UNITED STATES
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Washington, D.C. 20549
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The number of the registrant's common shares outstanding as of May 1, 2020 was
SUNOPTA INC.
FORM 10-Q
For the Quarterly Period Ended March 28, 2020
TABLE OF CONTENTS
Basis of Presentation
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q ("Form 10-Q") to the "Company," "SunOpta," "we," "us," "our" or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together.
In this report, all currency amounts presented are expressed in thousands of United States ("U.S.") dollars ("$"), except per share amounts, unless otherwise stated. Other amounts may be presented in thousands of Canadian dollars ("C$"), euros ("€") and Mexican pesos ("M$"). As at March 28, 2020, the closing rates of exchange for the Canadian dollar, euro and Mexican peso, expressed in U.S. dollars, based on Bank of Canada exchange rates, were C$0.7114, €1.1045 and M$0.0425. These rates are provided solely for convenience and do not necessarily reflect the rates used in the preparation of our financial statements.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements which are based on management's current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," the negatives of such terms, and words and phrases of similar impact and include, but are not limited to, references to future financial and operating results, plans, objectives, expectations and intentions; changes in customer demand resulting from or related to the COVID-19 pandemic, as well as supply chain, logistics and other disruptions, the cancellation or delay of new product launches, the availability and pricing of our raw materials, fluctuations in foreign currency exchange rates and commodity pricing, and general economic and political conditions globally and in the markets in which we do business; our plans and ability to expand capacity in our plant-based food and beverage business; unexpected issues or delays with our structural improvements and automation investments; our expectations regarding profitability improvements in our frozen fruit business in 2020; our expectations regarding customer demand, consumer preferences, competition, sales pricing, and availability and pricing of raw material inputs; other expectations related to our businesses, including anticipated results of operations, operational growth and expansion plans, plans to reduce costs and improve profitability, intent and ability to bring new products and processes to market through innovation, and the exploration of the sale of selected businesses or assets; liquidity constraints and the availability of alternative financing sources; and other statements that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on certain assumptions, expectations and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments, as well as other factors that we believe are appropriate in the circumstances.
| SUNOPTA INC. | 3 |
March 28, 2020 |
Whether actual results and developments will be consistent with and meet our expectations and predictions is subject to many risks and uncertainties. Accordingly, there are important factors that could cause our actual results to differ materially from our expectations and predictions. We believe these factors include, but are not limited to, the following:
| SUNOPTA INC. | 4 |
March 28, 2020 |
our ability to renew our revolving asset-based credit facility (the "Global Credit Facility") when it becomes due on March 31, 2022, and/or refinance our senior secured second lien notes when they mature on October 9, 2022;
| SUNOPTA INC. | 5 | March 28, 2020 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
| SunOpta Inc. | ||||||||||
| Consolidated Statements of Operations | ||||||||||
|
For the quarters ended March 28, 2020 and March 30, 2019 |
||||||||||
| (Unaudited) | ||||||||||
| (All dollar amounts expressed in thousands of U.S. dollars, except per share amounts) | ||||||||||
| Quarter ended | ||||||||||
| March 28, 2020 | March 30, 2019 | |||||||||
| $ | $ | |||||||||
| Revenues (note 2) | ||||||||||
| Cost of goods sold | ||||||||||
| Gross profit | ||||||||||
| Selling, general and administrative expenses | ||||||||||
| Intangible asset amortization | ||||||||||
|
Other income, net (note 9) |
( |
) | ( |
) | ||||||
| Foreign exchange loss (gain) | ( |
) | ||||||||
|
Earnings before the following |
||||||||||
| Interest expense, net | ||||||||||
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Earnings before income taxes |
||||||||||
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Provision for income taxes |
||||||||||
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Net earnings |
||||||||||
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Loss attributable to non-controlling interests |
( |
) | ( |
) | ||||||
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Earnings attributable to SunOpta Inc. |
||||||||||
|
Dividends and accretion on Series A Preferred Stock (note 8) |
( |
) | ( |
) | ||||||
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Earnings attributable to common shareholders |
||||||||||
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Earnings per share (note 10) |
||||||||||
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Basic |
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Diluted |
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(See accompanying notes to consolidated financial statements)
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SUNOPTA INC.
|
6 |
March 28, 2020 |
| SunOpta Inc. | ||||||
| Consolidated Statements of Comprehensive Earnings | ||||||
| For the quarters ended March 28, 2020 and March 30, 2019 | ||||||
| (Unaudited) | ||||||
| (All dollar amounts expressed in thousands of U.S. dollars) | ||||||
| Quarter ended | ||||||
| March 28, 2020 | March 30, 2019 | |||||
| $ | $ | |||||
| Net earnings | ||||||
|
Currency translation adjustment |
( |
) | ( |
) | ||
| Comprehensive earnings | ||||||
|
Comprehensive loss attributable to non-controlling interests |
( |
) | ( |
) | ||
| Comprehensive earnings attributable to SunOpta Inc. | ||||||
(See accompanying notes to consolidated financial statements)
|
SUNOPTA INC.
|
7 | March 28, 2020 |
|
SunOpta Inc. |
|||
| Consolidated Balance Sheets | |||
| As at March 28, 2020 and December 28, 2019 | |||
| (Unaudited) | |||
| (All dollar amounts expressed in thousands of U.S. dollars) |
| March 28, 2020 | December 28, 2019 | |||||||
| $ | $ | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts receivable, net of allowance for credit losses of $ |
||||||||
| Inventories (note 6) | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income taxes recoverable | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets | ||||||||
| Deferred income taxes | ||||||||
| Other assets | ||||||||
| Total assets | ||||||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Bank indebtedness (note 7) | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Customer and other deposits | ||||||||
| Income taxes payable | ||||||||
| Other current liabilities | ||||||||
| Current portion of long-term debt (note 7) | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of long-term liabilities | ||||||||
| Total current liabilities | ||||||||
|
Long-term debt (note 7) |
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| Operating lease liabilities | ||||||||
| Long-term liabilities | ||||||||
| Deferred income taxes | ||||||||
| Total liabilities | ||||||||
| Series A Preferred Stock (note 8) | ||||||||
| EQUITY | ||||||||
| SunOpta Inc. shareholders' equity | ||||||||
|
Common shares, |
||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive loss | ( |
) | ( |
) | ||||
| Non-controlling interests | ||||||||
| Total equity | ||||||||
| Total equity and liabilities | ||||||||
| Commitments and contingencies (note 12) | ||||||||
(See accompanying notes to consolidated financial statements)
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SUNOPTA INC.
|
8 | March 28, 2020 |
|
SunOpta Inc. |
| Consolidated Statements of Shareholders' Equity |
| As at and for the quarters ended March 30, 2019 and March 28, 2020 |
| (Unaudited) |
| (All dollar amounts expressed in thousands of U.S. dollars) |
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | |||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Balance at December 28, 2019 | ( |
) | ( |
) | ||||||||||||||||||
| Employee stock purchase plan | — | — | — | — | ||||||||||||||||||
| Stock incentive plan | ( |
) | — | — | — | |||||||||||||||||
| Withholding taxes on stock-based awards | — | — | ( |
) | — | — | — | ( |
) | |||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||
| Dividends on Series A Preferred Stock (note 8) | — | — | — | ( |
) | — | — | ( |
) | |||||||||||||
| Accretion on Series A Preferred Stock (note 8) | — | — | — | ( |
) | — | — | ( |
) | |||||||||||||
| Net earnings | — | — | — | — | ( |
) | ||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( |
) | ( |
) | ||||||||||||||
| Balance at March 28, 2020 | ( |
) | ( |
) | ||||||||||||||||||
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at December 29, 2018 | ( |
) | ( |
) | |||||||||||||||||
| Employee stock purchase plan | — | — | — | — | |||||||||||||||||
| Stock incentive plan | ( |
) | — | — | — | ||||||||||||||||
| Withholding taxes on stock-based awards | — | — | ( |
) | — | — | — | ( |
) | ||||||||||||
| Stock-based compensation | — | — | ( |
) | — | — | — | ( |
) | ||||||||||||
| Dividends on Series A Preferred Stock | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||
| Accretion on Series A Preferred Stock | — | — | — | ( |
) | — | — | ( |
) | ||||||||||||
| Net earnings | — | — | — | — | ( |
) | |||||||||||||||
| Currency translation adjustment | — | — | — | — | ( |
) | ( |
) | |||||||||||||
| Balance at March 30, 2019 | ( |
) | ( |
) | |||||||||||||||||
(See accompanying notes to consolidated financial statements)
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SUNOPTA INC.
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9 | March 28, 2020 |
| SunOpta Inc. | |||
| Consolidated Statements of Cash Flows | |||
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For the quarters ended March 28, 2020 and March 30, 2019 |
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| (Unaudited) | |||
| (Expressed in thousands of U.S. dollars) |
|
Quarter ended |
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March 28, 2020 |
March 30, 2019 |
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| $ | $ | ||||||
| CASH PROVIDED BY (USED IN) | |||||||
| Operating activities | |||||||
|
Net earnings |
|||||||
| Items not affecting cash: | |||||||
| Depreciation and amortization | |||||||
| Amortization of debt issuance costs | |||||||
| Deferred income taxes | |||||||
| Stock-based compensation | ( |
) | |||||
| Unrealized loss on derivative contracts (note 5) | |||||||
|
Gain on settlement of contingent consideration obligation (note 9) |
( |
) | — | ||||
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Gain on sale of business (note 3) |
— | ( |
) | ||||
| Other | ( |
) | ( |
) | |||
|
Changes in non-cash working capital, net of business sold (note 11) |
|
|
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Net cash flows from operating activities |
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| Investing activities | |||||||
| Purchases of property, plant and equipment | ( |
) | ( |
) | |||
|
Net proceeds from sale of business (note 3) |
— |
|
|||||
| Net cash flows from investing activities | ( |
) | |||||
| Financing activities | |||||||
|
Decrease under line of credit facilities (note 7) |
( |
) | ( |
) | |||
| Borrowings under long-term debt (note 7) | |||||||
| Repayment of long-term debt (note 7) | ( |
) | ( |
) | |||
|
Payment of cash dividends on Series A Preferred Stock (note 8) |
( |
) | ( |
) | |||
|
Proceeds from the exercise of stock options and employee share purchases |
|
|
|||||
| Payment of debt issuance costs | ( |
) |
( |
) | |||
| Other | ( |
) | |||||
| Net cash flows from financing activities | ( |
) | ( |
) | |||
| Foreign exchange loss on cash held in a foreign currency | ( |
) | ( |
) | |||
|
Increase in cash and cash equivalents in the period |
|||||||
| Cash and cash equivalents - beginning of the period | |||||||
| Cash and cash equivalents - end of the period | |||||||
|
Non-cash investing and financing activities (note 11) |
|||||||
(See accompanying notes to consolidated financial statements)
|
SUNOPTA INC. |
10 |
March 28, 2020 |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
| For the quarters ended March 28, 2020 and March 30, 2019 | |||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
1. Significant Accounting Policies
Basis of Presentation
These interim consolidated financial statements of SunOpta Inc. (the "Company" or "SunOpta") have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter ended March 28, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ending January 2, 2021, or for any other period. The interim consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended December 28, 2019. For further information, refer to the consolidated financial statements, and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
As described in note 13, in the fourth quarter of 2019, the Company changed its segment reporting to reflect changes to its operating structure. All segment information presented in these consolidated financial statements for the quarter ended March 30, 2019 has been restated to reflect the new segment reporting structure.
Fiscal Year
Recent Accounting Pronouncements
Effective the first quarter of 2020, the Company adopted Accounting Standards Update "ASU" 2016-13, "Measurement of Credit Losses on Financial Instruments," which requires the immediate recognition of expected versus incurred credit losses for most financial assets. The Company adopted ASU 2016-13 under the modified retrospective approach and applied the new guidance to its short-term accounts receivable. The adoption of this new guidance did not result in the recognition of additional allowances for credit losses. The Company closely monitors receivable balances and estimates the allowance for credit losses based on historical collection experience, and account aging analysis and trends. The Company evaluates the adequacy of the allowance each reporting period, considering individual customer account reviews, write-offs recorded in the period, sales forecasts and trends, and current and expected economic conditions.
|
SUNOPTA INC. |
11 |
March 28, 2020 |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
|
For the quarters ended March 28, 2020 and March 30, 2019 |
|||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
2. Revenue
The Company procures, processes and sells organic and non-GMO ingredients, and processes and packages plant-based and fruit-based foods and beverages. The Company's customers include retailers, foodservice operators, branded food companies and food manufacturers.
The following table presents a disaggregation of the Company's revenues based on categories used by the Company to evaluate sales performance:
|
Quarter ended |
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| March 28, 2020 | March 30, 2019 | |||||||
|
$ |
|
$ | ||||||
| Global Ingredients | ||||||||
| Organic and non-GMO ingredients | ||||||||
| Premium juice | ||||||||
| Soy and corn (see note 3) | ||||||||
| Total Global Ingredients | ||||||||
| Plant-Based Foods and Beverages | ||||||||
| Beverages and broths | ||||||||
| Plant-based ingredients | ||||||||
| Sunflower and roasted snacks | ||||||||
| Total Plant-Based Foods and Beverages | ||||||||
| Fruit-Based Foods and Beverages | ||||||||
| Frozen fruit | ||||||||
| Fruit-based ingredients | ||||||||
| Fruit snacks | ||||||||
| Total Fruit-Based Foods and Beverages | ||||||||
| Total revenues | ||||||||
3. Sale of Soy and Corn Business
On February 22, 2019, the Company's subsidiary, SunOpta Grains and Foods Inc., completed the sale of its specialty and organic soy and corn business to Pipeline Foods, LLC for $
| SUNOPTA INC. | 12 | March 28, 2020 |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters ended March 28, 2020 and March 30, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
4. Value Creation Plan
The Value Creation Plan is a broad-based initiative focused on increasing shareholder value through structural investments in people and assets, together with restructuring activities to streamline operations. In the first quarter of 2020, measures taken under the Value Creation Plan included the consolidation of the Company's corporate office functions, the closure of an organic ingredient warehousing facility located in China, and other business development activities. In the first quarter of 2019, actions taken under the Value Creation Plan related to the sale of the soy and corn business, and transition of the Company's Chief Executive Officer ("CEO"). The following table summarizes costs incurred by type under the Value Creation Plan for the quarters ended March 28, 2020 and March 30, 2019:
| Employee | ||||||||||||
| Asset | recruitment, | |||||||||||
| impairments | retention and | |||||||||||
| and facility | termination |
Professional |
||||||||||
| closure costs | costs | fees | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| March 28, 2020 | ||||||||||||
| Balance payable, December 28, 2019(1) | ||||||||||||
| Costs incurred and charged to expense | ||||||||||||
| Cash payments, net | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Non-cash adjustments | ( |
) | ||||||||||
| Balance payable, March 28, 2020(1) | ||||||||||||
| March 30, 2019 | ||||||||||||
| Balance payable, December 29, 2018 | ||||||||||||
| Costs incurred and charged to expense | ||||||||||||
|
Cash payments, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||
| Non-cash adjustments | ||||||||||||
| Balance payable, March 30, 2019 |
(1) Balance payable was included in accounts payable and accrued liabilities on the consolidated balance sheet.
The following table summarizes costs incurred since the inception of the Value Creation Plan in 2016 to March 28, 2020:
| Employee | ||||||||||||
| Asset | recruitment, |
Professional |
||||||||||
| impairments | retention and | fees and | ||||||||||
| and facility | termination | temporary | ||||||||||
| closure costs | costs | labor costs | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| Costs incurred and charged to expense | ||||||||||||
| Cash payments, net | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Non-cash adjustments | ( |
) | ( |
) | ||||||||
| Balance payable, March 28, 2020 |
| SUNOPTA INC. | 13 | March 28, 2020 |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters ended March 28, 2020 and March 30, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
For the quarters ended March 28, 2020 and March 30, 2019, costs incurred and charged to expense were recorded in the consolidated statement of operations as follows:
| Quarter ended | ||||||
| March 28, 2020 | March 30, 2019 | |||||
| $ | $ | |||||
| Selling, general and administrative expenses(1) | ||||||
| Other expense(2) | ||||||
(2) For the quarter ended March 28, 2020, costs recorded in other expense were allocated as follows: Global Ingredients - $
5. Derivative Financial Instruments and Fair Value Measurements
The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of March 28, 2020 and December 28, 2019:
| March 28, 2020 | ||||||||||||
| Fair value | ||||||||||||
| asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||
| $ | $ | $ | $ | |||||||||
| Commodity futures contracts(1) | ||||||||||||
| Unrealized short-term derivative liability | ( |
) | ( |
) | ||||||||
| Forward foreign currency contracts(2) | ||||||||||||
| Not designated as hedging instruments | ||||||||||||
| December 28, 2019 | ||||||||||||
| Fair value | ||||||||||||
| asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||
| $ | $ | $ | $ | |||||||||
| Commodity futures contracts(1) | ||||||||||||
| Unrealized short-term derivative asset | ||||||||||||
| Forward foreign currency contracts(2) | ||||||||||||
| Not designated as hedging instruments | ( |
) | ( |
) | ||||||||
(1) Commodity futures contracts
As at March 28, 2020, outstanding contracts comprised exchange-traded commodity futures for cocoa and coffee, which are used as part of the Company's risk management strategy and represent economic hedges to limit risk related to fluctuations in the price of these commodities. These contracts are not designated as hedges for accounting purposes. Exchange-traded futures are fair valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Gains and losses on changes in the fair value of these contracts are included in cost of goods sold on the consolidated statement of operations. For the quarter ended March 28, 2020, the Company recognized a loss of $
| SUNOPTA INC. | 14 | March 28, 2020 |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters ended March 28, 2020 and March 30, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
As at March 28, 2020, the Company had net open futures contracts to sell
(2) Foreign forward currency contracts
As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are included in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. These contracts typically represent economic hedges that are not designated as hedging instruments; however, certain of these contracts may be designated as cash flow hedges for accounting purposes.
As at March 28, 2020, the Company had open forward foreign exchange contracts to sell euros to buy U.S. dollars with a notional value of €
6. Inventories
|
March 28, 2020 |
December 28, 2019 | |||||
| $ | $ | |||||
| Raw materials and work-in-process | ||||||
| Finished goods | ||||||
| Inventory reserves | ( |
) | ( |
) | ||
7. Bank Indebtedness and Long-Term Debt
| March 28, 2020 | December 28, 2019 | ||||||
| $ | $ | ||||||
| Bank Indebtedness | |||||||
| Global Credit Facility(1) | |||||||
| Bulgarian credit facility(2) | |||||||
| Long-Term Debt | |||||||
| Senior Secured Second Lien Notes, net of unamortized debt issuance costs of $ |
|||||||
| Finance lease liabilities | |||||||
| Asset-backed term loan | |||||||
| Other | |||||||
| Less: current portion | |||||||
|
SUNOPTA INC.
|
15 | March 28, 2020 |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
| For the quarters ended March 28, 2020 and March 30, 2019 | |||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(1) Global Credit Facility
On
Individual borrowings under the Global Credit Facility have terms of six months or less and bear interest based on various reference rates plus an applicable margin. The margin ranges from
As at March 28, 2020, the weighted-average interest rate on all borrowings under the Global Credit Facility was
Obligations under the Global Credit Facility are guaranteed by substantially all of the Company's subsidiaries and, subject to certain exceptions, such obligations are secured by first-priority liens on substantially all of the assets of the Company.
The Global Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company's ability to create liens on assets; sell assets and enter into sale and leaseback transactions; pay dividends, prepay junior lien and unsecured indebtedness and make other restricted payments; incur additional indebtedness and make guarantees; make investments, loans or advances, including acquisitions; and engage in mergers or consolidations. The foregoing covenants are subject to certain threshold amounts and exceptions as set forth in the credit agreement.
(2) Bulgarian credit facility
On April 13, 2020, a subsidiary of The Organic Corporation B.V. ("TOC"), a wholly-owned subsidiary of the Company, extended its €
(3) Senior Secured Second Lien Notes
|
SUNOPTA INC. |
16 | March 28, 2020 |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
| For the quarters ended March 28, 2020 and March 30, 2019 | |||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
At any time after October 9, 2019, SunOpta Foods may redeem the Notes, in whole or in part, at a redemption price equal to
The Notes are secured by second-priority liens on substantially all of the assets that secure the credit facilities provided under the Global Credit Facility, subject to certain exceptions and permitted liens. The Notes are senior secured obligations and rank equally in right of payment with SunOpta Foods' existing and future senior debt and senior in right of payment to any future subordinated debt. The Notes are effectively subordinated to debt under the Global Credit Facility and any future indebtedness secured on a first-priority basis. The Notes are initially guaranteed on a senior secured second-priority basis by the Company and each of its subsidiaries (other than SunOpta Foods) that guarantees indebtedness under the Global Credit Facility, subject to certain exceptions.
The Notes are subject to covenants that, among other things, limit the Company's ability to (i) incur additional debt or issue preferred stock; (ii) pay dividends and make certain types of investments and other restricted payments; (iii) create liens; (iv) enter into transactions with affiliates; (v) sell assets; and (vi) create restrictions on the ability of restricted subsidiaries to pay dividends, make loans or advances or transfer assets to the Company, SunOpta Foods or any guarantor of the Notes. The foregoing covenants are subject to certain threshold amounts and exceptions as set forth in the indenture governing the Notes. In addition, the indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture, certain payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. If an event of default occurs and is continuing, the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued and unpaid interest on, if any, all the Notes to be due and payable.
As at March 28, 2020, the estimated fair value of the outstanding Notes was approximately $
8. Series A Preferred Stock
On October 7, 2016, the Company and SunOpta Foods entered into a subscription agreement (the "Series A Subscription Agreement") with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund II, L.P. (collectively, "Oaktree"). Pursuant to the Series A Subscription Agreement, SunOpta Foods issued an aggregate of
The Series A Preferred Stock had a stated value and initial liquidation preference of $
| SUNOPTA INC. | 17 | March 28, 2020 |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters ended March 28, 2020 and March 30, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
The Special Shares, Series 1 are not transferable, and the voting rights associated with the Special Shares, Series 1 will terminate upon the transfer of the Series A Preferred Stock to a third party, other than a controlled affiliate of Oaktree. Oaktree is entitled to designate up to two nominees for election to the Board of Directors of the Company (the “Board”) and have the right to designate one individual to attend meetings of the Board as a non-voting observer, subject to Oaktree maintaining certain levels of beneficial ownership of Common Shares on an as-exchanged basis.
| SUNOPTA INC. | 18 | March 28, 2020 |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters ended March 28, 2020 and March 30, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
9. Other Income, Net
The components of other expense (income) were as follows:
| Quarter ended | ||||||||
| March 28, 2020 | March 30, 2019 | |||||||
| $ | $ | |||||||
|
Contingent consideration(1) |
( |
) | ||||||
| Employee termination and recruitment costs(2) | ||||||||
|
Facility closure costs(3) |
||||||||
|
Gain on sale of soy and corn business (see note 3) |
( |
) | ||||||
|
Product withdrawal and recall costs |
||||||||
| Other | ||||||||
| ( |
) | ( |
) | |||||
(1) For the quarter ended March 28, 2020, income represents a gain on the settlement of the final contingent consideration obligation payable under an earn-out arrangement with the former unitholders of Citrusource, LLC, which was acquired by the Company in March 2015. As at March 28, 2020, the remaining $
(2) Employee termination and recruitment costs
For the quarter ended March 28, 2020, expenses represent severance benefits of $
For the quarter ended March 30, 2019, expenses represent severance benefits of $
(3) Facility closure costs
For the quarter ended March 28, 2020, expenses relate to costs to close an organic ingredient warehousing facility located in China.
For the quarter ended March 30, 2019, expenses include costs to dismantle and move equipment from a former soy extraction facility located in Heuvelton, New York, which was sold in April 2019.
|
SUNOPTA INC.
|
19 |
March 28, 2020 |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
|
For the quarters ended March 28, 2020 and March 30, 2019 |
|||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
10. Earnings Per Share
Basic and diluted earnings per share were calculated as follows (shares in thousands):
| Quarter ended | |||||||||
|
March 28, 2020 |
March 30, 2019 |
||||||||
|
Basic Earnings Per Share |
|||||||||
| Numerator for basic earnings per share | |||||||||
| Earnings attributable to SunOpta Inc. | $ | $ | |||||||
| Less: dividends and accretion on Series A Preferred Stock | ( |
) | ( |
) | |||||
|
Earnings attributable to common shareholders |
$ | $ | |||||||
| Denominator for basic earnings per share | |||||||||
| Basic weighted-average number of shares outstanding | |||||||||
| Basic earnings per share | $ | $ | |||||||
|
Diluted Earnings Per Share |
|||||||||
| Numerator for diluted earnings per share | |||||||||
| Earnings attributable to SunOpta Inc. | $ | $ | |||||||
| Less: dividends and accretion on Series A Preferred Stock(1) | ( |
) | |||||||
|
Earnings attributable to common shareholders |
$ | $ | |||||||
| Denominator for diluted earnings per share | |||||||||
| Basic weighted-average number of shares outstanding | |||||||||
| Dilutive effect of the following: | |||||||||
|
Stock options and restricted stock units(1) |
|||||||||
|
Series A Preferred Stock(2) |
|||||||||
| Diluted weighted-average number of shares outstanding | |||||||||
| Diluted earnings per share | $ | $ | |||||||
(1) For the quarter ended March 28, 2020, stock options to purchase
(2) For the quarter ended March 28, 2020, it was more dilutive to assume the Series A Preferred Stock was not converted into Common Shares and, therefore, the numerator of the diluted earnings per share calculation was not adjusted to add back the dividends and accretion on the Series A Preferred Stock and the denominator was not adjusted to include
|
SUNOPTA INC.
|
20 |
March 28, 2020 |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
|
For the quarters ended March 28, 2020 and March 30, 2019 |
|||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
11. Supplemental Cash Flow Information
| Quarter ended | ||||||
|
March 28, 2020 |
March 30, 2019 |
|||||
| $ | $ | |||||
| Changes in Non-Cash Working Capital, Net of Business Sold | ||||||
| Accounts receivable | ( |
) | ||||
| Inventories | ||||||
| Income tax recoverable/payable | ||||||
| Prepaid expenses and other current assets | ( |
) | ( |
) | ||
| Accounts payable and accrued liabilities | ( |
) | ( |
) | ||
| Customer and other deposits | ||||||
| Non-Cash Investing and Financing Activities | ||||||
|
Right-of-use assets obtained in exchange for lease liabilities |
||||||
|
Operating leases |
|
|||||
|
Dividends payable in kind on Series A Preferred Stock |
|
|||||
| Accrued cash dividends payable on Series A Preferred Stock | ||||||
12. Commitments and Contingencies
Product Recall
Other Claims
In addition, various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.
|
SUNOPTA INC. |
21 |
March 28, 2020 |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
|
For the quarters ended March 28, 2020 and March 30, 2019 |
|||
|
(Unaudited) |
|||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
13. Segmented Information
Effective the fourth quarter of 2019, the Company implemented changes to its organization and leadership structure to align with the operational and strategic objectives established by the Company's CEO. As a result, the Company established two new segments - a Plant-Based Foods and Beverages segment and a Fruit-Based Foods and Beverages segment - based on the synergistic nature of the underlying principal product ingredients. In addition, the Company realigned the Global Ingredients segment to combine its international organic ingredients operations and its co-manufactured premium juice program, based on shared raw material sourcing. Each segment has dedicated management, sales, marketing, plant operations, product development and business support teams, with full accountability to the CEO.
With these changes, the composition of the Company's three operating segments is as follows:
Corporate Services provides a variety of management, financial, information technology, treasury and administration services to each of the Company's operating segments.
When reviewing the operating results of the Company's operating segments, management uses segment revenues from external customers and segment operating income/loss to assess performance and allocate resources. Segment operating income/loss excludes other income/expense items. In addition, interest expense and income taxes are not allocated to the operating segments.
| SUNOPTA INC. | 22 | March 28, 2020 |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters ended March 28, 2020 and March 30, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Segment Revenues and Operating Income
Reportable segment operating results for the quarters ended March 28, 2020 and March 30, 2019 were as follows:
| Quarter ended | ||||||||||||
| March 28, 2020 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | ||||||||||||
| Segment operating income (loss) | ( |
) | ||||||||||
| Corporate Services | ( |
) | ||||||||||
| Other income, net (see note 9) | ||||||||||||
| Interest expense, net | ( |
) | ||||||||||
| Earnings before income taxes | ||||||||||||
| Quarter ended | ||||||||||||
| March 30, 2019 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | ||||||||||||
| Segment operating income (loss) | ( |
) | ||||||||||
| Corporate Services | ( |
) | ||||||||||
| Other income, net (see note 9) | ||||||||||||
| Interest expense, net | ( |
) | ||||||||||
| Earnings before income taxes | ||||||||||||
Segment Depreciation and Amortization
Depreciation and amortization by reportable segment for the quarters ended March 28, 2020 and March 30, 2019 was as follows:
| Quarter ended | ||||||
| March 28, 2020 | March 30, 2019 | |||||
| $ | $ | |||||
| Global Ingredients | ||||||
| Plant-Based Foods and Beverages | ||||||
| Fruit-Based Foods and Beverages | ||||||
| Total segment depreciation and amortization | ||||||
| Corporate Services | ||||||
| Total depreciation and amortization | ||||||
| SUNOPTA INC. | 23 | March 28, 2020 |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters ended March 28, 2020 and March 30, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
14. Subsequent Event
Series B Preferred Stock
On April 15, 2020, the Company and SunOpta Foods entered into a subscription agreement (the "Series B Subscription Agreement") with Oaktree and Engaged Capital, LLC, Engaged Capital Flagship Master Fund, LP and Engaged Capital Co-Invest IV-A, LP (collectively, "Engaged"), which contemplated the issuance by SunOpta Foods of shares of exchangeable, voting Series B-1 Preferred Stock and exchangeable, voting Series B-2 Preferred Stock (together with the Series B-1 Preferred Stock, the "Series B Preferred Stock"). The Series B Preferred Stock ranks on par with the Series A Preferred Stock.
On April 24, 2020, pursuant to the Series B Subscription Agreement, SunOpta Foods issued
At any time on or after April 24, 2025, SunOpta Foods may redeem all of the Series B-1 Preferred Stock for an amount per share equal to the value of the liquidation preference of the Series B-1 Preferred Stock at such time, plus accrued and unpaid dividends.
The Company has the right, but not the obligation, to require each of Oaktree and Engaged to purchase its proportionate share of up to
|
SUNOPTA INC. |
24 |
March 28, 2020 |
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 March 28, 2020 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 28, 2019 ("Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to May 6, 2020.
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 are a leading global company focused on the manufacture of plant-based and fruit-based foods and beverage products for sale to retail, foodservice and branded food customers. In addition, our global ingredient sourcing and production platform makes us one of the leading suppliers of organic and non-GMO ingredients to the food industry.
Effective the fourth quarter of 2019, we changed our segment reporting to reflect changes to our operating structure. As a result, we established two new segments - a Plant-Based Foods and Beverages segment and a Fruit-Based Foods and Beverages segment - based on the synergistic nature of the underlying principal product ingredients. In addition, we realigned the Global Ingredients segment to combine our international organic ingredients operations and our co-manufactured premium juice program, based on shared raw material sourcing. With these changes, the following is a summary of the principal activities and products that comprise each of our three operating segments:
|
SUNOPTA INC.
|
25 |
March 28, 2020 |
The segment information presented in this MD&A for the quarter ended March 30, 2019 has been restated to conform with the preceding changes to our operating structure.
Impact of COVID-19
The 2019 novel coronavirus (COVID-19) global pandemic began to impact our operations late in the first quarter of 2020 and is likely to have a significant effect on our business and results.
To contain the spread of COVID-19, various levels of government around the world have imposed mandatory restrictions, including business closures, shelter-in-place orders, and physical distancing protocols. These measures have produced significant shifts in the mix of our business, resulting in lower demand for our food and beverage products from the foodservice channel due to the closure of many foodservice outlets, and an increase in demand from retail customers as consumers increase their at-home food and beverage consumption. While not having a material effect on our results for the first quarter, these demand shifts could potentially have a negative impact on our results for the second quarter, as the full effect of COVID-19 is realized. This volatility in demand may extend beyond the second quarter depending on the duration and scope of the pandemic. In addition, in the first quarter we recorded an incremental $1.0 million reserve to reflect increased risk of customer credit losses due to weaker economic conditions and uncertainty caused by COVID-19.
Our priority has been the health and safety of our employees and we have put preventative measures in place at each of our plants and expanded our sick leave policies. In addition, we are providing pay premiums and bonuses to our plant workers. We are incurring additional costs and impacts to productivity due to these measures and employee absences, although these factors were not material to our first quarter results. For our office employees, we have implemented remote work arrangements and restricted business travel since mid-March. These arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems and internal controls.
To date, we have not experienced any material impact from plant closures, as our manufacturing facilities have largely been exempt from government closure orders. In addition, we have engaged actively with the various elements of our supply chain, including raw material and packaging suppliers, contract manufacturers, and logistics and transportation providers, to ensure we are able to meet customer demand for our products. However, we may experience disruptions and higher costs in our supply chain and potential extended closures of our key manufacturing facilities as the pandemic continues, which we may not be able to mitigate. In addition, the supply and field pricing related to the 2020 raw fruit crop from California, beginning in the second quarter, may be negatively impacted if COVID-19 conditions affect the migrant workforce for farms and production facilities in the U.S.
During the first quarter, we experienced increased volatility in foreign currency exchange rates and commodity prices, which we believe is in part related to the uncertainties from COVID-19, as well as actions taken by governments and central banks in response to COVID-19. Certain foreign currencies depreciated significantly against the U.S. dollar in March 2020, including the Mexican peso, which was down over 20%, resulting in foreign exchange losses related to our Mexican frozen fruit operations of $2.0 million in the month of March and $2.3 million in the first quarter. In April 2020, we entered into a combination of foreign currency put and call option contracts (a zero-cost collar) to hedge our exposure to fluctuations in the Mexican peso related to our purchases of inventory from Mexico through the remainder of 2020. Commodity cocoa futures also experienced a significant decline in market price in March 2020, which resulted in gains to our first quarter results of $2.1 million in the month of March and $1.3 million in the first quarter. We expect continued volatility in foreign currency exchange rates and commodity prices during 2020, though we cannot reasonably estimate the duration or extent of that volatility.
|
SUNOPTA INC.
|
26 |
March 28, 2020 |
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. At the end of the first quarter, we had approximately $63 million of availability under our Global Credit Facility. In addition, as described below under the heading "Liquidity and Capital Resources," after quarter-end we raised $30.0 million through the issuance of the first tranche of Series B Preferred Stock, and we have the option to issue a second tranche for up to an additional $30.0 million. We believe these funds, together with ongoing working capital efficiency initiatives, will provide adequate liquidity as we manage through the current economic environment.
Overall, based on information available to us as of the date of this report, we believe that we will continue to be able to deliver our products to our customers on a timely basis, while meeting our financial obligations. However, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its ultimate impact on the global economy and our business.
Value Creation Plan
The following table summarizes costs incurred by type under the Value Creation Plan that were charged to expense for the quarters ended March 28, 2020 and March 30, 2019:
| Employee | ||||||||||||||||
| Asset | recruitment, | |||||||||||||||
| impairments | retention and | |||||||||||||||
| and facility | termination | Professional | ||||||||||||||
| closure costs | costs | fees | Total | |||||||||||||
| For the quarter ended | $ | $ | $ | $ | ||||||||||||
| March 28, 2020 | ||||||||||||||||
| Selling, general and administrative expenses | — | 485 | 551 | 1,036 | ||||||||||||
| Other expense | 389 | 570 | — | 959 | ||||||||||||
| Total | 389 | 1,055 | 551 | 1,995 | ||||||||||||
| March 30, 2019 | ||||||||||||||||
| Selling, general and administrative expenses | — | 109 | 94 | 203 | ||||||||||||
| Other expense | 256 | 1,399 | — | 1,655 | ||||||||||||
| Total | 256 | 1,508 | 94 | 1,858 |
For more information regarding the Value Creation Plan, see note 4 to the unaudited consolidated financial statements included in this report.
Acquisition of Sanmark B.V.
On April 1, 2019, we acquired 100% of the outstanding shares of Sanmark B.V. ("Sanmark") for $3.3 million, net of cash acquired, which was financed through existing credit facilities. Sanmark is a sourcing and trading business focused on organic oils for the food, pharmacy, and cosmetic industries, generating most of its sales in the European and Asia-Pacific markets. The operations of Sanmark have been integrated into our organic ingredients operations based in the Netherlands, and the results of operations of Sanmark have been included in Global Ingredients since the date of acquisition.
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 for $66.5 million, subject to certain post-closing adjustments, which resulted in an pre-tax gain on sale of $45.6 million recognized in the first quarter of 2019. The soy and corn business engaged in seed and grain conditioning and corn milling and formed part of Global Ingredients. For the period ended February 22, 2019, the soy and corn business generated revenues and gross profit of $10.3 million and $0.2 million, respectively, and reported an operating loss of $0.2 million (excluding management fees charged by Corporate Services). The net proceeds from this transaction were initially used to repay borrowings and increase availability under our Global Credit Facility (as described below under the heading "Liquidity and Capital Resources").
|
SUNOPTA INC.
|
27 |
March 28, 2020 |
Consolidated Results of Operations for the Quarters Ended March 28, 2020 and March 30, 2019
| March 28, 2020 | March 30, 2019 | Change | Change | ||||||||||
| $ | $ | $ | % | ||||||||||
| Revenues | |||||||||||||
| Global Ingredients | 128,352 | 134,842 | (6,490 | ) | -4.8% | ||||||||
| Plant-Based Foods and Beverages | 106,242 | 81,276 | 24,966 | 30.7% | |||||||||
| Fruit-Based Foods and Beverages | 101,355 | 89,157 | 12,198 | 13.7% | |||||||||
| Total revenues | 335,949 | 305,275 | 30,674 | 10.0% | |||||||||
| Gross Profit | |||||||||||||
| Global Ingredients | 16,547 | 14,692 | 1,855 | 12.6% | |||||||||
| Plant-Based Foods and Beverages | 21,071 | 10,496 | 10,575 | 100.8% | |||||||||
| Fruit-Based Foods and Beverages | 6,102 | 3,018 | 3,084 | 102.2% | |||||||||
| Total gross profit | 43,720 | 28,206 | 15,514 | 55.0% | |||||||||
| Segment operating income (loss)(1) | |||||||||||||
| Global Ingredients | 8,114 | 6,543 | 1,571 | 24.0% | |||||||||
| Plant-Based Foods and Beverages | 13,853 | 2,528 | 11,325 | 448.0% | |||||||||
| Fruit-Based Foods and Beverages | (4,702 | ) | (5,605 | ) | 903 | 16.1% | |||||||
| Corporate Services | (5,806 | ) | (3,146 | ) | (2,660 | ) | -84.6% | ||||||
| Total segment operating income | 11,459 | 320 | 11,139 | 3480.9% | |||||||||
| Other income, net | (1,298 | ) | (43,512 | ) | 42,214 | 97.0% | |||||||
| Earnings before the following | 12,757 | 43,832 | (31,075 | ) | -70.9% | ||||||||
| Interest expense, net | 8,280 | 8,739 | (459 | ) | -5.3% | ||||||||
| Provision for income taxes | 1,130 | 9,498 | (8,368 | ) | -88.1% | ||||||||
| Net earnings(2),(3) | 3,347 | 25,595 | (22,248 | ) | -86.9% | ||||||||
| Loss attributable to non-controlling interests | (14 | ) | (54 | ) | 40 | 74.1% | |||||||
| Earnings attributable to SunOpta Inc. | 3,361 | 25,649 | (22,288 | ) | -86.9% | ||||||||
| Dividends and accretion on Series A Preferred Stock | (2,025 | ) | (1,995 | ) | (30 | ) | -1.5% | ||||||
| Earnings attributable to common shareholders(4) | 1,336 | 23,654 | (22,318 | ) | -94.4% | ||||||||
(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 and goodwill impairments 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 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.
| SUNOPTA INC. | 28 | March 28, 2020 |
| Plant-Based | Fruit-Based | ||||||||||||||
| Global | Foods and | Foods and | Corporate | ||||||||||||
| Ingredients | Beverages | Beverages | Services | Consolidated | |||||||||||
| $ | $ | $ | $ | $ | |||||||||||
| March 28, 2020 | |||||||||||||||
| Segment operating income (loss) | 8,114 | 13,853 | (4,702 | ) | (5,806 | ) | 11,459 | ||||||||
| Other income (expense), net | 1,835 | 7 | (920 | ) | 376 | 1,298 | |||||||||
| Earnings (loss) before the following | 9,949 | 13,860 | (5,622 | ) | (5,430 | ) | 12,757 | ||||||||
| March 30, 2019 | |||||||||||||||
| Segment operating income (loss) | 6,543 | 2,528 | (5,605 | ) | (3,146 | ) | 320 | ||||||||
| Other income (expense), net | 45,565 | (826 | ) | (290 | ) | (937 | ) | 43,512 | |||||||
| Earnings (loss) before the following | 52,108 | 1,702 | (5,895 | ) | (4,083 | ) | 43,832 |
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 earnings attributable to common shareholders determined in accordance with U.S. GAAP that excludes specific items recognized in other income/expense, impairment losses on goodwill and long-lived assets, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of our financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations.
The following table presents a reconciliation of adjusted earnings/loss from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, in recognition of the sale of the soy and corn business (as described above under the heading "Sale of Soy and Corn Business"), we have prepared this table in a columnar format to present the effect of the disposal of this business on our consolidated results for the quarter ended March 30, 2019. We believe this presentation assists investors in assessing the results of the operations we have disposed of and the effect of those operations on our financial performance.
| SUNOPTA INC. | 29 | March 28, 2020 |
| Excluding | ||||||||||||||||||
| disposed operations | Disposed operations | Consolidated | ||||||||||||||||
| Per Diluted Share | Per Diluted Share | Per Diluted Share | ||||||||||||||||
| For the quarter ended | $ | $ | $ | $ | $ | $ | ||||||||||||
| March 28, 2020 | ||||||||||||||||||
| Net earnings | 3,347 | — | 3,347 | |||||||||||||||
| Loss attributable to non-controlling interests | 14 | — | 14 | |||||||||||||||
| Dividends and accretion of Series A Preferred Stock | (2,025 | ) | — | (2,025 | ) | |||||||||||||
| Earnings attributable to common shareholders | 1,336 | 0.01 | — | — | 1,336 | 0.01 | ||||||||||||
| Adjusted for: | ||||||||||||||||||
| Contingent consideration settlement(a) | (2,286 | ) | — | (2,286 | ) | |||||||||||||
| Costs related to the Value Creation Plan(b) | 1,995 | — | 1,995 | |||||||||||||||
| Other(c) | 29 | — | 29 | |||||||||||||||
| Net income tax effect(d) | (135 | ) | — | (135 | ) | |||||||||||||
| Adjusted earnings | 939 | 0.01 | — | — | 939 | 0.01 | ||||||||||||
| March 30, 2019 | ||||||||||||||||||
| Net earnings (loss) | (7,201 | ) | 32,796 | 25,595 | ||||||||||||||
| Loss attributable to non-controlling interests | 54 | — | 54 | |||||||||||||||
| 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(e) | — | (45,579 | ) | (45,579 | ) | |||||||||||||
| Costs related to Value Creation Plan(f) | 1,858 | — | 1,858 | |||||||||||||||
| Product withdrawal and recall costs(g) | 260 | — | 260 | |||||||||||||||
| Contract manufacturer transition costs(h) | 88 | — | 88 | |||||||||||||||
| Other(i) | 152 | — | 152 | |||||||||||||||
| Net income tax effect(d) | (826 | ) | 12,489 | 11,663 | ||||||||||||||
| Adjusted loss | (7,610 | ) | (0.09 | ) | (294 | ) | — | (7,904 | ) | (0.09 | ) | |||||||
(a) Reflects a gain on the settlement of the remaining earn-out obligation related to our acquisition of Citrusource LLC ("Citrusource") in 2015, which was recorded in other income.
(b) Reflects employee retention costs of $0.5 million and professional fees of $0.6 million recorded in SG&A expenses; and employee termination costs of $1.0 million (offset by a $0.5 million reversal of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees), and facility closure costs of $0.4 million recorded in other expense.
(c) Other includes losses on the disposal of assets, which were recorded in other expense.
(d) Reflects the tax effect of the preceding adjustments to earnings and reflects an overall estimated annual effective tax rate of approximately 30% for the quarter ended March 28, 2020 (March 30, 2019 - 27%) on adjusted earnings/loss before tax.
(e) Reflects the gain on sale of the soy and corn business, net of transaction costs, which was recorded in other income.
(f) 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, offset by a $2.1 million reversal of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees, all recorded in other expense.
(g) Reflects product withdrawal and recall costs that were not eligible for reimbursement under insurance policies or exceeded the limits of those policies, including costs related to the recall of certain sunflower kernel products initiated in the second quarter of 2016, which were recorded in other expense.
(h) Reflects costs to transition certain production activities to a new contract manufacturer, which were recorded in cost of goods sold.
(i) Other included insurance deductibles, which were recorded in other expense.
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 disposal of the soy and corn business on our consolidated results for the quarter ended March 30, 2019. We believe this presentation assists investors in assessing the results of the operations we have disposed of and the effect of those operations on our financial performance.
| SUNOPTA INC. | 30 | March 28, 2020 |
| Excluding | ||||||||||
| disposed operations | Disposed operations | Consolidated | ||||||||
| For the quarter ended | $ | $ | $ | |||||||
| March 28, 2020 | ||||||||||
| Net earnings | 3,347 | — | 3,347 | |||||||
| Provision for income taxes | 1,130 | — | 1,130 | |||||||
| Interest expense, net | 8,280 | — | 8,280 | |||||||
| Other income, net | (1,298 | ) | — | (1,298 | ) | |||||
| Total segment operating income | 11,459 | — | 11,459 | |||||||
| Depreciation and amortization | 8,922 | — | 8,922 | |||||||
| Stock-based compensation(a) | 2,906 | — | 2,906 | |||||||
| Costs related to Value Creation Plan(b) | 1,036 | — | 1,036 | |||||||
| Adjusted EBITDA | 24,323 | — | 24,323 | |||||||
| 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 | ||||||
(a) For the first quarters of 2020 and 2019, stock-based compensation of $2.9 million and $1.9 million, respectively, was recorded in SG&A expenses, and the reversal of $0.5 million and $2.1 million, respectively, of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees was recognized in other income.
(b) For the first quarters of 2020 and 2019, reflects professional fees and employee retention costs of $1.0 million and $0.2 million, respectively, 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:
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income, earnings and adjusted earnings to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. In particular, we evaluate our revenues on a basis that excludes the effects of fluctuations in commodity pricing and foreign exchange rates. In addition, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2), and 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.
| SUNOPTA INC. | 31 | March 28, 2020 |
Revenues for the quarter ended March 28, 2020 increased by 10.0% to $335.9 million from $305.3 million for the quarter ended March 30, 2019. Excluding the impact on revenues of the sale of the soy and corn business and the acquisition of Sanmark (a net decrease in revenues of $7.3 million), and changes in foreign exchange rates (a decrease in revenues of $1.2 million) and commodity-related pricing (a decrease in revenues of $0.2 million), revenues increased by 13.2% in the first quarter of 2020, compared with the first quarter of 2019. Revenues increased on an adjusted basis across all segments of the business, reflecting the expansion of plant-based beverage and broth offerings, growth in plant-based ingredient extraction volumes, higher volumes of organic ingredients and premium juice products, and increased retail volumes and sales pricing for frozen fruit, together with higher sales of fruit snacks, fruit ingredients and sunflower and roasted snacks.
Gross profit increased $15.5 million, or 55.0%, to $43.7 million for the quarter ended March 28, 2020, compared with $28.2 million for the quarter ended March 30, 2019. As a percentage of revenues, gross profit for the quarter ended March 28, 2020 was 13.0% compared to 9.2% for the quarter ended March 30, 2019, an increase of 3.8%. Gross profit and gross profit percentage increased across all segments of the business, reflecting higher sales and production volumes of plant-based beverages, broths and plant-based ingredients, and improved plant utilization and productivity-driven cost savings in the Plant-Based Foods and Beverages segment, together with increased sales pricing and volumes within the Fruit-Based Foods and Beverages segment, and increased pricing spreads and productivity improvements for organic ingredients and premium juice products in the Global Ingredients segment.
For the quarter ended March 28, 2020, we realized total segment operating income of $11.5 million, compared with total segment operating income of $0.3 million for the quarter ended March 30, 2019. The $11.2 million increase in total segment operating income reflected higher gross profit, as described above, partially offset by a year-over-year unfavorable foreign exchange impact of $3.4 million within our Mexican frozen fruit and European organic ingredient operations, due to declines in the Mexican peso and euro relative to the U.S. dollar, together with a $1.0 million incremental reserve for credit losses included in SG&A expenses, due to a weaker economic outlook.
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 28, 2020 of $1.3 million reflected a $2.3 million gain on the settlement of a remaining earn-out obligation that arose from our acquisition of Citrusource in 2015, partially offset by employee termination and facility closure costs. 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, partially offset mainly by employee termination and recruitment costs.
Net interest expense decreased by $0.4 million to $8.3 million for the quarter ended March 28, 2020, compared with $8.7 million for the quarter ended March 30, 2019. Interest expense included the amortization of debt issuance costs of $0.9 million and $0.7 million in the first quarters of 2020 and 2019, respectively. The year-over-year decrease in net interest expense reflected lower average borrowings under our line of credit facilities, together with interest income received on a tax refund in the first quarter of 2020.
We recognized a provision of income tax of $1.1 million for the quarter ended March 28, 2020, compared with a recovery of income taxes of $9.5 million for the quarter ended March 30, 2019. The effective tax rate was 25.2% in the first quarter of 2020, compared with 27.1% in the first quarter of 2019.
On a consolidated basis, we realized earnings attributable to common shareholders of $1.3 million (diluted earnings per share of $0.01) for the quarter ended March 28, 2020, compared with earnings attributable to common shareholders of $23.7 million (diluted earnings per share of $0.26) for the quarter ended March 30, 2019.
For the quarter ended March 28, 2020, adjusted earnings were $0.9 million, or $0.01 per diluted share, compared with adjusted loss of $7.9 million, or $0.09 per diluted share, for the quarter ended March 30, 2019. Excluding the results of the disposed soy and corn operations, adjusted loss was $7.6 million, or $0.09 per diluted share, for the quarter ended March 30, 2019. Adjusted EBITDA of $24.3 million for the quarter ended March 28, 2020 more than doubled adjusted EBITDA of $10.9 million for the quarter ended March 30, 2019. Excluding disposed operations, adjusted EBITDA was $11.1 million for the quarter ended March 30, 2019. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the table above for a reconciliation of adjusted earnings/loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 32 | March 28, 2020 |
| Global Ingredients | ||||||||||||
| For the quarter ended | March 28, 2020 | March 30, 2019 | Change | % Change | ||||||||
| Revenues | $ | 128,352 | $ | 134,842 | $ | (6,490 | ) | -4.8% | ||||
| Gross profit | 16,547 | 14,692 | 1,855 | 12.6% | ||||||||
| Gross profit % | 12.9% | 10.9% | 2.0% | |||||||||
| Operating income | $ | 8,114 | $ | 6,543 | $ | 1,571 | 24.0% | |||||
| Operating income % | 6.3% | 4.9% | 1.4% |
Global Ingredients contributed $128.4 million in revenues for the quarter ended March 28, 2020, compared to $134.8 million for the quarter ended March 30, 2019, a decrease of $6.5 million, or 4.8%. Excluding the impact on revenues of the sale of the soy and corn business and acquisition of Sanmark (a net decrease in revenues of $7.3 million) and commodity-related pricing and foreign exchange rate movements (a decrease in revenues of $6.3 million), Global Ingredients revenues increased approximately 5.5%. The table below explains the decrease in reported revenues:
| Global Ingredients Revenue Changes | ||
| Revenues for the quarter ended March 30, 2019 | $134,842 | |
| Impact of the sale of the soy and corn business | (10,346) | |
| Decreased commodity pricing for organic ingredients | (5,070) | |
| Unfavorable foreign exchange impact on euro-denominated sales due to a stronger U.S. dollar period-over-period | (1,213) | |
| Increased sales volumes of organic ingredients including cocoa (reflecting increased production volumes of cocoa ingredients and sales of cocoa beans), oils (including incremental revenues from Sanmark and increased production volumes of sunflower oil), as well as seeds and nuts, partially offset by lower volumes of animal feed (due to the exit from underperforming bulk grain categories), fruit juice concentrates and coffee | 6,641 | |
| Higher sales volumes and pricing for premium juice products | 3,498 | |
| Revenues for the quarter ended March 28, 2020 | $128,352 | |
Gross profit in Global Ingredients increased by $1.9 million to $16.5 million for the quarter ended March 28, 2020, compared to $14.7 million for the quarter ended March 30, 2019, and the gross profit percentage increased by 2.0% to 12.9%. Excluding the impact on gross profit of the sale of the soy and corn business, the gross profit percentage would have been 11.6% in the first quarter of 2019. The increase in gross profit percentage excluding the soy and corn business reflected increased pricing spreads and manufacturing efficiencies for certain organic ingredients, and higher sales pricing and lower bottling costs for premium juice products. The table below explains the increase in gross profit:
| SUNOPTA INC. | 33 | March 28, 2020 |
| Global Ingredients Gross Profit Changes | ||
| Gross profit for the quarter ended March 30, 2019 | $14,692 | |
| Higher pricing spreads on seeds and nuts, and increased volumes of cocoa, oils, seeds and nuts, together with increased production volumes and manufacturing efficiencies in our cocoa and sunflower operations, and cocoa commodity hedging gains ($0.1 million), partially offset by lower margin cocoa bean and animal feed sales, and lower volumes and pricing for fruit juice concentrates and coffee | 1,191 | |
| Higher sales volumes and pricing, and lower bottling costs for premium juice products | 856 | |
| Impact of the sale of the soy and corn business | (192) | |
| Gross profit for the quarter ended March 28, 2020 | $16,547 | |
Operating income in Global Ingredients increased by $1.6 million, or 24.0%, to $8.1 million for the quarter ended March 28, 2020, compared to $6.5 million for the quarter ended March 30, 2019. The table below explains the increase in operating income:
| Global Ingredients Operating Income Changes | ||
| Operating income for the quarter ended March 30, 2019 | $6,543 | |
| Increase in gross profit, as explained above | 1,855 | |
| Favorable foreign exchange impact on euro-denominated SG&A expenses, and lower spending associated with travel and marketing activities, together with SG&A reductions from the sale of the soy and corn business | 538 | |
| Decrease in corporate cost allocations | 304 | |
| Net foreign exchange losses on the revaluation of U.S. dollar-denominated receivable and payable balances, together with a $0.4 million decrease in marked-to-market gains related to forward currency contracts | (1,126) | |
| Operating income for the quarter ended March 28, 2020 | $8,114 | |
Looking forward, we believe Global Ingredients is positioned to take advantage of opportunities in the growing organic and non-GMO food categories. We intend to invest in ingredient categories where we have strong positions, including cocoa, oil and coffee, while rationalizing certain underperforming categories, such as animal feed. For the balance of 2020, we could potentially experience increased demand for organic ingredients from food manufacturers in North America, as those manufacturers replenish inventories at the retail level that were depleted in the first quarter due to the consumer response to COVID-19. This demand may be offset by lower premium juice volumes due to the loss of some volume with customers, as well as softer market conditions for organic ingredients in Europe. In addition, COVID-19 is expected to put pressure on coffee volumes and pricing due to the closure of many foodservice outlets. 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 ongoing COVID-19 pandemic, fluctuations in foreign currency exchange rates, commodity prices and availability of raw materials, potential competitive pressures, and general economic and political conditions globally and in the markets in which we do business, along with the other factors described above under "Forward-Looking Statements."
| SUNOPTA INC. | 34 | March 28, 2020 |
| Plant-Based Foods and Beverages | ||||||||||||
| For the quarter ended | March 28, 2020 | March 30, 2019 | Change | % Change | ||||||||
| Revenues | $ | 106,242 | $ | 81,276 | $ | 24,966 | 30.7% | |||||
| Gross profit | 21,071 | 10,496 | 10,575 | 100.8% | ||||||||
| Gross profit % | 19.8% | 12.9% | 6.9% | |||||||||
| Operating income | $ | 13,853 | $ | 2,528 | $ | 11,325 | 448.0% | |||||
| Operating income % | 13.0% | 3.1% | 9.9% |
Plant-Based Foods and Beverages contributed $106.2 million in revenues for the quarter ended March 28, 2020, compared to $81.3 million for the quarter ended March 30, 2019, an increase of $25.0 million, or 30.7%. Excluding the impact on revenues of changes in sunflower commodity-related pricing (an increase in revenues of $0.8 million), Plant-Based Foods and Beverages revenues increased approximately 29.7%. The table below explains the increase in reported revenues:
| Plant-Based Foods and Beverages Revenue Changes | ||
| Revenues for the quarter ended March 30, 2019 | $81,276 | |
| Higher sales volumes of plant-based beverages and everyday broth offerings, including output from additional aseptic processing capacity that came on-line in the third quarter of 2019, as well as increased demand for plant-based ingredients | 23,218 | |
| Higher volumes of roasted snacks and ingredients, and retail birdfeed, partially offset by lower volumes of sunflower inshell and kernel | 930 | |
| Increased commodity pricing for sunflower | 818 | |
| Revenues for the quarter ended March 28, 2020 | $106,242 | |
Gross profit in Plant-Based Foods and Beverages more than doubled to $21.1 million for the quarter ended March 28, 2020, compared to $10.5 million for the quarter ended March 30, 2019, and the gross profit percentage increased by 6.9% to 19.8%. The increase in the gross profit percentage reflected strong production volumes, improved plant utilization and productivity-driven cost savings within our plant-based beverage and ingredient extraction operations, and improved margin performance within our roasting operations. The table below explains the increase in gross profit:
|
Plant-Based Foods and Beverages Gross Profit Changes
|
|
|
|
Gross profit for the quarter ended March 30, 2019
|
$10,496
|
|
|
|
Higher sales volumes, plant utilization and productivity improvements within our plant-based beverage and ingredient extraction operations
|
9,969
|
|
|
Higher sales volumes of roasted snacks and ingredients, and increased plant utilization within our roasting operations
|
606
|
|
Gross profit for the quarter ended March 28, 2020
|
$21,071
|
|
Operating income in Plant-Based Foods and Beverages increased by $11.4 million to $13.9 million for the quarter ended March 28, 2020, compared to $2.5 million for the quarter ended March 30, 2019. The table below explains the increase in operating income:
| SUNOPTA INC. | 35 | March 28, 2020 |
| Plant-Based Foods and Beverages Operating Income Changes | ||
| Operating income for the quarter ended March 30, 2019 | $2,528 | |
| Increase in gross profit, as explained above | 10,575 | |
| Decrease in corporate cost allocations | 675 | |
| Impact of workforce reductions and other cost savings initiatives, mostly offset by a reserve for credit losses due to weaker economic conditions | 75 | |
| Operating income for the quarter ended March 28, 2020 | $13,853 | |
Looking forward we believe the markets targeted by our Plant-Based Foods and Beverages segment have long-term growth potential. COVID-19 is expected to cause significant demand volatility within our plant-based beverage operations for the duration of the pandemic. We have already experienced a significant decline in orders from many foodservice customers beginning in the second quarter, offset by strong retail demand as retailers rebuild inventory levels depleted in the first quarter by consumers to meet higher at-home consumption. We expect this may be followed by a period of potential retail softness as consumers use existing home inventories and demand potentially returns to more normal levels. In addition, we expect that some new product launches planned for 2020 may be cancelled or delayed as customers focus on managing the COVID-19 impacts to their businesses. Despite the impacts of the COVID-19 pandemic, we expect to see significant year-over-year growth in revenues and gross profit from our plant-based beverage and ingredient operations in 2020, including the benefit from a full-year output from two new aseptic processing lines that were commissioned at our Allentown, Pennsylvania, plant-based beverage facility in the third quarter of 2019. In addition, we believe we are on-track to execute several major capital projects in 2020 to further increase our aseptic processing capacity and expand our ingredient extraction capabilities. 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 ongoing COVID-19 pandemic, customer actions, consumer behaviours, competitive pressures, inability to obtain financing to support planned capital projects, unexpected delays in executing on our capital projects, and general economic and political conditions in North America, along with the other factors described above under "Forward-Looking Statements."
| Fruit-Based Foods and Beverages | ||||||||||||
| For the quarter ended | March 28, 2020 | March 30, 2019 | Change | % Change | ||||||||
| Revenues | $ | 101,355 | $ | 89,157 | $ | 12,198 | 13.7% | |||||
| Gross profit | 6,102 | 3,018 | 3,084 | 102.2% | ||||||||
| Gross profit % | 6.0% | 3.4% | 2.6% | |||||||||
| Operating loss | $ | (4,702 | ) | $ | (5,605 | ) | $ | 903 | 16.1% | |||
| Operating loss % | -4.6% | -6.3% | 1.7% |
Fruit-Based Foods and Beverages contributed $101.4 million in revenues for the quarter ended March 28, 2020, compared to $89.2 million for the quarter ended March 30, 2019, an increase of $12.2 million, or 13.7%. Excluding the impact on revenues of changes in raw fruit commodity-related pricing (an increase in revenues of $4.1 million), Fruit-Based Foods and Beverages revenues increased approximately 9.1%. The table below explains the increase in reported revenues:
| Fruit-Based Foods and Beverages Revenue Changes | ||
| Revenues for the quarter ended March 30, 2019 | $89,157 | |
| Increased volumes and sales pricing for frozen fruit into the retail channel, together with increased demand for fruit ingredients from yogurt producers, partially offset by lower demand for frozen fruit and fruit preparations from foodservice customers | 6,338 | |
| Increase in commodity pricing for raw fruit | 4,083 | |
| Higher sales volumes of fruit snack products due to customer promotions | 1,777 | |
| Revenues for the quarter ended March 28, 2020 | $101,355 | |
| SUNOPTA INC. | 36 | March 28, 2020 |
| Fruit-Based Foods and Beverages Gross Profit Changes | ||
| Gross profit for the quarter ended March 30, 2019 | $3,018 | |
| Impact of higher sales volumes and pricing for frozen fruit, and increased sales volumes for fruit ingredients, partially offset by the higher cost of frozen fruit carried over from the 2019 crop cycle (approximately $1.9 million) | 2,925 | |
| Higher sales volumes for fruit snacks, partially offset by lower production volumes and plant utilization | 159 | |
| Gross profit for the quarter ended March 28, 2020 | $6,102 | |
Operating loss in Fruit-Based Foods and Beverages decreased by $0.9 million to $4.7 million for the quarter ended March 28, 2020, compared to $5.6 million for the quarter ended March 30, 2019. The table below explains the decrease in operating loss:
| Fruit-Based Foods and Beverages Operating Loss Changes | ||
| Operating loss for the quarter ended March 30, 2019 | $(5,605) | |
| Increase in gross profit, as explained above | 3,084 | |
| Decrease in corporate cost allocations | 737 | |
| Unfavorable foreign exchange impact on our frozen fruit operations in Mexico due to a decline in the value of the Mexican peso, together with a reserve for credit losses due to weaker economic conditions, partially offset by the impact of headcount reductions and other cost-saving initiatives | (2,918) | |
| Operating loss for the quarter ended March 28, 2020 | $(4,702) | |
Looking forward we expect sequential margin improvement in the Fruit-Based Foods and Beverages segment in 2020, as we realize the full effect of pricing actions on frozen fruit taken in 2019, together with expected labor cost savings in 2020 from new plant automation initiatives and improved cost of processing the 2020 strawberry crop compared to 2019. We believe that shelter-in-place orders due to COVID-19 may reduce consumer demand for, and access to, fresh fruit, while potentially increasing the availability of, and consumer preference for, retail frozen fruit. If so, we could experience increased demand for frozen fruit and fruit ingredients from our current retail and food manufacturing customers due to COVID-19, and we may benefit from spot opportunities for additional frozen fruit sales to new retail customers. However, any increase in demand for frozen fruit and fruit ingredients from retail and food manufacturing customers will likely be partially offset by the reduced demand we are experiencing for frozen fruit and fruit preparations from the foodservice channel due to outlet closures. 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 ongoing COVID-19 pandemic, customer actions, consumer behaviours, competitive pressures, and general economic and political conditions in North America, along with the other factors described above under "Forward-Looking Statements."
| SUNOPTA INC. | 37 | March 28, 2020 |
| Corporate Services | ||||||||||||
| For the quarter ended | March 28, 2020 | March 30, 2019 | Change | % Change | ||||||||
| Operating loss | $ | (5,806 | ) | $ | (3,146 | ) | $ | (2,660 | ) | -84.6% |
Operating loss at Corporate Services increased by $2.7 million to $5.8 million for the quarter ended March 28, 2020, compared to a loss of $3.1 million for the quarter ended March 30, 2019. The table below explains the increase in operating loss:
| Corporate Services Operating Loss Changes | ||
| Operating loss for the quarter ended March 30, 2019 | $(3,146) | |
| Decrease in corporate cost allocations to SunOpta operating segments, as a result of lower corporate headcount and overhead costs | (1,716) | |
| Increased stock-based compensation costs related to the initiation of an equity-based annual bonus plan for most employees commencing in the second quarter of 2019 | (968) | |
| Higher non-structural third-party professional fees and employee retention costs associated with the Value Creation Plan | (833) | |
| Impact of headcount reductions and other cost-saving initiatives, together with favorable foreign exchange impact on Canadian dollar-denominated SG&A expenses | 857 | |
| Operating loss for the quarter ended March 28, 2020 | $(5,806) | |
Corporate cost allocations mainly consist of salaries of corporate personnel who directly support the operating segments, as well as costs related to the enterprise resource management system. These expenses are allocated to the operating segments based on (1) specific identification of allocable costs that represent a service provided to each segment and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and the number of people employed within each segment.
Liquidity and Capital Resources
We have the following sources from which we can fund our operating cash requirements:
Existing cash and cash equivalents;
Available operating lines of credit;
Cash flows generated from operating activities, including working capital efficiency efforts;
Cash flows generated from the exercise, if any, of stock options during the year;
Potential additional long-term financing, including leasing arrangements and the issuance of debt and/or equity securities including the option to issue up to $30.0 million of Series B-2 Preferred Stock (as described below); 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”). On January 28, 2020, the credit agreement was amended to, among other things, extend the maturity date of the Global Credit Facility to March 31, 2022. The Global Credit Facility supports the working capital and general corporate needs of our global operations, in addition to funding strategic initiatives. The applicable margin in the Global Credit Facility ranges from 0.25% to 0.75% with respect to base rate and prime rate borrowings and from 1.25% to 1.75% for eurocurrency rate and bankers’ acceptance rate borrowings. In addition, in connection with the amendment of the credit agreement on January 28, 2020, the applicable margin rate on any loans under the Global Credit Facility is increased by an additional 0.50% while our total leverage ratio exceeds a specific threshold. Based on outstanding borrowings under the Global Credit Facility (as described below), the 50 basis-point increase in the margin rate will increase interest expense and reduce cash flows by approximately $1.1 million on an annualized basis.
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As at March 28, 2020, we had outstanding borrowings of $223.5 million (December 28, 2019 - $241.7 million) and available borrowing capacity of approximately $63 million (December 28, 2019 - $43 million) under the Global Credit Facility. For more information on the Global Credit Facility, see note 7(1) to the unaudited consolidated financial statements included in this report.
As at March 28, 2020, we had borrowings of $1.3 million (€1.2 million) outstanding under a $6.6 million (€6.0 million) revolving credit facility used to fund the activities of our Bulgarian sunflower processing operations. The maturity date of this annual facility was temporarily extended from April 30, 2020 to July 31, 2020 due to COVID-19 conditions. Our intention is to complete the renewal of this facility until April 30, 2021. For more information on the Bulgarian credit facility, see note 7(2) to the unaudited consolidated financial statements included in this report.
On October 20, 2016, SunOpta Foods issued $231.0 million of 9.5% Senior Secured Second Lien Notes due October 9, 2022 (the "Notes"). As at March 28, 2020, the outstanding principal amount of the Notes was $223.5 million. For more information on the Notes, see note 7(3) to the unaudited consolidated financial statements included in this report.
On October 7, 2016, SunOpta Foods issued 85,000 shares of Series A Preferred Stock (the "Series A Preferred Stock") for $85.0 million. The Series A Preferred Stock had an initial liquidation preference of $1,000 per share and is exchangeable into shares of our common stock at an exchange price of US$7.50 per share. Cumulative preferred dividends accrue daily on the Series A Preferred Stock at an annualized rate of 8.0% of the liquidation preference prior to October 5, 2025, which presently equates to quarterly dividend distributions of approximately $1.7 million, and 12.5% of the liquidation preference thereafter. Prior to October 5, 2025, SunOpta Foods may pay dividends in cash or elect, in lieu of paying cash, to pay in kind by adding the amount that would have been paid to the liquidation preference. For quarterly periods prior to the first quarter of 2020, dividends declared on the Series A Preferred Stock were paid in cash by SunOpta Foods. For the first quarter of 2020, SunOpta Foods elected to declare a dividend on the Series A Preferred Stock to be paid in kind on May 12, 2020. As a result, the aggregate liquidation preference of the outstanding Series A Preferred Stock will increase by $1.7 million. For more information on the Series A Preferred Stock, see note 8 to the unaudited consolidated financial statements included in this report.
On April 10, 2020, we entered into a master lease agreement that provides up to $20 million of equipment financing to support the expansion of our plant-based ingredient extraction capabilities at our Alexandria, Minnesota, facility. We expect this expansion to be competed, and the lease to commence, in the fourth quarter of 2020.
On April 15, 2020, we entered into a subscription agreement with funds managed by Oaktree Capital Management, L.P. (“Oaktree”) and Engaged Capital, LLC (“Engaged”), whereby Oaktree and Engaged will invest up to $60.0 million in shares of exchangeable, voting Series B Preferred Stock of SunOpta Foods. The Series B Preferred Stock ranks on par with the Series A Preferred Stock. On April 24, 2020, SunOpta Foods issued 15,000 shares of Series B-1 Preferred Stock to each of Oaktree and Engaged for aggregate consideration of $30.0 million, and 30,000 shares total. The Series B-1 Preferred Stock has an initial liquidation preference of $1,000 per share and is exchangeable into shares of our common stock at an exchange price of US$2.50 per share. In addition, we have the option, but not the obligation, to require that each of Oaktree and Engaged purchase its proportionate share of up to 15,000 shares of Series B-2 Preferred Stock for aggregate consideration of up to $30.0 million, and up to 30,000 shares total, by giving notice to Oaktree and Engaged on or before July 15, 2020. As of the filing date of this report, we have not exercised this option. Cumulative preferred dividends will accrue daily on the Series B Preferred Stock at an annualized rate of 8.0% of the liquidation preference prior to September 30, 2029 and 10.0% of the liquidation preference thereafter. Prior to September 30, 2029, SunOpta Foods may pay dividends on the Series B Preferred Stock in cash or in kind. Proceeds from the issuance of Series B Preferred Stock will provide incremental liquidity given the general economic uncertainty due to COVID-19 and may be used to invest in our plant-based food and beverage business through capital projects to expand capacity. For more information on the Series B Preferred Stock, see note 14 to the unaudited consolidated financial statements included in this report.
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In the event that we require additional liquidity due to market conditions, unexpected actions by our lenders, changes to our growth strategy, reduced earnings, or other factors, our ability to obtain any additional financing on favorable terms, if at all, could be limited. In order to reduce our indebtedness and improve our position to obtain additional financing, we may explore the sale of selected businesses or assets from time to time.
Cash Flows
First Quarter of 2020 Compared to First Quarter of 2019
Net cash and cash equivalents increased $1.2 million in the first quarter of 2020 to $2.7 million as at March 28, 2020, compared with $1.5 million at December 28, 2019.
Cash provided by operating activities was $34.7 million in the first quarter of 2020, compared with $1.0 million in the first quarter of 2019, an increase in cash provided of $33.8 million, which reflected a year-over-year increase in operating results, before changes in working capital, of $17.9 million, together with a reduction in working capital of $15.9 million. The year-over-year change in working capital reflected lower inventories of frozen fruit (due in part to a later harvest of Mexican strawberries) and ingredients (due to sales to reduce higher stocks of cocoa and coffee beans), together with the receipt of a $5.7 million income tax refund in the first quarter of 2020, partially offset by an increase in accounts receivables due to the relative timing of revenues within the quarters.
Excluding net proceeds of $64.9 million from the sale of the soy and corn business in the first quarter of 2019, cash used in investing activities related to capital expenditures was $9.7 million in the first quarter of 2020, compared with $7.9 million in the first quarter of 2019, an increase in cash used of $1.8 million. Capital expenditures in the first quarter of 2020 included the expansion of our plant-based ingredient extraction capabilities, the addition of new automation at our frozen fruit processing facilities.
Cash used in financing activities was $23.9 million in the first quarter of 2020, compared with cash used of $55.1 million in the first quarter of 2019, a decrease in cash used of $31.2 million. Net borrowings under our line of credit facilities decreased $19.8 million in the first quarter of 2020, reflecting our improved operating performance, together with lower working capital, partially offset by $2.1 million of debt issuance costs incurred in connection with the amendments to the Global Credit Facility. The $54.7 million decrease in net borrowings under the line of credit facilities in the first quarter of 2019 reflected the initial application of the net proceeds from the soy and corn 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 28, 2019.
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.
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For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of the Form 10-K. There have been no material changes to our exposures to market risks since December 28, 2019.
Evaluation of Disclosure Controls and Procedures
Our management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission's rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of March 28, 2020.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our CEO and CFO, has evaluated whether any change in our internal control over financial reporting (as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act) occurred during the quarter ended March 28, 2020. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the quarter ended March 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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For a discussion of legal proceedings, see note 12 to the unaudited consolidated financial statements included under Part I, Item 1 of this report.
Certain risks associated with our operations are discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 28, 2019. Except as described below, there have been no material changes to the previously reported risk factors as of the date of this quarterly report. Our previously reported risk factors, together with the information below, should be carefully reviewed in connection with an evaluation of our Company.
Risks Related to Our Business
The COVID-19 pandemic has significantly impacted worldwide economic conditions and could have a material adverse effect on our business and financial results
Our business and financial results may be negatively impacted by the 2019 novel coronavirus (COVID-19) pandemic, including causing significant volatility in customer demand for our products, changes in consumer behaviour and preference, disruptions in our manufacturing and supply chain operations, disruptions to our business expansion plans, limitations on our employees' ability to work and travel, significant changes in the economic conditions in markets in which we operate and related currency and commodity volatility, and pressure on our liquidity. Despite our efforts to manage these impacts, they also depend on factors beyond our knowledge or control, including the duration and severity of the COVID-19 pandemic and actions taken to contain its spread and mitigate its public health effects. As a result, we cannot reasonably estimate the negative impact of the COVID-19 pandemic on our business and financial results, but the impact could be material and last for an extended period.
The following exhibits are included as part of this report.
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* Filed herewith.
† Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: May 6, 2020
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/s/ Scott Huckins
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Scott Huckins
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Chief Financial Officer
(Authorized Signatory and Principal Financial Officer)
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