Item 1. Financial Statements
SunOpta Inc.
|
Consolidated Statements of Operations
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars,
except per share amounts)
|
|
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
320,713
|
|
|
348,732
|
|
|
987,198
|
|
|
1,049,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
284,258
|
|
|
307,702
|
|
|
870,382
|
|
|
940,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
36,455
|
|
|
41,030
|
|
|
116,816
|
|
|
108,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
26,102
|
|
|
23,915
|
|
|
99,413
|
|
|
72,676
|
|
Intangible asset amortization
|
|
2,817
|
|
|
2,826
|
|
|
8,429
|
|
|
8,472
|
|
Other expense, net (note 12)
|
|
5,972
|
|
|
10,312
|
|
|
12,022
|
|
|
22,723
|
|
Foreign exchange loss
|
|
2,575
|
|
|
1,068
|
|
|
4,350
|
|
|
3,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations
before the
following
|
|
(1,011
|
)
|
|
2,909
|
|
|
(7,398
|
)
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
8,371
|
|
|
12,178
|
|
|
23,820
|
|
|
34,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes
|
|
(9,382
|
)
|
|
(9,269
|
)
|
|
(31,218
|
)
|
|
(32,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery of income taxes
|
|
(3,499
|
)
|
|
(5,411
|
)
|
|
(14,049
|
)
|
|
(15,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(5,883
|
)
|
|
(3,858
|
)
|
|
(17,169
|
)
|
|
(17,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
(note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,993
|
)
|
Gain on classification as
held for sale
|
|
-
|
|
|
-
|
|
|
-
|
|
|
560
|
|
Recovery
of income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
599
|
|
Loss from
discontinued operations attributable to non-controlling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
264
|
|
Loss from discontinued
operations attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
(5,883
|
)
|
|
(3,858
|
)
|
|
(17,169
|
)
|
|
(17,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) attributable
to non-controlling interests
|
|
144
|
|
|
(503
|
)
|
|
664
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to
SunOpta Inc.
|
|
(6,027
|
)
|
|
(3,355
|
)
|
|
(17,833
|
)
|
|
(17,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic
(note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing
operations
|
|
(0.09
|
)
|
|
(0.04
|
)
|
|
(0.27
|
)
|
|
(0.20
|
)
|
- from
discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
|
(0.09
|
)
|
|
(0.04
|
)
|
|
(0.27
|
)
|
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share diluted
(note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
- from
continuing operations
|
|
(0.09
|
)
|
|
(0.04
|
)
|
|
(0.27
|
)
|
|
(0.20
|
)
|
- from discontinued
operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
|
(0.09
|
)
|
|
(0.04
|
)
|
|
(0.27
|
)
|
|
(0.21
|
)
|
(See accompanying notes to consolidated financial statements)
SUNOPTA INC.
|
6
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Comprehensive Loss
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars)
|
|
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
(5,883
|
)
|
|
(3,858
|
)
|
|
(17,169
|
)
|
|
(17,138
|
)
|
Loss from discontinued operations
attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss
|
|
(5,883
|
)
|
|
(3,858
|
)
|
|
(17,169
|
)
|
|
(17,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
earnings, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes related to cash
flow hedges (note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
155
|
|
|
-
|
|
|
1,568
|
|
|
-
|
|
Reclassification of gains to earnings
|
|
(107
|
)
|
|
-
|
|
|
(1,311
|
)
|
|
-
|
|
Net
changes related to cash flow hedges
|
|
48
|
|
|
-
|
|
|
257
|
|
|
-
|
|
Currency translation
adjustment
|
|
1,459
|
|
|
689
|
|
|
4,954
|
|
|
282
|
|
Other
comprehensive earnings, net of income taxes
|
|
1,507
|
|
|
689
|
|
|
5,211
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
(4,376
|
)
|
|
(3,169
|
)
|
|
(11,958
|
)
|
|
(17,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings (loss)
attributable to non-controlling interests
|
|
52
|
|
|
(482
|
)
|
|
617
|
|
|
(486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
attributable to SunOpta Inc.
|
|
(4,428
|
)
|
|
(2,687
|
)
|
|
(12,575
|
)
|
|
(16,940
|
)
|
(See accompanying notes to consolidated financial statements)
SUNOPTA INC.
|
7
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Balance Sheets
|
As at September 30, 2017 and December 31, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars)
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
2,855
|
|
|
1,251
|
|
Accounts receivable
|
|
147,481
|
|
|
157,369
|
|
Inventories (note 7)
|
|
370,599
|
|
|
368,482
|
|
Prepaid expenses and
other current assets
|
|
37,257
|
|
|
19,794
|
|
Income
taxes recoverable
|
|
4,862
|
|
|
2,801
|
|
Assets held for sale
(note 2)
|
|
1,250
|
|
|
-
|
|
Total current assets
|
|
564,304
|
|
|
549,697
|
|
|
|
|
|
|
|
|
Property, plant and
equipment
|
|
160,100
|
|
|
162,239
|
|
Goodwill
|
|
224,415
|
|
|
223,611
|
|
Intangible assets
|
|
174,808
|
|
|
183,524
|
|
Deferred income taxes
|
|
1,056
|
|
|
1,045
|
|
Other assets
|
|
8,411
|
|
|
9,442
|
|
|
|
|
|
|
|
|
Total assets
|
|
1,133,094
|
|
|
1,129,558
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Bank
indebtedness (note 8)
|
|
259,008
|
|
|
201,494
|
|
Accounts payable and
accrued liabilities
|
|
156,538
|
|
|
173,745
|
|
Customer
and other deposits
|
|
638
|
|
|
2,543
|
|
Income taxes payable
|
|
2,371
|
|
|
5,661
|
|
Other
current liabilities
|
|
251
|
|
|
1,016
|
|
Current portion of
long-term debt (note 8)
|
|
2,045
|
|
|
2,079
|
|
Current
portion of long-term liabilities
|
|
5,304
|
|
|
5,500
|
|
Total current liabilities
|
|
426,155
|
|
|
392,038
|
|
|
|
|
|
|
|
|
Long-term debt
(note 8)
|
|
228,761
|
|
|
229,008
|
|
Long-term liabilities
|
|
8,281
|
|
|
15,354
|
|
Deferred income taxes
|
|
31,281
|
|
|
44,561
|
|
Total liabilities
|
|
694,478
|
|
|
680,961
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
(note 9)
|
|
79,932
|
|
|
79,184
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
SunOpta Inc. shareholders equity
|
|
|
|
|
|
|
Common shares, no par value,
unlimited shares
authorized,
86,673,271
shares issued (December 31, 2016 - 85,743,958)
|
|
308,319
|
|
|
300,426
|
|
Additional paid-in
capital
|
|
26,657
|
|
|
25,522
|
|
Retained
earnings
|
|
30,157
|
|
|
53,838
|
|
Accumulated other
comprehensive loss (note 11)
|
|
(7,928
|
)
|
|
(13,104
|
)
|
|
|
357,205
|
|
|
366,682
|
|
Non-controlling interests
|
|
1,479
|
|
|
2,731
|
|
Total equity
|
|
358,684
|
|
|
369,413
|
|
|
|
|
|
|
|
|
Total equity and
liabilities
|
|
1,133,094
|
|
|
1,129,558
|
|
Commitments and contingencies
(note 15)
(See accompanying notes to consolidated financial statements)
SUNOPTA INC.
|
8
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Shareholders Equity
|
As at and for the three quarters ended September 30, 2017
and October 1, 2016
|
(Unaudited)
|
(All dollar amounts expressed in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other com-
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
paid-in
|
|
|
Retained
|
|
|
prehensive
|
|
|
controlling
|
|
|
|
|
|
|
Common shares
|
|
|
capital
|
|
|
earnings
|
|
|
loss
|
|
|
interests
|
|
|
Total
|
|
|
|
000s
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
85,744
|
|
|
300,426
|
|
|
25,522
|
|
|
53,838
|
|
|
(13,104
|
)
|
|
2,731
|
|
|
369,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share purchase plan
|
|
40
|
|
|
281
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
281
|
|
Stock incentive plan
|
|
889
|
|
|
7,612
|
|
|
(3,212
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,400
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
4,133
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,133
|
|
Dividends on Series A Preferred Stock (note
9)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,100
|
)
|
|
-
|
|
|
-
|
|
|
(5,100
|
)
|
Accretion on Series A
Preferred Stock (note 9)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(748
|
)
|
|
-
|
|
|
-
|
|
|
(748
|
)
|
Loss from continuing operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(17,833
|
)
|
|
-
|
|
|
664
|
|
|
(17,169
|
)
|
Currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,001
|
|
|
(47
|
)
|
|
4,954
|
|
Cash flow hedges, net of income taxes of $110
(note 6)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
257
|
|
|
-
|
|
|
257
|
|
Acquisitions of
non-controlling interests (note 3)
|
|
-
|
|
|
-
|
|
|
214
|
|
|
-
|
|
|
(82
|
)
|
|
(1,869
|
)
|
|
(1,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30,
2017
|
|
86,673
|
|
|
308,319
|
|
|
26,657
|
|
|
30,157
|
|
|
(7,928
|
)
|
|
1,479
|
|
|
358,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other com-
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
paid-in
|
|
|
Retained
|
|
|
prehensive
|
|
|
controlling
|
|
|
|
|
|
|
Common shares
|
|
|
capital
|
|
|
earnings
|
|
|
loss
|
|
|
interests
|
|
|
Total
|
|
|
|
000s
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2016
|
|
85,418
|
|
|
297,987
|
|
|
22,327
|
|
|
106,838
|
|
|
(6,113
|
)
|
|
5,140
|
|
|
426,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee share purchase plan
|
|
67
|
|
|
326
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
326
|
|
Stock incentive plan
|
|
169
|
|
|
1,157
|
|
|
(569
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
588
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
3,173
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,173
|
|
Loss from continuing operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(17,142
|
)
|
|
-
|
|
|
4
|
|
|
(17,138
|
)
|
Currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
508
|
|
|
(226
|
)
|
|
282
|
|
Loss from discontinued operations,
net of income taxes (note 4)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
|
-
|
|
|
(264
|
)
|
|
(834
|
)
|
Disposition of discontinued
operation (note 4)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,094
|
)
|
|
(2,054
|
)
|
|
(7,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1,
2016
|
|
85,654
|
|
|
299,470
|
|
|
24,931
|
|
|
89,126
|
|
|
(10,699
|
)
|
|
2,600
|
|
|
405,428
|
|
(See accompanying notes to consolidated financial statements)
SUNOPTA INC.
|
9
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Cash Flows
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(Expressed in thousands of U.S. dollars)
|
|
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED
IN)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
(5,883
|
)
|
|
(3,858
|
)
|
|
(17,169
|
)
|
|
(17,708
|
)
|
Loss from discontinued operations
attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss from continuing
operations
|
|
(5,883
|
)
|
|
(3,858
|
)
|
|
(17,169
|
)
|
|
(17,138
|
)
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
8,254
|
|
|
8,646
|
|
|
24,601
|
|
|
25,955
|
|
Amortization and
write-off of debt issuance costs
|
|
613
|
|
|
3,988
|
|
|
1,751
|
|
|
10,210
|
|
Deferred
income taxes
|
|
(3,425
|
)
|
|
(5,252
|
)
|
|
(13,340
|
)
|
|
(19,760
|
)
|
Stock-based compensation
|
|
1,995
|
|
|
1,181
|
|
|
4,133
|
|
|
3,173
|
|
Unrealized loss (gain) on derivative instruments (note 6)
|
|
754
|
|
|
(749
|
)
|
|
(475
|
)
|
|
(1,264
|
)
|
Fair value of contingent
consideration (note 12)
|
|
83
|
|
|
124
|
|
|
287
|
|
|
(1,281
|
)
|
Impairment of long-lived assets (note 2)
|
|
4,467
|
|
|
10,300
|
|
|
8,190
|
|
|
12,035
|
|
Acquisition accounting
adjustment on inventory sold
|
|
-
|
|
|
1,890
|
|
|
-
|
|
|
13,404
|
|
Other
|
|
55
|
|
|
(64
|
)
|
|
(46
|
)
|
|
343
|
|
Changes in non-cash
working capital (note 14)
|
|
(18,006
|
)
|
|
836
|
|
|
(25,319
|
)
|
|
(60,943
|
)
|
Net cash flows from
operations - continuing operations
|
|
(11,093
|
)
|
|
17,042
|
|
|
(17,387
|
)
|
|
(35,266
|
)
|
Net cash flows from operations - discontinued
operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
758
|
|
|
|
(11,093
|
)
|
|
17,042
|
|
|
(17,387
|
)
|
|
(34,508
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant
and equipment
|
|
(6,527
|
)
|
|
(5,463
|
)
|
|
(22,694
|
)
|
|
(14,803
|
)
|
Proceeds from sale of assets
|
|
475
|
|
|
-
|
|
|
776
|
|
|
-
|
|
Acquisition of
non-controlling interests (note 3)
|
|
(1,737
|
)
|
|
-
|
|
|
(1,737
|
)
|
|
-
|
|
Other
|
|
5
|
|
|
-
|
|
|
369
|
|
|
700
|
|
Net cash flows from investing
activities - continuing operations
|
|
(7,784
|
)
|
|
(5,463
|
)
|
|
(23,286
|
)
|
|
(14,103
|
)
|
Net cash flows from investing activities -
discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,754
|
|
|
|
(7,784
|
)
|
|
(5,463
|
)
|
|
(23,286
|
)
|
|
(12,349
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) under
line of credit facilities (note 8)
|
|
19,222
|
|
|
(13,097
|
)
|
|
48,571
|
|
|
258,475
|
|
Repayment of line of credit facilities (note
8)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(192,677
|
)
|
Borrowings under long-term
debt (note 8)
|
|
417
|
|
|
-
|
|
|
417
|
|
|
432
|
|
Repayment of long-term debt (note 8)
|
|
(564
|
)
|
|
(520
|
)
|
|
(1,680
|
)
|
|
(11,529
|
)
|
Payment of cash dividends on
Series A Preferred Stock
|
|
(1,700
|
)
|
|
-
|
|
|
(4,991
|
)
|
|
-
|
|
Proceeds from the exercise of stock options
and employee share purchases
|
|
1,052
|
|
|
227
|
|
|
4,681
|
|
|
914
|
|
Payment of debt issuance
costs
|
|
(206
|
)
|
|
(1,179
|
)
|
|
(206
|
)
|
|
(5,545
|
)
|
Payment of contingent consideration (note 6)
|
|
-
|
|
|
-
|
|
|
(4,330
|
)
|
|
(4,554
|
)
|
Other
|
|
13
|
|
|
8
|
|
|
(290
|
)
|
|
(126
|
)
|
Net cash flows from financing activities -
continuing operations
|
|
18,234
|
|
|
(14,561
|
)
|
|
42,172
|
|
|
45,390
|
|
Net cash flows from financing
activities - discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,180
|
)
|
|
|
18,234
|
|
|
(14,561
|
)
|
|
42,172
|
|
|
44,210
|
|
Foreign exchange gain on cash
held in a foreign currency
|
|
41
|
|
|
329
|
|
|
105
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
and cash equivalents in the period
|
|
(602
|
)
|
|
(2,653
|
)
|
|
1,604
|
|
|
(2,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations cash
activity included above:
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Balance included at
beginning of period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,707
|
|
Less:
Balance included at end of period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents -
beginning of the period
|
|
3,457
|
|
|
4,292
|
|
|
1,251
|
|
|
2,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents -
end of the period
|
|
2,855
|
|
|
1,639
|
|
|
2,855
|
|
|
1,639
|
|
(See accompanying notes to consolidated financial statements)
SUNOPTA INC.
|
10
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Consolidated Statements of Cash Flows (continued)
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(Expressed in thousands of U.S. dollars)
|
|
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
2017
|
|
|
October 1, 2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and
financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued cash dividends on Series A Preferred
Stock (note 9)
|
|
-
|
|
|
-
|
|
|
(1,700
|
)
|
|
-
|
|
Proceeds on disposition of
discontinued operation, note receivable (note 4)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,537
|
|
(See accompanying notes to consolidated financial statements)
SUNOPTA INC.
|
11
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
1. Description of Business and Significant Accounting
Policies
SunOpta Inc. (the Company or SunOpta) was incorporated
under the laws of Canada on November 13, 1973. The Company operates businesses
focused on a healthy products portfolio that promotes sustainable well-being.
The Companys two reportable segments, Global Ingredients and Consumer Products,
operate in the natural, organic and specialty food sectors and utilize an
integrated business model to bring cost-effective and quality products to
market.
Basis of Presentation
The interim consolidated financial statements of the Company
have been prepared in accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934,
as amended, and in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) for interim financial information.
Accordingly, these condensed interim consolidated financial statements do not
include all of the disclosures required by U.S. GAAP for annual financial
statements. In the opinion of management, all adjustments considered necessary
for fair presentation have been included and all such adjustments are of a
normal, recurring nature. Operating results for the quarter and three quarters
ended September 30, 2017 are not necessarily indicative of the results that may
be expected for the full fiscal year ending December 30, 2017 or for any other
period. The interim consolidated financial statements include the accounts of
the Company and its subsidiaries, and have been prepared on a basis consistent
with the annual consolidated financial statements for the year ended December
31, 2016, except as described below under Recent Accounting Pronouncements
Adoption of New Accounting Standards. For further information, refer to the
consolidated financial statements, and notes thereto, included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Fiscal Year
The fiscal year of the Company consists of a 52- or 53-week
period ending on the Saturday closest to December 31. Fiscal year 2017 is a
52-week period ending on December 30, 2017, with quarterly periods ending on
April 1, July 1 and September 30, 2017. Fiscal year 2016 was a 52-week period
ending on December 31, 2016, with quarterly periods ending on April 2, July 2
and October 1, 2016.
Recent Accounting Pronouncements
Adoption of New Accounting Standards
In August 2016, the Financial Accounting Standards Board
(FASB) issued Accounting Standard Update (ASU) 2016-15, Classification of
Certain Cash Receipts and Cash Payments, which clarifies how entities should
classify certain cash receipts and cash payments on the statement of cash flows,
including contingent consideration payments made after a business combination.
As permitted, the Company elected to early adopt the guidance as at December 31,
2016 on a retrospective basis. In connection with the adoption of ASU 2016-15,
the Company reclassified $4.6 million of contingent consideration payments from
investing activities to financing activities on the comparative consolidated
statement of cash flows for the three quarters ended October 1, 2016.
In March 2016, the FASB issued ASU 2016-09, Compensation
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting, which is intended to simplify the accounting for share-based
payment transactions, including income tax consequences, the classification of
awards as either equity or liabilities, and the classification on the statement
of cash flows. Under the new guidance, companies will record excess tax benefits
and tax deficiencies as income tax expense or benefit in the income statement
rather than in additional paid-in capital. In addition, the guidance permits
companies to elect to recognize forfeitures of share-based payments as they
occur, rather than estimating the number of awards expected to be forfeited as
is currently required. This guidance is effective for annual and interim periods
beginning after December 15, 2016. The Company adopted ASU 2016-09 effective
January 1, 2017, and elected upon adoption to recognize forfeitures of
stock-based awards as they occur versus estimating at the time of grant. The
cumulative effect of this change in accounting policy as at January 1, 2017, was
not material to the Companys financial statements. Commencing January 1, 2017,
the Company recognizes excess tax benefits and deficiencies in the provision for
income taxes on its consolidated statements of operations and
as an operating activity on the consolidated statements of cash flows.
SUNOPTA INC.
|
12
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
Recently Issued Accounting Standards, Not Adopted as at
September 30, 2017
In January 2017, the FASB issued ASU 2017-04, Intangibles
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
which simplifies the accounting for goodwill impairment by eliminating the
requirement to calculate the implied fair value of goodwill (that is, Step 2 of
the current goodwill impairment test) to measure a goodwill impairment charge.
Instead, companies will record an impairment charge based on the excess of a
reporting units carrying amount over its fair value (that is, measure the
charge based on Step 1 of the current goodwill impairment model). The guidance
is effective on a prospective basis for interim and annual goodwill impairment
testing dates after January 1, 2020; however, early adoption is permitted for
testing dates after January 1, 2017. The Company is currently assessing the
impact that this standard will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Measurement of
Credit Losses on Financial Instruments, which requires measurement and
recognition of expected versus incurred credit losses for most financial assets.
ASU 2016-13 is effective for interim and annual periods beginning after December
15, 2019. The Company is currently assessing the impact that this standard will
have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, a
comprehensive new standard that amends various aspects of existing accounting
guidance for leases, including the recognition of a right of use asset and a
lease liability for leases with a duration of greater than one year. The
guidance is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early adoption is
permitted. The Company is currently assessing the impact that this standard will
have on its consolidated financial statements; however, the Company anticipates
that upon adoption of the standard it will recognize additional assets and
corresponding liabilities related to leases on its balance sheet.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, which will supersede existing revenue recognition
guidance under U.S. GAAP. Under the new standard, a company will recognize
revenue when it transfers promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. ASU 2014-09 defines a five-step process to
achieve this principle and, in doing so, it is possible more judgment and
estimates may be required within the revenue recognition process than are
required under existing U.S. GAAP, including identifying performance obligations
in the contract, estimating the amount of variable consideration to include in
the transaction price and allocating the transaction price to each separate
performance obligation. In August 2015, the FASB issued ASU 2015-14, which
defers by one year the effective date of ASU 2014-09. During 2016, the FASB
issued ASU 2016-08, ASU 2016-10, 2016-11, 2016-12 and 2016-20, all of which
clarify certain implementation guidance within ASU 2014-09. ASU 2014-09, as
amended, is effective for annual and interim periods beginning on or after
December 15, 2017, and is to be applied on either a full retrospective or
modified retrospective basis.
With the assistance of a third party, the Company analyzed its
significant customer relationships to determine the effects of ASU 2014-09. In
particular, the Company assessed under the new guidance whether its existing
contracts with customers to produce certain consumer-packaged goods would permit
the Company to recognize revenue over time versus at a point in time, based on
whether the given product has an alternative use or not and whether there is an
enforceable right to payment under the contract for product produced to date.
Based on its assessment to date, the Company has tentatively concluded that it does
not satisfy the criteria to recognize revenue over time, and, therefore, expects
to continue to recognize revenue at a point in time consistent with its current
policies and processes. Consequently, the Company does not expect the adoption
of ASU 2014-09 to have a material impact on its consolidated financial
statements and revenue recognition practices, or its internal controls. The
Company expects to adopt ASU 2014-09 using the modified retrospective approach.
The Company is currently in the process of finalizing its assessment, and reviewing its disclosures for revenue
recognition to conform with the disclosure requirements of the standard.
SUNOPTA INC.
|
13
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
2. Value Creation Plan
Overview
On October 7, 2016, the Company entered into a strategic
partnership with Oaktree Capital Management L.P., a private equity investor
(together with its affiliates, Oaktree). On October 7, 2016, Oaktree invested
$85.0 million through the purchase of cumulative, non-participating Series A
Preferred Stock (the Preferred Stock) of the Companys wholly-owned
subsidiary, SunOpta Foods Inc. (SunOpta Foods) (see note 9). The Company
conducted, with the assistance of Oaktree, a thorough review of its operations,
management and governance, with the objective of maximizing the Companys
ability to deliver long-term value to its shareholders. Through this review, the
Company developed a Value Creation Plan built on four pillars: portfolio
optimization, operational excellence, go-to-market effectiveness and process
sustainability. The Company engaged management consulting firms to support the
design and implementation of the Value Creation Plan.
In the fourth quarter of 2016, measures taken under the Value
Creation Plan included the closure of the Companys San Bernardino, California,
juice facility and the Companys soy extraction facility in Heuvelton, New York.
In addition, effective November 11, 2016, Hendrik Jacobs stepped down as the
Companys President and Chief Executive Officer (CEO).
In the first three quarters of 2017, further measures were
taken under the Value Creation Plan, including the exit from the San Bernardino
facility and equipment leases, as well as the planned exits from flexible
resealable pouch and nutrition bar product lines and operations (as described
below). In addition, the Company made organizational changes within its
management and executive teams, including the appointment of David Colo as
President and CEO effective February 6, 2017, and the recruitment of new
employees in the areas of quality, sales, marketing, operations and engineering.
The Company also made capital investments at several of its manufacturing
facilities to enhance food safety and production efficiencies.
Exiting Flexible Resealable Pouch and Nutrition Bar
Product Lines and Operations
On July 26, 2017, SunOpta Foods entered an agreement with
Skjodt-Barrett Contract Packaging LLC to sell equipment used in the production
of flexible resealable pouches at the Companys Allentown, Pennsylvania facility
for gross proceeds of $2.0 million ($1.2 million net of costs to sell). The
transaction closed on November 3, 2017. The Company continued to produce
flexible resealable pouch products for existing customers until the closing
date. The Companys aseptic beverage operations were not affected by the sale of
assets, and the Company will continue to produce aseptic beverages at its
Allentown facility.
On September 27, 2017, the Company announced its intention to
exit its nutrition bar product lines and operations in Carson City, Nevada. The
Company expects to exit from these activities prior to the end of fiscal 2017,
and will continue to produce nutrition bar products for existing customers until
the exit date. The Company is in discussions with potential buyers interested in
purchasing the nutrition bar equipment and assuming the facility lease.
As the flexible resealable pouch and nutrition bar product
lines and operations do not qualify for presentation as discontinued operations,
operating results from these activities were reported in continuing operations
on the consolidated statements of operations for the current and comparative
periods. Revenues from sales of these product lines were $13.5 million and $44.1
million for the quarter and three quarters ended September 30, 2017,
respectively, compared with $14.3 million and $45.0 million for the quarter and
three quarters ended October 1, 2016, respectively. Losses before income taxes
from these operations were $8.6 million and $12.9 million for the quarter and
three quarters ended September 30, 2017, respectively, compared with $0.2
million and $0.1 million for the quarter and three quarters ended October 1,
2016, respectively. For the quarter and three quarters ended September 30, 2017,
losses before income taxes from these operations included impairment charges for
inventory ($1.3 million) and long-lived assets ($4.5 million) related to the
exit activities, as well as employee termination costs of $1.4 million. These
operations are included in the Consumer Products operating segment.
SUNOPTA INC.
|
14
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
Continuity of Costs Incurred Under the Value Creation
Plan
The following table summarizes costs incurred since the
inception of the Value Creation Plan to September 30, 2017:
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
recruitment,
|
|
|
Consulting
|
|
|
|
|
|
|
impairments
|
|
|
retention and
|
|
|
fees and
|
|
|
|
|
|
|
and facility
|
|
|
termination
|
|
|
temporary
|
|
|
|
|
|
|
closure costs
|
|
|
costs
|
|
|
labor costs
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
incurred and charged to expense
|
|
10,300
|
|
|
-
|
|
|
483
|
|
|
10,783
|
|
Cash payments
|
|
-
|
|
|
-
|
|
|
(483
|
)
|
|
(483
|
)
|
Non-cash adjustments
|
|
(10,300
|
)
|
|
-
|
|
|
-
|
|
|
(10,300
|
)
|
Balance payable, October 1, 2016
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Costs
incurred and charged to expense
|
|
1,222
|
|
|
2,763
|
|
|
3,558
|
|
|
7,543
|
|
Cash payments
|
|
-
|
|
|
(694
|
)
|
|
(1,901
|
)
|
|
(2,595
|
)
|
Non-cash adjustments
|
|
(1,222
|
)
|
|
(266
|
)
|
|
-
|
|
|
(1,488
|
)
|
Balance payable, December 31,
2016
(1)
|
|
-
|
|
|
1,803
|
|
|
1,657
|
|
|
3,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
incurred and charged to expense
|
|
4,095
|
|
|
3,478
|
|
|
9,710
|
|
|
17,283
|
|
Cash payments
|
|
(3,581
|
)
|
|
(2,578
|
)
|
|
(1,774
|
)
|
|
(7,933
|
)
|
Non-cash adjustments
|
|
(714
|
)
|
|
276
|
|
|
-
|
|
|
(438
|
)
|
Balance payable (receivable), April 1,
2017
(1)
|
|
(200
|
)
|
|
2,979
|
|
|
9,593
|
|
|
12,372
|
|
Costs
incurred and charged to expense
|
|
262
|
|
|
2,550
|
|
|
4,876
|
|
|
7,688
|
|
Cash payments
|
|
(262
|
)
|
|
(2,685
|
)
|
|
(9,538
|
)
|
|
(12,485
|
)
|
Non-cash adjustments
|
|
-
|
|
|
51
|
|
|
-
|
|
|
51
|
|
Balance payable (receivable), July 1,
2017
(1)
|
|
(200
|
)
|
|
2,895
|
|
|
4,931
|
|
|
7,626
|
|
Costs
incurred and charged to expense
|
|
5,754
|
|
|
3,284
|
|
|
1,218
|
|
|
10,256
|
|
Cash payments
|
|
-
|
|
|
(2,061
|
)
|
|
(5,964
|
)
|
|
(8,025
|
)
|
Non-cash adjustments
|
|
(5,754
|
)
|
|
240
|
|
|
-
|
|
|
(5,514
|
)
|
Balance payable
(receivable), September 30, 2017
(1)
|
|
(200
|
)
|
|
4,358
|
|
|
185
|
|
|
4,343
|
|
|
(1)
|
Balance payable was included in accounts payable and
accrued liabilities and balance receivable was included in accounts
receivable on the consolidated balance sheets.
|
(a)
|
Asset impairments and facility closure costs
|
|
|
|
For fiscal 2016, represents asset impairment losses of
$10.3 million recorded in the third quarter and $1.2 million recorded in
the fourth quarter related to the closures of the San Bernardino and
Heuvelton facilities, respectively.
|
|
|
|
For fiscal 2017, represents an additional asset
impairment loss of $3.7 million recorded in the first quarter on the
disposal of the San Bernardino assets, which included $3.2 million paid
for the early buyout of the San Bernardino equipment leases. In exchange
for the San Bernardino assets, the facility landlord agreed to release the
Company from its remaining property lease obligation and to pay proceeds
of $0.2 million on December 31, 2017. Facility closure costs reflect $0.4
million incurred by the Company for rent and maintenance of the San
Bernardino facility prior to its disposal to the
landlord.
|
SUNOPTA INC.
|
15
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
In addition, represents asset
impairment losses recorded in the third quarter of 2017 related to the exit from
flexible resealable pouch and nutrition bar product lines and operations as
described above.
(b)
|
Employee recruitment, retention and termination
costs
|
|
|
|
Represents third-party recruiting fees incurred to
identify and retain new employees; reimbursement of relocation costs for
new employees; retention and signing bonuses accrued for certain existing
and new employees; and severance benefits, net of forfeitures of
stock-based awards, and legal costs related to employee terminations. Some
employee termination costs will be paid out in periods after termination.
Retention bonuses will be paid out to employees who remain employed by the
Company through specified retention dates. Certain employees will be
entitled to pro-rata payouts of their retention bonuses if their
employment terminates earlier than their retention payment date.
|
|
|
(c)
|
Consulting fees and temporary labor costs
|
|
|
|
Represents the cost for third-party consultants and
temporary labor engaged to support the design and implementation of the
Value Creation Plan. In addition, consulting fees incurred in the third
quarter of 2016 were related to external financial and legal advisors
engaged to review the Companys operating plan and evaluate a range of
strategic and financial actions that the Company could take to maximize
shareholder value, which concluded with the strategic partnership with
Oaktree.
|
For the quarter and three quarters ended September 30, 2017,
costs incurred and charged to expense were recorded in the consolidated
statement of operations as follows:
|
|
Quarter ended
|
|
|
Three quarters
ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Cost of goods sold
(1)
|
|
1,287
|
|
|
-
|
|
|
1,921
|
|
|
-
|
|
Selling, general and administrative expenses
(2)
|
|
2,400
|
|
|
483
|
|
|
20,839
|
|
|
483
|
|
Other expense
(3)
|
|
6,569
|
|
|
10,300
|
|
|
12,467
|
|
|
10,300
|
|
|
|
10,256
|
|
|
10,783
|
|
|
35,227
|
|
|
10,783
|
|
|
(1)
|
Inventory write-downs and facility closure costs recorded
in cost of goods sold were allocated to the Consumer Products operating
segment.
|
|
(2)
|
Consulting fees and temporary labor costs, and employee
recruitment, relocation and retention costs recorded in selling, general
and administrative expenses were allocated to Corporate
Services.
|
|
(3)
|
Asset impairment and employee termination costs recorded
in other expense were not allocated to the Companys operating segments or
Corporate Services.
|
The Company estimates third-party consulting and employee
recruitment, retention and termination costs related to the Value Creation Plan
to be incurred and expensed during the fourth quarter of fiscal 2017 will be
approximately $10 million, which includes approximately $8.0 million related to
the early termination of the flexible resealable pouch equipment leases that was
paid on closing of the asset sale transaction. This estimate does not include
currently unforeseen asset impairment charges or employee-related costs that may
arise from future actions taken under the Value Creation Plan.
3. Acquisition of Non-Controlling Interests in Mexican
Subsidiary
On July 28, 2017, the Company acquired all the capital stock of
Opus Foods Mexico, S.A. de C.V. (Opus) held by non-controlling interests for
$1.7 million. This acquisition increased the Companys equity ownership in Opus
from 75% to 100%. The Company acquired its initial 75% interest in Opus through
the acquisition of Sunrise Holdings (Delaware), Inc. (Sunrise) in October
2015. Opus owns and operates a frozen fruit processing facility located in
central Mexico. The increase in the Companys ownership position in Opus was
accounted for as an equity transaction, with the difference between the cash
consideration paid and the amount of the non-controlling interest related to
Opus being recognized in additional paid-in capital.
SUNOPTA INC.
|
16
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
4. Discontinued Operation
On April 6, 2016, the Company completed the sale of its 66%
holding of common shares of Opta Minerals Inc. (Opta Minerals) to Speyside
Equity Fund I LP for aggregate gross proceeds of $4.8 million (C$6.2 million),
of which $3.2 million (C$4.2 million) was received in cash, and $1.5 million
(C$2.0 million) was received in the form of a subordinated promissory note
bearing interest at 2.0% per annum that will mature on October 6, 2018. The
Company has no significant continuing involvement with Opta Minerals.
The following table reconciles the major components of the
results of discontinued operations to the amounts reported in the consolidated
statement of operations for the three quarters ended October 1, 2016:
|
|
$
|
|
Revenues
|
|
24,896
|
|
Cost
of goods sold
|
|
(22,133
|
)
|
Selling, general and administrative expenses
|
|
(3,024
|
)
|
Other
expense, net
|
|
(794
|
)
|
Foreign exchange loss
|
|
(454
|
)
|
Interest expense
|
|
(484
|
)
|
Loss before income taxes
|
|
(1,993
|
)
|
Gain
on classification as held for sale before income taxes
|
|
560
|
|
Total pre-tax loss from discontinued operations
|
|
(1,433
|
)
|
Recovery of income taxes
|
|
599
|
|
Loss from discontinued operations
|
|
(834
|
)
|
Loss
from discontinued operations attributable to non-controlling interest
|
|
264
|
|
Loss from discontinued operations
attributable to SunOpta Inc.
|
|
(570
|
)
|
5. Product Recall
During the second quarter of 2016, the Company announced a
voluntary recall of certain roasted sunflower kernel products produced at its
Crookston, Minnesota facility due to potential contamination with Listeria
monocytogenes bacteria. The affected sunflower products originated from the
Crookston facility between May 31, 2015 and April 21, 2016. Estimated losses
related to the recall totaled $47.0 million as at September 30, 2017, compared
to $40.0 million as at December 31, 2016, comprised of estimates for customer
losses and direct incremental costs incurred by the Company. The estimates for
customer losses reflected the cost of the affected sunflower kernel products
returned to or replaced by the Company and the estimated cost to reimburse
customers for costs incurred by them related to the recall of their retail
products that contain the affected sunflower kernels as an ingredient or
component. The incremental costs incurred directly by the Company do not include
lost earnings associated with the interruption of production at the Companys
roasting facilities, or the costs to put into place corrective and preventive
actions at those facilities.
The Companys estimates for customer losses related to the
recall are provisional and were determined based on an assessment of the
information available up to the date of filing of this report, including a
review of customer claims received as of that date and consideration of the
extent of potential additional claims that have yet to be received. The
Companys estimates reflect the amount of losses that it determined as at
September 30, 2017 to be both probable and reasonably estimable. The Company may
need to revise its estimates in subsequent periods as the Company continues to
work with its customers and insurance providers to substantiate the claims
received to date and any additional claims that may be received. These revisions
may occur at any time and may be material.
The Company has general liability and product recall insurance
policies with aggregate limits of $47.0 million under which it expects to
recover recall-related costs, less applicable deductibles. The Company
recognizes expected insurance recoveries in the period in which the recoveries
are determined to be probable of realization. As at September 30, 2017, the
Company had recognized recoveries up to the limit of the coverage available
under its insurance policies. Consequently, to the extent any losses are excluded under the insurance policies or
additional losses are recognized related to existing or new claims, these
excluded or excess losses will be recognized as a charge to future earnings.
SUNOPTA INC.
|
17
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
As at September 30, 2017, $12.4 million of the estimated
recall-related costs were unsettled and were recorded in accounts payable and
accrued liabilities on the consolidated balance sheet. These costs were offset
by the corresponding estimated insurance recoveries of $11.1 million included in
accounts receivable on the consolidated balance sheet as at September 30, 2017,
which was net of $35.3 million of advances the Company received from its
insurance providers prior to September 30, 2017. As at September 30, 2017, the
Company had settled customer claims and direct costs in the amount of $34.6
million, which was fully funded under the Companys general liability and
product recall insurance policies.
6. Derivative Financial Instruments and Fair Value
Measurements
The following table presents for each of the fair value
hierarchies, the assets and liabilities that are measured at fair value on a
recurring basis as of September 30, 2017 and December 31, 2016:
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset (liability)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
(a)
|
|
Commodity futures and forward
contracts
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
short-term derivative asset
|
|
|
376
|
|
|
54
|
|
|
322
|
|
|
-
|
|
|
|
Unrealized short-term
derivative liability
|
|
|
(242
|
)
|
|
-
|
|
|
(242
|
)
|
|
-
|
|
|
|
Unrealized
long-term derivative liability
|
|
|
(2
|
)
|
|
-
|
|
|
(2
|
)
|
|
-
|
|
(b)
|
|
Inventories carried at
market
(2)
|
|
|
3,179
|
|
|
-
|
|
|
3,179
|
|
|
-
|
|
(c)
|
|
Forward foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging
instruments
(3)
|
|
|
(1,237
|
)
|
|
-
|
|
|
(1,237
|
)
|
|
-
|
|
|
|
Designated as a
hedging instruments
(4)
|
|
|
368
|
|
|
-
|
|
|
368
|
|
|
-
|
|
(d)
|
|
Contingent
consideration
(5)
|
|
|
(11,236
|
)
|
|
-
|
|
|
-
|
|
|
(11,236
|
)
|
(e)
|
|
Embedded derivative
(6)
|
|
|
2,690
|
|
|
-
|
|
|
-
|
|
|
2,690
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset (liability)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
(a)
|
|
Commodity futures and forward
contracts
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
short-term derivative asset
|
|
|
787
|
|
|
43
|
|
|
744
|
|
|
-
|
|
|
|
Unrealized short-term
derivative liability
|
|
|
(916
|
)
|
|
-
|
|
|
(916
|
)
|
|
-
|
|
|
|
Unrealized
long-term derivative liability
|
|
|
(8
|
)
|
|
-
|
|
|
(8
|
)
|
|
-
|
|
(b)
|
|
Inventories carried at
market
(2)
|
|
|
8,231
|
|
|
-
|
|
|
8,231
|
|
|
-
|
|
(c)
|
|
Forward foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging
instruments
(3)
|
|
|
1,345
|
|
|
-
|
|
|
1,345
|
|
|
-
|
|
(d)
|
|
Contingent consideration
(5)
|
|
|
(15,279
|
)
|
|
-
|
|
|
-
|
|
|
(15,279
|
)
|
(e)
|
|
Embedded derivative
(6)
|
|
|
2,944
|
|
|
-
|
|
|
-
|
|
|
2,944
|
|
|
(1)
|
Unrealized short-term derivative asset was included in
prepaid expenses and other current assets, unrealized short-term
derivative liability was included in other current liabilities and
unrealized long-term derivative liability was included in long-term
liabilities on the consolidated balance sheets.
|
|
(2)
|
Inventories carried at market were included in inventories
on the consolidated balance sheets.
|
|
(3)
|
Forward foreign currency contracts not designated as a
hedge were included in accounts receivable or accounts payable and accrued
liabilities on the consolidated balance
sheets.
|
SUNOPTA INC.
|
18
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
|
(4)
|
Forward foreign currency contracts designated as a hedge
were included in other assets or other current liabilities on the
consolidated balance sheets.
|
|
(5)
|
Contingent consideration obligations were included in
long-term liabilities (including the current portion thereof) on the
consolidated balance sheets.
|
|
(6)
|
The embedded derivative was included in other assets
(long-term) on the consolidated balance
sheets.
|
(a)
|
Commodity futures and forward contracts
|
|
|
|
The Companys derivative contracts that are measured at
fair value include exchange-traded commodity futures and forward commodity
purchase and sale contracts. Exchange-traded futures are valued based on
unadjusted quotes for identical assets priced in active markets and are
classified as level 1. Fair value for forward commodity purchase and sale
contracts is estimated based on exchange-quoted prices adjusted for
differences in local markets. Local market adjustments use observable
inputs or market transactions for similar assets or liabilities, and, as a
result, are classified as level 2. Based on historical experience with the
Companys suppliers and customers, the Companys own credit risk, and the
Companys knowledge of current market conditions, the Company does not
view non-performance risk to be a significant input to fair value for the
majority of its forward commodity purchase and sale contracts.
|
|
|
|
These exchange-traded commodity futures and forward
commodity purchase and sale contracts are used as part of the Companys
risk management strategy, and represent economic hedges to limit risk
related to fluctuations in the price of certain commodity grains, as well
as the prices of cocoa and coffee. These derivative instruments are not
designated as hedges for accounting purposes. Gains and losses on changes
in fair value of these derivative instruments are included in cost of
goods sold on the consolidated statement of operations. For the quarter
ended September 30, 2017, the Company recognized a loss of $0.1 million
(October 1, 2016 gain of $0.7 million) and for the three quarters ended
September 30, 2017, the Company recognized a gain of $0.3 million (October
1, 2016 gain of $1.3 million) related to changes in the fair value of
these derivatives.
|
|
|
|
As at September 30, 2017, the notional amounts of open
commodity futures and forward purchase and sale contracts were as follows
(in thousands of bushels):
|
|
|
Number of bushels purchased
(sold)
|
|
|
|
Corn
|
|
|
Soybeans
|
|
Forward commodity purchase contracts
|
|
(120
|
)
|
|
44
|
|
Forward commodity
sale contracts
|
|
(493
|
)
|
|
(676
|
)
|
Commodity futures contracts
|
|
365
|
|
|
495
|
|
In addition, as at September 30, 2017,
the Company had net open forward contracts to sell 235 lots of cocoa and 4 lots
of coffee.
(b)
|
Inventories carried at market
|
|
|
|
Grains inventory carried at fair value is determined
using quoted market prices from the Chicago Board of Trade (CBoT).
Estimated fair market values for grains inventory quantities at period end
are valued using the quoted price on the CBoT adjusted for differences in
local markets, and broker or dealer quotes. These assets are placed in
level 2 of the fair value hierarchy, as there are observable quoted prices
for similar assets in active markets. Gains and losses on commodity grains
inventory are included in cost of goods sold on the consolidated
statements of operations. As at September 30, 2017, the Company had
228,722 bushels of commodity corn and 183,325 bushels of commodity
soybeans in inventories carried at market.
|
|
|
(c)
|
Foreign forward currency contracts
|
|
|
|
As part of its risk management strategy, the Company
enters into forward foreign exchange contracts to reduce its exposure to
fluctuations in foreign currency exchange rates. For any open forward
foreign exchange contracts at period end, the contract rate is compared to
the forward rate, and a gain or loss is recorded. These contracts are
placed in level 2 of the fair value hierarchy, as the inputs used in
making the fair value determination are derived from and
are corroborated by observable market data. Certain of these
forward foreign exchange contracts may be designated as cash flow hedges for
accounting purposes, while other of these contracts represent economic hedges
that are not designated as hedging instruments.
|
SUNOPTA INC.
|
19
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(i) Not designated as hedging
instruments
As at September 30, 2017, the Company
had open forward foreign exchange contracts to sell euros to buy U.S. dollars
with a notional value of €28.4 million ($32.5 million), and to sell British
pounds to buy euros with a notional value of £0.8 million (€0.9 million). As
these contracts were not designated as hedging instruments, gains and losses on
changes in the fair value of the derivative instruments are included in foreign
exchange loss or gain on the consolidated statement of operations. For the
quarter ended September 30, 2017, the Company recognized a gain of $0.3 million
(October 1, 2016 loss of $0.3 million) related to changes in the fair value of
these derivatives and for the three quarters ended September 30, 2017, the
Company recognized a loss of $2.6 million (October 1, 2016 loss of $0.5
million) related to changes in the fair value of these derivatives.
(ii) Designated as hedging instruments
In the first quarter of 2017, the
Company initiated a foreign currency cash flow hedging program with the
objective of managing the variability of cash flows associated with a portion of
forecasted purchases of raw fruit inventories denominated in Mexican pesos. As
at September 30, 2017, the Company had net open forward foreign exchange
contracts to sell U.S. dollars to buy Mexican pesos with a notional value of
$2.4 million (M$51.8 million), and to sell Mexican pesos to buy U.S. dollars
with a notional value of M$46.0 million ($2.5 million). As these contracts have
been designated as hedging instruments, the effective portion of the gains and
losses on changes in the fair value of the derivative instruments are included
in other comprehensive earnings and reclassified to cost of goods sold in the
same period the hedged transaction affects earnings, which is upon the sale of
the inventories. For the quarter and three quarters ended September 30, 2017,
the Company recognized unrealized gains in other comprehensive earnings of $0.2
million and $2.3 million, respectively, related to changes in the fair value of
these derivatives. For the quarter and three quarters ended September 30, 2017,
the Company reclassified from other comprehensive earnings realized gains on
these derivatives of $0.2 million and $1.0 million, respectively, to cost of
goods sold. In addition, in the second quarter of 2017, the Company reclassified
an unrealized gain of $0.9 million related to the ineffective portion of the
hedge to foreign exchange loss on the consolidated statements of operations.
During the fourth quarter of 2017, the Company expects to reclassify the $0.4
million remaining amount of the unrealized gain recorded in accumulated other
comprehensive loss to earnings.
(d)
|
Contingent consideration
|
|
|
|
The fair value measurement of contingent consideration
arising from business acquisitions is determined using unobservable (level
3) inputs. These inputs include: (i) the estimated amount and timing of
the projected cash flows on which the contingency is based; and (ii) the
risk-adjusted discount rate used to calculate the present value of those
cash flows. The following table presents a reconciliation of contingent
consideration obligations for the quarters and three quarters ended
September 30, 2017 and October 1, 2016:
|
|
|
Quarter ended
|
|
|
Three quarters
ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Balance, beginning of period
|
|
(11,153
|
)
|
|
(15,051
|
)
|
|
(15,279
|
)
|
|
(21,010
|
)
|
Issuances
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Fair value adjustments
(1)
|
|
(83
|
)
|
|
(124
|
)
|
|
(287
|
)
|
|
1,281
|
|
Payments
(2)
|
|
-
|
|
|
-
|
|
|
4,330
|
|
|
4,554
|
|
Balance, end of period
|
|
(11,236
|
)
|
|
(15,175
|
)
|
|
(11,236
|
)
|
|
(15,175
|
)
|
SUNOPTA INC.
|
20
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
|
(1)
|
For all periods presented, reflected the accretion for
the time value of money, which was included in other income/expense (see
note 12). In addition, for the three quarters ended October 1, 2016,
included a gain of $1.7 million on the settlement of the contingent
consideration obligation related to the Companys acquisition of Niagara
Natural Fruit Snack Company Inc. (Niagara Natural) in August
2015.
|
|
(2)
|
For the three quarters ended September 30, 2017,
reflected the second installment payment of deferred consideration to the
former unitholders of Citrusource, LLC (Citrusource), which was acquired
by the Company in March 2015, and payment of the remaining deferred
consideration to a former shareholder of Organic Land Corporation OOD,
which was acquired by the Company in December 2012. For the three quarters
ended October 1, 2016, reflected the first installment payment related to
Citrusource and cash settlement of the remaining obligation related to
Niagara Natural.
|
(e)
|
Embedded derivative
|
|
|
|
On August 5, 2011 and August 29, 2014, the Company
invested $0.5 million and $0.9 million, respectively, in convertible
subordinated notes issued by Enchi Corporation (Enchi), a developer of
advanced bioconversion products for the renewable fuels industry. The
Companys investment includes the value of an accelerated payment option
embedded in the notes, which may result in a maximum payout to the Company
of $5.1 million. Due to a lack of level 1 or level 2 observable market
quotes for the notes, the Company used a discounted cash flow analysis
(income approach) to estimate the original fair value of the embedded
derivative based on unobservable level 3 inputs. The Company assesses
changes in the fair value of the embedded derivative based on the
performance of actual cash flows derived from certain royalty rights owned
by Enchi, which are expected to be the primary source of funds available
to settle the embedded derivative, relative to the financial forecasts
used in the valuation analysis. As at September 30, 2017 and December 31,
2016, the Company determined that the fair value of this embedded
derivative was $2.7 million and $2.9 million, respectively, based on
distributions received from Enchi on the notes up to those dates and on
expectations related to the remaining royalty
rights.
|
7. Inventories
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Raw materials and work-in-process
|
|
271,645
|
|
|
266,072
|
|
Finished goods
|
|
102,039
|
|
|
101,585
|
|
Company-owned grain
|
|
7,675
|
|
|
15,027
|
|
Inventory reserves
|
|
(10,760
|
)
|
|
(14,202
|
)
|
|
|
370,599
|
|
|
368,482
|
|
SUNOPTA INC.
|
21
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
8. Bank Indebtedness and Long-Term Debt
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Bank indebtedness:
|
|
|
|
|
|
|
Global Credit Facility
(1)
|
|
256,444
|
|
|
199,281
|
|
Bulgarian credit
facility
(2)
|
|
2,564
|
|
|
2,213
|
|
|
|
259,008
|
|
|
201,494
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
Senior Secured Second Lien
Notes, net of unamortized debt issuance costs of $8,217 (December 31, 2016
- $8,835)
(3)
|
|
222,781
|
|
|
222,163
|
|
Capital lease obligations
|
|
6,184
|
|
|
7,454
|
|
Other
|
|
1,841
|
|
|
1,470
|
|
|
|
230,806
|
|
|
231,087
|
|
Less: current portion
|
|
2,045
|
|
|
2,079
|
|
|
|
228,761
|
|
|
229,008
|
|
(1)
|
Global Credit Facility
|
|
|
|
On February 11, 2016, the Company entered into a
five-year credit agreement for a senior secured asset-based revolving
credit facility with a syndicate of banks in the maximum aggregate
principal amount of $350.0 million, subject to borrowing base capacity
(the Global Credit Facility). The Global Credit Facility is used to
support the working capital and general corporate needs of the Companys
global operations, in addition to funding future strategic initiatives.
The Global Credit Facility also includes borrowing capacity available for
letters of credit and provides for borrowings on same-day notice,
including in the form of swingline loans. Subject to customary borrowing
conditions and the agreement of any such lenders to provide such increased
commitments, the Company may request to increase the total lending
commitments under the Global Credit Facility to a maximum aggregate
principal amount not to exceed $450.0 million. Outstanding principal
amounts under the Global Credit Facility are repayable in full on the
maturity date of February 10, 2021.
|
|
|
|
Individual borrowings under the Global Credit Facility
have terms of six months or less and bear interest based on various
reference rates, including prime rate and LIBOR plus an applicable margin.
The applicable margin in the Global Credit Facility ranges from 1.25% to
1.75% for loans bearing interest based on LIBOR and from 0.25% to 0.75%
for loans bearing interest based on the prime rate and, in each case, is
set quarterly based on average borrowing availability for the preceding
fiscal quarter. As at September 30, 2017, the weighted-average interest
rate on the facilities was 3.10%.
|
|
|
|
On September 19, 2017 (the Effective Date), the Company
entered into an amendment to the Global Credit Facility to add an
additional U.S. asset-based credit subfacility of an aggregate principal
amount of $15.0 million (the New U.S. Subfacility).
|
|
|
|
The New U.S. Subfacility was fully drawn on the Effective
Date. Amortization payments on the aggregate principal amount of the New
U.S. Subfacility are equal to $2.5 million payable at the end of each
fiscal quarter, commencing with the fiscal quarter ending March 31, 2019.
Optional prepayment of borrowings under the New U.S. Subfacility are not
permitted until the first anniversary of the Effective Date and are
subject to certain availability conditions. Borrowings repaid under the
New U.S. Subfacility may not be borrowed again.
|
|
|
|
Borrowings under the New U.S. Subfacility bear interest
at a margin over various reference rates. The applicable margin for the
New U.S. Subfacility will be set quarterly based on average borrowing
availability for the preceding fiscal quarter and will range 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. The initial margin for the New U.S.
Subfacility is 2.50% with respect to base rate and prime rate borrowings and
3.50% with respect to eurocurrency rate borrowings.
|
SUNOPTA INC.
|
22
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
Obligations under the Global Credit
Facility are guaranteed by substantially all of the Companys subsidiaries and,
subject to certain exceptions, such obligations are secured by first priority
liens on substantially all of the assets of the Company.
The Global Credit Facility contains a
number of covenants that, among other things, restrict, subject to certain
exceptions, the Companys ability to create liens on assets; sell assets and
enter into sale and leaseback transactions; pay dividends, prepay junior lien
and unsecured indebtedness and make other restricted payments; incur additional
indebtedness and make guarantees; make investments, loans or advances, including
acquisitions; and engage in mergers or consolidations.
(2)
|
Bulgarian credit facility
|
|
|
|
On June 28, 2017, a subsidiary of The Organic Corporation
B.V. (TOC), a wholly-owned subsidiary of the Company, extended its
revolving credit facility agreement dated May 22, 2013, to provide up to
€4.5 million to cover the working capital needs of TOCs Bulgarian
operations. The facility is secured by the accounts receivable and
inventories of the Bulgarian operations and is fully guaranteed by TOC.
Interest accrues under the facility based on EURIBOR plus a margin of
2.75%, and borrowings under the facility are repayable in full on April
30, 2018. As at September 30, 2017, the weighted-average interest rate on
the Bulgarian credit facility was 2.75%.
|
|
|
(3)
|
Senior Secured Second Lien Notes
|
|
|
|
On October 20, 2016, SunOpta Foods issued $231.0 million
of 9.5% Senior Secured Second Lien Notes due 2022 (the Notes). The
Company incurred $9.3 million of debt issuance costs related to the Notes,
which were recorded as a reduction against the principal amount of the
Notes and are being amortized over the six-year term of the Notes.
Interest on the Notes is payable semi-annually in arrears on April 15 and
October 15 at a rate of 9.5% per annum, commencing on April 15, 2017. The
Notes will mature on October 9, 2022. Giving effect to the amortization of
debt issuance costs, the effective interest rate on the Notes is
approximately 10.4% per annum.
|
|
|
|
Prior to October 9, 2018, SunOpta Foods may redeem some
or all of the Notes at any time and from time to time at a make-whole
redemption price set forth in the indenture governing the Notes. On or
after October 9, 2018, SunOpta Foods may redeem the Notes, in whole or in
part, at any time at the redemption prices equal to 107.125% through
October 8, 2019, 104.750% from October 9, 2019 through October 8, 2020,
102.375% from October 9, 2020 through October 8, 2021 and at par
thereafter, plus accrued and unpaid interest, if any, to but excluding the
date of redemption. In addition, prior to October 9, 2018, SunOpta Foods
may, on one or more occasions, redeem up to 35% of the aggregate principal
amount of the Notes with the proceeds of certain equity offerings at a
redemption price equal to 109.500% of the principal amount of the Notes
redeemed, plus accrued and unpaid interest, if any, to but excluding the
date of redemption. At any time prior to October 9, 2018, SunOpta Foods
may also redeem, during each twelve-month period beginning on October 20,
2016, up to 10% of the aggregate principal amount of the Notes at a price
equal to 103.000% of the aggregate principal amount of the Notes being
redeemed, plus accrued and unpaid interest, if any, to but excluding the
date of redemption. In the event of a change of control, SunOpta Foods
will be required to make an offer to repurchase the Notes at 101.000% of
their principal amount, plus accrued and unpaid interest, if any, to the
date of purchase.
|
|
|
|
The Notes are secured by second-priority liens on
substantially all of the assets that secure the credit facilities provided
under the Global Credit Facility, subject to certain exceptions and
permitted liens. The Notes are senior secured obligations and rank equally
in right of payment with SunOpta Foods existing and future senior debt
and senior in right of payment to any future subordinated debt. The Notes
are effectively subordinated to debt under the Global Credit Facility and
any future indebtedness secured on a first priority basis. The Notes are
initially guaranteed on a senior secured second-priority basis by the Company and each of its
subsidiaries (other than SunOpta Foods) that guarantees indebtedness under the
Global Credit Facility, subject to certain exceptions.
|
SUNOPTA INC.
|
23
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
The Notes are subject to covenants
that, among other things, limit the Companys ability to (i) incur additional
debt or issue preferred stock; (ii) pay dividends and make certain types of
investments and other restricted payments; (iii) create liens; (iv) enter into
transactions with affiliates; (v) sell assets; and (vi) create restrictions on
the ability of restricted subsidiaries to pay dividends, make loans or advances
or transfer assets to the Company, SunOpta Foods or any guarantor of the Notes.
The indenture provides for customary events of default (subject in certain cases
to customary grace and cure periods), which include nonpayment, breach of
covenants in the indenture, certain payment defaults or acceleration of other
indebtedness, a failure to pay certain judgments and certain events of
bankruptcy and insolvency. If an event of default occurs and is continuing, the
trustee or holders of at least 25% in principal amount of the outstanding Notes
may declare the principal of and accrued and unpaid interest on, if any, all the
Notes to be due and payable.
On October 19, 2017, the Company repaid
$7.5 million principal amount of the Notes at 103.000% .
9. Series A Preferred Stock
On October 7, 2016 (the Closing Date), the Company and
SunOpta Foods entered into a subscription agreement (the Subscription
Agreement) with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund
II, L.P. (collectively, the Investors). Pursuant to the Subscription
Agreement, SunOpta Foods issued an aggregate of 85,000 shares of Preferred Stock
to the Investors for consideration in the amount of $85.0 million. In connection
with the issuance of the Preferred Stock, the Company incurred direct and
incremental expenses of $6.0 million, which reduced the carrying value of the
Preferred Stock. At any time on or after the fifth anniversary of the Closing
Date, SunOpta Foods may redeem all of the Preferred Stock for an amount, per
share of Preferred Stock, equal to the value of the liquidation preference at
such time. The carrying value of the Preferred Stock is being accreted to the
redemption amount of $85.0 million through charges to retained earnings over the
period preceding the fifth anniversary of the Closing Date, which accretion
amounted to $0.3 million and $0.7 million for the quarter and three quarters
ended September 30, 2017, respectively.
In connection with the Subscription Agreement, the Company
agreed to, among other things (i) ensure SunOpta Foods has sufficient funds to
pay its obligations under the terms of the Preferred Stock and (ii) grant each
holder of Preferred Stock (the Holder) the right to exchange the Preferred
Stock for shares of common stock of the Company (the Common Shares). The
Preferred Stock is non-participating with the Common Shares in dividends and
undistributed earnings of the Company.
The Preferred Stock has a stated value and initial liquidation
preference of $1,000 per share. Cumulative preferred dividends accrue daily on
the Preferred Stock at an annualized rate of 8.0% prior to October 5, 2025 and
12.5% thereafter, in each case of the liquidation preference (subject to an
increase of 1.0% per quarter, up to a maximum rate of 5.0% per quarter on the
occurrence of certain events of non-compliance). Prior to October 5, 2025,
SunOpta Foods may pay dividends in cash or elect, in lieu of paying cash, to add
the amount that would have been paid to the liquidation preference. After
October 4, 2025, the failure to pay dividends in cash will be an event of
non-compliance. The Preferred Stock ranks senior to the shares of common stock
of SunOpta Foods with respect to dividend rights and rights on the distribution
of assets on any liquidation, winding up or dissolution of the Company or
SunOpta Foods. As at September 30, 2017, the Company had accrued unpaid
dividends of $1.7 million, which were recorded in accounts payable and accrued
liabilities on the consolidated balance sheet.
At any time, the Holders may exchange their shares of Preferred
Stock, in whole or in part, into the number of Common Shares equal to, per share
of Preferred Stock, the quotient of the liquidation preference divided by $7.50
(such price, the Exchange Price and such quotient, the Exchange Rate). As at
September 30, 2017, the aggregate shares of Preferred Stock outstanding were
exchangeable into 11,333,333 Common Shares. The Exchange Price is subject to
certain anti-dilution adjustments, including a weighted-average adjustment for
issuances of Common Shares below the Exchange Price, provided that the Exchange
Price may not be lower than $7.00 (subject to adjustment in certain
circumstances). SunOpta Foods may cause the Holders to exchange all of the
Preferred Stock into a number of Common Shares based on the applicable Exchange
Price if (i) fewer than 10% of the shares of Preferred Stock issued on the
Closing Date remain outstanding or (ii) on or after the third anniversary of the
Closing Date, the average volume-weighted average price of the Common Shares
during the then preceding 20 trading day period is greater than 200% of the
Exchange Price. Prior to the receipt of applicable approval by the holders of Common Shares,
shares of Preferred Stock were not exchangeable into more than 19.99% of the
number of Common Shares outstanding immediately after giving effect to such
exchange (the Beneficial Ownership Exchange Cap). On May 24, 2017, the holders
of Common Shares approved the removal of the Beneficial Ownership Exchange Cap.
SUNOPTA INC.
|
24
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
In connection with the Subscription Agreement, the Company
issued Special Shares, Series 1 (the Special Voting Shares) to the Investors,
which entitle the Investors to one vote per Special Voting Share on all matters
submitted to a vote of the holders of Common Shares, together as a single class,
subject to certain exceptions. Additional Special Voting Shares will be issued,
or existing Special Voting Shares will be redeemed, as necessary to ensure that
the aggregate number of Special Voting Shares outstanding is equal to the number
of shares of Preferred Stock outstanding from time to time multiplied by the
Exchange Rate in effect at such time. As at September 30, 2017, 11,333,333
Special Voting Shares were issued and outstanding, which represented an
approximate 11.6% voting interest in the Company. The Special Voting Shares are
not transferable and the voting rights associated with the Special Voting Shares
will terminate upon the transfer of the Preferred Stock to a third party, other
than a controlled affiliate of the Investors. The Investors are entitled to
designate up to two nominees for election to the Board of Directors of the
Company (the Board) and have the right to designate one individual to attend
meetings of the Board as a non-voting observer, subject to the Investors
maintaining certain levels of beneficial ownership of Common Shares on an
as-exchanged basis. For so long as the Investors beneficially own or control at
least 50% of the Preferred Stock issued on the Closing Date, including any
corresponding Common Shares into which such Preferred Stock are exchanged, the
Investors will be entitled to (i) participation rights with respect to future
equity offerings of the Company; and (ii) governance rights, including the right
to approve certain actions proposed to be taken by the Company and its
subsidiaries.
10. Stock-Based Compensation
Stock Incentive Plan
For the three quarters ended September 30, 2017, the Company
granted 872,285 stock options to selected employees that vest 100% on the third
anniversary of the grant date and expire on the tenth anniversary of the grant
date. The weighted-average grant-date fair value of the stock options was $4.22.
The following table summarizes the weighted-average assumptions used in the
Black-Scholes option-pricing model to determine the fair value of the stock
options granted:
Grant-date stock price
|
$
|
9.41
|
|
Exercise price
|
$
|
9.41
|
|
Dividend yield
|
|
0%
|
|
Expected volatility
(1)
|
|
42.3%
|
|
Risk-free interest rate
(2)
|
|
2.0%
|
|
Expected life of options (in years)
(3)
|
|
6.5
|
|
|
(1)
|
Determined based on the historical volatility of the
Common Shares over the expected life of the stock options.
|
|
(2)
|
Determined based on U.S. Treasury yields with a remaining
term equal to the expected life of the stock options.
|
|
(3)
|
Determined based on the mid-point of vesting (three
years) and expiration (ten years).
|
The aggregate grant-date fair value of stock options awarded to
employees was $3.7 million, which will be recognized on a straight-line basis
over the three-year vesting period.
For the three quarters ended September 30, 2017, the Company
also granted 1,440,737 performance share units (PSU) to selected employees and
702,504 restricted stock units (RSUs) to selected employees and directors.
The vesting of the PSUs is subject to the satisfaction of
certain stock price performance conditions during a three-year performance
period ending May 24, 2020. One-third of the PSUs will vest upon achieving a
stock price of $11.00, one-third will vest upon achieving a stock price of
$14.00, and one-third will vest upon achieving a stock price of $18.00, in each
case for 20 consecutive trading days and subject to the employees continued
employment throughout the performance period.
SUNOPTA INC.
|
25
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
Each vested PSU will entitle the employee to receive one common
share of the Company without payment of additional consideration.
The fair value of the PSUs was estimated using a Monte Carlo
valuation model, which simulates the potential outcomes for the Companys stock
price performance and determines the payouts that would occur under each
scenario. Fair value is based on the average of those results. The grant-date
weighted-average fair value of the PSUs was determined to be $5.85, based on the
following inputs to the valuation model:
Grant-date stock price
|
$
|
9.47
|
|
Dividend yield
|
|
0%
|
|
Expected volatility
(1)
|
|
42.3%
|
|
Risk-free interest rate
(2)
|
|
1.5%
|
|
Expected life (in years)
(3)
|
|
3.0
|
|
(1)
|
Determined based on the historical volatility of the
Common Shares over 6.5 years, which is consistent with the volatility
assumption for stock options granted to employees on the same date as the
PSUs.
|
(2)
|
Determined based on U.S. Treasury yields with a remaining
term equal to the expected life of the PSUs.
|
(3)
|
Determined based on vesting for the
PSUs.
|
The aggregate grant-date fair value of the PSUs was $8.4
million, which will be recognized on a straight-line basis over the requisite
three-year performance period.
The RSUs granted to employees vest ratably on each of the first
through third anniversaries of the grant date. RSUs granted to directors vest
100% on the first anniversary of the grant date. Each vested RSU will entitle
the employee or director to receive one common share of the Company. The
weighted-average grant-date fair value of the RSUs was estimated to be $9.26,
based on the stock price of the Common Shares as of the dates of grant. The
aggregate grant-date fair value of the RSUs awarded to employees and directors
of $6.5 million will be recognized on a straight-line basis over the
weighted-average vesting period of 2.7 years.
CEO Plan
On February 6, 2017, David Colo was appointed President and CEO
of the Company. In connection with his appointment, the Company granted Mr. Colo
473,940 performance-based stock options (the Special Stock Options) and
277,780 performance stock units (the Special Performance Units). In addition,
Mr. Colo was granted 100,000 RSUs, of which 50,000 were contingent on Mr. Colo
purchasing Common Shares with an aggregate value of $1.0 million in the open
market.
The vesting of the Special Stock Options and Special
Performance Units is subject to: (i) Mr. Colos continued employment with the
Company during a three-year performance period ending February 6, 2020; and (ii)
the satisfaction of certain stock price performance conditions during the
performance period. One-third of the Special Stock Options and Special
Performance Units will vest upon achieving a stock price of $11.00, one-third
will vest upon achieving a stock price of $14.00, and one-third will vest upon
achieving a stock price of $18.00, in each case for 20 consecutive trading days
and subject to Mr. Colos continued employment through the performance period.
Each vested Special Stock Option will entitle Mr. Colo to purchase one common
share of the Company at an exercise price of $7.00, which was equal to the
closing price of the Common Shares as at February 6, 2017. Each vested Special
Performance Unit will entitle Mr. Colo to receive one common share of the
Company without payment of additional consideration.
The grant-date weighted-average fair values of the Special
Stock Options and Special Performance Units were estimated using a Monte Carlo
valuation model and determined to be $1.84 and $2.79, respectively, based on the
following inputs to the valuation model:
|
|
|
|
|
Special
|
|
|
|
Special Stock
|
|
|
Performance
|
|
|
|
Options
|
|
|
Units
|
|
Grant-date stock price
|
$
|
7.00
|
|
$
|
7.00
|
|
Exercise price
|
$
|
7.00
|
|
|
NA
|
|
Dividend yield
|
|
0%
|
|
|
0%
|
|
Expected volatility
(1)
|
|
42.0%
|
|
|
42.0%
|
|
Risk-free interest rate
(2)
|
|
2.2%
|
|
|
1.5%
|
|
Expected life (in years)
(3)
|
|
6.5
|
|
|
3.0
|
|
SUNOPTA INC.
|
26
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
|
(1)
|
Determined based on the historical volatility of the
Common Shares over the expected life of the Special Stock
Options.
|
|
(2)
|
Determined based on U.S. Treasury yields with a remaining
term equal to the respective expected lives of the Special Stock Options
and Special Performance Units.
|
|
(3)
|
Determined using the simplified method for the Special
Stock Options, based on the mid-point of vesting (three years) and
expiration (ten years). Determined based on vesting for the Special
Performance Units.
|
The aggregate grant-date fair value of the Special Stock
Options and Special Performance Units awarded to Mr. Colo was $1.6 million,
which will be recognized on a straight-line basis over the requisite three-year
performance period.
The RSUs granted to Mr. Colo vest in three equal installments
beginning on February 6, 2018. Each vested RSU will entitle Mr. Colo to receive
one common share of the Company. The grant-date fair value of the RSUs was
estimated to be $7.00 based on the stock price of the Common Shares as of the
date of grant. The aggregate grant-date fair value of the RSUs awarded to Mr.
Colo of $0.7 million will be recognized on a straight-line basis over the
three-year vesting period.
11. Accumulated Other Comprehensive Loss
Net unrealized gains/(losses) recorded in accumulated other
comprehensive loss were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Currency translation adjustment
|
|
(8,185
|
)
|
|
(13,104
|
)
|
Cash
flow hedges, net of income taxes
|
|
257
|
|
|
-
|
|
|
|
(7,928
|
)
|
|
(13,104
|
)
|
12. Other Expense, Net
The components of other expense (income) were as follows:
|
|
Quarter ended
|
|
|
Three quarters ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Impairment of long-lived assets
(1)
|
|
4,467
|
|
|
10,300
|
|
|
8,190
|
|
|
12,035
|
|
Employee termination costs
(2)
|
|
2,052
|
|
|
138
|
|
|
4,227
|
|
|
1,153
|
|
Product withdrawal and recall costs
(3)
|
|
134
|
|
|
-
|
|
|
413
|
|
|
1,697
|
|
Increase (decrease) in fair value of contingent
consideration
(4)
|
|
83
|
|
|
124
|
|
|
287
|
|
|
(1,281
|
)
|
Legal settlement
(5)
|
|
(1,024
|
)
|
|
-
|
|
|
(1,024
|
)
|
|
9,000
|
|
Other
|
|
260
|
|
|
(250
|
)
|
|
(71
|
)
|
|
119
|
|
|
|
5,972
|
|
|
10,312
|
|
|
12,022
|
|
|
22,723
|
|
SUNOPTA INC.
|
27
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(1)
|
Impairment of long-lived
assets
|
For the quarter ended September 30,
2017, represented the impairment of assets associated with the exit from
flexible resealable pouch and nutrition bar product lines and operations, and,
for the three quarters ended September 30, 2017, included $3.2 million paid for
the early buyout of the San Bernardino equipment leases (see note 2).
For the quarter ended October 1, 2016,
represented the impairment of equipment and leasehold improvements in connection
with the closure of the San Bernardino facility. In addition, for the three
quarters ended October 1, 2016, included the impairment of leasehold
improvements at the Companys Buena Park, California, facility on the
consolidation of Companys frozen fruit processing operations following the
acquisition of Sunrise in October 2015.
(2)
|
Employee termination costs
|
|
|
|
For the quarter and three quarters ended September 30,
2017, represented severance benefits, net of forfeitures of stock- based
awards, and legal costs incurred in connection with the Value Creation
Plan (see note 2), including employees affected by the exit from flexible
resealable pouch and nutrition bar product lines and operations.
|
|
|
|
For the quarter and three quarters ended October 1, 2016,
primarily represented severance benefits for employees affected by the
consolidation of the Companys frozen fruit processing
operations.
|
|
|
(3)
|
Product withdrawal and recall costs
|
|
|
|
For the three quarters ended September 30, 2017,
represented product withdrawal and recall costs that were not eligible for
reimbursement under the Companys insurance policies.
|
|
|
|
For the quarter and three quarters ended October 1, 2016,
the Company recognized estimated costs of $1.1 million related to the
voluntary withdrawal of a consumer-packaged product due to a
quality-related issue, and the $0.6 million for insurance deductibles
related to the sunflower recall (see note 5).
|
|
|
(4)
|
Increase (decrease) in fair value of contingent
consideration
|
|
|
|
For all periods presented, reflected the accretion of
contingent consideration obligations to reflect the time value of money.
In addition, for the three quarters ended October 1, 2016, included a gain
of $1.7 million on the settlement of the contingent consideration
obligation related to the acquisition of Niagara Natural in August
2015.
|
|
|
(5)
|
Legal settlement
|
|
|
|
In the second quarter of 2016, the Company recorded a
charge of $9.0 million related to the settlement of a product recall
dispute with a customer involving certain flexible resealable pouch
products manufactured by the Company in 2013. The settlement amount
included up to $4.0 million in rebates payable to the customer over a
four-year period. In connection with the exit from the flexible resealable
pouch product lines and operations, the Company agreed to an upfront cash
settlement of the remaining rebate obligation, resulting in a recovery of
$1.0 million recognized in the third quarter of
2017.
|
SUNOPTA INC.
|
28
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
13. Loss Per Share
Basic and diluted loss per share were calculated as follows
(shares in thousands):
|
|
Quarter ended
|
|
|
Three quarters
ended
|
|
|
|
September
|
|
|
October 1,
|
|
|
September
|
|
|
October 1,
|
|
|
|
30, 2017
|
|
|
2016
|
|
|
30, 2017
|
|
|
2016
|
|
Numerator for basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations,
less amount attributable to non-controlling interests
|
$
|
(6,027
|
)
|
$
|
(3,355
|
)
|
$
|
(17,833
|
)
|
$
|
(17,142
|
)
|
Less: dividends and accretion on
Series A Preferred Stock
|
|
(1,954
|
)
|
|
-
|
|
|
(5,848
|
)
|
|
-
|
|
Loss from continuing operations
available to common shareholders
|
|
(7,981
|
)
|
|
(3,355
|
)
|
|
(23,681
|
)
|
|
(17,142
|
)
|
Loss from discontinued
operations attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss available to common shareholders
|
$
|
(7,981
|
)
|
$
|
(3,355
|
)
|
$
|
(23,681
|
)
|
$
|
(17,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of
shares outstanding
|
|
86,541
|
|
|
85,619
|
|
|
86,232
|
|
|
85,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing operations
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.27
|
)
|
$
|
(0.20
|
)
|
- from discontinued
operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.27
|
)
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations, less amount attributable to non-controlling interests
|
$
|
(6,027
|
)
|
$
|
(3,355
|
)
|
$
|
(17,833
|
)
|
$
|
(17,142
|
)
|
Less: dividends and accretion on Series A Preferred
Stock
(1)
|
|
(1,954
|
)
|
|
-
|
|
|
(5,848
|
)
|
|
-
|
|
Loss from continuing
operations available to common shareholders
|
|
(7,981
|
)
|
|
(3,355
|
)
|
|
(23,681
|
)
|
|
(17,142
|
)
|
Loss from discontinued operations
attributable to SunOpta Inc.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(570
|
)
|
Loss available to common shareholders
|
$
|
(7,981
|
)
|
$
|
(3,355
|
)
|
$
|
(23,681
|
)
|
$
|
(17,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of shares outstanding
|
|
86,541
|
|
|
85,619
|
|
|
86,232
|
|
|
85,529
|
|
Dilutive effect of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred
Stock
(1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Stock options
and RSUs
(2)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diluted weighted-average number of shares outstanding
|
|
86,541
|
|
|
85,619
|
|
|
86,232
|
|
|
85,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
- from continuing operations
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.27
|
)
|
$
|
(0.20
|
)
|
- from discontinued operations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.01
|
)
|
|
$
|
(0.09
|
)
|
$
|
(0.04
|
)
|
$
|
(0.27
|
)
|
$
|
(0.21
|
)
|
SUNOPTA INC.
|
29
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
(1)
|
For the quarter and three quarters ended September 30,
2017, it was more dilutive to assume the Preferred Stock was not converted
into Common Shares and, therefore, the numerator of the diluted loss per
share calculation was not adjusted to add back the dividends and accretion
on the Preferred Stock and the denominator was not adjusted to include
11,333,333 Common Shares issuable on an if-converted basis.
|
|
|
(2)
|
For the quarter and three quarters ended September 30,
2017, stock options and RSUs to purchase or receive 917,702 (October 1,
2016 31,582) and 850,013 (October 1, 2016 20,534) Common Shares,
respectively, were excluded from the calculation of diluted loss per share
due to their anti-dilutive effect of reducing the loss per share. In
addition, for the quarter and three quarters ended September 30, 2017,
options to purchase 1,518,129 (October 1, 2016 1,873,871) and 2,488,826
(October 1, 2016 2,453,271) Common Shares, respectively, were
anti-dilutive because the exercise prices of these options were greater
than the average market price.
|
14. Supplemental Cash Flow Information
|
|
Quarter ended
|
|
|
Three quarters
ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Changes in non-cash working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
5,113
|
|
|
(22,302
|
)
|
|
12,754
|
|
|
(56,049
|
)
|
Inventories
|
|
15,100
|
|
|
5,150
|
|
|
9,187
|
|
|
(34,760
|
)
|
Income tax recoverable/payable
|
|
(552
|
)
|
|
9,423
|
|
|
(5,351
|
)
|
|
14,807
|
|
Prepaid expenses and other
current assets
|
|
(6,695
|
)
|
|
(1,985
|
)
|
|
(16,241
|
)
|
|
(2,591
|
)
|
Accounts payable and accrued
liabilities
|
|
(30,455
|
)
|
|
10,999
|
|
|
(23,760
|
)
|
|
21,943
|
|
Customer and other deposits
|
|
(517
|
)
|
|
(449
|
)
|
|
(1,908
|
)
|
|
(4,293
|
)
|
|
|
(18,006
|
)
|
|
836
|
|
|
(25,319
|
)
|
|
(60,943
|
)
|
15. Commitments and Contingencies
Employment Matter
On April 19, 2013, a class-action complaint, in the case titled
De Jesus, et al. v. Frozsun, Inc. d/b/a Frozsun Foods, was filed against Sunrise
Growers, Inc. (then named Frozsun, Inc.) in California Superior Court, Santa
Barbara County seeking damages, equitable relief and reasonable attorneys fees
for alleged wage and hour violations. This case includes claims for failure to
pay all hours worked, failure to pay overtime wages, meal and rest period
violations, waiting-time penalties, improper wage statements and unfair business
practices. The putative class includes approximately 10,000 non-exempt hourly
employees from Sunrises production facilities in Santa Maria and Oxnard,
California. The parties attended mediation on October 12, 2017 and reached a
general agreement to resolve the matter on a class-wide basis. The parties are
negotiating the remaining details of the settlement which is subject to court
approval. It is anticipated that the parties will seek preliminary approval of
the settlement from the court in December 2017 or January 2018. The Company
expects to recover the full amount payable under the settlement through
insurance coverage and an escrow account established in connection with the
Companys acquisition of Sunrise.
Other Claims
In addition, various claims and potential claims arising in the
normal course of business are pending against the Company. It is the opinion of
management that these claims or potential claims are without merit and the
amount of potential liability, if any, to the Company is not determinable.
Management believes the final determination of these claims or potential claims
will not materially affect the financial position or results of the Company.
SUNOPTA INC.
|
30
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
16. Segmented Information
The composition of the Companys reportable segments is as
follows:
|
|
Global Ingredients aggregates our North American-based
Raw Material Sourcing and Supply and European-based International Sourcing
and Supply operating segments focused on the procurement and sale of
specialty and organic grains and seeds, raw material ingredients,
value-added grain- and cocoa-based ingredients, and organic commodities.
|
|
|
|
|
|
Consumer Products consists of three main commercial
platforms: Healthy Beverages, Healthy Fruit and Healthy Snacks. Healthy
Beverages includes aseptic packaged products including non-dairy and dairy
beverages, broths and teas; refrigerated premium juices; and shelf-stable
juices and functional waters. Healthy Fruit includes individually quick
frozen (IQF) fruits for retail; IQF and bulk frozen fruit for
foodservice; and custom fruit preparations for industrial use. Healthy
Snacks includes fruit snacks; nutrition bars; and flexible resealable
pouch products.
|
In addition, Corporate Services provides a variety of
management, financial, information technology, treasury and administration
services to each of the Companys operating segments from the Companys
headquarters in Mississauga, Ontario and administrative office in Edina,
Minnesota.
When reviewing the operating results of the Companys operating
segments, management uses segment revenues from external customers and segment
operating income/loss to assess performance and allocate resources. Segment
operating income/loss excludes other income/expense items and goodwill
impairment losses. In addition, interest expense and income amounts, and
provisions for income taxes are not allocated to the operating segments.
|
|
Quarter ended
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
140,533
|
|
|
180,180
|
|
|
320,713
|
|
Segment operating income
|
|
5,265
|
|
|
4,528
|
|
|
9,793
|
|
Corporate Services
|
|
|
|
|
|
|
|
(4,832
|
)
|
Other
expense, net (see note 12)
|
|
|
|
|
|
|
|
(5,972
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(8,371
|
)
|
Loss from continuing operations before income
taxes
|
|
|
|
|
|
|
|
(9,382
|
)
|
|
|
Quarter ended
|
|
|
|
October 1, 2016
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
137,174
|
|
|
211,558
|
|
|
348,732
|
|
Segment operating income
|
|
7,404
|
|
|
8,104
|
|
|
15,508
|
|
Corporate Services
|
|
|
|
|
|
|
|
(2,287
|
)
|
Other
expense, net (see note 12)
|
|
|
|
|
|
|
|
(10,312
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(12,178
|
)
|
Loss from continuing operations before income
taxes
|
|
|
|
|
|
|
|
(9,269
|
)
|
SUNOPTA INC.
|
31
|
September 30, 2017 10-Q
|
SunOpta Inc.
|
Notes to Consolidated Financial Statements
|
For the quarters and three quarters ended September 30,
2017 and October 1, 2016
|
(Unaudited)
|
(All tabular
amounts expressed in thousands of U.S. dollars, except per share amounts)
|
|
|
Three quarters ended
|
|
|
|
September 30, 2017
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
420,247
|
|
|
566,951
|
|
|
987,198
|
|
Segment operating income
|
|
18,388
|
|
|
14,696
|
|
|
33,084
|
|
Corporate Services
|
|
|
|
|
|
|
|
(28,460
|
)
|
Other
expense, net (see note 12)
|
|
|
|
|
|
|
|
(12,022
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(23,820
|
)
|
Loss from continuing operations before income
taxes
|
|
|
|
|
|
|
|
(31,218
|
)
|
|
|
Three quarters ended
|
|
|
|
October 1, 2016
|
|
|
|
Global
|
|
|
Consumer
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Consolidated
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Segment revenues from external customers
|
|
441,694
|
|
|
607,498
|
|
|
1,049,192
|
|
Segment operating income
|
|
24,256
|
|
|
6,989
|
|
|
31,245
|
|
Corporate Services
|
|
|
|
|
|
|
|
(6,544
|
)
|
Other
expense, net (see note 12)
|
|
|
|
|
|
|
|
(22,723
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
(34,748
|
)
|
Loss from continuing operations before income
taxes
|
|
|
|
|
|
|
|
(32,770
|
)
|
SUNOPTA INC.
|
32
|
September 30, 2017 10-Q
|
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Financial Information
The following Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) should be read in conjunction
with the interim consolidated financial statements, and notes thereto, for the
quarter ended September 30, 2017 contained under Item 1 of this Quarterly Report
on Form 10-Q and in conjunction with the annual consolidated financial
statements, and notes thereto, contained in the Annual Report on Form 10-K for
the fiscal year ended December 31, 2016 (Form 10-K). Unless otherwise
indicated herein, the discussion and analysis contained in this MD&A
includes information available to November 8, 2017.
Certain statements contained in this MD&A may constitute
forward-looking statements as defined under securities laws. Forward-looking
statements may relate to our future outlook and anticipated events or results
and may include statements regarding our future financial position, business
strategy, budgets, litigation, projected costs, capital expenditures, financial
results, taxes, plans and objectives. In some cases, forward-looking statements
can be identified by terms such as anticipate, estimate, target, intend,
project, potential, continue, believe, expect, could, would,
should, might, plan, will, may, predict, or other similar
expressions concerning matters that are not historical facts. To the extent any
forward-looking statements contain future-oriented financial information or
financial outlooks, such information is being provided to enable a reader to
assess our financial condition, material changes in our financial condition, our
results of operations, and our liquidity and capital resources. Readers are
cautioned that this information may not be appropriate for any other purpose,
including investment decisions.
Forward-looking statements contained in this MD&A are based
on certain factors and assumptions regarding expected growth, results of
operations, performance, and business prospects and opportunities. While we
consider these assumptions to be reasonable, based on information currently
available, they may prove to be incorrect. Forward-looking statements are also
subject to certain factors, including risks and uncertainties that could cause
actual results to differ materially from what we currently expect. These factors
are more fully described in the Risk Factors section at Item 1A of the Form
10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are
based on our current estimates, expectations and projections, which we believe
are reasonable as of the date of this report. You should not place undue
importance on forward-looking statements and should not rely upon this
information as of any other date. Other than as required under securities laws,
we do not undertake to update any forward-looking information at any particular
time.
Unless otherwise noted herein, all currency amounts in this
MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed
in thousands of U.S. dollars, except per share amounts.
SUNOPTA INC.
|
33
|
September 30, 2017 10-Q
|
Overview
SunOpta is a global company focused on sourcing organic and
non-genetically modified (non-GMO) ingredients, and manufacturing healthy food
and beverage products. Our global sourcing platform makes us one of the leading
suppliers of organic and non-GMO raw materials and ingredients in the food
industry. Our consumer products portfolio utilizes internally and externally
sourced raw materials and ingredients to manufacture healthy food and beverage
products for supply to retail, foodservice and branded food customers. We
operate our business in the following reportable segments:
|
|
Global Ingredients aggregates our North American-based
Raw Material Sourcing and Supply and European-based International Sourcing
and Supply operating segments focused on the procurement and sale of
specialty and organic grains and seeds, raw material ingredients,
value-added grain- and cocoa-based ingredients, and organic commodities.
|
|
|
|
|
|
Consumer Products consists of three main commercial
platforms: Healthy Beverages, Healthy Fruit and Healthy Snacks. Healthy
Beverages includes aseptic packaged products including non-dairy and dairy
beverages, broths and teas; refrigerated premium juices; and shelf-stable
juices and functional waters. Healthy Fruit includes individually quick
frozen (IQF) fruits for retail; IQF and bulk frozen fruit for
foodservice; and custom fruit preparations for industrial use. Healthy
Snacks includes fruit snacks; nutrition bars; and flexible resealable
pouch products.
|
|
|
|
SUNOPTA INC.
|
34
|
September 30, 2017 10-Q
|
Fiscal Year
We operate on a fiscal calendar that results in a given fiscal
year consisting of a 52- or 53-week period ending on the Saturday closest to
December 31. Fiscal year 2017 is a 52-week period ending on December 30, 2017,
with quarterly periods ending on April 1, July 1 and September 30, 2017. Fiscal
year 2016 was a 52-week period ending on December 31, 2016, with quarterly
periods ending on April 2, July 2 and October 1, 2016.
Value Creation Plan
On October 7, 2016, we entered into a strategic partnership
with Oaktree Capital Management L.P., a private equity investor (together with
its affiliates, Oaktree). On October 7, 2016, Oaktree invested $85.0 million
through the purchase of cumulative, non-participating Series A Preferred Stock
(the Preferred Stock) of our wholly-owned subsidiary, SunOpta Foods Inc.
(SunOpta Foods).
Following the strategic partnership, with the assistance of
Oaktree, we conducted a thorough review of our operations, management and
governance, with the objective of maximizing our ability to deliver long-term
value to our shareholders. As a product of this review our management and the
Board of Directors developed a Value Creation Plan built on four pillars:
portfolio optimization, operational excellence, go-to-market effectiveness and
process sustainability. The Value Creation Plan is a broad-based initiative
focused on increasing shareholder value through strategic investments made to
the people and assets of the Company to deliver sustained profitable growth. We
expect the Value Creation Plan to be implemented in phases, and span several
years.
As part of the first phase of the Value Creation Plan, we are
targeting implementation of $30 million of productivity-driven annualized
enhancements of earnings before income taxes, depreciation and amortization
(EBITDA), to be implemented over 2017 and 2018. For fiscal 2017, these EBITDA
benefits will be offset by expenses associated with the Value Creation Plan,
including structural investments made in the areas of quality, sales, marketing,
operations and engineering resources, as well as non-structural third-party
consulting support, severance, and recruiting costs. The plan also calls for
increased investment in capital upgrades at several manufacturing facilities to
enhance food safety and manufacturing efficiencies. Over time, these investments
are expected to yield additional improvement in EBITDA beyond the $30 million of
initial productivity-driven savings. For the third quarter of 2017, we continued
to achieve progress against each of the four pillars of the Value Creation Plan
and we believe we are on track to achieve targeted productivity enhancements,
while continuing to make the necessary structural investments we believe will
accelerate growth and drive long-term value. Recent progress on each of the four
pillars of the Value Creation Plan is highlighted below:
Portfolio Optimization
The focus of the portfolio optimization pillar is to simplify
the business, investing where structural advantages exist, while exiting
businesses or product lines where we are not effectively positioned. Recent
highlights include:
|
|
Announced the exit from nutrition bar product lines and
operations in Carson City, Nevada, targeting substantial completion by the
end of the fourth quarter of 2017.
|
|
|
|
|
|
Announced the discontinuation of flexible resealable
pouch products along with an agreement to sell the associated pouch
equipment for $2.0 million, which closed on November 3, 2017.
|
|
|
|
|
|
Continued progress on an expansion project to add
incremental freezing capacity, storage, and retail bagging capabilities to
our Mexican frozen fruit facility, which is expected to be ready in time
for the 2018 fruit season.
|
|
|
|
|
|
Continued progress on an expansion project to add
increased roasting and press capacity to our specialty cocoa processing
facility in the Netherlands.
|
Since the initiation of the Value Creation Plan, we have
implemented portfolio changes that are expected to yield approximately $6.0
million of annualized EBITDA benefits. The increase from the previously
disclosed target of $5.0 million reflects the planned exit of the flexible
resealable pouch and nutrition bar product lines.
SUNOPTA INC.
|
35
|
September 30, 2017 10-Q
|
Operational Excellence
The focus of the operational excellence pillar is to ensure
food quality and safety, coupled with improved operational performance and
efficiency. We expect these efforts to generate productivity improvements and
cost savings in manufacturing, procurement and logistics. Recent highlights
include:
|
|
Continued to enhance food safety and quality across the
manufacturing platform at the plant level and supplier level with a
focus on ensuring raw materials meet strict food safety and quality
standards before entering our facilities.
|
|
|
|
|
|
Continued to identify and implement productivity
initiatives focusing on manufacturing efficiencies, purchasing synergies
and effective freight management.
|
|
|
|
|
|
Under the direction of a new continuous improvement
leader, rolled out SunOpta 360 across the network of aseptic beverage
facilities, establishing a sustainable continuous improvement methodology
for the Company and adding to the pipeline of opportunities.
|
Since the initiation of the Value Creation Plan, we have
implemented process improvements and cost savings that are expected to yield
approximately $5.3 million of annualized EBITDA benefits.
Go-To-Market Effectiveness
The focus of the go-to-market effectiveness pillar is to
optimize customer and product mix in existing sales channels, and identify and
penetrate new high-potential sales channels. We expect efforts under this pillar
to improve revenue growth and profitability over time. Recent highlights
include:
|
|
Continued to grow the pipeline of commercial
opportunities across the beverage, aseptic and fruit snack categories with
recent private label, foodservice, and contract manufacturing account wins
across several consumer products categories.
|
|
|
|
|
|
Hired a new Chief Customer Officer for the Consumer
Products segment, as well as a new head of marketing, and other new
commercial talent that will focus efforts on growing the topline.
|
Since the initiation of the Value Creation Plan, we have
implemented go-to-market improvements through strategic pricing actions that are
expected to yield approximately $1.2 million of annualized EBITDA benefits. We have lowered this estimate from $2.0 million, as previously disclosed, to reflect improvements associated with our flexible resealable pouch and nutrition bar product lines, which we now intend to exit.
Process Sustainability
The focus of the process sustainability pillar is to ensure we
have the infrastructure, systems and skills to sustain the business improvements
and value captured from the Value Creation Plan. Broadening the skillset and
experience of SunOptas leadership team is a critical component to the process
sustainability pillar of the Value Creation Plan. Recent highlights include:
|
|
Appointed a new General Manager to lead the
frozen fruit platform.
|
|
|
|
|
|
Upgraded several plant manager positions across
the Company.
|
|
|
|
|
|
Continued focus on customer service and working
capital levels as sales and operations planning processes and support
systems are refined.
|
|
|
|
|
|
Initiated enterprise resource planning at our
Mexican frozen fruit facility.
|
The statements we make in this report about the expected
results of the Value Creation Plan, including expected improvements in earnings,
EBITDA, working capital efficiencies, expected cash flows, and expected costs,
are forward-looking statements. See Forward-Looking Statements above. EBITDA
is a non-GAAP measure that management uses when assessing the performance of our
operations and our ability to generate cash flows to fund our cash requirements,
including debt service and capital expenditures. See footnote (3) to the
Consolidated Results of Operations for the Quarters Ended September 30, 2017 and October 1, 2016 table below for a
reconciliation of EBITDA and adjusted EBITDA from loss from continuing
operations, which we consider to be the most directly comparable U.S. GAAP
financial measure.
SUNOPTA INC.
|
36
|
September 30, 2017 10-Q
|
In the second half of 2016 and first three quarters of 2017, we
incurred significant costs in connection with measures taken under the Value
Creation Plan. These costs included inventory and long-lived asset impairment
charges and facility closure costs primarily related to the closure of our San
Bernardino, California, juice facility ($10.3 million in the third quarter of
2016 and $4.4 million in the first three quarters of 2017), and the exit from
flexible resealable pouch and nutrition bar product lines and operations ($5.8
million in the third quarter of 2017), as well as employee recruitment,
relocation, retention and severance costs related to exit activities and
organizational changes within management and executive teams, and recruiting
efforts in the areas of quality, sales, marketing, operations and engineering
($3.3 million and $9.3 million in the third quarter and first three quarters of
2017, respectively). In addition, we incurred third-party legal advisory,
consulting and temporary labor costs in support of the Value Creation Plan of
$0.5 million in the third quarter of 2016, and $1.2 million and $15.8 million in
the third quarter and first three quarters of 2017, respectively. We also made
capital investments at several of our manufacturing facilities to enhance food
safety and production efficiency.
Costs incurred and charged to expense in the quarters and three
quarters ended September 30, 2017 and October 1, 2016 were recorded in the
consolidated statement of operations as follows:
|
|
Quarter ended
|
|
|
Three quarters
ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Cost of goods sold
(1)
|
|
1,287
|
|
|
-
|
|
|
1,921
|
|
|
-
|
|
Selling, general and administrative expenses
(2)
|
|
2,400
|
|
|
483
|
|
|
20,839
|
|
|
483
|
|
Other expense
(3)
|
|
6,569
|
|
|
10,300
|
|
|
12,467
|
|
|
10,300
|
|
|
|
10,256
|
|
|
10,783
|
|
|
35,227
|
|
|
10,783
|
|
|
(1)
|
Inventory write-downs and facility closure costs recorded
in cost of goods sold were allocated to the Consumer Products operating
segment.
|
|
(2)
|
Consulting fees and temporary labor costs, and employee
recruitment, relocation and retention costs recorded in selling, general
and administrative expenses were allocated to Corporate
Services.
|
|
(3)
|
Asset impairment and employee termination costs recorded
in other expense were not allocated to the Companys operating segments or
Corporate Services.
|
We estimate third-party consulting and employee recruitment,
retention and termination costs related to the Value Creation Plan to be
incurred and expensed during the fourth quarter of fiscal 2017 will be
approximately $10 million, which includes approximately $8.0 million related to
the early termination of the flexible resealable pouch equipment leases that was
paid on closing of the asset sale transaction. This estimate does not include
currently unforeseen asset impairment charges or employee-related costs that may
arise from future actions taken under the Value Creation Plan.
For more information regarding the Value Creation Plan, see
note 2 to the unaudited consolidated financial statements included in this
report.
Recall of Certain Roasted Sunflower Kernel Products
During the second quarter of 2016, we announced a voluntary
recall of certain roasted sunflower kernel products produced at our Crookston,
Minnesota facility due to potential contamination with Listeria monocytogenes
bacteria. Estimated losses related to the recall totaled $47.0 million as at
September 30, 2017, compared to $40.0 million as at December 31, 2016, comprised
of estimates for customer losses and direct incremental costs that we incurred.
Our estimates for customer losses are provisional and were determined based on
an assessment of the information available up to the date of filing of this
report, including a review of customer claims received as of that date and
consideration of the extent of potential additional claims that have yet to be
received. We have general liability and product recall insurance policies with
aggregate limits of $47.0 million under which we expect to recover
recall-related costs, less applicable deductibles. As at September 30, 2017, we
had recognized recoveries up to the limit of the coverage available under our
insurance policies. Consequently, to the extent any losses are excluded under
the insurance policies or additional losses are recognized related to existing
or new claims, these excluded or excess losses will be recognized as a charge to
future earnings. As at September 30, 2017, we had settled customer claims and
direct costs in the amount of $34.6 million, which settlements were fully funded
under our general liability and product recall insurance policies.
SUNOPTA INC.
|
37
|
September 30, 2017 10-Q
|
For more information regarding the recall, see note 5 to the
unaudited consolidated financial statements included in this report.
SUNOPTA INC.
|
38
|
September 30, 2017 10-Q
|
Consolidated Results of Operations for the Quarters Ended
September 30, 2017 and October 1, 2016
|
|
September 30,
|
|
|
October 1,
|
|
|
|
|
|
|
|
For the quarter ended
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
140,533
|
|
|
137,174
|
|
|
3,359
|
|
|
2.4%
|
|
Consumer
Products
|
|
180,180
|
|
|
211,558
|
|
|
(31,378
|
)
|
|
-14.8%
|
|
Total revenues
|
|
320,713
|
|
|
348,732
|
|
|
(28,019
|
)
|
|
-8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Ingredients
|
|
16,064
|
|
|
16,796
|
|
|
(732
|
)
|
|
-4.4%
|
|
Consumer Products
|
|
20,391
|
|
|
24,234
|
|
|
(3,843
|
)
|
|
-15.9%
|
|
Total gross profit
|
|
36,455
|
|
|
41,030
|
|
|
(4,575
|
)
|
|
-11.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
5,265
|
|
|
7,404
|
|
|
(2,139
|
)
|
|
-28.9%
|
|
Consumer
Products
|
|
4,528
|
|
|
8,104
|
|
|
(3,576
|
)
|
|
-44.1%
|
|
Corporate Services
|
|
(4,832
|
)
|
|
(2,287
|
)
|
|
(2,545
|
)
|
|
-111.3%
|
|
Total segment operating
income
|
|
4,961
|
|
|
13,221
|
|
|
(8,260
|
)
|
|
-62.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
5,972
|
|
|
10,312
|
|
|
(4,340
|
)
|
|
-42.1%
|
|
Earnings (loss) from continuing operations
before the
following
|
|
(1,011
|
)
|
|
2,909
|
|
|
(3,920
|
)
|
|
-134.8%
|
|
Interest expense, net
|
|
8,371
|
|
|
12,178
|
|
|
(3,807
|
)
|
|
-31.3%
|
|
Recovery of income taxes
|
|
(3,499
|
)
|
|
(5,411
|
)
|
|
1,912
|
|
|
35.3%
|
|
Loss from continuing
operations
|
|
(5,883
|
)
|
|
(3,858
|
)
|
|
(2,025
|
)
|
|
-52.5%
|
|
Earnings (loss) attributable to
non-controlling interests
|
|
144
|
|
|
(503
|
)
|
|
647
|
|
|
128.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to SunOpta
Inc.
(2)
|
|
(6,027
|
)
|
|
(3,355
|
)
|
|
(2,672
|
)
|
|
-79.6%
|
|
(1)
|
When assessing the financial performance of our operating
segments, we use an internal measure of operating income that excludes
other income/expense items and goodwill impairments determined in
accordance with U.S. generally accepted accounting principles (GAAP).
This measure is the basis on which management, including the Chief
Executive Officer, assesses the underlying performance of our operating
segments.
|
|
|
|
We believe that disclosing this non-GAAP measure assists
investors in comparing financial performance across reporting periods on a
consistent basis by excluding items that are not indicative of our core
operating performance. However, the non-GAAP measure of operating income
should not be considered in isolation or as a substitute for performance
measures calculated in accordance with U.S. GAAP. The following table
presents a reconciliation of segment operating income/loss to earnings
(loss) from continuing operations before the following, which we consider
to be the most directly comparable U.S. GAAP financial
measure.
|
|
|
|
Global
|
|
|
Consumer
|
|
|
Corporate
|
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Services
|
|
|
Consolidated
|
|
|
For the quarter ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)
|
|
5,265
|
|
|
4,528
|
|
|
(4,832
|
)
|
|
4,961
|
|
|
Other income (expense), net
|
|
(233
|
)
|
|
(5,969
|
)
|
|
230
|
|
|
(5,972
|
)
|
|
Earnings (loss) from
continuing operations before the following
|
|
5,032
|
|
|
(1,441
|
)
|
|
(4,602
|
)
|
|
(1,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
7,404
|
|
|
8,104
|
|
|
(2,287
|
)
|
|
13,221
|
|
|
Other expense, net
|
|
(14
|
)
|
|
(10,218
|
)
|
|
(80
|
)
|
|
(10,312
|
)
|
|
Earnings (loss) from continuing operations
before the following
|
|
7,390
|
|
|
(2,114
|
)
|
|
(2,367
|
)
|
|
2,909
|
|
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.
|
39
|
September 30, 2017 10-Q
|
(2)
|
When assessing our financial performance, we use an
internal measure of earnings from continuing operations, net of
non-controlling interests, determined in accordance with U.S. GAAP that
includes dividends and accretion on convertible preferred stock and
excludes specific items recognized in other income/expense, impairment
losses on goodwill, long-lived assets and investments, other unusual items
that are identified and evaluated on an individual basis, which due to
their nature or size, we would not expect to occur as part of our normal
business on a regular basis. We believe that the identification of these
excluded items enhances an analysis of our financial performance of our
core business when comparing those operating results between periods, as
we do not consider these items to be reflective of normal core business
operations.
|
|
|
|
The following table presents a reconciliation of adjusted
earnings/loss from loss from continuing operations, which we consider to
be the most directly comparable U.S. GAAP financial measure. In addition,
recognizing our intention to exit flexible resealable pouch and nutrition
bar product lines and operations (as described above under Value Creation
Plan), we have prepared this table in a columnar format to present the
effect 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 intend to exit and the effect
of those operations on our financial
performance.
|
|
|
|
Excluding
flexible
|
|
|
Flexible
|
|
|
|
|
|
|
|
|
|
|
resealable
pouch
|
|
|
resealable
pouch
|
|
|
|
|
|
|
|
|
|
|
and nutrition bar
|
|
|
and nutrition bar
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Per Diluted
|
|
|
Per Diluted
|
|
|
|
|
|
Per Diluted
|
|
|
|
|
Share
|
|
|
Share
|
|
|
|
|
|
Share
|
|
|
For the quarter ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(639
|
)
|
|
|
|
|
(5,244
|
)
|
|
|
|
|
(5,883
|
)
|
|
|
|
|
Less: earnings
attributable to non-controlling interests
|
|
(144
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(144
|
)
|
|
|
|
|
Less: dividends and accretion of Series A Preferred Stock
|
|
(1,954
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,954
|
)
|
|
|
|
|
Loss from continuing
operations available to common shareholders
|
|
(2,737
|
)
|
|
(0.03
|
)
|
|
(5,244
|
)
|
|
(0.06
|
)
|
|
(7,981
|
)
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to the Value Creation
Plan
(a)
|
|
3,050
|
|
|
|
|
|
7,206
|
|
|
|
|
|
10,256
|
|
|
|
|
|
Product withdrawal and recall costs
(b)
|
|
134
|
|
|
|
|
|
-
|
|
|
|
|
|
134
|
|
|
|
|
|
Recovery of legal settlement
(c)
|
|
(1,024
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,024
|
)
|
|
|
|
|
Other
(d)
|
|
293
|
|
|
|
|
|
-
|
|
|
|
|
|
293
|
|
|
|
|
|
Net income tax effect
(e)
|
|
(774
|
)
|
|
|
|
|
(2,810
|
)
|
|
|
|
|
(3,584
|
)
|
|
|
|
|
Adjusted loss
|
|
(1,058
|
)
|
|
(0.01
|
)
|
|
(848
|
)
|
|
(0.01
|
)
|
|
(1,906
|
)
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(3,759
|
)
|
|
|
|
|
(99
|
)
|
|
|
|
|
(3,858
|
)
|
|
|
|
|
Add: loss
attributable to non-controlling interests
|
|
503
|
|
|
|
|
|
-
|
|
|
|
|
|
503
|
|
|
|
|
|
Loss from
continuing operations available to common shareholders
|
|
(3,256
|
)
|
|
(0.04
|
)
|
|
(99
|
)
|
|
(0.00
|
)
|
|
(3,355
|
)
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to the Value Creation Plan
(f)
|
|
10,783
|
|
|
|
|
|
-
|
|
|
|
|
|
10,783
|
|
|
|
|
|
Costs related to business
acquisitions
(g)
|
|
5,515
|
|
|
|
|
|
-
|
|
|
|
|
|
5,515
|
|
|
|
|
|
Product withdrawal and recall costs
(h)
|
|
683
|
|
|
|
|
|
-
|
|
|
|
|
|
683
|
|
|
|
|
|
Litigation-related legal fees
(i)
|
|
564
|
|
|
|
|
|
-
|
|
|
|
|
|
564
|
|
|
|
|
|
Other
(d)
|
|
12
|
|
|
|
|
|
-
|
|
|
|
|
|
12
|
|
|
|
|
|
Net income tax effect
(e)
|
|
(6,629
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(6,629
|
)
|
|
|
|
|
Change in unrecognized tax benefits
(j)
|
|
(1,268
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,268
|
)
|
|
|
|
|
Adjusted earnings (loss)
|
|
6,404
|
|
|
0.07
|
|
|
(99
|
)
|
|
(0.00
|
)
|
|
6,305
|
|
|
0.07
|
|
|
(a)
|
Reflects inventory write-downs of $1.3 million recorded
in cost of goods sold; and consulting fees, temporary labor, employee
recruitment, relocation and retention costs of $2.4 million recorded in
selling, general and administrative (SG&A) expenses; and asset
impairment charges and employee termination costs of $6.6 million recorded
in other expense (as described above under Value Creation
Plan).
|
|
(b)
|
Reflects product withdrawal costs not eligible for
reimbursement under our insurance policies, which were recorded in other
expense.
|
|
(c)
|
Reflects a recovery on the early extinguishment of a
rebate obligation that arose from the prior settlement of a flexible
resealable pouch product recall dispute with a customer, which was
recorded in other income.
|
|
(d)
|
Other included fair value adjustments related to
contingent consideration arrangements and gain/loss on the sale of assets,
which were recorded in other expense.
|
|
(e)
|
Reflects the tax effect of the preceding adjustments to
earnings and reflects an overall estimated annual effective tax rate of
approximately 30% on adjusted earnings before tax.
|
|
(f)
|
Reflects legal advisory costs of $0.5 million recorded in
SG&A expenses; and asset impairment charges of $10.3 million recorded
in other expense (as described above under Value Creation
Plan).
|
|
(g)
|
Reflects costs related to the acquisition of Sunrise
Holdings (Delaware), Inc. (Sunrise) in October 2015 (the Sunrise
Acquisition), including an acquisition accounting adjustment related to
Sunrises inventory sold in the third quarter of 2016 of $1.9 million,
which was recorded in cost of goods sold; and the non-cash amortization
and expense of debt issuance costs incurred in connection with the financing
related to the Sunrise Acquisition of $3.6 million, which was recorded in
interest expense.
|
SUNOPTA INC.
|
40
|
September 30, 2017 10-Q
|
|
(h)
|
Reflects $0.7 million adjustment for the estimated lost
gross profit caused by the recall of certain sunflower kernel products (as
described above under Recall of Certain Roasted Sunflower Kernel
Products), which reflected a shortfall in revenues against anticipated
volumes of approximately $2.9 million, less associated cost of goods sold
of approximately $2.2 million.
|
|
(i)
|
Reflects legal costs related to the settlement of the
flexible resealable pouch product recall dispute with a customer (see (c)
above), which were recorded in SG&A expenses.
|
|
(j)
|
Reflects the realization of previously unrecognized tax
benefits, due to the expiration of the statute of
limitations.
|
We believe that investors
understanding of our financial performance is enhanced by disclosing the
specific items that we exclude from earnings/loss attributable to SunOpta Inc.
to compute adjusted earnings/loss. However, adjusted earnings/loss is not, and
should not be viewed as, a substitute for earnings prepared under U.S. GAAP.
Adjusted earnings/loss is presented solely to allow investors to more fully
understand how we assess our financial performance.
(3)
|
We use measures of EBITDA when assessing the performance
of our operations and our ability to generate cash flows to fund our cash
requirements, including debt service and capital expenditures. We also use
these measures to review and assess our progress under the Value Creation
Plan (as described above under Value Creation Plan) and to assess
operating performance in connection with our employee incentive programs.
In addition, we are subject to certain debt covenants that restrict our
ability to incur additional indebtedness unless we meet certain ratios
based on EBITDA. We define EBITDA as segment operating income/loss plus
depreciation, amortization and non-cash stock-based compensation, and
adjusted EBITDA as EBITDA excluding other unusual items that affect the
comparability of operating performance as identified in the determination
of adjusted earnings (refer above to footnote (2)). The following table
presents a reconciliation of segment operating income/loss, EBITDA and
adjusted EBITDA from loss from continuing operations, which we consider to
be the most directly comparable U.S. GAAP financial measure. In addition,
as described above under footnote (2), we have prepared this table in a
columnar format to present the effect of flexible resealable pouch and
nutrition bar 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 intend to exit and the effect
of those operations on our financial performance and cash-generating
ability.
|
|
|
|
Excluding flexible
|
|
|
Flexible
|
|
|
|
|
|
|
|
resealable pouch
|
|
|
resealable pouch
|
|
|
|
|
|
|
|
and nutrition bar
|
|
|
and nutrition bar
|
|
|
Consolidated
|
|
|
For the quarter ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
(639
|
)
|
|
(5,244
|
)
|
|
(5,883
|
)
|
|
Recovery of income taxes
|
|
(146
|
)
|
|
(3,353
|
)
|
|
(3,499
|
)
|
|
Interest expense, net
|
|
8,371
|
|
|
-
|
|
|
8,371
|
|
|
Other expense, net
|
|
53
|
|
|
5,919
|
|
|
5,972
|
|
|
Total segment operating
income (loss)
|
|
7,639
|
|
|
(2,678
|
)
|
|
4,961
|
|
|
Depreciation and
amortization
|
|
8,055
|
|
|
199
|
|
|
8,254
|
|
|
Stock-based compensation
(a)
|
|
2,235
|
|
|
-
|
|
|
2,235
|
|
|
EBITDA
|
|
17,929
|
|
|
(2,479
|
)
|
|
15,450
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
Costs related to Value
Creation Plan
(b)
|
|
2,400
|
|
|
1,287
|
|
|
3,687
|
|
|
Adjusted EBITDA
|
|
20,329
|
|
|
(1,192
|
)
|
|
19,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(3,759
|
)
|
|
(99
|
)
|
|
(3,858
|
)
|
|
Recovery of income taxes
|
|
(5,348
|
)
|
|
(63
|
)
|
|
(5,411
|
)
|
|
Interest expense, net
|
|
12,178
|
|
|
-
|
|
|
12,178
|
|
|
Other expense, net
|
|
10,312
|
|
|
-
|
|
|
10,312
|
|
|
Total segment operating income (loss)
|
|
13,383
|
|
|
(162
|
)
|
|
13,221
|
|
|
Depreciation and amortization
|
|
8,436
|
|
|
210
|
|
|
8,646
|
|
|
Stock-based
compensation
(a)
|
|
1,181
|
|
|
-
|
|
|
1,181
|
|
|
EBITDA
|
|
23,000
|
|
|
48
|
|
|
23,048
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
Costs
related to Value Creation Plan
(b)
|
|
483
|
|
|
-
|
|
|
483
|
|
|
Costs related to business
acquisitions
(c)
|
|
1,890
|
|
|
-
|
|
|
1,890
|
|
|
Product
withdrawal and recall costs
(d)
|
|
683
|
|
|
-
|
|
|
683
|
|
|
Litigation-related legal
fees
(e)
|
|
564
|
|
|
-
|
|
|
564
|
|
|
Adjusted EBITDA
|
|
26,620
|
|
|
48
|
|
|
26,668
|
|
|
(a)
|
For the third quarter of 2017, stock-based compensation
of $2.2 million was recorded in SG&A expenses, and the reversal of
$0.2 million of previously recognized stock-based compensation related to
forfeited awards previously granted to terminated employees was recognized
in other expense. For the third quarter of 2016, stock-based compensation
of $1.2 million was recorded in SG&A.
|
|
(b)
|
For the third quarter of 2017, reflects inventory
write-downs of $1.3 million recorded in cost of goods sold and consulting
fees, temporary labor, employee recruitment, relocation and retention
costs of $2.4 million recorded in SG&A expenses. For the third quarter
of 2016, reflects legal advisory costs recorded in SG&A expenses. (As
described above under Value Creation Plan).
|
|
(c)
|
Reflects the acquisition accounting adjustment related to
Sunrises inventory sold in the third quarter of 2016 of $1.9 million,
which was recorded in cost of goods sold.
|
|
(d)
|
Reflects the estimated lost gross profit caused by the
recall of certain sunflower kernel products of $0.7 million, which
reflected the shortfall in revenues against anticipated volumes of
approximately $2.9 million, less associated cost of goods sold of
approximately $2.2 million.
|
SUNOPTA INC.
|
41
|
September 30, 2017 10-Q
|
|
(e)
|
Reflects legal costs related to the settlement of a
flexible resealable pouch product recall dispute with a customer, which
were recorded in SG&A expenses.
|
Although we use EBITDA and adjusted
EBITDA as measures to assess the performance of our business and for the other
purposes set forth above, these measures have limitations as analytic tools, and
should not be considered in isolation, or as a substitute for an analysis of our
results of operations as reported in accordance with U.S. GAAP. Some of these
limitations are:
|
|
neither EBITDA nor adjusted EBITDA reflects the interest
expense, or the cash requirements necessary to service interest payments
on our indebtedness;
|
|
|
|
|
|
neither EBITDA nor adjusted EBITDA includes the payment
of taxes, which is a necessary element of our operations;
|
|
|
|
|
|
although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized will often have to be
replaced in the future, and neither EBITDA nor adjusted EBITDA reflects
any cash requirements for such replacements; and
|
|
|
|
|
|
neither EBITDA nor adjusted EBITDA includes non-cash
stock-based compensation, which is an important component of our total
compensation program for employees and directors.
|
Because of these limitations, EBITDA
and adjusted EBITDA should not be considered as measures of discretionary cash
available to us to invest in the growth of our business. Management compensates
for these limitations by not viewing EBITDA or adjusted EBITDA in isolation, and
specifically by using other U.S. GAAP and non-GAAP measures, such as revenues,
gross profit, segment operating income, earnings and adjusted earnings to
measure our operating performance. Neither EBITDA nor adjusted EBITDA is a
measurement of financial performance under U.S. GAAP and neither should be
considered as an alternative to our results of operations or cash flows from
operations determined in accordance with U.S. GAAP, and our calculations of
EBITDA and adjusted EBITDA may not be comparable to the calculation of similarly
titled measures reported by other companies.
(4)
|
In order to evaluate our results of operations, we use
certain non-GAAP measures that we believe enhance an investors ability to
derive meaningful year-over-year comparisons and trends from our results
of operations. In particular, we evaluate our revenues on a basis that
excludes the effects of fluctuations in commodity pricing and foreign
exchange rates. In addition, we exclude specific items from our reported
results that due to their nature or size, we do not expect to occur as
part of our normal business on a regular basis. These items are identified
above under footnote (2), and in the discussion of our results of
operations below. These non-GAAP measures are presented solely to allow
investors to more fully assess our results of operations and should not
considered in isolation of, or as substitutes for an analysis of our
results as reported under U.S. GAAP.
|
Revenues for the quarter ended September 30, 2017 decreased by
8.0% to $320.7 million from $348.7 million for the quarter ended October 1,
2016. Excluding the impact on revenues for the third quarter of 2017 of changes
in commodity-related pricing and foreign exchange rates (a decrease in revenues
of approximately $2.7 million) and sales of flexible resealable pouch and
nutrition bar products (a decrease in revenues of $0.8 million), revenues in the
third quarter of 2017 decreased by 7.4%, compared with the third quarter of
2016. This decrease in revenues on an adjusted basis reflected lower sales of
frozen fruit products due to lower consumer demand and lost customer volumes,
and lower sales of non-dairy aseptic beverage products related to customer order
patterns and the previously announced loss of a significant customer.
Gross profit decreased $4.6 million, or 11.2%, to $36.5 million
for the quarter ended September 30, 2017, compared with $41.0 million for the
quarter ended October 1, 2016. As a percentage of revenues, gross profit for the
quarter ended September 30, 2017 was 11.4% compared to 11.8% for the quarter
ended October 1, 2016, a decrease of 0.4% . The gross profit percentage for the
third quarter of 2017 would have been approximately 11.8%, excluding the impact
of a $1.3 million write-down of flexible resealable pouch and nutrition bar
inventories as a result of the plan to exit these product lines. The gross
profit percentage for the third quarter of 2016 would have been approximately
12.3%, excluding the impact of costs related to the acquisition accounting
adjustment related to the Sunrise inventory sold subsequent to the acquisition
date ($1.9 million) and lost margin caused by the sunflower recall ($0.7
million). Excluding these items, the gross profit percentage decreased 0.5% on
an adjusted basis in the third quarter of 2017, compared with the third quarter
of 2016, which reflected higher losses within our flexible resealable pouch and
nutrition bar operations, due to the closure of west coast pouch operations
following a fire in the third quarter of 2016, and higher plant costs and
production inefficiencies related to the introduction of new nutrition bar
offerings. In addition, we experienced lower production volumes and operating
efficiencies within our aseptic beverage operations related to the shortfall in
sales volumes. These factors were partially offset by lower raw material pricing
within our healthy fruit operations and operational savings following the
closure of the San Bernardino premium juice facility.
Total segment operating income for the quarter ended September
30, 2017 decreased by $8.3 million, or 62.5%, to $5.0 million, compared with
$13.2 million for the quarter ended October 1, 2016. As a percentage of
revenues, segment operating income was 1.5% for the quarter ended September 30,
2017, compared with 3.8% for the quarter ended October 1, 2016. The decrease in
segment operating income reflected the lower overall gross profit as described
above and a $2.2 million increase in SG&A expenses. The increase in SG&A
expenses mainly reflected incremental employee recruitment, relocation and
retention costs ($1.2 million) and consulting fees and temporary labor costs
($1.2 million) associated with the Value Creation Plan. Excluding these items,
as well as those items identified above affecting gross profit, segment
operating income as a percentage of revenues on an adjusted basis would have been
2.7% for the third quarter of 2017, compared with 4.8% for the third quarter of
2016. In addition, SG&A expenses reflected higher employee
compensation-related costs related to structural investments in new quality,
sales, marketing, engineering and accounting resources, offset by a reversal in
the third quarter of 2017 of employee short-term incentives tied to operating
performance. Segment operating income included a foreign exchange loss of $2.6
million in the third quarter of 2017, compared with $1.1 million in the third
quarter of 2016, which mainly reflected the impact of movements in the U.S.
dollar relative to the euro and Mexican peso on our international organic
ingredient and frozen fruit operations.
SUNOPTA INC.
|
42
|
September 30, 2017 10-Q
|
Further details on revenue, gross profit and segment operating
income variances are provided below under Segmented Operations Information.
Other expense for the quarter ended September 30, 2017 of $6.0
million reflected the impairment of long-lived assets related to the exit from
our flexible resealable pouch and nutrition bar product lines and operations
($4.5 million) and employee termination costs ($2.1 million) associated with the
Value Creation Plan, partially offset by a $1.0 million recovery on the early
extinguishment of a rebate obligation that arose from the prior settlement of a
recall dispute with a customer related to flexible resealable pouch products.
Other expense for the quarter ended October 1, 2016 of $10.3 million reflected
the impairment of long-lived assets associated with the closure of San
Bernardino facility of $10.3 million.
Interest expense decreased by $3.8 million to $8.4 million for
the quarter ended September 30, 2017, compared with $12.2 million for the
quarter ended October 1, 2016. Interest expense included the amortization and
write-off of debt issuance costs of $0.6 million and $3.6 million in the third
quarters of 2017 and 2016, respectively. The quarter-over-quarter decrease in
interest expense primarily reflected the reduction in non-cash amortization
following the one-year maturity of the initial second lien loans used to
partially fund the Sunrise Acquisition, and the repayment of $79.0 million of
second lien debt with the net proceeds from the Preferred Stock offering in
October 2016.
We recognized a recovery of income tax of $3.5 million for the
quarter ended September 30, 2017, compared with $5.4 million for the quarter
ended October 1, 2016 (which included the realization of $1.3 million of
previously unrecognized tax benefits). The effective tax rate for the third
quarter of 2017 was 37.3%, compared with 44.7% for the third quarter of 2016
(excluding the impact of the change in unrecognized tax benefits). The effective
tax rates reflected the effect of a mix of pre-tax losses projected in the U.S.
and pre-tax earnings in certain other jurisdictions. In fiscal years 2017 and
2016, pre-tax losses projected in the U.S. reflected anticipated costs
associated with the Value Creation Plan, including asset impairment charges and
employee termination costs related to the exit from flexible resealable pouch
and nutrition bar product lines and operations, and closure of the San
Bernardino facility.
On a consolidated basis, we realized a loss of $6.0 million
(diluted loss per share of $0.09) for the quarter ended September 30, 2017,
compared with a loss of $3.4 million (diluted loss per share of $0.04) for the
quarter ended October 1, 2016.
For the quarter ended September 30, 2017, adjusted loss was
$1.9 million, or $0.02 per diluted share, on a consolidated basis, compared with
adjusted earnings of $6.3 million, or $0.07 per diluted share, on a consolidated
basis for the quarter ended October 1, 2016. Excluding flexible resealable pouch
and nutrition bar product lines and operations, which we plan to exit, adjusted
loss was $1.1 million, or $0.01 per diluted share, for the quarter ended
September 30, 2017, compared with adjusted earnings of $6.4 million, or $0.07
per diluted share, for the quarter ended October 1, 2016. Adjusted EBITDA for
the quarter ended September 30, 2017 was $19.1 million on a consolidated basis,
compared with $26.7 million on a consolidated basis for the quarter ended
October 1, 2016. Excluding flexible resealable pouch and nutrition bar product
lines and operations, adjusted EBITDA for the quarter ended September 30, 2017
was $20.3 million, compared with $26.6 million for the quarter ended October 1,
2016. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See
footnotes (2) and (3) to the table above for a reconciliation of adjusted
earnings/loss and adjusted EBITDA from loss from continuing operations, which we
consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC.
|
43
|
September 30, 2017 10-Q
|
Segmented Operations Information
Global Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
2017
|
|
|
October 1, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
140,533
|
|
$
|
137,174
|
|
$
|
3,359
|
|
|
2.4%
|
|
Gross Profit
|
|
16,064
|
|
|
16,796
|
|
|
(732
|
)
|
|
-4.4%
|
|
Gross Profit %
|
|
11.4%
|
|
|
12.2%
|
|
|
|
|
|
-0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
5,265
|
|
$
|
7,404
|
|
$
|
(2,139
|
)
|
|
-28.9%
|
|
Operating Income %
|
|
3.7%
|
|
|
5.4%
|
|
|
|
|
|
-1.7%
|
|
Global Ingredients contributed $140.5 million in revenues for
the quarter ended September 30, 2017, compared to $137.2 million for the quarter
ended October 1, 2016, an increase of $3.4 million, or 2.4% . The impact on
revenues of changes including foreign exchange rates and commodity-related
pricing had a negligible impact on the quarter-over-quarter change in Global
Ingredients revenues. The table below explains the increase in revenue:
Global Ingredients Revenue
Changes
|
|
Revenues for the quarter ended October
1, 2016
|
$137,174
|
Increased
volumes of internationally-sourced organic ingredients including nuts,
cocoa and
grains,
partially
offset by lower volumes of seeds, fruits, vegetables and liquid sweeteners
|
4,589
|
Favorable
foreign exchange impact on euro-denominated sales due to a weaker average
U.S. dollar quarter-over-quarter
|
2,709
|
Increased
volumes of domestically-sourced organic feed and specialty
soy,
partially
offset by lower volumes of specialty corn
|
2,521
|
Increased commodity pricing for internationally-sourced
organic ingredients
|
1,161
|
Decreased
commodity pricing for domestically-sourced specialty and organic grains
and seeds
|
(3,855)
|
Lower
roasted volumes due to reduced customer demand following the sunflower
recall, and lower
raw
sunflower
volumes due to competition from global suppliers
|
(3,766)
|
Revenues for the quarter ended September 30,
2017
|
$140,533
|
Gross profit in Global Ingredients decreased by $0.7 million to
$16.1 million for the quarter ended September 30, 2017 compared to $16.8 million
for the quarter ended October 1, 2016, and the gross profit percentage decreased
by 0.8% to 11.4% . The decrease in gross profit as a percentage of revenue was
primarily due to an unfavorable product mix of, and reduced pricing spreads on,
certain internationally-sourced organic ingredients, partially offset by
improved pricing spread on domestically-sourced organic feed. The table below
explains the decrease in gross profit:
Global Ingredients
Gross Profit Changes
|
|
Gross profit for the
quarter ended October 1, 2016
|
$16,796
|
Reduced pricing spreads and lower volumes
of certain higher-margin internationally-
sourced organic ingredients, and lower sales volumes of raw
sunflower and roasted
products
|
(1,605)
|
Improved pricing spread on
domestically-sourced organic feed, partially offset by lower
commodity pricing on specialty soy
|
873
|
Gross profit for the quarter
ended September 30, 2017
|
$16,064
|
SUNOPTA INC.
|
44
|
September 30, 2017 10-Q
|
Operating income in Global Ingredients decreased by $2.1
million, or 28.9%, to $5.3 million for the quarter ended September 30, 2017,
compared to $7.4 million for the quarter ended October 1, 2016. The table below
explains the decrease in operating income:
Global Ingredients
Operating Income Changes
|
|
Operating income for the
quarter ended October 1, 2016
|
$7,404
|
Decrease in gross profit, as explained above
|
(732)
|
Increase in foreign exchange losses primarily
related to forward currency contracts
|
(1,414)
|
Increase in corporate cost allocations
|
(75)
|
Lower
employee-related compensation costs due to the reversal of short-term
incentive
accruals,
mostly offset by increased headcount within our international organic
ingredient operations
|
82
|
Operating income for the quarter
ended September 30, 2017
|
$5,265
|
Looking forward, we believe Global Ingredients is well
positioned in growing non-GMO and organic food categories. However, performance
of Global Ingredients in the near-term could continue to be affected by reduced
customer demand due to the sunflower recall. We intend to focus our efforts on
(i) growing our organic sourcing and supply capabilities, making certified
organic ingredients a larger proportion of our overall sales; (ii) leveraging
our international sourcing and supply capabilities internally, and forward and
backward integrating where opportunities exist; and (iii) initiating a global
desk coordination program between our North American and International sourcing
and supply operations to capitalize on global opportunities and drive
incremental sales volume. The statements in this paragraph are forward-looking
statements. See Forward-Looking Statements above. Increased supply pressure in
the commodity-based markets in which we operate, increased competition, volume
decreases or loss of customers, unexpected delays in our expansion or desk
coordination plans, or our inability to secure quality inputs or achieve our
product mix or cost reduction goals, along with the other factors described
above under Forward-Looking Statements, could adversely impact our ability to
meet these forward-looking expectations.
Consumer Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
2017
|
|
|
October 1, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
180,180
|
|
$
|
211,558
|
|
$
|
(31,378
|
)
|
|
-14.8%
|
|
Gross Profit
|
|
20,391
|
|
|
24,234
|
|
|
(3,843
|
)
|
|
-15.9%
|
|
Gross Profit %
|
|
11.3%
|
|
|
11.5%
|
|
|
|
|
|
-0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
4,528
|
|
$
|
8,104
|
|
$
|
(3,576
|
)
|
|
-44.1%
|
|
Operating Income %
|
|
2.5%
|
|
|
3.8%
|
|
|
|
|
|
-1.3%
|
|
Consumer Products contributed $180.2 million in revenues for
the quarter ended September 30, 2017, compared to $211.6 million for the quarter
ended October 1, 2016, a $31.4 million, or 14.8% decrease. Excluding the impact
on revenues of changes in raw fruit commodity-related pricing (a decrease in
revenues of $2.7 million) and sales of flexible resealable pouch and nutrition
bar products (a decrease in revenues of $0.8 million), Consumer Products
revenues decreased 14.2% . The table below explains the decrease in revenues:
SUNOPTA INC.
|
45
|
September 30, 2017 10-Q
|
Consumer Products
Revenue Changes
|
|
Revenues for the quarter
ended October 1, 2016
|
$211,558
|
Lower
volumes of frozen fruit due to declines in consumer consumption trends and
lost
customer
volumes,
as well as the impact of lower raw fruit commodity-related pricing passed
on to customers
|
(19,138)
|
Lower
volumes of non-dairy aseptic beverage products related to customer order
patterns and
the
previously
announced loss of a significant customer, partially offset by higher
volumes of fruit snacks
|
(11,470)
|
Lower sales of flexible resealable pouch and
nutrition bar products
|
(770)
|
Revenues for the quarter ended
September 30, 2017
|
$180,180
|
Gross profit in Consumer Products decreased by $3.8 million to
$20.4 million for the quarter ended September 30, 2017 compared to $24.2 million
for the quarter ended October 1, 2016, and the gross profit percentage decreased
by 0.2% to 11.3% . For the quarter ended September 30, 2017, gross profit as a
percentage of revenue was impacted by a write-down of $1.3 million of flexible
resealable pouch and nutrition bar inventories as a result of the plan to exit
these operations. For the quarter ended October 1, 2016, gross profit as a
percentage of revenue was impacted by the acquisition accounting adjustment
related to Sunrise inventory sold of $1.9 million. Excluding these costs, the
gross profit percentage in Consumer Products would have been 12.0% and 12.3% for
the quarters ended September 30, 2017 and October 1, 2016, respectively. The
decrease in gross profit percentage primarily reflected lower production volumes
within our aseptic beverage operations, and higher losses within our flexible
resealable pouch and nutrition bar operations. These factors were partially
offset by improved raw material pricing within our healthy fruit operations and
operational savings from the closure of the San Bernardino premium juice
facility. The table below explains the decrease in gross profit:
Consumer Products Gross
Profit Changes
|
|
Gross profit for the
quarter ended October 1, 2016
|
$24,234
|
Lower
sales volumes of non-dairy aseptic beverages, partially offset by
operational savings
following
the
closure of the San Bernardino facility and higher sales volumes of fruit
snacks
|
(2,624)
|
Higher
losses within flexible resealable pouch and nutrition bar operations
(including the write-down of
inventories
related
to exit activities), which reflected the impact of the closure of west
coast pouch operations following a fire at
a
third-party
facility in the third quarter of 2016, and higher plant costs and
production inefficiencies related to the
introduction
of
new nutrition bar offerings
|
(2,516)
|
Lower
sales volumes of frozen fruit, partially offset by favorable pricing on
sourced raw fruit, as well as productivity
and cost reduction initiatives within fruit ingredient
operations
|
(593)
|
Acquisition
accounting adjustment related to Sunrise inventory sold in the third
quarter of 2016
|
1,890
|
Gross profit for the quarter
ended September 30, 2017
|
$20,391
|
Operating income in Consumer Products decreased by $3.6
million, or 44.1%, to $4.5 million for the quarter ended September 30, 2017,
compared to $8.1 million for the quarter ended October 1, 2016. The table below
explains the decrease in operating income:
SUNOPTA INC.
|
46
|
September 30, 2017 10-Q
|
Consumer Products
Operating Income Changes
|
|
Operating income for the
quarter ended October 1, 2016
|
$8,104
|
Decrease in gross profit, as explained above
|
(3,843)
|
Increase in corporate cost allocations
|
(1,578)
|
Lower
employee-related compensation costs due to the reversal of short-term
incentive
accruals,
and
lower foreign exchange losses on international operations
|
1,845
|
Operating income for the quarter
ended September 30, 2017
|
$4,528
|
Looking forward we believe our Consumer Products segment
remains well-positioned in markets with attractive growth potential. However, a
continued decline in consumer consumption of frozen fruit could adversely affect
the near-term performance of the Consumer Products segment. We intend to focus
our efforts on (i) continuing to invest in new sales and marketing resources
creating greater channel specific focus on retail and foodservice to bolster our
pipeline of opportunities to drive incremental sales volume; (ii) investing in
our facilities to enhance quality, safety, and manufacturing efficiency to drive
both incremental sales and cost reduction; (iii) executing procurement and
supply chain cost reduction initiatives focused on leveraging our buying power
and creating increased network efficiency in our planning and logistics efforts;
and (iv) leveraging our innovation capabilities to bring new value-added
packaged products and processes to market and to increase our capacity
utilization across the Consumer Products segment. The statements in this
paragraph are forward-looking statements. See Forward-Looking Statements
above. Unfavorable shifts in consumer preferences, increased competition,
availability of raw material supply, volume decreases or loss of customers,
unexpected delays in our expansion and integration plans, inefficiencies in our
manufacturing processes, lack of consumer product acceptance, or our inability
to successfully implement the particular goals and strategies indicated above,
along with the other factors described above under Forward-Looking Statements,
could have an adverse impact on these forward-looking expectations.
Corporate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
2017
|
|
|
October 1, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
$
|
(4,832
|
)
|
$
|
(2,287
|
)
|
$
|
(2,545
|
)
|
|
-111.3%
|
|
Operating loss at Corporate Services increased by $2.5 million
to $4.8 million for the quarter ended September 30, 2017, from a loss of $2.3
million for the quarter ended October 1, 2016. The table below explains the
increase in operating loss:
Corporate Services
Operating Loss Changes
|
|
Operating loss for the
quarter ended October 1, 2016
|
$(2,287)
|
Third-party
consulting costs and employee recruitment, relocation and retention costs
associated
with
the Value Creation Plan
|
(1,917)
|
Higher
non-compensation-related costs, including the unfavorable impact on
Canadian
dollar-denominated
corporate
headquarter expenses of a weaker average U.S. dollar quarter-over-quarter
|
(838)
|
Decrease in foreign exchange gains on foreign
currency transactions
|
(740)
|
Higher
employee-related compensation costs, including stock-based compensation,
associated with the
Value
Creation
Plan, partially offset by the reversal of short-term incentive accruals
|
(703)
|
Increase in corporate cost allocations to
SunOpta reporting segments
|
1,653
|
Operating loss for the quarter
ended September 30, 2017
|
$(4,832)
|
Corporate cost allocations mainly consist of salaries of
corporate personnel who directly support the operating segments, as well as
costs related to the enterprise resource management system. These expenses are
allocated to the operating segments based on (1) specific identification of allocable costs that
represent a service provided to each segment and (2) a proportionate
distribution of costs based on a weighting of factors such as revenue
contribution and number of people employed within each segment.
SUNOPTA INC.
|
47
|
September 30, 2017 10-Q
|
Consolidated Results of Operations for the three quarters
ended September 30, 2017 and October 1, 2016
|
|
September 30,
|
|
|
October 1,
|
|
|
|
|
|
|
|
For the three quarters ended
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
420,247
|
|
|
441,694
|
|
|
(21,447
|
)
|
|
-4.9%
|
|
Consumer
Products
|
|
566,951
|
|
|
607,498
|
|
|
(40,547
|
)
|
|
-6.7%
|
|
Total revenues
|
|
987,198
|
|
|
1,049,192
|
|
|
(61,994
|
)
|
|
-5.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Ingredients
|
|
52,453
|
|
|
54,716
|
|
|
(2,263
|
)
|
|
-4.1%
|
|
Consumer Products
|
|
64,363
|
|
|
54,193
|
|
|
10,170
|
|
|
18.8%
|
|
Total gross profit
|
|
116,816
|
|
|
108,909
|
|
|
7,907
|
|
|
7.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
18,388
|
|
|
24,256
|
|
|
(5,868
|
)
|
|
-24.2%
|
|
Consumer
Products
|
|
14,696
|
|
|
6,989
|
|
|
7,707
|
|
|
110.3%
|
|
Corporate Services
|
|
(28,460
|
)
|
|
(6,544
|
)
|
|
(21,916
|
)
|
|
-334.9%
|
|
Total segment operating
income
|
|
4,624
|
|
|
24,701
|
|
|
(20,077
|
)
|
|
-81.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
12,022
|
|
|
22,723
|
|
|
(10,701
|
)
|
|
-47.1%
|
|
Earnings (loss) from continuing operations
before the
following
|
|
(7,398
|
)
|
|
1,978
|
|
|
(9,376
|
)
|
|
-474.0%
|
|
Interest expense, net
|
|
23,820
|
|
|
34,748
|
|
|
(10,928
|
)
|
|
-31.4%
|
|
Recovery of income taxes
|
|
(14,049
|
)
|
|
(15,632
|
)
|
|
1,583
|
|
|
10.1%
|
|
Loss from continuing
operations
|
|
(17,169
|
)
|
|
(17,138
|
)
|
|
(31
|
)
|
|
-0.2%
|
|
Earnings attributable to non-controlling
interests
|
|
664
|
|
|
4
|
|
|
660
|
|
|
16500.0%
|
|
Loss from discontinued
operations attributable to SunOpta Inc.
|
|
-
|
|
|
(570
|
)
|
|
570
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to
SunOpta Inc.
(2)
|
|
(17,833
|
)
|
|
(17,712
|
)
|
|
(121
|
)
|
|
-0.7%
|
|
(1)
|
The following table presents a reconciliation of segment
operating income/loss to earnings (loss) from continuing operations before
the following, which we consider to be the most directly comparable U.S.
GAAP financial measure (refer to footnote (1) to the Consolidated Results
of Operations for the Quarters Ended September 30, 2017 and October 1,
2016 table regarding the use of this non-GAAP
measure).
|
|
|
|
Global
|
|
|
Consumer
|
|
|
Corporate
|
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Services
|
|
|
Consolidated
|
|
|
For the three quarters ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)
|
|
18,388
|
|
|
14,696
|
|
|
(28,460
|
)
|
|
4,624
|
|
|
Other expense, net
|
|
(346
|
)
|
|
(10,714
|
)
|
|
(962
|
)
|
|
(12,022
|
)
|
|
Earnings (loss) from
continuing operations before the following
|
|
18,042
|
|
|
3,982
|
|
|
(29,422
|
)
|
|
(7,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
24,256
|
|
|
6,989
|
|
|
(6,544
|
)
|
|
24,701
|
|
|
Other expense, net
|
|
(779
|
)
|
|
(21,472
|
)
|
|
(472
|
)
|
|
(22,723
|
)
|
|
Earnings (loss) from continuing operations
before the following
|
|
23,477
|
|
|
(14,483
|
)
|
|
(7,016
|
)
|
|
1,978
|
|
SUNOPTA INC.
|
48
|
September 30, 2017 10-Q
|
(2)
|
The following table presents a reconciliation of adjusted
earnings/loss from loss from continuing operations, which we consider to
be the most directly comparable U.S. GAAP financial measure (refer to
footnote (2) to the Consolidated Results of Operations for the Quarters
Ended September 30, 2017 and October 1, 2016 table regarding the use of
this non-GAAP measure). In addition, recognizing our intention to exit
flexible resealable pouch and nutrition bar product lines and operations
(as described above under Value Creation Plan), we have prepared this
table in a columnar format to present the effect 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 intend to exit and the effect of those operations on our
financial performance.
|
|
|
|
Excluding
flexible
|
|
|
Flexible
|
|
|
|
|
|
|
|
|
|
|
resealable
pouch
|
|
|
resealable
pouch
|
|
|
|
|
|
|
|
|
|
|
and nutrition bar
|
|
|
and nutrition bar
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Per Diluted
|
|
|
Per Diluted
|
|
|
|
|
|
Per Diluted
|
|
|
|
|
Share
|
|
|
Share
|
|
|
|
|
|
Share
|
|
|
For the three quarters ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(9,304
|
)
|
|
|
|
|
(7,865
|
)
|
|
|
|
|
(17,169
|
)
|
|
|
|
|
Less: earnings
attributable to non-controlling interests
|
|
(664
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(664
|
)
|
|
|
|
|
Less: dividends and accretion of Series A Preferred Stock
|
|
(5,848
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(5,848
|
)
|
|
|
|
|
Loss from continuing
operations available to common shareholders
|
|
(15,816
|
)
|
|
(0.18
|
)
|
|
(7,865
|
)
|
|
(0.09
|
)
|
|
(23,681
|
)
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to the Value Creation
Plan
(a)
|
|
28,021
|
|
|
|
|
|
7,206
|
|
|
|
|
|
35,227
|
|
|
|
|
|
Product withdrawal and recall costs
(b)
|
|
1,142
|
|
|
|
|
|
-
|
|
|
|
|
|
1,142
|
|
|
|
|
|
Recovery of legal settlement
(c)
|
|
(1,024
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,024
|
)
|
|
|
|
|
Other
(d)
|
|
166
|
|
|
|
|
|
-
|
|
|
|
|
|
166
|
|
|
|
|
|
Net income tax effect
(e)
|
|
(12,560
|
)
|
|
|
|
|
(2,810
|
)
|
|
|
|
|
(15,370
|
)
|
|
|
|
|
Adjusted loss
|
|
(71
|
)
|
|
(0.00
|
)
|
|
(3,469
|
)
|
|
(0.04
|
)
|
|
(3,540
|
)
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(17,101
|
)
|
|
|
|
|
(37
|
)
|
|
|
|
|
(17,138
|
)
|
|
|
|
|
Less: earnings
attributable to non-controlling interests
|
|
(4
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
Loss from
continuing operations available to common shareholders
|
|
(17,105
|
)
|
|
(0.20
|
)
|
|
(37
|
)
|
|
(0.00
|
)
|
|
(17,142
|
)
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs related to business acquisitions
(f)
|
|
25,931
|
|
|
|
|
|
-
|
|
|
|
|
|
25,931
|
|
|
|
|
|
Legal settlement and litigation-related legal
fees
(g)
|
|
10,850
|
|
|
|
|
|
-
|
|
|
|
|
|
10,850
|
|
|
|
|
|
Costs related to the Value Creation Plan
(h)
|
|
10,783
|
|
|
|
|
|
-
|
|
|
|
|
|
10,783
|
|
|
|
|
|
Product withdrawal and recall
costs
(i)
|
|
2,680
|
|
|
|
|
|
-
|
|
|
|
|
|
2,680
|
|
|
|
|
|
Plant start-up costs
(j)
|
|
1,565
|
|
|
|
|
|
-
|
|
|
|
|
|
1,565
|
|
|
|
|
|
Write-off of debt issuance costs
(k)
|
|
215
|
|
|
|
|
|
-
|
|
|
|
|
|
215
|
|
|
|
|
|
Other
(l)
|
|
1,199
|
|
|
|
|
|
-
|
|
|
|
|
|
1,199
|
|
|
|
|
|
Gain on settlement of contingent
consideration
(m)
|
|
(1,715
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,715
|
)
|
|
|
|
|
Net income tax effect
(e)
|
|
(19,985
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(19,985
|
)
|
|
|
|
|
Change in unrecognized tax
benefits
(n)
|
|
(1,268
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,268
|
)
|
|
|
|
|
Adjusted earnings
(loss)
|
|
13,150
|
|
|
0.15
|
|
|
(37
|
)
|
|
(0.00
|
)
|
|
13,113
|
|
|
0.15
|
|
|
(a)
|
Reflects inventory write-downs and facility closure costs
of $1.9 million recorded in cost of goods sold; consulting fees, temporary
labor, employee recruitment, relocation and retention costs of $20.8
million recorded in SG&A expenses; and asset impairment charges and
employee termination costs of $12.5 million recorded in other expense (as
described above under Value Creation Plan).
|
|
(b)
|
Reflects costs related to the recall of certain sunflower
kernel products (as described above under Recall of Certain Roasted
Sunflower Kernel Products), including a $0.7 million adjustment for the
estimated lost gross profit in the first quarter of 2017 caused by the
sunflower recall, which reflected a shortfall in revenues against prior
year volumes of approximately $3.3 million, less associated cost of goods
sold of approximately $2.6 million; and $0.4 million of product withdrawal
costs not eligible for reimbursement under our insurance policies, which
were recorded in other expense.
|
|
(c)
|
Reflects a recovery on the early extinguishment of a
rebate obligation that arose from the prior settlement of a flexible
resealable pouch product recall dispute with a customer (see (g) below),
which was recorded in other income.
|
|
(d)
|
Other included fair value adjustments related to
contingent consideration arrangements; severance costs unrelated to the
Value Creation Plan; and gain/loss on the sale of assets, which were
recorded in other expense.
|
|
(e)
|
Reflects the tax effect of the preceding adjustments to
earnings and reflects an overall estimated annual effective tax rate of
approximately 30% on adjusted earnings before
tax.
|
SUNOPTA INC.
|
49
|
September 30, 2017 10-Q
|
|
(f)
|
Reflects costs related to the Sunrise Acquisition,
including an acquisition accounting adjustment related to Sunrises
inventory sold in the first three quarters of 2016 of $13.4 million, which
was recorded in cost of goods sold; the non-cash amortization and expense
of debt issuance costs incurred in connection with the initial financing
related to the Sunrise Acquisition of $10.1 million, which were recorded
in interest expense; and $2.4 million of integration costs related to the
closure and consolidation of our frozen fruit processing operations
following the Sunrise Acquisition, which were recorded in cost of goods
sold and other expense.
|
|
(g)
|
Reflects a charge of $9.0 million for the settlement of a
flexible resealable pouch product recall dispute with a customer in the
second quarter of 2016, which was recorded in other expense, and
associated legal costs, which were recorded in SG&A expenses. The
settlement amount included up to $4.0 million in rebates payable to the
customer over a four-year period.
|
|
(h)
|
Reflects legal advisory costs of $0.5 million recorded in
SG&A expenses; and asset impairment charges of $10.3 million recorded
in other expense (as described above under Value Creation
Plan).
|
|
(i)
|
Reflects costs of $1.1 million for the withdrawal of a
consumer-packaged product for a quality-related issue and $0.6 million for
insurance deductibles related to the sunflower recall, which were recorded
in other expense. Also reflects a $1.0 million adjustment for the
estimated lost gross profit caused by the sunflower recall, which
reflected a shortfall in revenues against anticipated volumes of
approximately $6.4 million, less associated cost of goods sold of
approximately $5.4 million.
|
|
(j)
|
Plant start-up costs relate to the ramp-up of production
at our Allentown, Pennsylvania, facility following the completion of the
addition of aseptic beverage processing and filling capabilities in the
fourth quarter of 2015, which were recorded in cost of goods sold. These
start-up costs reflected the negative gross profit reported by the
facility as the facility ramped up to break-even production
levels.
|
|
(k)
|
Reflects the write-off to interest expense of $0.2
million of remaining unamortized debt issuance costs related to our former
North American credit facilities, which were replaced by the Global Credit
Facility.
|
|
(l)
|
Other includes severance costs of $0.6 million and fair
value adjustments related to contingent consideration arrangements of $0.6
million, which were recorded in other expense.
|
|
(m)
|
Reflects a gain of settlement of the contingent
consideration obligation related to the Niagara Natural acquisition, which
was recorded in other income.
|
|
(n)
|
Reflects the realization of previously unrecognized tax
benefits, due to the expiration of the statute of
limitations.
|
(3)
|
The following table presents a reconciliation of segment
operating income/loss, EBITDA and adjusted EBITDA from loss from
continuing operations, which we consider to be the most directly
comparable U.S. GAAP financial measure (refer to footnote (3) to the
Consolidated Results of Operations for the Quarters Ended September 30,
2017 and October 1, 2016 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 flexible
resealable pouch and nutrition bar 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 intend to
exit and the effect of those operations on our financial performance and
cash-generating ability.
|
|
|
|
Excluding flexible
|
|
|
Flexible
|
|
|
|
|
|
|
|
resealable pouch
|
|
|
resealable pouch
|
|
|
|
|
|
|
|
and nutrition bar
|
|
|
and nutrition bar
|
|
|
Consolidated
|
|
|
For the three quarters ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
(9,304
|
)
|
|
(7,865
|
)
|
|
(17,169
|
)
|
|
Recovery of income taxes
|
|
(9,021
|
)
|
|
(5,028
|
)
|
|
(14,049
|
)
|
|
Interest expense, net
|
|
23,820
|
|
|
-
|
|
|
23,820
|
|
|
Other expense, net
|
|
6,103
|
|
|
5,919
|
|
|
12,022
|
|
|
Total segment operating
income (loss)
|
|
11,598
|
|
|
(6,974
|
)
|
|
4,624
|
|
|
Depreciation and
amortization
|
|
23,951
|
|
|
650
|
|
|
24,601
|
|
|
Stock-based compensation
(a)
|
|
4,700
|
|
|
-
|
|
|
4,700
|
|
|
EBITDA
|
|
40,249
|
|
|
(6,324
|
)
|
|
33,925
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
Costs related to Value
Creation Plan
(b)
|
|
21,473
|
|
|
1,287
|
|
|
22,760
|
|
|
Product
withdrawal and recall costs
(c)
|
|
729
|
|
|
-
|
|
|
729
|
|
|
Adjusted EBITDA
|
|
62,451
|
|
|
(5,037
|
)
|
|
57,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
(17,101
|
)
|
|
(37
|
)
|
|
(17,138
|
)
|
|
Recovery of income taxes
|
|
(15,608
|
)
|
|
(24
|
)
|
|
(15,632
|
)
|
|
Interest expense, net
|
|
34,748
|
|
|
-
|
|
|
34,748
|
|
|
Other expense, net
|
|
22,723
|
|
|
-
|
|
|
22,723
|
|
|
Total segment operating
income (loss)
|
|
24,762
|
|
|
(61
|
)
|
|
24,701
|
|
|
Depreciation and
amortization
|
|
25,300
|
|
|
655
|
|
|
25,955
|
|
|
Stock-based compensation
(a)
|
|
3,173
|
|
|
-
|
|
|
3,173
|
|
|
EBITDA
|
|
53,235
|
|
|
594
|
|
|
53,829
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
Costs related to Value
Creation Plan
(b)
|
|
483
|
|
|
-
|
|
|
483
|
|
|
Product
withdrawal and recall costs
(c)
|
|
983
|
|
|
-
|
|
|
983
|
|
|
Costs related to business
acquisitions
(d)
|
|
13,554
|
|
|
-
|
|
|
13,554
|
|
|
Litigation-related legal fees
(e)
|
|
1,850
|
|
|
-
|
|
|
1,850
|
|
|
Plant expansion and
start-up costs
(f)
|
|
1,565
|
|
|
-
|
|
|
1,565
|
|
|
Adjusted EBITDA
|
|
71,670
|
|
|
594
|
|
|
72,264
|
|
|
(a)
|
For the first three quarters of 2017, stock-based
compensation of $4.7 million was recorded in SG&A expenses, and the
reversal of $0.6 million of previously recognized stock-based compensation
related to forfeited awards previously granted to terminated employees
was recognized in other expense. For the first three quarters of
2016, stock-based compensation of $3.2 million was recorded in SG&A
expenses.
|
SUNOPTA INC.
|
50
|
September 30, 2017 10-Q
|
|
(b)
|
For the first three quarters of 2017, reflects inventory
write-downs and facility closure costs of $1.9 million recorded in cost of
goods sold, and consulting fees, temporary labor, employee recruitment,
relocation and retention costs of $20.8 million recorded in SG&A
expenses. For the third quarter of 2016, reflects legal advisory costs of
$0.5 million recorded in SG&A expenses. (As described above under
Value Creation Plan).
|
|
(c)
|
For the first three quarters of 2017, reflects the
estimated lost gross profit caused by the recall of certain sunflower
kernel products of $0.7 million, which reflected the shortfall in revenues
in the first quarter of 2017 against first quarter of 2016 volumes of
approximately $3.3 million, less associated cost of goods sold of
approximately $2.6 million. For the first three quarters of 2016, reflects
estimated lost gross profit of $1.0 million, which reflected a shortfall
in revenues in the first three quarters of 2016 against anticipated
volumes of approximately $6.4 million, less associated cost of goods sold
of approximately $5.4 million.
|
|
(d)
|
Reflects costs related to the acquisition accounting
adjustment related to Sunrises inventory sold in the first three quarters
of 2016 of $13.4 million and the integration costs related to the closure
and consolidation of our frozen fruit processing operations following the
Sunrise Acquisition of $0.2 million, which were recorded in cost of goods
sold.
|
|
(e)
|
Reflects legal costs related to the settlement of the
flexible resealable pouch product recall dispute with a customer, which
were recorded in SG&A expenses.
|
|
(f)
|
Reflects the negative gross profit reported by the
Allentown facility as the facility ramped up to break-even production
levels.
|
(4)
|
Refer to footnote (4) to the Consolidated Results of
Operations for the Quarters Ended September 30, 2017 and October 1, 2016
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 30, 2017
decreased by 5.9% to $987.2 million from $1,049.2 million for the three quarters
ended October 1, 2016. Excluding the impact on revenues for the first three
quarters of 2017 of changes in commodity-related pricing and foreign exchange
rates (a decrease in revenues of $14.6 million), estimated impact of the recall
of certain sunflower kernel products based on shortfall against prior year
volumes (a decrease in revenues of $3.3 million), and sales of flexible
resealable pouch and nutrition bar products (a decrease in revenues of $0.9
million), revenues in the first three quarters of 2017 decreased by 4.3%,
compared with the first three quarters of 2016. This decrease in revenues on an
adjusted basis reflected a lower sales of frozen fruit products due to lower
consumer demand and lost customer volumes, lower sales of non-dairy aseptic
beverage products related to customer order patterns and the previously
announced loss of a significant customer, and lower raw and roasted sunflower
volumes, due to global competition and reduced customer demand following the
sunflower recall. These factors were partially offset by increased volumes of
domestically-sourced grains and of premium juice products.
Gross profit increased $7.9 million, or 7.3%, to $116.8 million
for the three quarters ended September 30, 2017, compared with $108.9 million
for the three quarters ended October 1, 2016. As a percentage of revenues, gross
profit for the three quarters ended September 30, 2017 was 11.8% compared to
10.4% for the three quarters ended October 1, 2016, an increase of 1.5% . The
gross profit percentage for the first three quarters of 2017 would have been
approximately 12.1%, excluding the impact of the write-down of flexible
resealable pouch and nutrition bar inventories as a result of the plan to exit
these product lines ($1.3 million), lost margin caused by the sunflower recall
($0.7 million), and facility closure costs under the Value Creation Plan ($0.6
million). For the first three quarters of 2016, the gross profit percentage
would have been 11.8%, excluding the impact of costs related to the acquisition
accounting adjustment related to the Sunrise inventory sold subsequent to the
acquisition date ($13.4 million), start-up costs related to the ramp-up of
production at the Allentown aseptic beverage facility ($1.6 million), and lost
margin caused by the sunflower recall ($1.0 million). Excluding these items, the
gross profit percentage increased 0.3% on an adjusted basis in the first three
quarters of 2017, compared with the first three quarters of 2016, which
reflected improved operating efficiencies and raw material pricing within our
healthy fruit operations and operational savings following the closure of the
San Bernardino premium juice facility, as well as a favorable foreign exchange
impact on U.S. dollar-denominated raw material sourcing within our international
organic ingredient operations. These factors were partially offset by higher
losses within our flexible resealable pouch and nutrition bar operations, due to
the closure of west coast pouch operations following a fire in the third quarter
of 2016, and higher plant costs and production inefficiencies related to the
introduction of new nutrition bar offerings. In addition, we experienced lower
production volumes and operating efficiencies within our aseptic beverage
operations related to the shortfall in sales volumes, and reduced operating
efficiencies in our sunflower and roasting operations, due to the lower
production volumes following the recall.
Total segment operating income for the three quarters ended
September 30, 2017 decreased by $20.1 million, or 81.3%, to $4.6 million,
compared with $24.7 million for the three quarters ended October 1, 2016. As a
percentage of revenues, segment operating income was 0.5% for the three quarters
ended September 30, 2017, compared with 2.4% for the three quarters ended
October 1, 2016. The decrease in segment operating income reflected a $26.7
million increase in SG&A expenses that more than offset the higher overall
gross profit as described above. The increase in SG&A expenses mainly
reflected incremental consulting fees and temporary labor costs ($15.8 million)
and employee recruitment, relocation and retention costs ($5.1 million)
associated with the Value Creation Plan. Excluding these items, as well as those
items identified above affecting gross profit, segment operating
income as a percentage of revenues on an adjusted basis would have been 2.8% for
the first three quarters of 2017, compared with 4.1% for the first three
quarters of 2016. In addition, the increase in SG&A expenses reflected
higher employee compensation-related costs related to structural investments in
new quality, sales, marketing, engineering and accounting resources. Segment
operating income included foreign exchange losses of $4.3 million and $3.1
million in the first three quarters of 2017 and 2016, respectively, which mainly
reflected the impact of movements in the U.S. dollar relative to the euro and
Mexican peso on our international organic ingredient and frozen fruit
operations.
SUNOPTA INC.
|
51
|
September 30, 2017 10-Q
|
Further details on revenue, gross profit and segment operating
income/loss variances are provided below under Segmented Operations
Information.
Other expense for the three quarters ended September 30, 2017
of $12.0 million reflected the impairment of long-lived assets related to the
exit from our flexible resealable pouch and nutrition bar product lines and
operations and closure of the San Bernardino facility ($8.2 million), and
employee termination costs ($4.2 million) associated with the Value Creation
Plan, partially offset by a $1.0 million recovery on the early extinguishment of
a rebate obligation that arose from the prior settlement of a recall dispute
with a customer related to flexible resealable pouch products. Other expense for
the three quarters ended October 1, 2016 of $22.7 million reflected the
impairment of long-lived assets associated with the San Bernardino facility
($10.3 million), the cost of the settlement of the aforementioned flexible
resealable pouch product recall dispute with a customer ($9.0 million, which
included up to $4.0 million in rebates payable to the customer over a four-year
period), as well as facility rationalization and severance costs primarily
related to the consolidation of our frozen fruit processing facilities following
the Sunrise Acquisition ($2.2 million), and costs associated with product
withdrawals and recalls ($1.7 million). Other expenses in the first three
quarters of 2016 were partially offset by the $1.7 million gain on settlement of
the contingent consideration obligation related to the acquisition of Niagara
Natural.
Interest expense decreased by $10.9 million to $23.8 million
for the three quarters ended September 30, 2017, compared with $34.7 million for
the three quarters ended October 1, 2016. Interest expense included the
amortization and write-off of debt issuance costs of $1.8 million and $10.2
million in the first three quarters of 2017 and 2016, respectively. The
period-over-period decrease in interest expense primarily reflected the
reduction in non-cash amortization following the one-year maturity of the
initial second lien loans used to partially fund the Sunrise Acquisition, and
the repayment of $79.0 million of second lien debt with the net proceeds from
the Preferred Stock offering in October 2016.
We recognized a recovery of income tax of $14.0 million for the
three quarters ended September 30, 2017, compared with $15.6 million for the
three quarters ended October 1, 2016 (which included the realization of $1.3
million of previously unrecognized tax benefits). The effective tax rate for the
first three quarters of 2017 was 45.0%, compared with 43.8% for the first three
quarters of 2016 (excluding the impact of the change in unrecognized tax
benefits). The effective tax rates reflected the effect of a mix of pre-tax
losses projected in the U.S. and pre-tax earnings in certain other
jurisdictions. In fiscal 2017, pre-tax losses projected in the U.S. reflect
anticipated costs associated with the Value Creation Plan, including asset
impairment charges and employee termination costs related to the exit from
flexible resealable pouch and nutrition bar product lines and operations, and
closure of the San Bernardino facility. In fiscal 2016, pre-tax losses in the
U.S. reflected costs associated with the Value Creation Plan (including the
asset impairment charge related to the closure of the San Bernardino facility),
Sunrise Acquisition, settlement of the product recall dispute, and product
withdrawal and recall costs.
Loss from continuing operations attributable to SunOpta Inc.
for the three quarters ended September 30, 2017 was $17.8 million, compared with
a loss of $17.1 million for the three quarters ended October 1, 2016, a decrease
of $0.7 million. Diluted loss per share from continuing operations was $0.27 for
the three quarters ended September 30, 2017, compared with diluted loss per
share from continuing operations of $0.20 for the three quarters ended October
1, 2016.
The loss from discontinued operations of $0.6 million in the
first three quarters of 2016 was related our investment in Opta Minerals Inc.,
which we sold in April 2016.
On a consolidated basis, we realized a loss of $17.8 million
(diluted loss per share of $0.27) for the three quarters ended September 30,
2017, compared with a loss of $17.7 million (diluted loss per share of $0.21)
for the three quarters ended October 1, 2016.
For the three quarters ended September 30, 2017, adjusted loss
was $3.5 million, or $0.04 per diluted share, on a consolidated basis, compared
with adjusted earnings of $13.1 million, or $0.15 per diluted share, on a
consolidated basis for the three quarters ended October 1, 2016. Excluding
flexible resealable pouch and nutrition bar product lines and operations, which
we plan to exit, adjusted earnings was $0.1 million, or $0.00
per diluted share, for the three quarters ended October 1, 2016, compared with
$13.2 million, or $0.15 per diluted share, for the three quarters ended
September 30, 2017. Adjusted EBITDA for the three quarters ended September 30,
2017 was $57.4 million on a consolidated basis, compared with $72.3 million on a
consolidated basis for the three quarters ended October 1, 2016. Excluding
flexible resealable pouch and nutrition bar product lines and operations,
adjusted EBITDA for the three quarters ended September 30, 2017 was $62.5
million, compared with $71.7 million for the quarter ended October 1, 2016.
Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See
footnotes (2) and (3) to the table above for a reconciliation of adjusted
earnings/loss and adjusted EBITDA from loss from continuing operations, which we
consider to be the most directly comparable U.S. GAAP financial measure.
SUNOPTA INC.
|
52
|
September 30, 2017 10-Q
|
Segmented Operations Information
Global Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
For the three quarters ended
|
|
2017
|
|
|
October 1, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
420,247
|
|
$
|
441,694
|
|
$
|
(21,447
|
)
|
|
-4.9%
|
|
Gross Profit
|
|
52,453
|
|
|
54,716
|
|
|
(2,263
|
)
|
|
-4.1%
|
|
Gross Profit %
|
|
12.5%
|
|
|
12.4%
|
|
|
|
|
|
0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
$
|
18,388
|
|
$
|
24,256
|
|
$
|
(5,868
|
)
|
|
-24.2%
|
|
Operating Income %
|
|
4.4%
|
|
|
5.5%
|
|
|
|
|
|
-1.1%
|
|
Global Ingredients contributed $420.2 million in revenues for
the three quarters ended September 30, 2017, compared to $441.7 million for the
three quarters ended October 1, 2016, a decrease of $21.4 million, or 4.9% .
Excluding the impact on revenues of changes including foreign exchange rates and
commodity-related pricing (a decrease in revenues of $12.0 million), and the
recall of certain sunflower kernel products announced in the second quarter of
2016 (a decrease in revenues of $3.3 million), Global Ingredients revenues
decreased approximately 1.4% . The table below explains the decrease in revenue:
Global Ingredients
Revenue Changes
|
|
Revenues for the three
quarters ended October 1, 2016
|
$441,694
|
Lower
roasted volumes due to reduced customer demand following the sunflower
recall, and lower
raw
sunflower
volumes due to competition from global suppliers
|
(16,618)
|
Decreased
commodity pricing for domestically-sourced specialty and organic grains
and seeds
|
(9,954)
|
Decreased commodity pricing for
internationally-sourced organic ingredients
|
(1,703)
|
Decreased
volumes of internationally-sourced organic ingredients including liquid
sweeteners, fruits,
vegetables
and
seeds, partially offset by increased volumes of nuts, animal feed and
cocoa
|
(1,529)
|
Unfavorable
foreign exchange impact on euro-denominated sales due to a stronger U.S.
dollar period-over-period
|
(294)
|
Increased
volumes of domestically-sourced specialty soy and organic feed, partially
offset by lower volumes
of
specialty
corn and crop inputs
|
8,651
|
Revenues for the three quarters
ended September 30, 2017
|
$420,247
|
Gross profit in Global Ingredients decreased by $2.3 million to
$52.5 million for the three quarters ended September 30, 2017 compared to $54.7
million for the three quarters ended October 1, 2016, and the gross profit
percentage increased by 0.1% to 12.5% . The increase in gross profit as a
percentage of revenue was primarily due to a favorable foreign exchange impact
on U.S. dollar-denominated raw material sourcing within our international
organic ingredient operations, mostly offset by an unfavorable product mix of,
and reduced pricing spreads on, certain organic commodities, and reduced
operating efficiencies within our sunflower and roasting operations due to lower
volumes following the recall. The table below explains the decrease in gross
profit:
SUNOPTA INC.
|
53
|
September 30, 2017 10-Q
|
Global Ingredients Gross Profit
Changes
|
|
Gross profit for the three quarters ended
October 1, 2016
|
$54,716
|
Lower
sales volumes of raw sunflower and roasted products, and reduced
operating
efficiencies
due to lower production volumes
|
(4,746)
|
Favorable
foreign exchange impact on U.S. dollar-denominated raw material sourcing
within our international
organic
ingredient
operations (partially offset by losses on forward currency contracts
included below in operating
income),
as
well as improved operating efficiencies at our European production
facilities, partially offset by reduced
pricing
spreads
and lower volumes of certain higher-margin internationally-sourced organic
ingredients
|
2,173
|
Increased
specialty soy and grain ingredient volumes, partially offset by reduced
pricing spread on
domestically-sourced
organic
feed and reduced volumes of higher-margin crop inputs due to a reduction
in contracted acres
|
310
|
Gross profit for the three quarters ended
September 30, 2017
|
$52,453
|
Operating income in Global Ingredients decreased by $5.9
million, or 24.2%, to $18.4 million for the three quarters ended September 30,
2017, compared to $24.3 million for the three quarters ended October 1, 2016.
The table below explains the decrease in operating income:
Global Ingredients Operating Income
Changes
|
|
Operating income for the three quarters
ended October 1, 2016
|
$24,256
|
Decrease in gross profit, as explained above
|
(2,263)
|
Increase in foreign exchange losses primarily related to forward
currency contracts
|
(2,966)
|
Higher
employee-related compensation costs due to increased headcount within our
international organic
ingredient
operations,
partially offset by lower non-compensation- related costs
|
(413)
|
Increase in corporate cost allocations
|
(226)
|
Operating income for the three quarters ended
September 30, 2017
|
$18,388
|
Consumer Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
For the three quarters ended
|
|
2017
|
|
|
October 1, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
566,951
|
|
$
|
607,498
|
|
$
|
(40,547
|
)
|
|
-6.7%
|
|
Gross Profit
|
|
64,363
|
|
|
54,193
|
|
|
10,170
|
|
|
18.8%
|
|
Gross Profit %
|
|
11.4%
|
|
|
8.9%
|
|
|
|
|
|
2.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income %
|
$
|
14,696
|
|
$
|
6,989
|
|
$
|
7,707
|
|
|
110.3%
|
|
Operating Income %
|
|
2.6%
|
|
|
1.2%
|
|
|
|
|
|
1.4%
|
|
Consumer Products contributed $567.0 million in revenues for
the three quarters ended September 30, 2017, compared to $607.5 million for the
three quarters ended October 1, 2016, a $40.5 million, or 6.7% decrease.
Excluding the impact on revenues of changes in raw fruit commodity-related
pricing (a decrease in revenues of $2.7 million) and sales of flexible
resealable pouch and nutrition bar products (a decrease in revenues of $0.9
million), Consumer Products revenues decreased 6.6% . The table below explains
the decrease in revenues:
SUNOPTA INC.
|
54
|
September 30, 2017 10-Q
|
SUNOPTA INC.
|
55
|
September 30, 2017 10-Q
|
Consumer Products Revenue Changes
|
|
Revenues for the three quarters ended
October 1, 2016
|
$607,498
|
Lower
volumes of frozen fruit due to declines in consumer consumption trends and
lost customer
volumes,
and
the impact of lower raw fruit commodity-related pricing passed on to
customers, partially offset by
increased
fruit
ingredient volumes
|
(34,592)
|
Lower
retail sales of non-dairy aseptic beverages related to customer order
patterns and the previously
announced
loss
of a significant customer, partially offset by increased volumes of
non-dairy aseptic beverage products into
the
foodservice
channel, and higher volumes of premium juice and fruit snack products
|
(5,013)
|
Lower
volumes of flexible resealable pouch volumes (including the impact on
revenues from the closure of west
coast
pouch
operations due to the fire at a third-party facility in the third quarter
of 2016), partially offset by higher volumes of nutrition bars as a result
of new product introductions
|
(942)
|
Revenues for the three quarters ended September
30, 2017
|
$566,951
|
Gross profit in Consumer Products increased by $10.2 million to
$64.4 million for the three quarters ended September 30, 2017 compared to $54.2
million for the three quarters ended October 1, 2016, and the gross profit
percentage increased by 2.5% to 11.4% . For the three quarters ended September
30, 2017, gross profit as a percentage of revenue was impacted by a write-down
of flexible resealable pouch and nutrition bar inventories as a result of the
plan to exit these product lines ($1.3 million), as well as costs associated
with the closure of the San Bernardino facility ($0.4 million). For the three
quarters ended October 1, 2016, gross profit as a percentage of revenue was
impacted by the acquisition accounting adjustment related to Sunrise inventory
sold ($13.4 million) and costs associated with the expansion activities at the
Allentown aseptic beverage facility ($1.6 million). Excluding these costs, the
gross profit percentage in Consumer Products would have been 11.7% for the three
quarters ended September 30, 2017, compared with 11.4% for the three quarters
ended October 1, 2016. The increase in gross profit percentage primarily
reflected improved operating efficiencies and raw material pricing within our
healthy fruit operations and operational savings from the closure of the San
Bernardino facility, largely offset by higher losses within our flexible
resealable pouch and nutrition bar operations. The table below explains the
increase in gross profit:
Consumer Products Gross Profit
Changes
|
|
Gross profit for the three quarters ended
October 1, 2016
|
$54,193
|
Acquisition
accounting adjustment related to Sunrise inventory sold in the first three
quarters of 2016
|
13,404
|
Increased
contribution on sales of frozen fruit, based on operating efficiencies due
to the timing of
the
fruit
harvest (which was delayed in fiscal 2016, resulting in higher labor costs
and reduced supply)
and
favorable
pricing on sourced raw fruit, as well as increased volumes of fruit
ingredients, and productivity
and cost reduction initiatives within fruit ingredient
operations
|
5,784
|
Higher
losses within flexible resealable pouch and nutrition bar operations
(including the write-down
of
inventories
related to exit activities), which reflected the impact of the closure of
west coast pouch
operations
following
the fire at a third-party facility in the third quarter of 2016, and
higher plant costs and production
inefficiencies
related
to the introduction of new nutrition bar offerings
|
(6,913)
|
Lower
sales volumes of non-dairy aseptic beverages, partially offset by higher
sales volumes of premium
juice
and
fruit snack products, and operational savings following the closure of the
San Bernardino facility
|
(2,105)
|
Gross profit for the three quarters ended
September 30, 2017
|
$64,363
|
Operating income in Consumer Products increased by $7.7 million
to $14.7 million for the three quarters ended September 30, 2017, compared to
$7.0 million for the three quarters ended October 1, 2016. The table below
explains the increase in operating income:
SUNOPTA INC.
|
56
|
September 30, 2017 10-Q
|
Consumer Products Operating Income
Changes
|
|
Operating loss for the three quarters
ended October 1, 2016
|
$6,989
|
Increase in gross profit, as explained above
|
10,170
|
Lower
foreign exchange losses on international operations, and lower non-
compensation-related costs
|
2,271
|
Increase in corporate cost allocations
|
(4,734)
|
Operating income for the three quarters ended
September 30, 2017
|
$14,696
|
Corporate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
For the three quarters ended
|
|
2017
|
|
|
October 1, 2016
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
$
|
(28,460
|
)
|
$
|
(6,544
|
)
|
$
|
(21,916
|
)
|
|
-334.9%
|
|
Operating loss at Corporate Services increased by $21.9 million
to $28.5 million for the three quarters ended September 30, 2017, from a loss of
$6.5 million for the three quarters ended October 1, 2016. The table below
explains the increase in operating loss:
Corporate Services Operating Loss
Changes
|
|
Operating loss for the three quarters
ended October 1, 2016
|
$(6,544)
|
Third-party
consulting costs and employee recruitment, relocation and retention costs
associated with the Value Creation Plan
|
(20,356)
|
Higher
employee-related compensation costs, including stock-based compensation,
associated with the Value Creation Plan
|
(6,552)
|
Decrease in foreign exchange gains on foreign currency transactions
|
(92)
|
Increase in corporate cost allocations to SunOpta reporting segments
|
4,960
|
Lower
non-compensation-related costs, partially offset by the unfavorable impact
on Canadian
dollar-denominated
corporate
headquarter expenses of a weaker average U.S. dollar period-over-period
|
124
|
Operating loss for the three quarters ended
September 30, 2017
|
$(28,460)
|
Liquidity and Capital Resources
We have the following sources from which we can fund our
operating cash requirements:
|
|
Existing cash and cash equivalents;
|
|
|
|
|
|
Available operating lines of credit;
|
|
|
|
|
|
Cash flows generated from operating activities, including
working capital efficiency efforts;
|
|
|
|
|
|
Cash flows generated from the exercise, if any, of stock
options during the year;
|
|
|
|
|
|
Potential additional long-term financing, including the
offer and sale of debt and/or equity securities; and
|
|
|
|
|
|
Potential sales of non-core divisions, or assets.
|
SUNOPTA INC.
|
57
|
September 30, 2017 10-Q
|
On February 11, 2016, we entered a five-year credit agreement
for a senior secured asset-based revolving credit facility in the maximum
aggregate principal amount of $350 million, subject to borrowing base capacity
(the Global Credit Facility). The Global Credit Facility supports the working
capital and general corporate needs of our global operations, in addition to
funding strategic initiatives. In addition, subject to customary borrowing
conditions and the agreement of any such lenders to provide such increased
commitments, we may request to increase the total lending commitments under this
facility to a maximum aggregate principal amount not to exceed $450 million. The
applicable margin in the Global Credit Facility ranges from 1.25% to 1.75% for
loans bearing interest based on LIBOR and from 0.25% to 0.75% for loans bearing
interest based on the prime rate and, in each case, is set quarterly based on
average borrowing availability for the preceding fiscal quarter.
On September 19, 2017, we entered into an amendment to the
Global Credit Facility to add an additional U.S. asset-based credit subfacility
of an aggregate principal amount of $15.0 million. The principal amount of this
subfacility is repayable in quarterly instalments of $2.5 million, commencing
with the fiscal quarter ending March 31, 2019. Borrowings repaid under this
subfacility may not be borrowed again. The applicable margin for this
subfacility ranges from 2.00% to 2.50% with respect to base rate and prime rate
borrowings and from 3.00% to 3.50% for eurocurrency rate and bankers acceptance
rate borrowings.
As at September 30, 2017, we had outstanding borrowings of
$256.4 million and approximately $69.0 million of available borrowing capacity
under the Global Credit Facility. For more information on the Global Credit
Facility, see note 8(1) to the unaudited consolidated financial statements
included in this report.
On October 20, 2016, SunOpta Foods issued $231.0 million of
9.5% Senior Secured Second Lien Notes due October 9, 2022 (the Notes). The
issuance of the Notes represented the culmination of the financing arrangements
associated with the Sunrise Acquisition. For more information on the Notes, see
note 8(3) to the unaudited consolidated financial statements included in this
report.
In order to finance significant acquisitions, if any, that may
arise in the future, we may need additional sources of cash that we could
attempt to obtain through a combination of additional bank or subordinated
financing, a private or public offering of debt or equity securities, or the
issuance of common stock as consideration in an acquisition. There can be no
assurance that these types of financing would be available at all or, if so, on
terms that are acceptable to us.
In the event that we require additional liquidity due to market
conditions, unexpected actions by our lenders, changes to our growth strategy,
or other factors, our ability to obtain any additional financing on favourable
terms, if at all, could be limited.
Cash Flows
Quarter ended September 30, 2017 Compared to quarter
ended October 1, 2016
Net cash and cash equivalents decreased $0.6 million in the
third quarter of 2017 to $2.9 million as at September 30, 2017, compared with
$3.5 million at July 1, 2017, which primarily reflected cash used by continuing
operating activities of $11.1 million and capital expenditures of $6.5 million,
offset by borrowings of $19.2 million under our line of credit facilities.
Cash used in operating activities of continuing operations was
$11.1 million in the third quarter of 2017, compared with cash provided of $17.0
million in the third quarter of 2016, an increase in cash used of $28.1 million.
The increase in cash used by operating activities in the third quarter of 2017,
compared with the third quarter of 2016, reflected the relative timing of fruit
purchases and the cash payment of $8.0 million of costs incurred under the Value
Creation Plan.
Cash used in investing activities of continuing operations was
$7.8 million in the third quarter of 2017, compared with cash used of $5.5
million in the third quarter of 2016, an increase of $2.3 million, which mainly
reflected the acquisition of the non-controlling interest in our Mexican frozen
fruit operations for $1.7 million, and an increase in capital expenditures of
$1.1 million to add a second processing line at our Dutch cocoa facility, as
well as to implement food safety and production enhancements across our
manufacturing facilities.
Cash provided by financing activities of continuing operations
was $18.2 million in the third quarter of 2017, compared with cash used of $14.6
million in the third quarter of 2016, an increase in cash provided of $33.8
million. Net borrowings under our line of credit facilities increased $19.2
million in the third quarter of 2017, compared with a decrease of $13.1 million
the third quarter of 2016. The quarter-over-quarter increase in borrowings of
$32.3 million mainly reflected the increase in working capital requirements in
the third quarter of 2017.
SUNOPTA INC.
|
58
|
September 30, 2017 10-Q
|
Three quarters ended September 30, 2017 Compared to three
quarters ended October 1, 2016
Net cash and cash equivalents increased $1.6 million in the
first three quarters of 2017 to $2.9 million as at September 30, 2017, compared
with $1.3 million as at December 31, 2016, which primarily reflected $48.6
million of borrowings under our line of credit facilities, partially offset by
capital expenditures of $22.7 million, cash used by continuing operating
activities of $17.4 million and preferred stock dividends of $5.0 million.
Cash used in operating activities of continuing operations was
$17.4 million in the first three quarters of 2017, compared with cash used of
$35.3 million in the first three quarters of 2016, a decrease in cash used of
$17.9 million. The decrease in cash used by operating activities in the first
three quarters of 2017, compared with the first three quarters of 2016,
reflected cash generated through working capital efficiency initiatives, which
were focused on lowering inventory positions, maximizing purchasing terms, and
augmenting collection efforts for accounts receivable. These positive efforts
were partially offset by the cash settlement of $28.4 million of costs incurred
under the Value Creation Plan.
Cash used in investing activities of continuing operations was
$23.3 million in the first three quarters of 2017, compared with $14.1 million
in the first three quarters of 2016, an increase in cash used of $9.2 million,
which mainly reflected an increase in capital expenditures of $7.8 million
related to new capabilities within our aseptic beverage operations and expansion
of our Dutch cocoa facility, as well as food safety and production enhancements.
In addition, capital expenditures in the first three quarters of 2017 included
$3.2 million related to the early buyout of equipment leases associated with the
closure of the San Bernardino facility.
Cash provided by financing activities of continuing operations
was $42.2 million in the first three quarters of 2017, compared with $45.4
million in the first three quarters of 2016, a decrease in cash provided of $3.2
million. Net borrowings under our line of credit facilities increased $48.6
million in the first three quarters of 2017, compared with an increase of $65.8
million the first three quarters of 2016, a period-over-period decrease in
borrowings of $17.2 million, which reflected the reduction in working capital
requirements in the first three quarters of 2017, and the repayment of $10.0
million of second lien debt in the first three quarters of 2016, partially
offset by the period-over-period increase in capital spending. Net borrowings
under our line of credit facilities in the first three quarters of 2016
reflected the repayment in full of outstanding borrowings of $192.7 million
under our former North American and European credit facilities with borrowings
under the Global Credit Facility.
Off-Balance Sheet Arrangements
There are currently no off-balance sheet arrangements that have
or are reasonably likely to have a current or future material effect on our
financial condition.
Contractual Obligations
There have been no material changes outside the normal course
of business in our contractual obligations since December 31, 2016.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities, related revenues and expenses,
and disclosure of gain and loss contingencies at the date of the financial
statements. The estimates and assumptions made require us to exercise our
judgment and are based on historical experience and various other factors that
we believe to be reasonable under the circumstances. We continually evaluate the
information that forms the basis of our estimates and assumptions as our
business and the business environment generally changes. The use of estimates is
pervasive throughout our financial statements. There have been no material
changes to the critical accounting estimates disclosed under the heading
Critical Accounting Estimates in Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations, of the Form 10-K.
SUNOPTA INC.
|
59
|
September 30, 2017 10-Q
|