UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended |
|
| OR | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ____________to ____________. | |
Commission file number:
(Exact name of registrant as specified in its charter)
| Not Applicable | ||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| ( |
||
| (Address of principal executive offices) | (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
| (Do not check if a smaller reporting company) | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The Toronto Stock Exchange |
The number of the registrant's common shares outstanding as of November 4, 2022 was
SUNOPTA INC.
FORM 10-Q
For the Quarterly Period Ended October 1, 2022
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 ("$"), except per share amounts, unless otherwise stated. Other amounts may be presented in thousands of Canadian dollars ("C$") and Mexican pesos ("M$").
Forward-Looking Statements
This Form 10-Q contains forward-looking statements that 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. Forward-looking statements include, but are not limited to, references to future financial and operating results, plans, objectives, expectations, and intentions; the effects of the global macroeconomic environment, including inflationary pressures and rising interest rates, on our operational and financial performance in future periods; our expectations regarding the future profitability of our plant-based and fruit-based businesses, including anticipated results of operations, revenue trends, and profit margin profiles; our expectations regarding customer demand, consumer preferences, competition, sales pricing, availability and pricing of raw material inputs, and timing and costs to complete capital expansion projects; our intentions related to the potential sale of selected businesses, operations, or assets; adequacy of existing sources of funds to meet financing needs, and availability of alternative financing sources; the outcome of litigation to which we may be a party; 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 | October 1, 2022 Form 10-Q |
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 | October 1, 2022 Form 10-Q |
All forward-looking statements made herein are qualified by these cautionary statements, and our actual results or the developments we anticipate may not be realized. Our forward-looking statements are based only on information currently available to us and speak only as of the date on which they are made. We do not undertake any obligation to publicly update our forward-looking statements, whether written or oral, after the date of this report for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities laws. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. A more detailed discussion of the principal factors that could cause actual results to be materially different and additional information about the material factors or assumptions underlying our forward-looking statements may be found under Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, under Item 1A. "Risk Factors" of this report, and in our other filings with the U.S. Securities and Exchange Commission and the Canadian Securities Administrators.
| SUNOPTA INC. | 5 | October 1, 2022 Form 10-Q |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations
For the quarters and three quarters ended October 1, 2022 and October 2, 2021
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars, except per share amounts)
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Revenues (note 12) | ||||||||||||
| Cost of goods sold | ||||||||||||
| Gross profit | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Intangible asset amortization | ||||||||||||
| Other expense, net (note 8) | ||||||||||||
| Foreign exchange loss (gain) | ( |
) | ||||||||||
| Earnings (loss) from continuing operations before the following | ( |
) | ( |
) | ||||||||
| Interest expense, net | ||||||||||||
| Loss from continuing operations before income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Income tax expense (benefit) | ( |
) | ( |
) | ||||||||
| Loss from continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings from discontinued operations (note 11) | ||||||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Dividends and accretion on preferred stock (note 6) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss attributable to common shareholders | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Basic and diluted earnings (loss) per share (note 9) | ||||||||||||
| Loss from continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings from discontinued operations | ||||||||||||
| Loss attributable to common shareholders | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Weighted-average common shares outstanding (000s) (note 9) | ||||||||||||
| Basic | ||||||||||||
| Diluted | ||||||||||||
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 6 | October 1, 2022 Form 10-Q |
SunOpta Inc.
Consolidated Balance Sheets
As at October 1, 2022 and January 1, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| October 1, 2022 | January 1, 2022 | |||||
| $ | $ | |||||
| ASSETS | ||||||
| Current assets | ||||||
| Cash and cash equivalents | ||||||
| Accounts receivable, net of allowance for credit losses of $ |
||||||
| Inventories (note 2) | ||||||
| Prepaid expenses and other current assets | ||||||
| Income taxes recoverable | ||||||
| Assets held for sale (note 3) | ||||||
| Total current assets | ||||||
| Property, plant and equipment, net | ||||||
| Operating lease right-of-use assets (note 4) | ||||||
| Intangible assets, net | ||||||
| Goodwill | ||||||
| Other assets | ||||||
| Total assets | ||||||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | ||||||
| Income taxes payable | ||||||
| Current portion of long-term debt (note 5) | ||||||
| Current portion of operating lease liabilities (note 4) | ||||||
| Liabilities held for sale (note 3) | ||||||
| Total current liabilities | ||||||
| Long-term debt (note 5) | ||||||
| Operating lease liabilities (note 4) | ||||||
| Long-term liabilities | ||||||
| Deferred income taxes | ||||||
| Total liabilities | ||||||
| Series B-1 preferred stock (note 6) | ||||||
| SHAREHOLDERS' EQUITY | ||||||
| Common shares, |
||||||
| Additional paid-in capital | ||||||
| Accumulated deficit | ( |
) | ( |
) | ||
| Accumulated other comprehensive income | ||||||
| Total shareholders' equity | ||||||
| Total liabilities and shareholders' equity |
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 7 | October 1, 2022 Form 10-Q |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity
As at and for the quarters ended October 1, 2022 and October 2, 2021
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at July 2, 2022 | ( |
) | ||||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plans | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at October 1, 2022 | ( |
) | ||||||||||||||||
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at July 3, 2021 | ( |
) | ||||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plans | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at October 2, 2021 | ( |
) | ||||||||||||||||
| SUNOPTA INC. | 8 | October 1, 2022 Form 10-Q |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity (continued)
As at and for the three quarters ended October 1, 2022 and October 2, 2021
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at January 1, 2022 | ( |
) | ||||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plans | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at October 1, 2022 | ( |
) | ||||||||||||||||
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at January 2, 2021 | ( |
) | ||||||||||||||||
| Exchange of Series A preferred stock, net of | ||||||||||||||||||
| share issuance costs of $ |
- | - | - | |||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plans | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at October 2, 2021 | ( |
) | ||||||||||||||||
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 9 | October 1, 2022 Form 10-Q |
Consolidated Statements of Cash Flows
For the quarters and three quarters ended October 1, 2022 and October 2, 2021
(Unaudited)
(Expressed in thousands of U.S. dollars)
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| $ | $ | $ | $ | |||||||||
| CASH PROVIDED BY (USED IN) | ||||||||||||
| Operating activities | ||||||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings from discontinued operations | ||||||||||||
| Loss from continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Items not affecting cash: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Amortization of debt issuance costs | ||||||||||||
| Deferred income taxes | ( |
) | ( |
) | ( |
) | ||||||
| Stock-based compensation | ||||||||||||
| Loss on classification of sunflower business as held for sale (note 3) | ||||||||||||
| Gain on sale of frozen fruit processing facility (note 8) | ( |
) | ( |
) | ||||||||
| Impairment of long-lived assets (note 8) | ||||||||||||
| Other | ( |
) | ( |
) | ( |
) | ||||||
| Changes in operating assets and liabilities (note 10) | ( |
) | ( |
) | ( |
) | ||||||
| Net cash provided by (used in) operating activities of continuing operations | ( |
) | ||||||||||
| Investing activities | ||||||||||||
| Additions to property, plant and equipment | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Proceeds from sale of property, plant and equipment | ||||||||||||
| Additions to intangible assets | ( |
) | ||||||||||
| Net cash used in investing activities of continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Net cash used in investing activities of discontinued operations | ( |
) | ( |
) | ||||||||
| Net cash used in investing activities | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Financing activities | ||||||||||||
| Increase (decrease) in borrowings under revolving credit facilities (note 5) | ( |
) | ( |
) | ||||||||
| Borrowings of long-term debt (notes 4 and 5) | ||||||||||||
| Repayment of long-term debt (note 4) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Payment of debt issuance costs | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Proceeds from the exercise of stock options and employee share purchases | ||||||||||||
| Payment of withholding taxes on stock-based awards | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Payment of cash dividends on preferred stock (note 6) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Payment of share issuance costs | ( |
) | ||||||||||
| Net cash provided by financing activities of continuing operations | ||||||||||||
| Net cash used in financing activities of discontinued operations | ( |
) | ||||||||||
| Net cash provided by financing activities | ||||||||||||
| Increase (decrease) in cash and cash equivalents in the period | ( |
) | ( |
) | ||||||||
| Cash and cash equivalent, beginning of the period | ||||||||||||
| Cash and cash equivalents, end of the period | ||||||||||||
Non-cash investing and financing activities (notes 4 and 10)
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 10 | October 1, 2022 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (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 United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and three quarters ended October 1, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2022 or for any other period. The interim consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended January 1, 2022. 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 January 1, 2022.
Fiscal Year
2. Inventories
| October 1, 2022 | January 1, 2022 | |||||
| $ | $ | |||||
| Raw materials and work-in-process | ||||||
| Finished goods | ||||||
| Inventory reserves | ( |
) | ( |
) | ||
3. Assets and Liabilities Held for Sale
Sunflower Business
As at October 1, 2022, the Company recognized a pre-tax loss of $
| SUNOPTA INC. | 11 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| October 1, 2022 | |||
| $ | |||
| Accounts receivable | |||
| Inventories | |||
| Other current assets | |||
| Property, plant and equipment, net | |||
| Operating lease right-of-use assets | |||
| Intangible assets, net | |||
| Write-down on classification as held for sale | ( |
) | |
| Total assets held for sale | |||
| Accounts payable and accrued liabilities | |||
| Operating lease liabilities | |||
| Total liabilities held for sale |
The disposal of the sunflower business does not have a major effect on the Company’s operations or financial results and, therefore, does not qualify for presentation as discontinued operations on a standalone basis. Revenues and earnings (loss) before income taxes of the sunflower business for the periods ended October 1, 2022 and October 2, 2021 were as follows:
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Revenues | ||||||||||||
| Earnings (loss) before income taxes(1) | ( |
) | ( |
) | ||||||||
(1) For the quarter and three quarters ended October 1, 2022, excludes the loss on classification as held for sale. In addition, for all periods presented, excludes the allocation of corporate costs.
4. Leases
The Company leases certain manufacturing plants, warehouses, offices, machinery and equipment, and vehicles. At the lease commencement date, the Company classifies a lease as a finance lease if it has the right to obtain substantially all of the economic benefits from the right-of-use assets, otherwise the lease is classified as an operating lease.
The following tables present supplemental information related to leases:
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Lease Costs | ||||||||||||
| Operating lease cost | ||||||||||||
| Finance lease cost: | ||||||||||||
| Depreciation of right-of-use assets | ||||||||||||
| Interest on lease liabilities | ||||||||||||
| Sublease income | ( |
) | ||||||||||
| Net lease cost | ||||||||||||
| SUNOPTA INC. | 12 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| October 1, 2022 | January 1, 2022 | |||||
| $ | $ | |||||
| Balance Sheet Classification | ||||||
| Operating leases: | ||||||
| Operating lease right-of-use assets | ||||||
| Current portion of operating lease liabilities | ||||||
| Operating lease liabilities | ||||||
| Total operating lease liabilities | ||||||
| Finance leases: | ||||||
| Property, plant and equipment, gross | ||||||
| Accumulated depreciation | ( |
) | ( |
) | ||
| Property, plant and equipment, net | ||||||
| Current portion of long-term debt | ||||||
| Long-term debt | ||||||
| Total finance lease liabilities |
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
| $ | $ | $ | $ | |||||||||
| Cash Flow Information | ||||||||||||
| Cash paid (received) for amounts included in measurement of lease liabilities: | ||||||||||||
| Operating cash flows from operating leases | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||
| Financing cash flows from finance leases: | ||||||||||||
| Cash paid under finance leases(1) | ||||||||||||
| Cash received under finance leases(2) | ( |
) | ( |
) | ||||||||
| Right-of-use assets obtained in exchange for lease liabilities: | ||||||||||||
| Operating leases(3) | ||||||||||||
| Finance leases | ||||||||||||
| Right-of-use assets and liabilities reduced through lease terminations or modifications: | ||||||||||||
| Operating leases | ( |
) | ( |
) | ||||||||
| Finance leases | ( |
) | ||||||||||
(1) Represents repayments under finance leases recorded as a reduction of the lease liability and reported in repayment of long-term debt on the consolidated statements of cash flows.
(2) Represents cash advances received by the Company under finance leases for the construction of right-of-use assets controlled by the Company, which related to the buildouts of the Company's plant-based beverage facility under construction in Midlothian, Texas, and the Company's executive office and innovation center located in Eden Prairie, Minnesota, as well as cash proceeds under sale and leaseback transactions accounted for as financings. Cash received under finance leases is reported in borrowings of long-term debt on the consolidated statements of cash flows.
(3) For the quarter and three quarters ended October, 1, 2022, includes the addition of a $
| SUNOPTA INC. | 13 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| October 1, 2022 | January 1, 2022 | |||||
| Other Information | ||||||
| Weighted-average remaining lease term (years): | ||||||
| Operating leases | ||||||
| Finance leases | ||||||
| Weighted-average discount rate: | ||||||
| Operating leases | ||||||
| Finance leases |
| Operating leases | Finance leases | |||||
| $ | $ | |||||
| Maturities of Lease Liabilities | ||||||
| Remainder of 2022 | ||||||
| 2023 | ||||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| Thereafter | ||||||
| Total lease payments | ||||||
| Less: imputed interest | ( |
) | ( |
) | ||
| Total lease liabilities |
| October 1, 2022 | January 1, 2022 | |||||
| $ | $ | |||||
| Asset-based credit facilities: | ||||||
| Revolving credit facilities | ||||||
| Term loan facility | ||||||
| Total asset-based credit facilities | ||||||
| Finance lease liabilities (see note 4) | ||||||
| Other | ||||||
| Total debt | ||||||
| Less: current portion | ||||||
| Total long-term debt |
Asset-Based Credit Facilities
On December 31, 2020, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement"), as amended by the First Amendment, dated as of April 15, 2021, the Second Amendment, dated as of July 2, 2021, and the Third Amendment, dated as of February 25, 2022, among the Company, SunOpta Foods Inc. ("SunOpta Foods"), the other borrowers and guarantors party thereto, and the lenders party thereto (the "Lenders"). As part of the Credit Agreement, the Lenders provided a
| SUNOPTA INC. | 14 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
As at October 1, 2022, the Company was in compliance with all covenants of the Credit Agreement.
6. Series B-1 Preferred Stock
As at October 1, 2022, SunOpta Foods had
7. Stock-Based Compensation
During the three quarters ended October 1, 2022,
On March 30, 2022, all outstanding EBITDA PSUs previously granted to certain employees of the Company in connection with the Company's 2021 STIP were cancelled because the fiscal year 2021 performance condition was not achieved. No compensation expense was recognized related to these EBITDA PSUs.
| SUNOPTA INC. | 15 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| Weighted- | ||||||
| average grant- | ||||||
| EBITDA PSUs | date fair value | |||||
| Non-vested, beginning of period | $ | |||||
| Granted | ||||||
| Vested | ( |
) | ||||
| Cancelled | ( |
) | ||||
| Non-vested, end of period | $ | |||||
During the three quarters ended October 1, 2022,
The weighted-average grant-date fair value of each RSU was estimated to be $
| PSUs | Stock options | |||||
| Grant-date stock price | $ | $ | ||||
| Exercise price | NA | $ | ||||
| Dividend yield | ||||||
| Expected volatility(a) | ||||||
| Risk-free interest rate(b) | ||||||
| Expected life (in years)(c) |
(a) Determined based on the historical volatility of the Common Shares over the performance period of the PSUs and expected life of the stock options.
(b) Determined based on U.S. Treasury yields with a remaining term equal to the performance period of the PSUs and expected life of the stock options.
(c) Determined based on the performance period of the PSUs and the mid-point of vesting (three years) and expiration (ten years) for the stock options.
As at October 1, 2022, the remaining compensation cost related to outstanding RSUs, PSUs and stock options granted under the 2022 LTIP not yet recognized as an expense was determined to be $
| SUNOPTA INC. | 16 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
8. Other Expense, Net
The components of other expense (income) were as follows:
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 | October 2, 2021 | October 1, 2022 | October 2, 2021 | |||||||||
| $ | $ | $ | $ | |||||||||
| Loss on classification of sunflower business as held for sale (see note 3) | ||||||||||||
| Gain on sale of frozen fruit processing facility(1) | ( |
) | ( |
) | ||||||||
| Facility closure costs(2) | ||||||||||||
| Settlement losses, net(3) | ||||||||||||
| Employee termination costs(4) | ||||||||||||
| Divestiture costs(5) | ||||||||||||
| Other | ||||||||||||
(1) Gain on sale of frozen fruit processing facility
For the quarter and three quarters ended October 1, 2022, the Company recognized a $
(2) Facility closure costs
For the quarter and three quarters ended October 1, 2022, expense primarily relates to the relocation of certain equipment from the Company's sold Oxnard facility.
For the quarter ended October 2, 2021, expense represents costs incurred to relocate inventory and equipment following the closure of the Company's former South Gate, California, fruit ingredient processing facility. For the three quarters ended October 2, 2021, facility closure costs also include asset impairment charges of $
(3) Settlement losses, net
For the three quarters ended October 1, 2022 and October 2, 2021, expense represents net losses incurred on the settlement of certain legal and contractual matters.
(4) Employee termination costs
For the quarter and three quarters ended October 2, 2021, expense represents termination costs for employees impacted by the closure of the Company's fruit ingredient processing facility and a workforce reduction in the Company's frozen fruit operations.
(5) Divestiture costs
For the quarter and three quarters ended October 2, 2021, expense relates to professional fees incurred in connection with post-closing matters related to the 2020 divestiture of the Company's global ingredients business, Tradin Organic.
| SUNOPTA INC. | 17 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
9. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows (shares in thousands):
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| Basic Earnings (Loss) Per Share | ||||||||||||
| Numerator for basic earnings (loss) per share: | ||||||||||||
| Loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Less: dividends and accretion on preferred stock | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss from continuing operations attributable to common shareholders | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings from discontinued operations | ||||||||||||
| Loss attributable to common shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Denominator for basic earnings (loss) per share: | ||||||||||||
| Basic weighted-average number of shares outstanding | ||||||||||||
| Basic earnings (loss) per share: | ||||||||||||
| From continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| From discontinued operations | ||||||||||||
| Basic earnings (loss) per share | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Diluted Earnings (Loss) Per Share | ||||||||||||
| Numerator for diluted earnings (loss) per share: | ||||||||||||
| Loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Less: dividends and accretion on preferred stock | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss from continuing operations attributable to common shareholders | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings from discontinued operations | ||||||||||||
| Loss attributable to common shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| Denominator for diluted earnings (loss) per share: | ||||||||||||
| Basic weighted-average number of shares outstanding | ||||||||||||
| Dilutive effect of the following: | ||||||||||||
| Stock options, restricted stock units and performance share units(1) | ||||||||||||
| Preferred stock(2) | ||||||||||||
| Diluted weighted-average number of shares outstanding | ||||||||||||
| Diluted earnings (loss) per share: | ||||||||||||
| From continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| From discontinued operations | ||||||||||||
| Diluted earnings (loss) per share | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) |
(1) For the quarter and three quarters ended October 1, 2022,
| SUNOPTA INC. | 18 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(2) For the quarter and three quarters ended October 1, 2022 and October 2, 2021, it was more dilutive to assume the Series B-1 preferred stock was not converted into Common Shares and, therefore, the numerator of the diluted earnings (loss) per share calculation was not adjusted to add back the dividends and accretion on the Series B-1 preferred stock and the denominator was not adjusted to include
10. Supplemental Cash Flow Information
| Quarter ended | Three quarters ended | |||||||||||
|
October 1, |
October 2, |
October 1, |
October 2, |
|||||||||
| $ | $ | $ | $ | |||||||||
| Changes in Operating Assets and Liabilities | ||||||||||||
| Accounts receivable | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Inventories | ( |
) | ( |
) | ( |
) | ||||||
| Accounts payable and accrued liabilities | ( |
) | ( |
) | ||||||||
| Other operating assets and liabilities | ( |
) | ( |
) | ||||||||
| ( |
) | ( |
) | ( |
) | |||||||
| Non-Cash Investing and Financing Activities | ||||||||||||
| Change in additions to property, plant and equipment included in accounts payable and accrued liabilities | ( |
) | ( |
) | ( |
) | ||||||
| Change in accounts payable and accrued liabilities related to discontinued operations | ( |
) | ||||||||||
| Change in accrued dividends on preferred stock | ( |
) | ||||||||||
| Change in accrued debt issuance costs | ( |
) | ||||||||||
11. Commitments and Contingencies
Legal Proceedings
Various current and potential claims and litigation arising in the ordinary course of business are pending against the Company. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable that may be incurred in connection with any such currently pending matter. In the Company's opinion, the eventual resolution of such matters, either individually or in the aggregate, is not expected to have a material impact on the Company's financial position, results of operations, or cash flows. However, litigation is inherently unpredictable and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on the Company's financial position, results of operations, and cash flows for the reporting period in which any such resolution or disposition occurs.
Arbitration Proceedings
On January 31, 2022, Amsterdam Commodities N.V. ("Acomo") submitted a Request for Summary Arbitral Proceedings to the Netherlands Arbitration Institute, which was later amended on February 16, 2022, asserting alleged claims against the Company and its subsidiaries, Coöperatie SunOpta U.A. and SunOpta Holdings LLC, relating to a dispute regarding the allocation of the purchase price Acomo paid to acquire the shares of The Organic Corporation B.V. and the membership interests of Tradin Organics USA LLC in connection with the closing of the transactions contemplated by the Master Purchase Agreement entered into by Acomo, the Company and the aforementioned subsidiaries on November 25, 2020 (the "Transaction"). On May 25, 2022, the parties entered into a definitive Settlement Agreement to resolve all outstanding matters related to the Master Purchase Agreement, following which the Request for Summary Arbitral Proceedings was withdrawn. In connection with the Settlement Agreement, the Company recognized earnings from discontinued operations of $
| SUNOPTA INC. | 19 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
12. Segment Information
The composition of the Company's operating and reportable 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. Total segment operating income/loss includes general and administrative expenses incurred by Corporate Services and excludes other income/expense items. In addition, interest on corporate debt and income taxes are not allocated to the operating segments.
Segment Revenues and Operating Income
Operating segment results for the quarters and three quarters ended October 1, 2022 and October 2, 2021 were as follows:
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Revenues from external customers | ||||||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Fruit-Based Foods and Beverages | ||||||||||||
| Total revenues from external customers | ||||||||||||
| Segment operating income (loss) | ||||||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Fruit-Based Foods and Beverages | ( |
) | ( |
) | ||||||||
| Corporate Services | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Total segment operating income | ||||||||||||
| Other expense, net (see note 8) | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Interest expense, net | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Loss from continuing operations before income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| SUNOPTA INC. | 20 | October 1, 2022 Form 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and three quarters ended October 1, 2022 and October 2, 2021 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Disaggregation of Revenue
The following table presents a disaggregation of revenues by operating segment based on categories used by the Company to evaluate sales performance:
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Beverages and broths | ||||||||||||
| Plant-based ingredients | ||||||||||||
| Sunflower and roasted snacks (see note 3) | ||||||||||||
| Total Plant-Based Foods and Beverages | ||||||||||||
| Fruit-Based Foods and Beverages | ||||||||||||
| Frozen fruit and fruit-based ingredients | ||||||||||||
| Fruit snacks and smoothie bowls | ||||||||||||
| Total Fruit-Based Foods and Beverages | ||||||||||||
| Total revenues | ||||||||||||
Segment Assets
Total assets by operating segment as at October 1, 2022 and January 1, 2022 were as follows:
| October 1, 2022 | January 1, 2022 | |||||
| $ | $ | |||||
| Plant-Based Foods and Beverages | ||||||
| Fruit-Based Foods and Beverages | ||||||
| Corporate Services | ||||||
| Assets held for sale (see note 3) | ||||||
| Total assets |
Segment Depreciation and Amortization
Depreciation and amortization by operating segment for the quarters and three quarters ended October 1, 2022 and October 2, 2021 was as follows:
| Quarter ended | Three quarters ended | |||||||||||
| October 1, 2022 |
October 2, 2021 |
October 1, 2022 |
October 2, 2021 |
|||||||||
| $ | $ | $ | $ | |||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Fruit-Based Foods and Beverages | ||||||||||||
| Corporate Services | ||||||||||||
| Total depreciation and amortization | ||||||||||||
| SUNOPTA INC. | 21 | October 1, 2022 Form 10-Q |
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 October 1, 2022 contained under Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the "Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to November 10, 2022.
Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," or other similar expressions concerning matters that are not historical facts, or the negative of such terms are intended to identify forward-looking statements; however, the absence of these words does not necessarily mean that a statement is not forward-looking. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable based on information currently available, they may prove to be incorrect. These factors are more fully described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current estimates, expectations, and projections, which we believe are reasonable as of the date of this report. Forward-looking statements are not guarantees of future performance or events. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements, and we hereby qualify all our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S. dollars, except per share amounts.
Overview
We procure, process, and package plant-based and fruit-based food and beverage products for sale to retailers, foodservice operators, branded food companies, and food manufacturers. The composition of our operating and reportable segments is as follows:
| SUNOPTA INC. | 22 | October 1, 2022 Form 10-Q |
Current Macroeconomic Conditions
Our businesses continue to be exposed to the effects of the current global macroeconomic environment, including elevated inflation and rising interest rates. Inflationary pressures on household spending, together with general economic uncertainty, is impacting purchasing behaviors, as consumers reduce discretionary spending and shift to lower priced product alternatives, and our customers manage inventories in reaction to these shifts in consumer behavior. As a result, we have experienced a softening of demand for certain of our products and from certain of our customers, which has had, and may continue to have, a negative impact on our results of operations. In addition, tighter U.S. monetary policy, including higher interest rates, has increased our current cost of borrowing and may limit our access to additional sources of financing to support our operations and investment plans.
Sale of Sunflower Business
On October 11, 2022, we completed the sale of 100% of the assets and liabilities of our sunflower business and related roasted snacks operations, for cash consideration of $16.0 million, subject to closing debt and working capital adjustments. The sale of the sunflower commodity business is consistent with our strategic priority of optimizing our non-core businesses and focusing our plant-based beverage and fruit snacks portfolios on high-growth, high-return opportunities. For the quarter and three quarters ended October 1, 2022, we recognized a $23.2 million pre-tax loss on sale in connection with the classification of the sunflower business as held for sale. The pre-tax loss on sale is included in other expense, net, on the statements of operations.
For more information regarding this transaction, see note 3 to the unaudited consolidated financial statements included in this report.
Sale of Frozen Fruit Processing Facility
On August 26, 2022, we completed the sale of our frozen fruit processing facility located in Oxnard, California, for net cash proceeds of $16.1 million, resulting in a pre-tax gain on sale of $3.8 million, which is included in other expense, net, on the statements of operations for the quarter and three quarters ended October 1, 2022. We continue to process frozen fruit at a leased facility in Oxnard, California. The sale of the Oxnard facility was facilitated by the expansion of our frozen fruit operations in Mexico and diversification of our fruit sourcing from California to Central and South America.
| SUNOPTA INC. | 23 | October 1, 2022 Form 10-Q |
Consolidated Results of Operations for the Quarters Ended October 1, 2022 and October 2, 2021
| October 1, 2022 | October 2, 2021 | Change | Change | |||||||||
| For the quarter ended | $ | $ | $ | % | ||||||||
| Revenues | ||||||||||||
| Plant-Based Foods and Beverages | 137,726 | 114,870 | 22,856 | 19.9% | ||||||||
| Fruit-Based Foods and Beverages | 91,939 | 83,609 | 8,330 | 10.0% | ||||||||
| Total revenues | 229,665 | 198,479 | 31,186 | 15.7% | ||||||||
| Gross Profit | ||||||||||||
| Plant-Based Foods and Beverages | 20,106 | 18,697 | 1,409 | 7.5% | ||||||||
| Fruit-Based Foods and Beverages | 11,277 | 4,659 | 6,618 | 142.0% | ||||||||
| Total gross profit | 31,383 | 23,356 | 8,027 | 34.4% | ||||||||
| Gross Margin | ||||||||||||
| Plant-Based Foods and Beverages | 14.6% | 16.3% | -1.7% | |||||||||
| Fruit-Based Foods and Beverages | 12.3% | 5.6% | 6.7% | |||||||||
| Total gross margin | 13.7% | 11.8% | 1.9% | |||||||||
| Segment operating income (loss)(1) | ||||||||||||
| Plant-Based Foods and Beverages | 8,814 | 8,056 | 758 | 9.4% | ||||||||
| Fruit-Based Foods and Beverages | 2,870 | (3,517 | ) | 6,387 | 181.6% | |||||||
| Corporate Services | (4,040 | ) | (618 | ) | (3,422 | ) | -553.7% | |||||
| Total segment operating income | 7,644 | 3,921 | 3,723 | 95.0% | ||||||||
| Other expense, net | 20,200 | 1,172 | 19,028 | 1623.5% | ||||||||
| Earnings (loss) before the following | (12,556 | ) | 2,749 | (15,305 | ) | -556.7% | ||||||
| Interest expense, net | 4,342 | 2,854 | 1,488 | 52.1% | ||||||||
| Income tax expense (benefit) | (4,259 | ) | 2,929 | (7,188 | ) | -245.4% | ||||||
| Net loss(2),(3) | (12,639 | ) | (3,034 | ) | (9,605 | ) | -316.6% | |||||
| Dividends and accretion on preferred stock | (764 | ) | (748 | ) | (16 | ) | -2.1% | |||||
| Loss attributable to common shareholders(4) | (13,403 | ) | (3,782 | ) | (9,621 | ) | -254.4% |
(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 determined in accordance with U.S. GAAP. This measure is the basis on which management, including the CEO, assesses the underlying performance of our operating segments.
We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our operating performance. However, the non-GAAP measure of operating income/loss should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. The following table presents a reconciliation of segment operating income/loss to "earnings (loss) before the following" on the consolidated statements of operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| Plant-Based | Fruit-Based | |||||||||||
| Foods and | Foods and | Corporate | ||||||||||
| Beverages | Beverages | Services | Consolidated | |||||||||
| For the quarter ended | $ | $ | $ | $ | ||||||||
| October 1, 2022 | ||||||||||||
| Segment operating income (loss) | 8,814 | 2,870 | (4,040 | ) | 7,644 | |||||||
| Other income (expense), net | (22,292 | ) | 3,199 | (1,107 | ) | (20,200 | ) | |||||
| Earnings (loss) before the following | (13,478 | ) | 6,069 | (5,147 | ) | (12,556 | ) | |||||
| October 2, 2021 | ||||||||||||
| Segment operating income (loss) | 8,056 | (3,517 | ) | (618 | ) | 3,921 | ||||||
| Other expense, net | (10 | ) | (1,029 | ) | (133 | ) | (1,172 | ) | ||||
| Earnings (loss) before the following | 8,046 | (4,546 | ) | (751 | ) | 2,749 |
| SUNOPTA INC. | 24 | October 1, 2022 Form 10-Q |
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 segment 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 adjusted earnings that excludes specific items recognized in other income/expense, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of the financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations. The following table presents a reconciliation of adjusted earnings from net loss, which we consider to be the most directly comparable U.S. GAAP financial measure.
| October 1, 2022 | October 2, 2021 | |||||||||||
| Per Share | Per Share | |||||||||||
| For the quarter ended | $ | $ | $ | $ | ||||||||
| Net loss | (12,639 | ) | (3,034 | ) | ||||||||
| Dividends and accretion on preferred stock | (764 | ) | (748 | ) | ||||||||
| Loss attributable to common shareholders | (13,403 | ) | (0.12 | ) | (3,782 | ) | (0.04 | ) | ||||
| Adjusted for: | ||||||||||||
| Loss on classification of sunflower business as held for sale(a) | 23,227 | - | ||||||||||
| Gain on sale of frozen fruit processing facility(b) | (3,779 | ) | - | |||||||||
| Start-up costs(c) | 608 | - | ||||||||||
| Facility closure costs(d) | 525 | - | ||||||||||
| Business development costs(e) | 75 | 1,782 | ||||||||||
| Workforce reduction charges(f) | - | 499 | ||||||||||
| Costs related to exit from fruit ingredient processing facility(g) | - | 479 | ||||||||||
| Other(h) | 227 | 40 | ||||||||||
| Net income tax effect(i) | (5,491 | ) | 2,121 | |||||||||
| Adjusted earnings | 1,989 | 0.02 | 1,139 | 0.01 | ||||||||
(a) Reflects the loss on the classification of the sunflower business as held for sale at the end of the third quarter of 2022, which was recorded in other expense.
(b) Reflects the gain on sale of our frozen fruit processing facility located in Oxnard, California, which was recorded in other income.
(c) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the third quarter of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, which were recorded in cost of goods sold ($0.5 million) and SG&A expenses ($0.1 million).
(d) For the third quarter of 2022, facility closure costs mainly related to the relocation of certain equipment from the sold Oxnard facility to our Mexican facility, which were recorded in other expense.
(e) Represents third-party costs associated with business development activities, including costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. For the third quarter of 2022, these costs related to actions undertaken to optimize non-core assets, which were recorded in SG&A expenses. For the third quarter of 2021, these costs were mainly related to the transition of the Dream and WestSoy brands, acquired in April 2021, and project development activities related to our new plant in Midlothian, Texas, which were recorded in SG&A expenses ($1.6 million), together with professional fees incurred in connection with post-closing matters related to the 2020 divestiture of our global ingredients business, Tradin Organic, which were recorded in other expense ($0.2 million).
(f) For the third quarter of 2021, represents employee termination costs related to workforce reduction actions in our frozen fruit operations, which were recorded in other expense.
(g) For the third quarter of 2021, these costs related to the exit from our former South Gate, California, fruit ingredient processing facility, which were recorded in other expense.
(h) For the third quarters of 2022 and 2021, other mainly reflects losses on the disposal of assets and the settlement of certain legal and matters.
(i) Reflects the tax effect of the preceding adjustments to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings. However, adjusted earnings is not, and should not be viewed as, a substitute for net earnings prepared under U.S. GAAP. Adjusted earnings is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) We use a measure of adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") when assessing the performance of our operations, which we believe is useful to investors' understanding of our operating profitability because it excludes non-operating expenses, such as interest and income taxes, and non-cash expenses, such as depreciation, amortization, and stock-based compensation, as well as other unusual items that affect the comparability of operating performance. We also use this measure to assess operating performance in connection with our employee incentive programs. We define adjusted EBITDA as segment operating income plus depreciation, amortization, and stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings (refer above to footnote (2)). The following table presents a reconciliation of segment operating income and adjusted EBITDA from net loss, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 25 | October 1, 2022 Form 10-Q |
| October 1, 2022 | October 2, 2021 | |||||
| For the quarter ended | $ | $ | ||||
| Net loss | (12,639 | ) | (3,034 | ) | ||
| Income tax expense (benefit) | (4,259 | ) | 2,929 | |||
| Interest expense, net | 4,342 | 2,854 | ||||
| Other expense, net | 20,200 | 1,172 | ||||
| Total segment operating income | 7,644 | 3,921 | ||||
| Depreciation and amortization | 9,730 | 8,837 | ||||
| Stock-based compensation | 4,092 | 1,250 | ||||
| Start-up costs(a) | 608 | - | ||||
| Business development costs(b) | 75 | 1,628 | ||||
| Adjusted EBITDA | 22,149 | 15,636 |
(a) For the third quarter of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, which were recorded in cost of goods sold ($0.5 million) and SG&A expenses ($0.1 million).
(b) For the third quarter of 2022, business development costs related to actions undertaken to optimize non-core assets, which were recorded in SG&A expenses. For the third quarter of 2021, these costs related to the integration of the Dream and WestSoy brands and project development activities related to our new plant in Midlothian, Texas, which were recorded in SG&A expenses.
Although we use adjusted EBITDA as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income/loss, net earnings, and adjusted earnings to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. In particular, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for, an analysis of our results as reported under U.S. GAAP.
Revenues for the quarter ended October 1, 2022 increased by 15.7% to $229.7 million from $198.5 million for the quarter ended October 2, 2021, reflecting 19.9% revenue growth in the Plant-Based Foods and Beverages segment and 10.0% revenue growth in the Fruit-Based Foods and Beverages segment. The change in revenues from the third quarter of 2021 to the third quarter of 2022 was due to the following:
| Plant-Based | Fruit-Based | |||||||||||||||||
| Foods and Beverages | Foods and Beverages | Consolidated | ||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||
| 2021 revenues | 114,870 | 83,609 | 198,479 | |||||||||||||||
| Price | 18,625 | 16.2% | 8,868 | 10.6% | 27,493 | 13.9% | ||||||||||||
| Volume/Mix | 4,231 | 3.7% | (538 | ) | -0.6% | 3,693 | 1.9% | |||||||||||
| 2022 revenues | 137,726 | 19.9% | 91,939 | 10.0% | 229,665 | 15.7% | ||||||||||||
Note: percentages may not add due to rounding.
For the quarter ended October 1, 2022, the 19.9% increase in revenues for the Plant-Based Foods and Beverages segment reflected a 16.2% overall increase in pricing and a favorable volume/mix impact of 3.7%. The increase in pricing was driven by pricing actions taken with customers to offset inflationary cost increases, together with the pass-through effect of higher sunflower commodity pricing. Volume/mix was favorable mainly due to growth from our oat-based product offerings and teas, partially offset by softer volumes of sunflower and lower demand for everyday broths.
| SUNOPTA INC. | 26 | October 1, 2022 Form 10-Q |
For the quarter ended October 1, 2022, the 10.0% increase in revenues for the Fruit-Based Foods and Beverages segment reflected a 10.6% overall increase in pricing, reflecting pricing actions taken to offset commodity inflation incurred on fruit inventories and other inflationary cost increases. The increase in pricing was partially offset by an unfavorable volume/mix impact of 0.6%, which reflected the volume impact of our frozen fruit portfolio rationalization efforts, together with lower consumer demand for retail frozen fruit due to higher prices resulting from inflation, partially offset by strong demand for fruit snacks and the introduction of smoothie bowls.
Consolidated gross profit increased $8.0 million, or 34.4%, to $31.4 million for the quarter ended October 1, 2022, compared with $23.4 million for the quarter ended October 2, 2021. Consolidated gross margin for the quarter ended October 1, 2022 was 13.7% compared to 11.8% for the quarter ended October 2, 2021, an increase of 190 basis points.
Gross profit for the Plant-Based Foods and Beverages segment increased $1.4 million to $20.1 million for the quarter ended October 1, 2022, compared with $18.7 million for the quarter ended October 2, 2021, while gross margin decreased to 14.6% in the third quarter of 2022 from 16.3% in the third quarter of 2021. The 170-basis point decrease in gross margin reflected an estimated 225 basis-point decline due to the dilutive effect of pass-through pricing to recover cost inflation on raw materials and packaging, together with the impacts of higher labor and utility costs, increased inventory reserves, and higher depreciation expense. In addition, we incurred start-up costs of $0.5 million (0.4% gross margin impact) in connection with our new plant in Midlothian, Texas. All of these factors were partially absorbed through higher production volumes and plant utilization in our plant-based beverage and ingredient operations.
Gross profit for the Fruit-Based Foods and Beverages segment increased $6.6 million to $11.3 million for the quarter ended October 1, 2022, compared with $4.7 million for the quarter ended October 2, 2021, and gross margin increased to 12.3% in the third quarter of 2022 from 5.6% in the third quarter of 2021. The 670-basis point improvement in gross margin reflected the benefits of portfolio rationalizations for frozen fruit and manufacturing cost savings from the consolidation of our fruit processing facilities, together with increased production volumes and plant efficiencies in our fruit snack operations, partially offset by an estimated 50 basis-point decline due to the dilutive effect of pass-through pricing to recover commodity cost inflation.
For the quarter ended October 1, 2022, we realized total segment operating income of $7.6 million, compared with $3.9 million for the quarter ended October 2, 2021. The $3.7 million increase in total segment operating income reflected higher gross profit, as described above, partially offset by a $4.2 million increase in SG&A expenses. The increase in SG&A expenses was mainly due to higher employee compensation costs, including incremental 2022 incentive plan accruals based on performance, partially offset by a reduction in expenses related to the integration of the acquired Dream and WestSoy brands, which were primarily incurred in 2021.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Operating Segment Information."
Other expense was $20.2 million for the quarter ended October 1, 2022, compared with other expense of $1.2 million for the quarter ended October 2, 2021. Other expense in the third quarter of 2022 mainly reflected a pre-tax loss of $23.2 million recognized on the classification of the sunflower business as held for sale, partially offset by a pre-tax gain of $3.8 million realized on the sale of our frozen fruit processing facility located in Oxnard, California. Other expense in the third quarter of 2021 mainly reflected employee termination costs related to a workforce reduction in our frozen fruit operations, together with plant closure costs related to the consolidation of our fruit processing facilities.
Net interest expense increased by $1.4 million to $4.3 million for the quarter ended October 1, 2022, compared with $2.9 million for the quarter ended October 2, 2021, resulting from an increase in outstanding debt to finance capital expansion projects and fund working capital requirements, together with the impact of higher interest rates.
Income tax benefit was $4.3 million on pre-tax loss of $16.9 million for the quarter ended October 1, 2022, compared with an income tax expense of $2.9 million on a pre-tax loss of $0.1 million for the quarter ended October 2, 2021. Excluding the impact of stock-based compensation and other non-deductible expenses on pre-tax earnings, our effective tax rate was approximately 26% for the third quarter of 2022, compared with approximately 27% for the third quarter of 2021.
We realized a loss attributable to common shareholders of $13.4 million (diluted loss per share of $0.12) for the quarter ended October 1, 2022, which was inclusive of an after-tax loss on the held-for-sale sunflower business of $16.9 million and an after-tax gain on the sale of the Oxnard facility of $2.7 million, compared with a loss attributable to common shareholders of $3.8 million (diluted loss per share of $0.04) for the quarter ended October 2, 2021. The loss attributable to common shareholders included dividends and accretion on our Series B-1 preferred stock of $0.8 million and $0.7 million in the third quarters of 2022 and 2021, respectively.
| SUNOPTA INC. | 27 | October 1, 2022 Form 10-Q |
For the quarter ended October 1, 2022, adjusted earnings were $2.0 million, or $0.02 per diluted share, compared with adjusted earnings of $1.1 million, or $0.01 per diluted share for the quarter ended October 2, 2021. Adjusted EBITDA for the quarter ended October 1, 2022 was $22.1 million, compared with $15.6 million for the quarter ended October 2, 2021. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the table above for a reconciliation of adjusted earnings and adjusted EBITDA from net loss, which we consider to be the most directly comparable U.S. GAAP financial measure.
Operating Segment Information
| Plant-Based Foods and Beverages For the quarter ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
| Revenues | $ | 137,726 | $ | 114,870 | $ | 22,856 | 19.9% | |||||
| Gross profit | 20,106 | 18,697 | 1,409 | 7.5% | ||||||||
| Gross margin | 14.6% | 16.3% | -1.7% | |||||||||
| Operating income | $ | 8,814 | $ | 8,056 | $ | 758 | 9.4% | |||||
| Operating margin | 6.4% | 7.0% | -0.6% |
Plant-Based Foods and Beverages contributed $137.7 million in revenues for the quarter ended October 1, 2022, compared to $114.9 million for the quarter ended October 2, 2021, an increase of $22.9 million, or 19.9%. The table below explains the increase in revenues:
| Plant-Based Foods and Beverages Revenue Changes | |
| Revenues for the quarter ended October 2, 2021 | $114,870 |
| Benefit of pricing actions taken to offset input cost inflation, together with sales volume growth for oat-based product offerings and teas, partially offset by lower demand for everyday broths | 21,649 |
| Increased commodity pricing for sunflower, partially offset by lower volumes | 1,207 |
| Revenues for the quarter ended October 1, 2022 | $137,726 |
Gross profit in Plant-Based Foods and Beverages increased by $1.4 million to $20.1 million for the quarter ended October 1, 2022, compared to $18.7 million for the quarter ended October 2, 2021. The table below explains the increase in gross profit:
| Plant-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the quarter ended October 2, 2021 | $18,697 |
| Higher volumes and pricing for plant-based beverages and ingredients, partially offset by higher manufacturing plant spend due to inflationary pressures on wage costs and utility rates, together with higher inventory reserves, incremental depreciation of new production equipment for capital expansion projects, and start-up costs incurred for our new plant in Midlothian, Texas | 1,905 |
| Lower volumes of sunflower, partially offset by higher pricing spreads | (496) |
| Gross profit for the quarter ended October 1, 2022 | $20,106 |
Operating income in Plant-Based Foods and Beverages increased by $0.8 million to $8.8 million for the quarter ended October 1, 2022, compared to $8.1 million for the quarter ended October 2, 2021. The table below explains the increase in operating income:
| SUNOPTA INC. | 28 | October 1, 2022 Form 10-Q |
| Plant-Based Foods and Beverages Operating Income Changes | |
| Operating income for the quarter ended October 2, 2021 | $8,056 |
| Increase in gross profit, as explained above | 1,409 |
| Reduced third-party consulting costs related to the transition of the Dream and WestSoy brands in the third quarter of 2021, partially offset by higher employee compensation costs in the third quarter of 2022 | 391 |
| Increase in corporate cost allocation, mainly related to incremental 2022 incentive plan accruals allocable to operating segment employees | (1,042) |
| Operating income for the quarter ended October 1, 2022 | $8,814 |
Following the sale of our sunflower business in October 2022, we are focusing our core plant-based operations on the development, manufacture, and sale of value-added, non-dairy beverage alternatives. Looking forward, assuming economic conditions, including inflation, do not significantly worsen, we anticipate year-over-year revenue growth for our Plant-Based Foods and Beverages operating segment in the fourth quarter of 2022, driven by capacity gains across our aseptic network, together with the expected benefit of pricing actions to offset input cost inflation. We expect these pricing actions, together with the divestiture of the lower-margin sunflower commodity business, to drive year-over-year gross margin improvements in our plant-based operations in the fourth quarter of 2022, excluding the impact of start-up costs related to our new plant in Midlothian, Texas, and other capital projects. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Several factors could adversely impact our ability to meet these forward-looking expectations, including the extent and duration of inflation headwinds; our ability to continue to pass through price increases to our customers to offset inflationary pressures; the impact of price inflation on consumer buying behavior and demand for plant-based beverage alternatives to dairy; our ability to successfully execute on our capital expansion projects, and the viability of those projects; and other factors described above under "Forward-Looking Statements."
| Fruit-Based Foods and Beverages For the quarter ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
| Revenues | 91,939 | $ | 83,609 | $ | 8,330 | 10.0% | ||||||
| Gross profit | 11,277 | 4,659 | 6,618 | 142.0% | ||||||||
| Gross margin | 12.3% | 5.6% | 6.7% | |||||||||
| Operating income (loss) | 2,870 | $ | (3,517 | ) | $ | 6,387 | 181.6% | |||||
| Operating margin | 3.1% | -4.2% | 7.3% |
Fruit-Based Foods and Beverages contributed $91.9 million in revenues for the quarter ended October 1, 2022, compared to $83.6 million for the quarter ended October 2, 2021, an increase of $8.3 million, or 10.0%. The table below explains the increase in revenues:
| Fruit-Based Foods and Beverages Revenue Changes | |
| Revenues for the quarter ended October 2, 2021 | $83,609 |
| Higher sales volumes and pricing for fruit snacks and incremental revenue from the introduction of smoothie bowls | 8,026 |
| Benefit of pricing actions taken to offset commodity inflation incurred on fruit inventories and other inflationary cost increases, partially offset by lower volumes due to our frozen fruit portfolio rationalization efforts, together with lower retail sales of frozen fruit due to the impact of higher prices on consumer demand | 304 |
| Revenues for the quarter ended October 1, 2022 | $91,939 |
Gross profit in Fruit-Based Foods and Beverages increased by $6.6 million to $11.3 million for the quarter ended October 1, 2022, compared to $4.7 million for the quarter ended October 2, 2021. The table below explains the increase in gross profit:
| SUNOPTA INC. | 29 | October 1, 2022 Form 10-Q |
| Fruit-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the quarter ended October 2, 2021 | $4,659 |
| Improved margin profile from portfolio rationalizations and reduced manufacturing cost base within our frozen fruit operations, together with higher pricing for retail frozen fruit, partially offset by lower sales volumes | 4,320 |
| Higher sales volumes and pricing for fruit snacks, together with increased production volumes and plant efficiencies in our fruit snack operations | 2,298 |
| Gross profit for the quarter ended October 1, 2022 | $11,277 |
Operating income in Fruit-Based Foods and Beverages increased by $6.4 million to $2.9 million for the quarter ended October 1, 2022, compared to an operating loss of $3.5 million for the quarter ended October 2, 2021. The table below explains the increase in operating income:
| Fruit-Based Foods and Beverages Operating Income Changes | |
| Operating loss for the quarter ended October 2, 2021 | $(3,517) |
| Increase in gross profit, as explained above | 6,618 |
| Increase in corporate cost allocation, mainly related to incremental 2022 incentive plan accruals allocable to operating segment employees | (133) |
| Unfavorable foreign exchange impact within our frozen fruit operations in Mexico, partially offset by lower SG&A expenses | (98) |
| Operating income for the quarter ended October 1, 2022 | $2,870 |
Looking forward, assuming economic conditions, including inflation, do not significantly worsen, we anticipate year-over-year gross margin improvement for our Fruit-Based Foods and Beverages operating segment in the fourth quarter of 2022, driven by the pricing actions taken on frozen fruit to offset commodity inflation and other inflationary cost increases, together with the benefit of a reduced manufacturing cost base within our frozen fruit operations. In addition, we expect strong year-over-year revenue and profit growth in the fourth quarter of 2022, driven by volume gains and pricing actions for core fruit snack products, and further expansion of our smoothie bowl line. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Several factors could adversely impact our ability to meet these forward-looking expectations, including the extent and duration of inflation headwinds, and the impact on consumer buying behavior and overall demand for frozen fruit; the outcome of our pricing actions with customers, including the softening of consumer demand due to higher retail prices; our ability to achieve the anticipated cost savings and efficiencies from our manufacturing network consolidation; our ability to successfully expand our smoothie bowl product line; and other factors described above under "Forward-Looking Statements."
| Corporate Services For the quarter ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
| Operating loss | $ | (4,040 | ) | $ | (618 | ) | $ | (3,422 | ) | -553.7% |
Operating loss at Corporate Services increased by $3.4 million to $4.0 million for the quarter ended October 1, 2022, compared to a loss of $0.6 million for the quarter ended October 2, 2021. The table below explains the increase in operating loss:
| SUNOPTA INC. | 30 | October 1, 2022 Form 10-Q |
| Corporate Services Operating Loss Changes | |
| Operating loss for the quarter ended October 2, 2021 | $(618) |
| Higher variable stock-based compensation, based on improved performance | (2,842) |
| Higher employee compensation costs, including incremental 2022 incentive plan accruals based on performance, partially offset by lower business development costs | (1,755) |
| Increase in corporate cost allocations, mainly related to the portion of the incremental 2022 incentive plan accruals allocable to operating segment employees | 1,175 |
| Operating loss for the quarter ended October 1, 2022 | $(4,040) |
Corporate cost allocations mainly consist of salaries of corporate personnel who directly support the operating segments, as well as costs related to our enterprise resource management system. These expenses are allocated to the operating segments based on (1) specific identification of allocable costs that represent a service provided to each segment and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and the number of people employed within each segment.
Consolidated Results of Operations for the three quarters ended October 1, 2022 and October 2, 2021
| October 1, 2022 | October 2, 2021 | Change | Change | ||||||||||
| For the three quarters ended | $ | $ | $ | % | |||||||||
| Revenues | |||||||||||||
| Plant-Based Foods and Beverages | 419,149 | 345,680 | 73,469 | 21.3% | |||||||||
| Fruit-Based Foods and Beverages | 294,220 | 262,712 | 31,508 | 12.0% | |||||||||
| Total revenues | 713,369 | 608,392 | 104,977 | 17.3% | |||||||||
| Gross Profit | |||||||||||||
| Plant-Based Foods and Beverages | 64,026 | 61,751 | 2,275 | 3.7% | |||||||||
| Fruit-Based Foods and Beverages | 30,246 | 17,930 | 12,316 | 68.7% | |||||||||
| Total gross profit | 94,272 | 79,681 | 14,591 | 18.3% | |||||||||
| Gross Margin | |||||||||||||
| Plant-Based Foods and Beverages | 15.3% | 17.9% | -2.6% | ||||||||||
| Fruit-Based Foods and Beverages | 10.3% | 6.8% | 3.5% | ||||||||||
| Total gross margin | 13.2% | 13.1% | 0.1% | ||||||||||
| Segment operating income (loss)(1) | |||||||||||||
| Plant-Based Foods and Beverages | 29,106 | 30,014 | (908 | ) | -3.0% | ||||||||
| Fruit-Based Foods and Beverages | 6,865 | (6,858 | ) | 13,723 | 200.1% | ||||||||
| Corporate Services | (16,302 | ) | (11,427 | ) | (4,875 | ) | -42.7% | ||||||
| Total segment operating income | 19,669 | 11,729 | 7,940 | 67.7% | |||||||||
| Other expense, net | 22,027 | 7,448 | 14,579 | 195.7% | |||||||||
| Earnings (loss) from continuing operations before the following | (2,358 | ) | 4,281 | (6,639 | ) | -155.1% | |||||||
| Interest expense, net | 10,004 | 6,145 | 3,859 | 62.8% | |||||||||
| Income tax expense (benefit) | (2,875 | ) | 416 | (3,291 | ) | -791.1% | |||||||
| Loss from continuing operations(2),(3) | (9,487 | ) | (2,280 | ) | (7,207 | ) | -316.1% | ||||||
| Earnings from discontinued operations | 2,752 | - | 2,752 | - | |||||||||
| Net loss | (6,735 | ) | (2,280 | ) | (4,455 | ) | -195.4% | ||||||
| Dividends and accretion on preferred stock | (2,279 | ) | (3,445 | ) | 1,166 | 33.8% | |||||||
| Loss attributable to common shareholders(4) | (9,014 | ) | (5,725 | ) | (3,289 | ) | -57.4% | ||||||
(1) The following table presents a reconciliation of segment operating income/loss to "earnings (loss) from continuing operations before the following" on the consolidated statements of operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (1) to the "Consolidated Results of Operations for the Quarters Ended October 1, 2022 and October 2, 2021" table regarding the use of this non-GAAP measure).
| SUNOPTA INC. | 31 | October 1, 2022 Form 10-Q |
| Plant-Based | Fruit-Based | |||||||||||
| Foods and | Foods and | Corporate | ||||||||||
| Beverages | Beverages | Services | Consolidated | |||||||||
| For the three quarters ended | $ | $ | $ | $ | ||||||||
| October 1, 2022 | ||||||||||||
| Segment operating income (loss) | 29,106 | 6,865 | (16,302 | ) | 19,669 | |||||||
| Other income (expense), net | (22,538 | ) | 2,044 | (1,533 | ) | (22,027 | ) | |||||
| Earnings (loss) from continuing operations before the following | 6,568 | 8,909 | (17,835 | ) | (2,358 | ) | ||||||
| October 2, 2021 | ||||||||||||
| Segment operating income (loss) | 30,014 | (6,858 | ) | (11,427 | ) | 11,729 | ||||||
| Other expense, net | (90 | ) | (6,506 | ) | (852 | ) | (7,448 | ) | ||||
| Earnings (loss) from continuing operations before the following | 29,924 | (13,364 | ) | (12,279 | ) | 4,281 |
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income. However, any measure of operating income excluding any or all of these items is not, and should not be viewed as, a substitute for operating income prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
(2) The following table presents a reconciliation of adjusted earnings from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (2) to the "Consolidated Results of Operations for the Quarters Ended October 1, 2022 and October 2, 2021" table regarding the use of this non-GAAP measure).
| October 1, 2022 | October 2, 2021 | |||||||||||
| Per Share | Per Share | |||||||||||
| For the three quarters ended | $ | $ | $ | $ | ||||||||
| Loss from continuing operations | (9,487 | ) | (2,280 | ) | ||||||||
| Dividends and accretion on preferred stock | (2,279 | ) | (3,445 | ) | ||||||||
| Loss from continuing operations attributable to common shareholders | (11,766 | ) | (0.11 | ) | (5,725 | ) | (0.06 | ) | ||||
| Adjusted for: | ||||||||||||
| Loss on classification of sunflower business as held for sale(a) | 23,227 | - | ||||||||||
| Gain on sale of frozen fruit processing facility(b) | (3,779 | ) | - | |||||||||
| Facility closure costs(c) | 1,812 | - | ||||||||||
| Start-up costs(d) | 1,329 | - | ||||||||||
| Business development costs(e) | 874 | 3,568 | ||||||||||
| Costs related to exit from fruit ingredient processing facility(f) | - | 4,602 | ||||||||||
| Restructuring costs(g) | - | 1,432 | ||||||||||
| Workforce reduction charges(h) | - | 499 | ||||||||||
| Other(i) | 767 | 287 | ||||||||||
| Net income tax effect(j) | (6,370 | ) | (2,141 | ) | ||||||||
| Adjusted earnings | 6,094 | 0.06 | 2,522 | 0.02 | ||||||||
(a) Reflects the loss on the classification of the sunflower business as held for sale at the end of the third quarter of 2022, which was recorded in other expense.
(b) Reflects the gain on sale of our frozen fruit processing facility located in Oxnard, California, which was recorded in other income.
(c) Facility closure costs mainly related to the relocation of certain equipment from the sold Oxnard facility to our Mexican facility, which were recorded in other expense.
(d) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the first three quarters of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, and the integration of the Dream and WestSoy brands, which were recorded in cost of goods sold ($1.1 million) and SG&A expenses ($0.2 million).
(e) Represents third-party costs associated with business development activities, including costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. For the first three quarters of 2022, these costs related to actions undertaken to optimize non-core assets, including the sale of the sunflower business, as well as costs related to our inaugural Investor Day held in June 2022, which were recorded in SG&A expenses. For the first three quarters of 2021, these costs were mainly related to the transition of the Dream and WestSoy brands, acquired in April 2021, and project development activities related to our new plant in Midlothian, Texas, which were recorded in SG&A expenses ($2.9 million), together with professional fees incurred in connection with post-closing matters related to the 2020 divestiture of our global ingredients business, Tradin Organic, which were recorded in other expense ($0.7 million).
(f) For the first three quarters of 2021, represents asset impairment charges, together with employee termination and asset relocation costs related to the exit from our former South Gate, California, fruit ingredient processing facility, which were recorded in other expense.
(g) For the first three quarters of 2021, represents costs to complete the exit from our former Santa Maria, California, frozen fruit processing facility, which were recorded in other expense.
| SUNOPTA INC. | 32 | October 1, 2022 Form 10-Q |
(h) For the first three quarters of 2021, represents employee termination costs related to workforce reduction actions in our frozen fruit operations, which were recorded in other expense.
(i) For the first three quarters of 2022 and 2021, other mainly reflects the settlement of certain legal and contractual matters, together with losses on the disposal of assets, which were recorded in other expense.
(j) Reflects the tax effect of the preceding adjustments to earnings calculated based on the statutory tax rates applicable in the tax jurisdiction of the underlying adjustment.
(3) The following table presents a reconciliation of segment operating income and adjusted EBITDA from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (3) to the "Consolidated Results of Operations for the Quarters Ended October 1, 2022 and October 2, 2021" table regarding the use of this non-GAAP measure).
| October 1, 2022 | October 2, 2021 | ||||||
| For the three quarters ended | $ | $ | |||||
| Loss from continuing operations | (9,487 | ) | (2,280 | ) | |||
| Income tax expense (benefit) | (2,875 | ) | 416 | ||||
| Interest expense, net | 10,004 | 6,145 | |||||
| Other expense, net | 22,027 | 7,448 | |||||
| Total segment operating income | 19,669 | 11,729 | |||||
| Depreciation and amortization | 28,515 | 25,790 | |||||
| Stock-based compensation | 9,691 | 9,593 | |||||
| Start-up costs(a) | 1,329 | - | |||||
| Business development costs(b) | 874 | 2,940 | |||||
| Adjusted EBITDA | 60,078 | 50,052 | |||||
(a) For the first three quarters of 2022, start-up costs mainly related to new employee hires for our plant-based beverage facility under construction in Midlothian, Texas, and the integration of the Dream and WestSoy brands acquired in April 2021, which were recorded in cost of goods sold ($1.1 million) and SG&A expenses ($0.2 million).
(b) For the first three quarters of 2022, business development costs related to actions undertaken to optimize non-core assets, including the sale of the sunflower business, as well as costs related to our Investor Day, which were recorded in SG&A expenses. For the first three quarters of 2021, these costs related to the integration of the Dream and WestSoy brands and project development activities related to our new plant in Midlothian, Texas, which were recorded in SG&A expenses.
(4) Refer to footnote (4) to the "Consolidated Results of Operations for the Quarters Ended October 1, 2022 and October 2, 2021" table regarding the use of certain other non-GAAP measures in the discussion of our results of operations below.
Revenues for the three quarters ended October 1, 2022 increased by 17.3% to $713.4 million from $608.4 million for the three quarters ended October 2, 2021, reflecting 21.3% revenue growth in the Plant-Based Foods and Beverages segment and 12.0% revenue growth in the Fruit-Based Foods and Beverages segment. The change in revenues from the first three quarters of 2021 to the first three quarters of 2022 was due to the following:
| Plant-Based | Fruit-Based | |||||||||||||||||
| Foods and Beverages | Foods and Beverages | Consolidated | ||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||
| 2021 revenues | 345,680 | 262,712 | 608,392 | |||||||||||||||
| Price | 43,542 | 12.6% | 29,550 | 11.2% | 73,092 | 12.0% | ||||||||||||
| Volume/Mix | 26,192 | 7.6% | 1,958 | 0.7% | 28,150 | 4.6% | ||||||||||||
| Acquisition | 3,735 | 1.1% | - | - | 3,735 | 0.6% | ||||||||||||
| 2022 revenues | 419,149 | 21.3% | 294,220 | 12.0% | 713,369 | 17.3% | ||||||||||||
Note: percentages may not add due to rounding.
For the three quarters ended October 1, 2022, the 21.3% increase in revenues for the Plant-Based Foods and Beverages segment reflected a 12.6% overall increase in pricing, a favorable volume/mix impact of 7.6%, and 1.1% of incremental revenue in the first quarter of 2022 related to the acquisition of the Dream and WestSoy brands in April 2021. The increase in pricing was driven by pricing actions taken with customers to offset inflationary cost increases, together with the pass-through effect of higher sunflower commodity pricing. Volume/mix was favorable mainly due to growth from our oat-based product offerings and teas, partially offset by softer volumes of sunflower and lower demand for everyday broths.
For the three quarters ended October 1, 2022, the 12.0% increase in revenues for the Fruit-Based Foods and Beverages segment reflected an 11.2% overall increase in pricing and a favorable volume/mix impact of 0.7%. The increased pricing reflected pricing actions taken to offset commodity inflation incurred on fruit inventories and other inflationary cost increases. The favorable volume/mix impact reflected strong demand for fruit snacks and the introduction of smoothie bowls, which reflected the volume impact of our frozen fruit portfolio rationalization efforts, together with lower consumer demand for retail frozen fruit due to higher prices resulting from inflation.
| SUNOPTA INC. | 33 | October 1, 2022 Form 10-Q |
Consolidated gross profit increased $14.6 million, or 18.3%, to $94.3 million for the three quarters ended October 1, 2022, compared with $79.7 million for the three quarters ended October 2, 2021. Consolidated gross margin for the three quarters ended October 1, 2022 was 13.2% compared to 13.1% for the three quarters ended October 2, 2021, an increase of 10 basis points.
Gross profit for the Plant-Based Foods and Beverages segment increased $2.3 million to $64.0 million for the three quarters ended October 1, 2022, compared with $61.8 million for the three quarters ended October 2, 2021, while gross margin decreased to 15.3% in the first three quarters of 2022 from 17.9% in the first three quarters of 2021. The 260-basis point decrease in gross margin reflected an estimated 200 basis-point decline due to the dilutive effect of pass-through pricing to recover cost inflation on raw materials and packaging, together with the impacts of higher labor and utility costs, increased inventory reserves, and higher depreciation expense. In addition, we incurred start-up costs of $1.2 million (0.3% gross margin impact) in connection with our new plant in Midlothian, Texas, and the integration of the Dream and WestSoy brands. All of these factors were partially absorbed through higher production volumes and plant utilization in our plant-based beverage and ingredient operations.
Gross profit for the Fruit-Based Foods and Beverages segment increased $12.3 million to $30.2 million for the three quarters ended October 1, 2022, compared with $17.9 million for the three quarters ended October 2, 2021, and gross margin increased to 10.3% in the first three quarters of 2022 from 6.8% in the first three quarters of 2021. The 350-basis point improvement in gross margin reflected the benefits of portfolio rationalizations for frozen fruit and manufacturing cost savings from the consolidation of our fruit processing facilities. These factors were partially offset by an estimated 70 basis-point decline due to the dilutive effect of pass-through pricing to recover commodity cost inflation, together with increases in freight and storage rates, a higher mix of low-margin fruit juice sales, and frozen fruit inventory losses due to excess spoilage during handling.
For the three quarters ended October 1, 2022, we realized total segment operating income of $19.7 million, compared with $11.7 million for the three quarters ended October 2, 2021. The $7.9 million increase in total segment operating income reflected higher gross profit, as described above, partially offset by a $6.8 million increase in SG&A expenses and a $0.5 million increase in amortization expense related to the acquired Dream and WestSoy brand name intangible assets. The increase in SG&A expenses was mainly due to higher employee compensation costs, including incremental 2022 incentive plan accruals based on performance, and a one-time bonus of $1.6 million recognized in the first quarter of 2022 to reward employees for improved performance, partially offset by cost savings related to headcount reductions in our frozen fruit operations in August 2021. In addition, we recognized a favorable year-over-year foreign exchange impact related to our Mexican operations of $0.7 million.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Operating Segment Information."
Other expense was $22.0 million for the three quarters ended October 1, 2022, compared with other expense of $7.4 million for the three quarters ended October 2, 2021. Other expense in the first three quarters of 2022 mainly reflected a pre-tax loss of $23.2 million recognized on the classification of the sunflower business as held for sale, together with costs to relocate equipment from our sold Oxnard, California, frozen fruit processing facility to our Mexican facility, partially offset by a pre-tax gain of $3.8 million realized on the sale of the Oxnard facility. Other expense in the first three quarters of 2021 mainly reflected plant closure costs related to the consolidation of our fruit processing facilities, together with employee termination costs related to the workforce reduction in our frozen fruit operations.
Net interest expense increased by $3.9 million to $10.0 million for the three quarters ended October 1, 2022, compared with $6.1 million for the three quarters ended October 2, 2021, resulting from an increase in outstanding debt to finance capital expansion projects and fund working capital requirements, together with the impact of higher interest rates.
Income tax benefit was $2.9 million on pre-tax loss of $12.4 million for the three quarters ended October 1, 2022, compared with an income tax expense of $0.4 million on a pre-tax loss of $1.9 million for the three quarters ended October 2, 2021. Excluding the impact of stock-based compensation and other non-deductible expenses on pre-tax earnings, our effective tax rate was approximately 26% for the first three quarters of 2022, compared with approximately 27% for the first three quarters of 2021.
Loss from continuing operations for the three quarters ended October 1, 2022 was $9.5 million, which was inclusive of an after-tax loss on the held-for-sale sunflower business of $16.9 million and an after-tax gain on the sale of the Oxnard facility of $2.7 million, compared with a loss of $2.3 million for the three quarters ended October 1, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.11 for the three quarters ended October 1, 2022, compared with a loss per share $0.06 for the three quarters ended October 2, 2021.
| SUNOPTA INC. | 34 | October 1, 2022 Form 10-Q |
Earnings from discontinued operations of $2.8 million for the three quarters ended October 1, 2022, were related to the settlement of the purchase price allocation and other post-closing matters in connection with the 2020 divestiture of our global ingredients business, Tradin Organic.
We realized a loss attributable to common shareholders of $9.0 million (diluted loss per share of $0.08) for the three quarters ended October 1, 2022, inclusive of the after-tax loss on the held-for-sale sunflower business of $16.9 million and after-tax gain on the sale of the Oxnard facility of $3.2 million, compared with a loss attributable to common shareholders of $5.7 million (diluted loss per share of $0.06) for the three quarters ended October 2, 2021. The loss attributable to common shareholders included dividends and accretion on preferred stock of $2.3 million and $3.4 million in the first three quarters of 2022 and 2021, respectively. The decline in preferred stock dividends and accretion reflected the exchange of all of the shares of Series A preferred stock for shares of our common stock in February 2021. Outstanding preferred stock since February 2021 consists entirely of our Series B-1 preferred stock.
For the three quarters ended October 1, 2022, adjusted earnings were $6.1 million, or $0.06 per diluted share, compared with adjusted earnings of $2.5 million, or $0.02 per diluted share for the three quarters ended October 2, 2021. Adjusted EBITDA for the three quarters ended October 1, 2022 was $60.1 million, compared with $50.1 million for the three quarters ended October 2, 2021. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the table above for a reconciliation of adjusted earnings and adjusted EBITDA from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
Segmented Operations Information
| Plant-Based Foods and Beverages For the three quarters ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
| Revenues | $ | 419,149 | $ | 345,680 | $ | 73,469 | 21.3% | |||||
| Gross profit | 64,026 | 61,751 | 2,275 | 3.7% | ||||||||
| Gross margin | 15.3% | 17.9% | -2.6% | |||||||||
| Operating income | $ | 29,106 | $ | 30,014 | $ | (908 | ) | -3.0% | ||||
| Operating margin | 6.9% | 8.7% | -1.8% |
Plant-Based Foods and Beverages contributed $419.1 million in revenues for the three quarters ended October 1, 2022, compared to $345.7 million for the three quarters ended October 2, 2021, an increase of $73.5 million, or 21.3%. The table below explains the increase in revenues:
| Plant-Based Foods and Beverages Revenue Changes | |
| Revenues for the three quarters ended October 2, 2021 | $345,680 |
| Benefit of pricing actions taken to offset input cost inflation, together with sales volume growth for oat-based product offerings, and other varieties of plant-based beverages and teas, partially offset by lower demand for everyday broths | 62,470 |
| Increased commodity pricing for sunflower, partially offset by lower volumes | 7,264 |
| Incremental revenue in the first quarter of 2022 related to the acquisition of the Dream and WestSoy brands in April 2021 | 3,735 |
| Revenues for the three quarters ended October 1, 2022 | $419,149 |
Gross profit in Plant-Based Foods and Beverages increased by $2.3 million to $64.0 million for the three quarters ended October 1, 2022, compared to $61.8 million for the three quarters ended October 2, 2021. The table below explains the increase in gross profit:
| SUNOPTA INC. | 35 | October 1, 2022 Form 10-Q |
| Plant-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the three quarters ended October 2, 2021 | $61,751 |
| Higher volumes and pricing for plant-based beverages and ingredients, including the incremental contribution in the first quarter of 2022 from the acquisition of the Dream and WestSoy brands in April 2021, partially offset by higher manufacturing plant spend due to inflationary pressures on wage costs and utility rates, together with higher inventory reserves, incremental depreciation of new production equipment for capital expansion projects, and start-up costs incurred for our new plant in Midlothian, Texas | 2,642 |
| Lower volumes of sunflower, partially offset by higher pricing spreads | (367) |
| Gross profit for the three quarters ended October 1, 2022 | $64,026 |
Operating income in Plant-Based Foods and Beverages decreased by $0.9 million to $29.1 million for the three quarters ended October 1, 2022, compared to $30.0 million for the three quarters ended October 2, 2021. The table below explains the decrease in operating income:
| Plant-Based Foods and Beverages Operating Income Changes | |
| Operating income for the three quarters ended October 2, 2021 | $30,014 |
| Increase in corporate cost allocation, mainly related to incremental 2022 incentive plan accruals allocable to operating segment employees | (3,126) |
| Incremental amortization of the acquired Dream and WestSoy brand name intangible assets, together with higher employee compensation costs and sales and marketing expenses, partially offset by reduced third-party consulting costs related to the acquisition and integration of the Dream and WestSoy brands in 2021 | (57) |
| Increase in gross profit, as explained above | 2,275 |
| Operating income for the three quarters ended October 1, 2022 | $29,106 |
| Fruit-Based Foods and Beverages For the three quarters ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
| Revenues | $ | 294,220 | $ | 262,712 | $ | 31,508 | 12.0% | |||||
| Gross profit | 30,246 | 17,930 | 12,316 | 68.7% | ||||||||
| Gross margin | 10.3% | 6.8% | 3.5% | |||||||||
| Operating income (loss) | $ | 6,865 | $ | (6,858 | ) | $ | 13,723 | 200.1% | ||||
| Operating margin | 2.3% | -2.6% | 4.9% |
Fruit-Based Foods and Beverages contributed $294.2 million in revenues for the three quarters ended October 1, 2022, compared to $262.7 million for the three quarters ended October 2, 2021, an increase of $31.5 million, or 12.0%. The table below explains the increase in revenues:
| SUNOPTA INC. | 36 | October 1, 2022 Form 10-Q |
| Fruit-Based Foods and Beverages Revenue Changes | |
| Revenues for the three quarters ended October 2, 2021 | $262,712 |
| Higher sales volumes and pricing for fruit snacks and incremental revenue from the introduction of smoothie bowls | 20,437 |
| Benefit of pricing actions taken to offset commodity inflation incurred on fruit inventories and other inflationary cost increases, partially offset by lower volumes due to our frozen fruit portfolio rationalization efforts, together with lower retail sales of frozen fruit due to the impact of higher prices on consumer demand | 11,071 |
| Revenues for the three quarters ended October 1, 2022 | $294,220 |
Gross profit in Fruit-Based Foods and Beverages increased by $12.3 million to $30.2 million for the three quarters ended October 1, 2022, compared to $17.9 million for the three quarters ended October 2, 2021. The table below explains the increase in gross profit:
| Fruit-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the three quarters ended October 2, 2021 | $17,930 |
| Improved margin profile from portfolio rationalizations and reduced manufacturing cost base within our frozen fruit operations, together with higher pricing for retail frozen fruit, partially offset by lower sales volumes, a higher mix of low-margin fruit juice sales, and frozen fruit inventory losses due to excess spoilage during handling | 9,395 |
| Higher sales volumes and pricing for fruit snacks, together with increased production volumes and plant efficiencies in our fruit snack operations | 2,921 |
| Gross profit for the three quarters ended October 1, 2022 | $30,246 |
Operating income in Fruit-Based Foods and Beverages increased by $13.7 million to $6.9 million for the quarter ended October 1, 2022, compared to an operating loss of $6.9 million for the quarter ended October 2, 2021. The table below explains the increase in operating income:
| Fruit-Based Foods and Beverages Operating Income Changes | |
| Operating loss for the three quarters ended October 2, 2021 | $(6,858) |
| Increase in gross profit, as explained above | 12,316 |
| Lower employee compensation costs due to a workforce reduction in August 2021, together with a favorable foreign exchange impact within our frozen fruit operations in Mexico | 1,807 |
| Increase in corporate cost allocation, mainly related to incremental 2022 incentive plan accruals allocable to operating segment employees | (400) |
| Operating income for the three quarters ended October 1, 2022 | $6,865 |
| Corporate Services For the three quarters ended | October 1, 2022 | October 2, 2021 | Change | % Change | ||||||||
| Operating loss | $ | (16,302 | ) | $ | (11,427 | ) | $ | (4,875 | ) | -42.7% |
Operating loss at Corporate Services increased by $4.9 million to $16.3 million for the three quarters ended October 1, 2022, compared to a loss of $11.4 million for the three quarters ended October 2, 2021. The table below explains the increase in operating loss:
| SUNOPTA INC. | 37 | October 1, 2022 Form 10-Q |
| Corporate Services Operating Loss Changes | |
| Operating loss for the three quarters ended October 2, 2021 | $(11,427) |
| Higher employee compensation costs, including incremental 2022 incentive plan accruals based on performance, and one-time bonus of $1.6 million recognized in the first quarter of 2022 to reward employees for improved performance, together with costs related to our 2022 Investor Day of $0.5 million, partially offset by lower business development costs | (8,303) |
| Higher variable stock-based compensation, based on improved performance | (98) |
| Increase in corporate cost allocations, mainly related to the portion of the incremental 2022 incentive plan accruals allocable to operating segment employees | 3,526 |
| Operating loss for the three quarters ended October 1, 2022 | $(16,302) |
Liquidity and Capital Resources
On December 31, 2020, we entered into a five-year credit agreement, as amended, for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $250 million, subject to borrowing base capacity. As at October 1, 2022, we had outstanding borrowings under the revolving credit facility of $154.0 million (January 1, 2022 - $153.3 million), and available borrowing capacity of approximately $75 million (January 1, 2022 - $67 million). The credit agreement also provides a five-year, $75 million delayed draw term loan, to be used for capital expenditures, which may be drawn upon up to March 31, 2023. As at October 1, 2022, we had $37.4 million drawn on the term loan facility mainly to finance the purchase of equipment for our new plant-based beverage facility under construction in Midlothian, Texas. For more information on our asset-based credit facilities see note 5 to the unaudited consolidated financial statements included in this report.
During the first three quarters of 2022, we recognized additional finance lease liabilities in the amount of $73.0 million, mainly related to the buildouts of our Midlothian, Texas, facility, and our executive office and innovation center located in Eden Prairie, Minnesota, together with the addition of new processing equipment at our Allentown, Pennsylvania, plant-based beverage facility, and plant improvements at our Alexandria, Minnesota, plant-based beverage facility. For more information on our operating and finance lease obligations, including maturity dates, see note 4 to the unaudited consolidated financial statements included in this report.
As at October 1, 2022, our subsidiary, SunOpta Foods Inc., had 30,000 shares of Series B-1 preferred stock issued and outstanding. The Series B-1 preferred stock currently has a liquidation preference of approximately $1,015 per share and is exchangeable into shares of our common stock at an exchange price of $2.50 per share. Cumulative preferred dividends accrue daily on the Series B-1 preferred stock at an annualized rate of 8.0% of the liquidation preference prior to September 30, 2029, which presently equates to quarterly dividend distributions of approximately $0.6 million, and 10.0% of the liquidation preference thereafter. For more information on the Series B-1 preferred stock, see note 6 to the unaudited consolidated financial statements included in this report.
There have been no material changes outside the normal course of business in the nature of our contractual obligations since January 1, 2022.
We believe that our operating cash flows and proceeds from the sale of businesses and assets, together with our revolving and term loan credit facilities, and access to lease financing, will be adequate to meet our operating, investing, and financing needs for the foreseeable future, including the 12-month period following the issuance of our financial statements. However, in order to finance significant investments in our existing businesses, or significant business acquisitions, if any, that may arise in the future, we may need additional sources of cash that we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering of debt or equity securities, or the issuance of common stock. There can be no assurance that these types of financing would be available at all or, if so, on terms that are acceptable to us. In addition, we may explore other sales of selected businesses or assets from time to time to improve our profitability, reduce our indebtedness, and/or improve our position to obtain additional financing.
| SUNOPTA INC. | 38 | October 1, 2022 Form 10-Q |
Cash Flows
Summarized cash flow information for the periods ended October 1, 2022 and October 2, 2021 is as follows:
| For the quarter ended | For the three quarters ended | |||||||||||||||||
| October 1, 2022 | October 2, 2021 | Change | October 1, 2022 | October 2, 2021 | Change | |||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||
| Net cash flows provided by (used in): | ||||||||||||||||||
| Operating activities of continuing operations | 19,973 | 5,065 | 14,908 | 33,062 | (41,097 | ) | 74,159 | |||||||||||
| Investing activities of continuing operations | (21,908 | ) | (17,436 | ) | (4,472 | ) | (80,486 | ) | (57,762 | ) | (22,724 | ) | ||||||
| Financing activities of continuing operations | 1,841 | 12,176 | (10,335 | ) | 53,980 | 112,472 | (58,492 | ) | ||||||||||
| Discontinued operations | - | - | - | (6,324 | ) | (13,580 | ) | 7,256 | ||||||||||
Operating Activities of Continuing Operations
Cash provided by operating activities of continuing operations increased $14.9 million and $74.2 million for the quarter and three quarters ended October 1, 2022, respectively, compared with the corresponding periods of 2021. The increases in cash provided reflected a normalization of frozen fruit inventory purchases in the current year periods, compared with a need to replenish those inventories in the corresponding periods of 2021, following a shortfall in supply in 2020, partially offset by the year-over-year impact of higher commodity prices for frozen fruit, and higher inventory levels to support the growth in our fruit snacks operations. In addition, the increases in cash provided reflected our improved operating performance in the current year periods, together with increased working capital efficiency through the selective use of early payment programs offered by some of our major customers, and improved payment terms with certain of our suppliers.
Investing Activities of Continuing Operations
Cash used in investing activities of continuing operations increased $4.5 million and $22.7 million for the quarter and three quarters ended October 1, 2022, respectively, compared with the corresponding periods of 2021. Investing cash flows reflected additions to property, plant and equipment of $38.0 million and $100.8 million in the third quarter and first three quarters of 2022, compared with additions of $18.4 million and $35.0 million in the corresponding periods of 2021. Capital expenditures in 2022 were mainly related to the construction of our new plant-based beverage facility in Midlothian, Texas, together with the completion of our executive office and innovation center in Eden Prairie, Minnesota, and other expansion projects within our plant-based and fruit snacks operations. Investing cash inflows for the quarter and three quarters ended October 1, 2022, included net proceeds of $16.1 million received on the sale of our Oxnard, California, frozen fruit processing facility, while investing cash outflows for the first three quarters of 2021 included $25.1 million paid to acquire the Dream and WestSoy brand name intangible assets.
Financing Activities of Continuing Operations
Cash provided by financing activities of continuing operations decreased $10.3 million and $58.5 million for the quarter and three quarters ended October 1, 2022, respectively, compared with the corresponding periods of 2021. The decreases in cash provided mainly reflected reduced levels of revolver borrowings required to fund changes in working capital in the current year periods, partially offset by increased borrowings of long-term debt related to term loan and lease financing for capital projects.
Discontinued Operations
Cash used in investing activities of discontinued operations of $6.3 million for the three quarters ended October 1, 2022, related to the settlement of the purchase price allocation and other post-closing matters in connection with the 2020 divestiture of Tradin Organic, while cash used in investing activities of discontinued operations of $13.4 million for the three quarters ended October 2, 2021, related to the settlement of transaction costs accrued in connection with the Tradin Organic sale.
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.
| SUNOPTA INC. | 39 | October 1, 2022 Form 10-Q |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 January 1, 2022.
Item 4. Controls and Procedures
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 our 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 October 1, 2022.
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 October 1, 2022. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the quarter ended October 1, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| SUNOPTA INC. | 40 | October 1, 2022 Form 10-Q |
Item 1. Legal Proceedings
For a discussion of legal proceedings, see note 11 to the unaudited consolidated financial statements included under Part I, Item 1 of this report.
Item 1A. Risk Factors
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 January 1, 2022. 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 should be carefully reviewed in connection with an evaluation of our Company.
Item 6. Exhibits
The following exhibits are included as part of this report.
† Indicates management contract or compensatory plan or arrangement.
* Filed herewith.
| SUNOPTA INC. | 41 | October 1, 2022 Form 10-Q |
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.
| SUNOPTA INC. | |
| Date: November 10, 2022 | /s/ Scott Huckins |
| Scott Huckins | |
| Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
| SUNOPTA INC. | 42 | October 1, 2022 Form 10-Q |