UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to . |
Commission file number:
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (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 every Interactive Data File required to be submitted 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 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):
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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 |
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The Toronto Stock Exchange |
The number of the registrant's common shares outstanding as of August 4, 2023 was
SUNOPTA INC.
FORM 10-Q
For the Quarterly Period Ended July 1, 2023
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 and include, but are not limited to, references to future financial and operating results, plans, objectives, expectations, and intentions; our expectations regarding the future profitability of our plant-based and fruit-based businesses, including anticipated results of operations, revenue trends, and gross margin profiles; the expected impact of the inflationary cost environment on our business, including raw material, packaging, labor, energy, fuel and transportation costs; the expected impact of pricing actions on sales volumes and gross margins; the expected impact of cost containment measures and productivity initiatives; our estimates for losses and related insurance recoveries associated with the recall of specific frozen fruit products in the second quarter of 2023; our expectations regarding customer demand, consumer preferences, competition, sales pricing, availability and pricing of raw material inputs, and timing and cost to complete capital expansion projects; our ability to successfully execute on our capital investment plans, and the viability of those plans; the adequacy of internally generated funds and existing sources of liquidity, such as the availability of bank financing; the anticipated sufficiency of future cash flows to enable the payments of interest and repayment of debt, working capital needs, planned capital expenditures; and our ability to obtain additional financing or issue additional debt or equity securities; our intentions related to the potential sale of selected businesses, operations, or assets; the outcome of litigation to which we may, from time to time, 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. Whether actual results and developments will be consistent with and meet our expectations and predictions is subject to many risks and uncertainties, including those set forth under Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 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. | 3 | July 1, 2023 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.
| SUNOPTA INC. | 4 | July 1, 2023 Form 10-Q |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SunOpta Inc.
Consolidated Statements of Operations
For the quarters and two quarters ended July 1, 2023 and July 2, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars, except per share amounts)
| Quarter ended | Two quarters ended | ||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| Revenues (note 13) | |||||||||||||
| Cost of goods sold | |||||||||||||
| Gross profit | |||||||||||||
| Selling, general and administrative expenses | |||||||||||||
| Intangible asset amortization | |||||||||||||
| Other expense (income), net | ( |
) | ( |
) | |||||||||
| Foreign exchange gain | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Earnings (loss) from continuing operations before the following | ( |
) | ( |
) | |||||||||
| Interest expense, net | |||||||||||||
| Earnings (loss) from continuing operations before income taxes | ( |
) | ( |
) | |||||||||
| Income tax expense (note 9) | |||||||||||||
| Earnings (loss) from continuing operations | ( |
) | ( |
) | |||||||||
| Earnings (loss) from discontinued operations | ( |
) | |||||||||||
| Net earnings (loss) | ( |
) | ( |
) | |||||||||
| Dividends and accretion on preferred stock (note 7) | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Earnings (loss) attributable to common shareholders | ( |
) | ( |
) | |||||||||
| Basic and diluted earnings (loss) per share (note 10) | |||||||||||||
| Earnings (loss) from continuing operations | ( |
) | ( |
) | |||||||||
| Earnings (loss) from discontinued operations | ( |
) | |||||||||||
| Earnings (loss) attributable to common shareholders(1) | ( |
) | ( |
) | |||||||||
| Weighted-average common shares outstanding (000s) (note 10) | |||||||||||||
| Basic | |||||||||||||
| Diluted | |||||||||||||
(1) The sum of the individual per share amounts may not add due to rounding.
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 5 | July 1, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Balance Sheets
As at July 1, 2023 and December 31, 2022
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| July 1, 2023 | December 31, 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 | ||||||
| Total current assets | ||||||
| Property, plant and equipment, net | ||||||
| Operating lease right-of-use assets (note 3) | ||||||
| Intangible assets, net | ||||||
| Goodwill | ||||||
| Deferred income taxes | ||||||
| Other assets | ||||||
| Total assets | ||||||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities (note 4) | ||||||
| Notes payable (note 5) | ||||||
| Income taxes payable | ||||||
| Current portion of long-term debt (note 6) | ||||||
| Current portion of operating lease liabilities (note 3) | ||||||
| Total current liabilities | ||||||
| Long-term debt (note 6) | ||||||
| Operating lease liabilities (note 3) | ||||||
| Deferred income taxes | ||||||
| Total liabilities | ||||||
| Series B-1 preferred stock (note 7) | ||||||
| SHAREHOLDERS' EQUITY | ||||||
| Common shares, |
||||||
| Additional paid-in capital | ||||||
| Accumulated deficit | ( |
) | ( |
) | ||
| Accumulated other comprehensive income | ||||||
| Total shareholders' equity | ||||||
| Total liabilities and shareholders' equity | ||||||
| Commitments and contingencies (note 12) |
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 6 | July 1, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity
As at and for the quarters ended July 1, 2023 and July 2, 2022
(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 April 1, 2023 | ( |
) | ||||||||||||||||
| Share issuance costs (note 7) | - | ( |
) | - | - | - | ( |
) | ||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at July 1, 2023 | ( |
) | ||||||||||||||||
| Common shares | Additional paid-in capital |
Accumulated deficit |
Accumulated other comprehensive income |
Total | ||||||||||||||
| 000s | $ | $ | $ | $ | $ | |||||||||||||
| Balance at April 2, 2022 | ( |
) | ||||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net earnings | - | - | - | - | ||||||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at July 2, 2022 | ( |
) | ||||||||||||||||
| SUNOPTA INC. | 7 | July 1, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity (continued)
As at and for the two quarters ended July 1, 2023 and July 2, 2022
(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 December 31, 2022 | ( |
) | ||||||||||||||||
| Exchange of Series B-1 preferred stock, net of share issuance costs of $ |
- | - | - | |||||||||||||||
| Employee stock purchase plan | - | - | - | |||||||||||||||
| Stock incentive plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net loss | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at July 1, 2023 | ( |
) | ||||||||||||||||
| 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 plan | ( |
) | - | - | ||||||||||||||
| Withholding taxes on stock-based awards | - | - | ( |
) | - | - | ( |
) | ||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||
| Net earnings | - | - | - | - | ||||||||||||||
| Dividends on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Accretion on preferred stock | - | - | - | ( |
) | - | ( |
) | ||||||||||
| Balance at July 2, 2022 | ( |
) | ||||||||||||||||
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 8 | July 1, 2023 Form 10-Q |
SunOpta Inc.
Consolidated Statements of Cash Flows
For the quarters and two quarters ended July 1, 2023 and July 2, 2022
(Unaudited)
(Expressed in thousands of U.S. dollars)
| Quarter ended | Two quarters ended | ||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| CASH PROVIDED BY (USED IN) | |||||||||||||
| Operating activities | |||||||||||||
| Net earnings (loss) | ( |
) | ( |
) | |||||||||
| Earnings (loss) from discontinued operations | ( |
) | |||||||||||
| Earnings (loss) from continuing operations | ( |
) | ( |
) | |||||||||
| Items not affecting cash: | |||||||||||||
| Depreciation and amortization | |||||||||||||
| Amortization of debt issuance costs | |||||||||||||
| Deferred income taxes | |||||||||||||
| Stock-based compensation | |||||||||||||
| Other | ( |
) | |||||||||||
| Changes in operating assets and liabilities (note 11) | ( |
) | ( |
) | |||||||||
| Net cash provided by (used in) operating activities of continuing operations | ( |
) | |||||||||||
| Investing activities | |||||||||||||
| Additions to property, plant and equipment | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Proceeds from sale of sunflower business (note 11) | |||||||||||||
| Proceeds from sale of property, plant and equipment | |||||||||||||
| Net cash used in investing activities of continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Net cash used in investing activities of discontinued operations | ( |
) | ( |
) | |||||||||
| Net cash used in investing activities of continuing operations | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Financing activities | |||||||||||||
| Increase (decrease) in borrowings under revolving credit facilities (note 6) | ( |
) | |||||||||||
| Borrowings of long-term debt (notes 3 and 6) | |||||||||||||
| Repayment of long-term debt (note 3) | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Proceeds from notes payable (note 5) | |||||||||||||
| Repayment of notes payable (note 5) | ( |
) | ( |
) | |||||||||
| 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 7) | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Payment of share issuance costs | ( |
) | ( |
) | |||||||||
| Payment of debt issuance costs | ( |
) | ( |
) | |||||||||
| Net cash provided by (used in) financing activities of continuing operations | ( |
) | |||||||||||
| Increase 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 3 and 11) | |||||||||||||
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 9 | July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements |
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 two quarters ended July 1, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 30, 2023 or for any other period. The interim consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended December 31, 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 December 31, 2022 (the "2022 Form 10-K").
As described in notes 1 and 23 to the consolidated financial statements included in the 2022 Form 10-K, certain amounts previously reported for the quarter and two quarters ended July 2, 2022 have been revised.
Fiscal Year
2. Inventories
| July 1, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Raw materials and work-in-process | ||||||
| Finished goods | ||||||
| Inventory reserves(1) | ( |
) | ( |
) | ||
(1) As at July 1, 2023, inventory reserves included $
3. 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.
| SUNOPTA INC. |
10 |
July 1, 2023 Form 10-Q |
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SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
The following tables present supplemental information related to leases:
| Quarter ended | Two quarters ended | ||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| Lease Costs | |||||||||||||
| Operating lease cost | |||||||||||||
| Finance lease cost: | |||||||||||||
| Depreciation of right-of-use assets | |||||||||||||
| Interest on lease liabilities | |||||||||||||
| Net lease cost | |||||||||||||
| July 1, 2023 | December 31, 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 | Two quarters ended | ||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| 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 | |||||||||||||
| Finance leases | |||||||||||||
| Right-of-use assets and liabilities reduced through lease terminations or modifications: | |||||||||||||
| Operating leases | ( |
) | |||||||||||
| SUNOPTA INC. |
11 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(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 buildout of the Company's new plant-based beverage facility in Midlothian, Texas, in the first two quarters of 2023 and 2022, as well as the buildout of the Company's executive office and innovation center located in Eden Prairie, Minnesota, in the first two quarters of 2022. Cash received under finance leases is reported in borrowings of long-term debt on the consolidated statements of cash flows.
| July 1, 2023 | December 31, 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 2023 | ||||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 | ||||||
| Thereafter | ||||||
| Total lease payments | ||||||
| Less: imputed interest | ( |
) | ( |
) | ||
| Total lease liabilities |
4. Accounts Payable
The Company is party to a supplier finance program with a third-party financial institution, which is offered to certain of the Company's major suppliers. Under this arrangement, the Company agrees with a supplier on the contractual payment terms for the goods the Company procures regardless of whether the supplier elects to participate in the program. If a supplier does participate in the program, the supplier determines, at its own discretion, which invoices, if any, it wants to sell to the financial institution in order to be paid earlier than the contractual payment terms provide. A supplier's voluntary inclusion of an invoice in the program has no bearing on the Company's payment terms, which remain the original due date of the supplier invoice, or the amounts it pays the financial institution, and the Company has no economic interest in a supplier's decision to participate in the program. In addition, the Company has not pledged any assets to the financial institution as it relates to the program. Amounts due to suppliers that elected to participate in the program are included in accounts payable and accrued liabilities on the Company's consolidated balance sheets. As at July 1, 2023, the Company had outstanding payment obligations to these suppliers of $
5. Notes Payable
Commencing in the first quarter of 2023, the Company is financing certain purchases of trade goods and services through third-party extended payables facilities. Under these facilities, third-party intermediaries advance the amount of the scheduled payment to the supplier based on the invoice due date and issue a short-term note payable to the Company for the face amount of the supplier invoice. Interest accrues on the note payable from the contractual payment date of the supplier invoice to the extended due date of the note payable, as specified by the negotiated terms of each facility. The Company does not maintain any form of security with the third-party intermediaries. As at July 1, 2023, the Company had outstanding principal payment obligations to the third-party intermediaries of $
| SUNOPTA INC. |
12 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
| July 1, 2023 | December 31, 2022 | ||||||
| $ | $ | ||||||
| Asset-based credit facilities: | |||||||
| Revolving credit facilities | |||||||
| Term loan facility | |||||||
| Total asset-based credit facilities | |||||||
| Finance lease liabilities (see note 3) | |||||||
| 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, the Third Amendment, dated as of February 25, 2022, and the Fourth Amendment, dated as of September 2, 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
As at July 1, 2023, the Company was in compliance with all covenants of the Credit Agreement.
| SUNOPTA INC. |
13 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
7. Series B-1 Preferred Stock
On April 15, 2020, the Company and SunOpta Foods entered into a subscription agreement (the "Series B Subscription Agreement") with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund II, L.P. (collectively, "Oaktree") and Engaged Capital, LLC, Engaged Capital Flagship Master Fund, LP and Engaged Capital Co-Invest IV-A, LP (collectively, "Engaged"). On April 24, 2020, pursuant to the Series B Subscription Agreement, SunOpta Foods issued
As at July 1, 2023, SunOpta Foods had
On May 19, 2023, the Company issued
In the first quarter of 2023, the Company paid cash dividends on the Series B-1 Preferred Stock of $
| SUNOPTA INC. |
14 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
8. Stock-Based Compensation
During the second quarter of 2023, the Company granted
During the first quarter of 2023, the Company issued
The following table summarizes all EBITDA PSU activity for the two quarters ended July 1, 2023:
| Weighted- | ||||||
| average grant- | ||||||
| EBITDA PSUs | date fair value | |||||
| Non-vested, beginning of period | $ | |||||
| Granted | ||||||
| Vested | ( |
) | ||||
| Cancelled | ( |
) | ||||
| Non-vested, end of period | $ |
Subsequent to the second quarter of 2023, on July 10, 2023, the Company granted
9. Income Taxes
The effective tax rates recognized for the quarter and two quarters ended July 1, 2023 were (
| SUNOPTA INC. |
15 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
10. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows (shares in thousands):
| Quarter ended | Two quarters ended | ||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||
| Basic Earnings (Loss) Per Share | |||||||||||||
| Numerator for basic earnings (loss) per share: | |||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | |||||
| Less: dividends and accretion on preferred stock | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Earnings (loss) from continuing operations attributable to common shareholders | ( |
) | ( |
) | |||||||||
| Earnings (loss) from discontinued operations | ( |
) | |||||||||||
| Earnings (loss) attributable to common shareholders | $ | ( |
) | $ | $ | ( |
) | $ | |||||
| Denominator for basic earnings (loss) per share: | |||||||||||||
| Basic weighted-average number of shares outstanding | |||||||||||||
| Basic earnings (loss) per share: | |||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | |||||
| Earnings (loss) from discontinued operations | ( |
) | |||||||||||
| Earnings (loss) attributable to common shareholders(1) | $ | ( |
) | $ | $ | ( |
) | $ | |||||
| Diluted Earnings (Loss) Per Share | |||||||||||||
| Numerator for diluted earnings (loss) per share: | |||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | |||||
| Less: dividends and accretion on preferred stock | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Earnings (loss) from continuing operations attributable to common shareholders | ( |
) | ( |
) | |||||||||
| Earnings (loss) from discontinued operations | ( |
) | |||||||||||
| Earnings (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(2) | |||||||||||||
| Series B-1 Preferred Stock(3) | |||||||||||||
| Diluted weighted-average number of shares outstanding | |||||||||||||
| Diluted earnings (loss) per share: | |||||||||||||
| Earnings (loss) from continuing operations | $ | ( |
) | $ | $ | ( |
) | $ | |||||
| Earnings (loss) from discontinued operations | ( |
) | |||||||||||
| Earnings (loss) attributable to common shareholders(1) | $ | ( |
) | $ | $ | ( |
) | $ | |||||
(1) The sum of the individual per share amounts may not add due to rounding.
(2) For the quarter and two quarters ended July 1, 2023,
| SUNOPTA INC. |
16 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(3) For the quarter and two quarters ended July 1, 2023 and July 2, 2022, 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 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 the
11. Supplemental Cash Flow Information
| Quarter ended | Two quarters ended | |||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
| $ | $ | $ | $ | |||||||||
| 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 accrued withholding taxes on stock-based awards included in accounts payable and accrued liabilities | ( |
) | ||||||||||
| Change in accrued dividends on preferred stock included in accounts payable and accrued liabilities | ( |
) | ||||||||||
| Change in proceeds receivable from sale of sunflower business(1) | ||||||||||||
| Change in accounts payable and accrued liabilities related to discontinued operations | ( |
) | ||||||||||
(1)
12. 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.
| SUNOPTA INC. |
17 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Product Recall
On June 21, 2023, the Company announced its subsidiary, Sunrise Growers Inc., had issued a voluntary recall of specific frozen fruit products linked to pineapple provided by a third-party supplier due to possible contamination by Listeria monocytogenes. For the quarter ended July 1, 2023, the Company recognized a reduction to revenues of $
The Company expects to incur additional costs related to the recall during the second half of 2023, including product warehousing, transportation and destruction costs, as well as administrative costs. In addition, the Company may be subject to additional claims for damages from customers and end-consumers related to the recall. The Company expects that these additional costs and potential claims will be generally covered under its insurance policies; however, as of the date of this filing, the Company cannot be certain of its ability to recover recall-related costs through its insurance coverage or the extent of any such recovery.
The Company is currently unable to assess the impact that this recall may have on its future sales of frozen fruit products or on its relationships with its frozen fruit customers, which may have an adverse impact on the fair values of the property, plant and equipment and finite-lived customer relationship intangible assets associated with the frozen fruit business, which had carrying values of $
13. 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.
| SUNOPTA INC. |
18 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Segment Revenues and Operating Income (Loss)
Operating segment results for the quarters and two quarters ended July 1, 2023 and July 2, 2022 were as follows:
| Quarter ended | Two quarters ended | |||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
| $ | $ | $ | $ | |||||||||
| 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 (loss) | ( |
) | ( |
) | ||||||||
| Other income (expense), net | ( |
) | ( |
) | ||||||||
| Interest expense, net | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Earnings (loss) from continuing operations before income taxes | ( |
) | ( |
) | ||||||||
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 | Two quarters ended | |||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
| $ | $ | $ | $ | |||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Beverages and broths | ||||||||||||
| Plant-based ingredients | ||||||||||||
| Sunflower and roasted snacks(1) | ||||||||||||
| 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 | ||||||||||||
(1) Reflects revenues of the Company's former sunflower business and related roasted snacks operations, which were sold on October 11, 2022.
| SUNOPTA INC. |
19 |
July 1, 2023 Form 10-Q |
|
SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended July 1, 2023 and July 2, 2022 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Segment Assets
Total assets by operating segment as at July 1, 2023 and December 31, 2022 were as follows:
| July 1, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Plant-Based Foods and Beverages | ||||||
| Fruit-Based Foods and Beverages | ||||||
| Corporate Services | ||||||
| Total assets |
Segment Depreciation and Amortization
Depreciation and amortization by operating segment for the quarters and two quarters ended July 1, 2023 and July 2, 2022 was as follows:
| Quarter ended | Two quarters ended | |||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | |||||||||
| $ | $ | $ | $ | |||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Fruit-Based Foods and Beverages | ||||||||||||
| Corporate Services | ||||||||||||
| Total depreciation and amortization | ||||||||||||
| SUNOPTA INC. | 20 |
July 1, 2023 Form 10-Q |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended July 1, 2023 contained under Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to August 10, 2023.
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:
Plant-Based Foods and Beverages - We offer a full line of plant-based beverages and liquid and powder ingredients, utilizing oat, almond, soy, coconut, rice, hemp, and other bases, as well as broths, teas, and nutritional beverages. In addition, our former sunflower business, which packaged dry- and oil-roasted inshell sunflower and sunflower kernels and processed raw sunflower inshell and kernel for food and feed applications, was part of this segment until it was divested on October 11, 2022.
Fruit-Based Foods and Beverages - We offer individually quick frozen ("IQF") fruit for retail, including strawberries, blueberries, mango, pineapple, and other berries and blends, and IQF and bulk frozen fruit for foodservice, including toppings, purées, and smoothies. In addition, we offer fruit snacks, including bars, twists, ropes, and bite-sized varieties, as well as fruit smoothie bowls.
| SUNOPTA INC. | 21 | July 1, 2023 Form 10-Q |
Global Economic Conditions and Inflationary Cost Environment
Our businesses continue to be exposed to the effects of the current global macroeconomic environment, including elevated inflation, higher interest rates, and shifts in consumer demand.
Frozen Fruit Product Recall
On June 21, 2023, we announced that our subsidiary, Sunrise Growers Inc., had issued a voluntary recall of specific frozen fruit products linked to pineapple provided by a third-party supplier due to possible contamination by Listeria monocytogenes. In July 2023, we began restocking each of the affected retail customers and these efforts will continue as replacement product is produced with fruit sourced from new suppliers.
For the quarter ended July 1, 2023, we recognized net expenses of $2.5 million related to this recall, equal to the self-insured retention amount under our insurance policies, which included a reduction to revenues of $0.2 million for customer returns and a $3.0 million charge to cost of goods sold for unsaleable inventory, partially offset by estimated insurance recoveries of $0.7 million, recorded in other income. We expect to incur additional recall-related costs during the second half of 2023, which we expect will be generally covered under our insurance policies.
For more information regarding the frozen fruit product recall, see note 12 to the unaudited consolidated financial statements included in this report.
| SUNOPTA INC. | 22 | July 1, 2023 Form 10-Q |
Consolidated Results of Operations for the Quarters Ended July 1, 2023 and July 2, 2022
| July 1, 2023 | July 2, 2022 | Change | Change | ||||||||||
| For the quarter ended | $ | $ | $ | % | |||||||||
| Revenues | |||||||||||||
| Plant-Based Foods and Beverages | 114,492 | 145,912 | (31,420 | ) | -21.5% | ||||||||
| Fruit-Based Foods and Beverages | 93,317 | 97,619 | (4,302 | ) | -4.4% | ||||||||
| Total revenues | 207,809 | 243,531 | (35,722 | ) | -14.7% | ||||||||
| Gross Profit | |||||||||||||
| Plant-Based Foods and Beverages | 14,405 | 23,940 | (9,535 | ) | -39.8% | ||||||||
| Fruit-Based Foods and Beverages | 1,974 | 10,958 | (8,984 | ) | -82.0% | ||||||||
| Total gross profit | 16,379 | 34,898 | (18,519 | ) | -53.1% | ||||||||
| Gross Margin(1) | |||||||||||||
| Plant-Based Foods and Beverages | 12.6% | 16.4% | -3.8% | ||||||||||
| Fruit-Based Foods and Beverages | 2.1% | 11.2% | -9.1% | ||||||||||
| Total gross margin | 7.9% | 14.3% | -6.4% | ||||||||||
| Segment operating income (loss)(2) | |||||||||||||
| Plant-Based Foods and Beverages | 1,903 | 12,196 | (10,293 | ) | -84.4% | ||||||||
| Fruit-Based Foods and Beverages | (4,278 | ) | 3,211 | (7,489 | ) | * | |||||||
| Corporate Services | (888 | ) | (7,298 | ) | 6,410 | 87.8% | |||||||
| Total segment operating income (loss) | (3,263 | ) | 8,109 | (11,372 | ) | * | |||||||
| Other expense (income), net | (227 | ) | 1,540 | (1,767 | ) | * | |||||||
| Earnings (loss) from continuing operations before the following | (3,036 | ) | 6,569 | (9,605 | ) | * | |||||||
| Interest expense, net | 6,969 | 3,132 | 3,837 | 122.5% | |||||||||
| Income tax expense | 8,833 | 1,152 | 7,681 | 666.8% | |||||||||
| Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | (21,123 | ) | * | |||||||
| Loss from discontinued operations | - | (814 | ) | 814 | 100.0% | ||||||||
| Net earnings (loss)(3),(4) | (18,838 | ) | 1,471 | (20,309 | ) | * | |||||||
| Dividends and accretion on preferred stock | (422 | ) | (760 | ) | 338 | 44.5% | |||||||
| Earnings (loss) attributable to common shareholders(5) | (19,260 | ) | 711 | (19,971 | ) | * | |||||||
* Percentage not meaningful due to figures being positive and negative.
(1) Gross margin is a measure of gross profit (equal to revenues less cost of goods sold) as a percentage of revenues. We use a measure of gross margin that excludes non-capitalizable start-up costs included in cost of goods sold that are incurred in connection with capital expansion projects. Start-up costs have had, and are expected to continue to have, a significant impact on the comparability of reported gross margins, which may obscure trends in our margin performance. Additionally, in the second quarter of 2023, we recorded an inventory reserve in cost of goods sold for unsaleable product related to the frozen fruit product recall, which we have excluded from our measure of adjusted gross margin due to the size and specific nature of this reserve.
We use the measure of adjusted gross margin to evaluate the underlying profitability of our revenue-generating activities within each reporting period. We believe that disclosing this non-GAAP measure provides investors with a meaningful, consistent comparison of our profitability measure for the periods presented. However, the non-GAAP measure of adjusted gross margin should not be considered in isolation or as a substitute for gross margin calculated based on gross profit determined in accordance with U.S. GAAP. The following table presents a reconciliation of adjusted gross margin from reported gross margin calculated in accordance with U.S. GAAP.
| SUNOPTA INC. | 23 | July 1, 2023 Form 10-Q |
| July 1, 2023 | July 2, 2022 | |||||||||||||||||
| Plant-Based | Fruit-Based | Plant-Based | Fruit-Based | |||||||||||||||
| Foods and | Foods and | Foods and | Foods and | |||||||||||||||
| For the quarter ended | Beverages | Beverages | Consolidated | Beverages | Beverages | Consolidated | ||||||||||||
| Reported gross margin | 12.6% | 2.1% | 7.9% | 16.4% | 11.2% | 14.3% | ||||||||||||
| Start-up costs(a) | 4.9% | 0.2% | 2.8% | 0.2% | - | 0.1% | ||||||||||||
| Product recall costs(b) | - | 3.2% | 1.5% | - | - | 0.0% | ||||||||||||
| Adjusted gross margin | 17.5% | 5.6% | 12.1% | 16.6% | 11.2% | 14.4% | ||||||||||||
Note: percentages may not add due to rounding.
(a) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the second quarter of 2023, start-up costs included in cost of goods sold related to the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, and the start-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington. For the second quarter of 2022, start-up costs included in cost of goods sold related to the hiring and training of new employees for the Midlothian facility.
(b) Represents the reserve for unsaleable inventory associated with the frozen fruit product recall in the second quarter of 2023.
(2) When assessing the financial performance of our operating segments, we use an internal measure of operating income/loss that excludes other income/expense items determined in accordance with U.S. GAAP. This measure is the basis on which management, including the CEO, assesses the underlying performance of our operating segments. We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our operating performance. However, the non-GAAP measure of operating income/loss should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. The following table presents a reconciliation of segment operating income (loss) to "earnings (loss) from continuing operations before the following" 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 | $ | $ | $ | $ | ||||||||
| July 1, 2023 | ||||||||||||
| Segment operating income (loss) | 1,903 | (4,278 | ) | (888 | ) | (3,263 | ) | |||||
| Other income (expense), net | 113 | (73 | ) | 187 | 227 | |||||||
| Earnings (loss) from continuing operations before the following | 2,016 | (4,351 | ) | (701 | ) | (3,036 | ) | |||||
| July 2, 2022 | ||||||||||||
| Segment operating income (loss) | 12,196 | 3,211 | (7,298 | ) | 8,109 | |||||||
| Other expense, net | (203 | ) | (1,145 | ) | (192 | ) | (1,540 | ) | ||||
| Earnings (loss) from continuing operations before the following | 11,993 | 2,066 | (7,490 | ) | 6,569 |
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.
(3) When assessing our financial performance, we use an internal measure of adjusted earnings/loss that excludes specific items recognized in other income or 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 (loss) from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 24 | July 1, 2023 Form 10-Q |
| July 1, 2023 | July 2, 2022 | ||||||||||||
| Per Share | Per Share | ||||||||||||
| For the quarter ended | $ | $ | $ | $ | |||||||||
| Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | ||||||||||
| Dividends and accretion on preferred stock | (422 | ) | (760 | ) | |||||||||
| Earnings (loss) from continuing operations attributable to common shareholders shareholders | (19,260 | ) | (0.17 | ) | 1,525 | 0.01 | |||||||
| Adjusted for: | |||||||||||||
| Start-up costs(a) | 6,697 | 281 | |||||||||||
| Product recall costs, net of insurance recoveries(b) | 2,500 | - | |||||||||||
| Business development costs(c) | 731 | 616 | |||||||||||
| Facility closure costs(d) | - | 1,287 | |||||||||||
| Other(e) | 443 | 253 | |||||||||||
| Net income tax on adjusting items(f) | 1,873 | (640 | ) | ||||||||||
| Change in valuation allowance for deferred tax assets(g) | 3,978 | - | |||||||||||
| Adjusted earnings (loss) | (3,038 | ) | (0.03 | ) | 3,322 | 0.03 | |||||||
(a) For the second quarter of 2023, start-up costs included the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, the start-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington, and professional fees related to productivity initiatives within our plant-based beverage operations, which were recorded in cost of goods sold ($5.8 million) and SG&A expenses ($0.9 million). For the second quarter of 2022, start-up costs included the hiring and training of new employees for the Midlothian facility, which were recorded in cost of goods sold ($0.2 million) and SG&A expenses ($0.1 million).
(b) Reflects estimated costs related to the frozen fruit product recall in the second quarter of 2023, which were recorded as a reduction to revenues ($0.2 million) for customer returns and as an addition to cost of goods sold ($3.0 million) for unsaleable inventory. These costs are reflected in the table above net of estimated insurance recoveries of $0.7 million, which were recorded in other income.
(c) Represents third-party costs associated with business development activities, which are inclusive of costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. These costs were recorded in SG&A expenses.
(d) For the second quarter of 2022, facility closure costs mainly related to the relocation of certain equipment from our former Oxnard, California, frozen fruit processing facility to our Mexican facility, which were recorded in other expense.
(e) For the second quarters of 2023 and 2022, other mainly reflects reserves for the settlement of certain legal and contractual matters.
(f) 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, net of deferred tax valuation allowances.
(g) Reflects an increase to the valuation allowance for U.S. deferred tax assets that originated prior to fiscal 2023, based on an assessment of the future realizability of the related tax benefits.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings (loss). However, adjusted earnings (loss) is not, and should not be viewed as, a substitute for earnings (loss) from continuing operations prepared under U.S. GAAP. Adjusted earnings (loss) is presented solely to allow investors to more fully understand how we assess our financial performance.
(4) We use a measure of adjusted EBITDA when assessing the performance of our operations, which we believe is useful to investors' understanding of our operating profitability because it excludes non-operating expenses, such as interest and income taxes, and non-cash expenses, such as depreciation, amortization, 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 (loss) plus depreciation, amortization, and stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings (loss) (refer above to footnote (3)). The following table presents a reconciliation of segment operating income (loss) and adjusted EBITDA from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 25 | July 1, 2023 Form 10-Q |
| July 1, 2023 | July 2, 2022 | |||||
| For the quarter ended | $ | $ | ||||
| Earnings (loss) from continuing operations | (18,838 | ) | 2,285 | |||
| Income tax expense | 8,833 | 1,152 | ||||
| Interest expense, net | 6,969 | 3,132 | ||||
| Other expense (income), net | (227 | ) | 1,540 | |||
| Total segment operating income (loss) | (3,263 | ) | 8,109 | |||
|
Depreciation and amortization |
10,787 | 9,372 | ||||
|
Stock-based compensation |
2,029 | 3,970 | ||||
|
Start-up costs(a) |
6,697 | 281 | ||||
|
Product recall costs(b) |
3,170 | - | ||||
|
Business development costs(c) |
731 | 616 | ||||
| Adjusted EBITDA | 20,151 | 22,348 |
(a) Refer to footnote (3)(a) above.
(b) Reflects estimated costs related to the frozen fruit product recall in the second quarter of 2023, which were recorded as a reduction to revenues ($0.2 million) and an addition to cost of goods sold ($3.0 million).
(c) Refer to footnote (3)(c) above.
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/loss, and adjusted earnings/loss 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.
(5) 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. For example, as described above under footnote (1), we evaluate our gross margins on a basis that excludes the impact of start-up and product recall costs. In addition, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (3), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for an analysis of our results as reported under U.S. GAAP.
| SUNOPTA INC. | 26 | July 1, 2023 Form 10-Q |
Inclusive of the impact of the divestiture of our sunflower business in the fourth quarter of 2022, total revenues for the quarter ended July 1, 2023 decreased by 14.7% to $207.8 million from $243.5 million for the quarter ended July 2, 2022, reflecting a 21.5% revenue decline in the Plant-Based Foods and Beverages segment and a 4.4% revenue decline in the Fruit-Based Foods and Beverages segment. The change in revenues from the second quarter of 2022 to the second quarter of 2023 was due to the following:
| Plant-Based | Fruit-Based | |||||||||||||||||
| Foods and Beverages | Foods and Beverages | Consolidated | ||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||
| 2022 revenues | 145,912 | 97,619 | 243,531 | |||||||||||||||
| Price | 4,741 | 3.2% | 283 | 0.3% | 5,024 | 2.1% | ||||||||||||
| Volume/Mix | (14,859 | ) | -10.2% | (4,431 | ) | -4.5% | (19,290 | ) | -7.9% | |||||||||
| Divestiture of sunflower business | (21,302 | ) | -14.6% | - | - | (21,302 | ) | -8.7% | ||||||||||
| Product recall costs | - | - | (154 | ) | -0.2% | (154 | ) | -0.1% | ||||||||||
| 2023 revenues | 114,492 | -21.5% | 93,317 | -4.4% | 207,809 | -14.7% | ||||||||||||
Note: percentages may not add due to rounding.
For the quarter ended July 1, 2023, the 21.5% decrease in revenues for the Plant-Based Foods and Beverages segment reflected a 14.6% revenue loss related to the divestiture of the sunflower business, together with an unfavorable volume/mix impact of 10.2%, partially offset by an 3.2% overall increase in pricing. The unfavorable volume/mix reflected lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base (an $8.2 million decrease to revenues), together with softer demand for almond beverages in the current period and lower sales volumes of everyday broths. Additionally, our co-manufactured tea volumes were negatively impacted in the second quarter of 2023 by raw material supply issues with a customer. On the other hand, we saw sales volume growth from our oat milks and creamers, and newly introduced 330-milliliter protein shakes. The increase in pricing mainly reflected the wrap-around benefit of pricing actions taken with customers in 2022 to offset inflationary cost increases.
For the quarter ended July 1, 2023, the 4.4% decrease in revenues for the Fruit-Based Foods and Beverages segment reflected an unfavorable volume/mix impact of 4.5%, slightly offset by a 0.3% increase in pricing. The volume/mix impact reflected lower volumes of frozen fruit, due to lower retail consumption trends, constraints on certain fruit varieties impacting blends, and lost foodservice volumes, partially offset by increased volumes of fruit snacks. For the quarter ended July 1, 2023, we recorded a reserve of $0.2 million (0.2% impact on revenues) for estimated customer returns associated with the frozen fruit product recall.
Consolidated gross profit decreased $18.5 million, or 53.1%, to $16.4 million for the quarter ended July 1, 2023, compared with $34.9 million for the quarter ended July 2, 2022. Consolidated gross margin for the quarter ended July 1, 2023 was 7.9% compared to 14.3% for the quarter ended July 2, 2022, a decrease of 640 basis points. Adjusted gross margin on a consolidated basis for the quarter ended July 1, 2023 was 12.1% compared to 14.4% for the quarter ended July 2, 2022, a decrease of 230 basis points. See footnote (1) to the table above for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
Gross profit for the Plant-Based Foods and Beverages segment decreased $9.5 million to $14.4 million for the quarter ended July 1, 2023, compared with $23.9 million for the quarter ended July 2, 2022, and gross margin decreased 380 basis points to 12.6% in the second quarter of 2023 from 16.4% in the second quarter of 2022. In the second quarter of 2023, we incurred start-up costs included in cost of goods sold of $5.6 million (4.9% gross margin impact) related to our new plant in Midlothian, Texas, compared with $0.2 million (0.2% gross margin impact) of start-up costs incurred in the second quarter of 2022. Excluding the impact of these costs, adjusted gross margin for the Plant-Based Food and Beverages segment was 17.5% in the second quarter of 2023, compared to 16.6% in the second quarter of 2022. The 90-basis point increase in adjusted gross margin reflected the wrap-around benefit of pricing actions taken in 2022 to recover input cost inflation, together with the positive margin impacts of the divestiture of our lower-margin sunflower commodity business, and a mix shift in our plant-based ingredient operations, with increased internal use of oat base to support our beverage business and lower external sales. These factors were partially offset by incremental depreciation of new production equipment for capital expansion projects ($2.4 million or 2.1% gross margin impact), together with the negative impacts of higher input costs and lower production volumes and plant utilization within our plant-based operations.
Gross profit for the Fruit-Based Foods and Beverages segment decreased $9.0 million to $2.0 million for the quarter ended July 1, 2023, compared with $11.0 million for the quarter ended July 2, 2022, and gross margin decreased 910 basis points to 2.1% in the second quarter of 2023 from 11.2% in the second quarter of 2022. In the second quarter of 2023, we recorded a reserve for unsaleable inventory associated with the frozen fruit product recall of $3.0 million (3.2% gross margin impact). Excluding the impact of these costs, adjusted gross margin for the Fruit-Based Food and Beverages segment was 5.6% in the second quarter of 2023, compared to 11.2% in the second quarter of 2022. The 560-basis point decrease in adjusted gross margin reflected higher manufacturing costs and unfavorable plant utilization due to lower production volumes, together with a higher mix of lower margin bulk fruit sales to right-size inventories and improve working capital efficiency, and a higher cost of inventory from Mexico due to the impact of a strengthening Mexican peso (approximately $2.4 million or 2.6% gross margin impact).
| SUNOPTA INC. | 27 | July 1, 2023 Form 10-Q |
For the quarter ended July 1, 2023, we realized a total segment operating loss of $3.3 million, compared with total segment operating income of $8.1 million for the quarter ended July 2, 2022. The $11.4 million decrease in total segment operating income reflected lower gross profit, as described above, partially offset by a $4.7 million decrease in SG&A expenses and a favorable year-over-year foreign exchange impact related to the remeasurement of our Mexican operations into U.S. dollars of $2.3 million. The decrease in SG&A expenses was mainly due to lower employee incentive compensation accruals based on performance, together with lower stock-based compensation expense related to the timing of our annual equity grants, partially offset by higher business development costs.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Operating Segment Information."
Other income of $0.2 million for the quarter ended July 1, 2023 mainly reflected estimated insurance recoveries associated with the frozen fruit product recall, partially offset by a reserve for the settlement of an unrelated legal matter. Other expense of $1.5 million for the quarter ended July 2, 2022 mainly reflected costs to relocate certain equipment from our former Oxnard, California, frozen fruit processing facility to our Mexican facility.
Net interest expense increased by $3.9 million to $7.0 million for the quarter ended July 1, 2023, compared with $3.1 million for the quarter ended July 2, 2022, resulting from an increase in outstanding debt to finance capital expansion projects, together with the impact of higher interest rates.
We recognized income tax expense of $8.8 million on a pre-tax loss of $10.0 million for the quarter ended July 1, 2023, compared with income tax expense of $1.2 million on pre-tax earnings of $3.4 million for the quarter ended July 2, 2022. The change in the effective tax rate from 33.5% for the second quarter of 2022 to (88.3)% for the second quarter of 2023, was mainly due to the recognition of a full valuation allowance against U.S. deferred tax assets in the second quarter of 2023, based on our assessment that the related tax benefits were no longer more likely than not to be realized in the future.
Loss from continuing operations for the quarter ended July 1, 2023 was $18.8 million, compared with earnings of $2.3 million for the quarter ended July 2, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.17 for the quarter ended July 1, 2023, compared with a diluted earnings per share of $0.01 for the quarter ended July 2, 2022.
We recognized a loss from discontinued operations of $0.8 million (diluted loss per share of $0.01) for the quarter ended July 2, 2022, which was 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 $19.3 million (diluted loss per share of $0.17) for the quarter ended July 1, 2023, compared with earnings attributable to common shareholders of $0.7 million (diluted earnings per share of $0.01) for the quarter ended July 2, 2022. Earnings (loss) attributable to common shareholders included dividends and accretion on our Series B-1 preferred stock of $0.4 million and $0.8 million in the second quarters of 2023 and 2022, respectively.
For the quarter ended July 1, 2023, adjusted loss was $3.0 million, or $0.03 loss per diluted share, compared with adjusted earnings of $3.3 million, or $0.03 earnings per diluted share for the quarter ended July 2, 2022. Adjusted EBITDA decreased $2.2 million, or 9.8%, for the quarter ended July 1, 2023 to $20.2 million, compared with $22.3 million for the quarter ended July 2, 2022, which was inclusive of $2.4 million of adjusted EBITDA attributable to the divested sunflower business. Adjusted earnings (loss) and adjusted EBITDA are non-GAAP financial measures. See footnotes (3) and (4) to the table above for a reconciliation of adjusted earnings (loss) and adjusted EBITDA from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 28 | July 1, 2023 Form 10-Q |
Operating Segment Information
| Plant-Based Foods and Beverages | ||||||||||||
| For the quarter ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
| Revenues | $ | 114,492 | $ | 145,912 | $ | (31,420 | ) | -21.5% | ||||
| Gross profit | 14,405 | 23,940 | (9,535 | ) | -39.8% | |||||||
| Gross margin | 12.6% | 16.4% | -3.8% | |||||||||
| Operating income | $ | 1,903 | $ | 12,196 | $ | (10,293 | ) | -84.4% | ||||
| Operating margin | 1.7% | 8.4% | -6.7% |
Plant-Based Foods and Beverages contributed $114.5 million in revenues for the quarter ended July 1, 2023, compared to $145.9 million for the quarter ended July 2, 2022, a decrease of $31.4 million, or 21.5%. The table below explains the decrease in revenues:
| Plant-Based Foods and Beverages Revenue Changes | |
| Revenues for the quarter ended July 2, 2022 | $145,912 |
| Impact of the divestiture of the sunflower business in the fourth quarter of 2022 | (21,302) |
| Lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base | (8,169) |
| Softer demand for almond beverages and lower sales volumes of everyday broths, together with lower co-manufactured tea volumes due to raw material supply issues with a customer, partially offset by sales volume growth for oat-based milks and creamers, and newly introduced 330-milliliter protein shakes, together with the wrap-around benefit of pricing actions taken in 2022 to offset input cost inflation | (1,949) |
| Revenues for the quarter ended July 1, 2023 | $114,492 |
Gross profit in Plant-Based Foods and Beverages decreased by $9.5 million to $14.4 million for the quarter ended July 1, 2023, compared to $23.9 million for the quarter ended July 2, 2022. The table below explains the decrease in gross profit:
| Plant-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the quarter ended July 2, 2022 | $23,940 |
| Increase in start-up costs related to our new plant in Midlothian, Texas | (5,375) |
| Impact of the divestiture of the sunflower business | (2,377) |
| Incremental depreciation of new production equipment for capital expansion projects ($2.4 million), together with the impacts of higher input costs, lower production volumes and plant utilization, and lower sales volumes of plant-based ingredients, everyday broths and teas, partially offset by higher sales pricing and increased internal use of oat base to support our beverage business | (1,783) |
| Gross profit for the quarter ended July 1, 2023 | $14,405 |
| SUNOPTA INC. | 29 | July 1, 2023 Form 10-Q |
Operating income in Plant-Based Foods and Beverages decreased by $10.3 million to $1.9 million for the quarter ended July 1, 2023, compared to $12.2 million for the quarter ended July 2, 2022. The table below explains the decrease in operating income:
| Plant-Based Foods and Beverages Operating Income Changes | |
| Operating income for the quarter ended July 2, 2022 | $12,196 |
| Decrease in gross profit, as explained above | (9,535) |
| Increase in corporate cost allocation | (510) |
| Increased professional fees related to operational productivity initiatives, together with higher sales and marketing expenses, partially offset by lower employee compensation costs | (248) |
| Operating income for the quarter ended July 1, 2023 | $1,903 |
Our current fiscal 2023 expectations for the Plant-Based Foods and Beverages operating segment are lower than our initial projections for the year, as a result of a number of factors including softening market trends for plant-based beverages driven by current economic conditions, lower external sales volumes of plant-based ingredients, customer-driven delays in the start-up of new business, and a slower than expected ramp-up of production at our Midlothian, Texas, facility. However, despite these revenue headwinds and the impact of the divestiture of the sunflower business in 2022, we are still anticipating year-over-year revenue growth for our plant-based operations in fiscal 2023, with a return to revenue growth expected in the third and fourth quarters of 2023, as 330-milliliter protein shake production continues to accelerate, and planned new business is commercialized. Excluding the impact of start-up costs related to the Midlothian facility, we expect year-over-year improvement in the gross margin performance of our plant-based operations in 2023, reflecting the divestiture of our lower-margin sunflower business, together with the impact of anticipated increased sales and production volumes. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Various factors could adversely impact our ability to meet these forward-looking expectations, including the impact of current economic conditions on consumer buying behavior and demand for plant-based beverages; our ability to successfully execute on our capital expansion projects, including the continued ramp-up of commercial production at our Midlothian facility; our ability to successfully commercialize new business; and other factors described above under "Forward-Looking Statements."
| Fruit-Based Foods and Beverages | ||||||||||||
| For the quarter ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
| Revenues | $ | 93,317 | $ | 97,619 | $ | (4,302 | ) | -4.4% | ||||
| Gross profit | 1,974 | 10,958 | (8,984 | ) | -82.0% | |||||||
| Gross margin | 2.1% | 11.2% | -9.1% | |||||||||
| Operating income (loss) | $ | (4,278 | ) | $ | 3,211 | $ | (7,489 | ) | -233.2% | |||
| Operating margin | -4.6% | 3.3% | -7.9% |
Fruit-Based Foods and Beverages contributed $93.3 million in revenues for the quarter ended July 1, 2023, compared to $97.6 million for the quarter ended July 2, 2022, a decrease of $4.3 million, or 4.4%. The table below explains the decrease in revenues:
| Fruit-Based Foods and Beverages Revenue Changes | |
| Revenues for the quarter ended July 2, 2022 | $97,619 |
| Lower retail sales volumes of frozen fruit, due to unfavorable consumption trends and constraints on certain fruit varieties, together with lost foodservice volumes | (7,364) |
| Increase in reserves for customer returns associated with the frozen fruit product recall | (154) |
| Higher sales volumes and pricing for fruit snacks | 3,216 |
| Revenues for the quarter ended July 1, 2023 | $93,317 |
| SUNOPTA INC. | 30 | July 1, 2023 Form 10-Q |
Gross profit in Fruit-Based Foods and Beverages decreased by $9.0 million to $2.0 million for the quarter ended July 1, 2023, compared to $11.0 million for the quarter ended July 2, 2022. The table below explains the decrease in gross profit:
| Fruit-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the quarter ended July 2, 2022 | $10,958 |
| Higher manufacturing costs and unfavorable plant utilization due to lower production volumes, together with a higher mix of lower margin bulk fruit sales, and a higher cost of inventory from Mexico due to the impact of a strengthening Mexican peso (approximately $2.4 million) | (5,814) |
| Increases in the reserves for customer returns and unsaleable inventory associated with the frozen fruit product recall | (3,170) |
| Gross profit for the quarter ended July 1, 2023 | $1,974 |
Operating income in Fruit-Based Foods and Beverages decreased by $7.5 million to an operating loss of $4.3 million for the quarter ended July 1, 2023, compared to operating income of $3.2 million for the quarter ended July 2, 2022. The table below explains the decrease in operating income:
| Fruit-Based Foods and Beverages Operating Income Changes | |
| Operating income for the quarter ended July 2, 2022 | $3,211 |
| Decrease in gross profit, as explained above | (8,984) |
| Increase in corporate cost allocation | (654) |
| Favorable foreign exchange impact related to the remeasurement of our frozen fruit operations in Mexico into U.S. dollars, partially offset by higher SG&A expenses | 2,149 |
| Operating loss for the quarter ended July 1, 2023 | $(4,278) |
We anticipate full year revenues and gross profit for our Fruit-Based Foods and Beverages operating segment for fiscal 2023 to be comparable to fiscal 2022, driven by the expected completion of capacity expansion projects within our fruit snacks operations in the second half of 2023 to address unfilled demand, which is expected to offset our lowered expectations for frozen fruit performance due to softer retail market demand and lost foodservice volumes. However, we cannot currently assess the extent of the revenue headwinds that may result from the frozen fruit product recall in the second quarter of 2023, and the effect of this recall on our ability to retain existing frozen fruit customers and attract new business. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Various factors could adversely impact our ability to meet these forward-looking expectations, including the impact of current economic conditions on consumer buying behavior and demand for our fruit-based products; our ability to successfully execute on our capital expansion projects within our fruit snacks operations; the financial and reputational impacts of the frozen fruit product recall; and other factors described above under "Forward-Looking Statements."
| SUNOPTA INC. | 31 | July 1, 2023 Form 10-Q |
| Corporate Services | ||||||||||||
| For the quarter ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
| Operating loss | $ | (888 | ) | $ | (7,298 | ) | $ | 6,410 | 87.8% |
Operating loss at Corporate Services decreased by $6.4 million to $0.9 million for the quarter ended July 1, 2023, compared to a loss of $7.3 million for the quarter ended July 2, 2022. The table below explains the decrease in operating loss:
| Corporate Services Operating Loss Changes | |
| Operating loss for the quarter ended July 2, 2022 | $(7,298) |
| Lower employee incentive compensation accruals based on performance, partially offset by higher business development costs | 3,305 |
| Lower variable stock-based compensation expense, related to the timing of annual equity grants under our incentive plans | 1,941 |
| Increase in corporate cost allocations, mainly related to headcount and salary increases | 1,164 |
| Operating loss for the quarter ended July 1, 2023 | $(888) |
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.
| SUNOPTA INC. | 32 | July 1, 2023 Form 10-Q |
Consolidated Results of Operations for the two quarters ended July 1, 2023 and July 2, 2022
| July 1, 2023 | July 2, 2022 | Change | Change | ||||||||||
| For the two quarters ended | $ | $ | $ | % | |||||||||
| Revenues | |||||||||||||
| Plant-Based Foods and Beverages | 243,842 | 281,423 | (37,581 | ) | -13.4% | ||||||||
| Fruit-Based Foods and Beverages | 187,847 | 202,281 | (14,434 | ) | -7.1% | ||||||||
| Total revenues | 431,689 | 483,704 | (52,015 | ) | -10.8% | ||||||||
| Gross Profit | |||||||||||||
| Plant-Based Foods and Beverages | 34,570 | 44,285 | (9,715 | ) | -21.9% | ||||||||
| Fruit-Based Foods and Beverages | 10,012 | 18,969 | (8,957 | ) | -47.2% | ||||||||
| Total gross profit | 44,582 | 63,254 | (18,672 | ) | -29.5% | ||||||||
| Gross Margin(1) | |||||||||||||
| Plant-Based Foods and Beverages | 14.2% | 15.7% | -1.5% | ||||||||||
| Fruit-Based Foods and Beverages | 5.3% | 9.4% | -4.1% | ||||||||||
| Total gross margin | 10.3% | 13.1% | -2.8% | ||||||||||
| Segment operating income (loss)(2) | |||||||||||||
| Plant-Based Foods and Beverages | 10,180 | 20,657 | (10,477 | ) | -50.7% | ||||||||
| Fruit-Based Foods and Beverages | (2,493 | ) | 3,995 | (6,488 | ) | * | |||||||
| Corporate Services | (8,412 | ) | (12,537 | ) | 4,125 | 32.9% | |||||||
| Total segment operating income (loss) | (725 | ) | 12,115 | (12,840 | ) | * | |||||||
| Other expense, net | (192 | ) | 1,827 | (2,019 | ) | * | |||||||
| Earnings (loss) from continuing operations before the following | (533 | ) | 10,288 | (10,821 | ) | * | |||||||
| Interest expense, net | 12,781 | 5,662 | 7,119 | 125.7% | |||||||||
| Income tax expense | 4,147 | 1,339 | 2,808 | 209.7% | |||||||||
| Earnings (loss) from continuing operations(3),(4) | (17,461 | ) | 3,287 | (20,748 | ) | * | |||||||
| Earnings from discontinued operations | - | 2,752 | (2,752 | ) | -100.0% | ||||||||
| Net earnings (loss) | (17,461 | ) | 6,039 | (23,500 | ) | * | |||||||
| Dividends and accretion on preferred stock | (1,126 | ) | (1,515 | ) | 389 | 25.7% | |||||||
| Earnings (loss) attributable to common shareholders(5) | (18,587 | ) | 4,524 | (23,111 | ) | * | |||||||
* Percentage not meaningful due to figures being positive and negative.
(1) The following table presents a reconciliation of adjusted gross margin from reported gross margin calculated in accordance with U.S. GAAP (refer to footnote (1) to the "Consolidated Results of Operations for the Quarters Ended July 1, 2023 and July 2, 2022" table regarding the use of this non-GAAP measure).
| July 1, 2023 | July 2, 2022 | |||||||||||||||||
| Plant-Based | Fruit-Based | Plant-Based | Fruit-Based | |||||||||||||||
| Foods and | Foods and | Foods and | Foods and | |||||||||||||||
| For the two quarters ended | Beverages | Beverages | Consolidated | Beverages | Beverages | Consolidated | ||||||||||||
| Reported gross margin | 14.2% | 5.3% | 10.3% | 15.7% | 9.4% | 13.1% | ||||||||||||
| Start-up costs(a) | 4.7% | 0.1% | 2.7% | 0.2% | - | 0.1% | ||||||||||||
| Product recall costs(b) | - | 1.6% | 0.7% | - | - | 0.0% | ||||||||||||
| Adjusted gross margin | 18.8% | 7.1% | 13.7% | 16.0% | 9.4% | 13.2% | ||||||||||||
Note: percentages may not add due to rounding.
(a) Represents incremental direct costs incurred in connection with plant expansion projects and new product introductions before the project or product reaches normal production levels, including costs for the hiring and training of additional personnel, fees for outside services, travel costs, and plant- and production-related expenses. For the first two quarters of 2023, start-up costs included in cost of goods sold related to the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, and the start-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington. For the first two quarters of 2022, start-up costs included in cost of goods sold related to the hiring and training of new employees for the Midlothian facility, together with the integration of the acquired Dream and West Life brands.
| SUNOPTA INC. | 33 | July 1, 2023 Form 10-Q |
(b) Represents the reserve for unsaleable inventory associated with the frozen fruit product recall in the second quarter of 2023.
(2) 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 (2) to the "Consolidated Results of Operations for the Quarters Ended July 1, 2023 and July 2, 2022" table regarding the use of this non-GAAP measure).
| Plant-Based | Fruit-Based | |||||||||||
| Foods and | Foods and | Corporate | ||||||||||
| Beverages | Beverages | Services | Consolidated | |||||||||
| For the two quarters ended | $ | $ | $ | $ | ||||||||
| July 1, 2023 | ||||||||||||
| Segment operating income (loss) | 10,180 | (2,493 | ) | (8,412 | ) | (725 | ) | |||||
| Other income (expense), net | 113 | (66 | ) | 145 | 192 | |||||||
| Earnings (loss) from continuing operations before the following | 10,293 | (2,559 | ) | (8,267 | ) | (533 | ) | |||||
| July 2, 2022 | ||||||||||||
| Segment operating income (loss) | 20,657 | 3,995 | (12,537 | ) | 12,115 | |||||||
| Other expense, net | (246 | ) | (1,155 | ) | (426 | ) | (1,827 | ) | ||||
| Earnings (loss) from continuing operations before the following | 20,411 | 2,840 | (12,963 | ) | 10,288 |
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income/loss. However, any measure of operating income/loss excluding any or all of these items is not, and should not be viewed as, a substitute for operating income/loss prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
(3) The following table presents a reconciliation of adjusted earnings from earnings (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 July 1, 2023 and July 2, 2022" table regarding the use of this non-GAAP measure).
| July 1, 2023 | July 2, 2022 | |||||||||||
| Per Share | Per Share | |||||||||||
| For the two quarters ended | $ | $ | $ | $ | ||||||||
| Earnings (loss) from continuing operations | (17,461 | ) | 3,287 | |||||||||
| Dividends and accretion on preferred stock | (1,126 | ) | (1,515 | ) | ||||||||
| Earnings (loss) from continuing operations attributable to common shareholders | (18,587 | ) | (0.16 | ) | 1,772 | 0.02 | ||||||
| Adjusted for: | ||||||||||||
| Start-up costs(a) | 13,122 | 721 | ||||||||||
| Product recall costs, net of insurance recoveries(b) | 2,500 | - | ||||||||||
| Business development costs(c) | 1,462 | 799 | ||||||||||
| Facility closure costs(d) | - | 1,287 | ||||||||||
| Other(e) | 478 | 540 | ||||||||||
| Net income tax on adjusting items(f) | - | (879 | ) | |||||||||
| Change in valuation allowance for deferred tax assets(g) | 3,978 | - | ||||||||||
| Adjusted earnings | 2,953 | 0.03 | 4,240 | 0.04 | ||||||||
| SUNOPTA INC. | 34 | July 1, 2023 Form 10-Q |
(a) For the first two quarters of 2023, start-up costs included the ramp-up of production at our new plant-based beverage facility in Midlothian, Texas, the start-up of a new high-speed packaging line at our fruit snacks facility in Omak, Washington, and professional fees related to productivity initiatives within our plant-based beverage operations, which were recorded in cost of goods sold ($11.6 million) and SG&A expenses ($1.5 million). For the first two quarters of 2022, start-up costs mainly related to the hiring and training of new employees for the Midlothian facility, and the integration of the Dream and West Life brands, which were recorded in cost of goods sold ($0.6 million) and SG&A expenses ($0.1 million).
(b) Reflects estimated costs related to the frozen fruit product recall in the second quarter of 2023, which were recorded as a reduction to revenues ($0.2 million) for customer returns and as an addition to cost of goods sold ($3.0 million) for unsaleable inventory. These costs are reflected in the table above net of estimated insurance recoveries of $0.7 million, which were recorded in other income.
(c) Represents third-party costs associated with business development activities, which are inclusive of costs related to the evaluation, execution, and integration of external acquisitions and divestitures, internal expansion projects, and other strategic initiatives. These costs were recorded in SG&A expenses. For the first two quarters of 2022, facility closure costs mainly related to the relocation of certain equipment from our former Oxnard, California, frozen fruit processing facility to our Mexican facility, which were recorded in other expense.
(d) For the first two quarters of 2022, facility closure costs mainly related to the relocation of certain equipment from our former Oxnard, California, frozen fruit processing facility to our Mexican facility, which were recorded in other expense.
(e) For the first two quarters of 2023 and 2022, other mainly reflects reserves for the settlement of certain legal and contractual matters.
(f) 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, net of deferred tax valuation allowances.
(g) Reflects an increase to the valuation allowance for U.S. deferred tax assets that originated prior to fiscal 2023, based on an assessment of the future realizability of the related tax benefits.
(4) The following table presents a reconciliation of segment operating income (loss) and adjusted EBITDA from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (4) to the "Consolidated Results of Operations for the Quarters Ended July 1, 2023 and July 2, 2022" table regarding the use of this non-GAAP measure).
| July 1, 2023 | July 2, 2022 | |||||
| For the two quarters ended | $ | $ | ||||
| Earnings (loss) from continuing operations | (17,461 | ) | 3,287 | |||
| Income tax expense | 4,147 | 1,339 | ||||
| Interest expense, net | 12,781 | 5,662 | ||||
| Other expense (income), net | (192 | ) | 1,827 | |||
| Total segment operating income (loss) | (725 | ) | 12,115 | |||
|
Depreciation and amortization |
20,785 | 18,785 | ||||
|
Stock-based compensation |
5,921 | 5,599 | ||||
|
Start-up costs(a) |
13,122 | 721 | ||||
|
Product recall costs(b) |
3,170 | - | ||||
|
Business development costs(c) |
1,462 | 799 | ||||
| Adjusted EBITDA | 43,735 | 38,019 |
(a) Refer to footnote (3)(a) above.
(b) Reflects estimated costs related to the recall of specific frozen fruit products in the second quarter of 2023, which were recorded as a reduction to revenues ($0.2 million) and an addition to cost of goods sold ($3.0 million).
(c) Refer to footnote (3)(c) above.
(5) Refer to footnote (5) to the "Consolidated Results of Operations for the Quarters Ended July 1, 2023 and July 2, 2022" table regarding the use of certain other non-GAAP measures in the discussion of our results of operations below.
Inclusive of the impact of the divestiture of our sunflower business in the fourth quarter of 2022, total revenues for the two quarters ended July 1, 2023 decreased by 10.8% to $431.7 million from $483.7 million for the two quarters ended July 2, 2022, reflecting a 13.4% revenue decline in the Plant-Based Foods and Beverages segment and a 7.1% revenue decline in the Fruit-Based Foods and Beverages segment. The change in revenues from the first two quarters of 2022 to the first two quarters of 2023 was due to the following:
| SUNOPTA INC. | 35 | July 1, 2023 Form 10-Q |
| Plant-Based | Fruit-Based | |||||||||||||||||
| Foods and Beverages | Foods and Beverages | Consolidated | ||||||||||||||||
| $ | % | $ | % | $ | % | |||||||||||||
| 2022 revenues | 281,423 | 202,281 | 483,704 | |||||||||||||||
| Price | 16,805 | 6.0% | 1,622 | 0.8% | 18,427 | 3.8% | ||||||||||||
| Volume/Mix | (15,921 | ) | -5.7% | (15,902 | ) | -7.9% | (31,823 | ) | -6.6% | |||||||||
| Divestiture of sunflower business | (38,465 | ) | -13.7% | - | - | (38,465 | ) | -8.0% | ||||||||||
| Product recall costs | - | - | (154 | ) | -0.1% | (154 | ) | 0.0% | ||||||||||
| 2023 revenues | 243,842 | -13.4% | 187,847 | -7.1% | 431,689 | -10.8% | ||||||||||||
Note: percentages may not add due to rounding.
For the two quarters ended July 1, 2023, the 13.4% decrease in revenues for the Plant-Based Foods and Beverages segment reflected a 13.7% revenue loss related to the divestiture of the sunflower business, together with an unfavorable volume/mix impact of 5.7%, partially offset by an 6.0% overall increase in pricing. The unfavorable volume/mix reflected lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base (a $15.9 million decrease to revenues), together with softer demand for almond beverages in the current period and lower sales volumes of everyday broths. On the other hand, we saw sales volume growth from our oat milks and creamers, teas, and newly introduced 330-milliliter protein shakes. The increase in pricing mainly reflected the wrap-around benefit of pricing actions taken with customers in 2022 to offset inflationary cost increases.
For the two quarters ended July 1, 2023, the 7.1% decrease in revenues for the Fruit-Based Foods and Beverages segment reflected an unfavorable volume/mix impact of 7.9%, slightly offset by a 0.8% increase in pricing. The volume/mix impact reflected lower volumes of frozen fruit, due to lower retail consumption trends, constraints on certain fruit varieties impacting blends, and lost foodservice volumes, together with the impact of one-time incremental volumes from a frozen fruit customer in the first quarter of 2022 that did not recur, partially offset by increased volumes of fruit snacks and smoothie bowls. For the two quarters ended July 1, 2023, we recorded a reserve of $0.2 million (0.1% impact on revenues) for estimated customer returns associated with the frozen fruit product recall.
Consolidated gross profit decreased $18.7 million, or 29.5%, to $44.6 million for the two quarters ended July 1, 2023, compared with $63.3 million for the two quarters ended July 2, 2022. Consolidated gross margin for the two quarters ended July 1, 2023 was 10.3% compared to 13.1% for the two quarters ended July 2, 2022, a decrease of 280 basis points. Adjusted gross margin on a consolidated basis for the two quarters ended July 1, 2023 was 13.7% compared to 13.2% for the two quarters ended July 2, 2022, an increase of 50 basis points. See footnote (1) to the table above for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
Gross profit for the Plant-Based Foods and Beverages segment decreased $9.7 million to $34.6 million for the two quarters ended July 1, 2023, compared with $44.3 million for the two quarters ended July 2, 2022, and gross margin decreased 150 basis points to 14.2% in the first two quarters of 2023 from 15.7% in the first two quarters of 2022. In the first two quarters of 2023, we incurred start-up costs included in cost of goods sold of $11.4 million (4.7% gross margin impact) related to our new plant in Midlothian, Texas, compared with $0.6 million (0.2% gross margin impact) of start-up costs incurred in the first two quarters of 2022. Excluding the impact of these costs, adjusted gross margin for the Plant-Based Food and Beverages segment was 18.8% in the first two quarters of 2023, compared to 16.0% in the first two quarters of 2022. The 280-basis point increase in adjusted gross margin reflected the wrap-around benefit of pricing actions taken in 2022 to recover input cost inflation, together with the positive margin impacts of the divestiture of our lower-margin sunflower commodity business, and a mix shift in our plant-based ingredient operations, with increased internal use of oat base to support our beverage business and lower external sales. These factors were partially offset by incremental depreciation of new production equipment for capital expansion projects ($4.0 million or 1.6% gross margin impact), together with the negative impacts of higher input costs and lower production volumes and plant utilization within our plant-based operations.
Gross profit for the Fruit-Based Foods and Beverages segment decreased $9.0 million to $10.0 million for the two quarters ended July 1, 2023, compared with $19.0 million for the two quarters ended July 2, 2022, and gross margin decreased 410 basis points to 5.3% in the first two quarters of 2023 from 9.4% in the first two quarters of 2022. In the first two quarters of 2023, we recorded a reserve for unsaleable inventory associated with the frozen fruit product recall of $3.0 million (1.6 % gross margin impact). Excluding the impact of these costs, adjusted gross margin for the Fruit-Based Food and Beverages segment was 7.1% in the first two quarters of 2023, compared to 9.4% in the first two quarters of 2022. The 230-basis point decease in adjusted gross margin reflected higher manufacturing costs and unfavorable plant utilization due to lower production volumes, together with a higher mix of lower margin bulk fruit sales to right-size inventories and improve working capital efficiency, and a higher cost of frozen fruit inventory from Mexico due to the impact of a strengthening Mexican peso (approximately $3.6 million or 1.9% gross margin impact).
| SUNOPTA INC. | 36 | July 1, 2023 Form 10-Q |
For the two quarters ended July 1, 2023, we realized a total segment operating loss of $0.7 million, compared with total operating income of $12.1 million for the two quarters ended July 2, 2022. The $12.8 million decrease in total segment operating income reflected lower gross profit, as described above, partially offset by a favorable year-over-year foreign exchange impact related to the remeasurement of our Mexican operations into U.S. dollars of $4.0 million and a $1.5 million decrease in SG&A expenses. The decrease in SG&A expenses was mainly due to lower employee incentive compensation accruals based on performance, partially offset by higher business development costs.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Operating Segment Information."
Other income of $0.2 million for the two quarters ended July 1, 2023 mainly reflected estimated insurance recoveries associated with the frozen fruit product recall, partially offset by a reserve for the settlement of an unrelated legal matter. Other expense of $1.8 million for the two quarters ended July 2, 2022 mainly reflected costs to relocate certain equipment from our former Oxnard, California, frozen fruit processing facility to our Mexican facility.
Net interest expense increased by $7.1 million to $12.8 million for the two quarters ended July 1, 2023, compared with $5.7 million for the two quarters ended July 2, 2022, resulting from an increase in outstanding debt to finance capital expansion projects, together with the impact of higher interest rates.
We recognized income tax expense of $4.1 million on a pre-tax loss of $13.3 million for the two quarters ended July 1, 2023, compared with income tax expense of $1.3 million on pre-tax earnings of $4.6 million for the two quarters ended July 2, 2022. The change in the effective tax rate from 28.9% for the first two quarters of 2022 to (31.1)% for the first two quarters of 2023, was mainly due to the recognition of a full valuation allowance against U.S. deferred tax assets in the second quarter of 2023, based on our assessment that the related tax benefits were no longer more likely than not to be realized in the future.
Loss from continuing operations for the two quarters ended July 1, 2023 was $17.5 million, compared with earnings of $3.3 million for the two quarters ended July 2, 2022. Diluted loss per share from continuing operations attributable to common shareholders (after dividends and accretion on preferred stock) was $0.16 for the two quarters ended July 1, 2023, compared with a diluted earnings per share of $0.02 for the two quarters ended July 2, 2022.
Earnings from discontinued operations of $2.8 million (diluted earnings per share of $0.03) for the two quarters ended July 2, 2022, which was 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 $18.6 million (diluted loss per share of $0.16) for the two quarters ended July 1, 2023, compared with earnings attributable to common shareholders of $4.5 million (diluted earnings per share of $0.04) for the two quarters ended July 2, 2022. Earnings (loss) attributable to common shareholders included dividends and accretion on our Series B-1 preferred stock of $1.1 million and $1.5 million in the first two quarters of 2023 and 2022, respectively.
For the two quarters ended July 1, 2023, adjusted earnings were $3.0 million, or $0.03 earnings per diluted share, compared with adjusted earnings of $4.2 million, or $0.04 earnings per diluted share for the two quarters ended July 2, 2022. Adjusted EBITDA increased $5.7 million, or 15.0%, for the two quarters ended July 1, 2023 to $43.7 million, compared with $38.0 million for the two quarters ended July 2, 2022, which was inclusive of $2.7 million of adjusted EBITDA attributable to the divested sunflower business. Adjusted EBITDA increased 23.9% year-over-year excluding the contribution from the sunflower business in the first two quarters of 2022. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (3) and (4) to the table above for a reconciliation of adjusted earnings and adjusted EBITDA from earnings (loss) from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 37 | July 1, 2023 Form 10-Q |
Segmented Operations Information
| Plant-Based Foods and Beverages | ||||||||||||
| For the two quarters ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
| Revenues | $ | 243,842 | $ | 281,423 | $ | (37,581 | ) | -13.4% | ||||
| Gross profit | 34,570 | 44,285 | (9,715 | ) | -21.9% | |||||||
| Gross margin | 14.2% | 15.7% | -1.5% | |||||||||
| Operating income | $ | 10,180 | $ | 20,657 | $ | (10,477 | ) | -50.7% | ||||
| Operating margin | 4.2% | 7.3% | -3.1% |
Plant-Based Foods and Beverages contributed $243.8 million in revenues for the two quarters ended July 1, 2023, compared to $281.4 million for the two quarters ended July 2, 2022, a decrease of $37.6 million, or 13.4%. The table below explains the decrease in revenues:
| Plant-Based Foods and Beverages Revenue Changes | |
| Revenues for the two quarters ended July 2, 2022 | $281,423 |
| Impact of the divestiture of the sunflower business in the fourth quarter of 2022 | (38,465) |
| Lower external sales of plant-based ingredients due to a customer transferring part of its business to a second-source supplier and increased internal demand for oat base | (15,864) |
| Wrap-around benefit of pricing actions taken in 2022 to offset input cost inflation, together with sales volume growth for oat milks and creamers, teas, and newly introduced 330-milliliter protein shakes, partially offset by softer demand for almond beverages and lower sales volumes of everyday broths | 16,748 |
| Revenues for the two quarters ended July 1, 2023 | $243,842 |
Gross profit in Plant-Based Foods and Beverages decreased by $9.7 million to $34.6 million for the two quarters ended July 1, 2023, compared to $44.3 million for the two quarters ended July 2, 2022. The table below explains the decrease in gross profit:
| Plant-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the two quarters ended July 2, 2022 | $44,285 |
| Increase in start-up costs related to our new plant in Midlothian, Texas | (10,729) |
| Impact of the divestiture of the sunflower business | (2,616) |
| Higher sales pricing and volumes for plant-based beverages and increased internal use of oat base to support our beverage business, partially offset by incremental depreciation of new production equipment for capital expansion projects ($4.0 million), together with the impacts of higher input costs, lower production volumes and plant utilization, and lower sales volumes of plant-based ingredients and everyday broths | 3,630 |
| Gross profit for the two quarters ended July 1, 2023 | $34,570 |
| SUNOPTA INC. | 38 | July 1, 2023 Form 10-Q |
Operating income in Plant-Based Foods and Beverages decreased by $10.5 million to $10.2 million for the two quarters ended July 1, 2023, compared to $20.7 million for the two quarters ended July 2, 2022. The table below explains the decrease in operating income:
| Plant-Based Foods and Beverages Operating Income Changes | |
| Operating income for the two quarters ended July 2, 2022 | $20,657 |
| Decrease in gross profit, as explained above | (9,715) |
| Increase in corporate cost allocation | (1,020) |
| Lower employee compensation costs, partially offset by increased professional fees related to productivity initiatives, together with higher sales and marketing expenses | 258 |
| Operating income for the two quarters ended July 1, 2023 | $10,180 |
| Fruit-Based Foods and Beverages | ||||||||||||
| For the two quarters ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
| Revenues | $ | 187,847 | $ | 202,281 | $ | (14,434 | ) | -7.1% | ||||
| Gross profit | 10,012 | 18,969 | (8,957 | ) | -47.2% | |||||||
| Gross margin | 5.3% | 9.4% | -4.1% | |||||||||
| Operating income (loss) | $ | (2,493 | ) | $ | 3,995 | $ | (6,488 | ) | -162.4% | |||
| Operating margin | -1.3% | 2.0% | -3.3% |
Fruit-Based Foods and Beverages contributed $187.8 million in revenues for the two quarters ended July 1, 2023, compared to $202.3 million for the two quarters ended July 2, 2022, a decrease of $14.5 million, or 7.1%. The table below explains the decrease in revenues:
| Fruit-Based Foods and Beverages Revenue Changes | |
| Revenues for the two quarters ended July 2, 2022 | $202,281 |
| Lower retail sales volumes of frozen fruit, due to unfavorable consumption trends and constraints on certain fruit varieties, together with lost foodservice volumes and the impact of one-time incremental volumes from a frozen fruit customer in the first quarter of 2022 that did not recur | (21,946) |
| Increase in the reserves for customer returns associated with the frozen fruit product recall | (154) |
| Higher sales volumes and pricing for fruit snacks and incremental volumes of smoothie bowls | 7,666 |
| Revenues for the two quarters ended July 1, 2023 | $187,847 |
| SUNOPTA INC. | 39 | July 1, 2023 Form 10-Q |
Gross profit in Fruit-Based Foods and Beverages decreased by $9.0 million to $10.0 million for the two quarters ended July 1, 2023, compared to $19.0 million for the two quarters ended July 2, 2022. The table below explains the decrease in gross profit:
| Fruit-Based Foods and Beverages Gross Profit Changes | |
| Gross profit for the two quarters ended July 2, 2022 | $18,969 |
| Higher manufacturing costs and unfavorable plant utilization due to lower production volumes, together with a higher mix of lower margin bulk fruit sales, and a higher cost of inventory from Mexico due to the impact of a strengthening Mexican peso (approximately $3.6 million) | (5,787) |
| Increases in the reserves for customer returns and unsaleable inventory associated with the frozen fruit product recall | (3,170) |
| Gross profit for the two quarters ended July 1, 2023 | $10,012 |
Operating income in Fruit-Based Foods and Beverages decreased by $6.5 million to an operating loss of $2.5 million for the two quarters ended July 1, 2023, compared to operating income of $4.0 million for the two quarters ended July 2, 2022. The table below explains the decrease in operating income:
| Fruit-Based Foods and Beverages Operating Income Changes | |
| Operating income for the two quarters ended July 2, 2022 | $3,995 |
| Decrease in gross profit, as explained above | (8,957) |
| Increase in corporate cost allocation | (1,308) |
| Favorable foreign exchange impact related to the remeasurement of our frozen fruit operations in Mexico into U.S. dollars, partially offset by higher SG&A expenses | 3,777 |
| Operating loss for the two quarters ended July 1, 2023 | $(2,493) |
| Corporate Services | ||||||||||||
| For the two quarters ended | July 1, 2023 | July 2, 2022 | Change | % Change | ||||||||
| Operating loss | $ | (8,412 | ) | $ | (12,537 | ) | $ | 4,125 | 32.9% |
Operating loss at Corporate Services decreased by $4.1 million to $8.4 million for the two quarters ended July 1, 2023, compared to a loss of $12.5 million for the two quarters ended July 2, 2022. The table below explains the decrease in operating loss:
| Corporate Services Operating Loss Changes | |
| Operating loss for the two quarters ended July 2, 2022 | $(12,537) |
| Increase in corporate cost allocations, mainly related to headcount and salary increases | 2,328 |
| Lower employee incentive compensation accruals based on performance, partially offset by higher business development costs and variable stock-based compensation expense | 1,797 |
| Operating loss for the two quarters ended July 1, 2023 | $(8,412) |
| SUNOPTA INC. | 40 | July 1, 2023 Form 10-Q |
Liquidity and Capital Resources
From time to time, as part of our ongoing efforts to improve working capital efficiency, we utilize, at our sole discretion, supplier finance programs offered by some of our major customers that allow us to sell our receivables from the customers to such customers' financial institutions, on a non-recourse basis, in order to be paid earlier than our payment terms with the customer provide at a discount rate that leverages those customers' favorable credit ratings. Utilizing these programs reduces our accounts receivable balances, improves our cash flows, and reduces the cost of servicing these receivables with our revolving credit facility.
In connection with our efforts to extend payment terms with our major suppliers to enhance cash flows, we facilitate our own voluntary supplier finance program through a third-party financial institution, by which a participating supplier may elect to sell an invoice to the financial institution in order to be paid earlier than the contractual payment terms provide (see note 4 to the unaudited consolidated financings statements included in this report.) Additionally, we are financing certain other purchases of goods and services through extended payables facilities, by which third-party intermediaries settle the supplier invoice on the contractual due date, and we pay the intermediaries the face amount of the invoice, together with interest, at a later date (see note 5 to the unaudited consolidated financial statements included in this report.)
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 July 1, 2023, we had outstanding borrowings under the revolving credit facility of $138.5 million (December 31, 2022 - $137.3 million), including a $15.0 million first-in-last-out ("FILO") term loan (December 31, 2022 - $20.0 million), and available borrowing capacity of approximately $29 million (January 1, 2022 - $50 million). Commencing with the first quarter of 2023, we are making amortization payments on the principal amount of the FILO term loan of $2.5 million each quarter, with the remaining amount payable at the maturity thereof on April 15, 2024.
The credit agreement also provided a five-year, up to $75 million delayed draw term loan, to be used for capital expenditures, which could be drawn upon up to March 31, 2023. As at March 31, 2023, we had utilized $57.0 million on the term loan facility to partially finance the purchase of equipment for our new plant-based beverage facility in Midlothian, Texas, as well as certain other equipment purchases. Commencing in March 2023, we are repaying the term loan facility in monthly installments of $0.7 million, with the remaining amount payable at the maturity thereof on December 31, 2025. As at July 1, 2023, the principal amount outstanding under the term loan facility was $54.3 million (December 31, 2022 - $43.7 million).
For the two quarters ended July 1, 2023, the weighted-average interest rate on all outstanding borrowings under our asset-based credit facilities was 7.17% (July 2, 2022 - 2.42%), reflecting increases in short-term interest rates.
For more information on our asset-based credit facilities, see note 6 to the unaudited consolidated financial statements included in this report.
As at July 1, 2023, we had outstanding finance lease liabilities of $114.8 million (December 31, 2022 - $124.1 million), with a weighted-average implicit interest rate of 8.12% and a weighted-average remaining lease term of 3.2 years. Additions to finance leases in the first two quarters of 2023 were related to the final buildout of our Midlothian, Texas, facility, and the addition of a new high-speed packaging line at our fruit snacks facility in Omak, Washington. For more information on our operating and finance lease obligations, including maturity dates, see note 3 to the unaudited consolidated financial statements included in this report.
As at July 1, 2023, our subsidiary, SunOpta Foods Inc. ("SunOpta Foods") had 15,000 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, which presently equates to approximately 6,089,333 common shares. Cumulative preferred dividends accrue daily on the Series B-1 preferred stock at an annualized rate of 8.0% of the liquidation preference, which equates to quarterly dividend distributions of approximately $0.3 million. At any time, the holders of the Series B-1 preferred stock may elect to exchange their shares of Series B-1 preferred stock into shares of our common stock. In addition, since April 24, 2023, SunOpta Foods may cause the holders of the Series B-1 Preferred Stock to exchange all of their shares of Series B-1 preferred stock into shares of our common stock if the volume-weighted average trading price of our common shares during the then preceding 20 trading day period is greater than 200% of the $2.50 exchange price per share.
For more information on the Series B-1 preferred stock, see note 7 to the unaudited consolidated financial statements included in this report.
| SUNOPTA INC. | 41 | July 1, 2023 Form 10-Q |
We estimate cash expenditures of approximately $45 million on identified capital projects in fiscal 2023, including $33.9 million spent in the first two quarters of 2023, mainly related to the completion of our Midlothian, Texas, facility. We funded our cash capital expenditures in the first two quarters of 2023 using our term loan facility, together with cash advances under finance leases and our revolving credit facility. In addition, we estimate approximately $10 million of finance leases commencing in fiscal 2023, including $3.0 million in the first two quarters of 2023.
We believe that our operating cash flows, including the selective use of supplier finance programs and the extended payables facility to improve payment terms, together with our revolving credit facility, 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 fiscal period end of our financial statements included in this report. However, in order to finance significant investments in our existing businesses, or significant business acquisitions, if any, that may arise in the future, we may need additional sources of cash that we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering of debt or equity securities, or the issuance of common stock. There can be no assurance that these types of financing would be available at all or, if so, on terms that are acceptable to us. In addition, we may explore the sale of selected operations or assets from time to time to improve our profitability, reduce our indebtedness, and/or improve our position to obtain additional financing.
Cash Flows
Summarized cash flow information for the periods ended July 1, 2023 and July 2, 2022 is as follows:
| For the quarter ended | For the two quarters ended | |||||||||||||||||
| July 1, 2023 | July 2, 2022 | Change | July 1, 2023 | July 2, 2022 | Change | |||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||
| Net cash flows provided by (used in): | ||||||||||||||||||
| Operating activities of continuing operations | 15,878 | (2,454 | ) | 18,332 | 19,745 | 13,089 | 6,656 | |||||||||||
| Investing activities of continuing operations | (8,057 | ) | (34,060 | ) | 26,003 | (33,514 | ) | (58,578 | ) | 25,064 | ||||||||
| Financing activities of continuing operations | (7,750 | ) | 42,896 | (50,646 | ) | 14,071 | 52,139 | (38,068 | ) | |||||||||
| Discontinued operations | - | (6,324 | ) | 6,324 | - | (6,324 | ) | 6,324 | ||||||||||
Operating Activities of Continuing Operations
Cash provided by operating activities of continuing operations increased $18.3 million and $6.7 million from the second quarter and first two quarters of 2022 to the comparable periods of 2023. The increases in cash provided mainly reflected lower year-over-year purchases of frozen fruit inventory to align with demand, partially offset by the impact of start-up costs related to our Midlothian, Texas, facility, and higher cash interest expense on borrowings to finance capital expenditures.
Investing Activities of Continuing Operations
Cash used in investing activities of continuing operations decreased $26.0 million and $25.1 million from the second quarter and first two quarters of 2022 to the comparable periods of 2023. The year-over-year decreases in investing cash outflows reflected the completion of certain major capital projects, including the construction of our new plant-based beverage facility in Midlothian, Texas.
Financing Activities of Continuing Operations
Cash used in financing activities of continuing operations increased $50.6 million from the second quarter of 2022 to the second quarter of 2023, and cash provided by financing activities of continuing operations decreased $38.1 million from the first two quarters of 2022 to the first two quarters of 2023. The year-over-year movements in financing cash flows mainly reflected a decreased level of borrowings under our revolving credit facility to fund changes in working capital, together with higher net repayments of long-term debt as capital projects are completed, partially offset by net proceeds from notes payable associated with our use of extended payables facilities in the second quarter and first two quarters of 2023.
| SUNOPTA INC. | 42 | July 1, 2023 Form 10-Q |
Discontinued Operations
Cash used in investing activities of discontinued operations of $6.3 million in the second quarter and first two quarters of 2022, related to the settlement of the purchase price allocation and other post-closing matters in connection with the 2020 divestiture of Tradin Organic.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. The estimates and assumptions made require us to exercise our judgment and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the information that forms the basis of our estimates and assumptions as our business and the business environment generally changes.
There have been no material changes to the critical accounting estimates disclosed under the heading "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Form 10-K.
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 December 31, 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. As a result of the material weaknesses in internal control over financial reporting identified and described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our disclosure controls and procedures were not effective as of July 1, 2023.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
The Company is in the process of improving its policies and procedures relating to the preparation and review of the consolidated income tax provision and recognition of deferred tax assets related to stock-based compensation. Management plans to enhance its internal controls by adding controls to ensure proper review and assessment of business activities impacting the provision and completeness and accuracy of data used in preparing the consolidated tax provision and deferred tax assets.
The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As a result of the material weakness relating to the annual consolidated income tax provision and recognition of deferred tax assets, we believe the remediation will occur in the fourth quarter of fiscal 2023 and will strengthen our internal control over financial reporting and will prevent a reoccurrence of the material weaknesses described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
| SUNOPTA INC. | 43 | July 1, 2023 Form 10-Q |
Changes in Internal Control over Financial Reporting
Other than the actions taken under "Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting" discussed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended July 1, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| SUNOPTA INC. | 44 | July 1, 2023 Form 10-Q |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see note 12 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 December 31, 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 5. Other Information
On August 9, 2023, the Company provided a written notice of termination to Mr. Michael Buick, Senior Vice President and General Manager of Plant-Based Foods and Beverages, with an effective termination date of October 9, 2023.
In connection with Mr. Buick's separation from the Company, the Company expects to enter into a Separation Agreement and Full and Final Release (the “Separation Agreement”) with Mr. Buick honoring the terms of Mr. Buick’s employment agreement. Mr. Buick’s separation from the Company constitutes an involuntary termination by the Company “without cause” under Mr. Buick’s employment agreement, entitling him to receive:
The Company will apply standard tax and other applicable withholdings to payments made to Mr. Buick. The Company also will pay Mr. Buick accrued but unused vacation, regardless of whether Mr. Buick signs the Separation Agreement.
Mr. Buick’s right to receive the consideration and benefits is contingent upon Mr. Buick’s agreeing to (and not revoking) a release of claims against the Company; to that end, the Separation Agreement contains a release and waiver of claims for the benefit of the Company, pursuant to which Mr. Buick agrees to release the Company and certain other parties from any and all claims, charges, causes of action and damages arising on or prior to his execution of the Separation Agreement.
Mr. Buick is also subject to certain confidentiality provisions as well as restrictions preventing him from competing with the Company and soliciting the customers or employees of the Company.
Mr. Buick shall have the right to revoke the Separation Agreement by giving written notice to the Company within fifteen (15) days after signing the Separation Agreement. In the event of any such revocation, the Separation Agreement will no longer be effective and Mr. Buick will not receive the payment and benefits listed above.
The foregoing summary of the Separation Agreement is qualified in its entirety by the text of the Separation Agreement, which the Company expects to file as an exhibit to its Quarterly Report on Form 10-Q for the quarter ending September 30, 2023.
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. | 45 | July 1, 2023 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: August 10, 2023 | /s/ Scott Huckins |
| Scott Huckins | |
| Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
| SUNOPTA INC. | 46 | July 1, 2023 Form 10-Q |