% | |
| | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | |
| Selling, general and administrative expenses | | 22,988 | | | 23,069 | | | (81 | ) | | -0.4% | |
| Intangible asset amortization | | 446 | | | 446 | | | - | | | 0.0% | |
| Other expense (income), net | | (1,800 | ) | | 42 | | | (1,842 | ) | | * | |
| Foreign exchange gain | | (51 | ) | | (11 | ) | | (40 | ) | | -363.6% | |
| Total operating expenses | | 21,583 | | | 23,546 | | | (1,963 | ) | | -8.3% | |
| | | | | | | | | | | | | |
| Operating income | | 10,164 | | | 533 | | | 9,631 | | | 1806.9% | |
| Interest expense, net | | 6,050 | | | 5,664 | | | 386 | | | 6.8% | |
| | | | | | | | | | | | | |
| Earnings (loss) from continuing operations before income taxes | | 4,114 | | | (5,131 | ) | | 9,245 | | | * | |
| Income tax expense (benefit) | | 277 | | | (2,304 | ) | | 2,581 | | | 112.0% | |
| | | | | | | | | | | | | |
| Earnings (loss) from continuing operations | | 3,837 | | | (2,827 | ) | | 6,664 | | | * | |
| Earnings (loss) from discontinued operations | | (1,417 | ) | | 4,204 | | | (5,621 | ) | | * | |
| | | | | | | | | | | | | |
| Net earnings(2),(3) | | 2,420 | | | 1,377 | | | 1,043 | | | 75.7% | |
| Dividends and accretion on preferred stock | | (433 | ) | | (704 | ) | | 271 | | | 38.5% | |
| | | | | | | | | | | | | |
| Earnings attributable to common shareholders(4) | | 1,987 | | | 673 | | | 1,314 | | | 195.2% | |
* 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 adjusted 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 a significant impact on the comparability of reported gross margins, which may obscure trends in our margin performance.
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.
| | | March 30, | | | | April 1, | |
| For the quarter ended | | 2024 | | | | 2023 | |
| Reported gross margin | | 17.4% | | | 15.5% | |
| Start-up costs(a) | | 0.2% | | | | 3.7% | |
| Adjusted gross margin | | 17.5% | | | | 19.3% | |
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 first quarter of 2024, start-up costs related to the ramp-up of production on a third line at our plant-based beverage facility in Midlothian, Texas, together with an expansion of our ingredient extraction operations at our Modesto, California, facility. For the first quarter of 2023, start-up costs included in cost of goods sold mainly related to the ramp-up of production on the first two lines at our Midlothian, Texas, facility.
| SUNOPTA INC. | 19 | March 30, 2024 Form 10-Q |
(2) When assessing our financial performance, we use an internal measure of adjusted earnings from continuing operations that excludes specific items recognized in other 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 from continuing operations from earnings (loss) from continuing operations which we consider to be the most directly comparable U.S. GAAP financial measure.
| | | March 30, 2024 | | | April 1, 2023 | |
| | | | | | Per | | | | | | Per | |
| | | | | | Share | | | | | | Share | |
| For the quarter ended | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | |
| Earnings (loss) from continuing operations | | 3,837 | | | | | | (2,827 | ) | | | |
| Dividends and accretion on preferred stock | | (433 | ) | | | | | (704 | ) | | | |
| | | | | | | | | | | | | |
| Earnings (loss) from continuing operations attributable to common shareholders | | 3,404 | | | 0.03 | | | (3,531 | ) | | (0.03 | ) |
| Adjusted for: | | | | | | | | | | | | |
| Gain on sale of smoothie bowls product line(a) | | (1,800 | ) | | | | | - | | | | |
| Start-up costs(b) | | 327 | | | | | | 6,425 | | | | |
| Business development costs(c) | | - | | | | | | 731 | | | | |
| Other | | - | | | | | | 42 | | | | |
| Net income tax on adjusting items(d) | | - | | | | | | (1,873 | ) | | | |
| Adjusted earnings from continuing operations | | 1,931 | | | 0.02 | | | 1,794 | | | 0.02 | |
(a) Reflects the pre-tax gain on sale of the smoothie bowls product line, which is recorded in other income.
(b) For the first quarter of 2024, start-up costs related to the ramp-up of production on a third line at our plant-based beverage facility in Midlothian, Texas, together with an expansion of our ingredient extraction operations at our Modesto, California, facility, and are recorded in cost of goods sold. For the first quarter of 2023, start-up costs mainly related to the ramp-up of production on the first two lines at our Midlothian, Texas, facility, and are recorded in cost of goods sold ($5.8 million) and SG&A expenses ($0.6 million).
(c) Represents third-party costs associated with business development activities, which 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 first quarter of 2023, business development costs related to the divestiture of our frozen fruit business ("Frozen Fruit"), which was completed in October 2023. These costs are recorded in SG&A expenses.
(d) Reflects the tax effect of the 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.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings from continuing operations. However, adjusted earnings from continuing operations is not, and should not be viewed as, a substitute for earnings (loss) from continuing operations prepared under U.S. GAAP. Adjusted earnings from continuing operations is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) We use a measure of adjusted EBITDA from continuing operations 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 from continuing operations as earnings (loss) from continuing operations before interest, income taxes, depreciation, amortization, and stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings from continuing operations (refer above to footnote (2)). The following table presents a reconciliation of adjusted EBITDA from continuing operations from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 20 | March 30, 2024 Form 10-Q |
| | | March 30, 2024 | | | April 1, 2023 | |
| For the quarter ended | | $ | | | $ | |
| Earnings (loss) from continuing operations | | 3,837 | | | (2,827 | ) |
| Income tax expense (benefit) | | 277 | | | (2,304 | ) |
| Interest expense, net | | 6,050 | | | 5,664 | |
| Depreciation and amortization | | 8,576 | | | 7,050 | |
| Stock-based compensation | | 5,299 | | | 3,892 | |
| Adjusted for: | | | | | | |
| Gain on sale of smoothie bowls product line(a) | | (1,800 | ) | | - | |
| Start-up costs(b) | | 327 | | | 6,425 | |
| Business development costs(c) | | - | | | 731 | |
| Other | | - | | | 42 | |
| Adjusted EBITDA from continuing operations | | 22,566 | | | 18,673 | |
(a)-(c) Refer to footnote (2) above.
Although we use adjusted EBITDA from continuing operations as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
• adjusted EBITDA from continuing operations does not reflect interest expense, or the cash requirements necessary to service interest payments on our indebtedness;
• adjusted EBITDA from continuing operations does not include the payment or recovery of income taxes, which is a necessary element of our operations;
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements; and
• adjusted EBITDA from continuing operations does not include non-cash stock-based compensation, which is an important component of our total compensation program for employees and directors.
Because of these limitations, adjusted EBITDA from continuing operations 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 from continuing operations in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, operating income, earnings (loss) from continuing operations, and adjusted earnings from continuing operations to measure our operating performance. Adjusted EBITDA from continuing operations 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 from continuing operations may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. For example, as described above under footnote (1), we evaluate our adjusted gross margins on a basis that excludes the impact of start-up costs. In addition, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for an analysis of our results as reported under U.S. GAAP.
| SUNOPTA INC. | 21 | March 30, 2024 Form 10-Q |
Revenues for the quarter ended March 30, 2024 increased by 18.0% to $182.8 million from $155.0 million for the quarter ended April 1, 2023. The change in revenues from the first quarter of 2023 to the first quarter of 2024 was due to the following:
| | | $ | | | % | |
| 2023 revenues | | 154,969 | | | | |
| Volume/Mix | | 36,438 | | | 23.5% | |
| Price | | (7,704 | ) | | -5.0% | |
| Exit from smoothie bowls | | (855 | ) | | -0.6% | |
| 2024 revenues | | 182,848 | | | 18.0% | |
Note: percentages may not add due to rounding.
For the quarter ended March 30, 2024, the 18.0% increase in revenues reflected a favorable volume/mix impact of 23.5%, partially offset by a 5.0% overall price reduction due to the pass-through of lower commodity costs for certain raw materials, together with a 0.6% revenue loss related to our exit from the smoothie bowls category in March 2024. The favorable volume/mix reflected sales volume growth for oat milks and creamers, protein shakes, broths, teas, and fruit snacks, partially offset by softer demand for other varieties of plant-based milks.
Gross profit increased $7.6 million, or 31.8%, to $31.7 million for the quarter ended March 30, 2024, compared with $24.1 million for the quarter ended April 1, 2023. Gross margin for the quarter ended March 30, 2024 was 17.4% compared to 15.5% for the quarter ended April 1, 2023, an increase of 190 basis points.
For the first quarter of 2024, we incurred start-up costs included in cost of goods sold of $0.3 million (0.2% gross margin impact) related to ramp-up of production on a third line at our plant-based beverage facility in Midlothian, Texas, together with an expansion of our ingredient extraction operations at our Modesto, California, facility. For the first quarter of 2023, we incurred start-up costs of $5.8 million (3.7% gross margin impact), mainly related to the ramp-up of production on the first two lines at our Midlothian, Texas, facility. Excluding the impact of start-up costs, adjusted gross margin for the quarter ended March 30, 2024 was 17.5% compared to 19.3% for the quarter ended April 1, 2023, a decrease of 180 basis points. See footnote (1) to the "Consolidated Results of Operations for the Quarters Ended March 30, 2024 and April 1, 2023" table for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
The 180-basis point decrease in adjusted gross margin reflected the impact of incremental depreciation of new production equipment related to capital expansion projects completed in 2023 ($1.7 million or 0.9% gross margin impact), together with higher inventory reserves in the first quarter of 2024, partially offset by higher sales and production volumes for beverages, broths and fruit snacks driving improved plant utilization.
Operating income increased $9.7 million to $10.2 million for the quarter ended March 30, 2024, compared with $0.5 million for the quarter ended April 1, 2023. The increase in operating income reflected higher gross profit, as described above, together with a gain on sale of the smoothie bowls product line of $1.8 million. Additionally, we recognized lower employee variable compensation accruals in the first quarter of 2024, compared with the first quarter of 2023, together with lower business development costs related to the divestiture of Frozen Fruit in October 2023. These factors were partially offset by higher stock- based compensation expense, mainly due to the accelerated vesting of certain previously granted awards in connection with the retirement of our former Chief Executive Officer ("CEO").
(Further details on the changes in revenue, gross profit and operating income are provided in the rollforward tables below.)
Net interest expense increased by $0.4 million to $6.1 million for the quarter ended March 30, 2024, compared with $5.7 million for the quarter ended April 1, 2023, which reflected the impact of higher market interest rates, partially offset by lower average outstanding debt in the first quarter of 2024 following the divestiture of Frozen Fruit.
Income taxes were recognized at an effective rate of 6.7% for the quarter ended March 30, 2024, compared with 44.9% recognized for the quarter ended April 1, 2023. The change in the effective tax rate was primarily driven by the recognition of a full valuation allowance against U.S. deferred tax assets in excess of deferred tax liabilities beginning 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.
| SUNOPTA INC. | 22 | March 30, 2024 Form 10-Q |
Earnings from continuing operations for the quarter ended March 30, 2024 were $3.8 million, compared with a loss of $2.8 million for the quarter ended April 1, 2023. Diluted earnings per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.03 for the quarter ended March 30, 2024, compared with a diluted loss per share of $0.03 for the quarter ended April 1, 2023.
We recognized a loss from discontinued operations related to Frozen Fruit of $1.4 million (diluted loss per share of $0.01) for the quarter ended March 30, 2024, compared with earnings of $4.2 million (diluted earnings per share of $0.04) for the quarter ended April 1, 2023. Refer to note 2 to the unaudited consolidated financial statements included in this report for additional details.
We realized earnings attributable to common shareholders of $2.0 million (diluted earnings per share of $0.02) for the quarter ended March 30, 2024, compared with earnings attributable to common shareholders of $0.7 million (diluted earnings per share of $0.01) for the quarter ended April 1, 2023. Earnings attributable to common shareholders included dividends and accretion on our Series B-1 Preferred Stock of $0.4 million and $0.7 million in the first quarters of 2024 and 2023, respectively.
Adjusted earnings from continuing operations for the quarter ended March 30, 2024 were $1.9 million, or $0.02 earnings per diluted share, compared with adjusted earnings from continuing operations of $1.8 million, or $0.02 earnings per diluted share, for the quarter ended April 1, 2023.
Adjusted EBITDA from continuing operations increased $3.9 million, or 20.8%, for the quarter ended March 30, 2024 to $22.6 million, compared with $18.7 million for the quarter ended April 1, 2023.
Adjusted earnings from continuing operations and adjusted EBITDA from continuing operations are non-GAAP financial measures. See footnotes (2) and (3) to the "Consolidated Results of Operations for the Quarters Ended March 30, 2024 and April 1, 2023" table for a reconciliation of adjusted earnings from continuing operations and adjusted EBITDA from continuing operations from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
Rollforward of Revenue, Gross Profit and Operating Income
| For the quarter ended | | March 30, 2024 | | | April 1, 2023 | | | Change | | | % Change | |
| | | | | | | | | | | | | |
| Revenues | $ | 182,848 | | $ | 154,969 | | $ | 27,879 | | | 18.0% | |
| Gross profit | | 31,747 | | | 24,079 | | | 7,668 | | | 31.8% | |
| Gross margin | | 17.4% | | | 15.5% | | | | | | 1.9% | |
| | | | | | | | | | | | | |
| Operating income | $ | 10,164 | | $ | 533 | | $ | 9,631 | | | 1806.9% | |
| Operating margin | | 5.6% | | | 0.3% | | | | | | 5.3% | |
Revenues
The table below explains the $27.8 million increase in revenues from $155.0 million for the first quarter of 2023 to $182.8 million for the first quarter of 2024:
| Revenues for the quarter ended April 1, 2023 | $154,969 |
| Sales volume growth for oat milks and creamers, protein shakes, broths, teas, and oat-based ingredients, partially offset by softer demand for other varieties of plant-based milks, together with the impact of lower pass-through sales pricing to customers to match lower costs for certain raw materials | 21,783 |
| Sales volume growth for fruit snacks due to the addition of new production and packaging capacity in 2023 to meet unfilled demand | 6,951 |
| Impact of the exit from the smoothie bowls category in March 2024 | (855) |
| Revenues for the quarter ended March 30, 2024 | $182,848 |
| SUNOPTA INC. | 23 | March 30, 2024 Form 10-Q |
Gross Profit
The table below explains the $7.6 million increase in gross profit of from $24.1 million for the first quarter of 2023 to $31.7 million for the first quarter of 2024:
| Gross profit for the quarter ended April 1, 2023 | $24,079 |
| Decrease in start-up costs related to capital expansion projects | 5,427 |
| Higher sales and production volumes for beverages, broths and fruit snacks, partially offset by higher inventory reserves | 3,909 |
| Incremental depreciation related to capital expansion projects | (1,668) |
| Gross profit for the quarter ended March 30, 2024 | $31,747 |
Operating Income
The table below explains the $9.7 million increase in operating income from $0.5 million for the first quarter of 2023 to $10.2 million for the first quarter of 2024:
| Operating income for the quarter ended April 1, 2023 | $533 |
| Increase in gross profit, as explained above | $7,668 |
| Gain on sale of the smoothie bowls product line, together with lower employee variable compensation accruals and lower business development costs following the divestiture of Frozen Fruit in 2023 | 3,370 |
| Higher stock-based compensation expense, mainly due to the accelerated vesting of certain previously granted awards in connection with the retirement of our former Chief Executive Officer | (1,407) |
| Operating income for the quarter ended March 30, 2024 | $10,164 |
Liquidity and Capital Resources
On December 8, 2023, we entered into a five-year Credit Agreement providing for a $180.0 million term loan credit facility (the "Term Loan Credit Facility") and an $85.0 million revolving credit facility (the "Revolving Credit Facility") (collectively, the "Credit Facilities"). As at March 30, 2024, $177.8 million remained outstanding under the Term Loan Credit Facility and we had utilized $37.9 million of the $85 million Revolving Credit Facility, including $5.9 million in letters of credit. For more information on our Credit Facilities, see note 7 to the unaudited consolidated financial statements included in this report.
In connection with our efforts to extend payment terms with our major suppliers to enhance cash flows, we are financing certain purchases of goods and services through extended payables facilities, by which third-party intermediaries settle the supplier invoice on the contractual due date and issue us a short-term note payable for the face amount of the invoice, which we repay, together with interest, at a later date. As at March 30, 2024 and December 30, 2023, we had $16.6 million and $17.6 million principal amount outstanding under these facilities. With the flexibility provided by our Credit Facilities, our intention is to reduce our reliance on these facilities in 2024 and to settle all remaining outstanding notes payable. Proceeds from, and repayments of the notes payable associated with these facilities are reported as financing cash flows on our consolidated statements of cash flows.
From time to time, as part of our ongoing efforts to improve working capital efficiency, we utilize, at our sole discretion, supply chain finance ("SCF") programs offered by some of our major customers that allows 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 our customers' SCF programs reduces our accounts receivable balances, improves our cash flows, and reduces the cost of servicing these receivables with our revolving credit facility. All operating cash flows from accounts receivable are reported consistently in our consolidated statements of cash flows regardless of whether they are associated with a SCF program.
| SUNOPTA INC. | 24 | March 30, 2024 Form 10-Q |
On April 17, 2024, we announced the elimination of the dividend rights attached to the shares of Series B-1 Preferred Stock of our subsidiary, SunOpta Foods Inc., effective from and after December 31, 2023 (see note 15 to the unaudited consolidated financial statements included in this report.). The elimination of the cumulative dividend of 8.0% per year will result in annual savings of $1.2 million.
For the quarter ended March 30, 2024, we incurred capital expenditures of $7.5 million. For fiscal 2024, we estimate total capital expenditures of approximately $15 million for discretionary investments in growth and productivity projects, and approximately $10 million to $15 million of non-discretionary maintenance projects. We are funding our capital expenditures using operating cash flows and borrowings under our Revolving Credit Facility. In addition, in the second quarter of 2024, we are adding approximately $25 million of finance lease right-of-use assets related to the expansion of our ingredient extraction operations at our Modesto, California, facility.
We believe that our operating cash flows, including the selective use of customer SCF programs to improve collection terms, and proceeds from the sale of our smoothie bowls product line, together with our Credit Facilities and lease financing, will be adequate to meet our operating, investing, and financing needs for the foreseeable future, including the 12-month period following the issuance of our financial statements. 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.
Cash Flows
Summarized cash flow information for the periods ended March 30, 2024 and April 1, 2023 is as follows:
| | | | | | For the quarter ended | |
| | | March 30, | | | April 1, | | | | |
| | | 2024 | | | 2023 | | | Change | |
| | | $ | | | $ | | | $ | |
| Net cash flows provided by (used in): | | | | | | | | | |
| Continuing operations: | | | | | | | | | |
| Operating activities | | 7,402 | | | 6,664 | | | 738 | |
| Investing activities | | (4,212 | ) | | (25,395 | ) | | 21,183 | |
| Financing activities | | (5,558 | ) | | 18,731 | | | (24,289 | ) |
| Discontinued operations | | 4,167 | | | 231 | | | 3,936 | |
Operating Activities of Continuing Operations
Cash provided by operating activities of continuing operations increased $0.7 million from the first quarter of 2023 to the first quarter of 2024. The increase in cash provided mainly reflected improved profitability driven by revenue volume growth and favorable plant utilization, together with lower start-up costs related to our Midlothian, Texas, facility, partially offset by higher inventories in the first quarter of 2024 to support continuing revenue growth and replenish safety stocks.
Investing Activities of Continuing Operations
Cash used in investing activities of continuing operations decreased $21.2 million from the first quarter of 2023 to the first quarter of 2024, which mainly reflected lower capital expenditures related to the completion of certain major capital projects in 2023, including the construction of our new plant-based beverage facility in Midlothian, Texas. In addition, in the first quarter of 2024, we received cash proceeds of $3.3 million from the sale of the smoothie bowls product line, with a further $3.0 million receivable on August 1, 2024.
Financing Activities of Continuing Operations
Cash used in financing activities of continuing operations was $5.6 million for the first quarter of 2024, which reflected repayments of long-term debt related to completed capital projects, compared with cash provided of $18.7 million for the first quarter of 2023, which reflected net borrowings of long-term debt to finance capital expenditures.
| SUNOPTA INC. | 25 | March 30, 2024 Form 10-Q |
Discontinued Operations
Net cash provided by discontinued operations increased $3.9 million from the first quarter of 2023 to the first quarter of 2024, which reflected proceeds of $6.3 million from the remaining short-term note receivable related to the Frozen Fruit divestiture, partially offset by the settlement of pre-divestiture obligations.
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 December 30, 2023.
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. Based on this evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of March 30, 2024.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our CEO and CFO, has evaluated whether any change in our internal control over financial reporting (as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act) occurred during the quarter ended March 30, 2024. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the quarter ended March 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| SUNOPTA INC. | 26 | March 30, 2024 Form 10-Q |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see note 13 to the unaudited consolidated financial statements included under Part I, Item 1 of this report.
Item 1A. Risk Factors
Certain risks associated with our operations are discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 30, 2023. 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
During the quarter ended March 30, 2024, none of our directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408 of Regulation S-K.
Item 6. Exhibits
The following exhibits are included as part of this report.
Exhibit | Description |
| | |
4.1 | Third Amended and Restated Certificate of Incorporation of SunOpta Foods, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 18, 2024). |
| | |
10.1†* | Performance Unit Award Agreement, entered into as of January 2, 2024, between SunOpta Inc. and Brian W. Kocher. |
| | |
10.2†* | Stock Option Award Agreement, entered into as of January 2, 2024, between SunOpta Inc. and Brian W. Kocher. |
| | |
10.3†* | Restricted Stock Unit Award Agreement, entered into as of January 2, 2024, between SunOpta Inc. and Brian W. Kocher. |
| | |
10.4†* | Employment Agreement, effective February 26, 2024, between SunOpta Inc. and Justin Kobler. |
| | |
10.5†* | Restricted Stock Unit Award Agreement, entered into as of March 13, 2024, between SunOpta Inc. and Brian W. Kocher. |
| | |
10.6†* | Employment Agreement, effective March 25, 2024, between SunOpta Inc. and Lauren McNamara. |
| | |
10.7 | Amending Agreement between Oaktree Organics, L.P., Oaktree Huntington Investment Fund II, L.P., OCM SunOpta Trustee LLC, SunOpta Inc. and SunOpta Foods Inc., dated as of April 17, 2024 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 18, 2024). |
| | |
31.1* | Certification by Brian Kocher, Chief Executive Officer, pursuant to Rule 13a - 14(a) under the Securities Exchange Act of 1934, as amended. |
| | |
31.2* | Certification by Greg Gaba, Chief Financial Officer, pursuant to Rule 13a - 14(a) under the Securities Exchange Act of 1934, as amended. |
| | |
32* | Certifications by Brian Kocher, Chief Executive Officer, and Greg Gaba, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350. |
| |
101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document |
| | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† Indicates management contract or compensatory plan or arrangement.
* Filed herewith.
| SUNOPTA INC. | 27 | March 30, 2024 Form 10-Q |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SUNOPTA INC. |
| |
Date: May 8, 2024 | /s/ Greg Gaba |
| Greg Gaba |
| Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
| SUNOPTA INC. | 28 | March 30, 2024 Form 10-Q |
