Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended April 2, 2022 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 January 1, 2022 (the "Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to May 12, 2022.
Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," or other similar expressions concerning matters that are not historical facts, or the negative of such terms are intended to identify forward-looking statements; however, the absence of these words does not necessarily mean that a statement is not forward-looking. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable based on information currently available, they may prove to be incorrect. These factors are more fully described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current estimates, expectations, and projections, which we believe are reasonable as of the date of this report. Forward-looking statements are not guarantees of future performance or events. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements, and we hereby qualify all our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S. dollars, except per share amounts.
Overview
We procure, process, and package plant-based and fruit-based food and beverage products for sale to retailers, foodservice operators, branded food companies, and food manufacturers. The composition of our operating segments is as follows:
- Plant-Based Foods and Beverages - We offer a full line of plant-based beverages and liquid and powder ingredients (utilizing oat, almond, soy, coconut, rice, hemp, and other bases), as well as broths, teas, and nutritional beverages. In addition, we package dry- and oil-roasted inshell sunflower and sunflower kernels, and we process and sell raw sunflower inshell and kernel for food and feed applications.
- Fruit-Based Foods and Beverages - We offer individually quick frozen ("IQF") fruit for retail (including strawberries, blueberries, mango, pineapple, and other berries and blends), IQF and bulk frozen fruit for foodservice (including toppings, purées, and smoothies). In addition, we offer fruit snacks, including bars, twists, ropes, and bite-sized varieties, as well as fruit smoothie bowls.
| SUNOPTA INC. |
20 |
April 2, 2022 Form 10-Q |
Current Supply Chain Disruptions and Inflationary Pressures
In the first quarter of 2022, we continued to experience ongoing incidents of supply chain disruption and issues related to the ongoing COVID-19 pandemic, resulting in raw material and packaging supply constraints, labor shortages, and transportation challenges, as well as higher health-related employee absenteeism, which impacted the efficiency of our operations and our ability to fulfill customer orders. In addition, these disruptions continue to put inflationary pressure on the prices for raw materials and packaging, as well as labor costs, and utility and freight rates. While we have taken certain pricing actions to mitigate these inflationary pressures, including a recently introduced fuel surcharge on freight, we continue to experience a lag in in our ability to fully pass-through higher input costs to our customers due to the accelerating pace of inflation and the timing of price adjustments in our contracts with customers. In addition, our gross margin profile reflects the dilutive effect of pass-through pricing to recover cost inflation. As a result, these supply chain challenges and inflationary pressures negatively impacted our revenues and profit margins in the first quarter of 2022, as described below in the discussion of our results of operations, and we may continue to experience further impacts in future periods. We anticipate additional inflationary headwinds and supply chain challenges for certain raw materials and energy as a consequence of the ongoing Russia-Ukraine war. We have taken immediate action to limit our exposure to the potential economic effects of this crisis by securing future sources of raw material and energy supplies and identifying alternative ingredients for use in our products.
Consolidated Results of Operations for the Quarters Ended April 2, 2022 and April 3, 2021
| |
|
April 2, 2022 |
|
|
April 3, 2021 |
|
|
Change |
|
|
Change |
|
| For the quarter ended |
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
| Plant-Based Foods and Beverages |
|
135,511 |
|
|
119,451 |
|
|
16,060 |
|
|
13.4% |
|
| Fruit-Based Foods and Beverages |
|
104,662 |
|
|
88,189 |
|
|
16,473 |
|
|
18.7% |
|
| Total revenues |
|
240,173 |
|
|
207,640 |
|
|
32,533 |
|
|
15.7% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
| Plant-Based Foods and Beverages |
|
19,980 |
|
|
23,158 |
|
|
(3,178 |
) |
|
-13.7% |
|
| Fruit-Based Foods and Beverages |
|
8,011 |
|
|
6,831 |
|
|
1,180 |
|
|
17.3% |
|
| Total gross profit |
|
27,991 |
|
|
29,989 |
|
|
(1,998 |
) |
|
-6.7% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Margin |
|
|
|
|
|
|
|
|
|
|
|
|
| Plant-Based Foods and Beverages |
|
14.7% |
|
|
19.4% |
|
|
|
|
|
-4.7% |
|
| Fruit-Based Foods and Beverages |
|
7.7% |
|
|
7.7% |
|
|
|
|
|
0.0% |
|
| Total gross margin |
|
11.7% |
|
|
14.4% |
|
|
|
|
|
-2.7% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Segment operating income (loss)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
| Plant-Based Foods and Beverages |
|
8,096 |
|
|
13,317 |
|
|
(5,221 |
) |
|
-39.2% |
|
| Fruit-Based Foods and Beverages |
|
784 |
|
|
(1,894 |
) |
|
2,678 |
|
|
141.4% |
|
| Corporate Services |
|
(4,964 |
) |
|
(5,338 |
) |
|
374 |
|
|
7.0% |
|
| Total segment operating income |
|
3,916 |
|
|
6,085 |
|
|
(2,169 |
) |
|
-35.6% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Other expense, net |
|
287 |
|
|
1,615 |
|
|
(1,328 |
) |
|
-82.2% |
|
| Earnings from continuing operations before the following |
|
3,629 |
|
|
4,470 |
|
|
(841 |
) |
|
-18.8% |
|
| Interest expense, net |
|
2,530 |
|
|
1,660 |
|
|
870 |
|
|
52.4% |
|
| Income tax expense |
|
445 |
|
|
1,138 |
|
|
(693 |
) |
|
-60.9% |
|
| Earnings from continuing operations(2),(3) |
|
654 |
|
|
1,672 |
|
|
(1,018 |
) |
|
-60.9% |
|
| Earnings from discontinued operations |
|
3,566 |
|
|
- |
|
|
3,566
|
|
|
- |
|
| Net earnings |
|
4,220 |
|
|
1,672 |
|
|
2,548 |
|
|
152.4% |
|
| Dividends and accretion on preferred stock |
|
(755 |
) |
|
(1,953 |
) |
|
1,198 |
|
|
61.3% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) attributable to common shareholders(4)
|
|
3,465 |
|
|
(281 |
) |
|
3,746 |
|
|
1,333.1% |
|
(1) When assessing the financial performance of our operating segments, we use an internal measure of operating income/loss that excludes other income/expense items determined in accordance with U.S. GAAP. This measure is the basis on which management, including the CEO, 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/loss 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.
| SUNOPTA INC. |
21 |
April 2, 2022 Form 10-Q |
| |
|
Plant-Based |
|
|
Fruit-Based |
|
|
|
|
|
|
|
| |
|
Foods and |
|
|
Foods and |
|
|
Corporate |
|
|
|
|
| |
|
Beverages |
|
|
Beverages |
|
|
Services |
|
|
Consolidated |
|
| For the quarter ended |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
| April 2, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
| Segment operating income (loss) |
|
8,096 |
|
|
784 |
|
|
(4,964 |
) |
|
3,916 |
|
| Other expense, net |
|
(43 |
) |
|
(10 |
) |
|
(538 |
) |
|
(591 |
) |
| Earnings (loss) from continuing operations before the following |
|
8,053 |
|
|
774 |
|
|
(5,502 |
) |
|
3,325 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| April 3, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
| Segment operating income (loss) |
|
13,317 |
|
|
(1,894 |
) |
|
(5,338 |
) |
|
6,085 |
|
| Other income (expense), net |
|
(299 |
) |
|
(1,365 |
) |
|
49 |
|
|
(1,615 |
) |
| Earnings (loss) from continuing operations before the following |
|
13,018 |
|
|
(3,259 |
) |
|
(5,289 |
) |
|
4,470 |
|
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income/loss. However, any measure of operating income/loss excluding any or all of these items is not, and should not be viewed as, a substitute for operating income/loss prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
(2) When assessing our financial performance, we use an internal measure of net earnings determined in accordance with U.S. GAAP that excludes specific items recognized in other income/expense, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of the financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations. The following table presents a reconciliation of adjusted earnings from earnings from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| |
|
April 2, 2022 |
|
|
April 3, 2021 |
|
| |
|
|
|
|
Per Share |
|
|
|
|
|
Per Share |
|
| For the quarter ended |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
| Earnings from continuing operations |
|
654 |
|
|
|
|
|
1,672 |
|
|
|
|
| Dividends and accretion on preferred stock |
|
(755 |
) |
|
|
|
|
(1,953 |
) |
|
|
|
| Loss attributable to common shareholders |
|
(101 |
) |
|
(0.00 |
) |
|
(281 |
) |
|
(0.00 |
) |
| Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
|
| Start-up costs(a) |
|
440 |
|
|
|
|
|
- |
|
|
|
|
| Business development costs(b) |
|
183 |
|
|
|
|
|
169 |
|
|
|
|
| Restructuring costs(c) |
|
- |
|
|
|
|
|
1,432 |
|
|
|
|
| Other(d) |
|
287 |
|
|
|
|
|
183 |
|
|
|
|
| Net income tax effect(e) |
|
(239 |
) |
|
|
|
|
(240 |
) |
|
|
|
| Adjusted earnings |
|
570 |
|
|
0.01 |
|
|
1,263 |
|
|
0.01 |
|
(a) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the first quarter of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, and the integration of the Dream and WestSoy brands acquired in April 2021, which were recorded in cost of goods sold.
(b) Represents third-party costs associated with business development activities, including costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives, which were recorded in SG&A expenses.
(c) For the first quarter of 2021, represents costs to complete the exit from our Santa Maria, California, frozen fruit processing facility, which were recorded in other expense.
(d) For the first quarter of 2022, other includes asset impairment charges. For the first quarter of 2021, other reflects professional fees incurred in connection with post-closing matters related to the 2020 divestiture of our global ingredients business, Tradin Organic.
(e) Reflects the tax effect of the preceding adjustments to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings. However, adjusted earnings is not, and should not be viewed as, a substitute for net earnings prepared under U.S. GAAP. Adjusted earnings is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) We use a measure of adjusted earnings before interest, taxes, depreciation and amortization ("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, and stock-based compensation, as well as other unusual items that affect the comparability of operating performance. We also use this measure to assess operating performance in connection with our employee incentive programs. We define adjusted EBITDA as segment operating income plus depreciation, amortization, and 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 and adjusted EBITDA from earnings from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. |
22 |
April 2, 2022 Form 10-Q |
| |
|
April 2, 2022 |
|
|
April 3, 2021 |
|
| For the quarter ended |
|
$ |
|
|
$ |
|
| Earnings from continuing operations |
|
654 |
|
|
1,672 |
|
| Income tax expense |
|
445 |
|
|
1,138 |
|
| Interest expense, net |
|
2,530 |
|
|
1,660 |
|
| Other expense, net |
|
287 |
|
|
1,615 |
|
| Total segment operating income |
|
3,916 |
|
|
6,085 |
|
| Depreciation and amortization |
|
9,413 |
|
|
8,043 |
|
| Stock-based compensation |
|
1,629 |
|
|
3,973 |
|
| Start-up costs(a) |
|
440 |
|
|
- |
|
| Business development costs(b) |
|
183 |
|
|
169 |
|
| Adjusted EBITDA |
|
15,581 |
|
|
18,270 |
|
(a) For the first quarter of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, and the integration of the Dream and WestSoy brands acquired in April 2021, which were recorded in cost of goods sold.
(b) For the first quarters of 2022 and 2021, business development activities were related to the exploration of potential strategic opportunities, which costs were recorded in SG&A expenses.
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 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.
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/loss, net earnings, and adjusted earnings to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. In particular, we 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 April 2, 2022 increased by 15.7% to $240.2 million from $207.6 million for the quarter ended April 3, 2021, reflecting 13.4% revenue growth in the Plant-Based Foods and Beverages segment and 18.7% revenue growth in the Fruit-Based Foods and Beverages segment. The change in revenues from the first quarter of 2021 to the first quarter of 2022 was due to the following:
| |
|
Plant-Based |
|
|
Fruit-Based |
|
|
|
|
|
|
|
| |
|
Foods and Beverages |
|
|
Foods and Beverages |
|
|
Consolidated |
|
| |
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
| 2021 revenues |
|
119,451 |
|
|
|
|
|
88,189 |
|
|
|
|
|
207,640 |
|
|
|
|
| Price |
|
9,628 |
|
|
8.1% |
|
|
11,205 |
|
|
12.7% |
|
|
20,833 |
|
|
10.0% |
|
| Volume/Mix |
|
2,697 |
|
|
2.3% |
|
|
5,268 |
|
|
6.0% |
|
|
7,965 |
|
|
3.8% |
|
| Acquisition |
|
3,735 |
|
|
3.1% |
|
|
- |
|
|
- |
|
|
3,735 |
|
|
1.8% |
|
| 2022 revenues |
|
135,511 |
|
|
13.4% |
|
|
104,662 |
|
|
18.7% |
|
|
240,173 |
|
|
15.7% |
|
Note: percentages may not add due to rounding.
| SUNOPTA INC. |
23 |
April 2, 2022 Form 10-Q |
For the quarter ended April 2, 2022, the 13.4% increase in revenues for the Plant-Based Foods and Beverages segment reflected an 8.1% overall increase in pricing, a favorable volume/mix impact of 2.3%, and a 3.1% favorable impact from the acquisition of the Dream and WestSoy brands in April 2021. The favorability in price was driven by certain pricing actions taken with customers to offset inflationary cost increases experienced in 2021 and first quarter of 2022, together with the pass-through effect of higher sunflower commodity pricing. Volume/mix was favorable mainly due to growth from our oat-based product offerings and teas, partially offset by softer volumes of sunflower, together with the impact of supply chain disruptions on our ability to meet some customer demand for our plant-based products.
For the quarter ended April 2, 2022, the 18.7% increase in revenues for the Fruit-Based Foods and Beverages segment reflected a 12.7% overall increase in pricing, reflecting the benefit of pricing actions taken in the second half of 2021 and first quarter of 2022 to offset commodity inflation incurred on fruit inventories, and a favorable volume/mix impact of 6.0%, reflecting strong demand for fruit snacks and introduction of smoothie bowls, together with one-time incremental volumes from a frozen fruit customer in the first quarter of 2022, and the easing of supply constraints for certain fruit varieties used in blends.
Consolidated gross profit decreased $2.0 million, or 6.7%, to $28.0 million for the quarter ended April 2, 2022, compared with $30.0 million for the quarter ended April 3, 2021. Consolidated gross margin for the quarter ended April 2, 2022 was 11.7% compared to 14.4% for the quarter ended April 3, 2021, a decrease of 270 basis points.
Gross profit for the Plant-Based Foods and Beverages segment decreased $3.2 million to $20.0 million for the quarter ended April 2, 2022, compared with $23.2 million for the quarter ended April 3, 2021, and gross margin decreased to 14.7% in the first quarter of 2022 from 19.4% in the first quarter of 2021. The 470-basis point decrease in the plant-based gross margin included an estimated 150 basis-point decline due to the dilutive effect of pass-through pricing to recover cost inflation on raw materials and packaging. The remaining gross margin impact reflected unrecovered raw material and freight cost inflation, due to the lag in pricing adjustments, together with higher labor and utility costs, and increased depreciation expense, partially offset by higher production volumes and plant utilization in our plant-based beverage and ingredient operations. In addition, the reported plant-based gross margin was negatively impacted by start-up costs of $0.4 million (0.3% gross margin impact) incurred in connection with our plant expansion in Midlothian, Texas, and the integration of the Dream and WestSoy brands.
Gross profit for the Fruit-Based Foods and Beverages segment increased $1.2 million to $8.0 million for the quarter ended April 2, 2022, compared with $6.8 million for the quarter ended April 3, 2021, and gross margin of 7.7% in the first quarter of 2022 was unchanged from the first quarter of 2021, despite an estimated 100 basis-point decline due to the dilutive effect of pass-through pricing to recover commodity cost inflation. Excluding this pricing effect, fruit-based gross margin reflected the benefits of portfolio rationalizations for frozen fruit and manufacturing cost savings from the consolidation of our fruit processing facilities in 2021, partially offset by currently unrecovered freight and storage cost inflation, a higher mix of low-margin fruit juice sales, and frozen fruit inventory losses due to excess spoilage during handling. In addition, we experienced higher production costs and manufacturing inefficiencies in our fruit snack operations, due to raw material supply constraints and the ramp-up of smoothie bowl production.
For the quarter ended April 2, 2022, we realized total segment operating income of $3.9 million, compared with $6.1 million for the quarter ended April 3, 2021. The $2.2 million decrease in total segment operating income reflected the lower gross profit, as described above, together with a $1.1 million increase in SG&A expenses, mainly due to a special one-time recognition bonus of $1.6 million to reward employees for improved performance in the first quarter of 2022, together with higher brand marketing and advertising, travel, and business development costs, partially offset by a $2.3 million reduction in variable stock-based compensation because the performance condition under our 2021 incentive plan was not achieved. In addition, amortization expense increased $0.4 million year-over-year, related to the acquired Dream and WestSoy brand name intangible assets. These factors were partially offset by a $1.3 million year-over-year favorable foreign exchange impact related to our Mexican operations.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Operating Segment Information."
Other expense was $0.3 million for the quarter ended April 2, 2022, compared with other expense of $1.6 million for the quarter ended April 3, 2021. Other expense in the first quarter of 2021 mainly reflected plant closure costs in our frozen fruit operations.
Net interest expense increased by $0.8 million to $2.5 million for the quarter ended April 2, 2022, compared with $1.7 million for the quarter ended April 3, 2021, which reflected an increase in outstanding debt to fund working capital requirements and finance capital expansion projects.
| SUNOPTA INC. |
24 |
April 2, 2022 Form 10-Q |
Income tax expense was $0.4 million for the quarter ended April 2, 2022, compared with income tax expense of $1.1 million for the quarter ended April 3, 2021. Excluding the impact of stock-based compensation and other non-deductible expenses included in pre-tax earnings, our effective tax rate was 26.4% in the first quarter of 2022, compared with 25.3% in the first quarter of 2021.
Earnings from continuing operations for the quarter ended April 2, 2022 were $0.7 million, compared with earnings of $1.7 million for the quarter ended April 2, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.00 for each of the quarters ended April 2, 2022 and April 3, 2021.
Earnings from discontinued operations were $3.6 million for the quarter ended April 3, 2021, which were related to the settlement of the purchase price allocation and other post-closing matters in connection with the 2020 divestiture of our global ingredients business, Tradin Organic.
We realized earnings attributable to common shareholders of $3.5 million (diluted earnings per share of $0.03) for the quarter ended April 2, 2022, compared with a loss attributable to common shareholders of $0.3 million (diluted loss per share of $0.00) for the quarter ended April 3, 2021, which reflected dividends and accretion on preferred stock of $0.8 million and $1.9 million in the first quarters of 2022 and 2021, respectively. The decline in preferred stock dividends and accretion reflected the exchange of all of the shares of Series A preferred stock for shares of our common stock in February 2021. Outstanding preferred stock since February 2021 consists of our Series B-1 preferred stock.
For the quarter ended April 2, 2022, adjusted earnings were $0.6 million, or $0.01 per diluted share, compared with adjusted earnings of $1.3 million, or $0.01 per diluted share for the quarter ended April 3, 2021. Adjusted EBITDA for the quarter ended April 2, 2022 was $15.6 million, compared with $18.3 million for the quarter ended April 3, 2021. 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 and adjusted EBITDA from earnings from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
Operating Segment Information
| Plant-Based Foods and Beverages |
|
|
|
|
|
|
|
|
|
|
|
|
| For the quarter ended |
|
April 2, 2022 |
|
|
April 3, 2021 |
|
|
Change |
|
|
% Change |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
$ |
135,511 |
|
$ |
119,451 |
|
$ |
16,060 |
|
|
13.4% |
|
| Gross profit |
|
19,980 |
|
|
23,158 |
|
|
(3,178 |
) |
|
-13.7% |
|
| Gross margin |
|
14.7% |
|
|
19.4% |
|
|
|
|
|
-4.7% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
$ |
8,096 |
|
$ |
13,317 |
|
$ |
(5,221 |
) |
|
-39.2% |
|
| Operating margin |
|
6.0% |
|
|
11.1% |
|
|
|
|
|
-5.1% |
|
Plant-Based Foods and Beverages contributed $135.5 million in revenues for the quarter ended April 2, 2022, compared to $119.5 million for the quarter ended April 3, 2021, an increase of $16.1 million, or 13.4%. The table below explains the increase in revenues:
| Plant-Based Foods and Beverages Revenue Changes |
|
|
|
| Revenues for the quarter ended April 3, 2021 |
$ |
119,451 |
|
| Growth in sales of plant-based beverages and ingredients, mainly related to oat-based product offerings and teas |
|
11,283 |
|
| Incremental Dream and WestSoy revenues |
|
3,735 |
|
| Increased commodity pricing for sunflower, partially offset by lower volumes |
|
1,042 |
|
| Revenues for the quarter ended April 2, 2022 |
$ |
135,511 |
|
Gross profit in Plant-Based Foods and Beverages decreased by $3.2 million to $20.0 million for the quarter ended April 2, 2022, compared to $23.2 million for the quarter ended April 3, 2021. The table below explains the decrease in gross profit:
| SUNOPTA INC. |
25 |
April 2, 2022 Form 10-Q |
| Plant-Based Foods and Beverages Gross Profit Changes |
|
|
|
| Gross profit for the quarter ended April 3, 2021 |
$ |
23,158 |
|
| Increased manufacturing plant spend, including unrecovered inflationary increases in utility and freight rates, higher wages to retain employees, and incremental costs related to the hiring of new employees and depreciation of new production equipment for capital expansion projects, partially offset by higher production volumes and plant utilization within our plant-based beverages and ingredient operations, and the incremental contribution from the Dream and WestSoy brands |
|
(2,599 |
) |
| Lower volumes and pricing spreads for raw sunflower kernel, partially offset by higher pricing spreads for birdfeed |
|
(579 |
) |
| Gross profit for the quarter ended April 2, 2022 |
$ |
19,980 |
|
Operating income in Plant-Based Foods and Beverages decreased by $5.2 million to $8.1 million for the quarter ended April 2, 2022, compared to $13.3 million for the quarter ended April 3, 2021. The table below explains the decrease in operating income:
| Plant-Based Foods and Beverages Operating Income Changes |
|
|
|
| Operating income for the quarter ended April 3, 2021 |
$ |
13,317 |
|
| Decrease in gross profit, as explained above |
|
(3,178 |
) |
| Increase in corporate costs allocation |
|
(1,042 |
) |
| Incremental amortization of the acquired Dream and WestSoy brand name intangible assets, together with increased brand marketing and advertising, and travel expenses |
|
(1,001 |
) |
| Operating income for the quarter ended April 2, 2022 |
$ |
8,096 |
|
Looking forward, assuming current supply chain challenges and inflationary pressures do not significantly worsen, we anticipate revenue growth for our plant-based business in 2022, compared with 2021, driven by higher expected output from our manufacturing facilities, together with the expected benefit of customer pricing actions taken to offset input cost inflation. These pricing actions, together with an expected improvement in plant operating performance, are expected to drive a year-over-year gross margin improvement in our plant-based operations in 2022, excluding the impact of start-up costs related to our new 285,000 square foot plant-based beverage facility under construction in Midlothian, Texas. Despite some construction delays due to supply chain issues, we believe we remain largely on track to begin operations at this facility in late 2022, with the ramp-up of commercial production expected to commence in the first quarter of 2023. 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 the extent and duration of supply chain and inflation headwinds; our ability to continue to pass through price increases to our customers to offset inflationary pressures; the impact of price inflation on consumer behaviour and demand for plant-based beverage alternatives to dairy; our ability to successfully execute on our capital expansion projects, including our ability to commence commercial production at our Midlothian, Texas, facility in the first quarter of 2023, and the viability of those projects; and other factors described above under "Forward-Looking Statements."
| Fruit-Based Foods and Beverages |
|
|
|
|
|
|
|
|
|
|
|
|
| For the quarter ended |
|
April 2, 2022 |
|
|
April 3, 2021 |
|
|
Change |
|
|
% Change |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
$ |
104,662 |
|
$ |
88,189 |
|
$ |
16,473 |
|
|
18.7% |
|
| Gross profit |
|
8,011 |
|
|
6,831 |
|
|
1,180 |
|
|
17.3% |
|
| Gross margin |
|
7.7% |
|
|
7.7% |
|
|
|
|
|
0.0% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income (loss) |
$ |
784 |
|
$ |
(1,894 |
) |
$ |
2,678 |
|
|
141.4% |
|
| Operating margin |
|
0.7% |
|
|
-2.1% |
|
|
|
|
|
2.8% |
|
| SUNOPTA INC. |
26 |
April 2, 2022 Form 10-Q |
Fruit-Based Foods and Beverages contributed $104.7 million in revenues for the quarter ended April 2, 2022, compared to $88.2 million for the quarter ended April 3, 2021, an increase of $16.5 million, or 18.7%. The table below explains the increase in revenues:
| Fruit-Based Foods and Beverages Revenue Changes |
|
|
|
| Revenues for the quarter ended April 3, 2021 |
$ |
88,189 |
|
| Higher retail sales of frozen fruit, including one-time incremental volumes from a frozen fruit customer in the first quarter of 2022, together with the benefit of pricing actions taken in the second half of 2021 and first quarter of 2022 to offset commodity inflation incurred on fruit inventories |
|
11,679 |
|
| Higher sales volumes and pricing for fruit snacks and incremental revenue from the introduction of smoothie bowls |
|
4,794 |
|
| Revenues for the quarter ended April 2, 2022 |
$ |
104,662 |
|
Gross profit in Fruit-Based Foods and Beverages increased by $1.2 million to $8.0 million for the quarter ended April 2, 2022, compared to $6.8 million for the quarter ended April 3, 2021, and gross margin of 7.7% remained unchanged. The table below explains the increase in gross profit:
| Fruit-Based Foods and Beverages Gross Profit Changes |
|
|
|
| Gross profit for the quarter ended April 3, 2021 |
$ |
6,831 |
|
| Higher sales volumes and pricing for retail frozen fruit, together with the benefits from portfolio rationalizations and a reduced manufacturing cost base within our frozen fruit operations, partially offset by unrecovered inflationary increases in freight and storage rates, and inventory losses due to excess spoilage during handling |
|
1,855 |
|
| Higher production costs and manufacturing inefficiencies in our fruit snacks operations due to raw material supply constraints and the ramp-up of smoothie bowl production, together with unrecovered freight cost inflation |
|
(675 |
) |
| Gross profit for the quarter ended April 2, 2022 |
$ |
8,011 |
|
Operating income in Fruit-Based Foods and Beverages increased by $2.7 million to $0.8 million for the quarter ended April 2, 2022, compared to an operating loss of $1.9 million for the quarter ended April 3, 2021. The table below explains the increase in operating income:
| Fruit-Based Foods and Beverages Operating Income Changes |
|
|
|
| Operating loss for the quarter ended April 3, 2021 |
$ |
(1,894 |
) |
| Favorable foreign exchange impact within our frozen fruit operations in Mexico, together with lower employee compensation costs due to a workforce reduction in August 2021 |
|
1,631 |
|
| Increase in gross profit, as explained above |
|
1,180 |
|
| Increase in corporate cost allocations |
|
(133 |
) |
| Operating income for the quarter ended April 2, 2022 |
$ |
784 |
|
Looking forward, assuming current supply chain challenges and inflationary pressures do not significantly worsen, we expect that the pricing actions taken on frozen fruit to offset commodity inflation experienced in 2021, together with the benefit of a reduced manufacturing cost base within our frozen fruit operations, will result in gross margin improvement in this business in 2022, compared with 2021. In addition, we currently anticipate that the 2022 fruit harvests in Mexico and California will compare favorably to 2021 in terms of volumes and pricing. Within our fruit snacks operations, we expect strong revenue and profit growth in 2022, compared with 2021, driven by volume gains and pricing actions for core fruit snack products, and further commercialization and automation of our smoothie bowl line to improve profitability. However, while capital expansion projects are underway in our fruit snacks operations to meet current unfilled demand, we expect that existing capacity constraints will limit the growth potential for this business through the first half of 2023. 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 the including the extent and duration of supply chain and inflation headwinds; the outcome of pricing actions with customers, including a potential softening of consumer demand due to higher prices; our expectations regarding the availability and pricing of fruit supply, and potential impacts on our revenues and profit margins; our ability to successfully commercialize and automate our smoothie bowl product line; our assessment of future capacity requirements in fruit snacks operations; our ability to successfully execute on our capital expansion projects and the viability of those projects; and other factors described above under "Forward-Looking Statements."
| SUNOPTA INC. |
27 |
April 2, 2022 Form 10-Q |
| Corporate Services |
|
|
|
|
|
|
|
|
|
|
|
|
| For the quarter ended |
|
April 2, 2022 |
|
|
April 3, 2021 |
|
|
Change |
|
|
% Change |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
$ |
(4,964 |
) |
$ |
(5,338 |
) |
$ |
374 |
|
|
7.0% |
|
Operating loss at Corporate Services decreased by $0.4 million to $5.0 million for the quarter ended April 2, 2022, compared to a loss of $5.3 million for the quarter ended April 3, 2021. The table below explains the decrease in operating loss:
| Corporate Services Operating Loss Changes |
|
|
|
| Operating loss for the quarter ended April 3, 2021 |
$ |
(5,338 |
) |
| Lower variable stock-based compensation, because the performance condition under our 2021 incentive plan was not achieved |
|
2,288 |
|
| Increase in corporate cost allocations to SunOpta operating segments |
|
1,175 |
|
|
One-time recognition bonus of $1.6 million to reward employees for improved performance in the first quarter of 2022, and an incremental 2022 incentive plan accrual based on performance, together with increased business development costs, partially offset by reduced losses on Mexican peso hedging activities
|
|
(3,089 |
) |
| Operating loss for the quarter ended April 2, 2022 |
$ |
(4,964 |
) |
Corporate cost allocations mainly consist of salaries of corporate personnel who directly support the operating segments, as well as costs related to our enterprise resource management system. These expenses are allocated to the operating segments based on (1) specific identification of allocable costs that represent a service provided to each segment and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and the number of people employed within each segment.
Liquidity and Capital Resources
On December 31, 2020, we entered into a five-year credit agreement, as amended, for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $250 million, subject to borrowing base capacity. As at April 2, 2022, we had outstanding borrowings under the revolving credit facility of $145.2 million (January 1, 2022 - $153.3 million), and available borrowing capacity of approximately $88 million (January 1, 2022 - $67 million). The credit agreement also provides a five-year, $75 million delayed draw term loan, to be used for capital expenditures, which may be drawn upon up to March 31, 2023. As at April 2, 2022, we had $15.8 million drawn on the term loan facility mainly to finance the purchase of equipment for our new Midlothian, Texas, facility. For more information on our asset-based credit facilities see note 4 to the unaudited consolidated financial statements included in this report.
During the first quarter of 2022, we recognized additional finance lease liabilities in the amount of $33.4 million, mainly related to the buildouts of our Midlothian, Texas, facility, and our executive office and innovation center located in Eden Prairie, Minnesota, together with the addition of new processing equipment at our Allentown, Pennsylvania, plant-based beverage facility. For more information on our operating and finance lease obligations, including maturity dates, see note 3 to the unaudited consolidated financial statements included in this report.
As at April 2, 2022, our subsidiary, SunOpta Foods Inc., had 30,000 shares of Series B-1 preferred stock issued and outstanding. The Series B-1 preferred stock currently has a liquidation preference of approximately $1,015 per share and is exchangeable into shares of our common stock at an exchange price of $2.50 per share. Cumulative preferred dividends accrue daily on the Series B-1 preferred stock at an annualized rate of 8.0% of the liquidation preference prior to September 30, 2029, which presently equates to quarterly dividend distributions of approximately $0.6 million, and 10.0% of the liquidation preference thereafter. For more information on the Series B-1 preferred stock, see note 5 to the unaudited consolidated financial statements included in this report.
| SUNOPTA INC. |
28 |
April 2, 2022 Form 10-Q |
There have been no material changes outside the normal course of business in the nature of our contractual obligations since January 1, 2022.
We believe that our operating cash flows, together with our revolving and term loan credit facilities, and access to lease financing, will be adequate to meet our operating, investing, and financing needs for the foreseeable future, including the 12-month period following the issuance of our financial statements. However, in order to finance significant investments in our existing businesses, or significant business acquisitions, if any, that may arise in the future, we may need additional sources of cash that we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering of debt or equity securities, or the issuance of common stock. There can be no assurance that these types of financing would be available at all or, if so, on terms that are acceptable to us. In addition, we may explore the sale of selected operations or assets from time to time to improve our profitability, reduce our indebtedness, and/or improve our position to obtain additional financing.
Cash Flows
Summarized cash flow information for the periods ended April 2, 2022 and April 3, 2021 is as follows:
| |
|
For the quarter ended |
|
| |
|
April 2, 2022 |
|
|
April 3, 2021 |
|
|
Change |
|
| |
|
$ |
|
|
$ |
|
|
$ |
|
| Net cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
| Operating activities of continuing operations |
|
15,543 |
|
|
(7,015 |
) |
|
22,558 |
|
| Investing activities of continuing operations |
|
(24,518 |
) |
|
(7,947 |
) |
|
(16,571 |
) |
| Financing activities of continuing operations |
|
9,243 |
|
|
29,045 |
|
|
(19,802 |
) |
| Discontinued operations |
|
- |
|
|
(13,580 |
) |
|
13,580 |
|
Operating Activities of Continuing Operations
Cash provided by operating activities was $15.5 million for the quarter ended April 2, 2022, compared with cash used of $7.0 million for the quarter ended April 3, 2021, an increase in cash provided of $22.6 million. The increase in cash provided reflected higher sales volumes of frozen fruit in the first quarter of 2022, compared with the replenishment of frozen fruit inventories in the first quarter of 2021, together with the benefit of improved working capital efficiency through the extension of payment terms with certain suppliers, partially offset by the year-over-year impact of higher commodity prices for frozen fruit and a build-up of plant-based raw materials and packaging to support growth.
Investing Activities of Continuing Operations
Cash used in investing activities was $24.5 million for the quarter ended April 2, 2022, compared with cash used of $7.9 million for the quarter ended April 3, 2021, an increase in cash used of $16.6 million, which mainly reflected additions to property, plant and equipment of $25.7 million in the first quarter of 2022, compared with additions of $9.3 million in the first quarter of 2021. Capital expenditures in the first quarter of 2022 were mainly related to the construction of our Midlothian, Texas, facility, the completion of our executive office and innovation center, and expansion projects within our plant-based operations.
Financing Activities of Continuing Operations
Cash provided by financing activities of continuing operations was $9.2 million for the quarter ended April 2, 2022, compared with cash provided of $29.0 million for the quarter ended April 3, 2021, a decrease in cash provided of $19.8 million. The decrease in cash provided mainly reflected higher revolver borrowings under our asset-based credit facilities in the first quarter of 2021 to fund inventory purchases, partially offset by increased borrowings of long-term debt in the first quarter of 2022 related to lease financing for capital projects.
| SUNOPTA INC. |
29 |
April 2, 2022 Form 10-Q |
Cash used in investing activities of discontinued operations of $13.4 million for the quarter ended April 3, 2021, was related to the settlement of the accrued transaction costs related to the 2020 divestiture of Tradin Organic.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. The estimates and assumptions made require us to exercise our judgment and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the information that forms the basis of our estimates and assumptions as our business and the business environment generally changes.
There have been no material changes to the critical accounting estimates disclosed under the heading "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Form 10-K.