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 March 30, 2019 contained under Item 1 of this Quarterly Report on
Form 10-Q and in conjunction with the annual consolidated financial statements,
and notes thereto, contained in the Annual Report on Form 10-K for the fiscal
year ended December 29, 2018 ("Form 10-K"). Unless otherwise indicated herein,
the discussion and analysis contained in this MD&A includes information
available to May 8, 2019.
Certain statements contained in this MD&A may constitute
forward-looking statements as defined under securities laws. Forward-looking
statements may relate to our future outlook and anticipated events or results
and may include statements regarding our future financial position, business
strategy, budgets, litigation, projected costs, capital expenditures, financial
results, taxes, plans and objectives. In some cases, forward-looking statements
can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential,"
"continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "may," "predict," "budget,"
"forecast,", or other similar expressions concerning matters that are not
historical facts, or the negative of such terms are intended to identify
forward-looking statements; however, the absence of these words does not
necessarily mean that a statement is not forward-looking. To the extent any
forward-looking statements contain future-oriented financial information or
financial outlooks, such information is being provided to enable a reader to
assess our financial condition, material changes in our financial condition, our
results of operations, and our liquidity and capital resources. Readers are
cautioned that this information may not be appropriate for any other purpose,
including investment decisions.
Forward-looking statements contained in this MD&A are based
on certain factors and assumptions regarding expected growth, results of
operations, performance, and business prospects and opportunities. While we
consider these assumptions to be reasonable, based on information currently
available, they may prove to be incorrect. These factors are more fully
described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A
of Part II of this report.
Forward-looking statements contained in this commentary are
based on our current estimates, expectations and projections, which we believe
are reasonable as of the date of this report. Forward-looking statements are not
guarantees of future performance or events. You should not place undue
importance on forward-looking statements and should not rely upon this
information as of any other date. Other than as required under securities laws,
we do not undertake to update any forward-looking information at any particular
time. Neither we nor any other person assumes responsibility for the accuracy
and completeness of these forward-looking statements, and we hereby qualify all
our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this
MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed
in thousands of U.S. dollars, except per share amounts.
Overview
SunOpta is a global company focused on sourcing organic and
non-genetically modified ("non-GMO") ingredients, and manufacturing healthy food
and beverage products. Our global sourcing platform makes us one of the leading
suppliers of organic and non-GMO raw materials and ingredients in the food
industry. Our consumer products portfolio utilizes internally and externally
sourced raw materials and ingredients to manufacture healthy food and beverage
products for supply to retail, foodservice and branded food customers. We
operate our business in the following reportable segments:
-
Global Ingredients aggregates the Companys North American-based sunflower
and roasted snack operations and international organic ingredients operations.
Global Ingredients included the operations of the specialty and organic soy
and corn business that was sold in first quarter of 2019 (as described below
under the heading "Sale of Soy and Corn Business").
SUNOPTA INC.
|
28
|
March 30, 2019 10-Q
|
-
Consumer Products consists of three main commercial platforms: Healthy
Beverages, Healthy Fruit and Healthy Snacks. Healthy Beverages includes
aseptically-packaged products including non-dairy plant-based beverages,
broths and teas; refrigerated premium juices; 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 is focused on fruit snack
offerings and included the ending contribution from the exited flexible
resealable pouch and nutrition bar product lines in the first quarter of 2018.
Sale of Soy and Corn Business
On February 22, 2019, our subsidiary, SunOpta Grains and Foods
Inc., completed the sale of our specialty and organic soy and corn business to
Pipeline Foods, LLC ("Pipeline Foods") for $66.5 million, subject to certain
post-closing adjustments. The soy and corn business engaged in seed and grain
conditioning and corn milling and formed part of the Global Ingredients
reportable segment. The net proceeds from this transaction of approximately $65
million were initially used to repay borrowings and increase availability under
our Global Credit Facility (as described below under the heading "Liquidity and
Capital Resources"). Over time, we intend to redeploy this capital to further
enhance our consumer products and international organic ingredients
operations.
The results of operations of the soy and corn business for the
quarters ended March 30, 2019 and March 31, 2018 are summarized in the table
below. These results exclude management fees charged by Corporate Services.
|
|
|
|
|
Quarter ended
|
|
|
|
March 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Revenues
|
|
10,346
|
|
|
21,399
|
|
Gross profit
|
|
192
|
|
|
2,658
|
|
Segment operating income (loss)
|
|
(187
|
)
|
|
2,275
|
|
Earnings (loss) before income taxes
|
|
(187
|
)
|
|
2,292
|
|
The sale of the soy and corn business simplified our
operations, enabling other overhead cost reduction measures to be taken in the
first quarter of 2019 that extended beyond the employees and expenses that
transferred to Pipeline Foods. Taking into consideration the contribution from
the soy and corn business, as well as the other associated costs and expenses
that were rationalized, the following table presents a reconciliation of
adjusted earnings before interest, taxes, depreciation and amortization
("EBITDA") in connection with this transaction from earnings/loss before income
taxes of the soy and corn business, which we consider in this case to be the
most directly comparable U.S. GAAP financial measure.
|
|
|
|
|
Quarter ended
|
|
|
|
March 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Earnings (loss) before income taxes of soy and corn
business
|
|
(187
|
)
|
|
2,292
|
|
Depreciation
|
|
129
|
|
|
213
|
|
Interest income
|
|
-
|
|
|
(15
|
)
|
Other expense
|
|
-
|
|
|
(2
|
)
|
Less
rationalized costs and expenses
|
|
(169
|
)
|
|
(995
|
)
|
Adjusted EBITDA
|
|
(227
|
)
|
|
1,493
|
|
Adjusted EBITDA is a non-GAAP measure that management uses when
assessing the performance of our operations. See footnote (3) to the
"Consolidated Results of Operations for the Quarters Ended March 30, 2019 and
March 31, 2018" table below for a discussion on the use of this non-GAAP
measure.
For more information regarding the sale of the soy and corn
business, see note 3 to the unaudited consolidated financial statements included
in this report.
SUNOPTA INC.
|
29
|
March 30, 2019 10-Q
|
Value Creation Plan
In the fourth quarter of 2016, we conducted a thorough review
of our operations, management and governance, with the objective of maximizing
our ability to deliver long-term value to our shareholders. As a product of this
review, we developed a Value Creation Plan built on four pillars: portfolio
optimization, operational excellence, go-to-market effectiveness, and process
sustainability.
In addition to the sale of our soy and corn business and
related cost rationalizations (as described above), other actions taken under
the Value Creation Plan have included the rationalization of certain of our
operations and facilities, including the closure of our juice facility in San
Bernardino, California, in the fourth quarter of 2016, the exit from flexible
resealable pouch and nutrition bar product lines and operations initiated in the
fourth quarter of 2017, and the consolidation of roasted snack operations and
related disposal of our roasting facility in Wahpeton, North Dakota, in the
second quarter of 2018, as well as other cost savings initiatives. Other actions
taken to-date under the Value Creation Plan include investments in certain of
our operations and facilities to enhance food safety and quality and to improve
production efficiencies, as well as investments in personnel, processes and
tools.
For the quarters ended March 30, 2019 and March 31, 2018, costs
incurred and charged to expense in connection with the Value Creation Plan were
recorded in the consolidated statement of operations as follows:
|
|
|
|
|
Quarter ended
|
|
|
|
March 30,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
Cost
of goods sold
(1)
|
|
-
|
|
|
100
|
|
Selling, general and
administrative expenses
(2)
|
|
203
|
|
|
313
|
|
Other expense
(3)
|
|
1,655
|
|
|
1,782
|
|
|
|
1,858
|
|
|
2,195
|
|
|
(1)
|
For the quarter ended March 31, 2018, inventory
write-downs and facility closure costs recorded in cost of goods sold were
allocated to Consumer Products.
|
|
(2)
|
Professional fees and employee retention and recruitment
costs recorded in selling general and administrative expenses ("SG&A")
were allocated to Corporate Services.
|
|
(3)
|
For the quarter ended March 30, 2019, employee
termination, recruitment and relocation costs, net of the reversal of
stock-based compensation, and facility closure costs recorded in other
expense were allocated as follows: Global Ingredients $0.2 million
(March 31, 2018 $0.3 million); Consumer Products $0.8 million (March
31, 2018 $1.3 million); and Corporate Services $0.7 million (March 31,
2018 $0.1 million).
|
We intend to continue to make the necessary strategic business
decisions and structural investments that we believe will deliver sustained
profitable growth and deliver long-term value. Consequently, significant
additional costs and expenses could arise in future periods if we determine to
initiate further actions under the framework of the Value Creation Plan.
For more information regarding the Value Creation Plan, see
note 4 to the unaudited consolidated financial statements included in this
report.
SUNOPTA INC.
|
30
|
March 30, 2019 10-Q
|
Consolidated Results of Operations for the Quarters Ended
March 30, 2019 and March 31, 2018
|
|
March 30,
|
|
|
March 31,
|
|
|
|
|
|
|
|
For the quarter ended
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
128,043
|
|
|
136,331
|
|
|
(8,288
|
)
|
|
-6.1%
|
|
Consumer Products
|
|
177,232
|
|
|
176,321
|
|
|
911
|
|
|
0.5%
|
|
Total revenues
|
|
305,275
|
|
|
312,652
|
|
|
(7,377
|
)
|
|
-2.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
12,872
|
|
|
14,635
|
|
|
(1,763
|
)
|
|
-12.0%
|
|
Consumer Products
|
|
15,334
|
|
|
19,049
|
|
|
(3,715
|
)
|
|
-19.5%
|
|
Total gross profit
|
|
28,206
|
|
|
33,684
|
|
|
(5,478
|
)
|
|
-16.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
(loss)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Ingredients
|
|
4,723
|
|
|
3,102
|
|
|
1,621
|
|
|
52.3%
|
|
Consumer Products
|
|
(1,338
|
)
|
|
3,316
|
|
|
(4,654
|
)
|
|
-140.3%
|
|
Corporate Services
|
|
(3,065
|
)
|
|
(4,755
|
)
|
|
1,690
|
|
|
35.5%
|
|
Total segment operating income
|
|
320
|
|
|
1,663
|
|
|
(1,343
|
)
|
|
-80.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
(43,512
|
)
|
|
(402
|
)
|
|
(43,110
|
)
|
|
-10723.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before the following
|
|
43,832
|
|
|
2,065
|
|
|
41,767
|
|
|
2022.6%
|
|
Interest expense, net
|
|
8,739
|
|
|
8,220
|
|
|
519
|
|
|
6.3%
|
|
Provision for (recovery of) income taxes
|
|
9,498
|
|
|
(1,693
|
)
|
|
11,191
|
|
|
661.0%
|
|
Net earnings (loss)
(2),(3)
|
|
25,595
|
|
|
(4,462
|
)
|
|
30,057
|
|
|
673.6%
|
|
Loss attributable to non-controlling
interests
|
|
(54
|
)
|
|
(99
|
)
|
|
45
|
|
|
45.5%
|
|
Earnings (loss) attributable to SunOpta Inc.
|
|
25,649
|
|
|
(4,363
|
)
|
|
30,012
|
|
|
687.9%
|
|
Dividends and accretion on Series A
Preferred Stock
|
|
(1,995
|
)
|
|
(1,967
|
)
|
|
(28
|
)
|
|
-1.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) attributable to
common
shareholders
(4)
|
|
23,654
|
|
|
(6,330
|
)
|
|
29,984
|
|
|
473.7%
|
|
(1)
|
When assessing the financial performance of our operating
segments, we use an internal measure of operating income that excludes
other income/expense items and goodwill impairments determined in
accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP"). This measure is the basis on which
management, including the Chief Executive Officer, assesses the underlying
performance of our operating segments.
|
|
|
|
We believe that disclosing this non-GAAP measure assists
investors in comparing financial performance across reporting periods on a
consistent basis by excluding items that are not indicative of our
operating performance. However, the non-GAAP measure of operating income
should not be considered in isolation or as a substitute for performance
measures calculated in accordance with U.S. GAAP. The following table
presents a reconciliation of segment operating income/loss to
earnings/loss before the following, which we consider to be the most
directly comparable U.S. GAAP financial
measure.
|
|
|
Global
|
|
|
Consumer
|
|
|
Corporate
|
|
|
|
|
|
|
Ingredients
|
|
|
Products
|
|
|
Services
|
|
|
Consolidated
|
|
For the quarter
ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
March 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
4,723
|
|
|
(1,338
|
)
|
|
(3,065
|
)
|
|
320
|
|
Other income (expense), net
|
|
44,995
|
|
|
(761
|
)
|
|
(722
|
)
|
|
43,512
|
|
Earnings (loss) before the following
|
|
49,718
|
|
|
(2,099
|
)
|
|
(3,787
|
)
|
|
43,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
3,102
|
|
|
3,316
|
|
|
(4,755
|
)
|
|
1,663
|
|
Other income (expense), net
|
|
(615
|
)
|
|
1,143
|
|
|
(126
|
)
|
|
402
|
|
Earnings (loss) before the following
|
|
2,487
|
|
|
4,459
|
|
|
(4,881
|
)
|
|
2,065
|
|
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.
|
31
|
March 30, 2019 10-Q
|
(2)
|
When assessing our financial performance, we use an
internal measure of earnings attributable to common shareholders
determined in accordance with U.S. GAAP that excludes specific items
recognized in other income/expense, impairment losses on goodwill and
long-lived assets, and other unusual items that are identified and
evaluated on an individual basis, which due to their nature or size, we
would not expect to occur as part of our normal business on a regular
basis. We believe that the identification of these excluded items enhances
an analysis of our financial performance of our business when comparing
those operating results between periods, as we do not consider these items
to be reflective of normal business operations.
|
|
|
|
The following table presents a reconciliation of adjusted
earnings/loss from net earnings/loss, which we consider to be the most
directly comparable U.S. GAAP financial measure. In addition, in
recognition of the sale of the soy and corn business (as described above
under the heading "Sale of Soy and Corn Business"), and our exit from
flexible resealable pouch and nutrition bar product lines and operations
(as described above under the heading "Value Creation Plan"), we have
prepared this table in a columnar format to present the effect of the
disposal of these operations on our consolidated results for the current
and comparative periods. We believe this presentation assists investors in
assessing the results of the operations we have disposed and the effect of
those operations on our financial performance.
|
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
disposed operations
|
|
|
Disposed operations
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
Per Diluted
|
|
|
|
|
|
Per Diluted
|
|
|
|
|
|
Per Diluted
|
|
|
|
|
|
|
Share
|
|
|
|
|
|
Share
|
|
|
|
|
|
Share
|
|
For the quarter
ended
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
March 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(7,201
|
)
|
|
|
|
|
32,796
|
|
|
|
|
|
25,595
|
|
|
|
|
Add: loss attributable to non-controlling interests
|
|
54
|
|
|
|
|
|
-
|
|
|
|
|
|
54
|
|
|
|
|
Less: dividends and accretion of Series A
Preferred Stock
|
|
(1,995
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,995
|
)
|
|
|
|
Earnings (loss) attributable to common shareholders
|
|
(9,142
|
)
|
|
(0.10
|
)
|
|
32,796
|
|
|
0.33
|
|
|
23,654
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of soy and
corn business
|
|
-
|
|
|
|
|
|
(45,579
|
)
|
|
|
|
|
(45,579
|
)
|
|
|
|
Costs related to the Value Creation
Plan
(a)
|
|
1,858
|
|
|
|
|
|
-
|
|
|
|
|
|
1,858
|
|
|
|
|
Product withdrawal and
recall costs
(b)
|
|
260
|
|
|
|
|
|
-
|
|
|
|
|
|
260
|
|
|
|
|
Contract manufacturer transition
costs
(c)
|
|
88
|
|
|
|
|
|
-
|
|
|
|
|
|
88
|
|
|
|
|
Other
(d)
|
|
152
|
|
|
|
|
|
-
|
|
|
|
|
|
152
|
|
|
|
|
Net income tax effect
(e)
|
|
(826
|
)
|
|
|
|
|
12,489
|
|
|
|
|
|
11,663
|
|
|
|
|
Adjusted loss
|
|
(7,610
|
)
|
|
(0.09
|
)
|
|
(294
|
)
|
|
-
|
|
|
(7,904
|
)
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(4,420
|
)
|
|
|
|
|
(42
|
)
|
|
|
|
|
(4,462
|
)
|
|
|
|
Add: loss attributable to non-controlling
interests
|
|
99
|
|
|
|
|
|
-
|
|
|
|
|
|
99
|
|
|
|
|
Less: dividends and accretion of Series A Preferred Stock
|
|
(1,967
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(1,967
|
)
|
|
|
|
Loss attributable to common shareholders
|
|
(6,288
|
)
|
|
(0.07
|
)
|
|
(42
|
)
|
|
-
|
|
|
(6,330
|
)
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustment on contingent
consideration
(f)
|
|
(2,500
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(2,500
|
)
|
|
|
|
Costs related to Value
Creation Plan
(g)
|
|
984
|
|
|
|
|
|
1,211
|
|
|
|
|
|
2,195
|
|
|
|
|
Product withdrawal and recall
costs
(b)
|
|
323
|
|
|
|
|
|
-
|
|
|
|
|
|
323
|
|
|
|
|
Other
(h)
|
|
(7
|
)
|
|
|
|
|
-
|
|
|
|
|
|
(7
|
)
|
|
|
|
Net income tax effect
(d)
|
|
221
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
(94
|
)
|
|
|
|
Adjusted loss
|
|
(7,267
|
)
|
|
(0.08
|
)
|
|
854
|
|
|
0.01
|
|
|
(6,413
|
)
|
|
(0.07
|
)
|
|
(a)
|
Reflects professional fees and employee retention costs
of $0.2 million recorded in SG&A expenses; and employee termination
costs of $2.9 million, recruitment costs of $0.6 million, and facility
closure costs of $0.3 million, net of the reversal of $2.1 million of
previously recognized stock-based compensation related to forfeited awards
previously granted to terminated employees, all recorded in other
expense.
|
|
(b)
|
Reflects product withdrawal and recall costs that were
not eligible for reimbursement under insurance policies or exceeded the
limits of those policies, including costs related to the recall of certain
sunflower kernel products initiated in the second quarter of 2016, which
were recorded in other expense.
|
|
(c)
|
Reflects costs to transition certain production
activities to a new contract manufacturer, which were recorded in cost of
goods sold.
|
|
(d)
|
Other included insurance deductibles, 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 27% for the quarter ended March 30, 2019 (March 31, 2018
26%) on adjusted earnings/loss before tax.
|
|
(f)
|
Reflects a fair value adjustment of $2.5 million to
reduce the contingent consideration obligation related to a prior business
acquisition, based on the results for the business in fiscal 2018, which
was recorded in other income.
|
|
(g)
|
Reflects the write-down of remaining flexible resealable
pouch and nutrition bar inventories of $0.1 million recorded in cost of
goods sold; and consulting fees, and employee recruitment and relocation
costs of $0.3 million recorded in SG&A expenses; and asset impairment,
lease obligation and employee termination costs of $1.8 million recorded
in other expense.
|
SUNOPTA INC.
|
32
|
March 30, 2019 10-Q
|
|
(h)
|
Other included the accretion of contingent consideration
obligations and gain/loss on the sale of assets, which were recorded in
other expense/income.
|
|
We believe that investors understanding of our financial
performance is enhanced by disclosing the specific items that we exclude
to compute adjusted earnings/loss. However, adjusted earnings/loss is not,
and should not be viewed as, a substitute for earnings prepared under U.S.
GAAP. Adjusted earnings/loss is presented solely to allow investors to
more fully understand how we assess our financial performance.
|
|
|
(3)
|
We use a measure of adjusted EBITDA when assessing the
performance of our operations, which we believe is useful to investors
understanding of our operating profitability because it excludes
non-operating expenses, such as interest and income taxes, and non-cash
expenses, such as depreciation, amortization, stock-based compensation and
asset impairment charges, as well as other unusual items that affect the
comparability of operating performance. We also use this measure to review
and assess our progress under the Value Creation Plan, and to assess
operating performance in connection with our employee incentive programs.
In addition, we are subject to certain restrictions on incurring
additional indebtedness based on availability and metrics that include in
their calculation a measure of EBITDA. We define adjusted EBITDA as
segment operating income/loss plus depreciation, amortization and non-cash
stock-based compensation, and excluding other unusual items as identified
in the determination of adjusted earnings (refer above to footnote (2)).
The following table presents a reconciliation of segment operating
income/loss and adjusted EBITDA from net earnings/loss, which we consider
to be the most directly comparable U.S. GAAP financial measure. In
addition, as described above under footnote (2), we have prepared this
table in a columnar format to present the effect of the disposals of the
soy and corn business, and flexible resealable pouch and nutrition bar
operations on our consolidated results for the periods presented. We
believe this presentation assists investors in assessing the results of
the operations we have disposed and the effect of those operations on our
financial performance.
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
disposed operations
|
|
|
Disposed operations
|
|
|
Consolidated
|
|
For the quarter
ended
|
|
$
|
|
|
$
|
|
|
$
|
|
March 30, 2019
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
(7,201
|
)
|
|
32,796
|
|
|
25,595
|
|
Provision for (recovery of) income taxes
|
|
(2,879
|
)
|
|
12,377
|
|
|
9,498
|
|
Interest expense, net
|
|
8,739
|
|
|
-
|
|
|
8,739
|
|
Other expense (income), net
|
|
2,067
|
|
|
(45,579
|
)
|
|
(43,512
|
)
|
Total segment operating income (loss)
|
|
726
|
|
|
(406
|
)
|
|
320
|
|
Depreciation and amortization
|
|
8,173
|
|
|
129
|
|
|
8,302
|
|
Stock-based
compensation
(a)
|
|
1,939
|
|
|
-
|
|
|
1,939
|
|
Costs related to Value Creation
Plan
(b)
|
|
203
|
|
|
-
|
|
|
203
|
|
Contract manufacturer
transition costs
(c)
|
|
88
|
|
|
-
|
|
|
88
|
|
Adjusted EBITDA
|
|
11,129
|
|
|
(277
|
)
|
|
10,852
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(4,420
|
)
|
|
(42
|
)
|
|
(4,462
|
)
|
Provision for (recovery of) income taxes
|
|
(1,702
|
)
|
|
9
|
|
|
(1,693
|
)
|
Interest expense (income), net
|
|
8,235
|
|
|
(15
|
)
|
|
8,220
|
|
Other expense (income), net
|
|
(1,611
|
)
|
|
1,209
|
|
|
(402
|
)
|
Total segment operating income
|
|
502
|
|
|
1,161
|
|
|
1,663
|
|
Depreciation and amortization
|
|
7,928
|
|
|
213
|
|
|
8,141
|
|
Stock-based
compensation
|
|
2,171
|
|
|
-
|
|
|
2,171
|
|
Costs related to Value Creation
Plan
(b)
|
|
413
|
|
|
-
|
|
|
413
|
|
Adjusted EBITDA
|
|
11,014
|
|
|
1,374
|
|
|
12,388
|
|
|
(a)
|
For the first quarter of 2019, stock-based compensation
of $1.9 million was recorded in SG&A expenses, and the reversal of
$2.1 million of previously recognized stock-based compensation related to
forfeited awards previously granted to terminated employees was recognized
in other income.
|
|
|
|
|
(b)
|
For the first quarter of 2019, reflects professional fees
and employee retention costs of $0.2 million recorded in SG&A
expenses. For the first quarter of 2018, reflects the write-down of
remaining flexible resealable pouch and nutrition bar inventories of $0.1
million recorded in cost of goods sold; and consulting fees, and employee
recruitment and relocation costs of $0.3 million recorded in SG&A
expenses.
|
|
|
|
|
(c)
|
Reflects costs to transition certain production
activities to a new contract manufacturer, which were recorded in cost of
goods sold.
|
Although we use adjusted EBITDA as a measure to assess the
performance of our business and for the other purposes set forth above, this
measure has limitations as an analytical tool, and should not be considered in
isolation, or as a substitute for an analysis of our results of operations as
reported in accordance with U.S. GAAP. Some of these limitations are:
-
adjusted EBITDA does not reflect the interest expense, or the cash
requirements necessary to service interest payments on our indebtedness;
-
adjusted EBITDA does not include the recovery/payment of taxes, which is a
necessary element of our operations;
-
although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the future,
and adjusted EBITDA does not reflect any cash requirements for such
replacements; and
-
adjusted EBITDA does not include non-cash stock-based compensation, which
is an important component of our total compensation program for employees and
directors.
SUNOPTA INC.
|
33
|
March 30, 2019 10-Q
|
|
Because of these limitations, adjusted EBITDA should not
be considered as a measure of discretionary cash available to us to invest
in the growth of our business. Management compensates for these
limitations by not viewing adjusted EBITDA in isolation, and specifically
by using other U.S. GAAP and non-GAAP measures, such as revenues, gross
profit, segment operating income, earnings and adjusted earnings to
measure our operating performance. Adjusted EBITDA is not a measurement of
financial performance under U.S. GAAP and should not be considered as an
alternative to our results of operations or cash flows from operations
determined in accordance with U.S. GAAP, and our calculation of adjusted
EBITDA may not be comparable to the calculation of a similarly titled
measure reported by other companies.
|
|
|
(4)
|
In order to evaluate our results of operations, we use
certain non-GAAP measures that we believe enhance an investors ability to
derive meaningful period-over-period comparisons and trends from our
results of operations. In particular, we evaluate our revenues on a basis
that excludes the effects of fluctuations in commodity pricing and foreign
exchange rates. In addition, we exclude specific items from our reported
results that due to their nature or size, we do not expect to occur as
part of our normal business on a regular basis. These items are identified
above under footnote (2), and in the discussion of our results of
operations below. These non-GAAP measures are presented solely to allow
investors to more fully assess our results of operations and should not be
considered in isolation of, or as substitutes for an analysis of our
results as reported under U.S. GAAP.
|
Revenues for the quarter ended March 30, 2019 decreased by 2.4%
to $305.3 million from $312.7 million for the quarter ended March 31, 2018.
Excluding the impact on revenues of the sale of the soy and corn business and
exit from flexible resealable pouch and nutrition bar product lines (a decrease
in revenues of $13.7 million), changes in commodity-related pricing (a decrease
in revenues of $4.8 million) and foreign exchange rates (a decrease in revenues
of $4.6 million), and a profit-neutral change to a co-manufacturing agreement
with a customer (a decrease in revenues of $2.3 million), revenues increased by
6.2% in the first quarter of 2019, compared with the first quarter of 2018. The
increase in revenues on an adjusted basis reflected higher volumes of
internationally-sourced organic ingredients in both Europe and the U.S., and of
aseptic beverage and fruit snack products. In addition, sales of frozen fruit
were higher on increased distribution volumes, despite shortfalls in meeting
certain customer demand due to weather-related supply issues out of central
Mexico. These increases were offset by reduced demand for fruit ingredients from
yogurt producers and food service customers, and lower volumes of sunflower
inshell and kernel.
Gross profit decreased $5.5 million, or 16.3%, to $28.2 million
for the quarter ended March 30, 2019, compared with $33.7 million for the
quarter ended March 31, 2018. As a percentage of revenues, gross profit for the
quarter ended March 30, 2019 was 9.2% compared to 10.8% for the quarter ended
March 31, 2018, a decrease of 1.6% . Excluding the gross profit impact of the
sale of the soy and corn business and exit from flexible resealable pouch and
nutrition bar product lines, as well as costs of $0.1 million to transition
certain production activities to a new contract manufacturer in the first
quarter of 2019 and the write-down of $0.1 million of flexible resealable pouch
and nutrition bar inventories in the first quarter of 2018, the gross profit
percentage for the first quarter of 2019 would have been approximately 9.5%,
compared with 10.7% for the first quarter of 2018.
Global Ingredients accounted for $1.8 million of the decrease
in gross profit, driven primarily by the sale of the soy and corn business,
offset by higher sales volumes of organic ingredients. Excluding the impact of
the sale of the soy and corn business, the gross profit percentage for Global
Ingredients would have been 10.8% and 10.4% in the first quarters of 2019 and
2018, respectively, which reflected an improved margin profile within our
international organic ingredients operations driven by a favorable cocoa hedging
result, partially offset by reduced pricing spreads and manufacturing
inefficiencies for certain organic ingredients and a modest decline in the
domestic sunflower gross margin. In the first quarter of 2019, we recognized a
gain of $1.3 million on futures contacts used to manage our exposure to changes
in cocoa prices on our physical organic cocoa position, compared with a loss of
$2.8 million in the first quarter of 2018.
Consumer Products accounted for $3.7 million of the decrease in
gross profit, reflecting the impact of the weather-related delay to the fruit
season in central Mexico. The delay resulted in commodity price inflation due to
a short supply of frozen fruit from Mexico, unfavorable production variances due
to lower yields related to crop quality issues, rework of bulk inventories,
substitution of higher-cost U.S.-grown product, and lower plant utilization at
our Mexican frozen fruit facility. The negative impact to gross profit from the
weather-related delay was estimated to be $1.6 million in the first quarter of
2019. In addition, the quarter-over-quarter decrease in gross profit reflected
lower volumes and plant utilization for fruit ingredients due to reduced demand.
These factors were partially offset by the favorable impact within the Healthy
Beverage and Snacks platforms of improved plant utilization due to higher
production volumes to meet sales demand, and productivity-driven cost savings.
Total segment operating income for the quarter ended March 30,
2019 decreased by $1.4 million, or 80.8%, to $0.3 million, compared with total
segment operating income of $1.7 million for the quarter ended March 31, 2018.
The decrease in segment operating income reflected lower overall gross profit,
as described above, partially offset by a $2.0 million decrease in SG&A
expenses and a favorable quarter-over-quarter foreign exchange impact of $2.1
million (including a $1.1 million favorable result related to forward currency
contracts within our international organic ingredients operations). The decrease
in SG&A expenses reflected the sale of the soy and corn business and
rationalized overhead, lower employee-related benefit costs, professional fees,
and other cost reduction measures. Excluding the operating results of the soy
and corn business and flexible resealable pouch and nutrition bar operations, as well as
SG&A costs incurred and expensed related to the Value Creation Plan and
other items identified above affecting gross profit, segment operating income
would have been $1.0 million for the first quarter of 2019, compared with $0.9
million for the first quarter of 2018.
SUNOPTA INC.
|
34
|
March 30, 2019 10-Q
|
Further details on revenue, gross profit and segment operating
income/loss variances are provided below under "Segmented Operations
Information".
Other income for the quarter ended March 30, 2019 of $43.5
million reflected the pre-tax gain on sale of the soy and corn business of $45.6
million and the reversal of $2.1 million of previously recognized stock-based
compensation related to forfeited awards previously granted to terminated
employees. These other income amounts were offset mainly by employee termination
and recruitment costs of $3.5 million, associated with the sale of the soy and
corn business and Value Creation Plan, including costs related to our CEO
transition in the first quarter of 2019. Other income for the quarter ended
March 31, 2018 of $0.4 million reflected a $2.5 million reduction to the
remaining contingent consideration obligation that arose from a prior business
acquisition, which was offset by facility lease and asset impairment charges of
$1.6 million related to the closure of our former nutrition bar facility and
sale of our former roasted snack facility, and employee termination costs of
$0.2 million associated with the Value Creation Plan.
Interest expense increased by $0.5 million to $8.7 million for
the quarter ended March 30, 2019, compared with $8.2 million for the quarter
ended March 31, 2018. Interest expense included the amortization of debt
issuance costs of $0.7 million and $0.6 million in the first quarters of 2019
and 2018, respectively. The quarter-over-quarter increase in interest expense
primarily reflected higher borrowings under our line of credit facilities to
fund increased working capital requirements. In late February 2019, we used the
net proceeds from the sale of the soy and corn business to initially repay
outstanding borrowings under these facilities by approximately $65 million.
We recognized a provision of income tax of $9.5 million for the
quarter ended March 30, 2019, compared with a recovery of income taxes of $1.7
million for the quarter ended March 31, 2018. The effective tax rate was 27.1%
for the first quarter of 2019, compared with 27.5% for the first quarter of
2018.
On a consolidated basis, we realized earnings attributable to
common shareholders of $23.7 million (diluted earnings per share of $0.26) for
the quarter ended March 30, 2019, compared with a loss attributable to common
shareholders of $6.3 million (diluted loss per share of $0.07) for the quarter
ended March 31, 2018.
For the quarter ended March 30, 2019, adjusted loss was $7.9
million, or $0.09 per diluted share, on a consolidated basis, compared with
adjusted loss of $6.4 million, or $0.07 per diluted share, on a consolidated
basis for the quarter ended March 31, 2018. Excluding the results of the
disposed soy and corn, flexible resealable pouch and nutrition bar operations,
adjusted loss was $7.6 million, or $0.09 per diluted share, for the quarter
ended March 30, 2019, compared with adjusted loss of $7.3 million, or $0.08 per
diluted share, for the quarter ended March 31, 2018. Adjusted EBITDA for the
quarter ended March 30, 2019 was $10.9 million on a consolidated basis, compared
with $12.4 million on a consolidated basis for the quarter ended March 31, 2018.
Excluding disposed operations, adjusted EBITDA for the quarter ended March 30,
2019 was $11.1 million, compared with $11.0 million for the quarter ended March
31, 2018. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures.
See footnotes (2) and (3) to the table above for a reconciliation of adjusted
loss and adjusted EBITDA from net earnings/loss, which we consider to be the
most directly comparable U.S. GAAP financial measure.
Segmented Operations Information
Global Ingredients
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
March 30, 2019
|
|
|
March 31, 2018
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
128,043
|
|
$
|
136,331
|
|
$
|
(8,288
|
)
|
|
-6.1%
|
|
Gross profit
|
|
12,872
|
|
|
14,635
|
|
|
(1,763
|
)
|
|
-12.0%
|
|
Gross profit %
|
|
10.1%
|
|
|
10.7%
|
|
|
|
|
|
-0.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
4,723
|
|
$
|
3,102
|
|
$
|
1,621
|
|
|
52.3%
|
|
Operating income %
|
|
3.7%
|
|
|
2.3%
|
|
|
|
|
|
1.4%
|
|
Global Ingredients contributed $128.0 million in revenues for
the quarter ended March 30, 2019, compared to $136.3 million for the quarter
ended March 31, 2018, a decrease of $8.3 million, or 6.1% . Excluding the impact
on revenues of the sale of the soy and corn business (a decrease in revenues of $11.1 million)
and commodity-related pricing and foreign exchange rate movements (a decrease in
revenues of $8.4 million), Global Ingredients revenues increased approximately
9.7% . The table below explains the decrease in reported revenues:
SUNOPTA INC.
|
35
|
March 30, 2019 10-Q
|
Global
Ingredients Revenue Changes
|
|
Revenues for the
quarter ended March 31, 2018
|
$136,331
|
Impact of the sale of the soy and
corn business
|
(11,053)
|
Unfavorable foreign exchange impact on euro-denominated sales due to a
stronger U.S. dollar period-over-period
|
(4,556)
|
Decreased commodity pricing for
internationally-sourced organic ingredients
|
(4,271)
|
Lower
volumes of sunflower inshell and kernel, partially offset by higher
roasted snack and ingredient volumes and retail birdfeed volumes
|
(1,244)
|
Increased trading volumes of internationally-sourced organic ingredients
including fruits and vegetables, oils, coffee and cocoa, offset by lower
volumes of nuts, seeds and sugars, with overall volumes of organic ingredients higher in both Europe and the
U.S. period-over-period
|
12,444
|
Increased commodity pricing for
sunflower
|
392
|
Revenues for the
quarter ended March 30, 2019
|
$128,043
|
Gross profit in Global Ingredients decreased by $1.8 million to
$12.9 million for the quarter ended March 30, 2019 compared to $14.6 million for
the quarter ended March 31, 2018, and the gross profit percentage decreased by
0.6% to 10.1% . Excluding the impact on gross profit of the sale of the soy and
corn business, the gross profit percentage would have been 10.8% and 10.4% in
the first quarters of 2019 and 2018, respectively. The increase in gross profit
percentage excluding the soy and corn business reflected an improved margin
profile within our international organic ingredients operations driven by a
favorable cocoa hedging result, partially offset by reduced pricing spreads on
other organic ingredients due to market conditions and higher carrying costs,
and manufacturing inefficiencies within our international organic ingredients
and domestic sunflower and roasting operations. The table below explains the
decrease in gross profit:
SUNOPTA INC.
|
36
|
March 30, 2019 10-Q
|
Global
Ingredients Gross Profit Changes
|
|
Gross profit for
the quarter ended March 31, 2018
|
$14,635
|
Impact of the sale of the soy and
corn business
|
(2,466)
|
Increased spending and lower utilization related to the recently
commissioned second cocoa processing line within our international organic
ingredients operations, and lower yields for organic sunflower oil and sesame seed production due
to the quality of the raw material inputs
|
(462)
|
Lower sales and production volumes for sunflower inshell and kernel, and
underutilization of the recently commissioned roasting line due to a
shortfall in new business
|
(292)
|
Decrease in foreign exchange gains on U.S. dollar-denominated raw material
purchase contracts within our international organic ingredients operations
|
(215)
|
Favorable cocoa commodity hedging result and increased trading volumes
within our international organic ingredients operations, offset by lower
pricing spreads and higher carrying costs for certain organic ingredients, including animal feed, sugars, fruits and
vegetables, grains and seeds
|
1,672
|
Gross profit for
the quarter ended March 30, 2019
|
$12,872
|
Operating income in Global Ingredients increased by $1.6
million, or 52.3%, to $4.7 million for the quarter ended March 30, 2019,
compared to $3.1 million for the quarter ended March 31, 2018. The table below
explains the increase in operating income:
Global
Ingredients Operating Income Changes
|
|
Operating income
for the quarter ended March 31, 2018
|
$3,102
|
Decrease in foreign exchange losses within our international organic
ingredient operations, which included a $1.1 million reduction in
marked-to-market losses related to forward currency contracts
|
2,195
|
Decrease in corporate cost
allocations due to the sale of the soy and corn business
|
1,174
|
Higher employee-related compensation costs within our international
organic ingredients operations, mostly offset by favorable foreign
exchange impact
on euro-
denominated SG&A expenses and SG&A reductions from the sale of the
soy and corn business
|
15
|
Decrease in gross profit, as
explained above
|
(1,763)
|
Operating income
for the quarter ended March 30, 2019
|
$4,723
|
SUNOPTA INC.
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37
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March 30, 2019 10-Q
|
Looking forward, we believe Global Ingredients is well
positioned in the growing organic food and non-GMO categories. Having completed
the sale of our soy and corn business, which formed part of Global Ingredients,
we intend to focus our efforts on growing our international organic sourcing and
supply capabilities and leveraging these capabilities internally with forward
and backward integration where opportunities exist. On April 1, 2019, we
acquired Sanmark B.V. ("Sanmark"), which we believe has synergies with, and
provides the opportunity to expand our global organic oils portfolio. The
Sanmark acquisition is expected to contribute annualized revenues of
approximately $10 million and EBITDA of approximately $1 million. In addition,
we plan to open a new organic avocado oil facility located in Ethiopia during
the second half of 2019. However, we also anticipate market pressures in certain
categories of organic ingredients that may negatively impact margin profiles,
and we expect that a lack of supply of quality raw materials may negatively
impact production within our international sunflower oil and sesame seed
processing operations. Within our domestic sunflower business, we expect global
competition on price and supply to remain strong, which may continue to
negatively impact the margin profile of this business. In addition,
underutilization of the new roasting line is expected to continue throughout
2019 as we pursue new business opportunities. The statements in this paragraph
are forward-looking statements. See "Forward-Looking Statements" above. Several
factors could adversely impact our ability to meet these forward-looking
expectations, including increased supply pressure in the commodity-based markets
in which we operate, increased competition, volume decreases or loss of
customers, unexpected delays in our ingredient expansion plans, or our inability
to secure quality inputs or achieve our product mix or cost reduction goals,
along with the other factors described above under "Forward-Looking
Statements".
Consumer Products
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
March 30, 2019
|
|
|
March 31, 2018
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
177,232
|
|
$
|
176,321
|
|
$
|
911
|
|
|
0.5%
|
|
Gross profit
|
|
15,334
|
|
|
19,049
|
|
|
(3,715
|
)
|
|
-19.5%
|
|
Gross profit %
|
|
8.7%
|
|
|
10.8%
|
|
|
|
|
|
-2.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
$
|
(1,338
|
)
|
$
|
3,316
|
|
$
|
(4,654
|
)
|
|
-140.3%
|
|
Operating income (loss) %
|
|
-0.8%
|
|
|
1.9%
|
|
|
|
|
|
-2.7%
|
|
Consumer Products contributed $177.2 million in revenues for
the quarter ended March 30, 2019, compared to $176.3 million for the quarter
ended March 31, 2018, a $0.9 million, or 0.5% increase. Excluding the impact on
revenues of sales of flexible resealable pouch and nutrition bar products (a
decrease in revenues of $2.6 million), a profit-neutral change to a
co-manufacturing agreement with a customer (a decrease in revenues of $2.3
million) and changes in raw fruit commodity-related pricing (a decrease in
revenues of $1.0 million), Consumer Products revenues increased approximately
3.9% . The table below explains the increase in reported revenues:
Consumer
Products Revenue Changes
|
|
Revenues for the
quarter ended March 31, 2018
|
$176,321
|
Higher
sales of aseptic plant-based beverages and expanded distribution of
everyday broth offerings, partially offset by lower revenues due the
change to a co-manufacturing agreement with a customer, and lower volumes of premium juice products due
to the temporary loss of distribution in certain regions (since regained)
|
2,819
|
Higher volumes of fruit snack
products due in part to increased customer promotions
|
1,490
|
Impact of the exit from flexible resealable pouch and nutrition bars product lines
|
(2,604)
|
Reduced volumes of fruit ingredients due to lower demand for yogurt bases
and fruit toppings, impact of weather-related crop shortages from central
Mexico on
ability to
meet certain customer demand for frozen fruit, and impact of strategic
pricing reductions taken in 2018 on frozen fruit to gain distribution
volumes, offset by increased distribution volumes for frozen fruit
|
(794)
|
Revenues for the
quarter ended March 30, 2019
|
$177,232
|
Gross profit in Consumer Products decreased by $3.7 million to
$15.3 million for the quarter ended March 30, 2019 compared to $19.0 million for
the quarter ended March 31, 2018, and the gross profit percentage decreased by
2.1% to 8.7% . The decrease in the gross profit percentage primarily reflected
the impact of higher commodity pricing for frozen fruit due to crop shortages from central Mexico, together with unfavorable production
variances due to lower yields and higher costs related to crop quality issues,
rework of bulk inventories, and substitution of higher-cost U.S.-grown product,
and lower plant utilization at our Mexican frozen fruit facility. The impact to
gross profit from the weather-related delay was estimated to be $1.6 million in
the first quarter of 2019, or approximately a negative 1% impact on the gross
profit percentage. In addition, the decrease in the gross profit percentage
reflected the impact of lower sales pricing for frozen fruit, and lower sales
and production volumes for fruit ingredients resulting in unfavorable plant
utilization. These factors were partially offset by strong production volumes
and productivity-driven cost savings within the Healthy Beverage and Healthy
Snacks platforms. The table below explains the decrease in gross profit:
SUNOPTA INC.
|
38
|
March 30, 2019 10-Q
|
Consumer
Products Gross Profit Changes
|
|
Gross profit for
the quarter ended March 31, 2018
|
$19,049
|
Impact of short supply of frozen fruit from central Mexico on
commodity pricing due to supply-driven price inflation, in addition to
lower yields and higher production costs, and lower plant utilization in Mexico, together with lower sales pricing
for frozen fruit and lower volumes and plant utilization for fruit
ingredients
|
(4,720)
|
Higher sales volumes, plant utilization and productivity improvements for
aseptic beverage and fruit snack products, partially offset by lower
volumes of premium juice products
|
935
|
Impact of the exit from flexible resealable pouch and nutrition bars product lines
|
70
|
Gross profit for
the quarter ended March 30, 2019
|
$15,334
|
Operating income in Consumer Products decreased by $4.7 million
to an operating loss of $1.3 million for the quarter ended March 30, 2019,
compared to operating income of $3.3 million for the quarter ended March 31,
2018. The table below explains the decrease in operating income:
Consumer
Products Operating Income Changes
|
|
Operating income
for the quarter ended March 31, 2018
|
$3,316
|
Decrease in gross profit, as
explained above
|
(3,715)
|
Increase in corporate cost allocations due to the centralization of
transactional and other support functions for the Healthy Fruit platform
and realignment of Corporate Services resources as a result of the sale of
the soy and corn business
|
(2,053)
|
Headcount reductions within the Healthy Fruit platform due to the
centralization of transactional and other support functions, as well as
other SG&A expense reductions
|
1,114
|
Operating loss for
the quarter ended March 30, 2019
|
$(1,338)
|
Looking forward we believe Consumer Products remains
well-positioned in markets with long-term growth potential. We currently expect
revenues and gross profit from the Healthy Beverage and Healthy Snacks platforms
in 2019 to outperform the prior year. However, weather conditions in Mexico and
California are expected to negatively impact the quantity and quality of
available raw fruit, as well put upward pressure on field pricing. These factors
could continue to have a negative impact on the revenues and margin profile of
our frozen fruit business in 2019, to the extent we are unable to procure enough
quality fruit to meet customer demand or are unable to fully recover the
increased commodity costs through higher sales pricing to customers. In
addition, changing consumer preferences in the yogurt category are expected to
continue to negatively impact our fruit ingredients business. We continue to
focus our efforts on (i) leveraging our sales and marketing resources to create
greater channel specific focus on retail and foodservice to increase
opportunities to diversify our portfolio and drive incremental sales volume;
(ii) continuing to invest in our facilities to enhance quality, safety,
capacity, and manufacturing efficiency to drive both incremental sales and cost
reduction, including a significant investment in our Allentown, Pennsylvania,
aseptic beverage facility to expand capacity and production capabilities, which
is expected to come online in the third quarter of 2019, and investments in automation and
supply chain efficiencies in our frozen fruit operations, which are expected to
be phased in over the next two crop seasons; (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 Consumer Products. The statements in
this paragraph are forward-looking statements. See "Forward-Looking Statements"
above. Several factors could adversely impact our ability to meet these
forward-looking expectations, including unfavorable shifts in consumer
preferences, increased competition, reduced 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".
SUNOPTA INC.
|
39
|
March 30, 2019 10-Q
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Services
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended
|
|
March 30, 2019
|
|
|
March 31, 2018
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
(3,065
|
)
|
$
|
(4,755
|
)
|
$
|
1,690
|
|
|
35.5%
|
|
Operating loss at Corporate Services decreased by $1.7 million
to $3.1 million for the quarter ended March 30, 2019, compared to a loss of $4.8
million for the quarter ended March 31, 2018. The table below explains the
decrease in operating loss:
Corporate
Services Operating Loss Changes
|
|
Operating loss for
the quarter ended March 31, 2018
|
$(4,755)
|
Increase in corporate cost
allocations to SunOpta operating segments
|
879
|
Lower employee-related benefit costs and professional fees, and cost
reduction measures associated with the Value Creation Plan, partially
offset by the incremental expense associated with headcount additions
during fiscal 2018
|
811
|
Operating loss for
the quarter ended March 30, 2019
|
$(3,065)
|
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.
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 businesses or assets.
On February 11, 2016, we entered a five-year credit agreement
for a senior secured asset-based revolving credit facility in the maximum
aggregate principal amount of $350 million, subject to borrowing base capacity
(the "Global Credit Facility"). The Global Credit Facility supports the working
capital and general corporate needs of our global operations, in addition to
funding strategic initiatives. Subject to customary borrowing conditions and the
agreement of any such lenders to provide such increased commitments, we may
request to increase the total lending commitments under this facility to a
maximum aggregate principal amount not to exceed $450 million. The applicable
margin in the Global Credit Facility ranges from 1.25% to 1.75% for loans bearing interest based on LIBOR and from 0.25% to
0.75% for loans bearing interest based on the prime rate and, in each case, is
set quarterly based on average borrowing availability for the preceding fiscal
quarter.
SUNOPTA INC.
|
40
|
March 30, 2019 10-Q
|
On September 19, 2017, the Global Credit Facility was amended
to add an additional $15 million U.S. asset-based credit subfacility (the "U.S.
Subfacility"). On October 22, 2018, the Global Credit Facility was further
amended to increase the commitment under the U.S. Subfacility by $5 million. The
entire $20 million available for borrowing under the U.S. Subfacility was fully
drawn as of October 22, 2018. Commencing on March 31, 2019, quarterly
amortization payments on the aggregate principal amount of the U.S. Subfacility
are equal to $3.33 million, and these payments may be funded through borrowings
under the revolving facilities of the Global Credit Facility. Borrowings repaid
under the U.S. Subfacility may not be borrowed again. The applicable margin for
the U.S. Subfacility is set quarterly based on average borrowing availability
for the preceding fiscal quarter ranges from 2.00% to 2.50% with respect to base
rate and prime rate borrowings and from 3.00% to 3.50% for eurocurrency rate and
bankers acceptance rate borrowings.
As at March 30, 2019, we had outstanding borrowings of $220.2
million (December 29, 2018 $276.8 million) and available borrowing capacity of
approximately $82 million (December 29, 2018 $55 million) under the Global
Credit Facility, which reflected the initial application of the net proceeds
from the sale of the soy and corn business. 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, our subsidiary, SunOpta Foods Inc.
("SunOpta Foods"), issued $231.0 million of 9.5% Senior Secured Second Lien
Notes due October 9, 2022 (the "Notes"). As at March 30, 2019, the outstanding
principal amount of the Notes was $223.5 million, reflecting the redemption of
$7.5 million principal amount by SunOpta Foods in October 2017. For more
information on the Notes, see note 8(2) to the unaudited consolidated financial
statements included in this report.
On October 7, 2016, SunOpta Foods issued 85,000 shares of
Series A Preferred Stock (the "Preferred Stock") for consideration in the amount
of $85.0 million. The Preferred Stock has a stated value and initial liquidation
preference of $1,000 per share. Cumulative preferred dividends accrue daily on
the Preferred Stock at an annualized rate of 8.0% of the liquidation preference
prior to October 5, 2025 and 12.5% of the liquidation preference thereafter
(subject to an increase of 1.0% per quarter, up to a maximum rate of 5.0% per
quarter on the occurrence of certain events of non-compliance). Prior to October
5, 2025, SunOpta Foods may pay dividends in cash or elect, in lieu of paying
cash, to add the amount that would have been paid to the liquidation preference.
After October 4, 2025, the failure to pay dividends in cash will be an event of
non-compliance. For each of the quarters ended March 30, 2019 and March 31,
2018, SunOpta Foods paid cash dividends on the Preferred Stock of $1.7 million.
As at March 30, 2019, SunOpta Foods had accrued unpaid dividends of $1.7
million. For more information on the Preferred Stock, see note 9 to the
unaudited consolidated financial statements included in this report.
In order to finance significant acquisitions, if any, that may
arise in the future, we may need additional sources of cash that we could
attempt to obtain through a combination of additional bank or subordinated
financing, a private or public offering of debt or equity securities, or the
issuance of common stock as consideration in an acquisition. There can be no
assurance that these types of financing would be available at all or, if so, on
terms that are acceptable to us.
In the event that we require additional liquidity due to market
conditions, unexpected actions by our lenders, changes to our growth strategy,
or other factors, our ability to obtain any additional financing on favorable
terms, if at all, could be limited.
Cash Flows
First Quarter of 2019 Compared to First Quarter of
2018
Net cash and cash equivalents increased $2.7 million in the
first quarter of 2019 to $6.0 million as at March 30, 2019, compared with $3.3
million at December 29, 2018.
Cash provided by operating activities was $1.0 million in the
first quarter of 2019, compared with $7.5 million in the first quarter of 2018,
a decrease in cash provided of $6.5 million, reflecting the receipt of income
tax refunds in the first quarter of 2018, and lower quarter-over-quarter
operating results including the sale of the soy and corn business.
Excluding net proceeds from the sale of the soy and corn
business of $64.9 million, cash used in investing activities was $8.0 million in
the first quarter of 2019, compared with $6.0 million in the first quarter of
2018, an increase in cash used of $2.0 million. This increase reflected higher
capital expenditures in the first quarter of 2019, mainly related to the
expansion of our aseptic beverage capacity, the addition of new automation at
our frozen fruit and cocoa processing facilities, and construction of our new
organic avocado oil facility.
SUNOPTA INC.
|
41
|
March 30, 2019 10-Q
|
Cash used in financing activities was $55.1 million in the
first quarter of 2019, compared with cash used of $1.8 million in the first
quarter of 2018, an increase in cash used of $53.3 million. The increase in cash
used mainly reflected the initial application of the net proceeds from the sale
of the soy and corn business to repay borrowings under our line of credit
facilities.
Subsequent to the first quarter, on April 1, 2019, we paid cash
consideration of $3.4 million to acquire Sanmark, an organic oils sourcing and
trading business.
Off-Balance Sheet Arrangements
There are currently no off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future material effect on
our financial condition.
Contractual Obligations
There have been no material changes outside the normal course
of business in our contractual obligations since December 29, 2018.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities, related revenues and expenses,
and disclosure of gain and loss contingencies at the date of the financial
statements. The estimates and assumptions made require us to exercise our
judgment and are based on historical experience and various other factors that
we believe to be reasonable under the circumstances. We continually evaluate the
information that forms the basis of our estimates and assumptions as our
business and the business environment generally changes. Except as described
below, there have been no material changes to the critical accounting estimates
disclosed under the heading "Critical Accounting Estimates" in Item 7,
"Managements Discussion and Analysis of Financial Condition and Results of
Operations", of the Form 10-K.
Leases
As described in note 1 to the unaudited financial statements
included in this report, we adopted ASC Topic 842, "Leases", on a modified
retrospective basis beginning the first quarter of 2019. Adoption of this
standard had a significant impact on our consolidated balance sheet as at March
30, 2019 due to the recognition of operating lease right-of-use assets and lease
liabilities; however, the standard did not have any impact on our consolidated
results of operations or cash flows for the quarter ended March 30, 2019, or on
our accounting for finance leases. Right-of-use assets represent our right to
use an underlying asset for the lease term and lease liabilities represent our
obligation to make lease payments arising from the lease. Lease assets and
liabilities are recognized and measured based on the present value of future
lease payments over the lease term. In measuring lease assets and liabilities,
critical estimates and assumptions include the amount and timing of the future
lease payments based on the expected lease term, and the discount rate to apply
to those future lease payments. In determining the expected lease term, we
consider the initial noncancelable period of the lease, together with periods
covered by renewal options that we are reasonably certain to exercise.
Typically, most of our real estate leases and certain of our equipment leases
include options to extend the leases, with exercise of these options being at
our sole discretion. The evaluation of whether the exercise of a renewal option
is reasonably certain is a matter of judgment based on a number of factors,
including the length of the initial lease period, the nature of the underlying
asset and importance of the asset to our operations, the addition of significant
leasehold improvements, and the availability of alternative replacement assets,
as well as consideration of business, market and economic factors that may
impact our assessment of the useful life of the underlying asset. Generally, we
use the initial noncancelable lease term when determining the lease asset and
liability. If there are significant events or changes in circumstances that
cause us to reassess whether we are reasonably certain or not to exercise an
option to extend a lease, we will remeasure the lease asset and liability using
revised estimates of the discount rate and remaining lease term as at the
reassessment date. The discount rate used to determine the present value of the
future lease payments is the implicit rate in the lease if readily determinable.
When that rate is not readily determinable, we use our incremental borrowing
rate, which is the estimated rate of interest that we would have to pay to
borrow on a collateralized basis over a similar term an amount equal to the
lease payments in a similar economic environment. We determine our incremental
borrowing rate based on the location of each leased asset, using relevant interest rate yield curves
and credit spreads derived from available market data and our corporate credit
rating.
SUNOPTA INC.
|
42
|
March 30, 2019 10-Q
|
See note 7 to the unaudited consolidated financial statements
for disclosures related to leases.