Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended September 28, 2024 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 30, 2023 (the "Form 10-K"). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to November 5, 2024.
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 operate as an innovation partner, solutions provider, and value-added manufacturer for leading brands, and produce our own brands, including SOWN®, Dream®, and West LifeTM. Our product portfolio comprises plant-based beverages, fruit snacks, nutritional beverages, broths, and teas, which are sold through retail, club, foodservice and e-commerce channels. We also produce liquid and dry ingredients for internal use and for sale to other food and beverage manufacturers.
On March 4, 2024, we completed the sale of the net assets related to our smoothie bowls product line and exited the category.
Fiscal 2024 Outlook
For full fiscal year 2024, we are projecting higher year-over-year revenues driven by organic volume growth from our beverages, broth and fruit snacks categories, partially offset by the impact of our exit from the smoothie bowls category. We anticipate an improved gross margin profile on a reported basis, compared with the prior year, reflecting higher production volumes and plant utilization to support sales, together with lower start-up costs and improved operating efficiencies at our Midlothian, Texas, facility. The resulting increase in gross profit, together with stable selling, general and administrative ("SG&A") spending as a percentage of revenue, is expected to drive year-over-year operating income growth and improved cash flows.
| SUNOPTA INC. |
21 |
September 28, 2024 Form 10-Q |
Consolidated Results of Operations for the Quarters Ended September 28, 2024 and September 30, 2023
| |
|
September 28,
2024 |
|
|
September 30,
2023 |
|
|
Change |
|
|
Change |
|
| For the quarter ended |
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
|
176,216 |
|
|
152,541 |
|
|
23,675 |
|
|
15.5% |
|
| Cost of goods sold |
|
152,632 |
|
|
132,273 |
|
|
20,359 |
|
|
15.4% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
23,584 |
|
|
20,268 |
|
|
3,316 |
|
|
16.4% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin(1) |
|
13.4% |
|
|
13.3% |
|
|
|
|
|
0.1% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| Selling, general and administrative expenses |
|
21,052 |
|
|
18,377 |
|
|
2,675 |
|
|
14.6% |
|
| Intangible asset amortization |
|
446 |
|
|
446 |
|
|
- |
|
|
0.0% |
|
| Other expense, net |
|
450 |
|
|
- |
|
|
450 |
|
|
* |
|
| Foreign exchange loss (gain) |
|
113 |
|
|
(37 |
) |
|
150 |
|
|
* |
|
| Total operating expenses |
|
22,061 |
|
|
18,786 |
|
|
3,275 |
|
|
17.4% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
1,523 |
|
|
1,482 |
|
|
41 |
|
|
2.8% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense, net |
|
6,762 |
|
|
7,162 |
|
|
(400 |
) |
|
-5.6% |
|
| Other non-operating expense |
|
236 |
|
|
- |
|
|
236 |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from continuing operations before income taxes |
|
(5,475 |
) |
|
(5,680 |
) |
|
205 |
|
|
3.6% |
|
| Income tax expense |
|
23 |
|
|
- |
|
|
23 |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from continuing operations |
|
(5,498 |
) |
|
(5,680 |
) |
|
182 |
|
|
3.2% |
|
| Net loss from discontinued operations |
|
- |
|
|
(140,143 |
) |
|
140,143 |
|
|
100.0% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss(2),(3) |
|
(5,498 |
) |
|
(145,823 |
) |
|
140,325 |
|
|
96.2% |
|
| Dividends and accretion on preferred stock |
|
(137 |
) |
|
(426 |
) |
|
289 |
|
|
67.8% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss attributable to common shareholders(4) |
|
(5,635 |
) |
|
(146,249 |
) |
|
140,614 |
|
|
96.1% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| * Percentage not meaningful |
|
(1) Gross margin is a measure of gross profit (equal to revenues less cost of goods sold) as a percentage of revenues. We use a measure of adjusted gross margin that excludes non-capitalizable start-up costs included in cost of goods sold that are incurred in connection with capital expansion projects. Start-up costs have had a significant impact on the comparability of reported gross margins, which may obscure trends in our margin performance. Additionally, our measure of adjusted gross margin may exclude 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 use the measure of adjusted gross margin to evaluate the underlying profitability of our revenue-generating activities within each reporting period. We believe that disclosing this non-GAAP measure provides investors with a meaningful, consistent comparison of our profitability measure for the periods presented. However, the non-GAAP measure of adjusted gross margin should not be considered in isolation or as a substitute for gross margin calculated based on gross profit determined in accordance with U.S. GAAP. The following table presents a reconciliation of adjusted gross margin from reported gross margin calculated in accordance with U.S. GAAP.
| For the quarter ended |
|
September 28,
2024 |
|
|
September 30,
2023 |
|
| Reported gross margin |
|
13.4% |
|
|
13.3% |
|
| Start-up costs(a) |
|
2.4% |
|
|
3.1% |
|
| Wastewater haul-off charges(b) |
|
1.2% |
|
|
- |
|
| Adjusted gross margin |
|
17.0% |
|
|
16.4% |
|
(a) For the third quarter of 2024, start-up costs of $4.1 million were recorded in costs of goods sold, which were mainly related to the scale-up of production at our plant-based beverage facility in Midlothian, Texas, including the start-up of a new high-speed Edge line. For the third quarter of 2023, start-up costs of $4.7 million included in cost of goods sold mainly related to the initial ramp-up of production at our Midlothian, Texas, facility, and the addition of a new extrusion line at our fruit snacks facility in Omak, Washington.
(b) For the third quarter of 2024, we incurred temporary third-party haul-off charges of $2.2 million for excess wastewater produced at our Midlothian, Texas, facility, due to volume constraints within our current treatment system.
| SUNOPTA INC. |
22 |
September 28, 2024 Form 10-Q |
(2) When assessing our financial performance, we use an internal measure of adjusted earnings from continuing operations that excludes specific items that are identified and evaluated on an individual basis, which due to their unusual nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of the financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations. The following table presents a reconciliation of adjusted earnings from continuing operations from loss from continuing operations which we consider to be the most directly comparable U.S. GAAP financial measure.
| |
|
September 28, 2024 |
|
|
September 30, 2023 |
|
| |
|
|
|
|
Per
Share |
|
|
|
|
|
Per
Share |
|
| For the quarter ended |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
| Loss from continuing operations |
|
(5,498 |
) |
|
|
|
|
(5,680 |
) |
|
|
|
| Dividends and accretion on preferred stock |
|
(137 |
) |
|
|
|
|
(426 |
) |
|
|
|
| Loss from continuing operations attributable to common shareholders |
|
(5,635 |
) |
|
(0.05 |
) |
|
(6,106 |
) |
|
(0.05 |
) |
| Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
|
| Start-up costs(a) |
|
4,980 |
|
|
|
|
|
4,733 |
|
|
|
|
|
Wastewater haul-off charges(b)
|
|
2,180 |
|
|
|
|
|
- |
|
|
|
|
| Unrealized foreign exchange loss on restricted cash(c) |
|
525 |
|
|
|
|
|
- |
|
|
|
|
| Business development costs(d) |
|
- |
|
|
|
|
|
928 |
|
|
|
|
| Severance costs(e) |
|
- |
|
|
|
|
|
897 |
|
|
|
|
| Other(f) |
|
450 |
|
|
|
|
|
- |
|
|
|
|
| Adjusted earnings from continuing operations |
|
2,500 |
|
|
0.02 |
|
|
452 |
|
|
0.00 |
|
(a) Refer to footnote (1)(a) above for a description of start-up costs included in cost of goods sold. Additionally, for the third quarter of 2024, start-up costs included $0.8 million of professional fees related to operational productivity initiatives, which are recorded in SG&A expenses.
(b) Refer to footnote (1)(b) above for a description of wastewater haul-off charges included in cost of goods sold.
(c) For the third quarter of 2024, reflects an unrealized foreign exchange loss associated with peso-denominated bank accounts in Mexico that were retained following the divestiture of our frozen fruit business ("Frozen Fruit") in October 2023. These accounts are currently subject to a judicial hold in connection with a litigation matter.
(d) For the third quarter of 2023, reflects business development costs related to the divestiture of Frozen Fruit, which are recorded in SG&A expenses.
(e) For the third quarter of 2023, reflects employee severance costs accrued in connection with the consolidation of our continuing operations following the divestiture of Frozen Fruit, which are recorded in SG&A expenses.
(f) For the third quarter of 2024, other reflects accrued demolition costs related to our former roasted snack facility, which was abandoned in 2018. These costs are recorded in other expense.
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude to compute adjusted earnings from continuing operations. However, adjusted earnings from continuing operations is not, and should not be viewed as, a substitute for loss from continuing operations prepared under U.S. GAAP. Adjusted earnings from continuing operations is presented solely to allow investors to more fully understand how we assess our financial performance.
(3) We use a measure of adjusted EBITDA from continuing operations 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, loss on sale of receivables, and income taxes, as well as non-cash expenses, such as depreciation, amortization, and stock-based compensation. In addition, our measure of adjusted EBITDA excludes other unusual items that affect the comparability of our operating performance, as identified in the determination of adjusted earnings from continuing operations (refer above to footnote (2)). We also use this measure of adjusted EBITDA to assess operating performance in connection with our employee incentive programs. The following table presents a reconciliation of adjusted EBITDA from continuing operations from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
| SUNOPTA INC. |
23 |
September 28, 2024 Form 10-Q |
| |
|
September 28, 2024 |
|
|
September 30, 2023 |
|
| For the quarter ended |
|
$ |
|
|
$ |
|
| Loss from continuing operations |
|
(5,498 |
) |
|
(5,680 |
) |
| Interest expense, net |
|
6,762 |
|
|
7,162 |
|
| Loss on sale of receivables* |
|
236 |
|
|
- |
|
| Income tax expense |
|
23 |
|
|
- |
|
| Depreciation and amortization |
|
9,319 |
|
|
7,983 |
|
| Stock-based compensation |
|
2,527 |
|
|
3,068 |
|
| Adjusted for: |
|
|
|
|
|
|
| Start-up costs(a) |
|
4,980 |
|
|
4,733 |
|
|
Wastewater haul-off charges(b)
|
|
2,180 |
|
|
- |
|
| Unrealized foreign exchange loss on restricted cash(c) |
|
525 |
|
|
- |
|
| Business development costs(d) |
|
- |
|
|
928 |
|
| Severance costs(e) |
|
- |
|
|
897 |
|
| Other(f) |
|
450 |
|
|
- |
|
| Adjusted EBITDA from continuing operations |
|
21,504 |
|
|
19,091 |
|
* Included in other non-operating expense.
(a)-(f) Refer to footnote (2) above.
Although we use adjusted EBITDA from continuing operations as a measure to assess the performance of our business and for the other purposes set forth above, this measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for an analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
- adjusted EBITDA from continuing operations does not reflect interest expense, or the cash requirements necessary to service interest payments on our indebtedness;
- adjusted EBITDA from continuing operations excludes the discount taken on trade receivables sold to a third-party factor, which is a strategic means for us to improve working capital efficiency, while reducing our indebtedness and interest expense;
- adjusted EBITDA from continuing operations does not include the payment or recovery of income taxes, which is a necessary element of our operations;
- although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements; and
- adjusted EBITDA from continuing operations does not include non-cash stock-based compensation, which is an important component of our total compensation program for employees and directors.
Because of these limitations, adjusted EBITDA from continuing operations 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 from continuing operations in isolation, and specifically by using other U.S. GAAP and non-GAAP measures, such as consolidated revenues, gross profit, gross margin, operating income, loss from continuing operations, and adjusted earnings from continuing operations to measure our operating performance. Adjusted EBITDA from continuing operations 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 from continuing operations may not be comparable to the calculation of a similarly titled measure reported by other companies.
| SUNOPTA INC. |
24 |
September 28, 2024 Form 10-Q |
(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. For example, as described above under footnote (1), we evaluate our adjusted gross margins on a basis that excludes the impact of start-up costs and other unusual items. 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.
Revenues for the quarter ended September 28, 2024 increased by 15.5% to $176.2 million from $152.5 million for the quarter ended September 30, 2023. The change in revenues from the third quarter of 2023 to the third quarter of 2024 was due to the following:
| |
|
$ |
|
|
% |
|
| 2023 revenues |
|
152,541 |
|
|
|
|
| Volume/Mix |
|
31,447 |
|
|
20.6% |
|
| Price |
|
(4,275 |
) |
|
-2.8% |
|
| Exit from smoothie bowls |
|
(3,497 |
) |
|
-2.3% |
|
| 2024 revenues |
|
176,216 |
|
|
15.5% |
|
For the quarter ended September 28, 2024, the 15.5% increase in revenues reflected a favorable volume/mix impact of 20.6%, partially offset by a 2.8% overall price reduction due to the pass-through of lower commodity costs for certain raw materials, together with a 2.3% revenue loss related to our exit from the smoothie bowls category in March 2024. The favorable volume/mix reflected the incremental output from our capital expansion projects, together with new product innovation launches, which produced sales volume growth with existing and new customers across our fruit snack, broth, plant-based beverage, and protein shake product lines.
Gross profit increased $3.3 million, or 16.4%, to $23.6 million for the quarter ended September 28, 2024, compared with $20.3 million for the quarter ended September 30, 2023. Gross margin was 13.4% for the quarter ended September 28, 2024, compared with 13.3% for the quarter ended September 30, 2023, an increase of 10 basis points.
For the third quarter of 2024, we incurred start-up costs included in cost of goods sold of $4.1 million (2.4% gross margin impact), compared with start-up costs of $4.7 million (3.1% gross margin impact) for the third quarter of 2023. Start-up costs for the third quarter of 2024, were mainly related to the scale-up of production at our plant-based beverage facility in Midlothian, Texas, including the start-up of a new high-speed Edge line. In addition, for the third quarter of 2024, we incurred temporary third-party haul-off charges of $2.2 million (1.2% gross margin impact) for excess wastewater produced at our plant-based beverage facility in Midlothian, Texas, due to volume constraints within our current treatment system. Excluding the impact of start-up costs and wastewater charges, adjusted gross margin was 17.0% for the quarter ended September 28, 2024, compared with 16.4% for the quarter ended September 30, 2023, an increase of 60 basis points. See footnote (1) to the “Consolidated Results of Operations for the Quarters Ended September 28, 2024 and September 30, 2023” table for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
The 60-basis point increase in adjusted gross margin reflected higher sales and production volumes for fruit snacks, broths and beverages driving improved plant utilization, partially offset by the impact of incremental depreciation of new production equipment related to capital expansion projects ($1.3 million or 0.8% gross margin impact), together with manufacturing inefficiencies resulting from the excess wastewater issue.
Operating income was $1.5 million for each of the quarters ended September 28, 2024 and September 30, 2023. Operating income for the third quarter of 2024, compared with the third quarter of 2023, reflected higher gross profit, as described above, together with lower business development and employee severance costs following the divestiture of Frozen Fruit and related consolidation of our continuing operations in 2023, offset by higher employee variable compensation accruals based on performance, and increased professional fees related to operational productivity initiatives.
(Further details on the changes in revenue, gross profit and operating income are provided in the rollforward tables below.)
Net interest expense decreased by $0.4 million to $6.8 million for the quarter ended September 28, 2024, compared with $7.2 million for the quarter ended September 30, 2023, which reflected lower average outstanding debt in the third quarter of 2024 following the divestiture of Frozen Fruit, partially offset by the impact of higher market interest rates.
| SUNOPTA INC. |
25 |
September 28, 2024 Form 10-Q |
Other non-operating expense of $0.2 million for the quarter ended September 28, 2024, reflected the loss on sale of certain trade receivables to a third-party financial institution under the Receivables Sales Program that we entered into in the third quarter of 2024 (as described below under "Liquidity and Capital Resources").
Income taxes were recognized at effective tax rates of (0.4)% and 0.0% for the quarters ended September 28, 2024 and September 30, 2023, respectively, which reflected the recognition of a full valuation allowance against U.S. deferred tax assets in excess of deferred tax liabilities beginning in the second quarter of 2023.
Loss from continuing operations was $5.5 million for the quarter ended September 28, 2024, compared with a loss of $5.7 million for the quarter ended September 30, 2023. Diluted loss per share from continuing operations attributable to common shareholders (after accretion on preferred stock) was $0.05 for the quarter ended September 28, 2024, compared with a diluted loss per share (after dividends and accretion on preferred stock) of $0.05 for the quarter ended September 30, 2023.
We recognized a loss from discontinued operations of $140.1 million (diluted loss per share of $1.21) for the quarter ended September 30, 2023, which included an estimated pre-tax loss on the divestiture of Frozen Fruit of $118.8 million. Refer to note 2 to the unaudited consolidated financial statements included in this report for additional details.
We realized a loss attributable to common shareholders of $5.6 million (diluted loss per share of $0.05) for the quarter ended September 28, 2024, compared with a loss attributable to common shareholders of $146.2 million (diluted loss per share of $1.26) for the quarter ended September 30, 2023.
Adjusted earnings from continuing operations were $2.5 million, or $0.02 earnings per diluted share, for the quarter ended September 28, 2024, compared with adjusted earnings from continuing operations of $0.5 million, or $0.00 earnings per diluted share, for the quarter ended September 30, 2023.
Adjusted EBITDA from continuing operations increased $2.4 million, or 12.6%, to $21.5 million for the quarter ended September 28, 2024, compared with $19.1 million for the quarter ended September 30, 2023.
Adjusted earnings from continuing operations and adjusted EBITDA from continuing operations are non-GAAP financial measures. See footnotes (2) and (3) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2024 and September 30, 2023" table for a reconciliation of adjusted earnings from continuing operations and adjusted EBITDA from continuing operations from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
Rollforward of Revenue, Gross Profit and Operating Income
| For the quarter ended |
|
September 28,
2024 |
|
|
September 30,
2023 |
|
|
Change |
|
|
% Change |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
$ |
176,216 |
|
$ |
152,541 |
|
$ |
23,675 |
|
|
15.5% |
|
| Gross profit |
|
23,584 |
|
|
20,268 |
|
|
3,316 |
|
|
16.4% |
|
| Gross margin |
|
13.4% |
|
|
13.3% |
|
|
|
|
|
0.1% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
$ |
1,523 |
|
$ |
1,482 |
|
$ |
41 |
|
|
2.8% |
|
| Operating margin |
|
0.9% |
|
|
1.0% |
|
|
|
|
|
-0.1% |
|
| SUNOPTA INC. |
26 |
September 28, 2024 Form 10-Q |
Revenues
The table below explains the $23.7 million increase in revenues from $152.5 million for the third quarter of 2023 to $176.2 million for the third quarter of 2024:
| Revenues for the quarter ended September 30, 2023 |
$152,541 |
| |
Sales volume growth for broths, plant-based beverages, and protein shakes, partially offset by the impact of lower pass-through pricing to customers due to lower costs for certain raw materials |
17,035 |
| |
Sales volume growth of over 40% for fruit snacks, reflecting the addition of new production and packaging capacity in 2023 to meet unfilled demand |
10,137 |
| |
Impact of the exit from the smoothie bowls category in March 2024 |
(3,497) |
| Revenues for the quarter ended September 28, 2024 |
$176,216 |
Gross Profit
The table below explains the $3.3 million increase in gross profit from $20.3 million for the third quarter of 2023 to $23.6 million for the third quarter of 2024:
| Gross profit for the quarter ended September 30, 2023 |
$20,268 |
| |
Higher sales and production volumes for fruit snacks, broths, and beverages |
6,241 |
| |
Decrease in start-up costs related to capital expansion projects |
586 |
| |
Excess wastewater haul-off charges, due to volume constraints within the current treatment system at our Midlothian, Texas, facility |
(2,180) |
| |
Incremental depreciation related to capital expansion projects |
(1,331) |
| Gross profit for the quarter ended September 28, 2024 |
$23,584 |
Operating Income
The table below explains the increase in operating income from the third quarter of 2023 to the third quarter of 2024:
| Operating income for the quarter ended September 30, 2023 |
$1,482 |
| |
Increase in gross profit, as explained above |
$3,316 |
| |
Higher employee variable compensation accruals based on performance, together with increased professional fees related to operational productivity initiatives, partially offset by lower business development and employee severance costs following the divestiture of Frozen Fruit and consolidation of our continuing operations in 2023 |
(3,275) |
| Operating income for the quarter ended September 28, 2024 |
$1,523 |
| SUNOPTA INC. |
27 |
September 28, 2024 Form 10-Q |
Consolidated Results of Operations for the Three Quarters Ended September 28, 2024 and September 30, 2023
| |
|
September 28,
2024 |
|
|
September 30,
2023 |
|
|
Change |
|
|
Change |
|
| For the three quarters ended |
|
$ |
|
|
$ |
|
|
$ |
|
|
% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
|
530,059 |
|
|
448,673 |
|
|
81,386 |
|
|
18.1% |
|
| Cost of goods sold |
|
452,880 |
|
|
385,697 |
|
|
67,183 |
|
|
17.4% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
77,179 |
|
|
62,976 |
|
|
14,203 |
|
|
22.6% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross margin(1) |
|
14.6% |
|
|
14.0% |
|
|
|
|
|
0.6% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
| Selling, general and administrative expenses |
|
61,824 |
|
|
58,403 |
|
|
3,421 |
|
|
5.9% |
|
| Intangible asset amortization |
|
1,338 |
|
|
1,338 |
|
|
- |
|
|
0.0% |
|
| Other income, net |
|
(1,654 |
) |
|
(20 |
) |
|
(1,634 |
) |
|
* |
|
| Foreign exchange loss |
|
1,372 |
|
|
44 |
|
|
1,328 |
|
|
* |
|
| Total operating expenses |
|
62,880 |
|
|
59,765 |
|
|
3,115 |
|
|
5.2% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
14,299 |
|
|
3,211 |
|
|
11,088 |
|
|
345.3% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense, net |
|
19,222 |
|
|
19,391 |
|
|
(169 |
) |
|
-0.9% |
|
| Other non-operating expense |
|
236 |
|
|
- |
|
|
236 |
|
|
* |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from continuing operations before income taxes |
|
(5,159 |
) |
|
(16,180 |
) |
|
11,021 |
|
|
68.1% |
|
| Income tax expense |
|
283 |
|
|
3,978 |
|
|
(3,695 |
) |
|
-92.9% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from continuing operations |
|
(5,442 |
) |
|
(20,158 |
) |
|
14,716 |
|
|
73.0% |
|
| Net loss from discontinued operations |
|
(2,314 |
) |
|
(143,126 |
) |
|
140,812 |
|
|
98.4% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss(2),(3) |
|
(7,756 |
) |
|
(163,284 |
) |
|
155,528 |
|
|
95.2% |
|
| Dividends and accretion on preferred stock |
|
(401 |
) |
|
(1,552 |
) |
|
1,151 |
|
|
74.2% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss attributable to common shareholders(4) |
|
(8,157 |
) |
|
(164,836 |
) |
|
156,679 |
|
|
95.1% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| * Percentage not meaningful |
|
(1) The following table presents a reconciliation of adjusted gross margin from reported gross margin calculated in accordance with U.S. GAAP (refer to footnote (1) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2024 and September 30, 2023" table regarding the use of this non-GAAP measure).
| For the three quarters ended |
|
September 28, 2024 |
|
|
September 30, 2023 |
|
| Reported gross margin |
|
14.6% |
|
|
14.0% |
|
| Start-up costs(a) |
|
1.3% |
|
|
3.6% |
|
|
Wastewater haul-off charges(b)
|
|
0.7% |
|
|
- |
|
| Product withdrawal costs(c) |
|
0.4% |
|
|
- |
|
| Adjusted gross margin |
|
16.9% |
|
|
17.7% |
|
| |
|
| Note: percentages may not add due to rounding |
|
(a) For the first three quarters of 2024, start-up costs of $6.8 million were recorded in costs of goods sold, which were mainly related to the scale-up of production at our plant-based beverage facility in Midlothian, Texas, including the start-up of a new high-speed Edge line, together with the ramp-up of oat-base extraction operations at our Modesto, California, facility. For the first three quarters of 2023, start-up costs of $16.3 million included in cost of goods sold mainly related to the initial ramp-up of production at our Midlothian, Texas, facility, and the addition of new extrusion and high-speed packaging lines at our fruit snacks facility in Omak, Washington.
(b) For the first three quarters of 2024, we incurred temporary third-party haul-off charges of $3.6 million for excess wastewater produced at our Midlothian, Texas, facility, due to volume constraints within our current treatment system.
(c) In the second quarter of 2024, we conducted a voluntary withdrawal from customers of certain batches of aseptically-packaged products that may have had the potential for non-pathogenic microbial contamination. None of the withdrawn product made it into the consumer marketplace. In the second and third quarters of 2024, we recognized direct costs related to the withdrawal of $2.1 million, net of expected insurance recoveries, which included finished goods inventory write-offs, product return and logistic costs, and costs related to investigative and remedial actions taken in response to the withdrawal, which corrective actions have been completed. These charges are incremental to our normal course reserves and have had an unfavorable impact on our reported gross profit and gross margin for the first three quarters of 2024.
| SUNOPTA INC. |
28 |
September 28, 2024 Form 10-Q |
(2) The following table presents a reconciliation of adjusted earnings from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (2) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2024 and September 30, 2023" table regarding the use of this non-GAAP measure).
| |
|
September 28, 2024 |
|
|
September 30, 2023 |
|
| |
|
|
|
|
Per Share |
|
|
|
|
|
Per Share |
|
| For the three quarters ended |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
| Loss from continuing operations |
|
(5,442 |
) |
|
|
|
|
(20,158 |
) |
|
|
|
| Dividends and accretion on preferred stock |
|
(401 |
) |
|
|
|
|
(1,552 |
) |
|
|
|
| Loss from continuing operations attributable to common shareholders |
|
(5,843 |
) |
|
(0.05 |
) |
|
(21,710 |
) |
|
(0.19 |
) |
| Adjusted for: |
|
|
|
|
|
|
|
|
|
|
|
|
| Start-up costs(a) |
|
7,655 |
|
|
|
|
|
17,855 |
|
|
|
|
|
Wastewater haul-off charges(b)
|
|
3,606 |
|
|
|
|
|
- |
|
|
|
|
| Product withdrawal costs(c) |
|
2,145 |
|
|
|
|
|
- |
|
|
|
|
| Unrealized foreign exchange loss on restricted cash(d) |
|
1,363 |
|
|
|
|
|
- |
|
|
|
|
| Business development costs(e) |
|
- |
|
|
|
|
|
2,390 |
|
|
|
|
| Severance costs(f) |
|
- |
|
|
|
|
|
897 |
|
|
|
|
| Gain on sale of smoothie bowls product line(g) |
|
(1,800 |
) |
|
|
|
|
- |
|
|
|
|
| Other(h) |
|
146 |
|
|
|
|
|
(20 |
) |
|
|
|
| Change in valuation allowance for deferred tax assets(i) |
|
- |
|
|
|
|
|
3,978 |
|
|
|
|
| Adjusted earnings from continuing operations |
|
7,272 |
|
|
0.06 |
|
|
3,390 |
|
|
0.03 |
|
(a) Refer to footnote (1)(a) above for a description of start-up costs included in cost of goods sold. Additionally, for the first three quarters of 2024 and 2023, start-up costs included $0.8 million and $1.5 million, respectively, of professional fees related to operational productivity initiatives, which are recorded in SG&A expenses.
(b) Refer to footnote (1)(b) above for a description of wastewater haul-off charges included in cost of goods sold.
(c) Refer to footnote (1)(c) above for a description of product withdrawal costs included in cost of goods sold.
(d) For the first three quarters of 2024, reflects an unrealized foreign exchange loss associated with peso-denominated bank accounts in Mexico that were retained following the divestiture of Frozen Fruit. These accounts are currently subject to a judicial hold in connection with a litigation matter.
(e) For the first three quarters of 2023, reflects business development costs related to the divestiture of Frozen Fruit, which are recorded in SG&A expenses.
(f) For the first three quarters of 2023, reflects employee severance costs accrued in connection with the consolidation of our continuing operation following the divestiture of Frozen Fruit, which are recorded in SG&A expenses.
(g) For the first three quarters of 2024, reflects the pre-tax gain on sale of the smoothie bowls product line recognized in the first quarter of 2024, which is recorded in other income.
(h) For the first three quarters of 2024, other reflects accrued demolition costs related to our former roasted snack facility, which was abandoned in 2018, partially offset by gains on the settlement of certain legal matters. These amounts are recorded in other expense/income.
(i) For the first three quarters of 2023, reflects an increase to the valuation allowance for U.S. deferred tax assets based on an assessment of the future realizability of the related tax benefits.
| SUNOPTA INC. |
29 |
September 28, 2024 Form 10-Q |
(3) The following table presents a reconciliation of adjusted EBITDA from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (3) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2024 and September 30, 2023" table regarding the use of this non-GAAP measure).
| |
|
|
|
|
September 28, 2024 |
|
|
September 30, 2023 |
|
| For the three quarters ended |
|
$ |
|
|
$ |
|
| Loss from continuing operations |
|
(5,442 |
) |
|
(20,158 |
) |
| Interest expense, net |
|
19,222 |
|
|
19,391 |
|
| Loss on sale of receivables* |
|
236 |
|
|
- |
|
| Income tax expense |
|
283 |
|
|
3,978 |
|
| Depreciation and amortization |
|
27,005 |
|
|
22,873 |
|
| Stock-based compensation |
|
10,269 |
|
|
8,989 |
|
| Adjusted for: |
|
|
|
|
|
|
| |
Start-up costs(a) |
|
7,655 |
|
|
17,855 |
|
| |
Wastewater haul-off charges(b)
|
|
3,606 |
|
|
- |
|
| |
Product withdrawal costs(c) |
|
2,145 |
|
|
- |
|
| |
Unrealized foreign exchange loss on restricted cash(d) |
|
1,363 |
|
|
- |
|
| |
Business development costs(e) |
|
- |
|
|
2,390 |
|
| |
Severance costs(f) |
|
- |
|
|
897 |
|
| |
Gain on sale of smoothie bowls product line(g) |
|
(1,800 |
) |
|
- |
|
| |
Other(h) |
|
146 |
|
|
(20 |
) |
| Adjusted EBITDA from continuing operations |
|
64,688 |
|
|
56,195 |
|
* Included in other non-operating expense.
(a)-(h) Refer to footnote (2) above.
(4) Refer to footnote (4) to the "Consolidated Results of Operations for the Quarters Ended September 28, 2024 and September 30, 2023" table regarding the use of certain other non-GAAP measures in the discussion of our results of operations below.
Revenues for the three quarters ended September 28, 2024 increased by 18.1% to $530.1 million from $448.7 million for the three quarters ended September 30, 2023. The change in revenues from the first three quarters of 2023 to the first three quarters of 2024 was due to the following:
| |
|
$ |
|
|
% |
|
| 2023 revenues |
|
448,673 |
|
|
|
|
| Volume/Mix |
|
105,805 |
|
|
23.6% |
|
| Price |
|
(17,476 |
) |
|
-3.9% |
|
| Exit from smoothie bowls |
|
(6,943 |
) |
|
-1.5% |
|
| 2024 revenues |
|
530,059 |
|
|
18.1% |
|
Note: percentages may not add due to rounding
For the three quarters ended September 28, 2024, the 18.1% increase in revenues reflected a favorable volume/mix impact of 23.6%, partially offset by a 3.9% overall price reduction due to the pass-through of lower commodity costs for certain raw materials, together with a 1.5% revenue loss related to our exit from the smoothie bowls category in March 2024. The favorable volume/mix reflected the incremental output from our capital expansion projects, together with new product innovation launches, which produced sales volume growth with existing and new customers across our fruit snack, broth, tea, protein shake, and plant-based beverage product lines.
Gross profit increased $14.2 million, or 22.6%, to $77.2 million for the three quarters ended September 28, 2024, compared with $63.0 million for the three quarters ended September 30, 2023. Gross margin was 14.6% for the three quarters ended September 28, 2024, compared with 14.0% for the three quarters ended September 30, 2023, an increase of 60 basis points.
For the first three quarters of 2024, we incurred start-up costs included in cost of goods sold of $6.8 million (1.3% gross margin impact), compared with start-up costs of $16.3 million (3.6% gross margin impact) for the first three quarters of 2023. Start-up costs for the first three quarters of 2024, were mainly related to the scale-up of production at our plant-based beverage facility in Midlothian, Texas, including the start-up of a new high-speed Edge line, together with the ramp-up of oat-base extraction operations at our Modesto, California, facility. In addition, for the first three quarters of 2024, we incurred temporary third-party haul-off charges of $3.6 million (0.7% gross margin impact) for excess wastewater produced at our plant-based beverage facility in Midlothian, Texas, due to volume constraints within our current treatment system, and, in the second and third quarters of 2024, we recognized direct costs of $2.1 million (0.4% gross margin impact), net of expected insurance recoveries, related to our voluntary withdrawal in the second quarter of 2024, of certain batches of aseptically-packaged products that may have had the potential for non-pathogenic microbial contamination. Excluding the impact of start-up costs, wastewater charges and product withdrawal costs, adjusted gross margin was 16.9% for the three quarters ended September 28, 2024, compared with 17.7% for the three quarters ended September 30, 2023, a decrease of 80 basis points. See footnote (1) to the “Consolidated Results of Operations for the Three Quarters Ended September 28, 2024 and September 30, 2023” table for a reconciliation of adjusted gross margin from gross margin calculated in accordance with U.S. GAAP.
| SUNOPTA INC. |
30 |
September 28, 2024 Form 10-Q |
The 80-basis point decrease in adjusted gross margin reflected the impact of incremental depreciation of new production equipment related to capital expansion projects completed in 2023 ($4.2 million or 0.8% gross margin impact), together with manufacturing inefficiencies resulting from the excess wastewater and product withdrawal issues, and higher inventory reserves, partially offset by higher sales and production volumes for beverages, fruit snacks and broths driving improved plant utilization.
Operating income increased $11.1 million to $14.3 million for the three quarters ended September 28, 2024, compared with $3.2 million for the three quarters ended September 30, 2023. The increase in operating income reflected higher gross profit, as described above, together with a gain on sale of the smoothie bowls product line of $1.8 million, and lower business development and employee severance costs following the divestiture of Frozen Fruit and related consolidation of our continuing operations in 2023. These factors were partially offset by higher variable employee compensation accruals based on performance, together with higher stock-based compensation expense due to the timing of our annual incentive plan grants and the accelerated vesting of certain previously granted awards in connection with the retirement of our former Chief Executive Officer ("CEO"). In addition, in the first three quarters of 2024, we recognized an unrealized foreign exchange loss of $1.4 million on peso-denominated restricted cash held in Mexico.
(Further details on the changes in revenue, gross profit and operating income are provided in the rollforward tables below.)
Net interest expense decreased by $0.2 million to $19.2 million for the three quarters ended September 28, 2024, compared with $19.4 million for the three quarters ended September 30, 2023, which reflected lower average outstanding debt in the first three quarters of 2024 following the divestiture of Frozen Fruit, partially offset by the impact of higher market interest rates.
Other non-operating expense of $0.2 million for the three quarters ended September 28, 2024, reflected the loss on sale of certain trade receivables to a third-party financial institution under the Receivables Sales Program that we entered into in the third quarter of 2024 (as described below under "Liquidity and Capital Resources").
Income taxes were recognized at an effective rate of (5.5)% for the three quarters ended September 28, 2024, compared with (24.6)% recognized for the three quarters ended September 30, 2023. The change in the effective tax rate was primarily driven by the recognition of a full valuation allowance against U.S. deferred tax assets in excess of deferred tax liabilities beginning in the second quarter of 2023.
Loss from continuing operations was $5.4 million for the three quarters ended September 28, 2024, compared with a loss of $20.2 million for the three quarters ended September 30, 2023. Diluted loss per share from continuing operations attributable to common shareholders (after accretion on preferred stock) was $0.05 for the three quarters ended September 28, 2024, compared with a diluted loss per share (after dividends and accretion on preferred stock) of $0.19 for the three quarters ended September 30, 2023.
We recognized a loss from discontinued operations related to Frozen Fruit of $2.3 million (diluted loss per share of $0.02) for the three quarters ended September 28, 2024, compared with a loss of $143.1 million (diluted loss per share of $1.26) for the three quarters ended September 30, 2023, which included an estimated pre-tax loss on the divestiture of Frozen Fruit of $118.8 million recognized in the third quarter of 2023. Refer to note 2 to the unaudited consolidated financial statements included in this report for additional details.
We realized a loss attributable to common shareholders of $8.2 million (diluted loss per share of $0.07) for the three quarters ended September 28, 2024, compared with a loss attributable to common shareholders of $164.8 million (diluted loss per share of $1.45) for the three quarters ended September 30, 2023.
| SUNOPTA INC. |
31 |
September 28, 2024 Form 10-Q |
Adjusted earnings from continuing operations were $7.3 million, or $0.06 earnings per diluted share, for the three quarters ended September 28, 2024, compared with adjusted earnings from continuing operations of $3.4 million, or $0.03 earnings per diluted share, for the three quarters ended September 30, 2023.
Adjusted EBITDA from continuing operations increased $8.5 million, or 15.1%, to $64.7 million for the three quarters ended September 28, 2024, compared with $56.2 million for the three quarters ended September 30, 2023.
Adjusted earnings from continuing operations and adjusted EBITDA from continuing operations are non-GAAP financial measures. See footnotes (2) and (3) to the "Consolidated Results of Operations for the Three Quarters Ended September 28, 2024 and September 30, 2023" table for a reconciliation of adjusted earnings from continuing operations and adjusted EBITDA from continuing operations from loss from continuing operations, which we consider to be the most directly comparable U.S. GAAP financial measure.
Rollforward of Revenue, Gross Profit and Operating Income
| For the three quarters ended |
|
September 28,
2024 |
|
|
September 30,
2023 |
|
|
Change |
|
|
% Change |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues |
$ |
530,059 |
|
$ |
448,673 |
|
$ |
81,386 |
|
|
18.1% |
|
| Gross profit |
|
77,179 |
|
|
62,976 |
|
|
14,203 |
|
|
22.6% |
|
| Gross margin |
|
14.6% |
|
|
14.0% |
|
|
|
|
|
0.6% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
$ |
14,299 |
|
$ |
3,211 |
|
$ |
11,088 |
|
|
345.3% |
|
| Operating margin |
|
2.7% |
|
|
0.7% |
|
|
|
|
|
2.0% |
|
Revenues
The table below explains the $81.4 million increase in revenues from $448.7 million for the first three quarters of 2023 to $530.1 million for the first three quarters of 2024:
| Revenues for the three quarters ended September 30, 2023 |
$448,673 |
| |
Sales volume growth for broths, teas, protein shakes, and plant-based beverages, partially offset by the impact of lower pass-through pricing to customers due to lower costs for certain raw materials |
65,386 |
| |
Sales volume growth of over 30% for fruit snacks, reflecting the addition of new production and packaging capacity in 2023 to meet unfilled demand |
22,943 |
| |
Impact of the exit from the smoothie bowls category in March 2024 |
(6,943) |
| Revenues for the three quarters ended September 28, 2024 |
$530,059 |
| SUNOPTA INC. |
32 |
September 28, 2024 Form 10-Q |
Gross Profit
The table below explains the $14.2 million increase in gross profit from $63.0 million for the first three quarters of 2023 to $77.2 million for the first three quarters of 2024:
| Gross profit for the three quarters ended September 30, 2023 |
$62,976 |
| |
Higher sales and production volumes for beverages, fruit snacks, and broths, together with lower commodity costs for certain raw materials, partially offset by higher inventory reserves |
14,662 |
| |
Decrease in start-up costs related to capital expansion projects |
9,509 |
| |
Incremental depreciation related to capital expansion projects |
(4,217) |
| |
Excess wastewater haul-off charges, due to volume constraints within the current treatment system at our Midlothian, Texas, facility
|
(3,606) |
| |
Direct costs, net of expected insurance recoveries, related to the voluntary withdrawal in the second quarter of 2024, of specific batches of aseptically-packaged product that may have had the potential for non-pathogenic microbial contamination |
(2,145) |
| Gross profit for the three quarters ended September 28, 2024 |
$77,179 |
Operating Income
The table below explains the $11.1 million increase in operating income from $3.2 million for the first three quarters of 2023 to $14.3 million for the first three quarters of 2024:
| Operating income for the three quarters ended September 30, 2023 |
$3,211 |
| |
Increase in gross profit, as explained above |
$14,203 |
| |
Gain on sale of smoothie bowls product line |
1,800 |
| |
Higher employee variable compensation accruals based on performance, together an unrealized foreign exchange loss of $1.4 million on peso-denominated restricted cash held in Mexico, partially offset by lower business development and employee severance costs following the divestiture of Frozen Fruit and consolidation of our continuing operations in 2023 |
(3,635) |
| |
Higher variable stock-based compensation expense based on performance, together with the accelerated vesting of certain previously granted awards in connection with the retirement of our former CEO, and the earlier timing of annual equity grants under our incentive plans |
(1,280) |
| Operating income for the three quarters ended September 28, 2024 |
$14,299 |
Liquidity and Capital Resources
On December 8, 2023, we entered into a five-year Credit Agreement providing for a $180.0 million term loan credit facility (the "Term Loan Credit Facility") and an $85.0 million revolving credit facility (the "Revolving Credit Facility") (collectively, the "Credit Facilities"). As at September 28, 2024, $175.5 million remained outstanding under the Term Loan Credit Facility and we had utilized $56.0 million of the Revolving Credit Facility, including $5.9 million in letters of credit. For more information on our Credit Facilities, see note 8 to the unaudited consolidated financial statements included in this report.
In connection with our efforts to extend payment terms with our major suppliers to enhance cash flows, we are financing certain purchases of goods and services through extended payables facilities, by which third-party intermediaries settle the supplier invoice on the contractual due date and issue us a short-term note payable for the face amount of the invoice, which we repay, together with interest, at a later date. As at September 28, 2024 and December 30, 2023, we had $13.0 million and $17.6 million principal amount outstanding under these facilities, respectively. Proceeds from, and repayments of, the notes payable associated with these facilities are reported as financing cash flows on our consolidated statements of cash flows.
| SUNOPTA INC. |
33 |
September 28, 2024 Form 10-Q |
On August 28, 2024, we entered into an agreement to sell, from time to time, on a revolving basis, up to $30.0 million aggregate amount of trade receivables of eligible customers to a third-party financial institution in exchange for cash proceeds (the "Receivables Sales Program" - see note 4 to the unaudited consolidated financial statements included in this report for more information). Additionally, we utilize, from time to time, supply chain finance ("SCF") programs offered by some of our major customers that allow us to sell our receivables from those customers to such customers' financial institutions. We utilize our Receivables Sales Program and our customers' SCF programs in order to be paid earlier than our payment terms with the customers provide, and at a discount rate that leverages those customers' favorable credit ratings. Utilizing these programs accelerates our cash flows and improves working capital efficiency, while providing a lower cost access to liquidity when compared to the Revolving Credit Facility. All cash flows associated with these programs are reported as operating activities on our consolidated statements of cash flows.
On April 17, 2024, we eliminated the dividend rights attached to the shares of Series B-1 Preferred Stock of our subsidiary, SunOpta Foods Inc., effective from and after December 31, 2023 (see note 9 to the unaudited consolidated financial statements included in this report). The elimination of the cumulative dividend of 8.0% per year will result in annual savings of $1.2 million.
For the three quarters ended September 28, 2024, we incurred capital expenditures of $22.8 million. For fiscal 2024, we estimate total capital expenditures of approximately $15 million for discretionary investments in growth and productivity projects, and approximately $15 million of non-discretionary maintenance projects. We are funding our capital expenditures using operating cash flows and borrowings under our Revolving Credit Facility. In addition, in the first three quarters of 2024, we added $24.6 million of finance lease right-of-use assets related to the expansion of our ingredient extraction operations at our Modesto, California, facility.
We believe that our operating cash flows, including the selective use of our Receivables Sales Program and customer SCF programs to improve collection terms, together with available borrowings under the Revolving Credit Facility and extended payable facilities, will be adequate to meet our operating, investing, and financing needs for the foreseeable future, including the 12-month period following the issuance of our financial statements. However, in order to finance significant investments in our existing businesses, or significant business acquisitions, if any, that may arise in the future, we may need additional sources of cash that we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering of debt or equity securities, or the issuance of common stock. There can be no assurance that these types of financing would be available at all or, if so, on terms that are acceptable to us.
Cash Flows
Summarized cash flow information for the three quarters ended September 28, 2024 and September 30, 2023, is as follows:
| |
|
|
For the three quarters ended |
|
| |
|
|
September 28,
2024 |
|
|
September 30,
2023 |
|
|
Change |
|
| |
|
|
$ |
|
|
$ |
|
|
$ |
|
| Net cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
| Continuing operations: |
|
|
|
|
|
|
|
|
|
| |
Operating activities |
|
19,221 |
|
|
(8,385 |
) |
|
27,606 |
|
| |
Investing activities |
|
(16,464 |
) |
|
(37,272 |
) |
|
20,808 |
|
| |
Financing activities |
|
(4,865 |
) |
|
45,661 |
|
|
(50,526 |
) |
| Discontinued operations |
|
3,990 |
|
|
2,861 |
|
|
1,129 |
|
Operating Activities of Continuing Operations
Cash provided by operating activities of continuing operations increased $27.6 million from the first three quarters of 2023 to the first three quarters of 2024. The increase in cash provided mainly reflected improved working capital efficiency attributable to our Receivables Sales Program, together with improved profitability, driven by revenue volume growth and lower start-up costs related to our Midlothian, Texas, facility, partially offset by a pre-season build of broth inventories, together with unrecovered product withdrawal costs.
| SUNOPTA INC. |
34 |
September 28, 2024 Form 10-Q |
Investing Activities of Continuing Operations
Cash used in investing activities of continuing operations decreased $20.8 million from the first three quarters of 2023 to the first three quarters of 2024, which mainly reflected lower capital expenditures following the completion of certain major capital projects in 2023, including the construction of our new plant-based beverage facility in Midlothian, Texas. In addition, in the first three quarters of 2024, we received cash proceeds of $6.3 million from the sale of the smoothie bowls product line.
Financing Activities of Continuing Operations
Cash used in financing activities of continuing operations was $4.9 million for the first three quarters of 2024, which reflected repayments of long-term debt related to completed capital projects, together with net repayments of notes payable in connection with our extended payables facilities, partially offset by borrowings under our Revolving Credit Facility to fund capital expenditures. Cash provided by financing activities of continuing operations was $45.7 million for the first three quarters of 2023, which reflected net proceeds from notes payable, together with borrowings under our Revolving Credit Facility to fund working capital and capital expenditures, partially offset by repayments of long-term debt related to completed capital projects, and the payment of withholding taxes on employee stock-based awards.
Discontinued Operations
Net cash provided by discontinued operations of $4.0 million for the first three quarters of 2024, reflected proceeds of $6.3 million from the remaining short-term note receivable related to the Frozen Fruit divestiture, partially offset by the settlement of pre-divestiture obligations.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. The estimates and assumptions made require us to exercise our judgment and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the information that forms the basis of our estimates and assumptions as our business and the business environment generally changes.
There have been no material changes to the critical accounting estimates disclosed under the heading "Critical Accounting Estimates" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," of the Form 10-K. There have been no material changes to our exposures to market risks since December 30, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission's rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we conducted an evaluation of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, our CEO and our CFO concluded that our disclosure controls and procedures were effective as of September 28, 2024.
| SUNOPTA INC. |
35 |
September 28, 2024 Form 10-Q |
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our CEO and CFO, has evaluated whether any change in our internal control over financial reporting (as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act) occurred during the quarter ended September 28, 2024. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the quarter ended September 28, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| SUNOPTA INC. |
36 |
September 28, 2024 Form 10-Q |
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see note 14 to the unaudited consolidated financial statements included under Part I, Item 1 of this report.
Item 1A. Risk Factors
Certain risks associated with our operations are discussed in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 30, 2023. There have been no material changes to the previously reported risk factors as of the date of this quarterly report. Our previously reported risk factors should be carefully reviewed in connection with an evaluation of our Company.
Item 5. Other Information
During the quarter ended September 28, 2024, none of our directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408 of Regulation S-K.
Item 6. Exhibits
The following exhibits are included as part of this report.
| Exhibit |
Description |
| |
|
| 4.1 |
Third Amended and Restated Certificate of Incorporation of SunOpta Foods, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 18, 2024). |
| |
|
| 31.1* |
Certification by Brian Kocher, Chief Executive Officer, pursuant to Rule 13a - 14(a) under the Securities Exchange Act of 1934, as amended. |
| |
|
| 31.2* |
Certification by Greg Gaba, Chief Financial Officer, pursuant to Rule 13a - 14(a) under the Securities Exchange Act of 1934, as amended. |
| |
|
| 32* |
Certifications by Brian Kocher, Chief Executive Officer, and Greg Gaba, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350. |
| |
|
| 101.INS* |
XBRL Instance Document - the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document |
| |
|
| 101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
| |
|
| 101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| |
|
| 101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
| |
|
| 101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
| |
|
| 101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
| SUNOPTA INC. |
37 |
September 28, 2024 Form 10-Q |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
SUNOPTA INC.
|
|
|
|
|
Date: November 5, 2024
|
/s/ Greg Gaba
|
|
|
Greg Gaba
|
|
|
Chief Financial Officer
(Authorized Signatory and Principal Financial Officer)
|
| SUNOPTA INC. |
38 |
September 28, 2024 Form 10-Q |