Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended September 28, 2019 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 29, 2018 ("Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to November 6, 2019.
Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," or other similar expressions concerning matters that are not historical facts, or the negative of such terms are intended to identify forward-looking statements; however, the absence of these words does not necessarily mean that a statement is not forward-looking. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. These factors are more fully described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current estimates, expectations and projections, which we believe are reasonable as of the date of this report. Forward-looking statements are not guarantees of future performance or events. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements, and we hereby qualify all our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S. dollars, except per share amounts.
Overview
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 the Company's North American-based sunflower and roasted snack operations and international organic ingredients operations. Global Ingredients included the operations of the specialty and organic soy and corn business that was sold in first quarter of 2019 (as described below under the heading "Sale of Soy and Corn Business").
|
SUNOPTA INC
|
33
|
September 28, 2019 10-Q
|
-
Consumer Products consists of three main commercial platforms: Healthy Beverages, Healthy Fruit and Healthy Snacks. Healthy Beverages includes aseptically-packaged products including non-dairy plant-based beverages, broths and teas; refrigerated premium juices; shelf-stable juices and functional waters; and extraction of plant-based beverage ingredients. 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 is focused on fruit snack offerings and included the ending contribution from the exited flexible resealable pouch and nutrition bar product lines in the first quarter of 2018.
Sale of Soy and Corn Business
On February 22, 2019, our subsidiary, SunOpta Grains and Foods Inc., completed the sale of our specialty and organic soy and corn business to Pipeline Foods, LLC ("Pipeline Foods") for $66.5 million, which was subject to certain post-closing adjustments recognized in the third quarter of 2019. The soy and corn business engaged in seed and grain conditioning and corn milling and formed part of the Global Ingredients reportable segment. The net proceeds from this transaction were initially used to repay borrowings and increase availability under our Global Credit Facility (as described below under the heading "Liquidity and Capital Resources"). Over time, we intend to redeploy this capital to further enhance our consumer products and international organic ingredients operations.
The results of operations of the soy and corn business for period ended February 22, 2019, and for the quarter and three quarters ended September 29, 2018, are summarized in the table below. These results exclude management fees charged by Corporate Services.
|
|
|
|
|
Period ended
|
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
|
|
|
February 22, 2019
|
|
|
September 29, 2018
|
|
|
September 29, 2018
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Revenues
|
|
10,346
|
|
|
27,002
|
|
|
77,944
|
|
|
Gross profit
|
|
192
|
|
|
1,251
|
|
|
6,687
|
|
|
Segment operating income (loss)
|
|
(187
|
)
|
|
868
|
|
|
5,538
|
|
|
Earnings (loss) before income taxes
|
|
(187
|
)
|
|
817
|
|
|
5,531
|
|
The sale of the soy and corn business simplified our operations, enabling other overhead cost reduction measures to be taken in the first quarter of 2019 that extended beyond the employees and expenses that transferred to Pipeline Foods. Taking into consideration the contribution from the soy and corn business, as well as the other associated costs and expenses that were rationalized, the following table presents a reconciliation of adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") in connection with this transaction from earnings/loss before income taxes of the soy and corn business, which we consider in this case to be the most directly comparable U.S. GAAP financial measure.
|
|
|
|
|
Period ended
|
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
|
|
|
February 22, 2019
|
|
|
September 29, 2018
|
|
|
September 29, 2018
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Earnings (loss) before income taxes of soy and corn
|
|
|
|
|
|
|
|
|
|
|
|
business
|
|
(187
|
)
|
|
817
|
|
|
5,531
|
|
|
Depreciation
|
|
129
|
|
|
212
|
|
|
642
|
|
|
Interest income
|
|
—
|
|
|
(39
|
)
|
|
(81
|
)
|
|
Other expense
|
|
—
|
|
|
91
|
|
|
89
|
|
|
Less rationalized costs and expenses
|
|
(169
|
)
|
|
(652
|
)
|
|
(2,548
|
)
|
|
Adjusted EBITDA
|
|
(227
|
)
|
|
429
|
|
|
3,633
|
|
Adjusted EBITDA is a non-GAAP measure that management uses when assessing the performance of our operations. See footnote (3) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2019 and September 29, 2018" table below for a discussion on the use of this non-GAAP measure.
For more information regarding the sale of the soy and corn business, see note 4 to the unaudited consolidated financial statements included in this report.
|
SUNOPTA INC
|
34
|
September 28, 2019 10-Q
|
Value Creation Plan
In the fourth quarter of 2016, 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, we developed a Value Creation Plan built on four pillars: portfolio optimization, operational excellence, go-to-market effectiveness, and process sustainability.
In September 2019, we completed a restructuring of our Corporate Services and Consumer Products organizational structures, which included a workforce reduction and other cost-saving initiatives that are expected to result in approximately $8 million to $10 million of annualized savings. This restructuring is part of our effort to become more efficient and profitable, by simplifying the leadership organization of the business, in order to enhance decision making and speed to market.
In addition to this restructuring, and the sale of the soy and corn business (as described above), other actions taken under the Value Creation Plan have included the rationalization of certain of our operations and facilities, including the closure of our juice facility in San Bernardino, California, in the fourth quarter of 2016, the exit from flexible resealable pouch and nutrition bar product lines and operations initiated in the fourth quarter of 2017, and the consolidation of roasted snack operations and related disposal of our roasting facility in Wahpeton, North Dakota, in the second quarter of 2018.
For the quarters and three quarters ended September 28, 2019 and September 29, 2018, costs incurred and charged to expense in connection with the Value Creation Plan were recorded in the consolidated statement of operations as follows:
|
|
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Cost of goods sold(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
Selling, general and administrative expenses(2)
|
|
1,615
|
|
|
—
|
|
|
2,772
|
|
|
613
|
|
|
Other expense(3)
|
|
3,222
|
|
|
43
|
|
|
5,598
|
|
|
2,164
|
|
|
|
|
|
4,837
|
|
|
43
|
|
|
8,370
|
|
|
2,877
|
|
(1) For the three quarters ended September 29, 2018, inventory write-downs and facility closure costs recorded in cost of goods sold were allocated to the Consumer Products operating segment.
(2) Professional fees and employee retention, recruitment and relocation costs recorded in selling general and administrative expenses were allocated to Corporate Services.
(3) For the quarter ended September 28, 2019, costs recorded in other expense, such as employee termination and recruitment costs, and asset impairment, facility closure and lease termination costs, were allocated as follows: Global Ingredients reportable segment - $nil (September 29, 2018 - $nil); Consumer Products operating segment - $1.1 million (September 29, 2018 - $nil); and Corporate Services - $2.1 million (September 29, 2018 - $0.0 million). For the three quarters ended September 28, 2019, costs recorded in other expense were allocated as follows: Global Ingredients reportable segment - $0.3 million (September 29, 2018 - $0.7 million); Consumer Products operating segment - $2.4 million (September 29, 2018 - $1.3 million); and Corporate Services - $2.9 million (September 29, 2018 - $0.2 million).
We intend to continue to make the necessary strategic business decisions and structural investments that we believe will deliver sustained profitable growth and deliver long-term value. Consequently, significant additional costs and expenses could arise in future periods if we determine to initiate further actions under the framework of the Value Creation Plan.
For more information regarding the Value Creation Plan, see note 5 to the unaudited consolidated financial statements included in this report.
Acquisition of Sanmark B.V.
On April 1, 2019, we acquired 100% of the outstanding shares of Sanmark B.V. ("Sanmark") for $3.3 million, net of cash acquired, which was financed through existing credit facilities. Sanmark is a sourcing and trading business focused on organic oils for the food, pharmacy, and cosmetic industries. Sanmark sources raw materials globally and generates most of its sales in the European and Asia-Pacific markets. The operations of Sanmark have been integrated into our international organic ingredients operations based in the Netherlands. The results of operations of Sanmark have been included in Global Ingredients since the date of acquisition. For more information regarding the acquisition of Sanmark, see note 3 to the unaudited consolidated financial statements included in this report.
|
SUNOPTA INC
|
35
|
September 28, 2019 10-Q
|
Consolidated Results of Operations for the Quarters Ended September 28, 2019 and September 29, 2018
|
For the quarter ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
107,853
|
|
|
136,754
|
|
|
(28,901
|
)
|
|
-21.1%
|
|
|
|
Consumer Products
|
|
188,088
|
|
|
171,617
|
|
|
16,471
|
|
|
9.6%
|
|
|
Total revenues
|
|
295,941
|
|
|
308,371
|
|
|
(12,430
|
)
|
|
-4.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
10,101
|
|
|
14,477
|
|
|
(4,376
|
)
|
|
-30.2%
|
|
|
|
Consumer Products
|
|
16,224
|
|
|
19,651
|
|
|
(3,427
|
)
|
|
-17.4%
|
|
|
Total gross profit
|
|
26,325
|
|
|
34,128
|
|
|
(7,803
|
)
|
|
-22.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
1,543
|
|
|
5,304
|
|
|
(3,761
|
)
|
|
-70.9%
|
|
|
|
Consumer Products
|
|
(147
|
)
|
|
3,319
|
|
|
(3,466
|
)
|
|
-104.4%
|
|
|
|
Corporate Services
|
|
(4,923
|
)
|
|
(4,101
|
)
|
|
(822
|
)
|
|
-20.0%
|
|
|
Total segment operating income (loss)
|
|
(3,527
|
)
|
|
4,522
|
|
|
(8,049
|
)
|
|
-178.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
3,323
|
|
|
1,136
|
|
|
2,187
|
|
|
192.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before the following
|
|
(6,850
|
)
|
|
3,386
|
|
|
(10,236
|
)
|
|
-302.3%
|
|
|
Interest expense, net
|
|
8,864
|
|
|
8,792
|
|
|
72
|
|
|
0.8%
|
|
|
Recovery of income taxes
|
|
(3,935
|
)
|
|
(870
|
)
|
|
(3,065
|
)
|
|
-352.3%
|
|
|
Net loss(2),(3)
|
|
(11,779
|
)
|
|
(4,536
|
)
|
|
(7,243
|
)
|
|
-159.7%
|
|
|
Earnings (loss) attributable to non-controlling interests
|
|
(30
|
)
|
|
70
|
|
|
(100
|
)
|
|
-142.9%
|
|
|
Loss attributable to SunOpta Inc.
|
|
(11,749
|
)
|
|
(4,606
|
)
|
|
(7,143
|
)
|
|
-155.1%
|
|
|
Dividends and accretion on Series A Preferred Stock
|
|
(2,009
|
)
|
|
(1,981
|
)
|
|
(28
|
)
|
|
-1.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common shareholders(4)
|
|
(13,758
|
)
|
|
(6,587
|
)
|
|
(7,171
|
)
|
|
-108.9%
|
|
(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 accounting principles generally accepted in the United States of America ("U.S. 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 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 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
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
1,543
|
|
|
(147
|
)
|
|
(4,923
|
)
|
|
(3,527
|
)
|
|
Other expense, net
|
|
(1,176
|
)
|
|
(1,327
|
)
|
|
(820
|
)
|
|
(3,323
|
)
|
|
Earnings (loss) before the following
|
|
367
|
|
|
(1,474
|
)
|
|
(5,743
|
)
|
|
(6,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
5,304
|
|
|
3,319
|
|
|
(4,101
|
)
|
|
4,522
|
|
|
Other expense, net
|
|
(1,047
|
)
|
|
(37
|
)
|
|
(52
|
)
|
|
(1,136
|
)
|
|
Earnings (loss) before the following
|
|
4,257
|
|
|
3,282
|
|
|
(4,153
|
)
|
|
3,386
|
|
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income. However, any measure of operating income excluding any or all of these items is not, and should not be viewed as, a substitute for operating income prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
|
SUNOPTA INC
|
36
|
September 28, 2019 10-Q
|
(2) When assessing our financial performance, we use an internal measure of earnings attributable to common shareholders determined in accordance with U.S. GAAP that excludes specific items recognized in other income/expense, impairment losses on goodwill and long-lived assets, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of our financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations.
The following table presents a reconciliation of adjusted earnings/loss from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, in recognition of the sale of the soy and corn business (as described above under the heading "Sale of Soy and Corn Business"), and our exit from flexible resealable pouch and nutrition bar product lines and operations (as described above under the heading "Value Creation Plan"), we have prepared this table in a columnar format to present the effect of the disposal of these operations on our consolidated results for the current and comparative periods. We believe this presentation assists investors in assessing the results of the operations we have disposed and the effect of those operations on our financial performance.
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
disposed operations
|
|
|
Disposed operations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
Per Diluted Share
|
|
|
|
|
|
Per Diluted Share
|
|
|
|
|
|
Per Diluted Share
|
|
|
For the quarter ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(10,974
|
)
|
|
|
|
|
(805
|
)
|
|
|
|
|
(11,779
|
)
|
|
|
|
|
Loss attributable to non-controlling interests
|
|
30
|
|
|
|
|
|
—
|
|
|
|
|
|
30
|
|
|
|
|
|
Dividends and accretion of Series A Preferred Stock
|
|
(2,009
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(2,009
|
)
|
|
|
|
|
Loss attributable to common shareholders
|
|
(12,953
|
)
|
|
(0.15
|
)
|
|
(805
|
)
|
|
(0.01
|
)
|
|
(13,758
|
)
|
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to the Value Creation Plan(a)
|
|
4,837
|
|
|
|
|
|
—
|
|
|
|
|
|
4,837
|
|
|
|
|
|
|
Post-closing adjustments and other costs related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale of soy and corn business(b)
|
|
—
|
|
|
|
|
|
1,109
|
|
|
|
|
|
1,109
|
|
|
|
|
|
|
Contract manufacturer transition costs(c)
|
|
159
|
|
|
|
|
|
—
|
|
|
|
|
|
159
|
|
|
|
|
|
|
Other(d)
|
|
(1,166
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(1,166
|
)
|
|
|
|
|
|
Net income tax effect(e)
|
|
(764
|
)
|
|
|
|
|
(304
|
)
|
|
|
|
|
(1,068
|
)
|
|
|
|
|
Adjusted loss
|
|
(9,887
|
)
|
|
(0.11
|
)
|
|
—
|
|
|
—
|
|
|
(9,887
|
)
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(4,620
|
)
|
|
|
|
|
84
|
|
|
|
|
|
(4,536
|
)
|
|
|
|
|
Earnings attributable to non-controlling interests
|
|
(70
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(70
|
)
|
|
|
|
|
Dividends and accretion of Series A Preferred Stock
|
|
(1,981
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(1,981
|
)
|
|
|
|
|
Earnings (loss) attributable to common shareholders
|
|
(6,671
|
)
|
|
(0.08
|
)
|
|
84
|
|
|
—
|
|
|
(6,587
|
)
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment start-up costs(f)
|
|
1,500
|
|
|
|
|
|
—
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
Product withdrawal and recall costs(g)
|
|
1,011
|
|
|
|
|
|
—
|
|
|
|
|
|
1,011
|
|
|
|
|
|
|
New product commercialization costs(h)
|
|
360
|
|
|
|
|
|
—
|
|
|
|
|
|
360
|
|
|
|
|
|
|
Costs related to Value Creation Plan(i)
|
|
43
|
|
|
|
|
|
—
|
|
|
|
|
|
43
|
|
|
|
|
|
|
Other(j)
|
|
83
|
|
|
|
|
|
—
|
|
|
|
|
|
83
|
|
|
|
|
|
|
Net income tax effect(e)
|
|
(243
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(243
|
)
|
|
|
|
|
Adjusted earnings (loss)
|
|
(3,917
|
)
|
|
(0.05
|
)
|
|
84
|
|
|
—
|
|
|
(3,833
|
)
|
|
(0.04
|
)
|
(a) Reflects employee retention and relocation costs of $0.9 million, and professional fees of $0.7 million recorded in SG&A expenses; and employee termination costs of $3.4 million (net of the reversal of $0.8 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees), and CFO recruitment costs of $0.6 million recorded in other expense.
(b) Reflects post-closing adjustments and transaction costs incurred in connection with the sale of the soy and corn business, which reduced the gain on sale recorded in other income.
(c) Reflects the write-down of assets related to the transition of premium juice production activities to new contract manufacturers, which was recorded in other expense.
(d) Other includes a legal settlement gain of $1.3 million, offset by losses on disposal of assets, which were recorded in other income/expense.
(e) Reflects the tax effect of the preceding adjustments to earnings and reflects an overall estimated annual effective tax rate of approximately 27% for the quarter ended September 28, 2019 (September 29, 2018 - 26%) on adjusted earnings/loss before tax.
(f) Reflects costs related to the start-up of new roasting equipment for grains, seeds and legumes at our Crookston, Minnesota, facility, which were recorded in cost of goods sold.
|
SUNOPTA INC
|
37
|
September 28, 2019 10-Q
|
(g) Reflects product withdrawal and recall costs that were not eligible for reimbursement under insurance policies or exceeded the limits of those policies, including costs related to the recall of certain sunflower kernel products initiated in the second quarter of 2016, which were recorded in other expense.
(h) Reflects costs of production trials and employee training related to the commercialization of new consumer products, which were recorded in cost of goods sold.
(i) Reflects employee termination costs related to the Value Creation Plan, which were recorded in other expense.
(j) Other includes the accretion of contingent consideration obligations, gain/loss on the disposal of assets, and settlement of a legal matter, which were recorded in other expense/income.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude 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 a measure of adjusted EBITDA when assessing the performance of our operations, which we believe is useful to investors' understanding of our operating profitability because it excludes non-operating expenses, such as interest and income taxes, and non-cash expenses, such as depreciation, amortization, stock-based compensation and asset impairment charges, as well as other unusual items that affect the comparability of operating performance. We also use this measure to review and assess our progress under the Value Creation Plan and to assess operating performance in connection with our employee incentive programs. In addition, we are subject to certain restrictions on incurring additional indebtedness based on availability and metrics that include in their calculation a measure of EBITDA. We define adjusted EBITDA as segment operating income/loss plus depreciation, amortization and non-cash stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings (refer above to footnote (2)). The following table presents a reconciliation of segment operating income/loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, as described above under footnote (2), we have prepared this table in a columnar format to present the effect of the disposals of the soy and corn business, and flexible resealable pouch and nutrition bar operations on our consolidated results for the periods presented. We believe this presentation assists investors in assessing the results of the operations we have disposed of and the effect of those operations on our financial performance.
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
disposed operations
|
|
|
Disposed operations
|
|
|
Consolidated
|
|
|
For the quarter ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(10,974
|
)
|
|
(805
|
)
|
|
(11,779
|
)
|
|
Recovery of income taxes
|
|
(3,631
|
)
|
|
(304
|
)
|
|
(3,935
|
)
|
|
Interest expense, net
|
|
8,864
|
|
|
—
|
|
|
8,864
|
|
|
Other expense, net
|
|
2,214
|
|
|
1,109
|
|
|
3,323
|
|
|
Total segment operating loss
|
|
(3,527
|
)
|
|
—
|
|
|
(3,527
|
)
|
|
|
Depreciation and amortization
|
|
8,517
|
|
|
—
|
|
|
8,517
|
|
|
|
Stock-based compensation(a)
|
|
3,327
|
|
|
—
|
|
|
3,327
|
|
|
|
Costs related to Value Creation Plan(b)
|
|
1,615
|
|
|
—
|
|
|
1,615
|
|
|
Adjusted EBITDA
|
|
9,932
|
|
|
—
|
|
|
9,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(4,620
|
)
|
|
84
|
|
|
(4,536
|
)
|
|
Provision for (recovery of) income taxes
|
|
(903
|
)
|
|
33
|
|
|
(870
|
)
|
|
Interest expense (income), net
|
|
8,831
|
|
|
(39
|
)
|
|
8,792
|
|
|
Other expense (income), net
|
|
1,045
|
|
|
91
|
|
|
1,136
|
|
|
Total segment operating income
|
|
4,353
|
|
|
169
|
|
|
4,522
|
|
|
|
Depreciation and amortization
|
|
7,959
|
|
|
212
|
|
|
8,171
|
|
|
|
Stock-based compensation
|
|
2,120
|
|
|
—
|
|
|
2,120
|
|
|
|
Equipment start-up costs(c)
|
|
1,500
|
|
|
—
|
|
|
1,500
|
|
|
|
New product commercialization costs(d)
|
|
360
|
|
|
—
|
|
|
360
|
|
|
Adjusted EBITDA
|
|
16,292
|
|
|
381
|
|
|
16,673
|
|
(a) For the third quarter of 2019, stock-based compensation of $3.3 million was recorded in SG&A expenses, and the reversal of $0.8 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees was recognized in other income.
(b) Reflects employee retention and relocation costs of $0.9 million, and professional fees of $0.7 million recorded in SG&A expenses.
(c) Reflects costs related to the start-up of new roasting equipment for grains, seeds and legumes at our Crookston, Minnesota, facility, which were recorded in cost of goods sold.
(d) Reflects costs of production trials and employee training related to the commercialization of new consumer products, which were recorded in cost of goods sold.
Although we use adjusted EBITDA as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
-
adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest payments on our indebtedness;
-
adjusted EBITDA does not include the recovery/payment of taxes, which is a necessary element of our operations;
|
SUNOPTA INC
|
38
|
September 28, 2019 10-Q
|
-
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and
-
adjusted EBITDA does not include non-cash stock-based compensation, which is an important component of our total compensation program for employees and directors.
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income, earnings and adjusted earnings to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. 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 below in the discussion of our results of operations. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for, an analysis of our results as reported under U.S. GAAP.
Revenues for the quarter ended September 28, 2019 decreased by 4.0% to $295.9 million from $308.4 million for the quarter ended September 29, 2018. Excluding the impact on revenues of the sale of the soy and corn business, exit from the flexible resealable pouch and nutrition bar product lines, and the acquisition of Sanmark (a net decrease in revenues of $25.4 million), a profit-neutral change to a co-manufacturing agreement with a customer (a decrease in revenues of $2.9 million), and changes in foreign exchange rates (a decrease in revenues of $1.6 million) and commodity-related pricing (a decrease in revenues of $1.2 million), revenues increased by 6.6% in the third quarter of 2019, compared with the third quarter of 2018. The increase in revenues on an adjusted basis reflected the expansion of plant-based beverage and broth offerings, growth in plant-based beverage ingredient extraction volumes, and increased trading volumes of internationally-sourced organic ingredients, offset by lower volumes of fruit snack products due to the timing of customer promotions and lower volumes of domestically-sourced sunflower inshell and kernel.
Gross profit decreased $7.8 million, or 22.9%, to $26.3 million for the quarter ended September 28, 2019, compared with $34.1 million for the quarter ended September 29, 2018. As a percentage of revenues, gross profit for the quarter ended September 28, 2019 was 8.9% compared to 11.1% for the quarter ended September 29, 2018, a decrease of 2.2%. The gross profit percentage would have been approximately 12.4% for the third quarter of 2018, excluding the gross profit impact of the sale of the soy and corn business and the exit from flexible resealable pouch and nutrition bar product lines, and equipment start-up and product introduction costs of $1.9 million. The decline in the gross profit percentage on an adjusted basis was mainly due to lower cocoa commodity hedging gains, together with reduced pricing spreads and manufacturing inefficiencies within our international organic ingredients operations, as described below for the Global Ingredients segment, and lower profitability within our frozen fruit operations, in part due to the impact of a weather-related shortfall of strawberry supply that resulted in higher fruit purchase prices and reduced production volumes and related inefficiencies as described below for the Consumer Products segment.
Global Ingredients accounted for $4.4 million of the decrease in gross profit, including the sale of the soy and corn business (a decrease in gross profit of $1.3 million). Excluding the impact of the sale of the soy and corn business, the gross profit percentage for Global Ingredients would have been 9.4% and 12.1% in the third quarters of 2019 and 2018, respectively, which reflected a $2.3 million reduction in cocoa commodity hedging gains within our international organic ingredients operations, together with reduced pricing spreads and manufacturing inefficiencies for certain organic ingredients, offset by a $0.7 million reduction in foreign exchange losses on U.S. dollar-denominated raw material purchase contracts, and improved margin performance from of our sunflower and roasting operations. In the third quarter of 2019, we recognized a gain of $0.3 million on futures contracts used to manage our exposure to changes in cocoa prices on our physical organic cocoa position, compared with a gain of $2.6 million in the third quarter of 2018.
Consumer Products accounted for $3.4 million of the decrease in gross profit, which reflected the impact of a significant shortfall in strawberries serving the freezer market due to poor weather conditions in both central Mexico and California, which resulted in commodity price inflation and unfavorable production variances within our frozen fruit operations due to lower plant utilization and the rework of bulk inventories to meet customer demand. The negative impact to gross profit of frozen fruit from the weather-related shortfall was estimated to be $8.1 million in the third quarter of 2019. Overall, the Healthy Fruit platform generated losses in the third quarter of 2019, after reporting a decline in gross profit of $9.1 million from the third quarter of 2018. Offsetting the negative Healthy Fruit results was a favorable impact within the Healthy Beverage platform from higher volumes of plant-based beverages, broths and plant-based beverage ingredients, improved plant utilization and productivity-driven cost savings, and additional aseptic processing capacity that came on-line in the third quarter of 2019.
|
SUNOPTA INC
|
39
|
September 28, 2019 10-Q
|
For the quarter ended September 28, 2019, we realized a total segment operating loss of $3.5 million, compared with total segment operating income of $4.5 million for the quarter ended September 29, 2018. The decrease in total segment operating income reflected lower overall gross profit, as described above, and a $0.5 million increase in consolidated SG&A expenses. The increase in SG&A expenses reflected higher overall employee compensation-related costs, offset by SG&A reductions related to the sale of the soy and corn business and rationalized overhead, together with other cost reduction measures. Excluding the operating results of the soy and corn business and flexible resealable pouch and nutrition bar operations, as well as SG&A costs incurred and expensed related to the Value Creation Plan and other items identified above affecting gross profit, the total segment operating loss would have been $1.9 million in the third quarter of 2019, compared with total segment operating income of $6.2 million in the third quarter of 2018.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Segmented Operations Information."
Other expense for the quarter ended September 28, 2019 of $3.3 million reflected employee termination and recruitment costs of $4.0 million associated with the Value Creation Plan, including costs related to our CFO transition in the third quarter of 2019, and post-closing adjustments of $1.1 million related to the sale of the soy and corn business, offset by a legal settlement gain of $1.3 million and the reversal of $0.8 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees. Other expense for the quarter ended September 29, 2018 of $1.1 million reflected product withdrawal and recall costs of $1.0 million, mainly related to the voluntary recall of certain roasted sunflower products initiated in 2016.
Interest expense increased by $0.1 million to $8.9 million for the quarter ended September 28, 2019, compared with $8.8 million for the quarter ended September 29, 2018. Interest expense included the amortization of debt issuance costs of $0.7 million and $0.6 million in the third quarters of 2019 and 2018, respectively.
We recognized a recovery of income tax of $3.9 million for the quarter ended September 28, 2019, compared with a recovery of income taxes of $0.9 million for the quarter ended September 29, 2018. The effective tax rate was 25.0% for the third quarter of 2019, compared with 16.1% for the third quarter of 2018.
On a consolidated basis, we realized a loss attributable to common shareholders of $13.8 million (diluted loss per share of $0.16) for the quarter ended September 28, 2019, compared with a loss attributable to common shareholders of $6.6 million (diluted loss per share of $0.08) for the quarter ended September 29, 2018.
For the quarter ended September 28, 2019, adjusted loss was $9.9 million, or $0.11 per diluted share, on a consolidated basis, compared with adjusted loss of $3.8 million, or $0.04 per diluted share, on a consolidated basis for the quarter ended September 29, 2018. Excluding the results of the disposed soy and corn, flexible resealable pouch and nutrition bar operations, adjusted loss was $9.9 million, or $0.11 per diluted share, for the quarter ended September 28, 2019, compared with adjusted loss of $3.9 million, or $0.05 per diluted share, for the quarter ended September 29, 2018. Adjusted EBITDA for the quarter ended September 28, 2019 was $9.9 million on a consolidated basis, compared with $16.7 million on a consolidated basis for the quarter ended September 29, 2018. Excluding disposed operations, adjusted EBITDA for the quarter ended September 28, 2019 was $9.9 million, compared with $16.3 million for the quarter ended September 29, 2018. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the table above for a reconciliation of adjusted loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure.
|
SUNOPTA INC
|
40
|
September 28, 2019 10-Q
|
Segmented Operations Information
|
Global Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
107,853
|
|
$
|
136,754
|
|
$
|
(28,901
|
)
|
|
-21.1%
|
|
|
Gross profit
|
|
10,101
|
|
|
14,477
|
|
|
(4,376
|
)
|
|
-30.2%
|
|
|
Gross profit %
|
|
9.4%
|
|
|
10.6%
|
|
|
|
|
|
-1.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
1,543
|
|
$
|
5,304
|
|
$
|
(3,761
|
)
|
|
-70.9%
|
|
|
Operating income %
|
|
1.4%
|
|
|
3.9%
|
|
|
|
|
|
-2.5%
|
|
Global Ingredients contributed $107.9 million in revenues for the quarter ended September 28, 2019, compared to $136.8 million for the quarter ended September 29, 2018, a decrease of $28.9 million, or 21.1%. Excluding the impact on revenues of the sale of the soy and corn business and acquisition of Sanmark (a net decrease in revenues of $25.4 million) and commodity-related pricing and foreign exchange rate movements (a decrease in revenues of $3.9 million), Global Ingredients revenues increased approximately 0.3%. The table below explains the decrease in reported revenues:
|
Global Ingredients Revenue Changes
|
|
|
Revenues for the quarter ended September 29, 2018
|
$136,754
|
|
|
Impact of the sale of the soy and corn business
|
(27,002)
|
|
|
Decreased commodity pricing for internationally-sourced organic ingredients, offset by increased commodity pricing for domestically-sourced sunflower
|
(2,249)
|
|
|
Unfavorable foreign exchange impact on euro-denominated sales due to a stronger U.S. dollar period-over-period
|
(1,611)
|
|
|
Increased trading volumes of internationally-sourced organic ingredients including sugars, grains and cocoa, together with higher volumes of retail birdfeed, offset by lower volumes of organic fruits and vegetables, coffee and nuts, together with lower volumes of sunflower inshell and kernel
|
1,961
|
|
Revenues for the quarter ended September 28, 2019
|
$107,853
|
Gross profit in Global Ingredients decreased by $4.4 million to $10.1 million for the quarter ended September 28, 2019, compared to $14.5 million for the quarter ended September 29, 2018, and the gross profit percentage decreased by 1.2% to 9.4%. Excluding the impact on gross profit of the sale of the soy and corn business, the gross profit percentage would have been 9.4% and 12.7% in the third quarters of 2019 and 2018, respectively. The decrease in gross profit percentage excluding the soy and corn business reflected lower cocoa commodity hedging gains, together with reduced pricing spreads and manufacturing inefficiencies within our international organic ingredients operations, offset by improved margin performance within our domestic sunflower and roasting operations, and a favorable foreign exchange result. The table below explains the decrease in gross profit:
|
SUNOPTA INC
|
41
|
September 28, 2019 10-Q
|
|
Global Ingredients Gross Profit Changes
|
|
|
Gross profit for the quarter ended September 29, 2018
|
$14,477
|
|
|
Lower cocoa commodity hedging gains within our international organic ingredients operations ($2.3 million) and lower pricing spreads for certain organic ingredients, including fruits and vegetables, offset by increased trading volumes of certain organic ingredients and higher pricing spread on oils, together with improved margin performance for roasted snacks and ingredients
|
(3,259)
|
|
|
Impact from the sale of soy and corn business
|
(1,251)
|
|
|
Increased spending and lower utilization related to the recently commissioned second cocoa processing line within our international organic ingredients operations, and lower yields for organic sunflower oil and sesame seed production due to the quality of the raw material inputs
|
(585)
|
|
|
Decrease in foreign exchange losses on U.S. dollar-denominated raw material purchase contracts within our international organic ingredients operations
|
719
|
|
Gross profit for the quarter ended September 28, 2019
|
$10,101
|
Operating income in Global Ingredients decreased by $3.8 million, or 70.9%, to $1.5 million for the quarter ended September 28, 2019, compared to $5.3 million for the quarter ended September 29, 2018. The table below explains the decrease in operating income:
|
Global Ingredients Operating Income Changes
|
|
|
Operating income for the quarter ended September 29, 2018
|
$5,304
|
|
|
Decrease in gross profit, as explained above
|
(4,376)
|
|
|
Higher employee-related compensation costs within our international organic ingredients operations, offset by SG&A reductions from the sale of the soy and corn business and favorable foreign exchange impact on euro-denominated SG&A expenses
|
(894)
|
|
|
Decrease in corporate cost allocations due to the sale of the soy and corn business
|
1,209
|
|
|
Net foreign exchange gains on the revaluation of U.S. dollar-denominated receivable and payable balances and $0.1 million increase in marked-to-market gains related to forward currency contracts
|
300
|
|
Operating income for the quarter ended September 28, 2019
|
$1,543
|
Looking forward, we believe Global Ingredients is positioned to take advantage of opportunities in the growing organic food and non-GMO categories. Having completed the sale of our soy and corn business, which formed part of Global Ingredients, we intend to focus our efforts on growing our international organic sourcing and supply capabilities and leveraging these capabilities internally with forward and backward integration where opportunities exist. In particular, we expect to grow our organic oils program through the integration of Sanmark, together with the completion of our new organic avocado oil facility located in Ethiopia. Commercial production of avocado oil began in third quarter of 2019, with output from the new facility expected to ramp-up in the fourth quarter of 2019 following the avocado harvest season. Within our domestic sunflower business, continued lower demand and resultant underutilization of our production facilities is expected to negatively impact the margin profile of this business in the fourth quarter of 2019. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Several factors could adversely impact our ability to meet these forward-looking expectations, including increased supply pressure in the commodity-based markets in which we operate, increased competition, volume decreases or loss of customers, unexpected delays in our ingredient expansion 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."
|
SUNOPTA INC
|
42
|
September 28, 2019 10-Q
|
|
Consumer Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
188,088
|
|
$
|
171,617
|
|
$
|
16,471
|
|
|
9.6%
|
|
|
Gross profit
|
|
16,224
|
|
|
19,651
|
|
|
(3,427
|
)
|
|
-17.4%
|
|
|
Gross profit %
|
|
8.6%
|
|
|
11.5%
|
|
|
|
|
|
-2.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
$
|
(147
|
)
|
$
|
3,319
|
|
$
|
(3,466
|
)
|
|
-104.4%
|
|
|
Operating income (loss) %
|
|
-0.1%
|
|
|
1.9%
|
|
|
|
|
|
-2.0%
|
|
Consumer Products contributed $188.1 million in revenues for the quarter ended September 28, 2019, compared to $171.6 million for the quarter ended September 29, 2018, an increase of $16.5 million, or 9.6%. Excluding the impact on revenues of a profit-neutral change to a co-manufacturing agreement with a customer and sales of flexible resealable pouch and nutrition bar products (a decrease in revenues of $2.9 million), and changes in raw fruit commodity-related pricing (an increase in revenues of $1.1 million), Consumer Products revenues increased approximately 10.7%. The table below explains the increase in reported revenues:
|
Consumer Products Revenue Changes
|
|
|
Revenues for the quarter ended September 29, 2018
|
$171,617
|
|
|
Higher sales volumes of plant-based beverages, everyday broth offerings and plant-based beverage ingredients
|
23,703
|
|
|
Lower volumes of fruit snack products related to the timing of customer promotions
|
(3,428)
|
|
|
Lower revenues due the change to a co-manufacturing agreement with a customer, and the impact of the exit from flexible resealable pouch and nutrition bar product lines
|
(2,932)
|
|
|
Reduced volumes of frozen fruit and fruit ingredients, offset by increased pricing for frozen fruit
|
(872)
|
|
Revenues for the quarter ended September 28, 2019
|
$188,088
|
Gross profit in Consumer Products decreased by $3.4 million to $16.2 million for the quarter ended September 28, 2019, compared to $19.7 million for the quarter ended September 29, 2018, and the gross profit percentage decreased by 2.9% to 8.6%. The decrease in the gross profit percentage primarily reflected the impact of higher commodity pricing for frozen fruit due to the weather-related shortage of strawberries, together with unfavorable production variances within our frozen fruit operations due to lower plant utilization and rework of bulk inventories to meet customer demand, offset by strong volumes and productivity-driven cost savings within the Healthy Beverage platform. The weather-related impact to gross profit from frozen fruit was estimated to be $8.1 million in the third quarter of 2019, or approximately a negative 4.3% impact on the gross profit percentage. The table below explains the decrease in gross profit:
|
Consumer Products Gross Profit Changes
|
|
|
Gross profit for the quarter ended September 29, 2018
|
$19,651
|
|
|
Impact of the strawberry shortage due to higher commodity pricing and costs associated with reduced plant utilization and rework of bulk inventories ($8.1 million), and lower volumes and plant utilization for fruit ingredients
|
(9,081)
|
|
|
Higher sales volumes, plant utilization and productivity improvements within our plant-based beverage, broth and ingredient extraction operations, offset by lower volumes of fruit snack products
|
5,654
|
|
Gross profit for the quarter ended September 28, 2019
|
$16,224
|
|
SUNOPTA INC
|
43
|
September 28, 2019 10-Q
|
Operating income in Consumer Products decreased by $3.5 million to an operating loss of $0.1 million for the quarter ended September 28, 2019, compared to operating income of $3.3 million for the quarter ended September 29, 2018. The table below explains the decrease in operating income:
|
Consumer Products Operating Income Changes
|
|
|
Operating income for the quarter ended September 29, 2018
|
$3,319
|
|
|
Decrease in gross profit, as explained above
|
(3,427)
|
|
|
Increase in corporate cost allocations due to the centralization of transactional and other support functions for the Healthy Fruit platform (offset by the headcount reductions below) and the realignment of Corporate Services resources following the sale of the soy and corn business
|
(2,046)
|
|
|
Headcount reductions within the Healthy Fruit platform due to the centralization of transactional and other support functions, as well as other SG&A expense reductions
|
2,007
|
|
Operating loss for the quarter ended September 28, 2019
|
$(147)
|
Looking forward we believe the markets targeted by our Consumer Products segment continue to have long-term growth potential. For the fourth quarter and full year 2019, we expect revenues and gross profit from the Healthy Beverage and Healthy Snacks platforms to outperform the prior year comparable periods. We completed the expansion of our Allentown, Pennsylvania, plant-based beverage facility in July 2019, which added incremental aseptic processing and filling capacity beginning in the third quarter of 2019, and we began construction related to the expansion of our plant-based beverage ingredient extraction capabilities. Revenues and margins in the Healthy Fruit platform were in-line with our expectations for the third quarter of 2019, after taking into account the effects of the weather-related shortfall of strawberry freezer supply from both Mexico and California. While this supply disruption is expected to continue to negatively impact revenues and margins in our frozen fruit business until the 2020 crop cycle, we anticipate profitability improvements in the fourth quarter of 2019 and first half of 2020, as a result of steps we have taken to source additional fruit from alternative regions, and to recover the increased commodity costs through higher sales pricing to customers. In addition, we continue to make progress with the fruit optimization plan we are implementing over the 2019 and 2020 crop seasons, including the installation of further automation to lower variable labor costs, building rational customer pricing structures, and enhancing business planning and leadership. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Several factors could adversely impact our ability to meet these forward-looking expectations, including unfavorable shifts in consumer preferences, increased competition, realization of sales pricing initiatives, availability and field pricing for fruit, availability and pricing of other raw material supplies, 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."
|
Corporate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
(4,923
|
)
|
$
|
(4,101
|
)
|
$
|
(822
|
)
|
|
-20.0%
|
|
Operating loss at Corporate Services increased by $0.8 million to $4.9 million for the quarter ended September 28, 2019, compared to a loss of $4.1 million for the quarter ended September 29, 2018. The table below explains the increase in operating loss:
|
SUNOPTA INC
|
44
|
September 28, 2019 10-Q
|
|
Corporate Services Operating Loss Changes
|
|
|
Operating loss for the quarter ended September 29, 2018
|
$(4,101)
|
|
|
Increased stock-based compensation costs related to the initiation of an equity-based annual bonus plan for most employees in 2019
|
(1,212)
|
|
|
Incremental expense associated with headcount additions during fiscal 2018, higher employee-related variable compensation and salary increases, offset by reductions in travel and other discretionary spending, and favorable foreign exchange impact on Canadian dollar-denominated SG&A expenses
|
(447)
|
|
|
Increase in corporate cost allocations to SunOpta operating segments
|
837
|
|
Operating loss for the quarter ended September 28, 2019
|
$(4,923)
|
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 the number of people employed within each segment.
|
SUNOPTA INC
|
45
|
September 28, 2019 10-Q
|
Consolidated Results of Operations for the three quarters ended September 28, 2019 and September 29, 2018
|
For the three quarters ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
352,903
|
|
|
419,770
|
|
|
(66,867
|
)
|
|
-15.9%
|
|
|
|
Consumer Products
|
|
541,317
|
|
|
520,561
|
|
|
20,756
|
|
|
4.0%
|
|
|
Total revenues
|
|
894,220
|
|
|
940,331
|
|
|
(46,111
|
)
|
|
-4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
34,735
|
|
|
42,576
|
|
|
(7,841
|
)
|
|
-18.4%
|
|
|
|
Consumer Products
|
|
47,123
|
|
|
59,582
|
|
|
(12,459
|
)
|
|
-20.9%
|
|
|
Total gross profit
|
|
81,858
|
|
|
102,158
|
|
|
(20,300
|
)
|
|
-19.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
9,611
|
|
|
11,371
|
|
|
(1,760
|
)
|
|
-15.5%
|
|
|
|
Consumer Products
|
|
(2,698
|
)
|
|
11,397
|
|
|
(14,095
|
)
|
|
-123.7%
|
|
|
|
Corporate Services
|
|
(12,657
|
)
|
|
(11,942
|
)
|
|
(715
|
)
|
|
-6.0%
|
|
|
Total segment operating income (loss)
|
|
(5,744
|
)
|
|
10,826
|
|
|
(16,570
|
)
|
|
-153.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income), net
|
|
(39,744
|
)
|
|
1,317
|
|
|
(41,061
|
)
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before the following
|
|
34,000
|
|
|
9,509
|
|
|
24,491
|
|
|
257.6%
|
|
|
Interest expense, net
|
|
25,857
|
|
|
25,486
|
|
|
371
|
|
|
1.5%
|
|
|
Provision for (recovery of) income taxes
|
|
3,239
|
|
|
(3,853
|
)
|
|
7,092
|
|
|
184.1%
|
|
|
Net earnings (loss)(2),(3)
|
|
4,904
|
|
|
(12,124
|
)
|
|
17,028
|
|
|
140.4%
|
|
|
Earnings attributable to non-controlling interests
|
|
59
|
|
|
19
|
|
|
40
|
|
|
210.5%
|
|
|
Earnings (loss) attributable to SunOpta Inc.
|
|
4,845
|
|
|
(12,143
|
)
|
|
16,988
|
|
|
139.9%
|
|
|
Dividends and accretion on Series A Preferred Stock
|
|
(6,005
|
)
|
|
(5,922
|
)
|
|
(83
|
)
|
|
-1.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to common shareholders(4)
|
|
(1,160
|
)
|
|
(18,065
|
)
|
|
16,905
|
|
|
93.6%
|
|
(1) The following table presents a reconciliation of segment operating income/loss to earnings/loss 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 September 28, 2019 and September 29, 2018" table regarding the use of this non-GAAP measure).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
Consumer
|
|
|
Corporate
|
|
|
Consol-
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Services
|
|
|
idated
|
|
|
For the three quarters ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
9,611
|
|
|
(2,698
|
)
|
|
(12,657
|
)
|
|
(5,744
|
)
|
|
Other income (expense), net
|
|
43,507
|
|
|
(2,104
|
)
|
|
(1,659
|
)
|
|
39,744
|
|
|
Earnings (loss) before the following
|
|
53,118
|
|
|
(4,802
|
)
|
|
(14,316
|
)
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
11,371
|
|
|
11,397
|
|
|
(11,942
|
)
|
|
10,826
|
|
|
Other income (expense), net
|
|
(2,299
|
)
|
|
1,180
|
|
|
(198
|
)
|
|
(1,317
|
)
|
|
Earnings (loss) before the following
|
|
9,072
|
|
|
12,577
|
|
|
(12,140
|
)
|
|
9,509
|
|
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) The following table presents a reconciliation of adjusted earnings/loss from net earnings/loss, 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 September 28, 2019 and September 29, 2018" table regarding the use of this non-GAAP measure). In addition, in recognition of the sale of the soy and corn business (as described above under the heading "Sale of Soy and Corn Business"), and our exit from flexible resealable pouch and nutrition bar product lines and operations (as described above under the heading "Value Creation Plan"), we have prepared this table in a columnar format to present the effect of the disposal of these operations on our consolidated results for the current and comparative periods. We believe this presentation assists investors in assessing the results of the operations we have disposed and the effect of those operations on our financial performance.
|
SUNOPTA INC
|
46
|
September 28, 2019 10-Q
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
disposed operations
|
|
|
Disposed operations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Per Diluted Share
|
|
|
|
|
|
Per Diluted Share
|
|
|
|
|
|
Per Diluted Share
|
|
|
For the three quarters ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(26,941
|
)
|
|
|
|
|
31,845
|
|
|
|
|
|
4,904
|
|
|
|
|
|
Earnings attributable to non-controlling interests
|
|
(59
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
Dividends and accretion of Series A Preferred Stock
|
|
(6,005
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(6,005
|
)
|
|
|
|
|
Earnings (loss) attributable to common shareholders
|
|
(33,005
|
)
|
|
(0.38
|
)
|
|
31,845
|
|
|
0.36
|
|
|
(1,160
|
)
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of soy and corn business(a)
|
|
—
|
|
|
|
|
|
(44,269
|
)
|
|
|
|
|
(44,269
|
)
|
|
|
|
|
|
Costs related to the Value Creation Plan(b)
|
|
8,370
|
|
|
|
|
|
—
|
|
|
|
|
|
8,370
|
|
|
|
|
|
|
Contract manufacturer transition costs(c)
|
|
448
|
|
|
|
|
|
—
|
|
|
|
|
|
448
|
|
|
|
|
|
|
Plant expansion costs(d)
|
|
311
|
|
|
|
|
|
—
|
|
|
|
|
|
311
|
|
|
|
|
|
|
Product withdrawal and recall costs(e)
|
|
260
|
|
|
|
|
|
—
|
|
|
|
|
|
260
|
|
|
|
|
|
|
Other(f)
|
|
(1,491
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(1,491
|
)
|
|
|
|
|
|
Net income tax effect(g)
|
|
(1,379
|
)
|
|
|
|
|
12,130
|
|
|
|
|
|
10,751
|
|
|
|
|
|
Adjusted loss
|
|
(26,486
|
)
|
|
(0.30
|
)
|
|
(294
|
)
|
|
—
|
|
|
(26,780
|
)
|
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(13,557
|
)
|
|
|
|
|
1,433
|
|
|
|
|
|
(12,124
|
)
|
|
|
|
|
Earnings attributable to non-controlling interests
|
|
(19
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
Dividends and accretion of Series A Preferred Stock
|
|
(5,922
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(5,922
|
)
|
|
|
|
|
Earnings (loss) attributable to common shareholders
|
|
(19,498
|
)
|
|
(0.22
|
)
|
|
1,433
|
|
|
0.02
|
|
|
(18,065
|
)
|
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to Value Creation Plan(h)
|
|
1,696
|
|
|
|
|
|
1,181
|
|
|
|
|
|
2,877
|
|
|
|
|
|
|
Equipment start-up costs(i)
|
|
2,230
|
|
|
|
|
|
—
|
|
|
|
|
|
2,230
|
|
|
|
|
|
|
Product withdrawal and recall costs(j)
|
|
1,456
|
|
|
|
|
|
—
|
|
|
|
|
|
1,456
|
|
|
|
|
|
|
New product commercialization costs(k)
|
|
360
|
|
|
|
|
|
—
|
|
|
|
|
|
360
|
|
|
|
|
|
|
Other(l)
|
|
198
|
|
|
|
|
|
—
|
|
|
|
|
|
198
|
|
|
|
|
|
|
Fair value adjustment on contingent consideration(m)
|
|
(2,500
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
Recovery of product withdrawal costs(n)
|
|
(1,200
|
)
|
|
|
|
|
—
|
|
|
|
|
|
(1,200
|
)
|
|
|
|
|
|
Net income tax effect(g)
|
|
(280
|
)
|
|
|
|
|
(307
|
)
|
|
|
|
|
(587
|
)
|
|
|
|
|
Adjusted earnings (loss)
|
|
(17,538
|
)
|
|
(0.20
|
)
|
|
2,307
|
|
|
0.03
|
|
|
(15,231
|
)
|
|
(0.18
|
)
|
(a) Reflects the gain on sale of the soy and corn business, net of transaction costs and post-closing adjustments, which was recorded in other income.
(b) Reflects employee retention and relocation costs of $1.8 million, and professional fees of $1.0 million recorded in SG&A expenses; and employee termination costs of $6.9 million (net of the reversal of $2.9 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees), CEO and CFO recruitment costs of $1.2 million, and facility closure costs of $0.3 million, all recorded in other expense.
(c) Reflects costs to transition premium juice production activities to new contract manufacturers, which were recorded in cost of goods sold and other expense.
(d) Reflects costs related to the expansion of our Allentown, Pennsylvania, plant-based beverage facility, which were recorded in cost of goods sold.
(e) Reflects product withdrawal and recall costs that were not eligible for reimbursement under insurance policies or exceeded the limits of those policies, including costs related to the recall of certain sunflower kernel products initiated in the second quarter of 2016, which were recorded in other expense.
(f) Other includes settlement gains resulting from a legal matter and a project cancellation, offset by losses on disposal of assets, insurance deductibles, and business development costs, which were recorded in other income/expense.
(g) Reflects the tax effect of the preceding adjustments to earnings and reflects an overall estimated annual effective tax rate of approximately 27% for the three quarters ended September 28, 2019 (September 29, 2018 - 26%) on adjusted earnings/loss before tax.
(h) Reflects the write-down of remaining flexible resealable pouch and nutrition bar inventories of $0.1 million recorded in cost of goods sold; professional and consulting fees, and employee recruitment and relocation costs of $0.6 million recorded in SG&A expenses; and asset impairment, facility closure and employee termination costs of $2.2 million recorded in other expense, all related to the Value Creation Plan.
|
SUNOPTA INC
|
47
|
September 28, 2019 10-Q
|
(i) Reflects costs related to the start-up of new roasting equipment for grains, seeds and legumes at our Crookston, Minnesota, facility, which were recorded in cost of goods sold.
(j) Reflects product withdrawal and recall costs that were not eligible for reimbursement under insurance policies or exceeded the limits of those policies, including costs related to the recall of certain sunflower kernel products initiated in the second quarter of 2016, which were recorded in other expense.
(k) Reflects costs of production trials and employee training related to the commercialization of new consumer products, which were recorded in cost of goods sold.
(l) Other included the accretion of contingent consideration obligations, gain/loss on the disposal of assets, severance costs unrelated to the Value Creation Plan, and settlement of a legal matter, which were recorded in other expense/income.
(m) Reflects a fair value adjustment of $2.5 million to reduce the contingent consideration obligation related to a prior business acquisition, based on the results for the business in fiscal 2018, which was recorded in other income.
(n) Reflects the recovery from a third-party supplier of $1.2 million of costs we incurred relating to the withdrawal of certain consumer-packaged products due to quality-related issues, which was recorded in cost of goods sold. Costs incurred related to this withdrawal were recognized in cost of goods sold in the fourth quarter of 2016.
(3) The following table presents a reconciliation of segment operating income/loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (3) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2019 and September 29, 2018" table regarding the use of this non-GAAP measure). In addition, as described above under footnote (2), we have prepared this table in a columnar format to present the effect of the disposals of the soy and corn business, and flexible resealable pouch and nutrition bar operations on our consolidated results for the periods presented. We believe this presentation assists investors in assessing the results of the operations we have exited and the effect of those operations on our financial performance.
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
|
|
disposed operations
|
|
|
Disposed operations
|
|
|
Consolidated
|
|
|
For the three quarters ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(26,941
|
)
|
|
31,845
|
|
|
4,904
|
|
|
Provision for (recovery of) income taxes
|
|
(8,779
|
)
|
|
12,018
|
|
|
3,239
|
|
|
Interest expense, net
|
|
25,857
|
|
|
—
|
|
|
25,857
|
|
|
Other expense (income), net
|
|
4,525
|
|
|
(44,269
|
)
|
|
(39,744
|
)
|
|
Total segment operating loss
|
|
(5,338
|
)
|
|
(406
|
)
|
|
(5,744
|
)
|
|
|
Depreciation and amortization
|
|
24,876
|
|
|
129
|
|
|
25,005
|
|
|
|
Stock-based compensation(a)
|
|
8,265
|
|
|
—
|
|
|
8,265
|
|
|
|
Costs related to Value Creation Plan(b)
|
|
2,772
|
|
|
—
|
|
|
2,772
|
|
|
|
Plant expansion costs(c)
|
|
311
|
|
|
—
|
|
|
311
|
|
|
|
Contract manufacturer transition costs(d)
|
|
289
|
|
|
—
|
|
|
289
|
|
|
Adjusted EBITDA
|
|
31,175
|
|
|
(277
|
)
|
|
30,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(13,557
|
)
|
|
1,433
|
|
|
(12,124
|
)
|
|
Provision for (recovery of) income taxes
|
|
(4,413
|
)
|
|
560
|
|
|
(3,853
|
)
|
|
Interest expense (income), net
|
|
25,567
|
|
|
(81
|
)
|
|
25,486
|
|
|
Other expense (income), net
|
|
47
|
|
|
1,270
|
|
|
1,317
|
|
|
Total segment operating income
|
|
7,644
|
|
|
3,182
|
|
|
10,826
|
|
|
|
Depreciation and amortization
|
|
23,859
|
|
|
642
|
|
|
24,501
|
|
|
|
Stock-based compensation
|
|
6,395
|
|
|
—
|
|
|
6,395
|
|
|
|
Equipment start-up costs(e)
|
|
2,230
|
|
|
—
|
|
|
2,230
|
|
|
|
Costs related to Value Creation Plan(b)
|
|
713
|
|
|
—
|
|
|
713
|
|
|
|
New product commercialization costs(f)
|
|
360
|
|
|
—
|
|
|
360
|
|
|
|
Recovery of product withdrawal costs(g)
|
|
(1,200
|
)
|
|
—
|
|
|
(1,200
|
)
|
|
Adjusted EBITDA
|
|
40,001
|
|
|
3,824
|
|
|
43,825
|
|
(a) For the first three quarters of 2019, stock-based compensation of $8.3 million was recorded in SG&A expenses, and the reversal of $2.9 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees was recognized in other income.
(b) For the first three quarters of 2019, reflects employee retention and relocation costs of $1.8 million, and professional fees of $1.0 million recorded in SG&A expenses. For the first three quarters of 2018, reflects the write-down of remaining flexible resealable pouch and nutrition bar inventories of $0.1 million recorded in cost of goods sold; and professional and consulting fees, and employee recruitment and relocation costs of $0.6 million recorded in SG&A expenses.
(c) Reflects costs related to the expansion of our Allentown, Pennsylvania, plant-based beverage facility, which were recorded in cost of goods sold.
(d) Reflects costs to transition premium juice production activities to new contract manufacturers, which were recorded in cost of goods sold.
(e) Reflects costs related to the start-up of new roasting equipment for grains, seeds and legumes at our Crookston, Minnesota, facility, which were recorded in cost of goods sold.
(f) Reflects costs of production trials and employee training related to the commercialization of new consumer products, which were recorded in cost of goods sold.
|
SUNOPTA INC
|
48
|
September 28, 2019 10-Q
|
(g) Reflects the recovery from a third-party supplier of $1.2 million of costs we incurred relating to the withdrawal of certain consumer-packaged products due to quality-related issues, which was recorded in cost of goods sold. Costs incurred related to this withdrawal were recognized in cost of goods sold in the fourth quarter of 2016.
(4) Refer to footnote (4) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2019 and September 29, 2018" table regarding the use of certain other non-GAAP measures in the discussion of our results of operations below.
Revenues for the three quarters ended September 28, 2019 decreased by 4.9% to $894.2 million from $940.3 million for the three quarters ended September 29, 2018. Excluding the impact on revenues of the sale of the soy and corn business, the exit from flexible resealable pouch and nutrition bar product lines, and the acquisition of Sanmark (a net decrease in revenues of $66.4 million), changes in foreign exchange rates (a decrease in revenues of $8.6 million) and commodity-related pricing (a decrease in revenues of $7.5 million), and a profit-neutral change to a co-manufacturing agreement with a customer (a decrease in revenues of $7.4 million), revenues increased by 5.1% in the first three quarters of 2019, compared with the first three quarters of 2018. The increase in revenues on an adjusted basis reflected the expansion of plant-based beverage and broth offerings, growth in plant-based beverage ingredient extraction volumes, and increased trading volumes of internationally-sourced organic ingredients, offset by reduced demand for fruit ingredients from yogurt producers and foodservice customers, modest declines in sales volumes for frozen fruit, net of increased pricing, and lower volumes of domestically-sourced sunflower inshell and kernel.
Gross profit decreased $20.3 million, or 19.9%, to $81.9 million for the three quarters ended September 28, 2019, compared with $102.2 million for the three quarters ended September 29, 2018. As a percentage of revenues, gross profit for the three quarters ended September 28, 2019 was 9.2% compared to 10.9% for the three quarters ended September 29, 2018, a decrease of 1.7%. Excluding the gross profit impact of the sale of the soy and corn business and the exit from flexible resealable pouch and nutrition bar product lines, together with plant expansion and contract manufacturing transition costs of $0.6 million in the first three quarters of 2019, the gross profit percentage for the first three quarters of 2019 would have been approximately 9.3%, which compares to 11.3% for the first three quarters of 2018, excluding equipment start-up and product introduction costs of $2.6 million, less the recovery from a supplier of previously-incurred product withdrawal costs of $1.2 million in the first three quarters of 2018. The decline in the gross profit percentage on an adjusted basis was mainly due to lower profitability within our frozen fruit operations, in part due to the impact of a weather-related shortfall of strawberry supply that resulted in higher fruit purchase prices and reduced production volumes and related inefficiencies as described below for the Consumer Products segment, and reduced pricing spreads and manufacturing inefficiencies within our international organic ingredients operations, as described below for the Global Ingredients segment.
Global Ingredients accounted for $7.8 million of the decrease in gross profit, including the sale of the soy and corn business (a decrease in gross profit of $6.5 million). Excluding the impact of the sale of the soy and corn business, the gross profit percentage for Global Ingredients would have been 10.1% and 10.5% in the first three quarters of 2019 and 2018, respectively, which reflected reduced pricing spreads and manufacturing inefficiencies for certain organic ingredients, together with a $0.7 million reduction in cocoa commodity hedging gains, offset by a $4.8 million reduction in foreign exchange losses on U.S. dollar-denominated raw material purchase contracts within our international organic ingredients operations, and improved margin performance from of our sunflower and roasting operations. In the first three quarters of 2019, we recognized a gain of $0.3 million on futures contracts used to manage our exposure to changes in cocoa prices on our physical organic cocoa position, compared with a gain of $0.9 million in the first three quarters of 2018.
Consumer Products accounted for $12.5 million of the decrease in gross profit, mainly reflecting the impact of a significant shortfall in strawberries serving the freezer market due to poor weather conditions in both central Mexico and California, which resulted in commodity price inflation and unfavorable production variances within our frozen fruit operations due to lower plant utilization and the rework of bulk inventories to meet customer demand. The negative impact to gross profit of frozen fruit from the weather-related shortfall was estimated to be $13.3 million in the first three quarters of 2019. Overall, the Healthy Fruit platform generated losses in the first three quarters of 2019, after reporting a decline in gross profit of $19.9 million from the comparable period of 2018. Offsetting the negative Healthy Fruit results was a favorable impact within the Healthy Beverage platform from higher volumes of plant-based beverages, broths and plant-based beverage ingredients, improved plant utilization and productivity-driven cost savings, and additional aseptic processing capacity that came on-line in the third quarter of 2019.
For the three quarters ended September 28, 2019, we realized a total segment operating loss of $5.7 million, compared with total segment operating income of $10.8 million for the three quarters ended September 29, 2018. The decrease in total segment operating income reflected lower overall gross profit, as described above, partially offset by a $1.3 million decrease in SG&A expenses and a favorable foreign exchange impact of $2.4 million mainly within our international organic ingredients operations (including a $0.3 million favorable result related to forward currency contracts). The decrease in SG&A expenses reflected the sale of the soy and corn business and rationalized overhead, and other cost reduction measures, offset by higher employee compensation-related costs. Excluding the operating results of the soy and corn business and flexible resealable pouch and nutrition bar operations, as well as SG&A costs incurred and expensed related to the Value Creation Plan and other items identified above affecting gross profit, the total segment operating loss would have been $2.0 million in the first three quarters of 2019, compared with total segment operating income of $9.9 million in the first three quarters of 2018.
|
SUNOPTA INC
|
49
|
September 28, 2019 10-Q
|
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Segmented Operations Information".
Other income for the three quarters ended September 28, 2019 of $39.7 million reflected a pre-tax gain on sale of the soy and corn business of $44.3 million, the reversal of $2.9 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees, and legal settlement and project cancellation gains of $1.8 million. These other income amounts were offset mainly by employee termination and recruitment costs of $8.2 million associated with the Value Creation Plan, including costs related to our CEO and CFO transitions, and the sale of the soy and corn business. Other expense for the three quarters ended September 29, 2018 of $1.3 million reflected facility closure costs, asset impairment charges and employee termination costs of $2.2 million associated with the Value Creation Plan, and product withdrawal and recall costs of $1.5 million, offset by a $2.5 million reduction to the remaining contingent consideration obligation that arose from a prior business acquisition.
Interest expense increased by $0.4 million to $25.9 million for the three quarters ended September 28, 2019, compared with $25.5 million for the three quarters ended September 29, 2018. Interest expense included the amortization of debt issuance costs of $2.0 million and $1.8 million in the first three quarters of 2019 and 2018, respectively.
We recognized a provision of income tax of $3.2 million for the three quarters ended September 28, 2019, compared with a recovery of income taxes of $3.9 million for the three quarters ended September 29, 2018. The effective tax rate was 39.8% for the first three quarters of 2019, compared with 24.1% for the first three quarters of 2018, which reflected the impact of a year-over-year increase in non-deductible stock-based compensation expense related to our 2019 annual bonus plan.
On a consolidated basis, we realized a loss attributable to common shareholders of $1.2 million (diluted loss per share of $0.01) for the three quarters ended September 28, 2019, compared with a loss attributable to common shareholders of $18.1 million (diluted loss per share of $0.21) for the three quarters ended September 29, 2018.
For the three quarters ended September 28, 2019, adjusted loss was $26.8 million, or $0.31 per diluted share, on a consolidated basis, compared with adjusted loss of $15.2 million, or $0.18 per diluted share, on a consolidated basis for the three quarters ended September 29, 2018. Excluding the results of the disposed soy and corn, flexible resealable pouch and nutrition bar operations, adjusted loss was $26.5 million, or $0.30 per diluted share, for the three quarters ended September 28, 2019, compared with adjusted loss of $17.5 million, or $0.20 per diluted share, for the three quarters ended September 29, 2018. Adjusted EBITDA for the three quarters ended September 28, 2019 was $30.9 million on a consolidated basis, compared with $43.8 million on a consolidated basis for the three quarters ended September 29, 2018. Excluding disposed operations, adjusted EBITDA for the three quarters ended September 28, 2019 was $31.2 million, compared with $40.0 million for the three quarters ended September 29, 2018. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the table above for a reconciliation of adjusted loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure.
|
SUNOPTA INC
|
50
|
September 28, 2019 10-Q
|
Segmented Operations Information
|
Global Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three quarters ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
352,903
|
|
$
|
419,770
|
|
$
|
(66,867
|
)
|
|
-15.9%
|
|
|
Gross profit
|
|
34,735
|
|
|
42,576
|
|
|
(7,841
|
)
|
|
-18.4%
|
|
|
Gross profit %
|
|
9.8%
|
|
|
10.1%
|
|
|
|
|
|
-0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
9,611
|
|
$
|
11,371
|
|
$
|
(1,760
|
)
|
|
-15.5%
|
|
|
Operating income %
|
|
2.7%
|
|
|
2.7%
|
|
|
|
|
|
0.0%
|
|
Global Ingredients contributed $352.9 million in revenues for the three quarters ended September 28, 2019, compared to $419.8 million for the three quarters ended September 29, 2018, a decrease of $66.9 million, or 15.9%. Excluding the impact on revenues of the sale of the soy and corn business and acquisition of Sanmark (a net decrease in revenues of $63.3 million) and commodity-related pricing and foreign exchange rate movements (a decrease in revenues of $16.8 million), Global Ingredients revenues increased approximately 3.8%. The table below explains the decrease in reported revenues:
|
Global Ingredients Revenue Changes
|
|
|
Revenues for the three quarters ended September 29, 2018
|
$419,770
|
|
|
Impact of the sale of the soy and corn business
|
(67,598)
|
|
|
Unfavorable foreign exchange impact on euro-denominated sales due to a stronger U.S. dollar period-over-period
|
(8,586)
|
|
|
Decreased commodity pricing for internationally-sourced organic ingredients, offset by increased commodity pricing for domestically-sourced sunflower
|
(8,222)
|
|
|
Increased trading volumes of internationally-sourced organic ingredients including oils (which included incremental revenues of Sanmark from the date of acquisition), cocoa, coffee, sugars, and fruits and vegetables, together with higher volumes of retail birdfeed, and roasted snacks and ingredients, offset by lower volumes of organic seeds and nuts, together with lower volumes of sunflower inshell and kernel
|
17,539
|
|
Revenues for the three quarters ended September 28, 2019
|
$352,903
|
Gross profit in Global Ingredients decreased by $7.8 million to $34.7 million for the three quarters ended September 28, 2019, compared to $42.6 million for the three quarters ended September 29, 2018, and the gross profit percentage decreased by 0.3% to 9.8%. Excluding the impact on gross profit of the sale of the soy and corn business, the gross profit percentage would have been 10.1% and 10.5% in the first three quarters of 2019 and 2018, respectively. The decrease in gross profit percentage excluding the soy and corn business reflected reduced pricing spreads and manufacturing inefficiencies within our international organic ingredients operations, offset by a favorable foreign exchange result, and improved margin performance within our domestic sunflower and roasting operations. The table below explains the decrease in gross profit:
|
SUNOPTA INC
|
51
|
September 28, 2019 10-Q
|
|
Global Ingredients Gross Profit Changes
|
|
|
Gross profit for the three quarters ended September 29, 2018
|
$42,576
|
|
|
Impact of the sale of the soy and corn business
|
(6,495)
|
|
|
Lower pricing spreads for certain organic ingredients, including fruits and vegetables, cocoa, animal feed and nuts, together with lower sales and production volumes for sunflower inshell and kernel, and lower cocoa commodity hedging gains within our international organic ingredients operations ($0.7 million), offset by increased trading volumes for certain organic ingredients and higher pricing spread on coffee, together with improved margin performance for roasted snacks and ingredients, and birdfeed
|
(4,339)
|
|
|
Increased spending and lower utilization related to the recently commissioned second cocoa processing line within our international organic ingredients operations, and lower yields for organic sunflower oil and sesame seed production due to the quality of the raw material inputs
|
(1,801)
|
|
|
Decrease in foreign exchange losses on U.S. dollar-denominated raw material purchase contracts within our international organic ingredients operations
|
4,794
|
|
Gross profit for the three quarters ended September 28, 2019
|
$34,735
|
Operating income in Global Ingredients decreased by $1.8 million, or 15.5%, to $9.6 million for the three quarters ended September 28, 2019, compared to $11.4 million for the three quarters ended September 29, 2018. The table below explains the decrease in operating income:
|
Global Ingredients Operating Income Changes
|
|
|
Operating income for the three quarters ended September 29, 2018
|
$11,371
|
|
|
Decrease in gross profit, as explained above
|
(7,841)
|
|
|
Decrease in corporate cost allocations due to the sale of the soy and corn business
|
3,614
|
|
|
Net foreign exchange gains on the revaluation of U.S. dollar-denominated receivable and payable balances and $0.3 million increase in marked-to-market gains related to forward currency contracts
|
2,378
|
|
|
SG&A reductions from the sale of the soy and corn business and favorable foreign exchange impact on euro-denominated SG&A expenses, offset by higher employee-related compensation costs within our international organic ingredients operations
|
89
|
|
Operating income for the three quarters ended September 28, 2019
|
$9,611
|
|
Consumer Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three quarters ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
541,317
|
|
$
|
520,561
|
|
$
|
20,756
|
|
|
4.0%
|
|
|
Gross profit
|
|
47,123
|
|
|
59,582
|
|
|
(12,459
|
)
|
|
-20.9%
|
|
|
Gross profit %
|
|
8.7%
|
|
|
11.4%
|
|
|
|
|
|
-2.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) %
|
$
|
(2,698
|
)
|
$
|
11,397
|
|
$
|
(14,095
|
)
|
|
-123.7%
|
|
|
Operating income (loss) %
|
|
-0.5%
|
|
|
2.2%
|
|
|
|
|
|
-2.7%
|
|
Consumer Products contributed $541.3 million in revenues for the three quarters ended September 28, 2019, compared to $520.6 million for the three quarters ended September 29, 2018, an increase of $20.8 million, or 4.0%. Excluding the impact on revenues of a profit-neutral change to a co-manufacturing agreement with a customer (a decrease in revenues of $7.4 million), sales of flexible resealable pouch and nutrition bar products (a decrease in revenues of $3.1 million), and changes in raw fruit commodity-related pricing (an increase in revenues of $0.7 million), Consumer Products revenues increased approximately 5.9%. The table below explains the increase in reported revenues:
|
SUNOPTA INC
|
52
|
September 28, 2019 10-Q
|
|
Consumer Products Revenue Changes
|
|
|
Revenues for the three quarters ended September 29, 2018
|
$520,561
|
|
|
Higher sales volumes of plant-based beverages, everyday broth offerings and plant-based beverage ingredients, together with comparable year-over-year sales of fruit snack products, offset by lower volumes of premium juice products due to the temporary loss of distribution in certain regions in the first quarter of 2019
|
36,318
|
|
|
Lower revenues due the change to a co-manufacturing agreement with a customer
|
(7,371)
|
|
|
Reduced volumes of fruit ingredients and frozen fruit, slightly offset by increased pricing for frozen fruit
|
(5,079)
|
|
|
Impact of the exit from flexible resealable pouch and nutrition bars product lines
|
(3,112)
|
|
Revenues for the three quarters ended September 28, 2019
|
$541,317
|
Gross profit in Consumer Products decreased by $12.5 million to $47.1 million for the three quarters ended September 28, 2019, compared to $59.6 million for the three quarters ended September 29, 2018, and the gross profit percentage decreased by 2.7% to 8.7%. The decrease in the gross profit percentage primarily reflected the impact of higher commodity pricing for frozen fruit due to the shortage of strawberries, together with unfavorable production variances with our frozen fruit operations due to lower plant utilization and rework of bulk inventories to meet customer demand, together with lower volumes and plant utilization for fruit ingredients. The weather-related impact to gross profit from frozen fruit was estimated to be $13.3 million in the first three quarters of 2019, or approximately a negative 2.5% impact on the gross profit percentage. These factors were partially offset by strong volumes and productivity-driven cost savings within the Healthy Beverage platform. The table below explains the decrease in gross profit:
|
Consumer Products Gross Profit Changes
|
|
|
Gross profit for the three quarters ended September 29, 2018
|
$59,582
|
|
|
Impact of the strawberry shortage due to higher commodity pricing and costs associated with reduced plant utilization and rework of bulk inventories ($13.3 million), and lower volumes and plant utilization for fruit ingredients, together with the impact of a claim recovery from a supplier in the first half of 2018 for $1.2 million
|
(19,895)
|
|
|
Impact of the exit from flexible resealable pouch and nutrition bars product lines
|
(157)
|
|
|
Higher sales volumes, plant utilization and productivity improvements within our plant-based beverage, broth and ingredient extraction operations, offset by a $0.9 million expense related to an isolated raw material spoilage event in our plant-based beverage operations in the second quarter of 2019, and increased costs for premium juice products associated with new contract manufacturing agreements
|
7,593
|
|
Gross profit for the three quarters ended September 28, 2019
|
$47,123
|
Operating income in Consumer Products decreased by $14.1 million to an operating loss of $2.7 million for the three quarters ended September 28, 2019, compared to operating income of $11.4 million for the three quarters ended September 29, 2018. The table below explains the decrease in operating income:
|
SUNOPTA INC
|
53
|
September 28, 2019 10-Q
|
|
Consumer Products Operating Income Changes
|
|
|
Operating income for the three quarters ended September 29, 2018
|
$11,397
|
|
|
Decrease in gross profit, as explained above
|
(12,459)
|
|
|
Increase in corporate cost allocations due to the centralization of transactional and other support functions for the Healthy Fruit platform (offset by the headcount reductions below) and the realignment of Corporate Services resources following the sale of the soy and corn business
|
(6,150)
|
|
|
Headcount reductions within the Healthy Fruit platform due to the centralization of transactional and other support functions, as well as other SG&A expense reductions
|
4,514
|
|
Operating loss for the three quarters ended September 28, 2019
|
$(2,698)
|
|
Corporate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three quarters ended
|
|
September 28, 2019
|
|
|
September 29, 2018
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
(12,657
|
)
|
$
|
(11,942
|
)
|
$
|
(715
|
)
|
|
-6.0%
|
|
Operating loss at Corporate Services increased by $0.7 million to $12.7 million for the three quarters ended September 28, 2019, compared to a loss of $11.9 million for the three quarters ended September 29, 2018. The table below explains the increase in operating loss:
|
Corporate Services Operating Loss Changes
|
|
|
Operating loss for the three quarters ended September 29, 2018
|
$(11,942)
|
|
|
Increased stock-based compensation costs related to the initiation of an equity-based annual bonus plan for most employees in 2019
|
(1,871)
|
|
|
Incremental expense associated with headcount additions during fiscal 2018, higher employee-related variable compensation, and salary increases, offset by lower employee-related benefit costs and professional fees, and reductions in travel and other discretionary spending, and favorable foreign exchange impact on Canadian dollar-denominated SG&A expenses
|
(1,380)
|
|
|
Increase in corporate cost allocations to SunOpta operating segments
|
2,536
|
|
Operating loss for the three quarters ended September 28, 2019
|
$(12,657)
|
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 the number of people employed within each segment.
Liquidity and Capital Resources
We have the following sources from which we can fund our operating cash requirements:
-
Existing cash and cash equivalents;
-
Available operating lines of credit;
-
Cash flows generated from operating activities, including working capital efficiency efforts;
|
SUNOPTA INC
|
54
|
September 28, 2019 10-Q
|
-
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 businesses 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. Subject to customary borrowing conditions and the agreement of any such lenders to provide such increased commitments, we may request to increase the total lending commitments under this facility to a maximum aggregate principal amount not to exceed $450 million. The applicable margin in the Global Credit Facility ranges from 1.25% to 1.75% for loans bearing interest based on LIBOR and from 0.25% to 0.75% for loans bearing interest based on the prime rate and, in each case, is set quarterly based on average borrowing availability for the preceding fiscal quarter.
On September 19, 2017, the Global Credit Facility was amended to add an additional $15 million U.S. asset-based credit subfacility (the "U.S. Subfacility"). On October 22, 2018, the Global Credit Facility was further amended to increase the commitment under the U.S. Subfacility by $5 million. The entire $20 million available for borrowing under the U.S. Subfacility was fully drawn as of October 22, 2018. Commencing on March 31, 2019, quarterly amortization payments on the aggregate principal amount of the U.S. Subfacility are equal to $3.33 million, and these payments may be funded through borrowings under the revolving facilities of the Global Credit Facility. Borrowings repaid under the U.S. Subfacility may not be borrowed again. As at September 28, 2019, $13.3 million remained drawn on the U.S. Subfacility. The applicable margin for the U.S. Subfacility is set quarterly based on average borrowing availability for the preceding fiscal quarter ranges from 2.00% to 2.50% with respect to base rate and prime rate borrowings and from 3.00% to 3.50% for eurocurrency rate and bankers' acceptance rate borrowings.
As at September 28, 2019, we had outstanding borrowings of $268.2 million (December 29, 2018 - $276.8 million) and available borrowing capacity of approximately $48 million (December 29, 2018 - $55 million) under the Global Credit Facility. For more information on the Global Credit Facility, see note 9(1) to the unaudited consolidated financial statements included in this report.
On October 20, 2016, our subsidiary, SunOpta Foods Inc. ("SunOpta Foods"), issued $231.0 million of 9.5% Senior Secured Second Lien Notes due October 9, 2022 (the "Notes"). As at September 28, 2019, the outstanding principal amount of the Notes was $223.5 million, reflecting the redemption of $7.5 million principal amount by SunOpta Foods in October 2017. For more information on the Notes, see note 9(3) to the unaudited consolidated financial statements included in this report.
On October 7, 2016, SunOpta Foods issued 85,000 shares of Series A Preferred Stock (the "Preferred Stock") for $85.0 million. 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% of the liquidation preference prior to October 5, 2025, which presently equates to quarterly dividend payments of $1.7 million, and 12.5% of the liquidation preference thereafter (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. For more information on the Preferred Stock, see note 10 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 favorable terms, if at all, could be limited. In order to reduce our indebtedness and improve our position to obtain additional financing, we may explore the sale of selected businesses or assets from time to time.
|
SUNOPTA INC
|
55
|
September 28, 2019 10-Q
|
Cash Flows
Third Quarter of 2019 Compared to Third Quarter of 2018
Net cash and cash equivalents decreased $0.3 million in the third quarter of 2019 to $2.2 million as at September 28, 2019, compared with $2.5 million at June 29, 2019.
Cash provided by operating activities was $4.3 million in the third quarter of 2019, compared with $10.5 million in the third quarter of 2018, a decrease in cash provided of $6.2 million, which reflected lower quarter-over-quarter operating results, mainly due to the reduction in frozen fruit profitability.
Cash used in investing activities was $7.6 million in the third quarter of 2019, compared with $6.0 million in the third quarter of 2018, an increase in cash used of $1.6 million, which reflected proceeds of $1.7 million received in the third quarter of 2018 related to the sale of businesses and assets. Capital expenditures in the third quarter of 2019 of $7.6 million included the expansion of our plant-based beverage capacity, the addition of new automation at our frozen fruit and cocoa processing facilities, and completion of our new organic avocado oil facility.
Cash provided by financing activities was $3.0 million in the third quarter of 2019, compared with cash used of $4.7 million in the third quarter of 2018, an increase in cash provided of $7.7 million, which reflected borrowings of $4.6 million under our line of credit facilities in the third quarter of 2019, compared with repayments of $2.7 million in the third quarter of 2018, which reflected lower quarter-over-quarter operating results.
First Three Quarters of 2019 Compared to First Three Quarters of 2018
Net cash and cash equivalents decreased $1.1 million in the first three quarters of 2019 to $2.2 million as at September 28, 2019, compared with $3.3 million at December 29, 2018.
Cash used in operating activities was $26.4 million in the first three quarters of 2019, compared with $16.2 million in the first three quarters of 2018, an increase in cash used of $10.2 million, which reflected lower year-over-year operating results, mainly due to the reduction in frozen fruit profitability and sale of the soy and corn business, offset by lower cash used to fund working capital, including reduced inventory purchases due to the strawberry shortfall.
Excluding net proceeds from the sale of the soy and corn business of $64.7 million, cash used in investing activities was $28.2 million in the first three quarters of 2019, compared with $22.1 million in the first three quarters of 2018, an increase in cash used of $6.1 million, which reflected cash paid of $3.3 million to acquire Sanmark in first three quarters of 2019, and proceeds received of $2.7 million from the sale of businesses and assets in the first three quarters of 2018. Capital expenditures were $24.9 million in the first three quarters of 2019, mainly reflecting spending on the projects identified above for the third quarter.
Cash used in financing activities was $11.0 million in the first three quarters of 2019, compared with cash provided of $37.0 million in the first three quarters of 2018, an increase in cash used of $48.0 million that reflected the initial application of the net proceeds from the sale of the soy and corn business to repay borrowings under our line of credit facilities, together with reduced inventory purchases in the first three quarters of 2019, offset by lower year-over-year operating results.
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 29, 2018.
|
SUNOPTA INC
|
56
|
September 28, 2019 10-Q
|
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. Except as described below, there have been no material changes to the critical accounting estimates disclosed under the heading "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Form 10-K.
Leases
As described in note 1 to the unaudited financial statements included in this report, we adopted ASC Topic 842, "Leases", on a modified retrospective basis beginning the first quarter of 2019. Adoption of this standard had a significant impact on our consolidated balance sheet as at September 28, 2019 due to the recognition of operating lease right-of-use assets and lease liabilities; however, the standard did not have any impact on our consolidated results of operations or cash flows for the quarter and three quarters ended September 28, 2019, or on our accounting for finance leases. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized and measured based on the present value of future lease payments over the lease term. In measuring lease assets and liabilities, critical estimates and assumptions include the amount and timing of the future lease payments based on the expected lease term, and the discount rate to apply to those future lease payments. In determining the expected lease term, we consider the initial noncancelable period of the lease, together with periods covered by renewal options that we are reasonably certain to exercise. Typically, most of our real estate leases and certain of our equipment leases include options to extend the leases, with exercise of these options being at our sole discretion. The evaluation of whether the exercise of a renewal option is reasonably certain is a matter of judgment based on a number of factors, including the length of the initial lease period, the nature of the underlying asset and importance of the asset to our operations, the addition of significant leasehold improvements, and the availability of alternative replacement assets, as well as consideration of business, market and economic factors that may impact our assessment of the useful life of the underlying asset. Generally, we use the initial noncancelable lease term when determining the lease asset and liability. If there are significant events or changes in circumstances that cause us to reassess whether we are reasonably certain or not to exercise an option to extend a lease, we will remeasure the lease asset and liability using revised estimates of the discount rate and remaining lease term as at the reassessment date. The discount rate used to determine the present value of the future lease payments is the implicit rate in the lease if readily determinable. When that rate is not readily determinable, we use our incremental borrowing rate, which is the estimated rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We determine our incremental borrowing rate based on the location of each leased asset, using relevant interest rate yield curves and credit spreads derived from available market data and our corporate credit rating.
See note 8 to the unaudited consolidated financial statements for disclosures related to leases.