UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to .
Commission file number:
(Exact name of registrant as specified in its charter)
| Not Applicable | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| ( | |
| (Address of principal executive offices) | (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large 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 ☐
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
The Toronto Stock Exchange |
The number of the registrant's common shares outstanding as of July 31, 2020 was
Basis of Presentation
This Form 10-Q contains forward-looking statements which are based on management's current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," the negatives of such terms, and words and phrases of similar impact and include, but are not limited to, references to future financial and operating results, plans, objectives, expectations and intentions; changes in customer demand resulting from or related to the COVID-19 pandemic, as well as supply chain, logistics and other disruptions, the cancellation or delay of new product launches, the availability and pricing of our raw materials, fluctuations in foreign currency exchange rates and commodity pricing, and general economic and political conditions globally and in the markets in which we do business; our plans and ability to expand capacity in our plant-based food and beverage business, and timing to complete expansion projects in 2020; unexpected issues or delays with our automation investments and structural improvements; our expectations regarding profitability improvements in our frozen fruit business in 2020; our expectations regarding the availability and commodity pricing for the 2020 California strawberry crop, and potential impacts to our revenues and margins; our expectations regarding customer demand, consumer preferences, competition, sales pricing, and availability and pricing of raw material inputs; other expectations related to our businesses, including anticipated results of operations, operational growth and expansion plans, plans to reduce costs and improve profitability, intent and ability to bring new products and processes to market through innovation, and the exploration of the sale of selected businesses or assets; liquidity constraints and the availability of alternative financing sources; and other statements that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on certain assumptions, expectations and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments, as well as other factors that we believe are appropriate in the circumstances.
| SUNOPTA INC. | 3 | June 27, 2020 10-Q |
| SUNOPTA INC. | 4 | June 27, 2020 10-Q |
| SUNOPTA INC. | 5 | June 27, 2020 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 and our Annual Report on Form 10-K for the fiscal year ended December 28, 2019. Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found under Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, 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. | 6 | June 27, 2020 10-Q |
| Quarter ended | Two quarters ended | ||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| Revenues (note 2) | |||||||||||||
| Cost of goods sold | |||||||||||||
| Gross profit | |||||||||||||
| Selling, general and administrative expenses | |||||||||||||
| Intangible asset amortization | |||||||||||||
| Other expense (income), net (note 10) | ( | ) | ( | ) | ( | ) | |||||||
| Foreign exchange loss (gain) | ( | ) | ( | ) | ( | ) | |||||||
| Earnings (loss) before the following | ( | ) | |||||||||||
| Interest expense, net | |||||||||||||
| Earnings (loss) before income taxes | ( | ) | |||||||||||
| Provision for (recovery of) income taxes | ( | ) | |||||||||||
| Net earnings (loss) | ( | ) | |||||||||||
| Earnings (loss) attributable to non-controlling interests | ( | ) | ( | ) | |||||||||
| Earnings (loss) attributable to SunOpta Inc. | ( | ) | |||||||||||
| Dividends and accretion on preferred stock (note 8) | ( | ) | ( | ) | ( | ) | ( | ) | |||||
| Earnings (loss) attributable to common shareholders | ( | ) | ( | ) | ( | ) | |||||||
| Earnings (loss) per share (note 11) | |||||||||||||
| Basic | ( | ) | ( | ) | ( | ) | |||||||
| Diluted | ( | ) | ( | ) | ( | ) | |||||||
| Weighted-average common shares outstanding (000s) (note 11) | |||||||||||||
| Basic | |||||||||||||
| Diluted | |||||||||||||
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 7 | June 27, 2020 10-Q |
| SunOpta Inc. | ||||||
| Consolidated Statements of Comprehensive Earnings (Loss) | ||||||
| For the quarters and two quarters ended June 27, 2020 and June 29, 2019 | ||||||
| (Unaudited) | ||||||
| (All dollar amounts expressed in thousands of U.S. dollars) | ||||||
| Quarter ended | Two quarters ended | |||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Net earnings (loss) | ( | ) | ||||||||||
| Currency translation adjustment | ( | ) | ||||||||||
| Comprehensive earnings (loss) | ( | ) | ||||||||||
| Comprehensive earnings (loss) attributable to non-controlling interests | ( | ) | ( | ) | ||||||||
| Comprehensive earnings (loss) attributable to SunOpta Inc. | ( | ) | ||||||||||
SUNOPTA INC. | 8 | June 27, 2020 10-Q |
SunOpta Inc. | |||
| Consolidated Balance Sheets | |||
| As at June 27, 2020 and December 28, 2019 | |||
| (Unaudited) | |||
| (All dollar amounts expressed in thousands of U.S. dollars) |
| June 27, 2020 | December 28, 2019 | |||||||
| $ | $ | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts receivable, net of allowance for credit losses of $ | ||||||||
| Inventories (note 6) | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Income taxes recoverable | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Intangible assets | ||||||||
| Deferred income taxes | — | |||||||
| Other assets | ||||||||
| Total assets | ||||||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Bank indebtedness (note 7) | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Customer and other deposits | ||||||||
| Income taxes payable | ||||||||
| Other current liabilities | ||||||||
| Current portion of long-term debt (note 7) | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Current portion of long-term liabilities | ||||||||
| Total current liabilities | ||||||||
Long-term debt (note 7) | ||||||||
| Operating lease liabilities | ||||||||
| Long-term liabilities | ||||||||
| Deferred income taxes | ||||||||
| Total liabilities | ||||||||
Series A Preferred Stock (note 8) | ||||||||
Series B Preferred Stock (note 8) | — | |||||||
| EQUITY | ||||||||
| SunOpta Inc. shareholders' equity | ||||||||
Common shares, | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Non-controlling interests | ||||||||
| Total equity | ||||||||
| Total equity and liabilities | ||||||||
| Commitments and contingencies (note 13) | ||||||||
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 9 | June 27, 2020 10-Q |
SunOpta Inc. |
| Consolidated Statements of Shareholders' Equity |
As at and for the quarters ended June 27, 2020 and June 29, 2019 |
| (Unaudited) |
| (All dollar amounts expressed in thousands of U.S. dollars) |
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | |||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Balance at March 28, 2020 | ( | ) | ( | ) | ||||||||||||||||||
| Employee stock purchase plan | — | — | — | — | ||||||||||||||||||
| Stock incentive plan | ( | ) | — | — | — | |||||||||||||||||
| Withholding taxes on stock-based awards | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||
| Stock-based compensation | — | — | — | — | — | |||||||||||||||||
Dividends on preferred stock | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||
Accretion on preferred stock | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||
| Net earnings | — | — | — | — | ( | ) | ||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ) | ||||||||||||||||
| Balance at June 27, 2020 | ( | ) | ( | ) | ||||||||||||||||||
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com-prehensive loss | Non-controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at March 29, 2019 | ( | ) | ( | ) | |||||||||||||||||
| Employee stock purchase plan | — | — | — | — | |||||||||||||||||
| Stock incentive plan | ( | ) | — | — | — | ||||||||||||||||
| Withholding taxes on stock-based awards | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||
Dividends on preferred stock | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||
Accretion on preferred stock | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||
| Net loss | — | — | — | ( | ) | — | ( | ) | |||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ) | |||||||||||||||
Capital contribution to majority-owned | |||||||||||||||||||||
subsidiary | — | — | — | — | — | ||||||||||||||||
| Balance at June 29, 2019 | ( | ) | ( | ) | |||||||||||||||||
| SUNOPTA INC. | 10 | June 27, 2020 10-Q |
SunOpta Inc.
Consolidated Statements of Shareholders' Equity (continued)
As at and for the two quarters ended June 29, 2019 and June 27, 2020
(Unaudited)
(All dollar amounts expressed in thousands of U.S. dollars)
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com- prehensive loss | Non- controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at December 28, 2019 | ( | ) | ( | ) | |||||||||||||||||
| Employee stock purchase plan | — | — | — | — | |||||||||||||||||
| Stock incentive plan | ( | ) | — | — | — | ||||||||||||||||
| Withholding taxes on stock-based awards | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||
| Dividends on preferred stock | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||
| Accretion on preferred stock | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||
| Net earnings | — | — | — | — | ( | ) | |||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ) | |||||||||||||||
| Balance at June 27, 2020 | ( | ) | ( | ) | |||||||||||||||||
| Common shares | Additional paid-in capital | Accumulated deficit | Accumulated other com- prehensive loss | Non- controlling interests | Total | ||||||||||||||||
| 000s | $ | $ | $ | $ | $ | $ | |||||||||||||||
| Balance at December 29, 2018 | ( | ) | ( | ) | |||||||||||||||||
| Employee stock purchase plan | — | — | — | — | |||||||||||||||||
| Stock incentive plan | ( | ) | — | — | — | ||||||||||||||||
| Withholding taxes on stock-based awards | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||
| Dividends on preferred stock | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||
| Accretion on preferred stock | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||
| Net earnings | — | — | — | — | |||||||||||||||||
| Currency translation adjustment | — | — | — | — | ( | ) | ( | ) | |||||||||||||
| Capital contribution to majority-owned | |||||||||||||||||||||
| subsidiary | — | — | — | — | — | ||||||||||||||||
| Balance at June 29, 2019 | ( | ) | ( | ) | |||||||||||||||||
(See accompanying notes to consolidated financial statements)
| SUNOPTA INC. | 11 | June 27, 2020 10-Q |
| SunOpta Inc. | |||
| Consolidated Statements of Cash Flows | |||
For the quarters and two quarters ended June 27, 2020 and June 29, 2019 | |||
| (Unaudited) | |||
| (Expressed in thousands of U.S. dollars) |
| Quarter ended | Two quarters ended | ||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| CASH PROVIDED BY (USED IN) | |||||||||||||
| Operating activities | |||||||||||||
| Net earnings (loss) | ( | ) | |||||||||||
| Items not affecting cash: | |||||||||||||
| Depreciation and amortization | |||||||||||||
| Amortization of debt issuance costs | |||||||||||||
| Deferred income taxes | ( | ) | |||||||||||
| Stock-based compensation | |||||||||||||
| Unrealized loss (gain) on derivative contracts (note 5) | ( | ) | ( | ) | ( | ) | |||||||
| Gain on settlement of contingent consideration obligation (note 10) | — | — | ( | ) | — | ||||||||
| Loss (gain) on sale of business (note 3) | — | — | ( | ) | |||||||||
| Other | ( | ) | ( | ) | ( | ) | ( | ) | |||||
| Changes in non-cash working capital, net of businesses acquired or sold (note 12) | ( | ) | ( | ) | ( | ) | |||||||
| Net cash flows from operating activities | ( | ) | ( | ) | |||||||||
| Investing activities | |||||||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ( | ) | ( | ) | |||||
| Net proceeds from sale of business (note 3) | — | ( | ) | — | |||||||||
| Acquisition of business, net of cash acquired | — | ( | ) | — | ( | ) | |||||||
| Other | — | — | |||||||||||
| Net cash flows from investing activities | ( | ) | ( | ) | ( | ) | |||||||
| Financing activities | |||||||||||||
| Increase (decrease) under line of credit facilities (note 7) | ( | ) | ( | ) | ( | ) | |||||||
| Borrowings under long-term debt (note 7) | — | ||||||||||||
| Repayment of long-term debt (note 7) | ( | ) | ( | ) | ( | ) | ( | ) | |||||
| Proceeds on issuance of preferred stock, net of issuance costs (note 8) | — | — | |||||||||||
| Payment of cash dividends on preferred stock (note 8) | — | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from the exercise of stock options and employee purchases | |||||||||||||
| Payment of withholding taxes on stock-based awards | ( | ) | ( | ) | ( | ) | ( | ) | |||||
| Payment of debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | |||||
| Payment of contingent consideration (note 10) | ( | ) | — | ( | ) | — | |||||||
| Other | — | ( | ) | ( | ) | ||||||||
| Net cash flows from financing activities | ( | ) | ( | ) | |||||||||
| Foreign exchange gain (loss) on cash held in a foreign currency | ( | ) | ( | ) | |||||||||
| Increase (decrease) in cash and cash equivalents in the period | ( | ) | ( | ) | ( | ) | |||||||
| Cash and cash equivalents - beginning of the period | |||||||||||||
| Cash and cash equivalents - end of the period | |||||||||||||
| Non-cash investing and financing activities (note 12) | |||||||||||||
SUNOPTA INC. | 12 | June 27, 2020 10-Q |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
For the quarters and two quarters ended June 27, 2020 and June 29, 2019 | |||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
1. Significant Accounting Policies
Basis of Presentation
These interim consolidated financial statements of SunOpta Inc. (the "Company" or "SunOpta") have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and two quarters ended June 27, 2020 are not necessarily indicative of the results that may be expected for the full fiscal year ending January 2, 2021 or for any other period. The interim consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries, and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended December 28, 2019. For further information, refer to the consolidated financial statements, and notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019.
As described in note 14, in the fourth quarter of 2019, the Company changed its segment reporting to reflect changes to its operating structure. All segment information presented in these consolidated financial statements for the quarter and two quarters ended June 29, 2019 has been restated to reflect the new segment reporting structure.
Fiscal Year
Recent Accounting Pronouncements
Effective the first quarter of 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments," which requires the immediate recognition of expected versus incurred credit losses for most financial assets. The Company adopted ASU 2016-13 under the modified retrospective approach and applied the new guidance to its short-term accounts receivable. The adoption of this new guidance did not result in the recognition of additional allowances for credit losses. The Company closely monitors receivable balances and estimates the allowance for credit losses based on historical collection experience, and account aging analysis and trends. The Company evaluates the adequacy of the allowance each reporting period, considering individual customer account reviews, write-offs recorded in the period, sales forecasts and trends, and current and expected economic conditions.
2. Revenue
The Company procures, processes and sells organic and non-GMO ingredients, and processes and packages plant-based and fruit-based foods and beverages. The Company's customers include retailers, foodservice operators, branded food companies and food manufacturers.
| SUNOPTA INC. | 13 | June 27, 2020 10-Q |
SunOpta Inc. |
The following table presents a disaggregation of the Company's revenues based on categories used by the Company to evaluate sales performance:
| Quarter ended | Two quarters ended | |||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Global Ingredients | ||||||||||||
| Organic and non-GMO ingredients | ||||||||||||
| Premium juice | ||||||||||||
| Soy and corn (see note 3) | ||||||||||||
| Total Global Ingredients | ||||||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Beverages and broths | ||||||||||||
| Plant-based ingredients | ||||||||||||
| Sunflower and roasted snacks | ||||||||||||
| Total Plant-Based Foods and Beverages | ||||||||||||
| Fruit-Based Foods and Beverages | ||||||||||||
| Frozen fruit | ||||||||||||
| Fruit-based ingredients | ||||||||||||
| Fruit snacks | ||||||||||||
| Total Fruit-Based Foods and Beverages | ||||||||||||
| Total revenues | ||||||||||||
3. Sale of Soy and Corn Business
On February 22, 2019, the Company's subsidiary, SunOpta Grains and Foods Inc., completed the sale of its specialty and organic soy and corn business to Pipeline Foods, LLC for $
4. Value Creation Plan
The Value Creation Plan is a broad-based initiative focused on increasing shareholder value through structural investments in people and assets, together with restructuring activities to streamline operations. In the first two quarters of 2020, measures taken under the Value Creation Plan included the consolidation of the Company's corporate office functions, the closure of an organic ingredient warehousing facility located in China, and other business development activities. In the first two quarters of 2019, actions taken under the Value Creation Plan related to the sale of the soy and corn business, and transition of the Company's Chief Executive Officer ("CEO"). The following table summarizes costs incurred by type under the Value Creation Plan for the two quarters ended June 27, 2020 and June 29, 2019:
| SUNOPTA INC. | 14 | June 27, 2020 10-Q |
SunOpta Inc. |
| Employee | ||||||||||||
| Asset | recruitment, | |||||||||||
| impairments | retention and | |||||||||||
| and facility | termination | Professional | ||||||||||
| closure costs | costs | fees | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| June 27, 2020 | ||||||||||||
| Balance payable, December 28, 2019(1) | ||||||||||||
| Costs incurred and charged to expense | ||||||||||||
| Cash payments, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||
| Non-cash adjustments | ( | ) | ||||||||||
| Balance payable, June 27, 2020(1) | ||||||||||||
| June 29, 2019 | ||||||||||||
| Balance payable, December 29, 2018 | ||||||||||||
| Costs incurred and charged to expense | ||||||||||||
| Cash payments, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||
| Non-cash adjustments | ||||||||||||
| Balance payable, June 29, 2019 |
(1) Balance payable was included in accounts payable and accrued liabilities on the consolidated balance sheet.
The following table summarizes costs incurred since the inception of the Value Creation Plan in 2016 to June 27, 2020:
| Employee | ||||||||||||
| Asset | recruitment, | Professional | ||||||||||
| impairments | retention and | fees and | ||||||||||
| and facility | termination | temporary | ||||||||||
| closure costs | costs | labor costs | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| Costs incurred and charged to expense | ||||||||||||
| Cash payments, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||
| Non-cash adjustments | ( | ) | ( | ) | ||||||||
| Balance payable, June 27, 2020 |
For the quarters and two quarters ended June 27, 2020 and June 29, 2019, costs incurred and charged to expense were recorded in the consolidated statement of operations as follows:
| Quarter ended | Two quarters ended | |||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Selling, general and administrative expenses(1) | ||||||||||||
| Other expense(2) | ||||||||||||
| SUNOPTA INC. | 15 | June 27, 2020 10-Q |
SunOpta Inc. |
5. Derivative Financial Instruments and Fair Value Measurements
The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of June 27, 2020 and December 28, 2019:
June 27, 2020 | ||||||||||||
| Fair value | ||||||||||||
| asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||
| $ | $ | $ | $ | |||||||||
| Commodity futures contracts(1) | ||||||||||||
| Unrealized short-term derivative asset | ||||||||||||
| Forward foreign currency contracts(2) | ||||||||||||
| Not designated as hedging instruments | ( | ) | ( | ) | ||||||||
| December 28, 2019 | ||||||||||||
| Fair value | ||||||||||||
| asset (liability) | Level 1 | Level 2 | Level 3 | |||||||||
| $ | $ | $ | $ | |||||||||
| Commodity futures contracts(1) | ||||||||||||
| Unrealized short-term derivative asset | ||||||||||||
| Forward foreign currency contracts(2) | ||||||||||||
| Not designated as hedging instruments | ( | ) | ( | ) | ||||||||
(1) Commodity futures contracts
As at June 27, 2020, outstanding contracts comprised exchange-traded commodity futures for cocoa and coffee, which are used as part of the Company's risk management strategy and represent economic hedges to limit risk related to fluctuations in the price of these commodities. These contracts are not designated as hedges for accounting purposes. Exchange-traded futures are fair valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Gains and losses on changes in the fair value of these contracts are included in cost of goods sold on the consolidated statement of operations. For the quarter ended June 27, 2020, the Company recognized a gain of $
As at June 27, 2020, the Company had net open futures contracts to sell
(2) Foreign forward currency contracts
As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are included in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. These contracts typically represent economic hedges that are not designated as hedging instruments; however, certain of these contracts may be designated as cash flow hedges for accounting purposes.
| SUNOPTA INC. | 16 | June 27, 2020 10-Q |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended June 27, 2020 and June 29, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
As at June 27, 2020, the Company had open forward foreign exchange contracts to sell euros to buy U.S. dollars with a notional value of €
In April 2020, the Company entered into a combination of foreign currency put and call option contracts (a zero-cost collar) to hedge its exposure to fluctuations in the Mexican peso related to purchases of fruit inventory from Mexico through the remainder of 2020. The aggregate notional amount of these contracts was $
6. Inventories
| June 27, 2020 | December 28, 2019 | |||||
| $ | $ | |||||
| Raw materials and work-in-process | ||||||
| Finished goods | ||||||
| Inventory reserves | ( | ) | ( | ) | ||
| SUNOPTA INC. | 17 | June 27, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements |
7. Bank Indebtedness and Long-Term Debt
| June 27, 2020 | December 28, 2019 | |||||
| $ | $ | |||||
| Bank Indebtedness | ||||||
| Global Credit Facility(1) | ||||||
| Bulgarian credit facility(2) | ||||||
| Long-Term Debt | ||||||
| Senior Secured Second Lien Notes, net of unamortized debt issuance costs of $ | ||||||
| Finance lease liabilities(4) | ||||||
| Asset-backed term loan | ||||||
| Other | ||||||
| Less: current portion | ||||||
(1) Global Credit Facility
On
Individual borrowings under the Global Credit Facility have terms of six months or less and bear interest based on various reference rates plus an applicable margin. The margin ranges from
As at June 27, 2020, the weighted-average interest rate on all borrowings under the Global Credit Facility was
SUNOPTA INC. | 18 | June 27, 2020 10-Q |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
For the quarters and two quarters ended June 27, 2020 and June 29, 2019 | |||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
Obligations under the Global Credit Facility are guaranteed by substantially all of the Company's subsidiaries and, subject to certain exceptions, such obligations are secured by first priority liens on substantially all of the assets of the Company.
The Global Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company's ability to create liens on assets; sell assets and enter into sale and leaseback transactions; pay dividends, prepay junior lien and unsecured indebtedness and make other restricted payments; incur additional indebtedness and make guarantees; make investments, loans or advances, including acquisitions; and engage in mergers or consolidations. The foregoing covenants are subject to certain threshold amounts and exceptions as set forth in the credit agreement.
(2) Bulgarian credit facility
Borrowings under this €
(3) Senior Secured Second Lien Notes
At any time after October 9, 2019, SunOpta Foods may redeem the Notes, in whole or in part, at a redemption price equal to
The Notes are secured by second-priority liens on substantially all of the assets that secure the credit facilities provided under the Global Credit Facility, subject to certain exceptions and permitted liens. The Notes are senior secured obligations and rank equally in right of payment with SunOpta Foods' existing and future senior debt and senior in right of payment to any future subordinated debt. The Notes are effectively subordinated to debt under the Global Credit Facility and any future indebtedness secured on a first-priority basis. The Notes are initially guaranteed on a senior secured second-priority basis by the Company and each of its subsidiaries (other than SunOpta Foods) that guarantees indebtedness under the Global Credit Facility, subject to certain exceptions.
The Notes are subject to covenants that, among other things, limit the Company's ability to (i) incur additional debt or issue preferred stock; (ii) pay dividends and make certain types of investments and other restricted payments; (iii) create liens; (iv) enter into transactions with affiliates; (v) sell assets; and (vi) create restrictions on the ability of restricted subsidiaries to pay dividends, make loans or advances or transfer assets to the Company, SunOpta Foods or any guarantor of the Notes. The foregoing covenants are subject to certain threshold amounts and exceptions as set forth in the indenture governing the Notes. In addition, the indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the indenture, certain payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency. If an event of default occurs and is continuing, the trustee or holders of at least 25% in principal amount of the outstanding Notes may declare the principal of and accrued and unpaid interest on, if any, all the Notes to be due and payable.
SUNOPTA INC. | 19 | June 27, 2020 10-Q |
| SunOpta Inc. | |||
| Notes to Consolidated Financial Statements | |||
For the quarters and two quarters ended June 27, 2020 and June 29, 2019 | |||
| (Unaudited) | |||
| (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
As at June 27, 2020, the estimated fair value of the outstanding Notes was approximately $
(4) Finance lease obligations
8. Preferred Stock
Series A Preferred Stock
On October 7, 2016, the Company and SunOpta Foods entered into a subscription agreement (the "Series A Subscription Agreement") with Oaktree Organics, L.P. and Oaktree Huntington Investment Fund II, L.P. (collectively, "Oaktree"). Pursuant to the Series A Subscription Agreement, SunOpta Foods issued an aggregate of
| SUNOPTA INC. | 20 | June 27, 2020 10-Q |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended June 27, 2020 and June 29, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
SunOpta Foods may cause the holders of Series A Preferred Stock to exchange all of their shares of Series A Preferred Stock into a number of Common Shares equal to the number of shares of Series A Preferred Stock outstanding multiplied by the Series A Exchange Rate if (i) fewer than 10% of the shares of Series A Preferred Stock issued on October 7, 2016 remain outstanding, or (ii) on or after October 7, 2019, the average volume-weighted average price of the Common Shares during the then preceding 20 trading day period is greater than 200% of the Series A Exchange Price then in effect. At any time on or after October 7, 2021, SunOpta Foods may redeem all of the Series A Preferred Stock for an amount per share equal to the value of the Series A Liquidation Preference at such time, plus accrued and unpaid dividends.
The Special Shares, Series 1 are not transferable, and the voting rights associated with the Special Shares, Series 1 will terminate upon the transfer of the Series A Preferred Stock to a third party, other than a controlled affiliate of Oaktree. Oaktree is entitled to designate up to two nominees for election to the Board of Directors of the Company (the "Board") and have the right to designate one individual to attend meetings of the Board as a non-voting observer, subject to Oaktree maintaining certain levels of beneficial ownership of Common Shares on an as-exchanged basis.
Series B Preferred Stock
On April 15, 2020, the Company and SunOpta Foods entered into a subscription agreement (the "Series B Subscription Agreement") with Oaktree and Engaged Capital, LLC, Engaged Capital Flagship Master Fund, LP and Engaged Capital Co-Invest IV-A, LP (collectively, "Engaged"), which contemplated the issuance by SunOpta Foods of shares of exchangeable, voting Series B-1 Preferred Stock and exchangeable, voting Series B-2 Preferred Stock (together with the Series B-1 Preferred Stock, the "Series B Preferred Stock"). The Series B Preferred Stock ranks on par with the Series A Preferred Stock.
On April 24, 2020, pursuant to the Series B Subscription Agreement, SunOpta Foods issued
The Series B-1 Preferred Stock has an initial stated value and liquidation preference of $
| SUNOPTA INC. | 21 | June 27, 2020 10-Q |
SunOpta Inc. Notes to Consolidated Financial Statements |
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 a number of Common Shares equal to the number of shares of Series B-1 Preferred Stock outstanding multiplied by the Series B-1 Exchange Rate if (i) fewer than 10% of the shares of Series B-1 Preferred Stock issued on April 24, 2020 remain outstanding, or (ii) on or after April 24, 2023, the average volume-weighted average price of the Common Shares during the then preceding 20 trading day period is greater than 200% of the Series B-1 Exchange Price then in effect.
At any time, if a holder of Series B Preferred Stock elects to exchange, or SunOpta Foods causes an exchange of Series B Preferred Stock, the number of Common Shares delivered to each applicable holder may not cause such holder's beneficial ownership to exceed 19.99% of the Common Shares that would be outstanding immediately following such exchange (the "Series B Exchange Cap").
At any time on or after April 24, 2025, SunOpta Foods may redeem all of the Series B-1 Preferred Stock for an amount per share equal to the value of the Series B-1 Liquidation Preference at such time, plus accrued and unpaid dividends.
Oaktree and Engaged will be entitled to vote the Series B Preferred Stock with the Common Shares on an as-exchanged basis, subject to a permanent 19.99% voting cap. As a result of the voting cap, each of Oaktree and Engaged will only be able to vote its Series B Preferred Stock to the extent that, when taken together with any other voting securities each investor controls, such votes do not exceed 19.99% of the votes eligible to be cast by all security holders of the Company. On April 24, 2020, the Company designated Special Shares, Series 2 to serve as the mechanism for attaching exchanged voting to the Series B Preferred Stock. The Special Shares, Series 2 entitle the holder thereof to one vote per Special Share, Series 2 on all matters submitted to a vote of the holders of Common Shares, voting together as a single class, subject to certain exceptions. The Special Shares, Series 2 are not transferrable and the voting rights associated with the Special Shares, Series 2 will terminate upon the transfer of the shares of Series B Preferred Stock to a third party, other than an affiliate of Oaktree or Engaged, as applicable. On April 24, 2020, 6,000,000 Special Shares, Series 2 were issued to Engaged, equal to the number of Common Shares issuable to Engaged on the exchange of all of the shares of Series B-1 Preferred Stock held by it, and no Special Shares, Series 2 were issued to Oaktree, as Oaktree was subject to the Series B Exchange Cap.
Under the terms of the Series B Subscription Agreement, the Company had the right, but not the obligation, to require each of Oaktree and Engaged to purchase its proportionate share of up to 15,000 shares of Series B-2 Preferred Stock for aggregate consideration of up to $30.0 million, and up to 30,000 shares total, by giving notice to Oaktree and Engaged on or before July 15, 2020. The exchange price for the Series B-2 Preferred Stock would initially have been that amount which was equal to a 30% premium to the 15-day volume-weighted average price of the Common Shares determined as at the date of notice, provided that such exchange price could not be less than $2.00 or greater than $3.50 per underlying Common Share. The Company elected not to exercise this option, and no shares of Series B-2 Preferred Stock have been issued.
9. Stock-Based Compensation
Short-Term Incentive Plan
On April 12, 2020, the Company issued
On April 22, 2020, the Company granted a total of
| SUNOPTA INC. | 22 | June 27, 2020 10-Q |
SunOpta Inc. |
Subsequent to the end of the second quarter of 2020, on June 30, 2020, the Company granted an additional total of
10. Other Expense (Income), Net
The components of other expense (income) were as follows:
| Quarter ended | Two quarters ended | |||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Contingent consideration(1) | ( | ) | ||||||||||
| Product withdrawal and recall costs(2) | ( | ) | ( | ) | ||||||||
| Employee termination and recruitment costs(3) | ||||||||||||
| Facility closure costs(4) | ( | ) | ||||||||||
| Gain on sale of soy and corn business (see note 3) | ( | ) | ||||||||||
| Settlement gain on project cancellation | ( | ) | ( | ) | ||||||||
| Other | ( | ) | ||||||||||
| ( | ) | ( | ) | ( | ) | |||||||
(1) Contingent consideration
(2) Product withdrawal and recall costs
For the quarter and two quarters ended June 27, 2020, income represents the reversal of previously accrued costs related to a withdrawal of certain consumer-packaged products. These costs were recognized in other expense in 2016.
For the two quarters ended June 29, 2019, expense represents product withdrawal and recall costs that were not eligible for reimbursement under the Company's insurance policies or exceeded the limits of those policies, including certain costs related to the voluntary recall of certain roasted sunflower kernel products initiated by the Company in 2016.
| SUNOPTA INC. | 23 | June 27, 2020 10-Q |
SunOpta Inc. |
(3) Employee termination and recruitment costs
For the quarter and two quarters ended June 27, 2020, expense represents severance benefits of $
For the quarter ended June 29, 2019, expense represents severance benefits of $
(4) Facility closure costs
For the quarter and two quarters ended June 27, 2020, expense relates to the costs to close an organic ingredient warehousing facility located in China.
For the quarter and two quarters ended June 29, 2019, expense includes the costs to dismantle and move equipment from a former soy extraction facility located in Heuvelton, New York, which was sold in April 2019.
| SUNOPTA INC. | 24 | June 27, 2020 10-Q |
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters and two quarters ended June 27, 2020 and June 29, 2019
(Unaudited)
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts)
11. Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows (shares in thousands):
| Quarter ended | Two quarters ended | |||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||||
| Basic Earnings (Loss) Per Share | ||||||||||||||
| Numerator for basic earnings (loss) per share | ||||||||||||||
| Earnings (loss) attributable to SunOpta Inc. | $ | $ | ( | ) | $ | $ | ||||||||
| Less: dividends and accretion on Series A Preferred Stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||
| Less: dividends and accretion on Series B Preferred Stock | ( | ) | ( | ) | ||||||||||
| 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||
| Diluted Earnings Per Share | ||||||||||||||
| Numerator for diluted earnings (loss) per share | ||||||||||||||
| Earnings (loss) attributable to SunOpta Inc. | $ | $ | ( | ) | $ | $ | ||||||||
| Less: dividends and accretion on Series A Preferred Stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||
| Less: dividends and accretion on Series B Preferred Stock | ( | ) | ( | ) | ||||||||||
| 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 and restricted stock units(1) | ||||||||||||||
| Series B Preferred Stock(2) | ||||||||||||||
| Series A Preferred Stock(3) | ||||||||||||||
| Diluted weighted-average number of shares outstanding | ||||||||||||||
| Diluted earnings (loss) per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||
(1) For the quarter and two quarters ended June 27, 2020, stock options and restricted stock units to purchase or receive
(2) For the quarter and two quarters ended June 27, 2020, it was more dilutive to assume the Series B 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 Preferred Stock and the denominator was not adjusted to include
| SUNOPTA INC. | 25 | June 27, 2020 10-Q |
| SunOpta Inc. Notes to Consolidated Financial Statements For the quarters and two quarters ended June 27, 2020 and June 29, 2019 (Unaudited) (All tabular amounts expressed in thousands of U.S. dollars, except per share amounts) |
(3) For the quarters and two quarters ended June 27, 2020 and June 29, 2019, it was more dilutive to assume the Series A Preferred Stock was not converted into Common Shares and, therefore, the numerator of the diluted earnings per share calculation was not adjusted to add back the dividends and accretion on the Series A Preferred Stock and the denominator was not adjusted to include
12. Supplemental Cash Flow Information
| Quarter ended | Two quarters ended | ||||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | ||||||||||
| $ | $ | $ | $ | ||||||||||
| Changes in Non-Cash Working Capital, Net of Businesses Acquired or Sold | |||||||||||||
| Accounts receivable | ( | ) | |||||||||||
| Inventories | ( | ) | ( | ) | ( | ) | |||||||
| Income tax recoverable/payable | ( | ) | ( | ) | ( | ) | |||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | |||||||||
| Accounts payable and accrued liabilities | ( | ) | |||||||||||
| Customer and other deposits | ( | ) | ( | ) | ( | ) | |||||||
| ( | ) | ( | ) | ( | ) | ||||||||
| Non-Cash Investing and Financing Activities | |||||||||||||
| Right-of-use assets obtained in exchange for lease liabilities | |||||||||||||
| Operating leases | |||||||||||||
| Accrued dividends on preferred stock | |||||||||||||
| Dividend paid in kind on preferred stock | |||||||||||||
13. Commitments and Contingencies
Product Recall
Other Claims
In addition, various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.
| SUNOPTA INC. | 26 | June 27, 2020 10-Q |
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters and two quarters ended June 27, 2020 and June 29, 2019
(Unaudited)
(All tabular amounts expressed in thousands of U.S. dollars, except per share amounts)
14. Segmented Information
Effective the fourth quarter of 2019, the Company implemented changes to its organization and leadership structure to align with the operational and strategic objectives established by the Company's CEO. As a result, the Company established two new segments - a Plant-Based Foods and Beverages segment and a Fruit-Based Foods and Beverages segment - based on the synergistic nature of the underlying principal product ingredients. In addition, the Company realigned the Global Ingredients segment to combine its international organic ingredients operations and its co-manufactured premium juice program, based on shared raw material sourcing. Each segment has dedicated management, sales, marketing, plant operations, product development and business support teams, with full accountability to the CEO.
With these changes, the composition of the Company's three operating segments is as follows:
Corporate Services provides a variety of management, financial, information technology, treasury and administration services to each of the Company's operating segments.
When reviewing the operating results of the Company's operating segments, management uses segment revenues from external customers and segment operating income/loss to assess performance and allocate resources. Segment operating income/loss excludes other income/expense items. In addition, interest expense and income taxes are not allocated to the operating segments.
| SUNOPTA INC. | 27 | June 27, 2020 10-Q |
SunOpta Inc. |
Segment Revenues and Operating Income
Reportable segment operating results for the quarters and two quarters ended June 27, 2020 and June 29, 2019 were as follows:
| Quarter ended | ||||||||||||
| June 27, 2020 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | ||||||||||||
| Segment operating income (loss) | ( | ) | ||||||||||
| Corporate Services | ( | ) | ||||||||||
| Other income, net (see note 10) | ||||||||||||
| Interest expense, net | ( | ) | ||||||||||
| Earnings before income taxes | ||||||||||||
| Quarter ended | ||||||||||||
| June 29, 2019 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | ||||||||||||
| Segment operating income (loss) | ( | ) | ||||||||||
| Corporate Services | ( | ) | ||||||||||
| Other expense, net (see note 10) | ( | ) | ||||||||||
| Interest expense, net | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ||||||||||
| SUNOPTA INC. | 28 | June 27, 2020 10-Q |
SunOpta Inc. |
| Two quarters ended | ||||||||||||
| June 27, 2020 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | ||||||||||||
| Segment operating income (loss) | ( | ) | ||||||||||
| Corporate Services | ( | ) | ||||||||||
| Other income, net (see note 10) | ||||||||||||
| Interest expense, net | ( | ) | ||||||||||
| Earnings before income taxes | ||||||||||||
| Two quarters ended | ||||||||||||
| June 29, 2019 | ||||||||||||
| Plant-Based | Fruit-Based | |||||||||||
| Global | Foods and | Foods and | ||||||||||
| Ingredients | Beverages | Beverages | Consolidated | |||||||||
| $ | $ | $ | $ | |||||||||
| Segment revenues from external customers | ||||||||||||
| Segment operating income (loss) | ( | ) | ||||||||||
| Corporate Services | ( | ) | ||||||||||
| Other income, net (see note 10) | ||||||||||||
| Interest expense, net | ( | ) | ||||||||||
| Earnings before income taxes | ||||||||||||
Segment Depreciation and Amortization
Depreciation and amortization by reportable segment for the quarters and two quarters ended June 27, 2020 and June 29, 2019 was as follows:
| Quarter ended | Two quarters ended | |||||||||||
| June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |||||||||
| $ | $ | $ | $ | |||||||||
| Global Ingredients | ||||||||||||
| Plant-Based Foods and Beverages | ||||||||||||
| Fruit-Based Foods and Beverages | ||||||||||||
| Total segment depreciation and amortization | ||||||||||||
| Corporate Services | ||||||||||||
| Total depreciation and amortization | ||||||||||||
| SUNOPTA INC. | 29 | June 27, 2020 10-Q |
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended June 27, 2020 contained under Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended December 28, 2019 ("Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to August 5, 2020.
Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as "anticipate," "estimate," "target," "intend," "project," "potential," "predict," "continue," "believe," "expect," "can," "could," "would," "should," "may," "might," "plan," "will," "budget," "forecast," or other similar expressions concerning matters that are not historical facts, or the negative of such terms are intended to identify forward-looking statements; however, the absence of these words does not necessarily mean that a statement is not forward-looking. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. These factors are more fully described in the "Risk Factors" section at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current estimates, expectations and projections, which we believe are reasonable as of the date of this report. Forward-looking statements are not guarantees of future performance or events. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time. Neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements, and we hereby qualify all our forward-looking statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S. dollars, except per share amounts.
Overview
We are a leading global company focused on the manufacture of plant-based and fruit-based foods and beverage products for sale to retail, foodservice and branded food customers. In addition, our global ingredient sourcing and production platform makes us one of the leading suppliers of organic and non-GMO ingredients to the food industry.
Effective the fourth quarter of 2019, we changed our segment reporting to reflect changes to our operating structure. As a result, we established two new segments - a Plant-Based Foods and Beverages segment and a Fruit-Based Foods and Beverages segment - based on the synergistic nature of the underlying principal product ingredients. In addition, we realigned the Global Ingredients segment to combine our international organic ingredients operations and our co-manufactured premium juice program, based on shared raw material sourcing. With these changes, the following is a summary of the principal activities and products that comprise each of our three operating segments:
| SUNOPTA INC. | 30 | June 27, 2020 10-Q |
The segment information presented in this MD&A for the quarter and two quarters ended June 29, 2019 has been restated to conform with the preceding changes to our operating structure.
Update on Impact of COVID-19
We continue to actively address the impacts of the COVID-19 pandemic on our global operations. We began to experience impacts to our business and results late in the first quarter of 2020, and these impacts continued through the second quarter of 2020. As a result, we saw significant shifts in the mix of our business, resulting in lower demand for our food and beverage products from the foodservice channel due to the full or partial closure of many foodservice outlets, and an increase in demand from retail customers as consumers increased their at-home food and beverage consumption. We saw a return towards normalized levels towards the end of the second quarter of 2020, as more foodservice outlets reopened and consumers adapted to the evolving environment; however, we cannot be certain that this trend will continue due to uncertain scope and duration of the pandemic.
To date, we have not experienced any material interruptions in our plant operations due to employee absences, or to our supply chains. Our facilities have largely been exempt from government closure orders where applicable. In the second quarter of 2020, we incurred approximately $1.4 million of incremental costs related to COVID-19, in order to provide wage premiums and personal protective equipment for our plant employees, and to implement additional cleaning and disinfecting protocols at our facilities.
During the first two quarters of 2020, we experienced increased volatility in foreign currency exchange rates and commodity prices, including a more than 20% depreciation of the Mexican peso against the U.S. dollar in March 2020. In April 2020, we entered into a combination of foreign currency put and call option contracts (a zero-cost collar) to hedge our exposure to fluctuations in the Mexican peso on fruit inventory purchases and operating costs in Mexico through the remainder of 2020.
To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources.
Overall, based on information available to us as of the date of this report, we believe that we will continue to be able to deliver our products to our customers on a timely basis, while meeting our financial obligations. However, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its ultimate impact on the global economy and our business.
| SUNOPTA INC. | 31 | June 27, 2020 10-Q |
Value Creation Plan
The following table summarizes costs incurred by type under the Value Creation Plan that were charged to expense for the quarters and two quarters ended June 27, 2020 and June 29, 2019:
| Employee | ||||||||||||
| Asset | recruitment, | |||||||||||
| impairments | retention and | |||||||||||
| and facility | termination | Professional | ||||||||||
| closure costs | costs | fees | Total | |||||||||
| For the quarter ended | $ | $ | $ | $ | ||||||||
| June 27, 2020 | ||||||||||||
| Selling, general and administrative expenses | — | 225 | 238 | 463 | ||||||||
| Other expense (income) | (24 | ) | 40 | — | 16 | |||||||
| Total | (24 | ) | 265 | 238 | 479 | |||||||
| June 29, 2019 | ||||||||||||
| Selling, general and administrative expenses | — | 770 | 184 | 954 | ||||||||
| Other expense | 52 | 669 | — | 721 | ||||||||
| Total | 52 | 1,439 | 184 | 1,675 |
| Employee | ||||||||||||
| Asset | recruitment, | |||||||||||
| impairments | retention and | |||||||||||
| and facility | termination | Professional | ||||||||||
| closure costs | costs | fees | Total | |||||||||
| For the two quarters ended | $ | $ | $ | $ | ||||||||
| June 27, 2020 | ||||||||||||
| Selling, general and administrative expenses | — | 710 | 789 | 1,499 | ||||||||
| Other expense | 365 | 610 | — | 975 | ||||||||
| Total | 365 | 1,320 | 789 | 2,474 | ||||||||
| June 29, 2019 | ||||||||||||
| Selling, general and administrative expenses | — | 879 | 278 | 1,157 | ||||||||
| Other expense | 308 | 2,068 | — | 2,376 | ||||||||
| Total | 308 | 2,947 | 278 | 3,533 |
For more information regarding the Value Creation Plan, see note 4 to the unaudited consolidated financial statements included in this report.
Acquisition of Sanmark B.V.
On April 1, 2019, we acquired 100% of the outstanding shares of Sanmark B.V. ("Sanmark") for $3.3 million, net of cash acquired, which was financed through existing credit facilities. Sanmark is a sourcing and trading business focused on organic oils for the food, pharmacy, and cosmetic industries, generating most of its sales in the European and Asia-Pacific markets. The operations of Sanmark have been integrated into our organic ingredients operations based in the Netherlands, and the results of operations of Sanmark have been included in Global Ingredients since the date of acquisition.
Sale of Soy and Corn Business
On February 22, 2019, our subsidiary, SunOpta Grains and Foods Inc., completed the sale of our specialty and organic soy and corn business to Pipeline Foods, LLC for $66.5 million, subject to certain post-closing adjustments, which resulted in a pre-tax gain on sale of $45.4 million recognized in the first two quarters of 2019. The soy and corn business engaged in seed and grain conditioning and corn milling and formed part of Global Ingredients. For the period ended February 22, 2019, the soy and corn business generated revenues and gross profit of $10.3 million and $0.2 million, respectively, and reported an operating loss of $0.2 million (excluding management fees charged by Corporate Services). The net proceeds from this transaction were initially used to repay borrowings and increase availability under our Global Credit Facility (as described below under the heading "Liquidity and Capital Resources").
| SUNOPTA INC. | 32 | June 27, 2020 10-Q |
Consolidated Results of Operations for the Quarters Ended June 27, 2020 and June 29, 2019
| June 27, 2020 | June 29, 2019 | Change | Change | ||||||||||
| For the quarter ended | $ | $ | $ | % | |||||||||
| Revenues | |||||||||||||
| Global Ingredients | 126,543 | 120,892 | 5,651 | 4.7% | |||||||||
| Plant-Based Foods and Beverages | 91,705 | 81,940 | 9,765 | 11.9% | |||||||||
| Fruit-Based Foods and Beverages | 92,696 | 90,172 | 2,524 | 2.8% | |||||||||
| Total revenues | 310,944 | 293,004 | 17,940 | 6.1% | |||||||||
| Gross Profit | |||||||||||||
| Global Ingredients | 16,433 | 12,077 | 4,356 | 36.1% | |||||||||
| Plant-Based Foods and Beverages | 16,731 | 12,114 | 4,617 | 38.1% | |||||||||
| Fruit-Based Foods and Beverages | 6,528 | 3,136 | 3,392 | 108.2% | |||||||||
| Total gross profit | 39,692 | 27,327 | 12,365 | 45.2% | |||||||||
| Segment operating income (loss)(1) | |||||||||||||
| Global Ingredients | 8,038 | 3,667 | 4,371 | 119.2% | |||||||||
| Plant-Based Foods and Beverages | 10,484 | 4,496 | 5,988 | 133.2% | |||||||||
| Fruit-Based Foods and Beverages | (2,016 | ) | (5,960 | ) | 3,944 | 66.2% | |||||||
| Corporate Services | (7,674 | ) | (4,740 | ) | (2,934 | ) | -61.9% | ||||||
| Total segment operating income (loss) | 8,832 | (2,537 | ) | 11,369 | 448.1% | ||||||||
| Other expense (income), net | (333 | ) | 445 | (778 | ) | -174.8% | |||||||
| Earnings (loss) before the following | 9,165 | (2,982 | ) | 12,147 | 407.3% | ||||||||
| Interest expense, net | 7,936 | 8,254 | (318 | ) | -3.9% | ||||||||
| Provision for (recovery of) income taxes | 452 | (2,324 | ) | 2,776 | 119.4% | ||||||||
| Net earnings (loss)(2),(3) | 777 | (8,912 | ) | 9,689 | 108.7% | ||||||||
| Earnings (loss) attributable to non-controlling interests | (230 | ) | 143 | (373 | ) | -260.8% | |||||||
| Earnings (loss) attributable to SunOpta Inc. | 1,007 | (9,055 | ) | 10,062 | 111.1% | ||||||||
| Dividends and accretion on preferred stock | (2,604 | ) | (2,001 | ) | (603 | ) | -30.1% | ||||||
| Loss attributable to common shareholders(4) | (1,597 | ) | (11,056 | ) | 9,459 | 85.6% | |||||||
(1) When assessing the financial performance of our operating segments, we use an internal measure of operating income/loss that excludes other income/expense items and goodwill impairments determined in accordance with U.S. GAAP. This measure is the basis on which management, including the CEO, assesses the underlying performance of our operating segments.
We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our operating performance. However, the non-GAAP measure of operating income should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. The following table presents a reconciliation of segment operating income/loss to earnings/loss before the following, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 33 | June 27, 2020 10-Q |
| Plant-Based | Fruit-Based | ||||||||||||||
| Global | Foods and | Foods and | Corporate | ||||||||||||
| Ingredients | Beverages | Beverages | Services | Consolidated | |||||||||||
| For the quarter ended | $ | $ | $ | $ | $ | ||||||||||
| June 27, 2020 | |||||||||||||||
| Segment operating income (loss) | 8,038 | 10,484 | (2,016 | ) | (7,674 | ) | 8,832 | ||||||||
| Other income (expense), net | (503 | ) | 1 | 479 | 356 | 333 | |||||||||
| Earnings (loss) before the following | 7,535 | 10,485 | (1,537 | ) | (7,318 | ) | 9,165 | ||||||||
| June 29, 2019 | |||||||||||||||
| Segment operating income (loss) | 3,667 | 4,496 | (5,960 | ) | (4,740 | ) | (2,537 | ) | |||||||
| Other income (expense), net | (237 | ) | 430 | (472 | ) | (166 | ) | (445 | ) | ||||||
| Earnings (loss) before the following | 3,430 | 4,926 | (6,432 | ) | (4,906 | ) | (2,982 | ) |
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income/loss. However, any measure of operating income/loss excluding any or all of these items is not, and should not be viewed as, a substitute for operating income/loss prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.
(2) When assessing our financial performance, we use an internal measure of earnings attributable to common shareholders determined in accordance with U.S. GAAP that excludes specific items recognized in other income/expense, impairment losses on goodwill and long-lived assets, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of our financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations.
The following table presents a reconciliation of adjusted earnings/loss from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, in recognition of the sale of the soy and corn business (as described above under the heading "Sale of Soy and Corn Business"), we have prepared this table in a columnar format to present the effect of the disposal of this business on our consolidated results for the quarter ended June 29, 2019. We believe this presentation assists investors in assessing the results of the operations we have disposed of and the effect of those operations on our financial performance.
| SUNOPTA INC. | 34 | June 27, 2020 10-Q |
| Excluding | |||||||||||||||||||
| disposed operations | Disposed operations | Consolidated | |||||||||||||||||
| Per Diluted Share | Per Diluted Share | Per Diluted Share | |||||||||||||||||
| For the quarter ended | $ | $ | $ | $ | $ | $ | |||||||||||||
| June 27, 2020 | |||||||||||||||||||
| Net earnings | 777 | — | 777 | ||||||||||||||||
| Loss attributable to non-controlling interests | 230 | — | 230 | ||||||||||||||||
| Dividends and accretion on preferred stock | (2,604 | ) | — | (2,604 | ) | ||||||||||||||
| Loss attributable to common shareholders | (1,597 | ) | (0.02 | ) | — | — | (1,597 | ) | (0.02 | ) | |||||||||
| Adjusted for: | |||||||||||||||||||
| Costs related to the Value Creation Plan(a) | 479 | — | 479 | ||||||||||||||||
| Plant expansion costs(b) | 92 | — | 92 | ||||||||||||||||
| Other(c) | (349 | ) | — | (349 | ) | ||||||||||||||
| Net income tax effect(d) | 17 | — | 17 | ||||||||||||||||
| Adjusted loss | (1,358 | ) | (0.02 | ) | — | — | (1,358 | ) | (0.02 | ) | |||||||||
| June 29, 2019 | |||||||||||||||||||
| Net loss | (8,766 | ) | (146 | ) | (8,912 | ) | |||||||||||||
| Earnings attributable to non-controlling interests | (143 | ) | — | (143 | ) | ||||||||||||||
| Dividends and accretion on preferred stock | (2,001 | ) | — | (2,001 | ) | ||||||||||||||
| Loss attributable to common shareholders | (10,910 | ) | (0.12 | ) | (146 | ) | — | (11,056 | ) | (0.13 | ) | ||||||||
| Adjusted for: | |||||||||||||||||||
| Costs related to Value Creation Plan(e) | 1,675 | — | 1,675 | ||||||||||||||||
| Plant expansion costs(f) | 311 | — | 311 | ||||||||||||||||
| Costs related to sale of soy and corn business(g) | — | 201 | 201 | ||||||||||||||||
| Contract manufacturer transition costs(h) | 201 | — | 201 | ||||||||||||||||
| Other(i) | (477 | ) | — | (477 | ) | ||||||||||||||
| Net income tax effect(d) | 211 | (55 | ) | 156 | |||||||||||||||
| Adjusted loss | (8,989 | ) | (0.10 | ) | — | — | (8,989 | ) | (0.10 | ) | |||||||||
(a) Reflects employee retention costs of $0.2 million and professional fees of $0.2 million recorded in SG&A expenses; and employee termination costs of $0.5 million (offset by a $0.4 million reversal of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees) recorded in other expense.
(b) Reflects costs related to the expansion of our plant-based extraction capabilities at our Alexandria, Minnesota, facility, which were recorded in cost of goods sold.
(c) Other income includes the reversal of previously accrued costs related to the withdrawal of certain consumer-packaged products. These costs were recognized in other expense in 2016.
(d) Reflects the tax effect of the preceding adjustments to earnings and reflects an overall estimated annual effective tax rate of approximately 30% for the quarter ended June 27, 2020 (June 29, 2019 - 27%) on adjusted earnings/loss before tax.
(e) Reflects employee retention and relocation costs of $0.8 million, and professional fees of $0.2 million recorded in SG&A expenses; and employee termination costs of $0.7 million recorded in other expense.
(f) Reflects costs related to the expansion of our Allentown, Pennsylvania, plant-based beverage facility, which were recorded in cost of goods sold.
(g) Reflects legal fees incurred in connection with the sale of the soy and corn business, which were recorded in other expense.
(h) Reflects costs to transition premium juice production activities to new contract manufacturers, which were recorded in cost of goods sold.
(i) Other includes a gain related to a project cancellation, partially offset by losses on the disposal of assets, and business development costs, which were recorded in other income/expense.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings/loss. However, adjusted earnings/loss is not, and should not be viewed as, a substitute for earnings prepared under U.S. GAAP. Adjusted earnings/loss is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) We use a measure of adjusted EBITDA when assessing the performance of our operations, which we believe is useful to investors' understanding of our operating profitability because it excludes non-operating expenses, such as interest and income taxes, and non-cash expenses, such as depreciation, amortization, stock-based compensation and asset impairment charges, as well as other unusual items that affect the comparability of operating performance. We also use this measure to review and assess our progress under the Value Creation Plan and to assess operating performance in connection with our employee incentive programs. In addition, we are subject to certain restrictions on incurring additional indebtedness based on availability and metrics that include in their calculation a measure of EBITDA. We define adjusted EBITDA as segment operating income/loss plus depreciation, amortization and non-cash stock-based compensation, and excluding other unusual items as identified in the determination of adjusted earnings (refer above to footnote (2)). The following table presents a reconciliation of segment operating income/loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure. In addition, as described above under footnote (2), we have prepared this table in a columnar format to present the effect of the disposal of the soy and corn business on our consolidated results for the quarter ended June 29, 2019. We believe this presentation assists investors in assessing the results of the operations we have disposed of and the effect of those operations on our financial performance.
| SUNOPTA INC. | 35 | June 27, 2020 10-Q |
| Excluding | |||||||||
| disposed operations | Disposed operations | Consolidated | |||||||
| For the quarter ended | $ | $ | $ | ||||||
| June 27, 2020 | |||||||||
| Net earnings | 777 | — | 777 | ||||||
| Provision for income taxes | 452 | — | 452 | ||||||
| Interest expense, net | 7,936 | — | 7,936 | ||||||
| Other income, net | (333 | ) | — | (333 | ) | ||||
| Total segment operating income | 8,832 | — | 8,832 | ||||||
| Depreciation and amortization | 8,751 | — | 8,751 | ||||||
| Stock-based compensation(a) | 2,368 | — | 2,368 | ||||||
| Costs related to Value Creation Plan(b) | 463 | — | 463 | ||||||
| Plant expansion costs(c) | 92 | — | 92 | ||||||
| Adjusted EBITDA | 20,506 | — | 20,506 | ||||||
| June 29, 2019 | |||||||||
| Net loss | (8,766 | ) | (146 | ) | (8,912 | ) | |||
| Recovery of income taxes | (2,269 | ) | (55 | ) | (2,324 | ) | |||
| Interest expense, net | 8,254 | — | 8,254 | ||||||
| Other expense, net | 244 | 201 | 445 | ||||||
| Total segment operating loss | (2,537 | ) | — | (2,537 | ) | ||||
| Depreciation and amortization | 8,186 | — | 8,186 | ||||||
| Stock-based compensation | 2,999 | — | 2,999 | ||||||
| Costs related to Value Creation Plan(b) | 954 | — | 954 | ||||||
| Plant expansion costs(c) | 311 | — | 311 | ||||||
| Contract manufacturer transition costs(d) | 201 | — | 201 | ||||||
| Adjusted EBITDA | 10,114 | — | 10,114 |
(a) For the second quarter of 2020, stock-based compensation of $2.4 million was recorded in SG&A expenses, and the reversal of $0.4 million of previously recognized stock-based compensation related to forfeited awards previously granted to terminated employees was recognized in other income.
(b) For the second quarters of 2020 and 2019, reflects professional fees and employee retention costs of $0.5 million and $1.0 million, respectively, recorded in SG&A expenses.
(c) For the second quarter of 2020, reflects costs related to the expansion of our plant-based extraction capabilities at our Alexandria, Minnesota, facility, and, for the second quarter of 2019, reflects costs related to the expansion of our Allentown, Pennsylvania, plant-based beverage facility, which were recorded in cost of goods sold.
(d) Reflects costs to transition premium juice production activities to new contract manufacturers, which were recorded in cost of goods sold.
Although we use adjusted EBITDA as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing adjusted EBITDA in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income, earnings and adjusted earnings to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance with U.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies.
(4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. In particular, we evaluate our revenues on a basis that excludes the effects of fluctuations in commodity pricing and foreign exchange rates. In addition, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for, an analysis of our results as reported under U.S. GAAP.
| SUNOPTA INC. | 36 | June 27, 2020 10-Q |
Revenues for the quarter ended June 27, 2020 increased by 6.1% to $310.9 million from $293.0 million for the quarter ended June 29, 2019. Excluding the impact on revenues of changes in commodity-related pricing (an increase in revenues of $1.8 million), partially offset by changes in foreign exchange rates (a decrease in revenues of $0.8 million), revenues increased by 5.8% in the second quarter of 2020, compared with the second quarter of 2019. Revenues increased on an adjusted basis across all segments of the business, reflecting the expansion of plant-based beverage and broth offerings for retail customers, growth in plant-based ingredient extraction volumes, higher volumes of organic ingredients and premium juice products, and increased retail volumes and sales pricing for frozen fruit, partially offset by lower volumes of plant-based beverage, frozen fruit and fruit ingredient products sold into the foodservice channel, and lower sales of fruit snacks related to the timing of customer promotions.
Gross profit increased $12.4 million, or 45.2%, to $39.7 million for the quarter ended June 27, 2020, compared with $27.3 million for the quarter ended June 29, 2019. As a percentage of revenues, gross profit for the quarter ended June 27, 2020 was 12.8% compared to 9.3% for the quarter ended June 29, 2019, an increase of 350 basis points. Gross profit and gross profit percentage increased across all segments of the business, reflecting higher sales and production volumes of plant-based beverages, broths and plant-based ingredients, and improved plant utilization and productivity-driven cost savings in the Plant-Based Foods and Beverages segment, together with increased sales pricing and volumes, and a favorable mix of higher-margin retail sales of frozen fruit, and lower processing costs for frozen fruit within the Fruit-Based Foods and Beverages segment, and increased pricing spreads and productivity improvements for certain organic ingredients and premium juice products in the Global Ingredients segment, partially offset by lower production and plant utilization for fruit ingredients and fruit snacks in the Fruit-Based Foods and Beverages segment.
For the quarter ended June 27, 2020, we realized total segment operating income of $8.8 million, compared with a total segment operating loss of $2.5 million for the quarter ended June 29, 2019. The $11.4 million increase in total segment operating income reflected higher gross profit, as described above, partially offset by a $1.0 million increase in SG&A expenses mainly due to higher employee-related variable compensation and benefit costs, partially offset by the benefit from headcount reductions and other cost savings measures taken in 2019, together with lower travel and marketing costs, and stock-based compensation expense.
Further details on revenue, gross profit and segment operating income/loss variances are provided below under "Segmented Operations Information."
Other income for the quarter ended June 27, 2020, of $0.3 million, mainly reflected the reversal of costs that remained accrued related to the withdrawal of certain consumer-packaged products in 2016. Other expense for the quarter ended June 29, 2019, of $0.4 million, reflected employee termination costs related to the Value Creation Plan and costs associated with the sale of the soy and corn business, offset by a gain related to a project cancellation.
Net interest expense decreased by $0.4 million to $7.9 million for the quarter ended June 27, 2020, compared with $8.3 million for the quarter ended June 29, 2019. Interest expense included the amortization of debt issuance costs of $1.1 million and $0.7 million in the second quarters of 2020 and 2019, respectively. The period-over-period decrease in net interest expense reflected lower average borrowings and weighted-average interest rates under our line of credit facilities.
We recognized a provision of income tax of $0.5 million for the quarter ended June 27, 2020, compared with a recovery of income taxes of $2.3 million for the quarter ended June 29, 2019.
On a consolidated basis, we realized a loss attributable to common shareholders of $1.6 million (diluted loss per share of $0.02) for the quarter ended June 27, 2020, compared with a loss attributable to common shareholders of $11.1 million (diluted loss per share of $0.13) for the quarter ended June 29, 2019.
For the quarter ended June 27, 2020, the adjusted loss was $1.4 million, or $0.02 per diluted share, compared with an adjusted loss of $9.0 million, or $0.10 per diluted share, for the quarter ended June 29, 2019. Adjusted EBITDA of $20.5 million for the quarter ended June 27, 2020 more than doubled adjusted EBITDA of $10.1 million for the quarter ended June 29, 2019. Adjusted earnings and adjusted EBITDA are non-GAAP financial measures. See footnotes (2) and (3) to the table above for a reconciliation of adjusted earnings/loss and adjusted EBITDA from net earnings/loss, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. | 37 | June 27, 2020 10-Q |
Segmented Operations Information
| Global Ingredients | ||||||||||||
| For the quarter ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Revenues | $ | 126,543 | $ | 120,892 | $ | 5,651 | 4.7% | |||||
| Gross profit | 16,433 | 12,077 | 4,356 | 36.1% | ||||||||
| Gross profit % | 13.0% | 10.0% | 3.0% | |||||||||
| Operating income | $ | 8,038 | $ | 3,667 | $ | 4,371 | 119.2% | |||||
| Operating income % | 6.4% | 3.0% | 3.4% |
Global Ingredients contributed $126.5 million in revenues for the quarter ended June 27, 2020, compared to $120.9 million for the quarter ended June 29, 2019, an increase of $5.7 million, or 4.7%. Excluding the impact on revenues of commodity-related pricing and foreign exchange rate movements (a decrease in revenues of $2.7 million), Global Ingredients revenues increased approximately 6.9%. The table below explains the increase in reported revenues:
Global Ingredients Revenue Changes |
| |
Revenues for the quarter ended June 29, 2019 | $120,892 | |
| Increased sales volumes of organic ingredients including cocoa (reflecting increased production volumes of cocoa ingredients), oils (including increased production volumes of sunflower oil), and fruit (due to growth in new business), partially offset by lower volumes of coffee (due to COVID-19-related impacts on foodservice customers) and animal feed (due to the exit from underperforming bulk grain categories) | 4,480 |
| Higher sales volumes and pricing for premium juice products | 3,915 |
| Decreased commodity pricing for organic ingredients | (1,921) |
| Unfavorable foreign exchange impact on euro-denominated sales due to a stronger U.S. dollar period-over-period | (823) |
Revenues for the quarter ended June 27, 2020 | $126,543 | |
Gross profit in Global Ingredients increased by $4.4 million to $16.4 million for the quarter ended June 27, 2020, compared to $12.1 million for the quarter ended June 29, 2019, and the gross profit percentage increased by 3.0% to 13.0%. The increase in gross profit percentage reflected increased pricing spreads, higher-margin product mix within certain categories, and manufacturing efficiencies for certain organic ingredients, together with a favorable cocoa commodity hedging result, and higher sales pricing and lower bottling costs for premium juice products. The table below explains the increase in gross profit:
Global Ingredients Gross Profit Changes |
| |
Gross profit for the quarter ended June 29, 2019 | $12,077 | |
| Increased volumes of cocoa, oils and fruit, higher pricing spreads on fruit and nuts, and favorable mix of higher-margin specialty versus bulk oil and high-protein versus bulk animal feed sales, together with increased production volumes and manufacturing efficiencies in our cocoa and sunflower operations, and cocoa commodity hedging gains ($1.8 million), partially offset by lower volumes and pricing for coffee and lower-margin sales to reduce positions in older fruit inventories | 2,905 |
| Higher sales volumes and pricing, and lower bottling costs for premium juice products | 1,451 |
Gross profit for the quarter ended June 27, 2020 | $16,433 | |
Operating income in Global Ingredients increased by $4.3 million, or 119.2%, to $8.0 million for the quarter ended June 27, 2020, compared to $3.7 million for the quarter ended June 29, 2019. The table below explains the increase in operating income:
| SUNOPTA INC. | 38 | June 27, 2020 10-Q |
Global Ingredients Operating Income Changes |
| |
Operating income for the quarter ended June 29, 2019 | $3,667 | |
| Increase in gross profit, as explained above | 4,356 |
| Decrease in corporate cost allocations | 311 |
| Lower spending associated with travel and marketing activities, together with a favorable foreign exchange impact on euro-denominated SG&A expenses, partially offset by higher employee-related variable compensation | 205 |
| Decrease in mark-to-market gains related to forward currency contracts ($0.4 million), together with net foreign exchange losses on the revaluation of U.S. dollar-denominated receivable and payable balances | (501) |
Operating income for the quarter ended June 27, 2020 | $8,038 | |
Looking forward, we believe Global Ingredients is positioned to take advantage of opportunities in the growing organic and non-GMO food categories. We intend to invest in ingredient categories where we have strong positions, including cocoa, oil and coffee, while continuing to rationalize certain underperforming categories, such as bulk animal feed. During the second half of 2020, we could potentially experience increased demand for organic ingredients from food manufacturers in North America, as those manufacturers replenish retail inventories that were depleted due to the consumer response to COVID-19, which may be offset by weaker market conditions expected for organic ingredients in Europe. In addition, we expect consumer demand for premium juice products to remain strong in the second half of 2020; however, coffee volumes are expected to remain soft, due to government restrictions on the reopening of many foodservice outlets. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Several factors could adversely impact our ability to meet these forward-looking expectations, including the ongoing COVID-19 pandemic, fluctuations in foreign currency exchange rates, commodity prices and availability of raw materials, potential competitive pressures, and general economic and political conditions globally and in the markets in which we do business, along with the other factors described above under "Forward-Looking Statements."
| Plant-Based Foods and Beverages | ||||||||||||
| For the quarter ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Revenues | $ | 91,705 | $ | 81,940 | $ | 9,765 | 11.9% | |||||
| Gross profit | 16,731 | 12,114 | 4,617 | 38.1% | ||||||||
| Gross profit % | 18.2% | 14.8% | 3.4% | |||||||||
| Operating income | $ | 10,484 | $ | 4,496 | $ | 5,988 | 133.2% | |||||
| Operating income % | 11.4% | 5.5% | 5.9% |
Plant-Based Foods and Beverages contributed $91.7 million in revenues for the quarter ended June 27, 2020, compared to $81.9 million for the quarter ended June 29, 2019, an increase of $9.8 million, or 11.9%. Excluding the impact on revenues of changes in sunflower commodity-related pricing (an increase in revenues of $1.9 million), Plant-Based Foods and Beverages revenues increased approximately 9.6%. The table below explains the increase in reported revenues:
| SUNOPTA INC. | 39 | June 27, 2020 10-Q |
Plant-Based Foods and Beverages Revenue Changes |
| |
Revenues for the quarter ended June 29, 2019 | $81,940 | |
| Higher retail sales volumes of plant-based beverages and everyday broth offerings, including output from additional aseptic processing capacity that came on-line in the third quarter of 2019, as well as increased demand for plant-based ingredients, partially offset by reduced sales volumes of plant-based beverage products to foodservice customers | 7,864 |
| Increased commodity pricing for sunflower | 1,941 |
| Lower volumes of sunflower inshell and kernel, mostly offset by higher volumes of birdfeed and roasted snacks | (40) |
Revenues for the quarter ended June 27, 2020 | $91,705 | |
Gross profit in Plant-Based Foods and Beverages increased by $4.6 million to $16.7 million for the quarter ended June 27, 2020, compared to $12.1 million for the quarter ended June 29, 2019, and the gross profit percentage increased by 3.4% to 18.2%. The increase in the gross profit percentage reflected strong production volumes, improved plant utilization and productivity-driven cost savings within our plant-based beverage and ingredient extraction operations, and improved margin performance within our sunflower and roasting operations. The table below explains the increase in gross profit:
Plant-Based Foods and Beverages Gross Profit Changes |
| |
Gross profit for the quarter ended June 29, 2019 | $12,114 | |
| Higher sales volumes, plant utilization and productivity improvements within our plant-based beverage and ingredient extraction operations, partially offset by wage premiums and higher cleaning costs attributable to COVID-19 (approximately $0.5 million) | 4,529 |
| Higher sales volumes of birdfeed and roasted snacks, and increased plant utilization within our sunflower and roasting operations, partially offset by COVID-19-related costs (approximately $0.1 million) | 88 |
Gross profit for the quarter ended June 27, 2020 | $16,731 | |
Operating income in Plant-Based Foods and Beverages increased by $6.0 million to $10.5 million for the quarter ended June 27, 2020, compared to $4.5 million for the quarter ended June 29, 2019. The table below explains the increase in operating income:
Plant-Based Foods and Beverages Operating Income Changes |
| |
Operating income for the quarter ended June 29, 2019 | $4,496 | |
| Increase in gross profit, as explained above | 4,617 |
| Lower employee compensation costs due to headcount reductions, together with credit recoveries and reduced travel costs, partially offset by higher product development spending | 697 |
| Decrease in corporate cost allocations | 674 |
Operating income for the quarter ended June 27, 2020 | $10,484 | |
Looking forward we believe the markets targeted by our Plant-Based Foods and Beverages segment have long-term growth potential; however, COVID-19 may cause significant demand volatility within our plant-based beverage operations for the duration of the pandemic. In the second quarter of 2020, we experienced a significant decline in orders from many foodservice customers, offset by strong retail demand to meet higher at-home consumption. We could potentially experience a return toward normalized levels in the second half of 2020, as more foodservice outlets re-open and consumers adapt to the evolving environment; however, we cannot be certain of this trend due to uncertain scope and duration of the COVID-19 pandemic. Despite the impacts of COVID-19, we expect to see significant year-over-year growth in revenues and gross profit from our plant-based beverage and ingredient operations in 2020, including the benefit from a full-year output from two new aseptic processing lines that were commissioned at our Allentown, Pennsylvania, plant-based beverage facility in the third quarter of 2019. In addition, we believe we are on-track to execute several major capital projects in 2020 to further increase our aseptic processing capacity and expand our ingredient extraction capabilities. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Several factors could adversely impact our ability to meet these forward-looking expectations, including the ongoing COVID-19 pandemic, customer actions, consumer behaviours, competitive pressures, unexpected delays in executing on our capital projects, and general economic and political conditions in North America, along with the other factors described above under "Forward-Looking Statements."
| SUNOPTA INC. | 40 | June 27, 2020 10-Q |
| Fruit-Based Foods and Beverages | ||||||||||||
| For the quarter ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Revenues | $ | 92,696 | $ | 90,172 | $ | 2,524 | 2.8% | |||||
| Gross profit | 6,528 | 3,136 | 3,392 | 108.2% | ||||||||
| Gross profit % | 7.0% | 3.5% | 3.5% | |||||||||
| Operating loss | $ | (2,016 | ) | $ | (5,960 | ) | $ | 3,944 | 66.2% | |||
| Operating loss % | -2.2% | -6.6% | 4.4% |
Fruit-Based Foods and Beverages contributed $92.7 million in revenues for the quarter ended June 27, 2020, compared to $90.2 million for the quarter ended June 29, 2019, an increase of $2.5 million, or 2.8%. Excluding the impact on revenues of changes in raw fruit commodity-related pricing (an increase in revenues of $1.8 million), Fruit-Based Foods and Beverages revenues increased approximately 0.8%. The table below explains the increase in reported revenues:
Fruit-Based Foods and Beverages Revenue Changes |
| |
Revenues for the quarter ended June 29, 2019 | $90,172 | |
| Increased volumes and sales pricing for frozen fruit into the retail channel, partially offset by lower demand for frozen fruit and fruit preparations from foodservice customers | 2,495 |
| Increase in commodity pricing for raw fruit | 1,808 |
| Lower sales volumes of fruit snack products due to the timing of customer promotions | (1,779) |
Revenues for the quarter ended June 27, 2020 | $92,696 | |
| SUNOPTA INC. | 41 | June 27, 2020 10-Q |
Gross profit in Fruit-Based Foods and Beverages more than doubled to $6.5 million for the quarter ended June 27, 2020, compared to $3.1 million for the quarter ended June 29, 2019, and the gross profit percentage increased by 3.5% to 7.0%. The increase in the gross profit percentage reflected increased sales pricing and a favorable mix of higher-margin retail sales of frozen fruit. In addition, automation and productivity initiatives in our frozen fruit manufacturing facilities have generated higher yields and throughput, while allowing these facilities to operate with fewer seasonal workers. These factors were partially offset by lower production volumes and plant utilization within our fruit ingredient and fruit snacks operations. The table below explains the increase in gross profit:
Fruit-Based Foods and Beverages Gross Profit Changes |
| |
Gross profit for the quarter ended June 29, 2019 | $3,136 | |
| Impact of higher sales volumes and pricing for frozen fruit, including a favorable mix of higher-margin retail versus foodservice sales, together with lower processing costs for frozen fruit, partially offset by lower sales volumes and plant utilization for fruit ingredients, together with wage premiums and higher cleaning costs attributable to COVID-19 (approximately $0.6 million) | 4,392 |
| Lower sales volumes for fruit snacks, together with lower production volumes, plant utilization and COVID-19-related costs (approximately $0.1 million) | (1,000) |
Gross profit for the quarter ended June 27, 2020 | $6,528 | |
Operating loss in Fruit-Based Foods and Beverages decreased by $4.0 million to $2.0 million for the quarter ended June 27, 2020, compared to $6.0 million for the quarter ended June 29, 2019. The table below explains the decrease in operating loss:
Fruit-Based Foods and Beverages Operating Loss Changes |
| |
Operating loss for the quarter ended June 29, 2019 | $(5,960) | |
| Increase in gross profit, as explained above | 3,392 |
| Decrease in corporate cost allocations | 737 |
| Impact of reserves for credit losses due to weaker economic conditions and increased employee compensation related to new management hires, partially offset by a favorable foreign exchange impact on Mexican peso-denominated SG&A expenses, together with realized gains from hedging activities | (185) |
Operating loss for the quarter ended June 27, 2020 | $(2,016) | |
Looking forward we expect sequential margin improvement in the Fruit-Based Foods and Beverages segment in the second half of 2020, as we realize the full effect of pricing actions on frozen fruit taken in 2019, together with expected labor cost savings in 2020 from new plant automation initiatives and improved cost of processing the 2020 strawberry crop compared to 2019. We expect to see continued strong demand for frozen fruit from retail customers in the second half of 2020; however, in the second quarter of 2020, we began to experience a shortfall in frozen strawberry supply from growers in California, due to more of the crop being directed to meet fresh market demand, which is putting upward pressure on strawberry commodity pricing. This supply shortfall may continue until the next crop cycle, which could negatively impact our revenues in the second half of 2020 and into the first half of 2021, due to a potential need to reduce volumes to certain existing customers and inability to benefit from spot opportunities with new customers. The supply shortfall could also negatively impact gross margins during these periods, to the extent we are unable to recover the higher input costs through increased sales pricing to customers. The statements in this paragraph are forward-looking statements. See "Forward-Looking Statements" above. Several factors could adversely impact our ability to meet these forward-looking expectations, including the ongoing COVID-19 pandemic, availability and commodity pricing for fruit, customer actions, consumer behaviours, competitive pressures, and general economic and political conditions in North America, along with the other factors described above under "Forward-Looking Statements."
| Corporate Services | ||||||||||||
| For the quarter ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Operating loss | $ | (7,674 | ) | $ | (4,740 | ) | $ | (2,934 | ) | -61.9% |
Operating loss at Corporate Services increased by $2.9 million to $7.7 million for the quarter ended June 27, 2020, compared to a loss of $4.7 million for the quarter ended June 29, 2019. The table below explains the increase in operating loss:
| SUNOPTA INC. | 42 | June 27, 2020 10-Q |
Corporate Services Operating Loss Changes |
| |
Operating loss for the quarter ended June 29, 2019 | $(4,740) | |
| Higher employee-related variable compensation and benefit costs, partially offset by the impact of headcount reductions and reduced travel costs, together with favorable foreign exchange impact on Canadian dollar-denominated SG&A expenses | (2,334) |
| Decrease in corporate cost allocations to SunOpta operating segments, as a result of lower corporate headcount and overhead costs | (1,722) |
| Lower stock-based compensation costs related to a prior three-year incentive plan, as awards granted under the plan to certain employees in the second quarter of 2017 became fully amortized | 631 |
| Lower non-structural third-party professional fees and employee retention costs associated with the Value Creation Plan | 491 |
Operating loss for the quarter ended June 27, 2020 | $(7,674) | |
Corporate cost allocations mainly consist of salaries of corporate personnel who directly support the operating segments, as well as costs related to the enterprise resource management system. These expenses are allocated to the operating segments based on (1) specific identification of allocable costs that represent a service provided to each segment and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and the number of people employed within each segment.
| SUNOPTA INC. | 43 | June 27, 2020 10-Q |
| June 27, 2020 | June 29, 2019 | Change | Change | ||||||||||
| For the two quarters ended | $ | $ | $ | % | |||||||||
| Revenues | |||||||||||||
| Global Ingredients | 254,895 | 255,734 | (839 | ) | -0.3% | ||||||||
| Plant-Based Foods and Beverages | 197,947 | 163,216 | 34,731 | 21.3% | |||||||||
| Fruit-Based Foods and Beverages | 194,051 | 179,329 | 14,722 | 8.2% | |||||||||
| Total revenues | 646,893 | 598,279 | 48,614 | 8.1% | |||||||||
| Gross Profit | |||||||||||||
| Global Ingredients | 32,980 | 26,769 | 6,211 | 23.2% | |||||||||
| Plant-Based Foods and Beverages | 37,802 | 22,610 | 15,192 | 67.2% | |||||||||
| Fruit-Based Foods and Beverages | 12,630 | 6,154 | 6,476 | 105.2% | |||||||||
| Total gross profit | 83,412 | 55,533 | 27,879 | 50.2% | |||||||||
| Segment operating income (loss)(1) | |||||||||||||
| Global Ingredients | 16,152 | 10,210 | 5,942 | 58.2% | |||||||||
| Plant-Based Foods and Beverages | 24,337 | 7,024 | 17,313 | 246.5% | |||||||||
| Fruit-Based Foods and Beverages | (6,718 | ) | (11,565 | ) | 4,847 | 41.9% | |||||||
| Corporate Services | (13,480 | ) | (7,886 | ) | (5,594 | ) | -70.9% | ||||||
| Total segment operating income (loss) | 20,291 | (2,217 | ) | 22,508 | 1015.2% | ||||||||
| Other income, net | (1,631 | ) | (43,067 | ) | 41,436 | 96.2% | |||||||
| Earnings before the following | 21,922 | 40,850 | (18,928 | ) | -46.3% | ||||||||
| Interest expense, net | 16,216 | 16,993 | (777 | ) | -4.6% | ||||||||
| Provision for income taxes | 1,582 | 7,174 | (5,592 | ) | -77.9% | ||||||||
| Net earnings(2),(3) | 4,124 | 16,683 | (12,559 | ) | -75.3% | ||||||||
| Earnings (loss) attributable to non-controlling interests | (244 | ) | 89 | (333 | ) | -374.2% | |||||||
| Earnings attributable to SunOpta Inc. | 4,368 | 16,594 | (12,226 | ) | -73.7% | ||||||||
| Dividends and accretion on preferred stock | (4,629 | ) | (3,996 | ) | (633 | ) | -15.8% | ||||||
| Earnings (loss) attributable to common shareholders(4) | (261 | ) | 12,598 | (12,859 | ) | -102.1% | |||||||
(1) The following table presents a reconciliation of segment operating income/loss to earnings/loss before the following, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (1) to the "Consolidated Results of Operations for the Quarters Ended June 27, 2020 and June 29, 2019" table regarding the use of this non-GAAP measure).
| Plant-Based | Fruit-Based | ||||||||||||||
| Global | Foods and | Foods and | Corporate | ||||||||||||
| Ingredients | Beverages | Beverages | Services | Consolidated | |||||||||||
| For the two quarters ended | $ | $ | $ | $ | $ | ||||||||||
| June 27, 2020 | |||||||||||||||
| Segment operating income (loss) | 16,152 | 24,337 | (6,718 | ) | (13,480 | ) | 20,291 | ||||||||
| Other income (expense), net | 1,332 | 8 | (441 | ) | 732 | 1,631 | |||||||||
| Earnings (loss) before the following | 17,484 | 24,345 | (7,159 | ) | (12,748 | ) | 21,922 | ||||||||
| June 29, 2019 | |||||||||||||||
| Segment operating income (loss) | 10,210 | 7,024 | (11,565 | ) | (7,886 | ) | (2,217 | ) | |||||||
| Other income (expense), net | 45,328 | (396 | ) | (762 | ) | (1,103 | ) | 43,067 | |||||||
| Earnings (loss) before the following | 55,538 | 6,628 | (12,327 | ) | (8,989 | ) | 40,850 |
| SUNOPTA INC. | 44 | June 27, 2020 10-Q |
| Excluding | |||||||||||||||||||
| disposed operations | Disposed operations | Consolidated | |||||||||||||||||
| Per Diluted Share | Per Diluted Share | Per Diluted Share | |||||||||||||||||
| For the two quarters ended | $ | $ | $ | $ | $ | $ | |||||||||||||
| June 27, 2020 | |||||||||||||||||||
| Net earnings | 4,124 | — | 4,124 | ||||||||||||||||
| Loss attributable to non-controlling interests | 244 | — | 244 | ||||||||||||||||
| Dividends and accretion on preferred stock | (4,629 | ) | — | (4,629 | ) | ||||||||||||||
| Loss attributable to common shareholders | (261 | ) | (0.00 | ) | — | — | (261 | ) | (0.00 | ) | |||||||||
| Adjusted for: | |||||||||||||||||||
| Costs related to the Value Creation Plan(a) | 2,474 | — | 2,474 | ||||||||||||||||
| Plant expansion costs(b) | 92 | — | 92 | ||||||||||||||||
| Contingent consideration settlement(c) | (2,286 | ) | — | (2,286 | ) | ||||||||||||||
| Other(d) | (320 | ) | — | (320 | ) | ||||||||||||||
| Net income tax effect(e) | (118 | ) | — | (118 | ) | ||||||||||||||
| Adjusted loss | (419 | ) | (0.00 | ) | — | — | (419 | ) | (0.00 | ) | |||||||||
| June 29, 2019 | |||||||||||||||||||
| Net earnings (loss) | (15,967 | ) | 32,650 | 16,683 | |||||||||||||||
| Earnings attributable to non-controlling interests | (89 | ) | — | (89 | ) | ||||||||||||||
| Dividends and accretion on preferred stock | (3,996 | ) | — | (3,996 | ) | ||||||||||||||
| Earnings (loss) attributable to common shareholders | (20,052 | ) | (0.23 | ) | 32,650 | 0.37 | 12,598 | 0.14 | |||||||||||
| Adjusted for: | |||||||||||||||||||
| Gain on sale of soy and corn business(f) | — | (45,378 | ) | (45,378 | ) | ||||||||||||||
| Costs related to Value Creation Plan(g) | 3,533 | — | 3,533 | ||||||||||||||||
| Plant expansion costs(h) | 311 | — | 311 | ||||||||||||||||
| Contract manufacturer transition costs(i) | 289 | — | 289 | ||||||||||||||||
| Product withdrawal and recall costs(j) | 260 | — | 260 | ||||||||||||||||
| Other(k) | (325 | ) | — | (325 | ) | ||||||||||||||
| Net income tax effect(e) | (615 | ) | 12,434 | 11,819 | |||||||||||||||
| Adjusted loss | (16,599 | ) | (0.19 | ) | (294 | ) | (0.00 | ) | (16,893 | ) | (0.19 | ) | |||||||
| SUNOPTA INC. | 45 | June 27, 2020 10-Q |
| Excluding | ||||||||||
| disposed operations | Disposed operations | Consolidated | ||||||||
| For the two quarters ended | $ | $ | $ | |||||||
| June 27, 2020 | ||||||||||
| Net earnings | 4,124 | — | 4,124 | |||||||
| Provision for income taxes | 1,582 | — | 1,582 | |||||||
| Interest expense, net | 16,216 | — | 16,216 | |||||||
| Other income, net | (1,631 | ) | — | (1,631 | ) | |||||
| Total segment operating income | 20,291 | — | 20,291 | |||||||
| Depreciation and amortization | 17,673 | — | 17,673 | |||||||
| Stock-based compensation(a) | 5,274 | — | 5,274 | |||||||
| Costs related to Value Creation Plan(b) | 1,499 | — | 1,499 | |||||||
| Plant expansion costs(c) | 92 | — | 92 | |||||||
| Adjusted EBITDA | 44,829 | — | 44,829 | |||||||
| June 29, 2019 | ||||||||||
| Net earnings (loss) | (15,967 | ) | 32,650 | 16,683 | ||||||
| Provision for (recovery of) income taxes | (5,148 | ) | 12,322 | 7,174 | ||||||
| Interest expense, net | 16,993 | — | 16,993 | |||||||
| Other expense (income), net | 2,311 | (45,378 | ) | (43,067 | ) | |||||
| Total segment operating income (loss) | (1,811 | ) | (406 | ) | (2,217 | ) | ||||
| Depreciation and amortization | 16,359 | 129 | 16,488 | |||||||
| Stock-based compensation(a) | 4,938 | — | 4,938 | |||||||
| Costs related to Value Creation Plan(b) | 1,157 | — | 1,157 | |||||||
| Plant expansion costs(c) | 311 | — | 311 | |||||||
| Contract manufacturer transition costs(d) | 289 | — | 289 | |||||||
| Adjusted EBITDA | 21,243 | (277 | ) | 20,966 | ||||||
Revenues for the two quarters ended June 27, 2020 increased by 8.1% to $646.9 million from $598.3 million for the two quarters ended June 29, 2019. Excluding the impact on revenues of the sale of the soy and corn business and the acquisition of Sanmark (a net decrease in revenues of $7.3 million) and changes in foreign exchange rates (a decrease in revenues of $2.0 million), partially offset by changes in commodity-related pricing (an increase in revenues of $1.7 million), revenues increased by 9.5% in the first two quarters of 2020, compared with the first two quarters of 2019. Revenues increased on an adjusted basis across all segments of the business, reflecting the expansion of plant-based beverage and broth offerings for retail customers, growth in plant-based ingredient extraction volumes, higher volumes of organic ingredients and premium juice products, and increased retail volumes and sales pricing for frozen fruit, partially offset by lower volumes of plant-based beverage, frozen fruit and fruit ingredient products sold into the foodservice channel.
| SUNOPTA INC. | 46 | June 27, 2020 10-Q |
| SUNOPTA INC. | 47 | June 27, 2020 10-Q |
| Global Ingredients | ||||||||||||
| For the two quarters ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Revenues | $ | 254,895 | $ | 255,734 | $ | (839 | ) | -0.3% | ||||
| Gross profit | 32,980 | 26,769 | 6,211 | 23.2% | ||||||||
| Gross profit % | 12.9% | 10.5% | 2.4% | |||||||||
| Operating income | $ | 16,152 | $ | 10,210 | $ | 5,942 | 58.2% | |||||
| Operating income % | 6.3% | 4.0% | 2.3% |
Global Ingredients Revenue Changes | ||
Revenues for the two quarters ended June 29, 2019 | $255,734 | |
Impact of the sale of the soy and corn business | (10,346) | |
Decreased commodity pricing for organic ingredients | (6,991) | |
Unfavorable foreign exchange impact on euro-denominated sales due to a stronger U.S. dollar period-over-period | (2,036) | |
Increased sales volumes of organic ingredients including cocoa (reflecting increased production volumes of cocoa ingredients and sales of cocoa beans) and oils (including incremental revenues from Sanmark and increased production volumes of sunflower oil), partially offset by lower volumes of animal feed (due to the exit from underperforming bulk grain categories) and coffee (due to COVID-19-related impacts on foodservice customers) | 11,121 | |
Higher sales volumes and pricing for premium juice products | 7,413 | |
Revenues for the two quarters ended June 27, 2020 | $254,895 | |
| SUNOPTA INC. | 48 | June 27, 2020 10-Q |
Global Ingredients Gross Profit Changes | ||
Gross profit for the two quarters ended June 29, 2019 | $26,769 | |
Increased volumes of cocoa and oils, higher pricing spreads on nuts, and favorable mix of higher-margin specialty versus bulk oil and high-protein versus bulk animal feed sales, together with increased production volumes and manufacturing efficiencies in our cocoa and sunflower operations, and cocoa commodity hedging gains ($1.8 million), partially offset by lower volumes and pricing for coffee, and lower-margin sales to reduce positions in bulk animal feed and older fruit inventories | 4,084 | |
Higher sales volumes and pricing, and lower bottling costs for premium juice products | 2,307 | |
Impact of the sale of the soy and corn business | (180) | |
Gross profit for the two quarters ended June 27, 2020 | $32,980 | |
Global Ingredients Operating Income Changes | ||
Operating income for the two quarters ended June 29, 2019 | $10,210 | |
Increase in gross profit, as explained above | 6,211 | |
Lower spending associated with travel and marketing activities and favorable foreign exchange impact on euro-denominated SG&A expenses, together with SG&A reductions from the sale of the soy and corn business, partially offset by higher employee-related variable compensation | 743 | |
Decrease in corporate cost allocations | 615 | |
Net foreign exchange losses on the revaluation of U.S. dollar-denominated receivable and payable balances, together with a $0.8 million decrease in mark-to-market gains related to forward currency contracts | (1,627) | |
Operating income for the two quarters ended June 27, 2020 | $16,152 | |
Plant-Based Foods and Beverages | ||||||||||||
| For the two quarters ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Revenues | $ | 197,947 | $ | 163,216 | $ | 34,731 | 21.3% | |||||
| Gross profit | 37,802 | 22,610 | 15,192 | 67.2% | ||||||||
| Gross profit % | 19.1% | 13.9% | 5.2% | |||||||||
| Operating income | $ | 24,337 | $ | 7,024 | $ | 17,313 | 246.5% | |||||
| Operating income % | 12.3% | 4.3% | 8.0% |
| SUNOPTA INC. | 49 | June 27, 2020 10-Q |
Plant-Based Foods and Beverages Revenue Changes | ||
Revenues for the two quarters ended June 29, 2019 | $163,216 | |
Higher retail sales volumes of plant-based beverages and everyday broth offerings, including output from additional aseptic processing capacity that came on-line in the third quarter of 2019, as well as increased demand for plant-based ingredients, partially offset by reduced sales volumes of plant-based beverage products to foodservice customers | 31,082 | |
Increased commodity pricing for sunflower | 2,759 | |
Higher volumes of birdfeed and roasted snacks, partially offset by lower volumes of sunflower inshell and kernel | 890 | |
Revenues for the two quarters ended June 27, 2020 | $197,947 | |
Plant-Based Foods and Beverages Gross Profit Changes | ||
Gross profit for the two quarters ended June 29, 2019 | $22,610 | |
Higher sales volumes, plant utilization and productivity improvements within our plant-based beverage and ingredient extraction operations, partially offset by wage premiums and higher cleaning costs attributable to COVID-19 (approximately $0.5 million) | 14,498 | |
Higher sales volumes of birdfeed and roasted snacks, and increased plant utilization within our sunflower and roasting operations, partially offset by COVID-19-related costs (approximately $0.1 million) | 694 | |
Gross profit for the two quarters ended June 27, 2020 | $37,802 | |
Plant-Based Foods and Beverages Operating Income Changes | ||
Operating income for the two quarters ended June 29, 2019 | $7,024 | |
Increase in gross profit, as explained above | 15,192 | |
Decrease in corporate cost allocations | 1,349 | |
Lower employee compensation costs due to headcount reductions and reduced travel costs, partially offset by higher product development spending and reserves for credit losses due to weaker economic conditions | 772 | |
Operating income for the two quarters ended June 27, 2020 | $24,337 | |
| SUNOPTA INC. | 50 | June 27, 2020 10-Q |
| Fruit-Based Foods and Beverages | ||||||||||||
| For the two quarters ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Revenues | $ | 194,051 | $ | 179,329 | $ | 14,722 | 8.2% | |||||
| Gross profit | 12,630 | 6,154 | 6,476 | 105.2% | ||||||||
| Gross profit % | 6.5% | 3.4% | 3.1% | |||||||||
| Operating loss | $ | (6,718 | ) | $ | (11,565 | ) | $ | 4,847 | 41.9% | |||
| Operating loss % | -3.5% | -6.4% | 2.9% |
Fruit-Based Foods and Beverages Revenue Changes | ||
Revenues for the two quarters ended June 29, 2019 | $179,329 | |
Increased volumes and sales pricing for frozen fruit into the retail channel, together with increased demand for fruit ingredients from yogurt producers, partially offset by lower demand for frozen fruit and fruit preparations from foodservice customers | 8,831 | |
Increased commodity pricing for raw fruit | 5,891 | |
Revenues for the two quarters ended June 27, 2020 | $194,051 | |
Gross profit in Fruit-Based Foods and Beverages more than doubled to $12.6 million for the two quarters ended June 27, 2020, compared to $6.2 million for the two quarters ended June 29, 2019, and the gross profit percentage increased by 3.1% to 6.5%. The increase in the gross profit percentage reflected increased sales pricing and a favorable mix of higher-margin retail sales of frozen fruit. In addition, automation and productivity initiatives in our frozen fruit manufacturing facilities have generated higher yields and throughput, while allowing these facilities to operate with fewer seasonal workers. These factors were partially offset by lower production volumes and plant utilization within our fruit ingredient and fruit snacks operations. The table below explains the increase in gross profit:
Fruit-Based Foods and Beverages Gross Profit Changes | ||
Gross profit for the two quarters ended June 29, 2019 | $6,154 | |
Impact of higher sales volumes and pricing for frozen fruit, including a favorable mix of higher-margin retail versus foodservice sales, together with lower processing costs for frozen fruit, partially offset by lower sales volumes and plant utilization for fruit ingredients, together with wage premiums and higher cleaning costs attributable to COVID-19 (approximately $0.6 million) | 7,317 | |
Lower production volumes and plant utilization for fruit snacks, together with COVID-19-related costs (approximately $0.1 million) | (841) | |
Gross profit for the two quarters ended June 27, 2020 | $12,630 | |
| SUNOPTA INC. | 51 | June 27, 2020 10-Q |
Fruit-Based Foods and Beverages Operating Loss Changes | ||
Operating loss for the two quarters ended June 29, 2019 | $(11,565) | |
Increase in gross profit, as explained above | 6,476 | |
Decrease in corporate cost allocations | 1,474 | |
Unfavorable foreign exchange impact on our frozen fruit operations in Mexico due to a decline in the value of the Mexican peso in the first two quarters of 2020 (net of realized gains from hedging activities in the second quarter of 2020), together with the impact of reserves for credit losses due to weaker economic conditions and increased employee compensation related to new management hires | (3,103) | |
Operating loss for the two quarters ended June 27, 2020 | $(6,718) | |
Corporate Services | ||||||||||||
| For the two quarters ended | June 27, 2020 | June 29, 2019 | Change | % Change | ||||||||
| Operating loss | $ | (13,480 | ) | $ | (7,886 | ) | $ | (5,594 | ) | -70.9% |
Corporate Services Operating Loss Changes | ||
Operating loss for the two quarters ended June 29, 2019 | $(7,886) | |
Decrease in corporate cost allocations to SunOpta operating segments, as a result of lower corporate headcount and overhead costs | (3,438) | |
Higher employee-related variable compensation and benefit costs, partially offset by the impact of headcount reductions and reduced travel costs, together with favorable foreign exchange impact on Canadian dollar-denominated SG&A expenses | (1,478) | |
Higher non-structural third-party professional fees and employee retention costs associated with the Value Creation Plan | (342) | |
Increased stock-based compensation costs related to the initiation of an equity-based annual bonus plan for certain employees commencing in the second quarter of 2019 | (336) | |
Operating loss for the two quarters ended June 27, 2020 | $(13,480) | |
| SUNOPTA INC. | 52 | June 27, 2020 10-Q |
| SUNOPTA INC. | 53 | June 27, 2020 10-Q |
Second Quarter of 2020 Compared to Second Quarter of 2019
Net cash and cash equivalents decreased $1.0 million in the second quarter of 2020 to $1.6 million as at June 27, 2020, compared with $2.7 million as at March 28, 2020.
| SUNOPTA INC. | 54 | June 27, 2020 10-Q |
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of the Form 10-K. There have been no material changes to our exposures to market risks since December 28, 2019.
| SUNOPTA INC. | 55 | June 27, 2020 10-Q |
| SUNOPTA INC. | 56 | June 27, 2020 10-Q |
Our business and financial results may be negatively impacted by the 2019 novel coronavirus (COVID-19) pandemic, including causing significant volatility in customer demand for our products, changes in consumer behaviour and preference, disruptions in our supply chain operations, disruptions to our business expansion plans, limitations on our employees' ability to work and travel, significant changes in the economic conditions in markets in which we operate and related currency and commodity volatility, and pressure on our liquidity. In addition, while we have not experienced any material interruptions in our plant operations to date, and our facilities have largely been exempt from government closure orders where applicable, it is possible during the pandemic that we could experience employee absences that cause interruptions in our plant operations, and we may not be exempt from future government closure orders depending on the specific circumstances. Despite our efforts to manage these impacts, they also depend on factors beyond our knowledge or control, including the duration and severity of the COVID-19 pandemic and actions taken to contain its spread and mitigate its public health effects. As a result, we cannot reasonably estimate the negative impact of the COVID-19 pandemic on our business and financial results, but the impact could be material and last for an extended period.
4.1 | |
4.2 | |
10.1 | |
10.2 | |
10.3 |
| SUNOPTA INC. | 57 | June 27, 2020 10-Q |
10.4 | |
10.5 | |
10.6 | |
10.7 | |
10.8 | |
10.9† | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| SUNOPTA INC. | 58 | June 27, 2020 10-Q |
SUNOPTA INC. | |
Date: August 5, 2020 | /s/ Scott Huckins |
Scott Huckins Chief Financial Officer (Authorized Signatory and Principal Financial Officer) |
| SUNOPTA INC. | 59 | June 27, 2020 10-Q |