Item 1. Financial Statements
SunOpta Inc.
|
Consolidated Statements of Operations
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars,
except per share amounts)
|
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
336,454
|
|
|
348,146
|
|
|
666,485
|
|
|
700,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
294,792
|
|
|
312,168
|
|
|
586,124
|
|
|
632,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
41,662
|
|
|
35,978
|
|
|
80,361
|
|
|
67,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
35,039
|
|
|
24,489
|
|
|
73,311
|
|
|
48,761
|
|
Intangible asset amortization
|
|
2,809
|
|
|
2,824
|
|
|
5,612
|
|
|
5,646
|
|
Other expense, net (note 11)
|
|
607
|
|
|
8,433
|
|
|
6,050
|
|
|
12,411
|
|
Foreign exchange loss (gain)
|
|
1,195
|
|
|
(180
|
)
|
|
1,775
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations before the following
|
|
2,012
|
|
|
412
|
|
|
(6,387
|
)
|
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
7,695
|
|
|
11,548
|
|
|
15,449
|
|
|
22,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
(5,683
|
)
|
|
(11,136
|
)
|
|
(21,836
|
)
|
|
(23,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery of income taxes
|
|
(5,581
|
)
|
|
(7,135
|
)
|
|
(10,550
|
)
|
|
(10,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(102
|
)
|
|
(4,001
|
)
|
|
(11,286
|
)
|
|
(13,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
(note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,993
|
)
|
Gain on classification as held for sale
|
|
-
|
|
|
-
|
|
|
-
|
|
|
560
|
|
Recovery of income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
599
|
|
Loss from discontinued operations attributable to
non-controlling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
264
|
|
Loss from discontinued operations
attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
(102
|
)
|
|
(4,001
|
)
|
|
(11,286
|
)
|
|
(13,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings attributable to non-controlling
interests
|
|
306
|
|
|
123
|
|
|
520
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to SunOpta Inc.
|
|
(408
|
)
|
|
(4,124
|
)
|
|
(11,806
|
)
|
|
(14,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic
(note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing operations
|
|
(0.03
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
(0.16
|
)
|
- from discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share diluted
(note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing operations
|
|
(0.03
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
(0.16
|
)
|
- from discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
(0.17
|
)
|
(See accompanying notes to consolidated financial statements)
SUNOPTA
INC.
|
5
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Comprehensive Earnings (Loss)
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars)
|
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(102
|
)
|
|
(4,001
|
)
|
|
(11,286
|
)
|
|
(13,280
|
)
|
Loss from discontinued operations attributable to SunOpta
Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss
|
|
(102
|
)
|
|
(4,001
|
)
|
|
(11,286
|
)
|
|
(13,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss), net
of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes related to cash flow hedges (note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
171
|
|
|
-
|
|
|
1,413
|
|
|
-
|
|
Reclassification of gains to earnings
|
|
(1,204
|
)
|
|
-
|
|
|
(1,204
|
)
|
|
-
|
|
Net changes related to cash flow hedges
|
|
(1,033
|
)
|
|
-
|
|
|
209
|
|
|
-
|
|
Currency translation adjustment
|
|
2,897
|
|
|
(2,346
|
)
|
|
3,495
|
|
|
(407
|
)
|
Other comprehensive earnings (loss), net of
income taxes
|
|
1,864
|
|
|
(2,346
|
)
|
|
3,704
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings (loss)
|
|
1,762
|
|
|
(6,347
|
)
|
|
(7,582
|
)
|
|
(14,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings (loss) attributable
to non-controlling interests
|
|
47
|
|
|
(245
|
)
|
|
565
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings (loss)
attributable to SunOpta Inc.
|
|
1,715
|
|
|
(6,102
|
)
|
|
(8,147
|
)
|
|
(14,253
|
)
|
(See accompanying notes to consolidated financial statements)
SUNOPTA
INC.
|
6
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Balance Sheets
|
As at July 1, 2017 and December 31, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars)
|
|
|
July 1, 2017
|
|
|
December 31, 2016
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
3,457
|
|
|
1,251
|
|
Accounts receivable
|
|
152,406
|
|
|
157,369
|
|
Inventories (note 6)
|
|
381,979
|
|
|
368,482
|
|
Prepaid expenses and other current assets
|
|
31,193
|
|
|
19,794
|
|
Income taxes recoverable
|
|
2,815
|
|
|
2,801
|
|
Total current assets
|
|
571,850
|
|
|
549,697
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
164,131
|
|
|
162,239
|
|
Goodwill
|
|
224,161
|
|
|
223,611
|
|
Intangible assets
|
|
178,030
|
|
|
183,524
|
|
Deferred income taxes
|
|
3,060
|
|
|
1,045
|
|
Other assets
|
|
8,563
|
|
|
9,442
|
|
|
|
|
|
|
|
|
Total assets
|
|
1,149,795
|
|
|
1,129,558
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Bank indebtedness (note 7)
|
|
237,107
|
|
|
201,494
|
|
Accounts payable and accrued liabilities
|
|
182,841
|
|
|
173,745
|
|
Customer and other deposits
|
|
1,155
|
|
|
2,543
|
|
Income taxes payable
|
|
876
|
|
|
5,661
|
|
Other current liabilities
|
|
433
|
|
|
1,016
|
|
Current portion of long-term debt (note 7)
|
|
2,062
|
|
|
2,079
|
|
Current portion of long-term liabilities
|
|
6,300
|
|
|
5,500
|
|
Total current liabilities
|
|
430,774
|
|
|
392,038
|
|
|
|
|
|
|
|
|
Long-term debt
(note 7)
|
|
228,514
|
|
|
229,008
|
|
Long-term liabilities
|
|
10,374
|
|
|
15,354
|
|
Deferred income taxes
|
|
36,751
|
|
|
44,561
|
|
Total liabilities
|
|
706,413
|
|
|
680,961
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
(note 8)
|
|
79,678
|
|
|
79,184
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
SunOpta Inc. shareholders equity
|
|
|
|
|
|
|
Common shares, no par value, unlimited shares authorized,
86,467,070 shares issued (December 31, 2016 - 85,743,958)
|
|
306,827
|
|
|
300,426
|
|
Additional paid-in capital
|
|
24,726
|
|
|
25,522
|
|
Retained earnings
|
|
38,138
|
|
|
53,838
|
|
Accumulated other comprehensive loss (note
10)
|
|
(9,527
|
)
|
|
(13,104
|
)
|
|
|
360,164
|
|
|
366,682
|
|
Non-controlling interests
|
|
3,540
|
|
|
2,731
|
|
Total equity
|
|
363,704
|
|
|
369,413
|
|
|
|
|
|
|
|
|
Total equity and liabilities
|
|
1,149,795
|
|
|
1,129,558
|
|
Commitments and contingencies
(note 14)
(See accompanying notes to consolidated financial statements)
SUNOPTA
INC.
|
7
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Shareholders Equity
|
As at and for the two quarters ended July 1, 2017 and July
2, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other com-
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
paid-in
|
|
|
Retained
|
|
|
prehensive
|
|
|
controlling
|
|
|
|
|
|
|
Common shares
|
|
|
capital
|
|
|
earnings
|
|
|
loss
|
|
|
interests
|
|
|
Total
|
|
|
|
000s
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
85,744
|
|
|
300,426
|
|
|
25,522
|
|
|
53,838
|
|
|
(13,104
|
)
|
|
2,731
|
|
|
369,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share purchase plan
|
|
25
|
|
|
182
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
182
|
|
Stock incentive plan
|
|
698
|
|
|
6,219
|
|
|
(2,772
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,447
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
2,138
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,138
|
|
Dividends and accretion on Series A Preferred Stock (note
8)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,894
|
)
|
|
-
|
|
|
-
|
|
|
(3,894
|
)
|
Loss from continuing operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,806
|
)
|
|
-
|
|
|
520
|
|
|
(11,286
|
)
|
Currency translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,502
|
|
|
(7
|
)
|
|
3,495
|
|
Cash flow hedges, net of income taxes of
$90 (note 5)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
157
|
|
|
52
|
|
|
209
|
|
Acquisition of non-controlling interest
|
|
-
|
|
|
-
|
|
|
(162
|
)
|
|
-
|
|
|
(82
|
)
|
|
244
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2017
|
|
86,467
|
|
|
306,827
|
|
|
24,726
|
|
|
38,138
|
|
|
(9,527
|
)
|
|
3,540
|
|
|
363,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other com-
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
paid-in
|
|
|
Retained
|
|
|
prehensive
|
|
|
controlling
|
|
|
|
|
|
|
Common shares
|
|
|
capital
|
|
|
earnings
|
|
|
loss
|
|
|
interests
|
|
|
Total
|
|
|
|
000s
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2016
|
|
85,418
|
|
|
297,987
|
|
|
22,327
|
|
|
106,838
|
|
|
(6,113
|
)
|
|
5,140
|
|
|
426,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share purchase plan
|
|
50
|
|
|
200
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
200
|
|
Stock incentive plan
|
|
143
|
|
|
941
|
|
|
(418
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
523
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
1,992
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,992
|
|
Loss from continuing operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(13,787
|
)
|
|
-
|
|
|
507
|
|
|
(13,280
|
)
|
Currency translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(160
|
)
|
|
(247
|
)
|
|
(407
|
)
|
Loss from discontinued operations, net of income taxes
(note 3)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
|
-
|
|
|
(264
|
)
|
|
(834
|
)
|
Disposition of discontinued operation (note
3)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,094
|
)
|
|
(2,054
|
)
|
|
(7,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 2, 2016
|
|
85,611
|
|
|
299,128
|
|
|
23,901
|
|
|
92,481
|
|
|
(11,367
|
)
|
|
3,082
|
|
|
407,225
|
|
(See accompanying notes to consolidated financial statements)
SUNOPTA
INC.
|
8
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Cash Flows
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(Expressed in thousands of U.S. dollars)
|
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED IN)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
(102
|
)
|
|
(4,001
|
)
|
|
(11,286
|
)
|
|
(13,850
|
)
|
Loss from discontinued operations
attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss from continuing operations
|
|
(102
|
)
|
|
(4,001
|
)
|
|
(11,286
|
)
|
|
(13,280
|
)
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
8,167
|
|
|
8,549
|
|
|
16,347
|
|
|
17,309
|
|
Amortization and write-off of debt issuance
costs
|
|
652
|
|
|
2,854
|
|
|
1,138
|
|
|
6,222
|
|
Deferred income taxes
|
|
(3,823
|
)
|
|
(10,821
|
)
|
|
(9,915
|
)
|
|
(14,508
|
)
|
Stock-based compensation
|
|
1,286
|
|
|
953
|
|
|
2,138
|
|
|
1,992
|
|
Unrealized gain on derivative instruments (note 5)
|
|
(1,267
|
)
|
|
(306
|
)
|
|
(1,229
|
)
|
|
(515
|
)
|
Fair value of contingent consideration
(note 11)
|
|
204
|
|
|
(1,603
|
)
|
|
204
|
|
|
(1,405
|
)
|
Impairment of long-lived assets (note 2)
|
|
-
|
|
|
-
|
|
|
3,723
|
|
|
1,735
|
|
Acquisition accounting adjustment on
inventory sold
|
|
-
|
|
|
3,888
|
|
|
-
|
|
|
11,514
|
|
Other
|
|
(244
|
)
|
|
367
|
|
|
(101
|
)
|
|
407
|
|
Changes in non-cash working capital (note
13)
|
|
(30,648
|
)
|
|
(34,294
|
)
|
|
(7,313
|
)
|
|
(61,779
|
)
|
Net cash flows from operations - continuing operations
|
|
(25,775
|
)
|
|
(34,414
|
)
|
|
(6,294
|
)
|
|
(52,308
|
)
|
Net cash flows from operations -
discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
758
|
|
|
|
(25,775
|
)
|
|
(34,414
|
)
|
|
(6,294
|
)
|
|
(51,550
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(7,143
|
)
|
|
(4,793
|
)
|
|
(16,167
|
)
|
|
(9,340
|
)
|
Proceeds from sale of assets
|
|
51
|
|
|
-
|
|
|
301
|
|
|
-
|
|
Other
|
|
254
|
|
|
700
|
|
|
364
|
|
|
700
|
|
Net cash flows from investing activities -
continuing operations
|
|
(6,838
|
)
|
|
(4,093
|
)
|
|
(15,502
|
)
|
|
(8,640
|
)
|
Net cash flows from investing activities - discontinued
operations
|
|
-
|
|
|
1,945
|
|
|
-
|
|
|
1,754
|
|
|
|
(6,838
|
)
|
|
(2,148
|
)
|
|
(15,502
|
)
|
|
(6,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase under line of credit facilities (note 7)
|
|
36,690
|
|
|
39,029
|
|
|
29,349
|
|
|
271,572
|
|
Repayment of line of credit facilities
(note 7)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(192,677
|
)
|
Borrowings under long-term debt (note 7)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
432
|
|
Repayment of long-term debt (note 7)
|
|
(589
|
)
|
|
(523
|
)
|
|
(1,116
|
)
|
|
(11,009
|
)
|
Payment of cash dividends on Series A Preferred Stock
|
|
(1,700
|
)
|
|
-
|
|
|
(3,291
|
)
|
|
-
|
|
Proceeds from the exercise of stock options
and employee share purchases
|
|
2,535
|
|
|
575
|
|
|
3,629
|
|
|
687
|
|
Payment of contingent consideration (note 5)
|
|
(4,330
|
)
|
|
(4,554
|
)
|
|
(4,330
|
)
|
|
(4,554
|
)
|
Payment of debt issuance costs
|
|
-
|
|
|
(256
|
)
|
|
-
|
|
|
(4,366
|
)
|
Other
|
|
(101
|
)
|
|
(119
|
)
|
|
(303
|
)
|
|
(134
|
)
|
Net cash flows from financing activities -
continuing operations
|
|
32,505
|
|
|
34,152
|
|
|
23,938
|
|
|
59,951
|
|
Net cash flows from financing activities - discontinued
operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,180
|
)
|
|
|
32,505
|
|
|
34,152
|
|
|
23,938
|
|
|
58,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss) on cash held
in a foreign currency
|
|
54
|
|
|
(61
|
)
|
|
64
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents in the period
|
|
(54
|
)
|
|
(2,471
|
)
|
|
2,206
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations cash activity
included above:
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Balance included at beginning of period
|
|
-
|
|
|
1,288
|
|
|
-
|
|
|
1,707
|
|
Less: Balance included at end of period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of
the period
|
|
3,511
|
|
|
5,475
|
|
|
1,251
|
|
|
2,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of the
period
|
|
3,457
|
|
|
4,292
|
|
|
3,457
|
|
|
4,292
|
|
(See accompanying notes to consolidated financial statements)
SUNOPTA
INC.
|
9
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Cash Flows (continued)
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(Expressed in thousands of U.S. dollars)
|
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued cash dividends on Series A Preferred Stock (note 8)
|
|
(1,700
|
)
|
|
-
|
|
|
(1,700
|
)
|
|
-
|
|
Proceeds on disposition of discontinued
operation, note receivable (note 3)
|
|
-
|
|
|
1,537
|
|
|
-
|
|
|
1,537
|
|
(See accompanying notes to consolidated financial statements)
SUNOPTA
INC.
|
10
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
1. Description of Business and Significant Accounting
Policies
SunOpta Inc. (the Company or SunOpta) was incorporated
under the laws of Canada on November 13, 1973. The Company operates businesses
focused on a healthy products portfolio that promotes sustainable well-being.
The Companys two reportable segments, Global Ingredients and Consumer Products,
operate in the natural, organic and specialty food sectors and utilize an
integrated business model to bring cost-effective and quality products to
market.
Basis of Presentation
The interim consolidated financial statements of the Company
have been prepared in accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934,
as amended, and in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) for interim financial information.
Accordingly, these condensed interim consolidated financial statements do not
include all of the disclosures required by U.S. GAAP for annual financial
statements. In the opinion of management, all adjustments considered necessary
for fair presentation have been included and all such adjustments are of a
normal, recurring nature. Operating results for the quarter and two quarters
ended July 1, 2017 are not necessarily indicative of the results that may be
expected for the full fiscal year ending December 30, 2017 or for any other
period. The interim consolidated financial statements include the accounts of
the Company and its subsidiaries, and have been prepared on a basis consistent
with the annual consolidated financial statements for the year ended December
31, 2016, except as described below under Recent Accounting Pronouncements
Adoption of New Accounting Standards. For further information, refer to the
consolidated financial statements, and notes thereto, included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Fiscal Year
The fiscal year of the Company consists of a 52- or 53-week
period ending on the Saturday closest to December 31. Fiscal year 2017 is a
52-week period ending on December 30, 2017, with quarterly periods ending on
April 1, July 1 and September 30, 2017. Fiscal year 2016 was a 52-week period
ending on December 31, 2016, with quarterly periods ending on April 2, July 2
and October 1, 2016.
Recent Accounting Pronouncements
Adoption of New Accounting Standards
In August 2016, the Financial Accounting Standards Board
(FASB) issued Accounting Standard Update (ASU) 2016-15, Classification of
Certain Cash Receipts and Cash Payments, which clarifies how entities should
classify certain cash receipts and cash payments on the statement of cash flows,
including contingent consideration payments made after a business combination.
As permitted, the Company elected to early adopt the guidance as at December 31,
2016 on a retrospective basis. In connection with the adoption of ASU 2016-15,
the Company reclassified $4.6 million of contingent consideration payments from
investing activities to financing activities on the comparative consolidated
statement of cash flows for the quarter and two quarters ended July 2, 2016.
In March 2016, the FASB issued ASU 2016-09, Compensation
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting, which is intended to simplify the accounting for share-based
payment transactions, including income tax consequences, the classification of
awards as either equity or liabilities, and the classification on the statement
of cash flows. Under the new guidance, companies will record excess tax benefits
and tax deficiencies as income tax expense or benefit in the income statement
rather than in additional paid-in capital. In addition, the guidance permits
companies to elect to recognize forfeitures of share-based payments as they
occur, rather than estimating the number of awards expected to be forfeited as
is currently required. This guidance is effective for annual and interim periods
beginning after December 15, 2016. The Company adopted ASU 2016-09 effective
January 1, 2017, and elected upon adoption to recognize forfeitures of
stock-based awards as they occur versus estimating at the time of grant. The
cumulative effect of this change in accounting policy as at January 1, 2017, was
not material to the Companys financial statements. Commencing January 1, 2017,
the Company recognizes excess tax benefits and deficiencies in the provision for income taxes on its consolidated statements of operations and
as an operating activity on the consolidated statements of cash flows.
SUNOPTA
INC.
|
11
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
Recently Issued Accounting Standards, Not Adopted as at July
1, 2017
In January 2017, the FASB issued ASU 2017-04, Intangibles
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the accounting for goodwill impairment by eliminating the
requirement to calculate the implied fair value of goodwill (that is, Step 2 of
the current goodwill impairment test) to measure a goodwill impairment charge.
Instead, companies will record an impairment charge based on the excess of a
reporting units carrying amount over its fair value (that is, measure the
charge based on Step 1 of the current goodwill impairment model). The guidance
is effective on a prospective basis for interim and annual goodwill impairment
testing dates after January 1, 2020; however, early adoption is permitted for
testing dates after January 1, 2017. The Company is currently assessing the
impact that this standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of
Credit Losses on Financial Instruments, which requires measurement and
recognition of expected versus incurred credit losses for most financial assets.
ASU 2016-13 is effective for interim and annual periods beginning after December
15, 2019. The Company is currently assessing the impact that this standard will
have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, a
comprehensive new standard that amends various aspects of existing accounting
guidance for leases, including the recognition of a right of use asset and a
lease liability for leases with a duration of greater than one year. The
guidance is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early adoption is
permitted. The Company is currently assessing the impact that this standard will
have on its consolidated financial statements; however, the Company anticipates
that upon adoption of the standard it will recognize additional assets and
corresponding liabilities related to leases on its balance sheet.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, which will supersede existing revenue recognition
guidance under U.S. GAAP. Under the new standard, a company will recognize
revenue when it transfers promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. ASU 2014-09 defines a five-step process to
achieve this principle and, in doing so, it is possible more judgment and
estimates may be required within the revenue recognition process than are
required under existing U.S. GAAP, including identifying performance obligations
in the contract, estimating the amount of variable consideration to include in
the transaction price and allocating the transaction price to each separate
performance obligation. In August 2015, the FASB issued ASU 2015-14, which
defers by one year the effective date of ASU 2014-09. During 2016, the FASB
issued ASU 2016-08, ASU 2016-10, 2016-11, 2016-12 and 2016-20, all of which
clarify certain implementation guidance within ASU 2014-09. ASU 2014-09, as
amended, will be effective for annual and interim periods beginning on or after
December 15, 2017, and is to be applied on either a full retrospective or
modified retrospective basis. Early adoption is permitted only as of annual and
interim reporting periods beginning on or after December 15, 2016; however, the
Company has elected not to early adopt the standard.
The Company currently expects to adopt the standard using the
modified retrospective approach; however, that expectation is subject to change
once the Company completes its evaluation and quantification of the impact of
the guidance. With the assistance of a third party, the Company is analyzing its
significant customer relationships to determine the effects of ASU 2014-09. In
particular, the Company is assessing under the new guidance whether its existing
contracts with customers to produce private label consumer products would permit
the Company to recognize revenue over time versus at a point in time, based on
whether a given product has an alternative use or not and whether there is an
enforceable right to payment under the contract for product produced to date.
The Company has not completed its assessment or determined whether a change to
recognizing revenue over time, if required, would have a significant impact on
the Companys reported revenues and earnings. Once this assessment is completed, the Company will work
towards establishing policies, updating its processes, and implementing
necessary changes to be able to comply with the new requirements.
SUNOPTA
INC.
|
12
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
2. Value Creation Plan
On October 7, 2016, the Company entered into a strategic
partnership with Oaktree Capital Management L.P., a private equity investor
(together with its affiliates, Oaktree). On October 7, 2016, Oaktree invested
$85.0 million through the purchase of cumulative, non-participating Series A
Preferred Stock (the Preferred Stock) of the Companys wholly-owned
subsidiary, SunOpta Foods Inc. (SunOpta Foods) (see note 8). The Company
conducted, with the assistance of Oaktree, a thorough review of its operations,
management and governance, with the objective of maximizing the Companys
ability to deliver long-term value to its shareholders. Through this review, the
Company developed a Value Creation Plan built on four pillars: portfolio
optimization, operational excellence, go-to-market effectiveness and process
sustainability. The Company engaged management consulting firms to support the
design and implementation of the Value Creation Plan.
In the fourth quarter of 2016, measures taken under the Value
Creation Plan included the closure of the Companys San Bernardino, California,
juice facility and the Companys soy extraction facility in Heuvelton, New York.
In addition, effective November 11, 2016, Hendrik Jacobs stepped down as the
Companys President and Chief Executive Officer (CEO). In the first two
quarters of 2017, further measures were taken, including the exit from the San
Bernardino facility and equipment leases. In addition, the Company made
organizational changes within its management and executive teams, including the
appointment of David Colo as President and CEO effective February 6, 2017, and
the recruitment of new employees in the areas of quality, sales, marketing,
operations and engineering. In the first half of 2017, the Company also made
capital investments at several of its manufacturing facilities to enhance food
safety and production efficiencies.
The following table summarizes actual costs incurred since the
inception of the Value Creation Plan to July 1, 2017:
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
Impairment of
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
long-lived assets
|
|
|
recruitment,
|
|
|
Consulting fees
|
|
|
|
|
|
|
and facility
|
|
|
retention and
|
|
|
and temporary
|
|
|
|
|
|
|
closure costs
|
|
|
termination costs
|
|
|
labor costs
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs incurred and
charged to expense
|
|
11,522
|
|
|
2,763
|
|
|
4,041
|
|
|
18,326
|
|
Cash
payments
|
|
-
|
|
|
(694
|
)
|
|
(2,384
|
)
|
|
(3,078
|
)
|
Non-cash adjustments
|
|
(11,522
|
)
|
|
(266
|
)
|
|
-
|
|
|
(11,788
|
)
|
Balance payable, December 31, 2016
|
|
-
|
|
|
1,803
|
|
|
1,657
|
|
|
3,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs incurred and
charged to expense
|
|
4,095
|
|
|
3,478
|
|
|
9,710
|
|
|
17,283
|
|
Cash
payments
|
|
(3,581
|
)
|
|
(2,578
|
)
|
|
(1,774
|
)
|
|
(7,933
|
)
|
Non-cash adjustments
|
|
(714
|
)
|
|
276
|
|
|
-
|
|
|
(438
|
)
|
Balance payable (receivable), April 1, 2017
|
|
(200
|
)
|
|
2,979
|
|
|
9,593
|
|
|
12,372
|
|
Costs incurred and
charged to expense
|
|
262
|
|
|
2,550
|
|
|
4,876
|
|
|
7,688
|
|
Cash
payments
|
|
(262
|
)
|
|
(2,685
|
)
|
|
(9,538
|
)
|
|
(12,485
|
)
|
Non-cash adjustments
|
|
-
|
|
|
51
|
|
|
-
|
|
|
51
|
|
Balance payable (receivable), July 1, 2017
|
|
(200
|
)
|
|
2,895
|
|
|
4,931
|
|
|
7,626
|
|
(a)
|
Impairment of long-lived assets and facility closure
costs
|
|
|
|
Represents asset impairment losses of $10.3 million and
$1.2 million in the fourth quarter of 2016 related to the closures of the
San Bernardino and Heuvelton facilities, respectively, and an additional
asset impairment loss of $3.7 million in the first quarter of 2017 on the
disposal of the San Bernardino assets, which included $3.2 million paid in
the first quarter of 2017 for the early buyout of the San Bernardino
equipment leases. In exchange for the San Bernardino assets, the facility
landlord agreed to release the Company from its remaining property lease
obligation and to pay proceeds of $0.2 million on December 31, 2017. Facility closure costs
reflect $0.4 million incurred by the Company for rent and maintenance of
the San Bernardino facility prior to its disposal to the
landlord.
|
SUNOPTA
INC.
|
13
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(b)
|
Employee recruitment, retention and termination
costs
|
|
|
|
Represents third-party recruiting fees incurred to
identify and retain new employees; reimbursement of relocation costs for
new employees; retention and signing bonuses accrued for certain existing
and new employees; and severance benefits, net of forfeitures of
stock-based awards, and legal costs related to employee terminations. Some
employee termination costs will be paid out in periods after termination.
Retention bonuses will be paid out to employees who remain employed by the
Company through specified retention dates. Certain employees will be
entitled to pro-rata payouts of their retention bonuses if their
employment terminates earlier than their retention payment date.
|
|
|
(c)
|
Consulting fees and temporary labor costs
|
|
|
|
Represents the cost for third-party consultants and
temporary labor engaged to support the design and implementation of the
Value Creation Plan. A portion of the consulting fees incurred in fiscal
2016 were related to external financial and legal advisors engaged to
review the Companys operating plan and evaluate a range of strategic and
financial actions that the Company could take to maximize shareholder
value, which concluded with the strategic partnership with
Oaktree.
|
For the quarter and two quarters ended July 1, 2017, costs
incurred and charged to expense were recorded in the consolidated statement of
operations as follows:
|
|
Two quarters
|
|
|
|
Quarter ended
|
|
|
ended
|
|
|
|
July 1, 2017
|
|
|
July 1, 2017
|
|
|
|
$
|
|
|
$
|
|
Cost
of goods sold
(1)
|
|
262
|
|
|
634
|
|
Selling, general and
administrative expenses
(2)
|
|
7,001
|
|
|
18,439
|
|
Other expense
(3)
|
|
425
|
|
|
5,898
|
|
|
|
7,688
|
|
|
24,971
|
|
|
(1)
|
Facility closure costs recorded in cost of goods sold
were allocated to the Consumer Products operating segment.
|
|
(2)
|
Consulting fees and temporary labor costs, and employee
recruitment, relocation and retention costs recorded in selling, general
and administrative expenses were allocated to Corporate
Services.
|
|
(3)
|
Asset impairment and employee termination costs recorded
in other expense were not allocated to the Companys operating segments or
Corporate Services.
|
The Company estimates remaining third-party consulting, and
employee recruitment, retention and termination costs related to the Value
Creation Plan to be incurred and expensed during the second half of fiscal 2017
will be approximately $4 million. This estimate does not include currently
unforeseen asset impairment charges or employee-related costs that may arise
from future actions taken under the Value Creation Plan. Costs incurred through
the second quarter of 2017 related to the Value Creation Plan were higher than
expected, due to the extended support of third-party consultants to assist with
certain initiatives, including food safety and quality, procurement, and
enhancements to our enterprise resource planning systems.
In the fourth quarter of 2017, the Company intends to
discontinue flexible resealable pouch products as part of the Value Creation
Plan and to sell the related production equipment (see note 16). The Company
expects to incur a loss of $8.0 million to $9.0 million related to the sale of
the flexible resealable pouch assets.
SUNOPTA
INC.
|
14
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
3. Discontinued Operation
On April 6, 2016, the Company completed the sale of its 66%
holding of common shares of Opta Minerals Inc. (Opta Minerals) to Speyside
Equity Fund I LP for aggregate gross proceeds of $4.8 million (C$6.2 million),
of which $3.2 million (C$4.2 million) was received in cash, and $1.5 million
(C$2.0 million) was received in the form of a subordinated promissory note
bearing interest at 2.0% per annum that will mature on October 6, 2018. The
Company has no significant continuing involvement with Opta Minerals.
The following table reconciles the major components of the
results of discontinued operations to the amounts reported in the consolidated
statement of operations for the two quarters ended July 2, 2016:
|
|
$
|
|
Revenues
|
|
24,896
|
|
Cost of goods sold
|
|
(22,133
|
)
|
Selling, general and administrative expenses
|
|
(3,024
|
)
|
Other expense, net
|
|
(794
|
)
|
Foreign exchange loss
|
|
(454
|
)
|
Interest expense
|
|
(484
|
)
|
Loss
before income taxes
|
|
(1,993
|
)
|
Gain on
classification as held for sale before income taxes
|
|
560
|
|
Total pre-tax loss from discontinued operations
|
|
(1,433
|
)
|
Recovery of income
taxes
|
|
599
|
|
Loss
from discontinued operations
|
|
(834
|
)
|
Loss from
discontinued operations attributable to non-controlling interest
|
|
264
|
|
Loss from discontinued operations attributable
to SunOpta Inc.
|
|
(570
|
)
|
4. Product Recall
During the second quarter of 2016, the Company announced a
voluntary recall of certain roasted sunflower kernel products produced at its
Crookston, Minnesota facility due to potential contamination with Listeria
monocytogenes bacteria. The affected sunflower products originated from the
Crookston facility between May 31, 2015 and April 21, 2016. As at July 1, 2017
and December 31, 2016, the Company recognized estimated losses related to the
recall of $47.0 million and $40.0 million, respectively, which comprised
estimates for customer losses and direct incremental costs incurred by the
Company. The estimates for customer losses reflected the cost of the affected
sunflower kernel products returned to or replaced by the Company and the
estimated cost to reimburse customers for costs incurred by them related to the
recall of their retail products that contain the affected sunflower kernels as
an ingredient or component. The incremental costs incurred directly by the
Company do not include lost earnings associated with the interruption of
production at the Companys roasting facilities, or the costs to put into place
corrective and preventive actions at those facilities.
The Companys estimates for customer losses related to the
recall are provisional and were determined based on an assessment of the
information available up to the date of filing of this report, including a
review of customer claims received as of that date and consideration of the
extent of potential additional claims that have yet to be received. The
Companys estimates reflect the amount of losses that it determined as at July
1, 2017 to be both probable and reasonably estimable. The Company may need to
revise its estimates in subsequent periods as the Company continues to work with
its customers and insurance providers to substantiate the claims received to
date and any additional claims that may be received. These revisions may occur
at any time and may be material.
The Company has general liability and product recall insurance
policies with aggregate limits of $47.0 million under which it is expecting to
recover recall-related costs, less applicable deductibles. The Company
recognizes expected insurance recoveries in the period in which the recoveries
are determined to be probable of realization. As at July 1, 2017, the Company
has recognized recoveries up to the limit of the coverage available under its
insurance policies. Consequently, to the extent any losses are excluded under
the insurance policies or additional losses are recognized related to existing
or new claims, these excluded or excess losses will be recognized as a charge to
future earnings.
SUNOPTA
INC.
|
15
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
As at July 1, 2017, $23.2 million of the estimated
recall-related costs were unsettled and were recorded in accounts payable and
accrued liabilities on the consolidated balance sheet. These costs were offset
by the corresponding estimated insurance recoveries of $20.8 million included in
accounts receivable on the consolidated balance sheet as at July 1, 2017, which
is net of $25.6 million of advances the Company received from its insurance
providers prior to July 1, 2017. As at July 1, 2017, the Company had settled
customer claims in the amount of $23.8 million, which was fully funded under the
Companys general liability and product recall insurance policies.
5. Derivative Financial Instruments and Fair Value
Measurements
The following table presents for each of the fair value
hierarchies, the assets and liabilities that are measured at fair value on a
recurring basis as of July 1, 2017 and December 31, 2016:
|
|
|
July 1, 2017
|
|
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset (liability)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
(a)
|
Commodity futures
and forward contracts
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized short-term derivative
asset
|
|
544
|
|
|
5
|
|
|
539
|
|
|
-
|
|
|
Unrealized
long-term derivative asset
|
|
3
|
|
|
-
|
|
|
3
|
|
|
-
|
|
|
Unrealized short-term derivative
liability
|
|
(323
|
)
|
|
-
|
|
|
(323
|
)
|
|
-
|
|
|
Unrealized
long-term derivative liability
|
|
(9
|
)
|
|
-
|
|
|
(9
|
)
|
|
-
|
|
(b)
|
Inventories carried at
market
(2)
|
|
4,107
|
|
|
-
|
|
|
4,107
|
|
|
-
|
|
(c)
|
Forward foreign
currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging
instruments
(3)
|
|
(1,579
|
)
|
|
-
|
|
|
(1,579
|
)
|
|
-
|
|
|
Designated as a
hedging instruments
(4)
|
|
1,176
|
|
|
-
|
|
|
1,176
|
|
|
-
|
|
(d)
|
Contingent
consideration
(5)
|
|
(11,153
|
)
|
|
-
|
|
|
-
|
|
|
(11,153
|
)
|
(e)
|
Embedded derivative
(6)
|
|
2,690
|
|
|
-
|
|
|
-
|
|
|
2,690
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset (liability)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
(a)
|
Commodity futures
and forward contracts
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized short-term derivative
asset
|
|
787
|
|
|
43
|
|
|
744
|
|
|
-
|
|
|
Unrealized
short-term derivative liability
|
|
(916
|
)
|
|
-
|
|
|
(916
|
)
|
|
-
|
|
|
Unrealized long-term derivative
liability
|
|
(8
|
)
|
|
-
|
|
|
(8
|
)
|
|
-
|
|
(b)
|
Inventories
carried at market
(2)
|
|
8,231
|
|
|
-
|
|
|
8,231
|
|
|
-
|
|
(c)
|
Forward foreign currency
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as
hedging instruments
(3)
|
|
1,345
|
|
|
-
|
|
|
1,345
|
|
|
-
|
|
(d)
|
Contingent
consideration
(5)
|
|
(15,279
|
)
|
|
-
|
|
|
-
|
|
|
(15,279
|
)
|
(e)
|
Embedded derivative
(6)
|
|
2,944
|
|
|
-
|
|
|
-
|
|
|
2,944
|
|
|
(1)
|
Unrealized short-term derivative asset is included in
prepaid expenses and other current assets, unrealized long-term derivative
asset is included in other assets, unrealized short-term derivative
liability is included in other current liabilities and unrealized
long-term derivative liability is included in long-term liabilities on the
consolidated balance sheets.
|
|
(2)
|
Inventories carried at market are included in inventories
on the consolidated balance sheets.
|
|
(3)
|
Forward foreign currency contracts not designated as a
hedge are included in accounts receivable or accounts payable and accrued
liabilities on the consolidated balance sheets.
|
|
(4)
|
Forward foreign currency contracts designated as a hedge
are included in other assets or other current liabilities on the
consolidated balance sheets.
|
|
(5)
|
Contingent consideration obligations are included in
long-term liabilities (including the current portion thereof) on the
consolidated balance sheets.
|
|
(6)
|
The embedded derivative is included in other assets
(long-term) on the consolidated balance
sheets.
|
SUNOPTA
INC.
|
16
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(a)
|
Commodity futures and forward contracts
|
|
|
|
The Companys derivative contracts that are measured at
fair value include exchange-traded commodity futures and forward commodity
purchase and sale contracts. Exchange-traded futures are valued based on
unadjusted quotes for identical assets priced in active markets and are
classified as level 1. Fair value for forward commodity purchase and sale
contracts is estimated based on exchange-quoted prices adjusted for
differences in local markets. Local market adjustments use observable
inputs or market transactions for similar assets or liabilities, and, as a
result, are classified as level 2. Based on historical experience with the
Companys suppliers and customers, the Companys own credit risk, and the
Companys knowledge of current market conditions, the Company does not
view non-performance risk to be a significant input to fair value for the
majority of its forward commodity purchase and sale contracts.
|
|
|
|
These exchange-traded commodity futures and forward
commodity purchase and sale contracts are used as part of the Companys
risk management strategy, and represent economic hedges to limit risk
related to fluctuations in the price of certain commodity grains, as well
as the prices of cocoa and coffee. These derivative instruments are not
designated as hedges for accounting purposes. Gains and losses on changes
in fair value of these derivative instruments are included in cost of
goods sold on the consolidated statement of operations. For the quarter
ended July 1, 2017, the Company recognized a gain of $0.4 million (July 2,
2016 gain of $0.3 million) and for the two quarters ended July 1, 2017,
the Company recognized a gain of $0.4 million (July 2, 2016 gain of $0.5
million) related to changes in the fair value of these
derivatives.
|
|
|
|
As at July 1, 2017, the notional amounts of open
commodity futures and forward purchase and sale contracts were as follows
(in thousands of bushels):
|
|
|
Number of bushels purchased
(sold)
|
|
|
|
Corn
|
|
|
Soybeans
|
|
Forward commodity purchase contracts
|
|
49
|
|
|
119
|
|
Forward commodity
sale contracts
|
|
(261
|
)
|
|
(782
|
)
|
Commodity futures contracts
|
|
(100
|
)
|
|
375
|
|
|
In addition, as at July 1, 2017, the Company had net open
forward contracts to sell 102 lots of cocoa and sell 8 lots of
coffee.
|
|
|
(b)
|
Inventories carried at market
|
|
|
|
Grains inventory carried at fair value is determined
using quoted market prices from the Chicago Board of Trade (CBoT).
Estimated fair market values for grains inventory quantities at period end
are valued using the quoted price on the CBoT adjusted for differences in
local markets, and broker or dealer quotes. These assets are placed in
level 2 of the fair value hierarchy, as there are observable quoted prices
for similar assets in active markets. Gains and losses on commodity grains
inventory are included in cost of goods sold on the consolidated
statements of operations. As at July 1, 2017, the Company had 377,303
bushels of commodity corn and 294,468 bushels of commodity soybeans in
inventories carried at market.
|
|
|
(c)
|
Foreign forward currency contracts
|
|
|
|
As part of its risk management strategy, the Company
enters into forward foreign exchange contracts to reduce its exposure to
fluctuations in foreign currency exchange rates. For any open forward
foreign exchange contracts at period end, the contract rate is compared to
the forward rate, and a gain or loss is recorded. These contracts are
placed in level 2 of the fair value hierarchy, as the inputs used in
making the fair value determination are derived from and are corroborated
by observable market data. Certain of these forward foreign exchange
contracts may be designated as cash flow hedges for accounting purposes,
while other of these contracts represent economic hedges that are not
designated as hedging instruments.
|
SUNOPTA
INC.
|
17
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(i) Not
designated as hedging instruments
As at July 1, 2017, the Company had
open forward foreign exchange contracts to sell euros to buy U.S. dollars with a
notional value of €32.3 million ($35.5 million). As these contracts were not
designated as hedging instruments, gains and losses on changes in the fair value
of the derivative instruments are included in foreign exchange loss or gain on
the consolidated statement of operations. For the quarter ended July 1, 2017,
the Company recognized a loss of $2.0 million (July 2, 2016 gain of $1.0
million) related to changes in the fair value of these derivatives and for the
two quarters ended July 1, 2017, the Company recognized a loss of $2.9 million
(July 2, 2016 loss of $0.2 million) related to changes in the fair value of
these derivatives.
(ii) Designated
as hedging instruments
In the first quarter of 2017, the
Company initiated a foreign currency cash flow hedging program with the
objective of managing the variability of cash flows associated with a portion of
forecasted purchases of raw fruit inventories denominated in Mexican pesos. As
at July 1, 2017, the Company had net open forward foreign exchange contracts to
sell U.S. dollars to buy Mexican pesos with a net notional value of $1.9 million
(M$56.5 million). As these contracts have been designated as hedging
instruments, the effective portion of the gains and losses on changes in the
fair value of the derivative instruments are included in other comprehensive
earnings and reclassified to cost of goods sold in the same period the hedged
transaction affects earnings, which is upon the sale of the inventories. For the
quarter and two quarters ended July 1, 2017, the Company recognized unrealized
gains in other comprehensive earnings of $0.2 million and $2.0 million,
respectively, related to changes in the fair value of these derivatives. For the
quarter and two quarters ended July 1, 2017, the Company reclassified from other
comprehensive earnings a realized gain on these derivatives of $0.8 million to
cost of goods sold, and an unrealized gain of $0.9 million related to the
ineffective portion of the hedge to foreign exchange loss on the consolidated
statements of operations. During the second half of 2017, the Company expects to
reclassify the $0.3 million remaining amount of the unrealized gain recorded in
accumulated other comprehensive loss to earnings.
(d)
|
Contingent consideration
|
|
|
|
The fair value measurement of contingent consideration
arising from business acquisitions is determined using unobservable (level
3) inputs. These inputs include: (i) the estimated amount and timing of
the projected cash flows on which the contingency is based; and (ii) the
risk-adjusted discount rate used to calculate the present value of those
cash flows. The following table presents a reconciliation of contingent
consideration obligations for the quarters and two quarters ended July 1,
2017 and July 2, 2016:
|
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, beginning of period
|
|
(15,130
|
)
|
|
(21,208
|
)
|
|
(15,279
|
)
|
|
(21,010
|
)
|
Issuances
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Fair
value adjustments
(1)
|
|
(84
|
)
|
|
1,603
|
|
|
(204
|
)
|
|
1,405
|
|
Payments
(2)
|
|
4,061
|
|
|
4,554
|
|
|
4,330
|
|
|
4,554
|
|
Balance, end of period
|
|
(11,153
|
)
|
|
(15,051
|
)
|
|
(11,153
|
)
|
|
(15,051
|
)
|
|
(1)
|
For all periods presented, reflects the accretion for the
time value of money, which is included in other income/expense (see note
11). In addition, for the quarter and two quarters ended July 2, 2016,
included a gain of $1.7 million on the settlement of the contingent
consideration obligation related to the Companys acquisition of Niagara
Natural Fruit Snack Company Inc. (Niagara Natural) in August
2015.
|
|
(2)
|
For the quarter and two quarters ended July 1, 2017,
reflects the second installment payment of deferred consideration to the
former unitholders of Citrusource, LLC (Citrusource), which was acquired
by the Company in March 2015, and payment of the remaining deferred
consideration to a former shareholder of Organic Land Corporation OOD,
which was acquired by the Company in December 2012. For the quarter and
two quarters ended July 2, 2016, reflects the first installment payment
related to Citrusource and cash settlement of the remaining obligation
related to Niagara Natural.
|
SUNOPTA
INC.
|
18
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(e)
|
Embedded derivative
|
|
|
|
On August 5, 2011 and August 29, 2014, the Company
invested $0.5 million and $0.9 million, respectively, in convertible
subordinated notes issued by Enchi Corporation (Enchi), a developer of
advanced bioconversion products for the renewable fuels industry. The
Companys investment includes the value of an accelerated payment option
embedded in the notes, which may result in a maximum payout to the Company
of $5.1 million. Due to a lack of level 1 or level 2 observable market
quotes for the notes, the Company used a discounted cash flow analysis
(income approach) to estimate the original fair value of the embedded
derivative based on unobservable level 3 inputs. The Company assesses
changes in the fair value of the embedded derivative based on the
performance of actual cash flows derived from certain royalty rights owned
by Enchi, which are expected to be the primary source of funds available
to settle the embedded derivative, relative to the financial forecasts
used in the valuation analysis. As at July 1, 2017 and December 31, 2016,
the Company determined that the fair value of this embedded derivative was
$2.7 million and $2.9 million, respectively, based on distributions
received from Enchi on the notes up to those dates and on expectations
related to the remaining royalty rights.
|
6. Inventories
|
|
July 1, 2017
|
|
|
December 31, 2016
|
|
|
|
$
|
|
|
$
|
|
Raw
materials and work-in-process
|
|
280,041
|
|
|
266,072
|
|
Finished goods
|
|
103,990
|
|
|
101,585
|
|
Company-owned grain
|
|
9,487
|
|
|
15,027
|
|
Inventory reserves
|
|
(11,539
|
)
|
|
(14,202
|
)
|
|
|
381,979
|
|
|
368,482
|
|
7. Bank Indebtedness and Long-Term Debt
|
|
July 1, 2017
|
|
|
December 31, 2016
|
|
|
|
$
|
|
|
$
|
|
Bank
indebtedness:
|
|
|
|
|
|
|
Global Credit
Facility
(1)
|
|
236,275
|
|
|
199,281
|
|
Bulgarian credit facility
(2)
|
|
832
|
|
|
2,213
|
|
|
|
237,107
|
|
|
201,494
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
Senior Secured Second Lien Notes, net of unamortized debt
issuance costs of $8,525 (December 31, 2016 - $8,835)
(3)
|
|
222,473
|
|
|
222,163
|
|
Capital lease
obligations
|
|
6,661
|
|
|
7,454
|
|
Other
|
|
1,442
|
|
|
1,470
|
|
|
|
230,576
|
|
|
231,087
|
|
Less: current portion
|
|
2,062
|
|
|
2,079
|
|
|
|
228,514
|
|
|
229,008
|
|
(1)
|
Global Credit Facility
|
|
|
|
On February 11, 2016, the Company entered into a
five-year credit agreement for a senior secured asset-based revolving
credit facility with a syndicate of banks in the maximum aggregate
principal amount of $350.0 million, subject to borrowing base capacity (the Global Credit Facility).
The Global Credit Facility is used to support the working capital and
general corporate needs of the Companys global operations, in addition to
funding future strategic initiatives. The Global Credit Facility also
includes borrowing capacity available for letters of credit and provides
for borrowings on same-day notice, including in the form of swingline
loans. Subject to customary borrowing conditions and the agreement of any
such lenders to provide such increased commitments, the Company may
request to increase the total lending commitments under the Global Credit
Facility to a maximum aggregate principal amount not to exceed $450.0
million. Outstanding principal amounts under the Global Credit Facility
are repayable in full on the maturity date of February 10, 2021.
|
SUNOPTA
INC.
|
19
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
|
Individual borrowings under the Global Credit Facility
have terms of six months or less and bear interest based on various
reference rates, including prime rate and LIBOR plus an applicable margin.
The applicable margin in the Global Credit Facility ranges from 1.25% to
1.75% for loans bearing interest based on LIBOR and from 0.25% to 0.75%
for loans bearing interest based on the prime rate and, in each case, is
set quarterly based on average borrowing availability for the preceding
fiscal quarter. As at July 1, 2017, the weighted-average interest rate on
the facilities was 3.07%. The obligations under the Global Credit Facility
are guaranteed by substantially all of the Companys subsidiaries and,
subject to certain exceptions, such obligations are secured by first
priority liens on substantially all of the assets of the
Company.
|
|
|
|
The Global Credit Facility contains a number of covenants
that, among other things, restrict, subject to certain exceptions, the
Companys ability to create liens on assets; sell assets and enter into
sale and leaseback transactions; pay dividends, prepay junior lien and
unsecured indebtedness and make other restricted payments; incur
additional indebtedness and make guarantees; make investments, loans or
advances, including acquisitions; and engage in mergers or
consolidations.
|
|
|
(2)
|
Bulgarian credit facility
|
|
|
|
On June 28, 2017, a subsidiary of The Organic Corporation
(TOC), a wholly-owned subsidiary of the Company, extended its revolving
credit facility agreement dated May 22, 2013, to provide up to €4.5
million to cover the working capital needs of TOCs Bulgarian operations.
The facility is secured by the accounts receivable and inventories of the
Bulgarian operations and is fully guaranteed by TOC. Interest accrues
under the facility based on EURIBOR plus a margin of 2.75%, and borrowings
under the facility are repayable in full on April 30, 2018. As at July 1,
2017, the weighted-average interest rate on the Bulgarian credit facility
was 2.75%.
|
|
|
(3)
|
Senior Secured Second Lien Notes
|
|
|
|
On October 20, 2016, SunOpta Foods issued $231.0 million
of 9.5% Senior Secured Second Lien Notes due 2022 (the Notes). The
Company incurred $9.3 million of debt issuance costs related to the Notes,
which were recorded as a reduction against the principal amount of the
Notes and are being amortized over the six-year term of the Notes.
Interest on the Notes is payable semi-annually in arrears on April 15 and
October 15 at a rate of 9.5% per annum, commencing on April 15, 2017. The
Notes will mature on October 9, 2022. Giving effect to the amortization of
debt issuance costs, the effective interest rate on the Notes is
approximately 10.4% per annum.
|
|
|
|
At any time prior to October 9, 2018, SunOpta Foods may
redeem some or all of the Notes at any time and from time to time at a
make-whole redemption price set forth in the indenture governing the
Notes. On or after October 9, 2018, SunOpta Foods may redeem the Notes, in
whole or in part, at any time at the redemption prices equal to 107.125%
through October 8, 2019, 104.750% from October 9, 2019 through October 8,
2020, 102.375% from October 9, 2020 through October 8, 2021 and at par
thereafter, plus accrued and unpaid interest, if any, to but excluding the
date of redemption. In addition, prior to October 9, 2018, SunOpta Foods
may, on one or more occasions, redeem up to 35% of the aggregate principal
amount of the Notes with the proceeds of certain equity offerings at a
redemption price equal to 109.500% of the principal amount of the Notes
redeemed, plus accrued and unpaid interest, if any, to but excluding the
date of redemption. At any time prior to October 9, 2018, SunOpta Foods
may also redeem, during each twelve-month period beginning on October 20,
2016, up to 10% of the aggregate principal amount of the Notes at a price
equal to 103.000% of the aggregate principal amount of the Notes being
redeemed, plus accrued and unpaid interest, if any, to
but excluding the date of redemption. In
the event of a change of control, SunOpta Foods will be required to make an
offer to repurchase the Notes at 101.000% of their principal amount, plus
accrued and unpaid interest, if any, to the date of purchase.
|
SUNOPTA
INC.
|
20
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
The Notes are secured by
second-priority liens on substantially all of the assets that secure the credit
facilities provided under the Global Credit Facility, subject to certain
exceptions and permitted liens. The Notes are senior secured obligations and
rank equally in right of payment with SunOpta Foods existing and future senior
debt and senior in right of payment to any future subordinated debt. The Notes
are effectively subordinated to debt under the Global Credit Facility and any
future indebtedness secured on a first priority basis. The Notes are initially
guaranteed on a senior secured second-priority basis by the Company and each of
its subsidiaries (other than SunOpta Foods) that guarantees indebtedness under
the Global Credit Facility, subject to certain exceptions.
The Notes are subject to covenants
that, among other things, limit the Companys ability to (i) incur additional
debt or issue preferred stock; (ii) pay dividends and make certain types of
investments and other restricted payments; (iii) create liens; (iv) enter into
transactions with affiliates; (v) sell assets; and (vi) create restrictions on
the ability of restricted subsidiaries to pay dividends, make loans or advances
or transfer assets to the Company, SunOpta Foods or any guarantor of the Notes.
The indenture provides for customary events of default (subject in certain cases
to customary grace and cure periods), which include nonpayment, breach of
covenants in the indenture, certain payment defaults or acceleration of other
indebtedness, a failure to pay certain judgments and certain events of
bankruptcy and insolvency. If an event of default occurs and is continuing, the
trustee or holders of at least 25% in principal amount of the outstanding Notes
may declare the principal of and accrued and unpaid interest on, if any, all the
Notes to be due and payable.
8. Series A Preferred Stock
On October 7, 2016 (the Closing Date), the Company and
SunOpta Foods entered into a subscription agreement (the Subscription
Agreement) with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund
II, L.P. (collectively, the Investors). Pursuant to the Subscription
Agreement, SunOpta Foods issued an aggregate of 85,000 shares of Preferred Stock
to the Investors for consideration in the amount of $85.0 million. In connection
with the issuance of the Preferred Stock, the Company incurred direct and
incremental expenses of $6.0 million, which reduced the carrying value of the
Preferred Stock. At any time on or after the fifth anniversary of the Closing
Date, SunOpta Foods may redeem all of the Preferred Stock for an amount, per
share of Preferred Stock, equal to the value of the liquidation preference at
such time. The carrying value of the Preferred Stock is being accreted to the
redemption amount of $85.0 million through charges to retained earnings over the
period preceding the fifth anniversary of the Closing Date, which accretion
amounted to $0.5 million for the two quarters ended July 1, 2017 and $0.7
million from the Closing Date.
In connection with the Subscription Agreement, the Company
agreed to, among other things (i) ensure SunOpta Foods has sufficient funds to
pay its obligations under the terms of the Preferred Stock and (ii) grant each
holder of Preferred Stock (the Holder) the right to exchange the Preferred
Stock for shares of common stock of the Company (the Common Shares). The
Preferred Stock is non-participating with the Common Shares in dividends and
undistributed earnings of the Company.
The Preferred Stock has a stated value and initial liquidation
preference of $1,000 per share. Cumulative preferred dividends accrue daily on
the Preferred Stock at an annualized rate of 8.0% prior to October 5, 2025 and
12.5% thereafter, in each case of the liquidation preference (subject to an
increase of 1.0% per quarter, up to a maximum rate of 5.0% per quarter on the
occurrence of certain events of non-compliance). Prior to October 5, 2025,
SunOpta Foods may pay dividends in cash or elect, in lieu of paying cash, to add
the amount that would have been paid to the liquidation preference. After
October 4, 2025, the failure to pay dividends in cash will be an event of
non-compliance. The Preferred Stock ranks senior to the shares of common stock
of SunOpta Foods with respect to dividend rights and rights on the distribution
of assets on any liquidation, winding up or dissolution of the Company or
SunOpta Foods. As at July 1, 2017, the Company had accrued unpaid dividends of
$1.7 million, which were recorded in accounts payable and accrued liabilities on
the consolidated balance sheet.
At any time, the Holders may exchange their
shares of Preferred Stock, in whole or in part, into the number of shares of
common stock of the Company (the Common Shares) equal to, per share of
Preferred Stock, the quotient of the liquidation preference divided by $7.50
(such price, the Exchange Price and such quotient, the Exchange Rate). As at
July 1, 2017, the aggregate shares of Preferred Stock outstanding were
exchangeable into 11,333,333 Common Shares. The Exchange Price is subject to certain anti-dilution adjustments,
including a weighted-average adjustment for issuances of Common Shares below the
Exchange Price, provided that the Exchange Price may not be lower than $7.00
(subject to adjustment in certain circumstances). SunOpta Foods may cause the
Holders to exchange all of the Preferred Stock into a number of Common Shares
based on the applicable Exchange Price if (i) fewer than 10% of the shares of
Preferred Stock issued on the Closing Date remain outstanding or (ii) on or
after the third anniversary of the Closing Date, the average volume-weighted
average price of the Common Shares during the then preceding 20 trading day
period is greater than 200% of the Exchange Price. Prior to the receipt of
applicable approval by the holders of Common Shares, shares of Preferred Stock
were not exchangeable into more than 19.99% of the number of Common Shares
outstanding immediately after giving effect to such exchange (the Beneficial
Ownership Exchange Cap). On May 24, 2017, the holders of Common Shares approved
the removal of the Beneficial Ownership Exchange Cap.
SUNOPTA
INC.
|
21
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
In connection with the Subscription Agreement, the Company
issued Special Shares, Series 1 (the Special Voting Shares) to the Investors,
which entitle the Investors to one vote per Special Voting Share on all matters
submitted to a vote of the holders of Common Shares, together as a single class,
subject to certain exceptions. Additional Special Voting Shares will be issued,
or existing Special Voting Shares will be redeemed, as necessary to ensure that
the aggregate number of Special Voting Shares outstanding is equal to the number
of shares of Preferred Stock outstanding from time to time multiplied by the
Exchange Rate in effect at such time. As at July 1, 2017, 11,333,333 Special
Voting Shares were issued and outstanding, which represented an approximate
11.6% voting interest in the Company. The Special Voting Shares are not
transferable and the voting rights associated with the Special Voting Shares
will terminate upon the transfer of the Preferred Stock to a third party, other
than a controlled affiliate of the Investors. The Investors are entitled to
designate up to two nominees for election to the Board of Directors of the
Company (the Board) and have the right to designate one individual to attend
meetings of the Board as a non-voting observer, subject to the Investors
maintaining certain levels of beneficial ownership of Common Shares on an
as-exchanged basis. For so long as the Investors beneficially own or control at
least 50% of the Preferred Stock issued on the Closing Date, including any
corresponding Common Shares into which such Preferred Stock are exchanged, the
Investors will be entitled to (i) participation rights with respect to future
equity offerings of the Company; and (ii) governance rights, including the right
to approve certain actions proposed to be taken by the Company and its
subsidiaries.
9. Stock-Based Compensation
Stock Incentive Plan
For the two quarters ended July 1, 2017, the Company granted
823,236 stock options to selected employees that vest 100% on the third
anniversary of the grant date and expire on the tenth anniversary of the grant
date. The weighted-average grant-date fair value of the stock options was $4.24.
The following table summarizes the weighted-average assumptions used in the
Black-Scholes option-pricing model to determine the fair value of the stock
options granted:
Grant-date stock price
|
$
|
9.46
|
|
Exercise price
|
$
|
9.46
|
|
Dividend yield
|
|
0%
|
|
Expected
volatility
(1)
|
|
42.3%
|
|
Risk-free interest rate
(2)
|
|
2.0%
|
|
Expected life of options (in years)
(3)
|
|
6.5
|
|
|
(1)
|
Determined based on the historical volatility of the
Common Shares over the expected life of the stock options.
|
|
(2)
|
Determined based on U.S. Treasury yields with a remaining
term equal the expected life of the stock options.
|
|
(3)
|
Determined based on the mid-point of vesting (three
years) and expiration (ten years).
|
The aggregate grant-date fair value of stock options awarded to
employees was $3.5 million, which will be recognized on a straight-line basis
over the three-year vesting period.
For the two quarters ended July 1, 2017, the Company also
granted 1,386,335 performance share units (PSU) to selected employees and
653,982 restricted stock units (RSUs) to selected employees and directors.
SUNOPTA
INC.
|
22
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
The vesting of the PSUs is subject to the satisfaction of
certain stock price performance conditions during a three-year performance
period ending May 24, 2020. One-third of the PSUs will vest upon achieving a
stock price of $11.00, one-third will vest upon achieving a stock price of
$14.00, and one-third will vest upon achieving a stock price of $18.00, in each
case for 20 consecutive trading days and subject to the employees continued
employment throughout the performance period. Each vested PSU will entitle the
employee to receive one common share of the Company without payment of
additional consideration.
The fair value of the PSUs was estimated using a Monte Carlo
valuation model, which simulates the potential outcomes for the Companys stock
price performance and determines the payouts that would occur under each
scenario. Fair value is based on the average of those results. The grant-date
weighted-average fair value of the PSUs was determined to be $5.90, based on the
following inputs to the valuation model:
Grant-date stock price
|
$
|
9.50
|
|
Dividend yield
|
|
0%
|
|
Expected volatility
(1)
|
|
42.3%
|
|
Risk-free interest
rate
(2)
|
|
1.5%
|
|
Expected life (in years)
(3)
|
|
3.0
|
|
|
(1)
|
Determined based on the historical volatility of the
Common Shares over 6.5 years, which is consistent with the volatility
assumption for stock options granted to employees on the same date as the
PSUs.
|
|
(2)
|
Determined based on U.S. Treasury yields with a remaining
term equal to the expected life of the PSUs.
|
|
(3)
|
Determined based on vesting for the
PSUs.
|
The aggregate grant-date fair value of the PSUs was $8.2
million, which will be recognized on a straight-line basis over the requisite
three-year performance period.
The RSUs granted to employees vest ratably on each of the first
through third anniversaries of the grant date. RSUs granted to directors vest
100% on the first anniversary of the grant date. Each vested RSU will entitle
the employee or director to receive one common share of the Company. The
weighted-average grant-date fair value of the RSUs was estimated to be $9.31,
based on the stock price of the Common Shares as of the dates of grant. The
aggregate grant-date fair value of the RSUs awarded to employees and directors
of $6.1 million will be recognized on a straight-line basis over the
weighted-average vesting period of 2.7 years.
CEO Plan
On February 6, 2017, David Colo was appointed President and CEO
of the Company. In connection with his appointment, the Company granted Mr. Colo
473,940 performance-based stock options (the Special Stock Options) and
277,780 performance stock units (the Special Performance Units). In addition,
Mr. Colo was granted 100,000 RSUs, of which 50,000 of the RSUs granted were
contingent on Mr. Colo purchasing an aggregate value of $1.0 million of Common
Shares in the open market.
The vesting of the Special Stock Options and Special
Performance Units is subject to: (i) Mr. Colos continued employment with the
Company during a three-year performance period ending February 6, 2020; and (ii)
the satisfaction of certain stock price performance conditions during the
performance period. One-third of the Special Stock Options and Special
Performance Units will vest upon achieving a stock price of $11.00, one-third
will vest upon achieving a stock price of $14.00, and one-third will vest upon
achieving a stock price of $18.00, in each case for 20 consecutive trading days
and subject to Mr. Colos continued employment through the performance period.
Each vested Special Stock Option will entitle Mr. Colo to purchase one common
share of the Company at an exercise price of $7.00, which was equal to the
closing price of the Common Shares as at February 6, 2017. Each vested Special
Performance Unit will entitle Mr. Colo to receive one common share of the
Company without payment of additional consideration.
SUNOPTA
INC.
|
23
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
The grant-date weighted-average fair values of the Special
Stock Options and Special Performance Units were estimated using a Monte Carlo
valuation model and determined to be $1.84 and $2.79, respectively, based on the
following inputs to the valuation model:
|
|
|
|
|
Special
|
|
|
|
Special Stock
|
|
|
Performance
|
|
|
|
Options
|
|
|
Units
|
|
Grant-date stock price
|
$
|
7.00 $
|
|
|
7.00
|
|
Exercise price
|
$
|
7.00
|
|
|
NA
|
|
Dividend yield
|
|
0%
|
|
|
0%
|
|
Expected
volatility
(1)
|
|
42.0%
|
|
|
42.0%
|
|
Risk-free interest rate
(2)
|
|
2.2%
|
|
|
1.5%
|
|
Expected life (in years)
(3)
|
|
6.5
|
|
|
3.0
|
|
|
(1)
|
Determined based on the historical volatility of the
Common Shares over the expected life of the Special Stock
Options.
|
|
(2)
|
Determined based on U.S. Treasury yields with a remaining
term equal the respective expected lives of the Special Stock Options and
Special Performance Units.
|
|
(3)
|
Determined using the simplified method for the Special
Stock Options, based on the mid-point of vesting (three years) and
expiration (ten years). Determined based on vesting for the Special
Performance Units.
|
The aggregate grant-date fair value of the Special Stock
Options and Special Performance Units awarded to Mr. Colo was $1.6 million,
which will be recognized on a straight-line basis over the requisite three-year
performance period.
The RSUs granted to Mr. Colo vest in three equal installments
beginning on February 6, 2018. Each vested RSU will entitle Mr. Colo to receive
one common share of the Company. The grant-date fair value of the RSUs was
estimated to be $7.00 based on the stock price of the Common Shares as of the
date of grant. The aggregate grant-date fair value of the RSUs awarded to Mr.
Colo of $0.7 million will be recognized on a straight-line basis over the
three-year vesting period.
10. Accumulated Other Comprehensive Loss
Net unrealized gains/(losses) recorded in accumulated other
comprehensive loss were as follows:
|
|
July 1, 2017
|
|
|
December 31, 2016
|
|
|
|
$
|
|
|
$
|
|
Currency translation adjustment
|
|
(9,684
|
)
|
|
(13,104
|
)
|
Cash flow hedges,
net of income taxes
|
|
157
|
|
|
-
|
|
|
|
(9,527
|
)
|
|
(13,104
|
)
|
11. Other Expense, Net
The components of other expense (income) were as follows:
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Impairment of long-lived assets
(1)
|
|
-
|
|
|
-
|
|
|
3,723
|
|
|
1,735
|
|
Employee severance
costs
(2)
|
|
425
|
|
|
543
|
|
|
2,175
|
|
|
1,015
|
|
Product withdrawal and recall costs
(3)
|
|
-
|
|
|
229
|
|
|
279
|
|
|
1,697
|
|
Increase (decrease)
in fair value of contingent consideration
(4)
|
|
84
|
|
|
(1,603
|
)
|
|
204
|
|
|
(1,405
|
)
|
Legal settlement
(5)
|
|
-
|
|
|
9,000
|
|
|
-
|
|
|
9,000
|
|
Other
|
|
98
|
|
|
264
|
|
|
(331
|
)
|
|
369
|
|
|
|
607
|
|
|
8,433
|
|
|
6,050
|
|
|
12,411
|
|
SUNOPTA
INC.
|
24
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(1)
|
Impairment of long-lived assets
|
|
|
|
For the two quarters ended July 1, 2017, represents the
loss on the disposal of the San Bernardino assets in connection with the
Value Creation Plan (see note 2), including $3.2 million paid for the
early buyout of the San Bernardino equipment leases.
|
|
|
|
For the two quarters ended July 2, 2016, represents the
impairment of leasehold improvements at the Companys Buena Park,
California, facility on the consolidation of Companys frozen fruit
processing operations following the acquisition of Sunrise Holdings
(Delaware), Inc. (Sunrise) in October 2015.
|
|
|
(2)
|
Employee severance costs
|
|
|
|
For the quarter and two quarters ended July 1, 2017,
represents severance benefits, net of forfeitures of stock-based awards,
and legal costs incurred related to employee terminations in connection
with the Value Creation Plan (see note 2).
|
|
|
|
For the quarter and two quarters ended July 2, 2016,
severance costs primarily relate to employees impacted by the
consolidation of the Companys frozen fruit processing
operations.
|
|
|
(3)
|
Product withdrawal and recall costs
|
|
|
|
For the two quarters ended July 1, 2017, includes certain
direct costs related to the voluntary recall of certain sunflower kernel
products (see note 4) that were not eligible for reimbursement under the
Companys insurance policies.
|
|
|
|
For the quarter and two quarters ended July 2, 2016, the
Company recognized estimated costs of $1.1 million related to the
voluntary withdrawal of a consumer-packaged product due to a
quality-related issue, and the $0.6 million for insurance deductibles
related to the sunflower recall.
|
|
|
(4)
|
Decrease in fair value of contingent
consideration
|
|
|
|
For the quarter and two quarters ended July 2, 2016,
includes a gain of $1.7 million on the settlement of the contingent
consideration obligation related to the acquisition of Niagara Natural in
August 2015.
|
|
|
(5)
|
Legal settlement
|
|
|
|
For the quarter and two quarters ended July 2, 2016,
reflects a charge related to the settlement of a product recall dispute
with a customer involving certain flexible resealable pouch products
manufactured by the Company in 2013.
|
SUNOPTA
INC.
|
25
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
12. Loss Per Share
Basic and diluted loss per share were calculated as follows
(shares in thousands):
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
Numerator for basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations, less amount attributable to non-controlling interests
|
$
|
(408
|
)
|
$
|
(4,124
|
)
|
$
|
(11,806
|
)
|
$
|
(13,787
|
)
|
Less: dividends and accretion on Series A Preferred Stock
|
|
(1,954
|
)
|
|
-
|
|
|
(3,894
|
)
|
|
-
|
|
Loss from continuing
operations available to common shareholders
|
|
(2,362
|
)
|
|
(4,124
|
)
|
|
(15,700
|
)
|
|
(13,787
|
)
|
Loss
from discontinued operations attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss available to
common shareholders
|
$
|
(2,362
|
)
|
$
|
(4,124
|
)
|
$
|
(15,700
|
)
|
$
|
(14,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for
basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of shares outstanding
|
|
86,213
|
|
|
85,541
|
|
|
86,062
|
|
|
85,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing
operations
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.18
|
)
|
$
|
(0.16
|
)
|
-
from discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.18
|
)
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for
diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations, less amount attributable to non-controlling
interests
|
$
|
(408
|
)
|
$
|
(4,124
|
)
|
$
|
(11,806
|
)
|
$
|
(13,787
|
)
|
Less: dividends and
accretion on Series A Preferred Stock
(1)
|
|
(1,954
|
)
|
|
-
|
|
|
(3,894
|
)
|
|
-
|
|
Loss
from continuing operations available to common shareholders
|
|
(2,362
|
)
|
|
(4,124
|
)
|
|
(15,700
|
)
|
|
(13,787
|
)
|
Loss from
discontinued operations attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss
available to common shareholders
|
$
|
(2,362
|
)
|
$
|
(4,124
|
)
|
$
|
(15,700
|
)
|
$
|
(14,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted-average number of shares outstanding
|
|
86,213
|
|
|
85,541
|
|
|
86,062
|
|
|
85,483
|
|
Dilutive effect of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
Stock
(1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock options and RSUs
(2)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diluted
weighted-average number of shares outstanding
|
|
86,213
|
|
|
85,541
|
|
|
86,062
|
|
|
85,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
-
from continuing operations
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.18
|
)
|
$
|
(0.16
|
)
|
- from discontinued
operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
$
|
(0.18
|
)
|
$
|
(0.17
|
)
|
(1)
|
For the quarter and two quarters ended July 1, 2017, it
was more dilutive to assume the Preferred Stock was not converted into
Common Shares and, therefore, the numerator of the diluted loss per share
calculation was not adjusted to add back the dividends and accretion on the Preferred
Stock and the denominator was not adjusted to include 11,333,333 Common
Shares issuable on an if-converted basis.
|
|
|
(2)
|
For the quarter and two quarters ended July 1, 2017,
stock options and RSUs to purchase or receive 832,910 (July 2, 2016
16,304) and 761,344 (July 2, 2016 17,288) Common Shares, respectively,
were excluded from the calculation of diluted loss per share due to their
anti-dilutive effect of reducing the loss per share. In addition, for the
quarter and two quarters ended July 1, 2017, options to purchase 2,530,766
(July 2, 2016 3,187,777) and 2,836,606 (July 2, 2016 3,184,777) Common
Shares, respectively, were anti-dilutive because the exercise prices of
these options were greater than the average market
price.
|
SUNOPTA
INC.
|
26
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
13. Supplemental Cash Flow Information
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Changes in non-cash working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
18,768
|
|
|
(16,910
|
)
|
|
7,641
|
|
|
(33,747
|
)
|
Inventories
|
|
(32,271
|
)
|
|
(49,777
|
)
|
|
(5,913
|
)
|
|
(39,910
|
)
|
Income tax
recoverable/payable
|
|
(3,339
|
)
|
|
4,353
|
|
|
(4,799
|
)
|
|
5,384
|
|
Prepaid expenses and other current assets
|
|
(4,813
|
)
|
|
1,707
|
|
|
(9,546
|
)
|
|
(606
|
)
|
Accounts payable and
accrued liabilities
|
|
(5,715
|
)
|
|
29,114
|
|
|
6,695
|
|
|
10,944
|
|
Customer and other deposits
|
|
(3,278
|
)
|
|
(2,781
|
)
|
|
(1,391
|
)
|
|
(3,844
|
)
|
|
|
(30,648
|
)
|
|
(34,294
|
)
|
|
(7,313
|
)
|
|
(61,779
|
)
|
14. Commitments and Contingencies
Employment Matter
On April 19, 2013, a class-action complaint, in the case titled
De Jesus, et al. v. Frozsun, Inc. d/b/a Frozsun Foods, was filed against Sunrise
Growers, Inc. (then named Frozsun, Inc.) in California Superior Court, Santa
Barbara County seeking damages, equitable relief and reasonable attorneys fees
for alleged wage and hour violations. This case includes claims for failure to
pay all hours worked, failure to pay overtime wages, meal and rest period
violations, waiting-time penalties, improper wage statements and unfair business
practices. The putative class includes approximately 8,500 to 9,000 non-exempt
hourly employees from Sunrises production facilities in Santa Maria and Oxnard,
California. The parties are currently engaged in pre-class certification
discovery. The Company is unable to estimate any potential liabilities relating
to this proceeding, and any such liabilities could be material.
Other Claims
In addition, various claims and potential claims arising in the
normal course of business are pending against the Company. It is the opinion of
management that these claims or potential claims are without merit and the
amount of potential liability, if any, to the Company is not determinable.
Management believes the final determination of these claims or potential claims
will not materially affect the financial position or results of the Company.
15. Segmented Information
The composition of the Companys reportable segments is as
follows:
-
Global Ingredients aggregates our North American-based Raw Material
Sourcing and Supply and European-based International Sourcing and Supply
operating segments focused on the procurement and sale of specialty and
organic grains and seeds, raw material ingredients, value-added grain- and
cocoa-based ingredients, and organic commodities.
-
Consumer Products consists of three main commercial platforms: Healthy
Beverages, Healthy Fruit and Healthy Snacks. Healthy Beverages includes
aseptic packaged products including non-dairy and dairy beverages, broths and
teas; refrigerated premium juices; and shelf-stable juices and functional
waters. Healthy Fruit includes individually quick frozen (IQF) fruits for
retail; IQF and bulk frozen fruit for foodservice; and custom fruit
preparations for industrial use. Healthy Snacks includes fruit snacks;
nutritional and protein bars; and flexible resealable pouch products.
SUNOPTA
INC.
|
27
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
In addition, Corporate Services provides a variety of
management, financial, information technology, treasury and administration
services to each of the Companys operating segments from the Companys
headquarters in Mississauga, Ontario and administrative office in Edina,
Minnesota.
When reviewing the operating results of the Companys operating
segments, management uses segment revenues from external customers and segment
operating income/loss to assess performance and allocate resources. Segment
operating income/loss excludes other income/expense items and goodwill
impairment losses. In addition, interest expense and income amounts, and
provisions for income taxes are not allocated to the operating segments.
|
|
Quarter ended
|
|
|
|
July 1, 2017
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
149,423
|
|
|
187,031
|
|
|
336,454
|
|
Segment operating
income
|
|
8,372
|
|
|
4,220
|
|
|
12,592
|
|
Corporate Services
|
|
|
|
|
|
|
|
(9,973
|
)
|
Other expense, net
(see note 11)
|
|
|
|
|
|
|
|
(607
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(7,695
|
)
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
(5,683
|
)
|
|
|
Quarter ended
|
|
|
|
July 2, 2016
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
158,498
|
|
|
189,648
|
|
|
348,146
|
|
Segment operating
income
|
|
10,411
|
|
|
663
|
|
|
11,074
|
|
Corporate Services
|
|
|
|
|
|
|
|
(2,229
|
)
|
Other expense, net
(see note 11)
|
|
|
|
|
|
|
|
(8,433
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(11,548
|
)
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
(11,136
|
)
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
279,714
|
|
|
386,771
|
|
|
666,485
|
|
Segment operating
income
|
|
13,123
|
|
|
10,168
|
|
|
23,291
|
|
Corporate Services
|
|
|
|
|
|
|
|
(23,628
|
)
|
Other expense, net
(see note 11)
|
|
|
|
|
|
|
|
(6,050
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(15,449
|
)
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
(21,836
|
)
|
SUNOPTA
INC.
|
28
|
July 1, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and two quarters ended July 1, 2017 and
July 2, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
|
|
Two quarters ended
|
|
|
|
July 2, 2016
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
304,520
|
|
|
395,940
|
|
|
700,460
|
|
Segment operating
income (loss)
|
|
16,852
|
|
|
(1,115
|
)
|
|
15,737
|
|
Corporate Services
|
|
|
|
|
|
|
|
(4,257
|
)
|
Other expense, net
(see note 11)
|
|
|
|
|
|
|
|
(12,411
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(22,570
|
)
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
(23,501
|
)
|
16. Subsequent Events
Acquisition of Non-Controlling Interests in Mexican
Subsidiary
On July 28, 2017, the Company acquired all of the capital stock
of Opus Foods Mexico, S.A. de C.V. (Opus) held by the non-controlling
interests for $1.9 million. This acquisition increased the Companys equity
ownership in Opus from 75% to 100%. Opus owns and operates a frozen fruit
processing facility located in central Mexico. The Company acquired its initial
75% interest in Opus through the acquisition of Sunrise.
Rationalization of Flexible Resealable Pouch Operations
On July 26, 2017, SunOpta Foods entered an agreement with
Skjodt-Barrett Contract Packaging LLC to sell equipment used in the production
of flexible resealable pouches at the Companys Allentown, Pennsylvania facility
for gross proceeds of $2.0 million. The asset sale is in conjunction with the
Companys decision to discontinue flexible resealable pouch products as part of
its ongoing portfolio optimization strategy and Value Creation Plan. The
transaction is expected to close during the fourth quarter of 2017. The Company
will continue to produce flexible resealable pouch products for existing
customers until the closing date. The Companys aseptic beverage operations were
not affected by the sale of assets, and the Company will continue to produce
aseptic beverages at its Allentown facility.
Revenues from sales of flexible resealable pouch products were
$9.3 million and $19.2 million for the quarter and two quarters ended July 1,
2017, respectively, compared with $11.2 million and $24.6 million for the
quarter and two quarters ended July 2, 2016, respectively. The production and
sale of these products resulted in gross profit losses of $1.2 million and $2.7
million for the quarter and two quarters ended July 1, 2017, respectively,
compared with gross profit of $0.2 million and $0.4 million for the quarter and
two quarters ended July 2, 2016, respectively. Revenues and gross profit losses
from sales of flexible resealable pouch products during the third quarter of
2017 are expected to be similar to those recorded during the second quarter.
Depending on the closing date of the sale of the resealable pouch assets, the
Company also expects to record a proportionate amount of revenue and gross profit losses from
sales of flexible resealable pouch products during the fourth quarter of 2017.
The Company expects to record a loss on the sale of the
flexible resealable pouch assets of $8.0 million to $9.0 million, including
costs related to the early termination of the related equipment leases at the
closing date. The flexible resealable pouch operations are included in the
Consumer Products operating segment. As the flexible resealable pouch operations
do not qualify for presentation as discontinued operations, operating results
from these operations will continue to be reported in continuing operations on
the consolidated statements of operations for the year ended December 30,
2017.
SUNOPTA
INC.
|
29
|
July 1, 2017 10-Q
|
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Financial Information
The following Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) should be read in conjunction
with the interim consolidated financial statements, and notes thereto, for the
quarter ended July 1, 2017 contained under Item 1 of this Quarterly Report on
Form 10-Q and in conjunction with the annual consolidated financial statements,
and notes thereto, contained in the Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 (Form 10-K). Unless otherwise indicated herein,
the discussion and analysis contained in this MD&A includes information
available to August 9, 2017.
Certain statements contained in this MD&A may constitute
forward-looking statements as defined under securities laws. Forward-looking
statements may relate to our future outlook and anticipated events or results
and may include statements regarding our future financial position, business
strategy, budgets, litigation, projected costs, capital expenditures, financial
results, taxes, plans and objectives. In some cases, forward-looking statements
can be identified by terms such as anticipate, estimate, target, intend,
project, potential, continue, believe, expect, could, would,
should, might, plan, will, may, predict, or other similar
expressions concerning matters that are not historical facts. To the extent any
forward-looking statements contain future-oriented financial information or
financial outlooks, such information is being provided to enable a reader to
assess our financial condition, material changes in our financial condition, our
results of operations, and our liquidity and capital resources. Readers are
cautioned that this information may not be appropriate for any other purpose,
including investment decisions.
Forward-looking statements contained in this MD&A are based
on certain factors and assumptions regarding expected growth, results of
operations, performance, and business prospects and opportunities. While we
consider these assumptions to be reasonable, based on information currently
available, they may prove to be incorrect. Forward-looking statements are also
subject to certain factors, including risks and uncertainties that could cause
actual results to differ materially from what we currently expect. These factors
are more fully described in the Risk Factors section at Item 1A of the Form
10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are
based on our current estimates, expectations and projections, which we believe
are reasonable as of the date of this report. You should not place undue
importance on forward-looking statements and should not rely upon this
information as of any other date. Other than as required under securities laws,
we do not undertake to update any forward-looking information at any particular
time.
Unless otherwise noted herein, all currency amounts in this
MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed
in thousands of U.S. dollars, except per share amounts.
Overview
SunOpta is a global company focused on sourcing organic and
non-genetically modified (non-GMO) ingredients, and manufacturing healthy food
and beverage products. Our global sourcing platform makes us one of the leading
suppliers of organic and non-GMO raw materials and ingredients in the food
industry. Our consumer products portfolio utilizes internally and externally
sourced raw materials and ingredients to manufacture healthy food and beverage
products for supply to retail, foodservice and branded food customers. We
operate our business in the following reportable segments:
-
Global Ingredients aggregates our North American-based Raw Material
Sourcing and Supply and European-based International Sourcing and Supply
operating segments focused on the procurement and sale of specialty and
organic grains and seeds, raw material ingredients, value-added grain- and
cocoa-based ingredients, and organic commodities.
-
Consumer Products consists of three main commercial platforms: Healthy
Beverages, Healthy Fruit and Healthy Snacks. Healthy Beverages includes
aseptic packaged products including non-dairy and dairy beverages, broths and
teas; refrigerated premium juices; and shelf-stable juices and functional
waters. Healthy Fruit includes individually quick frozen (IQF) fruits for
retail; IQF and bulk frozen fruit for foodservice; and custom fruit
preparations for industrial use. Healthy Snacks includes fruit snacks;
nutritional and protein bars; and flexible resealable pouch products.
SUNOPTA
INC.
|
30
|
July 1, 2017 10-Q
|
Fiscal Year
We operate on a fiscal calendar that results in a given fiscal
year consisting of a 52- or 53-week period ending on the Saturday closest to
December 31. Fiscal year 2017 is a 52-week period ending on December 30, 2017,
with quarterly periods ending on April 1, July 1 and September 30, 2017. Fiscal
year 2016 was a 52-week period ending on December 31, 2016, with quarterly
periods ending on April 2, July 2 and October 1, 2016.
Value Creation Plan
On October 7, 2016, we entered into a strategic partnership
with Oaktree Capital Management L.P., a private equity investor (together with
its affiliates, Oaktree). On October 7, 2016, Oaktree invested $85.0 million
through the purchase of cumulative, non-participating Series A Preferred Stock
(the Preferred Stock) of our wholly-owned subsidiary, SunOpta Foods Inc.
(SunOpta Foods).
Following the strategic partnership, with the assistance of
Oaktree, we conducted a thorough review of our operations, management and
governance, with the objective of maximizing our ability to deliver long-term
value to our shareholders. As a product of this review our management and the
Board of Directors developed a Value Creation Plan built on four pillars:
portfolio optimization, operational excellence, go-to-market effectiveness and
process sustainability. The Value Creation Plan is a broad-based initiative
focused on increasing shareholder value through strategic investments made to
the people and assets of the Company to deliver sustained profitable growth. We
expect the Value Creation Plan to be implemented in phases, and span several
years.
As part of the first phase of the Value Creation Plan, we are
targeting implementation of $30 million of productivity-driven annualized
enhancements of earnings before income taxes, depreciation and amortization
(EBITDA), to be implemented over 2017 and 2018. For fiscal 2017, these EBITDA
benefits will be offset by expenses associated with the Value Creation Plan,
including structural investments made in the areas of quality, sales, marketing,
operations and engineering resources, as well as non-structural third-party
consulting support, severance, and recruiting costs. The plan also calls for
increased investment in capital upgrades at several manufacturing facilities to
enhance food safety and manufacturing efficiencies. Over time, these investments
are expected to yield additional improvement in EBITDA beyond the $30 million of
initial productivity-driven savings. For the second quarter of 2017, we
continued to achieve progress against each of the four pillars of the Value
Creation Plan and we believe we are on track to achieve targeted productivity
enhancements, while continuing to make the necessary structural investments we
believe will accelerate growth and drive long-term value. Recent progress on
each of the four pillars of the Value Creation Plan is highlighted below:
Portfolio Optimization
The focus of the portfolio optimization pillar is to simplify
the business, investing where structural advantages exist, while exiting
businesses or product lines where we are not effectively positioned. Recent
highlights include:
-
Announced the discontinuation of flexible resealable pouch products along
with an agreement to sell the associated pouch equipment for $2.0 million,
which is expected to close during the fourth quarter of 2017 (for more
information regarding this transaction, see note 16 to the unaudited
consolidated financial statements included in this report).
-
Initiated a plan to consolidate certain soy and specialty grain volume and
close an under-utilized facility to enhance facility utilization and reduce
operating costs.
-
Purchased the remaining 25% non-controlling interest in our Mexican frozen
fruit operations (for more information regarding this transaction, see note 16
to the unaudited consolidated financial statements included in this report),
and broke ground on an expansion project to add incremental freezing capacity,
storage, and retail bagging capabilities to the Mexican frozen fruit facility.
-
Approved plans to increase capabilities at sunflower operations in both
North America and Europe, as well as a capacity expansion at our speciality
cocoa processing facility in the Netherlands.
Since the initiation of the Value Creation Plan, we have
implemented portfolio changes that are expected to yield $4.2 million of
annualized EBITDA benefits.
SUNOPTA
INC.
|
31
|
July 1, 2017 10-Q
|
Operational Excellence
The focus of the operational excellence pillar is to ensure
food quality and safety, coupled with improved operational performance and
efficiency. These efforts are expected to generate productivity improvements and
cost savings in manufacturing, procurement and logistics. Recent highlights
include:
-
Launched SunOpta 360, initially across the network of aseptic beverage
facilities, establishing a sustainable continuous improvement methodology for
the Company.
-
Enhanced food safety and quality across the manufacturing platform via the
roll-out of new processes and systems.
-
Continued to identify and implement productivity initiatives focusing on
manufacturing efficiencies, purchasing synergies, and effective freight
management.
-
Initiated rapid recovery plans to resolve performance issues at certain
Consumer Products manufacturing facilities which, during the first half of
2017, have partially consumed the benefit driven from other productivity
initiatives.
Since the initiation of the Value Creation Plan, we have
implemented process improvements and cost savings that are expected to yield
$3.1 million of annualized EBITDA benefits.
Go-To-Market Effectiveness
The focus of the go-to-market effectiveness pillar is to
optimize customer and product mix in existing sales channels, and identify and
penetrate new high-potential sales channels. We expect efforts under this pillar
to improve revenue growth and profitability over time. Recent highlights
include:
-
Completed the creation of a new food service distribution network,
leveraging third parties, which will support our plan to grow and diversify
penetration into the foodservice channel.
-
Continued to attract and hire new commercial talent in the areas of sales,
marketing, and research and development, which has furthered the development
of control branded products that are expected to enhance access to the food
service channel.
-
Increased the pipeline of commercial opportunities across the
beverage, fruit and snack categories.
Since the initiation of the Value Creation Plan, we have
implemented go-to-market improvements through strategic pricing actions that are
expected to yield $2.0 million of annualized EBITDA benefits.
Process Sustainability
The focus of the process sustainability pillar is to ensure we
have the infrastructure, systems and skills to sustain the business improvements
and value captured from the Value Creation Plan. Broadening the skillset and
experience of our leadership team is a critical component to the process
sustainability pillar of the Value Creation Plan. Recent
highlights include:
-
Completed the onboarding of key senior leaders and continued to add new
talent in the areas of sales and marketing, engineering, supply chain and
procurement.
-
Further maturation of the sales and operations planning processes, which
were initiated in the first quarter of 2017, resulting in improved customer
service levels.
-
Continued enhancements to enterprise resource planning (ERP) systems in
Consumer Products facilities.
The statements we make in this report about the expected
results of the Value Creation Plan, including expected improvements in earnings,
EBITDA, working capital efficiencies, expected cash flows, and expected costs,
are forward-looking statements. See Forward-Looking Statements above. EBITDA
is a non-GAAP measure that management uses when assessing the performance of our operations and our
ability to generate cash flows to fund our cash requirements, including debt
service and capital expenditures. See footnote (3) to the Consolidated Results
of Operations for the Quarters Ended July 1, 2017 and July 2, 2016 table below
for a reconciliation of EBITDA and adjusted EBITDA from loss from continuing
operations, which we consider to be the most directly comparable U.S. GAAP
financial measure.
SUNOPTA
INC.
|
32
|
July 1, 2017 10-Q
|
In the first half of 2017, we incurred significant costs in
connection with measures taken under the Value Creation Plan, which included
asset impairment charges and facility closure costs primarily related to the
closure of our San Bernardino, California, juice facility ($4.4 million); and
employee recruitment, relocation, retention and severance costs related to
organizational changes within our management and executive teams, and
recruitment of new employees in the areas of quality, sales, marketing,
operations and engineering ($6.4 million). In addition, we incurred third-party
consulting and temporary labor costs in support of the Value Creation Plan of
$14.6 million. In the first half of 2017, we also made capital investments at
several of our manufacturing facilities to enhance food safety and production
efficiencies.
Costs incurred and charged to expense in the quarter and two
quarters ended July 1, 2017 were recorded in the consolidated statement of
operations as follows:
|
|
Quarter ended
|
|
|
Two quarters ended
|
|
|
|
July 1, 2017
|
|
|
July 1, 2017
|
|
|
|
$
|
|
|
$
|
|
Cost
of goods sold
(1)
|
|
262
|
|
|
634
|
|
Selling, general and
administrative expenses
(2)
|
|
7,001
|
|
|
18,439
|
|
Other expense
(3)
|
|
425
|
|
|
5,898
|
|
|
|
7,688
|
|
|
24,971
|
|
|
(1)
|
Facility closure costs recorded in cost of goods sold
were allocated to the Consumer Products operating segment.
|
|
(2)
|
Consulting fees and temporary labor costs, and employee
recruitment, relocation and retention costs recorded in selling, general
and administrative expenses were allocated to Corporate
Services.
|
|
(3)
|
Asset impairment and employee termination costs recorded
in other expense were not allocated to the Companys operating segments or
Corporate Services.
|
We estimate remaining third-party consulting, and employee
recruitment, retention and termination costs related to the Value Creation Plan
to be incurred and expensed during the second half of fiscal 2017 will be
approximately $4 million. This estimate does not include currently unforeseen
asset impairment charges or employee-related costs that may arise from future
actions taken under the Value Creation Plan. Costs incurred to-date related to
the Value Creation Plan have been higher than expected, due to the extended
support of third-party consultants to assist with certain initiatives, including
food safety and quality, procurement, and enhancements to our ERP systems. We
also expect to record a loss of $8.0 million to $9.0 million in the second half
of 2017, related to the sale of the flexible resealable pouch assets.
For more information regarding the Value Creation Plan, see
note 2 to the unaudited consolidated financial statements included in this
report.
Recall of Certain Roasted Sunflower Kernel Products
During the second quarter of 2016, we announced a voluntary
recall of certain roasted sunflower kernel products produced at our Crookston,
Minnesota facility due to potential contamination with Listeria monocytogenes
bacteria. As at July 1, 2017 and December 31, 2016, we recognized estimated
losses related to the recall of $47.0 million and $40.0 million, respectively,
which comprised estimates for customer losses and direct incremental costs that
we incurred. Our estimates for customer losses are provisional and were
determined based on an assessment of the information available up to the date of
filing of this report, including a review of customer claims received as of that
date and consideration of the extent of potential additional claims that have
yet to be received. We have general liability and product recall insurance
policies with aggregate limits of $47.0 million under which we are expecting to
recover recall-related costs, less applicable deductibles. As at July 1, 2017,
we have recognized recoveries up to the limit of the coverage available under
our insurance policies. Consequently, to the extent any losses are excluded
under the insurance policies or additional losses are recognized related to
existing or new claims, these excluded or excess losses will be recognized as a
charge to future earnings. As at July 1, 2017, we had settled customer claims in
the amount of $23.8 million, which settlements were fully funded under our
general liability and product recall insurance policies.
SUNOPTA
INC.
|
33
|
July 1, 2017 10-Q
|
For more information regarding the recall, see note 4 to the
unaudited consolidated financial statements included in this report.
Consolidated Results of Operations for the Quarters Ended
July 1, 2017 and July 2, 2016
For the
quarter ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
Change
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
149,423
|
|
|
158,498
|
|
|
(9,075
|
)
|
|
-5.7%
|
|
Consumer Products
|
|
187,031
|
|
|
189,648
|
|
|
(2,617
|
)
|
|
-1.4%
|
|
Total revenues
|
|
336,454
|
|
|
348,146
|
|
|
(11,692
|
)
|
|
-3.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
20,743
|
|
|
19,828
|
|
|
915
|
|
|
4.6%
|
|
Consumer Products
|
|
20,919
|
|
|
16,150
|
|
|
4,769
|
|
|
29.5%
|
|
Total gross profit
|
|
41,662
|
|
|
35,978
|
|
|
5,684
|
|
|
15.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
8,372
|
|
|
10,411
|
|
|
(2,039
|
)
|
|
-19.6%
|
|
Consumer Products
|
|
4,220
|
|
|
663
|
|
|
3,557
|
|
|
536.5%
|
|
Corporate Services
|
|
(9,973
|
)
|
|
(2,229
|
)
|
|
(7,744
|
)
|
|
-347.4%
|
|
Total segment operating income
|
|
2,619
|
|
|
8,845
|
|
|
(6,226
|
)
|
|
-70.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
607
|
|
|
8,433
|
|
|
(7,826
|
)
|
|
-92.8%
|
|
Earnings from continuing operations before the
following
|
|
2,012
|
|
|
412
|
|
|
1,600
|
|
|
388.3%
|
|
Interest expense, net
|
|
7,695
|
|
|
11,548
|
|
|
(3,853
|
)
|
|
-33.4%
|
|
Recovery of income taxes
|
|
(5,581
|
)
|
|
(7,135
|
)
|
|
1,554
|
|
|
21.8%
|
|
Loss from continuing operations
|
|
(102
|
)
|
|
(4,001
|
)
|
|
3,899
|
|
|
97.5%
|
|
Earnings attributable to non-controlling interests
|
|
306
|
|
|
123
|
|
|
183
|
|
|
148.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to SunOpta
Inc.
(2)
|
|
(408
|
)
|
|
(4,124
|
)
|
|
3,716
|
|
|
90.1%
|
|
(1)
|
When assessing the financial performance of our operating
segments, we use an internal measure of operating income that excludes
other income/expense items and goodwill impairments determined in
accordance with U.S. generally accepted accounting principles (GAAP).
This measure is the basis on which management, including the Chief
Executive Officer, assesses the underlying performance of our operating
segments.
|
|
|
|
We believe that disclosing this non-GAAP measure assists
investors in comparing financial performance across reporting periods on a
consistent basis by excluding items that are not indicative of our core
operating performance. However, the non-GAAP measure of operating income
should not be considered in isolation or as a substitute for performance
measures calculated in accordance with U.S. GAAP. The following table
presents a reconciliation of segment operating income/loss to earnings
(loss) from continuing operations before the following, which we consider
to be the most directly comparable U.S. GAAP financial
measure.
|
|
|
|
Global
|
|
|
Consumer
|
|
|
Corporate
|
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Services
|
|
|
Consolidated
|
|
|
For the quarter
ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
July 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
8,372
|
|
|
4,220
|
|
|
(9,973
|
)
|
|
2,619
|
|
|
Other expense, net
|
|
(2
|
)
|
|
(265
|
)
|
|
(340
|
)
|
|
(607
|
)
|
|
Earnings (loss) from continuing operations before the
following
|
|
8,370
|
|
|
3,955
|
|
|
(10,313
|
)
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
10,411
|
|
|
663
|
|
|
(2,229
|
)
|
|
8,845
|
|
|
Other expense, net
|
|
(105
|
)
|
|
(8,163
|
)
|
|
(165
|
)
|
|
(8,433
|
)
|
|
Earnings (loss) from continuing operations
before the following
|
|
10,306
|
|
|
(7,500
|
)
|
|
(2,394
|
)
|
|
412
|
|
SUNOPTA
INC.
|
34
|
July 1, 2017 10-Q
|
|
We believe that investors understanding of our financial
performance is enhanced by disclosing the specific items that we exclude
from segment operating income. However, any measure of operating income
excluding any or all of these items is not, and should not be viewed as, a
substitute for operating income prepared under U.S. GAAP. These items are
presented solely to allow investors to more fully understand how we assess
financial performance.
|
|
|
(2)
|
When assessing our financial performance, we use an
internal measure of earnings from continuing operations, net of
non-controlling interests, determined in accordance with U.S. GAAP that
includes dividends and accretion on convertible preferred stock and
excludes specific items recognized in other income/expense, impairment
losses on goodwill, long-lived assets and investments, 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 an analysis of our financial performance of our
core business when comparing those operating results between periods, as
we do not consider these items to be reflective of normal core business
operations. The following table presents a reconciliation of adjusted
earnings/loss from loss from continuing operations, which we consider to
be the most directly comparable U.S. GAAP financial
measure.
|
|
|
|
Per Diluted Share
|
|
|
For the quarter
ended
|
|
$
|
|
|
$
|
|
|
July 1, 2017
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(102
|
)
|
|
|
|
|
Less: earnings attributable to
non-controlling interests
|
|
(306
|
)
|
|
|
|
|
Less: dividends and accretion of Series A Preferred Stock
|
|
(1,954
|
)
|
|
|
|
|
Loss from continuing operations available
to common shareholders
|
|
(2,362
|
)
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
Costs related to the Value Creation Plan
(a)
|
|
7,688
|
|
|
|
|
|
Other
(b)
|
|
182
|
|
|
|
|
|
Net income tax effect
(c)
|
|
(6,254
|
)
|
|
|
|
|
Adjusted loss
|
|
(746
|
)
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
July 2, 2016
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(4,001
|
)
|
|
|
|
|
Less: earnings attributable to
non-controlling interests
|
|
(123
|
)
|
|
|
|
|
Loss from continuing operations available to common
shareholders
|
|
(4,124
|
)
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
Legal settlement and litigation-related
legal fees
(d)
|
|
9,661
|
|
|
|
|
|
Costs related to business acquisitions
(e)
|
|
7,905
|
|
|
|
|
|
Product withdrawal and recall
costs
(f)
|
|
529
|
|
|
|
|
|
Plant start-up costs
(g)
|
|
278
|
|
|
|
|
|
Other
(b)
|
|
412
|
|
|
|
|
|
Gain on settlement of contingent
consideration
(h)
|
|
(1,715
|
)
|
|
|
|
|
Net income tax effect
(c)
|
|
(8,825
|
)
|
|
|
|
|
Adjusted earnings
|
|
4,121
|
|
|
0.05
|
|
|
(a)
|
Reflects facility closure costs of $0.3 million recorded
in cost of goods sold; consulting fees, temporary labor, employee
recruitment, relocation and retention costs of $7.0 million recorded in
selling, general and administrative (SG&A) expenses; and employee
termination costs of $0.4 million recorded in other expense (as described
above under Value Creation Plan).
|
|
(b)
|
Other included fair value adjustments related to
contingent consideration arrangements and gain/loss on the sale of assets,
which were recorded in other expense.
|
|
(c)
|
Reflects the tax effect of the preceding adjustments to
earnings and reflects an overall estimated annual effective tax rate of
approximately 30% on adjusted earnings before tax.
|
|
(d)
|
Reflects a charge of $9.0 million for the settlement of a
product recall dispute with a customer, which was recorded in other
expense, and associated litigation-related legal costs, which were
recorded in SG&A expenses.
|
|
(e)
|
Reflects costs related to the acquisition of Sunrise
Holdings (Delaware), Inc. (Sunrise) in October 2015 (the Sunrise
Acquisition), including an acquisition accounting adjustment related to
Sunrises inventory sold in the second quarter of 2016 of $3.9 million,
which was recorded in cost of goods sold; the non-cash amortization of
debt issuance costs incurred in connection with the initial financing
related to the Sunrise Acquisition of $2.6 million, as well as $0.9
million of additional financing costs expensed as incurred in the second
quarter of 2016, which was recorded in interest expense; and $0.5 million
of integration costs related to the closure and consolidation of our
frozen fruit processing operations following the Sunrise Acquisition,
which were recorded other expense.
|
|
(f)
|
Reflects costs of $0.2 million related to the withdrawal
or recall of products, which were recorded in other expense, and a $0.3
million adjustment for the estimated lost gross profit caused by the
recall of certain sunflower kernel products (as described above under
Recall of Certain Roasted Sunflower Kernel Products), which reflected a
shortfall in revenues against anticipated volumes of approximately $3.5
million, less associated cost of goods sold of approximately $3.2
million.
|
|
(g)
|
Plant start-up costs relate to the ramp-up of production
at our Allentown, Pennsylvania, facility following the completion of the
addition of aseptic beverage processing and filling capabilities in the
fourth quarter of 2015, which were recorded in cost of goods sold. These
start-up costs reflected the negative gross profit reported by the
facility as the facility ramped up to break-even production
levels.
|
SUNOPTA
INC.
|
35
|
July 1, 2017 10-Q
|
|
(h)
|
Reflects a gain of settlement of the contingent
consideration obligation related to the August 2015 acquisition of Niagara
Natural Fruit Snack Company Inc. (Niagara Natural), which was recorded
in other income.
|
|
We believe that investors understanding of our financial
performance is enhanced by disclosing the specific items that we exclude
from earnings/loss attributable to SunOpta Inc. to compute adjusted
earnings/loss. However, adjusted earnings/loss is not, and should not be
viewed as, a substitute for earnings prepared under U.S. GAAP. Adjusted
earnings/loss is presented solely to allow investors to more fully
understand how we assess our financial performance.
|
|
|
(3)
|
We use measures of EBITDA when assessing the performance
of our operations and our ability to generate cash flows to fund our cash
requirements, including debt service and capital expenditures. We also use
these measures to review and assess our progress under the Value Creation
Plan (as described above under Value Creation Plan) and to assess
operating performance in connection with our employee incentive programs.
In addition, we are subject to certain debt covenants that restrict our
ability to incur additional indebtedness unless we meet certain ratios
based on EBITDA. We define EBITDA as segment operating income/loss plus
depreciation, amortization and non-cash stock-based compensation, and
adjusted EBITDA as EBITDA excluding other unusual items that affect the
comparability of operating performance as identified in the determination
of adjusted earnings (refer above to footnote (2)). The following table
presents a reconciliation of segment operating income/loss, EBITDA and
adjusted EBITDA from loss from continuing operations, which we consider to
be the most directly comparable U.S. GAAP financial
measure.
|
|
|
|
Quarter ended
|
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
|
$
|
|
|
$
|
|
|
Loss from continuing operations
|
|
(102
|
)
|
|
(4,001
|
)
|
|
Recovery of income taxes
|
|
(5,581
|
)
|
|
(7,135
|
)
|
|
Interest expense, net
|
|
7,695
|
|
|
11,548
|
|
|
Other expense, net
|
|
607
|
|
|
8,433
|
|
|
Total segment operating income
|
|
2,619
|
|
|
8,845
|
|
|
Depreciation and amortization
|
|
8,167
|
|
|
8,549
|
|
|
Stock-based compensation
(a)
|
|
1,337
|
|
|
953
|
|
|
EBITDA
|
|
12,123
|
|
|
18,347
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
Costs related to Value Creation Plan
(b)
|
|
7,263
|
|
|
-
|
|
|
Costs related to business
acquisitions
(c)
|
|
-
|
|
|
3,888
|
|
|
Litigation-related legal fees
(d)
|
|
-
|
|
|
661
|
|
|
Product recall costs
(e)
|
|
-
|
|
|
300
|
|
|
Plant expansion and start-up costs
(f)
|
|
-
|
|
|
278
|
|
|
Adjusted EBITDA
|
|
19,386
|
|
|
23,474
|
|
|
(a)
|
Stock-based compensation of $1.3 million was recorded in
SG&A expenses. The reversal of $0.1 million of previously recognized
stock- based compensation related to forfeited awards previously granted
to terminated employees was recognized in other expense.
|
|
(b)
|
Reflects facility closure costs of $0.3 million recorded
in cost of goods sold and consulting fees, temporary labor, employee
recruitment, relocation and retention costs of $7.0 million recorded in
SG&A expenses (as described above under Value Creation
Plan).
|
|
(c)
|
Reflects costs related to the acquisition accounting
adjustment related to Sunrises inventory sold in the second quarter of
2016 of $3.9 million, which was recorded in cost of goods sold.
|
|
(d)
|
Reflects legal costs related to the settlement of a
product recall dispute with a customer, which were recorded in SG&A
expenses.
|
|
(e)
|
Reflects the estimated lost gross profit caused by the
recall of certain sunflower kernel products of $0.3 million, which
reflected the shortfall in revenues against anticipated volumes of
approximately $3.5 million, less associated cost of goods sold of
approximately $3.2 million.
|
|
(f)
|
Reflects the negative gross profit reported by the
Allentown facility as the facility ramped up to break-even production
levels.
|
Although we
use EBITDA and adjusted EBITDA as measures to assess the performance of our
business and for the other purposes set forth above, these measures have
limitations as analytic tools, and should not be considered in isolation, or as
a substitute for an analysis of our results of operations as reported in
accordance with U.S. GAAP. Some of these limitations are:
-
neither EBITDA nor adjusted EBITDA reflects the
interest expense, or the cash requirements necessary to service interest
payments on our indebtedness;
-
neither EBITDA nor adjusted EBITDA includes the
payment of taxes, which is a necessary element of our operations;
-
although depreciation and amortization are
non-cash charges, the assets being depreciated and amortized will often have
to be replaced in the future, and neither EBITDA nor adjusted EBITDA reflects
any cash requirements for such replacements; and
-
neither EBITDA nor adjusted EBITDA includes
non-cash stock-based compensation, which is an important component of our
total compensation program for employees and directors.
Because of
these limitations, EBITDA and adjusted EBITDA should not be considered as
measures of discretionary cash available to us to invest in the growth of our
business. Management compensates for these limitations by not viewing EBITDA or
adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and
non-GAAP measures, such as revenues, gross profit, segment operating income,
earnings and adjusted earnings to measure our operating performance. Neither
EBITDA nor adjusted EBITDA is a measurement of financial performance under U.S.
GAAP and neither should be considered as an alternative to our results of
operations or cash flows from operations determined in accordance with U.S.
GAAP, and our calculations of EBITDA and adjusted EBITDA may not be comparable
to the calculation of similarly titled measures reported by other companies.
SUNOPTA
INC.
|
36
|
July 1, 2017 10-Q
|
(4)
|
In order to evaluate our results of operations, we use
certain non-GAAP measures that we believe enhance an investors ability to
derive meaningful year-over-year comparisons and trends from our results
of operations. In particular, we evaluate our revenues on a basis that
excludes the effects of fluctuations in commodity pricing and foreign
exchange rates. In addition, we exclude specific items from our reported
results that due to their nature or size, we do not expect to occur as
part of our normal business on a regular basis. These items are identified
above under footnote (2), and in the discussion of our results of
operations below. These non-GAAP measures are presented solely to allow
investors to more fully assess our results of operations and should not
considered in isolation of, or as substitutes for an analysis of our
results as reported under U.S. GAAP.
|
Revenues for the quarter ended July 1, 2017 decreased by 3.4%
to $336.5 million from $348.1 million for the quarter ended July 2, 2016.
Excluding the impact on revenues for the second quarter of 2017 of changes in
commodity-related pricing and foreign exchange rates (a decrease in revenues of
approximately $7.1 million) and estimated impact on west coast pouch operations
as a result of a fire at a third-party facility in the third quarter of 2016 (a
decrease in revenues of approximately $2.3 million), revenues in the second
quarter of 2017 decreased by 0.6%, compared with the second quarter of 2016.
This decrease in revenues on an adjusted basis reflected lower raw and roasted
sunflower volumes due to global competition and reduced customer demand
following the sunflower recall, as well as a continued decline in retail market
demand for frozen fruit products. These factors were partially offset by
increased volumes of domestically-sourced grains and sales of new specialty bar
offerings.
Gross profit increased $5.7 million, or 15.8%, to $41.7 million
for the quarter ended July 1, 2017, compared with $36.0 million for the quarter
ended July 2, 2016. As a percentage of revenues, gross profit for the quarter
ended July 1, 2017 was 12.4% compared to 10.3% for the quarter ended July 2,
2016, an increase of 2.1% . The gross profit percentage for the second quarter
of 2017 would have been approximately 12.5%, excluding the impact of facility
closure costs under the Value Creation Plan of $0.3 million. The gross profit
percentage for the second quarter of 2016 would have been approximately 11.5%,
excluding the impact of costs related to the acquisition accounting adjustment
related to the Sunrises inventory sold subsequent to the acquisition date ($3.9
million), lost margin caused by the sunflower recall ($0.3 million), and
start-up costs related to the ramp-up of production at the Allentown aseptic
beverage facility ($0.3 million). Excluding these items, the gross profit
percentage increased 1.0% on an adjusted basis in second quarter of 2017,
compared with the second quarter of 2016, which reflected improved operating
efficiencies and lower raw material pricing within our healthy fruit operations
and operational savings following the closure of the San Bernardino facility, as
well as a favorable foreign exchange impact on U.S. dollar-denominated raw
material sourcing within our international organic ingredient operations. These
factors were partially offset by operating inefficiencies in our sunflower and
roasting operations due to lower production volumes following the recall, and at
our specialty bar and flexible resealable pouch facilities, due to new product
introductions and product mix. As described above under Value Creation Plan,
we expect to discontinue flexible resealable pouch products during the fourth
quarter of 2017.
Total segment operating income for the quarter ended July 1,
2017 decreased by $6.2 million, or 70.4%, to $2.6 million, compared with $8.8
million for the quarter ended July 2, 2016. As a percentage of revenues, segment
operating income was 0.8% for the quarter ended July 1, 2017, compared with 2.5%
for the quarter ended July 2, 2016. The decrease in segment operating income
reflected a $10.6 million increase in SG&A expenses that more than offset
the higher overall gross profit as described above. The increase in SG&A
expenses mainly reflected incremental consulting fees and temporary labor costs
($4.9 million) and employee recruitment, relocation and retention costs ($2.1
million) associated with the Value Creation Plan. In addition, the increase in
SG&A expenses reflected higher employee compensation-related costs related
to structural investments in new quality, sales, marketing, engineering and
accounting resources. Segment operating income included a foreign exchange loss
of $1.2 million in the second quarter of 2017, compared with a foreign exchange
gain of $0.2 million in the second quarter of 2016, which mainly reflected the
impact of movements in the U.S. dollar relative to the euro and Mexican peso on
forward currency contracts within our international organic ingredient and
frozen fruit operations.
Further details on revenue, gross profit and segment operating
income variances are provided below under Segmented Operations Information.
Other expense for the quarter ended July 1, 2017 of $0.6
million reflected employee termination costs associated with the Value Creation
Plan. Other expense for the quarter ended July 2, 2016 of $8.4 million included
the cost of the settlement of a product recall dispute with a customer ($9.0
million), as well as facility rationalization and severance costs primarily
related to the consolidation of our frozen fruit processing facilities following
the Sunrise Acquisition ($0.5 million), and costs associated with product
withdrawals and recalls ($0.2 million). These expenses were partially offset by
the $1.7 million gain on settlement of the contingent consideration obligation
related to the acquisition of Niagara Natural.
Interest expense decreased by $3.9 million to $7.7 million for
the quarter ended July 1, 2017, compared with $11.5 million for the quarter
ended July 2, 2016. Interest expense included the amortization and write-off of
debt issuance costs of $0.7 million and $2.9 million in the second quarters of
2017 and 2016, respectively. The quarter-over-quarter decrease in interest expense primarily reflected the reduction in non-cash
amortization following the one-year maturity of the initial second lien loans
used to partially fund the Sunrise Acquisition, and the repayment of $79.0
million of second lien debt with the net proceeds from the Preferred Stock
offering in October 2016.
SUNOPTA
INC.
|
37
|
July 1, 2017 10-Q
|
We recognized a recovery of income tax of $5.6 million for the
quarter ended July 1, 2017, compared with $7.1 million for the quarter ended
July 2, 2016. The effective tax rate for the second quarter of 2017 was 98.2%,
compared with 64.1% for the second quarter of 2016. The effective tax rate for
the second quarter of 2017 reflected an increase in our estimated annual
effective tax rate from 30.8% to 48.3%, due to the impact on the jurisdictional
mix of earnings of higher than anticipated costs to be incurred in the U.S.
related to the Value Creation Plan. The effective tax rate for the second
quarter of 2016 reflected the impact of pre-tax losses in the U.S. related to
the settlement of the product recall dispute, consolidation of our frozen fruit
processing facilities, and product withdrawal and recall costs.
On a consolidated basis, we realized a loss of $0.4 million
(diluted loss per share of $0.03) for the quarter ended July 1, 2017, compared
with a loss of $4.1 million (diluted loss per share of $0.05) for the quarter
ended July 2, 2016.
For the quarter ended July 1, 2017, adjusted loss was $0.7
million, or $0.01 per diluted share, compared with adjusted earnings of $4.1
million, or $0.05 per diluted share for the quarter ended July 2, 2016. Adjusted
EBITDA for the quarter ended July 1, 2017 was $19.4 million, compared with $23.5
million for the quarter ended July 2, 2016. Adjusted earnings and adjusted
EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the table
above for a reconciliation of adjusted earnings/loss and adjusted EBITDA from
loss from continuing operations, which we consider to be the most directly
comparable U.S. GAAP financial measure.
Segmented Operations Information
Global Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
149,423
|
|
$
|
158,498
|
|
$
|
(9,075
|
)
|
|
-5.7%
|
|
Gross Profit
|
|
20,743
|
|
|
19,828
|
|
|
915
|
|
|
4.6%
|
|
Gross Profit %
|
|
13.9%
|
|
|
12.5%
|
|
|
|
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
8,372
|
|
$
|
10,411
|
|
$
|
(2,039
|
)
|
|
-19.6%
|
|
Operating Income %
|
|
5.6%
|
|
|
6.6%
|
|
|
|
|
|
-1.0%
|
|
Global Ingredients contributed $149.4 million in revenues for
the quarter ended July 1, 2017, compared to $158.5 million for the quarter ended
July 2, 2016, a decrease of $9.1 million, or 5.7% . Excluding the estimated
impacts on revenues of changes including foreign exchange rates and
commodity-related pricing ($7.1 million), Global Ingredients revenues decreased
approximately 1.2% . The table below explains the decrease in revenue:
Global Ingredients Revenue Changes
|
|
Revenues for the quarter ended July 2, 2016
|
$158,498
|
Lower roasted volumes due to reduced customer demand
following the sunflower recall, and lower raw sunflower volumes due to
competition from global suppliers
|
(6,547)
|
Decreased commodity pricing for domestically-sourced
specialty and organic grains and seeds
|
(4,133)
|
Decreased commodity pricing for internationally-sourced
organic ingredients
|
(1,613)
|
Unfavorable foreign exchange impact on euro-denominated
sales due to a stronger U.S. dollar quarter-over-quarter
|
(1,398)
|
Decreased volumes of internationally-sourced organic
ingredients including fruits, vegetables and liquid sweeteners, partially
offset by increased volumes of organic feed following weather-related crop
delays in the first quarter of 2017
|
(554)
|
Increased volumes of domestically-sourced specialty soy and
organic feed, partially offset by lower volumes of specialty corn and crop
inputs
|
5,170
|
Revenues for the
quarter ended July 1, 2017
|
$149,423
|
SUNOPTA
INC.
|
38
|
July 1, 2017 10-Q
|
Gross profit in Global Ingredients increased by $0.9 million to
$20.7 million for the quarter ended July 1, 2017 compared to $19.8 million for
the quarter ended July 2, 2016, and the gross profit percentage increased by
1.4% to 13.9% . The increase in gross profit as a percentage of revenue was
primarily due to a favorable foreign exchange impact on U.S. dollar-denominated
raw material sourcing within our international organic ingredient operations,
partially offset by reduced operating efficiencies within our sunflower and
roasting operations due to lower volumes following the recall, and a reduced
spread on certain domestically-sourced commodities. The table below explains the
increase in gross profit:
Global Ingredients Gross Profit Changes
|
|
Gross profit for the quarter ended July 2, 2016
|
$19,828
|
Favorable foreign exchange impact on U.S.
dollar-denominated raw material sourcing within our international organic
ingredient operations (partially offset by losses on forward currency
contracts included below in operating income), as well as an improved
pricing spread on internationally-sourced organic feed and operating
efficiencies at our European production facilities
|
4,982
|
Lower sales volumes of raw sunflower and roasted products,
and reduced operating efficiencies due to lower production volumes
|
(2,313)
|
Lower pricing and increased raw material costs for
domestically-sourced organic feed and specialty corn, as well as reduced
volumes of higher-margin crop inputs due to a reduction in contracted
acres, partially offset by increased specialty soy volumes
|
(1,754)
|
Gross profit for the quarter ended July 1, 2017
|
$20,743
|
Operating income in Global Ingredients decreased by $2.0
million, or 19.6%, to $8.4 million for the quarter ended July 1, 2017, compared
to $10.4 million for the quarter ended July 2, 2016. The table below explains
the decrease in operating income:
Global Ingredients Operating Income Changes
|
|
Operating income for the quarter ended July 2, 2016
|
$10,411
|
Increase in gross profit, as explained above
|
915
|
Increase in foreign exchange losses primarily related to
forward currency contracts and higher employee-related compensation costs,
partially offset by lower non-compensation- related costs
|
(2,874)
|
Increase in corporate cost allocations
|
(80)
|
Operating income for the quarter ended July 1, 2017
|
$8,372
|
Looking forward, we believe Global Ingredients is well
positioned in growing non-GMO and organic food categories. However, performance
of Global Ingredients in the near-term could continue to be affected by reduced
customer demand due to the sunflower recall. We intend to focus our efforts on
(i) growing our organic sourcing and supply capabilities, making certified
organic ingredients a larger proportion of our overall sales; (ii) leveraging
our international sourcing and supply capabilities internally, and forward and
backward integrating where opportunities exist; and (iii) initiating a global
desk coordination program between our North American and International sourcing
and supply operations to capitalize on global opportunities and drive
incremental sales volume. The statements in this paragraph are forward-looking
statements. See Forward-Looking Statements above. Increased supply pressure in
the commodity-based markets in which we operate, increased competition, volume
decreases or loss of customers, unexpected delays in our expansion or desk
coordination plans, or our inability to secure quality inputs or achieve our
product mix or cost reduction goals, along with the other factors described
above under Forward-Looking Statements, could adversely impact our ability to
meet these forward-looking expectations.
SUNOPTA
INC.
|
39
|
July 1, 2017 10-Q
|
Consumer Products
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
187,031
|
|
$
|
189,648
|
|
$
|
(2,617
|
)
|
|
-1.4%
|
|
Gross Profit
|
|
20,919
|
|
|
16,150
|
|
|
4,769
|
|
|
29.5%
|
|
Gross Profit %
|
|
11.2%
|
|
|
8.5%
|
|
|
|
|
|
2.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
4,220
|
|
$
|
663
|
|
$
|
3,557
|
|
|
536.5%
|
|
Operating Income %
|
|
2.3%
|
|
|
0.3%
|
|
|
|
|
|
2.0%
|
|
Consumer Products contributed $187.0 million in revenues for
the quarter ended July 1, 2017, compared to $189.6 million for the quarter ended
July 2, 2016, a decrease of $2.6 million, or 1.4% . Excluding the impact on west
coast pouch operations of a fire at a third-party facility in the third quarter
of 2016 ($2.3 million), Consumer Products revenues decreased 0.2% . The table
below explains the decrease in revenues:
Consumer Products Revenue Changes
|
|
Revenues for the quarter ended July 2, 2016
|
$189,648
|
Impact on revenues from the closure of west coast pouch
operations as a result of a fire at a third-party facility
|
(2,311)
|
Lower volumes of frozen fruit primarily to retail customers
due to declines in consumer consumption trends, partially offset by
increased fruit ingredient volumes to the foodservice channel
|
(2,086)
|
Lower retail sales of non-dairy aseptic beverage products
due to the previously announced loss of a significant customer, mostly
offset by increased volumes into the foodservice channel and stronger
retail sales of premium juice products
|
(859)
|
Higher volumes of specialty bars as a result of new
business contracted, partially offset by lower volumes of resealable pouch
offerings
|
2,639
|
Revenues for the quarter ended July 1, 2017
|
$187,031
|
Gross profit in Consumer Products increased by $4.8 million to
$20.9 million for the quarter ended July 1, 2017 compared to $16.2 million for
the quarter ended July 2, 2016, and the gross profit percentage increased by
2.7% to 11.2% . For the quarter ended July 2, 2016, gross profit as a percentage
of revenue was impacted by the acquisition accounting adjustment related to
Sunrise inventory sold ($3.9 million) and costs associated with expansion
activities at the Allentown facility ($0.3 million). Excluding these costs, the
gross profit percentage in Consumer Products would have been 10.7% for the
quarter ended July 2, 2016. The increase in gross profit percentage primarily
reflected improved operating efficiencies and raw material pricing within our
healthy fruit operations and operational savings from the closure of the San
Bernardino facility, partially offset by higher plant costs and operating
inefficiencies within our healthy snacks operations. The table below explains
the increase in gross profit:
SUNOPTA
INC.
|
40
|
July 1, 2017 10-Q
|
Consumer Products Gross Profit Changes
|
|
Gross profit for the quarter ended July 2, 2016
|
$16,150
|
Increased contribution on sales of frozen fruit to both
retail and foodservice channels, based on operating efficiencies due to
the timing of the fruit harvest (which was delayed in fiscal 2016,
resulting in higher labor costs and reduced supply) and favorable cost on
sourced fresh fruit, as well as increased volumes of fruit ingredient
applications to foodservice customers
|
4,458
|
Acquisition accounting adjustment related to Sunrise
inventory sold in the second quarter of 2016
|
3,889
|
Lower volumes of resealable pouch offerings, and higher
plant costs and operating inefficiencies at our specialty bar and flexible
resealable pouch facilities due to new product introductions and
unfavorable product mix, partially offset by the contribution from the
increased sales volumes of specialty bars
|
(2,709)
|
Lower overall sales volumes of non-dairy aseptic beverages,
mostly offset by higher sales volumes of premium juice products, and
operational savings following the closure of the San Bernardino facility
|
(869)
|
Gross profit for the quarter ended July 1, 2017
|
$20,919
|
Operating income in Consumer Products increased by $3.6
million, or 536.5%, to $4.2 million for the quarter ended July 1, 2017, compared
to $0.7 million for the quarter ended July 2, 2016. The table below explains the
increase in operating income:
Consumer Products Operating Income Changes
|
|
Operating income for the quarter ended July 2, 2016
|
$663
|
Increase in gross profit, as explained above
|
4,769
|
Lower foreign exchange losses on international
operations, partially offset by increased employee-related compensation
costs
|
353
|
Increase in corporate cost allocations
|
(1,565)
|
Operating income for the quarter ended July 1, 2017
|
$4,220
|
Looking forward we believe our Consumer Products segment
remains well-positioned in markets with attractive growth potential. However, a
continued decline in consumer consumption of frozen fruit could adversely affect
the near-term performance of the Consumer Products segment. We intend to focus
our efforts on (i) continuing to invest in new sales and marketing resources
creating greater channel specific focus on retail and foodservice to bolster our
pipeline of opportunities to drive incremental sales volume; (ii) investing in
our facilities to enhance quality, safety, and manufacturing efficiency to drive
both incremental sales and cost reduction; (iii) executing procurement and
supply chain cost reduction initiatives focused on leveraging our buying power
and creating increased network efficiency in our planning and logistics efforts;
and (iv) leveraging our innovation capabilities to bring new value-added
packaged products and processes to market and to increase our capacity
utilization across the Consumer Products segment. The statements in this
paragraph are forward-looking statements. See Forward-Looking Statements
above. Unfavorable shifts in consumer preferences, increased competition,
availability of raw material supply, volume decreases or loss of customers,
unexpected delays in our expansion and integration plans, inefficiencies in our
manufacturing processes, lack of consumer product acceptance, or our inability
to successfully implement the particular goals and strategies indicated above,
along with the other factors described above under Forward-Looking Statements,
could have an adverse impact on these forward-looking expectations.
SUNOPTA
INC.
|
41
|
July 1, 2017 10-Q
|
Corporate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
$
|
(9,973
|
)
|
$
|
(2,229
|
)
|
$
|
(7,744
|
)
|
|
-347.4%
|
|
Operating loss at Corporate Services increased by $7.7 million
to $10.0 million for the quarter ended July 1, 2017, from a loss of $2.2 million
for the quarter ended July 2, 2016. The table below explains the increase in
operating loss:
Corporate Services Operating Loss Changes
|
|
Operating loss for the quarter ended July 2, 2016
|
$(2,229)
|
Third-party consulting costs and employee recruitment,
relocation and retention costs associated with the Value Creation Plan
|
(7,077)
|
Higher employee-related compensation costs, including
stock-based compensation and incentives, primarily associated with the
Value Creation Plan
|
(4,062)
|
Increase in corporate cost allocations to SunOpta reporting
segments
|
1,645
|
Lower non-compensation-related costs, including the
favorable impact on Canadian dollar-denominated corporate headquarter
expenses of a stronger U.S. dollar quarter- over-quarter
|
1,071
|
Increase in foreign exchange gains on foreign currency
transactions
|
679
|
Operating loss for the quarter ended July 1, 2017
|
$(9,973)
|
Corporate cost allocations mainly consist of salaries of
corporate personnel who directly support the operating segments, as well as
costs related to the enterprise resource management system. These expenses are
allocated to the operating segments based on (1) specific identification of
allocable costs that represent a service provided to each segment and (2) a
proportionate distribution of costs based on a weighting of factors such as
revenue contribution and number of people employed within each segment.
SUNOPTA
INC.
|
42
|
July 1, 2017 10-Q
|
Consolidated Results of Operations for the Two Quarters
Ended July 1, 2017 and July 2, 2016
For the two quarters ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
Change
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
279,714
|
|
|
304,520
|
|
|
(24,806
|
)
|
|
-8.1%
|
|
Consumer Products
|
|
386,771
|
|
|
395,940
|
|
|
(9,169
|
)
|
|
-2.3%
|
|
Total revenues
|
|
666,485
|
|
|
700,460
|
|
|
(33,975
|
)
|
|
-4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
36,389
|
|
|
37,920
|
|
|
(1,531
|
)
|
|
-4.0%
|
|
Consumer Products
|
|
43,972
|
|
|
29,959
|
|
|
14,013
|
|
|
46.8%
|
|
Total gross profit
|
|
80,361
|
|
|
67,879
|
|
|
12,482
|
|
|
18.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
13,123
|
|
|
16,852
|
|
|
(3,729
|
)
|
|
-22.1%
|
|
Consumer Products
|
|
10,168
|
|
|
(1,115
|
)
|
|
11,283
|
|
|
1011.9%
|
|
Corporate Services
|
|
(23,628
|
)
|
|
(4,257
|
)
|
|
(19,371
|
)
|
|
-455.0%
|
|
Total segment operating income
(loss)
|
|
(337
|
)
|
|
11,480
|
|
|
(11,817
|
)
|
|
-102.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
6,050
|
|
|
12,411
|
|
|
(6,361
|
)
|
|
-51.3%
|
|
Loss from continuing operations before the
following
|
|
(6,387
|
)
|
|
(931
|
)
|
|
(5,456
|
)
|
|
-586.0%
|
|
Interest expense, net
|
|
15,449
|
|
|
22,570
|
|
|
(7,121
|
)
|
|
-31.6%
|
|
Recovery of income taxes
|
|
(10,550
|
)
|
|
(10,221
|
)
|
|
(329
|
)
|
|
-3.2%
|
|
Loss from continuing operations
|
|
(11,286
|
)
|
|
(13,280
|
)
|
|
1,994
|
|
|
15.0%
|
|
Earnings attributable to non-controlling interests
|
|
520
|
|
|
507
|
|
|
13
|
|
|
2.6%
|
|
Loss from discontinued operations
attributable to SunOpta Inc.
|
|
-
|
|
|
(570
|
)
|
|
570
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to SunOpta
Inc.
(2)
|
|
(11,806
|
)
|
|
(14,357
|
)
|
|
2,551
|
|
|
17.8%
|
|
(1)
|
The following table presents a reconciliation of segment
operating income/loss to earnings (loss) from continuing operations before
the following, which we consider to be the most directly comparable U.S.
GAAP financial measure (refer to footnote (1) to the Consolidated Results
of Operations for the Quarters Ended July 1, 2017 and July 2, 2016 table
regarding the use of this non-GAAP
measure).
|
|
|
|
Global
|
|
|
Consumer
|
|
|
Corporate
|
|
|
Consol-
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Services
|
|
|
idated
|
|
|
For the two
quarters ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
July 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
13,123
|
|
|
10,168
|
|
|
(23,628
|
)
|
|
(337
|
)
|
|
Other expense, net
|
|
(113
|
)
|
|
(4,745
|
)
|
|
(1,192
|
)
|
|
(6,050
|
)
|
|
Earnings (loss) from continuing operations before the
following
|
|
13,010
|
|
|
5,423
|
|
|
(24,820
|
)
|
|
(6,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
16,852
|
|
|
(1,115
|
)
|
|
(4,257
|
)
|
|
11,480
|
|
|
Other expense, net
|
|
(765
|
)
|
|
(11,254
|
)
|
|
(392
|
)
|
|
(12,411
|
)
|
|
Earnings (loss) from continuing operations
before the following
|
|
16,087
|
|
|
(12,369
|
)
|
|
(4,649
|
)
|
|
(931
|
)
|
SUNOPTA
INC.
|
43
|
July 1, 2017 10-Q
|
(2)
|
The following table presents a reconciliation of adjusted
earnings/loss 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 July 1, 2017 and July 2, 2016 table regarding the use of this
non-GAAP measure).
|
|
|
|
Per Diluted Share
|
|
|
For the two
quarters ended
|
|
$
|
|
|
$
|
|
|
July 1, 2017
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(11,286
|
)
|
|
|
|
|
Less: earnings attributable to
non-controlling interests
|
|
(520
|
)
|
|
|
|
|
Less: dividends and accretion of Series A Preferred Stock
|
|
(3,894
|
)
|
|
|
|
|
Loss from continuing operations available
to common shareholders
|
|
(15,700
|
)
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
Costs related to the Value Creation Plan
(a)
|
|
24,971
|
|
|
|
|
|
Product recall costs
(b)
|
|
1,008
|
|
|
|
|
|
Other
(c)
|
|
(127
|
)
|
|
|
|
|
Net income tax effect
(d)
|
|
(11,786
|
)
|
|
|
|
|
Adjusted loss
|
|
(1,634
|
)
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
July 2, 2016
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(13,280
|
)
|
|
|
|
|
Less: earnings attributable to non-controlling interests
|
|
(507
|
)
|
|
|
|
|
Loss from continuing operations available
to common shareholders
|
|
(13,787
|
)
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
Costs related to business acquisitions
(e)
|
|
20,416
|
|
|
|
|
|
Legal settlement and litigation-related
legal fees
(f)
|
|
10,286
|
|
|
|
|
|
Product withdrawal and recall costs
(g)
|
|
1,997
|
|
|
|
|
|
Plant start-up costs
(h)
|
|
1,565
|
|
|
|
|
|
Write-off of debt issuance costs
(i)
|
|
215
|
|
|
|
|
|
Other
(j)
|
|
1,187
|
|
|
|
|
|
Gain on settlement of contingent
consideration
(k)
|
|
(1,715
|
)
|
|
|
|
|
Net income tax effect
(d)
|
|
(13,356
|
)
|
|
|
|
|
Adjusted earnings
|
|
6,808
|
|
|
0.08
|
|
|
(a)
|
Reflects facility closure costs of $0.6 million recorded
in cost of goods sold; consulting fees, temporary labor, employee
recruitment, relocation and retention costs of $18.4 million recorded in
SG&A expenses; and asset impairment and employee termination costs of
$5.9 million recorded in other expense (as described above under Value
Creation Plan).
|
|
(b)
|
Reflects costs related to the recall of certain sunflower
kernel products (as described above under Recall of Certain Roasted
Sunflower Kernel Products), including a $0.7 million adjustment for the
estimated lost gross profit caused by the sunflower recall in the first
quarter of 2017, which reflected a shortfall in revenues against prior
year volumes of approximately $3.3 million, less associated cost of goods
sold of approximately $2.6 million; and $0.3 million of direct costs
recorded in other expense that are not eligible for reimbursement under
our insurance policies.
|
|
(c)
|
Other included fair value adjustments related to
contingent consideration arrangements and gain/loss on the sale of assets,
which were recorded in other expense.
|
|
(d)
|
Reflects the tax effect of the preceding adjustments to
earnings and reflects an overall estimated annual effective tax rate of
approximately 30% on adjusted earnings before tax.
|
|
(e)
|
Reflects costs related to the Sunrise Acquisition,
including an acquisition accounting adjustment related to Sunrises
inventory sold in the first half of 2016 of $11.5 million, which was
recorded in cost of goods sold; the non-cash amortization of debt issuance
costs incurred in connection with the initial financing related to the
Sunrise Acquisition of $5.6 million, as well as $0.9 million of additional
financing costs expensed as incurred in the second quarter of 2016, which
were recorded in interest expense; and $2.4 million of integration costs
related to the closure and consolidation of our frozen fruit processing
operations following the Sunrise Acquisition, which were recorded in cost
of goods sold and other expense.
|
|
(f)
|
Reflects a charge of $9.0 million for the settlement of a
product recall dispute with a customer, which was recorded in other
expense, and associated litigation-related legal costs, which were
recorded in SG&A expenses.
|
|
(g)
|
Reflects costs of $1.1 million for the withdrawal of a
consumer-packaged product for a quality-related issue and $0.6 million for
insurance deductibles related to the sunflower recall, which were recorded
in other expense. Also reflects a $0.3 million adjustment for the
estimated lost gross profit caused by the sunflower recall, which
reflected a shortfall in revenues against anticipated volumes of
approximately $3.5 million, less associated cost of goods sold of
approximately $3.2 million.
|
|
(h)
|
Plant start-up costs relate to the ramp-up of production
at our Allentown, Pennsylvania, facility following the completion of the
addition of aseptic beverage processing and filling capabilities in the
fourth quarter of 2015, which were recorded in cost of goods sold. These
start-up costs reflected the negative gross profit reported by the
facility as the facility ramped up to break-even production
levels.
|
|
(i)
|
Reflects the write-off to interest expense of $0.2
million of remaining unamortized debt issuance costs related to our former
North American credit facilities, which were replaced by the Global Credit
Facility.
|
SUNOPTA
INC.
|
44
|
July 1, 2017 10-Q
|
|
(j)
|
Other includes severance costs of $0.5 million and fair
value adjustments related to contingent consideration arrangements of $0.4
million, which were recorded in other expense.
|
|
(k)
|
Reflects a gain of settlement of the contingent
consideration obligation related to the Niagara Natural acquisition, which
was recorded in other income.
|
(3)
|
The following table presents a reconciliation of segment
operating income/loss, EBITDA and adjusted EBITDA from loss from
continuing operations, which we consider to be the most directly
comparable U.S. GAAP financial measure (refer to footnote (3) to the
Consolidated Results of Operations for the Quarters Ended July 1, 2017
and July 2, 2016 table regarding the use of this non-GAAP
measure).
|
|
|
|
Two quarters ended
|
|
|
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
|
|
$
|
|
|
$
|
|
|
Loss from continuing operations
|
|
(11,286
|
)
|
|
(13,280
|
)
|
|
Recovery of income taxes
|
|
(10,550
|
)
|
|
(10,221
|
)
|
|
Interest expense, net
|
|
15,449
|
|
|
22,570
|
|
|
Other expense, net
|
|
6,050
|
|
|
12,411
|
|
|
Total segment operating income (loss)
|
|
(337
|
)
|
|
11,480
|
|
|
Depreciation and amortization
|
|
16,347
|
|
|
17,309
|
|
|
Stock-based compensation
(a)
|
|
2,465
|
|
|
1,992
|
|
|
EBITDA
|
|
18,475
|
|
|
30,781
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
Costs related to Value Creation Plan
(b)
|
|
19,073
|
|
|
-
|
|
|
Product recall costs
(c)
|
|
729
|
|
|
300
|
|
|
Costs related to business acquisitions
(d)
|
|
-
|
|
|
11,664
|
|
|
Plant expansion and start-up
costs
(e)
|
|
-
|
|
|
1,565
|
|
|
Litigation-related legal fees
(f)
|
|
-
|
|
|
1,286
|
|
|
Adjusted EBITDA
|
|
38,277
|
|
|
45,596
|
|
|
(a)
|
Stock-based compensation of $2.5 million was recorded in
SG&A expenses. The reversal of $0.3 million of previously recognized
stock- based compensation related to forfeited awards previously granted
to terminated employees was recognized in other expense.
|
|
(b)
|
Reflects facility closure costs of $0.6 million recorded
in cost of goods sold and consulting fees, temporary labor, employee
recruitment, relocation and retention costs of $18.4 million recorded in
SG&A expenses (as described above under Value Creation
Plan).
|
|
(c)
|
For the first half of 2017, reflects the estimated lost
gross profit caused by the recall of certain sunflower kernel products of
$0.7 million, which reflected the shortfall in revenues in the first
quarter of 2017 against first quarter 2016 volumes of approximately $3.3
million, less associated cost of goods sold of approximately $2.6 million.
For the first half of 2016, reflects estimated lost gross profit of $0.3
million, which reflected a shortfall in revenues in the second quarter of
2016 against anticipated volumes of approximately $3.5 million, less
associated cost of goods sold of approximately $3.2 million.
|
|
(d)
|
Reflects costs related to the acquisition accounting
adjustment related to Sunrises inventory sold in the first half of 2016
of $11.5 million and the integration costs related to the closure and
consolidation of our frozen fruit processing operations following the
Sunrise Acquisition of $0.2 million, which were recorded in cost of goods
sold.
|
|
(e)
|
Reflects the negative gross profit reported by the
Allentown facility as the facility ramped up to break-even production
levels.
|
|
(f)
|
Reflects legal costs related to the settlement of a
product recall dispute with a customer, which were recorded in SG&A
expenses.
|
(4)
|
Refer to footnote (4) to the Consolidated Results of
Operations for the Quarters Ended July 1, 2017 and July 2, 2016 table
regarding the use of certain other non-GAAP measures in the discussion of
our results of operations below.
|
Revenues for the two quarters ended July 1, 2017 decreased by
4.9% to $666.5 million from $700.5 million for the two quarters ended July 2,
2016. Excluding the impact on revenues for the first half of 2017 of changes in
commodity-related pricing and foreign exchange rates (a decrease in revenues of
approximately $12.0 million), estimated impact on west coast pouch operations as
a result of a fire at a third-party facility in the third quarter of 2016 (a
decrease in revenues of approximately $5.5 million), and estimated impact of the
recall of certain sunflower kernel products based on shortfall against prior
year volumes (a decrease in revenues of approximately $3.3 million), revenues in
the first half of 2017 decreased by 1.9%, compared with the first half of 2016.
This decrease in revenues on an adjusted basis reflected a continued decline in
retail market demand for frozen fruit products, lower raw and roasted sunflower
volumes due to global competition, reduced customer demand following the
sunflower recall, and lower volumes of international-sourced organic
ingredients. These factors were partially offset by increased volumes of
domestically-sourced grains, stronger sales of shelf-stable juice products, and
sales of new specialty bar offerings.
Gross profit increased $12.5 million, or 18.4%, to $80.4
million for the two quarters ended July 1, 2017, compared with $67.9 million for
the two quarters ended July 2, 2016. As a percentage of revenues, gross profit
for the two quarters ended July 1, 2017 was 12.1% compared to 9.7% for the two
quarters ended July 2, 2016, an increase of 2.4% . The gross profit percentage
for the first half of 2017 would have been approximately 12.2%, excluding the
impact of the lost margin caused by the sunflower recall ($0.7 million) and
facility closure costs under the Value Creation Plan ($0.6 million). For the
first half of 2016, the gross profit percentage would have been 11.6%, excluding
the impact of costs related to the acquisition accounting adjustment related to
Sunrise inventory sold subsequent to the acquisition date ($11.5 million),
start-up costs related to the ramp-up of production at the Allentown aseptic
beverage facility ($1.6 million), and lost margin caused by the sunflower recall
($0.3 million). Excluding these items, the gross profit percentage increased
0.6% on an adjusted basis in first half of 2017, compared with the first half of
2016, which reflected improved operating efficiencies and raw material pricing
within our healthy fruit operations and operational savings following the
closure of the San Bernardino facility, as well as a favorable foreign exchange
impact on U.S. dollar-denominated raw material sourcing within our international
organic ingredient operations. These factors were partially offset by reduced
operating efficiencies in our sunflower and roasting operations, due to lower
production volumes following the recall, and at our specialty bar and flexible
resealable pouch facilities, due to new product introductions and product mix.
As described above under Value Creation Plan, we expect to discontinue
flexible resealable pouch products during the fourth quarter of 2017.
SUNOPTA
INC.
|
45
|
July 1, 2017 10-Q
|
Total segment operating loss for the two quarters ended July 1,
2017 was $0.3 million, compared with income of $11.5 million for the two
quarters ended July 2, 2016. The $11.8 million decrease in segment operating
income reflected a $24.6 million increase in SG&A expenses that more than
offset the higher overall gross profit as described above. The increase in
SG&A expenses mainly reflected incremental consulting fees and temporary
labor costs ($14.6 million) and employee recruitment, relocation and retention
costs ($3.9 million) associated with the Value Creation Plan. In addition, the
increase in SG&A expenses reflected higher employee compensation-related
costs related to structural investments in new quality, sales, marketing,
engineering and accounting resources. Segment operating income/loss included
foreign exchange losses of $1.8 million and $2.0 million in the first half of
2017 and 2016, respectively, which mainly reflected the impact of movements in
the U.S. dollar relative to the euro and Mexican peso on our international
organic ingredient and frozen fruit operations.
Further details on revenue, gross profit and segment operating
income/loss variances are provided below under Segmented Operations
Information.
Other expense for the two quarters ended July 1, 2017 of $6.1
million mainly reflected asset impairments related to the closure of the San
Bernardino facility ($3.7 million) and employee termination costs ($2.2 million)
associated with the Value Creation Plan. Other expense for the two quarters
ended July 2, 2016 of $12.4 million included the cost of the settlement of a
product recall dispute with a customer ($9.0 million), as well as facility
rationalization and severance costs primarily related to the consolidation of
our frozen fruit processing facilities following the Sunrise Acquisition ($2.8
million), and costs associated with product withdrawals and recalls ($1.7
million). These expenses were partially offset by the $1.7 million gain on
settlement of the contingent consideration obligation related to the acquisition
of Niagara Natural.
Interest expense decreased by $7.1 million to $15.4 million for
the two quarters ended July 1, 2017, compared with $22.6 million for the two
quarters ended July 2, 2016. Interest expense included the amortization and
write-off of debt issuance costs of $1.1 million and $6.2 million in the first
half of 2017 and 2016, respectively. The period-over-period decrease in interest
expense primarily reflected the reduction in non-cash amortization following the
one-year maturity of the initial second lien loans used to partially fund the
Sunrise Acquisition, and the repayment of $79.0 million of second lien debt with
the net proceeds from the Preferred Stock offering in October 2016. In addition,
in the first half of 2016, we wrote-off $0.2 million of remaining unamortized
debt issuance costs related to our former North American credit facilities,
which were replaced by the Global Credit Facility, and recognized $0.9 million
of costs in connection with proposed financing arrangements intended to repay in
full the term loans outstanding under the Second Lien Loan Agreement.
We recognized a recovery of income tax of $10.6 million for the
two quarters ended July 1, 2017, compared with $10.2 million for the two
quarters ended July 2, 2016. The effective tax rate for the first half of 2017
was 48.3%, compared with 43.5% for the first half of 2016. The effective tax
rates reflected the effect of a mix of pre-tax losses projected in the U.S. and
pre-tax earnings in certain other jurisdictions. In fiscal 2017, pre-tax losses
projected in the U.S. reflected anticipated costs associated with the Value
Creation Plan. In fiscal 2016, pre-tax losses in the U.S. reflect costs
associated with the Sunrise acquisition, settlement of the product recall
dispute, and product withdrawal and recall costs.
Loss from continuing operations attributable to SunOpta Inc.
for the two quarters ended July 1, 2017 was $11.8 million, compared with a loss
of $13.8 million for the two quarters ended July 2, 2016, a decrease of $2.0
million. Diluted loss per share from continuing operations was $0.18 for the two
quarters ended July 1, 2017, compared with diluted loss per share from
continuing operations of $0.16 for the two quarters ended July 2, 2016.
The loss from discontinued operations of $0.6 million in the
first half of 2016 was related to our investment in Opta Minerals Inc. (Opta
Minerals), which we sold in April 2016.
SUNOPTA
INC.
|
46
|
July 1, 2017 10-Q
|
On a consolidated basis, we realized a loss of $11.8 million
(diluted loss per share of $0.18) for the two quarters ended July 1, 2017,
compared with a loss of $14.4 million (diluted loss per share of $0.17) for the
two quarters ended July 2, 2016.
For the two quarters ended July 1, 2017, adjusted loss was $1.6
million, or $0.02 per diluted share, compared with adjusted earnings of $6.8
million, or $0.08 per diluted share for the two quarters ended July 2, 2016.
Adjusted EBITDA for the two quarters ended July 1, 2017 was $38.3 million,
compared with $45.6 million for the two quarters ended July 2, 2016. Adjusted
earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2)
and (3) to the table above for a reconciliation of adjusted earnings/loss and
adjusted EBITDA from loss from continuing operations, which we consider to be
the most directly comparable U.S. GAAP financial measure.
Segmented Operations Information
Global Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
For the two quarters ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
279,714
|
|
$
|
304,520
|
|
$
|
(24,806
|
)
|
|
-8.1%
|
|
Gross Profit
|
|
36,389
|
|
|
37,920
|
|
|
(1,531
|
)
|
|
-4.0%
|
|
Gross Profit %
|
|
13.0%
|
|
|
12.5%
|
|
|
|
|
|
0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
13,123
|
|
$
|
16,852
|
|
$
|
(3,729
|
)
|
|
-22.1%
|
|
Operating Income %
|
|
4.7%
|
|
|
5.5%
|
|
|
|
|
|
-0.8%
|
|
Global Ingredients contributed $279.7 million in revenues for
the two quarters ended July 1, 2017, compared to $304.5 million for the two
quarters ended July 2, 2016, a decrease of $24.8 million, or 8.1% . Excluding
the estimated impacts on revenues of changes including foreign exchange rates
and commodity-related pricing ($12.0 million), and the recall of certain
sunflower kernel products announced in the second quarter of 2016 ($3.3
million), Global Ingredients revenues decreased approximately 3.1% . The table
below explains the decrease in revenue:
Global Ingredients Revenue Changes
|
|
Revenues for the two quarters ended July 2, 2016
|
$304,520
|
Lower roasted volumes due to reduced customer demand
following the sunflower recall, and lower raw sunflower volumes due to
competition from global suppliers
|
(12,853)
|
Decreased volumes of internationally-sourced organic
ingredients including fruits, vegetables and liquid sweeteners
|
(6,118)
|
Decreased commodity pricing for domestically-sourced
specialty and organic grains and seeds
|
(6,099)
|
Decreased commodity pricing for internationally-sourced
organic ingredients
|
(2,864)
|
Unfavorable foreign exchange impact on euro-denominated
sales due to a stronger U.S. dollar period-over-period
|
(3,003)
|
Increased volumes of domestically-sourced specialty soy,
partially offset by lower volumes of specialty corn, organic feed and crop
inputs
|
6,131
|
Revenues for the two quarters ended July 1, 2017
|
$279,714
|
Gross profit in Global Ingredients decreased by $1.5 million to
$36.4 million for the two quarters ended July 1, 2017 compared to $37.9 million
for the two quarters ended July 2, 2016, and the gross profit percentage
increased by 0.5% to 13.0% . The increase in gross profit as a percentage of
revenue was primarily due to a favorable foreign exchange impact on U.S.
dollar-denominated raw material sourcing within our international organic
ingredient operations and improved pricing spread on certain commodities,
partially offset by reduced operating efficiencies within our sunflower and
roasting operations due to lower volumes following the recall. The table below
explains the decrease in gross profit:
SUNOPTA
INC.
|
47
|
July 1, 2017 10-Q
|
Global Ingredients Gross Profit Changes
|
|
Gross profit for the two quarters ended July 2, 2016
|
$37,920
|
Lower sales volumes of raw sunflower and roasted products,
and reduced operating efficiencies due to lower production volumes
|
(4,653)
|
Lower pricing and increased raw material costs for
domestically-sourced organic feed and reduced volumes of higher-margin
crop inputs due to a reduction in contracted acres, partially offset by
increased specialty soy volumes
|
(563)
|
Favorable foreign exchange impact on U.S.
dollar-denominated raw material sourcing within our international organic
ingredient operations (partially offset by losses on forward currency
contracts included below in operating income), as well as improved pricing
spread on organic feed and operating efficiencies at our European
production facilities, partially offset by lower volumes of certain
internationally-sourced organic ingredients
|
3,685
|
Gross profit for the two quarters ended July 1, 2017
|
$36,389
|
Operating income in Global Ingredients decreased by $3.7
million, or 22.1%, to $13.1 million for the two quarters ended July 1, 2017,
compared to $16.9 million for the two quarters ended July 2, 2016. The table
below explains the decrease in operating income:
Global Ingredients Operating Income Changes
|
|
Operating income for the two quarters ended July 2, 2016
|
$16,852
|
Decrease in gross profit, as explained above
|
(1,531)
|
Increase in foreign exchange losses primarily related to
forward currency contracts and higher employee-related compensation costs
|
(2,047)
|
Increase in corporate cost allocations
|
(151)
|
Operating income for the two quarters ended July 1, 2017
|
$13,123
|
Consumer Products
|
|
|
|
|
|
|
|
|
|
|
|
|
For the two quarters ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
386,771
|
|
$
|
395,940
|
|
$
|
(9,169
|
)
|
|
-2.3%
|
|
Gross Profit
|
|
43,972
|
|
|
29,959
|
|
|
14,013
|
|
|
46.8%
|
|
Gross Profit %
|
|
11.4%
|
|
|
7.6%
|
|
|
|
|
|
3.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) %
|
$
|
10,168
|
|
$
|
(1,115
|
)
|
$
|
11,283
|
|
|
1011.9%
|
|
Operating Income (Loss) %
|
|
2.6%
|
|
|
-0.3%
|
|
|
|
|
|
2.9%
|
|
Consumer Products contributed $386.8 million in revenues for
the two quarters ended July 1, 2017, compared to $395.9 million for the two
quarters ended July 2, 2016, a decrease of $9.2 million, or 2.3% . Excluding the
impact on west coast pouch operations of a fire at a third-party facility in the
third quarter of 2016 ($5.5 million), Consumer Products revenues decreased 0.9%
. The table below explains the decrease in revenues:
SUNOPTA
INC.
|
48
|
July 1, 2017 10-Q
|
Consumer Products Revenue Changes
|
|
Revenues for the two quarters ended July 2, 2016
|
$395,940
|
Lower volumes of frozen fruit primarily to retail customers
due to declines in consumer consumption trends, partially offset by
increased fruit ingredient volumes to the foodservice channel
|
(15,454)
|
Impact on revenues from the closure of west coast pouch
operations as a result of a fire at a third-party facility
|
(5,493)
|
Stronger retail sales of premium juice products and
increased volumes of non-dairy aseptic beverage products into the
foodservice channel, partially offset by lower retail sales of aseptic
beverages due to the previously announced loss of a significant customer
|
5,983
|
Higher volumes of specialty bars as a result of new
business contracted
|
5,795
|
Revenues for the two quarters ended July 1, 2017
|
$386,771
|
Gross profit in Consumer Products increased by $14.0 million to
$44.0 million for the two quarters ended July 1, 2017, compared to $30.0 million
for the two quarters ended July 2, 2016, and the gross profit percentage
increased by 3.8% to 11.4% . For the two quarters ended July 1, 2017, gross
profit as a percentage of revenue was impacted by costs associated with the
closure of the San Bernardino facility of $0.4 million. For the two quarters
ended July 2, 2016, gross profit as a percentage of revenue was impacted by the
acquisition accounting adjustment related to Sunrise inventory sold ($11.5
million) and costs associated with expansion activities at the Allentown
facility ($1.6 million). Excluding these costs, the gross profit percentage in
Consumer Products would have been 11.5% for the two quarters ended July 1, 2017,
compared with 10.9% for the two quarters ended July 2, 2016. The increase in
gross profit percentage primarily reflected improved operating efficiencies and
raw material pricing within our healthy fruit operations and operational savings
from the closure of the San Bernardino facility, partially offset by higher
plant costs and operating inefficiencies within our healthy snacks operations.
The table below explains the increase in gross profit:
Consumer Products Gross Profit Changes
|
|
Gross profit for the two quarters ended July 2, 2016
|
$29,959
|
Acquisition accounting adjustment related to Sunrise
inventory sold in the first half of 2016
|
11,515
|
Increased contribution on sales of frozen fruit to both
retail and foodservice channels, based on operating efficiencies due to
the timing of the fruit harvest (which was delayed in fiscal 2016,
resulting in higher labor costs and reduced supply) and favorable cost on
sourced fresh fruit, as well as increased volumes of fruit ingredient
applications to foodservice customers
|
6,375
|
Higher sales volumes of premium juice products and
operational savings following the closure of the San Bernardino facility,
partially offset by lower overall sales volumes of non-dairy aseptic
beverages
|
442
|
Lower volumes of resealable pouch offerings, and higher
plant costs and operating inefficiencies at our specialty bar and flexible
resealable pouch facilities due to new product introductions and
unfavorable product mix, partially offset by the contribution from the
increased sales volumes of specialty bars
|
(4,319)
|
Gross profit for the two quarters ended July 1, 2017
|
$43,972
|
Operating income in Consumer Products increased by $11.3
million to $10.2 million for the two quarters ended July 1, 2017, compared to an
operating loss of $1.1 million for the two quarters ended July 2, 2016. The
table below explains the increase in operating income:
SUNOPTA
INC.
|
49
|
July 1, 2017 10-Q
|
Consumer Products Operating Income Changes
|
|
Operating loss for the two quarters ended July 2, 2016
|
$(1,115)
|
Increase in gross profit, as explained above
|
14,015
|
Lower foreign exchange losses on international operations,
partially offset by increased employee-related compensation costs
|
424
|
Increase in corporate cost allocations
|
(3,156)
|
Operating income for the two quarters ended July 1, 2017
|
$10,168
|
Corporate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
For the two quarters ended
|
|
July 1, 2017
|
|
|
July 2, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
$
|
(23,628
|
)
|
$
|
(4,257
|
)
|
$
|
(19,371
|
)
|
|
-455.0%
|
|
Operating loss at Corporate Services increased by $19.4 million
to $23.6 million for the two quarters ended July 1, 2017, from a loss of $4.3
million for the two quarters ended July 2, 2016. The table below explains the
increase in operating loss:
Corporate Services Operating Loss Changes
|
|
Operating loss for the two quarters ended July 2, 2016
|
$(4,257)
|
Third-party consulting costs and employee recruitment,
relocation and retention costs associated with the Value Creation Plan
|
(18,515)
|
Higher employee-related compensation costs, including
stock-based compensation and incentives, primarily associated with the
Value Creation Plan
|
(5,847)
|
Increase in corporate cost allocations to SunOpta reporting
segments
|
3,307
|
Lower non-compensation-related costs, including the
favorable impact on Canadian dollar-denominated corporate headquarter
expenses of a stronger U.S. dollar period- over-period
|
960
|
Increase in foreign exchange gains on foreign currency
transactions
|
724
|
Operating loss for the two quarters ended July 1, 2017
|
$(23,628)
|
Liquidity and Capital Resources
We have the following sources from which we can fund our
operating cash requirements:
-
Existing cash and cash equivalents;
-
Available operating lines of credit;
Cash flows generated from operating activities, including working capital
efficiency efforts;
Cash flows generated from the exercise, if any, of stock options during
the year;
Potential additional long-term financing, including the offer and sale of
debt and/or equity securities; and
Potential sales of non-core divisions, or assets.
On February 11, 2016, we entered a five-year credit agreement
for a senior secured asset-based revolving credit facility in the maximum
aggregate principal amount of $350 million, subject to borrowing base capacity
(the Global Credit Facility). The Global Credit Facility supports the working
capital and general corporate needs of our global operations, in addition to funding strategic initiatives. In addition, subject to
customary borrowing conditions and the agreement of any such lenders to provide
such increased commitments, we may request to increase the total lending
commitments under this facility to a maximum aggregate principal amount not to
exceed $450 million. The applicable margin in the Global Credit Facility ranges
from 1.25% to 1.75% for loans bearing interest based on LIBOR and from 0.25% to
0.75% for loans bearing interest based on the prime rate and, in each case, is
set quarterly based on average borrowing availability for the preceding fiscal
quarter. As at July 1, 2017, we had outstanding borrowings of $236.3 million and
approximately $53.0 million of available borrowing capacity under the Global
Credit Facility. For more information on the Global Credit Facility, see note
7(1) to the unaudited consolidated financial statements included in this report.
SUNOPTA
INC.
|
50
|
July 1, 2017 10-Q
|
On October 20, 2016, SunOpta Foods issued $231.0 million of
9.5% Senior Secured Second Lien Notes due October 9, 2022 (the Notes). The
issuance of the Notes represented the culmination of the financing arrangements
associated with the Sunrise Acquisition. For more information on the Notes, see
note 7(3) to the unaudited consolidated financial statements included in this
report.
In order to finance significant acquisitions, if any, that may
arise in the future, we may need additional sources of cash that we could
attempt to obtain through a combination of additional bank or subordinated
financing, a private or public offering of debt or equity securities, or the
issuance of common stock as consideration in an acquisition. There can be no
assurance that these types of financing would be available at all or, if so, on
terms that are acceptable to us.
In the event that we require additional liquidity due to market
conditions, unexpected actions by our lenders, changes to our growth strategy,
or other factors, our ability to obtain any additional financing on favourable
terms, if at all, could be limited.
Cash Flows
Quarter Ended July 1, 2017 Compared to Quarter Ended July
2, 2016
Net cash and cash equivalents were $3.5 million as at July 1,
2017, unchanged from April 1, 2017, which primarily reflected cash used by
continuing operating activities of $25.8 million, capital expenditures of $7.1
million and contingent consideration payments of $4.3 million, offset by
borrowings of $36.7 million under our line of credit facilities.
Cash used in operating activities of continuing operations was
$25.8 million in the second quarter of 2017, compared with cash used of $34.4
million in the second quarter of 2016, a decrease of $8.6 million. Heavy cash
use for working capital in the second quarter of each fiscal year reflects the
normal timing of seasonal fruit purchases. The decrease in cash used by
operating activities in the second quarter of 2017, compared with the second
quarter of 2016, reflected cash generated through working capital efficiency
initiatives, which were focused on lowering inventory positions, maximizing
purchasing terms, and augmenting collection efforts for accounts receivable.
These positive factors were partially offset by the cash payment of $12.5
million of costs incurred under the Value Creation Plan.
Cash used in investing activities of continuing operations was
$6.8 million in the second quarter of 2017, compared with $4.1 million in the
second quarter of 2016, an increase of $2.7 million, which mainly reflected an
increase in capital expenditures of $2.4 million to add new capabilities within
our aseptic beverage operations and to add a second processing line at our Dutch
cocoa facility, as well as to implement food safety, employee safety and production enhancements
across our manufacturing facilities. Cash provided by investing activities of
discontinued operations of $1.9 million in the second quarter of 2016 reflected
net cash proceeds from the sale of Opta Minerals.
Cash provided by financing activities of continuing operations
was $32.5 million in the second quarter of 2017, compared with cash provided of
$34.2 million in the second quarter of 2016, a decrease of $1.7 million. Net
borrowings under our line of credit facilities increased $36.7 million in the
second quarter of 2017, compared with $39.0 million in the second quarter of
2016, a quarter-over-quarter decrease of $2.3 million, which reflected the
reduction in working capital requirements in the second quarter of 2017,
partially offset by the quarter-over-quarter increase in capital spending.
Two Quarters Ended July 1, 2017 Compared to Two Quarters
Ended July 2, 2016
Net cash and cash equivalents increased $2.2 million in the
first half of 2017 to $3.5 million as at July 1, 2017, compared with $1.3
million as at December 31, 2016, which primarily reflected $29.3 million of
borrowings under our line of credit facilities, partially offset by capital
expenditures of $16.2 million and cash used by continuing operating activities
of $6.3 million.
SUNOPTA
INC.
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July 1, 2017 10-Q
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Cash used in operating activities of continuing operations was
$6.3 million in the first half of 2017, compared with cash used of $52.3 million
in the first half of 2016, a decrease of $46.0 million. Like the
quarter-over-quarter decline discussed above, the decrease in cash used by
operating activities in the first half of 2017, compared with the first half of
2016, reflected cash generated through working capital efficiency initiatives,
which was partially offset by the cash payment of $20.4 million of costs
incurred under the Value Creation Plan.
Cash used in investing activities of continuing operations was
$15.5 million in the first half of 2017, compared with $8.6 million in the first
half of 2016, an increase in cash used of $6.9 million, which mainly reflected
an increase in capital expenditures of $6.8 million related to new capabilities
within our aseptic beverage operations and expansion of our Dutch cocoa
facility, as well as food safety, employee safety and production enhancements. In addition,
capital expenditures in the first half of 2017 included $3.2 million related to
the early buyout of equipment leases associated with the closure of the San
Bernardino facility.
Cash provided by financing activities of continuing operations
was $23.9 million in the first half of 2017, compared with $60.0 million in the
first half of 2016, a decrease of $36.1 million. Net borrowings under our line
of credit facilities increased $29.3 million in the first half of 2017, compared
with an increase of $78.9 million the first half of 2016, a period-over-period
decrease of $49.6 million, which reflected the reduction in working capital
requirements in the first half 2017 and the repayment of $10.0 million of second
lien debt in the first half of 2016, partially offset by the period-over-period
increase in capital spending. Net borrowings under our line of credit facilities
in the first half of 2016 reflected the repayment in full of outstanding
borrowings of $192.7 million under our former North American and European credit
facilities with borrowings under the Global Credit Facility.
Off-Balance Sheet Arrangements
There are currently no off-balance sheet arrangements that have
or are reasonably likely to have a current or future material effect on our
financial condition.
Contractual Obligations
There have been no material changes outside the normal course
of business in our contractual obligations since December 31, 2016.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities, related revenues and expenses,
and disclosure of gain and loss contingencies at the date of the financial
statements. The estimates and assumptions made require us to exercise our
judgment and are based on historical experience and various other factors that
we believe to be reasonable under the circumstances. We continually evaluate the
information that forms the basis of our estimates and assumptions as our
business and the business environment generally changes. The use of estimates is
pervasive throughout our financial statements. There have been no material
changes to the critical accounting estimates disclosed under the heading
Critical Accounting Estimates in Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations, of the Form 10-K.