SUNOPTA INC. Forward-Looking Financial Information
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") should be read in conjunction with the interim
consolidated financial statements, and notes thereto, for the quarter ended July
2, 2022 contained under Item 1 of this Quarterly Report on Form 10-Q and in
conjunction with the annual consolidated financial statements, and notes
thereto, contained in the Annual Report on Form 10-K for the fiscal year ended
January 1, 2022 (the "Form 10-K"). Unless otherwise indicated herein, the
discussion and analysis contained in this MD&A includes information available to
August 11, 2022 .
Certain statements contained in this MD&A may constitute forward-looking
statements as defined under securities laws. Forward-looking statements may
relate to our future outlook and anticipated events or results and may include
statements regarding our future financial position, business strategy, budgets,
litigation, projected costs, capital expenditures, financial results, taxes,
plans and objectives. In some cases, forward-looking statements can be
identified by terms such as "anticipate," "estimate," "target," "intend,"
"project," "potential," "predict," "continue," "believe," "expect," "can,"
"could," "would," "should," "may," "might," "plan," "will," "budget,"
"forecast," or other similar expressions concerning matters that are not
historical facts, or the negative of such terms are intended to identify
forward-looking statements; however, the absence of these words does not
necessarily mean that a statement is not forward-looking. To the extent any
forward-looking statements contain future-oriented financial information or
financial outlooks, such information is being provided to enable a reader to
assess our financial condition, material changes in our financial condition, our
results of operations, and our liquidity and capital resources. Readers are
cautioned that this information may not be appropriate for any other purpose,
including investment decisions.
Forward-looking statements contained in this MD&A are based on certain factors
and assumptions regarding expected growth, results of operations, performance,
and business prospects and opportunities. While we consider these assumptions to
be reasonable based on information currently available, they may prove to be
incorrect. These factors are more fully described in the "Risk Factors" section
at Item 1A of the Form 10-K and Item 1A of Part II of this report.
Forward-looking statements contained in this commentary are based on our current
estimates, expectations, and projections, which we believe are reasonable as of
the date of this report. Forward-looking statements are not guarantees of future
performance or events. You should not place undue importance on forward-looking
statements and should not rely upon this information as of any other date. Other
than as required under securities laws, we do not undertake to update any
forward- looking information at any particular time. Neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements, and we hereby qualify all our forward-looking
statements by these cautionary statements.
Unless otherwise noted herein, all currency amounts in this MD&A are expressed
in U.S. dollars. All tabular dollar amounts are expressed in thousands of U.S.
dollars, except per share amounts.
Overview
We procure, process, and package plant-based and fruit-based food and beverage products for sale to retailers, foodservice operators, branded food companies, and food manufacturers. The composition of our operating segments is as follows: •Plant-Based Foods and Beverages - We offer a full line of plant-based beverages and liquid and powder ingredients (utilizing oat, almond, soy, coconut, rice, hemp, and other bases), as well as broths, teas, and nutritional beverages. In addition, we package dry- and oil-roasted inshell sunflower and sunflower kernels, and we process and sell raw sunflower inshell and kernel for food and feed applications. •Fruit-Based Foods and Beverages - We offer individually quick frozen ("IQF") fruit for retail (including strawberries, blueberries, mango, pineapple, and other berries and blends) and IQF and bulk frozen fruit for foodservice (including toppings, purées, and smoothies). In addition, we offer fruit snacks, including bars, twists, ropes, and bite-sized varieties, as well as fruit smoothie bowls.
--------------------------------------------------------------------------------
Current Macroeconomic Conditions
We continue to be exposed to macroeconomic pressures including supply chain and labor challenges, inflation, and rising interest rates, as well as potential impacts from the persistent COVID-19 pandemic and theRussia -Ukraine war. We have been successful, however, in mitigating the effects of the supply chain and labor issues that adversely affected the efficiency of our operations in the second half of 2021 and first quarter of 2022, resulting in improved plant utilization and production output in the second quarter of 2022, and enabling us to alleviate the shortfall in our customer order fulfillment. In addition, through the pricing actions we took to offset inflation pressures on raw materials and packaging, as well as fuel costs and freight rates, we effectively passed-through most of these higher input costs to our customers during the second quarter of 2022. We were also able to largely absorb other inflationary impacts on labor costs and utility rates, as well as any remaining unrecovered raw material cost inflation, through the improved efficiency of our manufacturing plant operations. However, despite the actions we have taken to date, we may continue to experience further supply chain and labor challenges, and inflation impacts on our operations in future periods. In addition, the current economic inflation is impacting purchasing behaviors, as consumers reduce discretionary spending and shift to lower priced product alternatives. As a result, we have experienced a softening of demand for certain of our products and from certain of our customers, mainly within our frozen fruit business, which has had, and may continue to have, a negative impact on our results of operations. In addition, recent changes toU.S. monetary policy, including higher interest rates, have increased our current cost of borrowing and may limit our access to additional sources of financing to support our operations and investment plans. Assets Held for Sale OnJuly 6, 2022 , we finalized an agreement to sell our frozen fruit processing facility located inOxnard, California , for gross proceeds of$16.5 million , payable in cash on the closing of the transaction, which is expected to occur in the third quarter of 2022. The sale of theOxnard facility was facilitated by our efforts to expand the production capacity and capabilities of our frozen fruit operations inMexico , including the relocation of certain equipment from theOxnard facility toMexico , together with the diversification of our fruit sourcing fromCalifornia to Central andSouth America .
--------------------------------------------------------------------------------
Consolidated Results of Operations for the Quarters EndedJuly 2, 2022 andJuly 3, 2021 July 2, 2022 July 3, 2021 Change Change For the quarter ended $ $ $ % Revenues
97,619 90,914 6,705 7.4%
Total revenues 243,531 202,273 41,258 20.4%
Gross Profit
Plant-Based Foods and Beverages 23,940 19,896 4,044 20.3%
Fruit-Based Foods and Beverages 10,958 6,440 4,518 70.2%
Total gross profit 34,898 26,336 8,562 32.5%
Gross Margin
Plant-Based Foods and Beverages 16.4% 17.9% -1.5%
Fruit-Based Foods and Beverages 11.2% 7.1% 4.1% Total gross margin 14.3% 13.0% 1.3% Segment operating income (loss)(1) Plant-Based Foods and Beverages 12,196 8,641 3,555 41.1% Fruit-Based Foods and Beverages 3,211 (1,447) 4,658 321.9% Corporate Services (7,298 ) (5,471 ) (1,827 ) -33.4% Total segment operating income 8,109 1,723 6,386 370.6% Other expense, net 1,540 4,661 (3,121 ) -67.0% Earnings (loss) before the following 6,569 (2,938 ) 9,507 323.6% Interest expense, net 3,132 1,631 1,501 92.0% Income tax expense (benefit) 939 (3,651 ) 4,590 125.7% Earnings (loss) from continuing operations(2),(3) 2,498 (918 ) 3,416 372.1% Loss from discontinued operations (814 ) - (814 ) - Net earnings (loss) 1,684 (918 ) 2,602 283.4% Dividends and accretion on preferred stock (760 ) (744 ) (16 ) -2.2% Earnings (loss) attributable to common shareholders(4) 924 (1,662 )
2,586 155.6%
(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 determined in accordance withU.S. GAAP. This measure is the basis on which management, including the CEO, assesses the underlying performance of our operating segments. We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our operating performance. However, the non-GAAP measure of operating income/loss should not be considered in isolation or as a substitute for performance measures calculated in accordance withU.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 comparableU.S. GAAP financial measure. Plant-Based Fruit-Based Foods and Foods and Corporate Beverages Beverages Services Consolidated For the quarter ended $ $ $ $July 2, 2022
Segment operating income (loss) 12,196 3,211 (7,298) 8,109
Other expense, net (203 ) (1,145 ) (192 ) (1,540 )
Earnings (loss) before the following 11,993 2,066 (7,490 ) 6,569
Segment operating income (loss) 8,641 (1,447 ) (5,471 ) 1,723
Other income (expense), net 219 (4,112 ) (768 ) (4,661 )
Earnings (loss) before the following 8,860 (5,559 )
(6,239 ) (2,938 )SUNOPTA INC. 23July 2, 2022 Form 10-Q
--------------------------------------------------------------------------------
We believe that investors' understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income/loss. However, any measure of 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 underU.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 net earnings determined in accordance withU.S. GAAP that excludes specific items recognized in other income/expense, and other unusual items that are identified and evaluated on an individual basis, which due to their nature or size, we would not expect to occur as part of our normal business on a regular basis. We believe that the identification of these excluded items enhances the analysis of the financial performance of our business when comparing those operating results between periods, as we do not consider these items to be reflective of normal business operations. The following table presents a reconciliation of adjusted earnings from earnings (loss) from continuing operations, which we consider to be the most directly comparableU.S. GAAP financial measure. July 2, 2022 July 3, 2021 Per Share Per Share For the quarter ended $ $ $ $ Earnings (loss) from continuing operations 2,498 (918) Dividends and accretion on preferred stock (760) (744) Earnings (loss) from continuing operations attributable to common shareholders 1,738 0.02 (1,662) (0.02) Adjusted for: Facility closure costs(a) 1,287 - Business development costs(b) 616 1,434 Start-up costs(c) 281 -
Costs related to exit from fruit ingredient processing facility(d)
- 4,123
Other(e) 253 247
Net income tax effect(f) (640 ) (4,022 )
Adjusted earnings 3,535 0.03 120 0.00
(a) Facility closure costs mainly related to the relocation of certain equipment
from our held-for-sale Oxnard, California , frozen fruit processing facility to
our Mexican facility, which were recorded in other expense.
(b) Represents third-party costs associated with business development
activities, including costs related to the evaluation, execution, and
integration of external acquisitions and divestitures, internal expansion
projects, and other strategic initiatives. For the second quarter of 2022, these
costs related to our inaugural Investor Day held in June 2022 ($0.5 million ), as
well as specific business transactions under consideration, which were recorded
in SG&A expenses. For the second quarter of 2021, these costs were mainly
related to the transition of the Dream and WestSoy brands, acquired in April
2021 , and professional fees incurred in connection with post-closing matters
related to the 2020 divestiture of our global ingredients business, Tradin
Organic, which were recorded in SG&A expenses ($1.1 million ) and other expense
($0.3 million ).
(c) Represents incremental direct costs incurred in connection with plant
expansion projects and new product introductions before the project or product
reaches normal production levels, including costs for the hiring and training of
additional personnel, fees for outside services, travel costs, and plant- and
production-related expenses. For the second quarter of 2022, start-up costs
mainly related to new employee hires for our plant-based beverage facility under
construction in Midlothian, Texas , which were recorded in cost of goods sold
($0.2 million ) and SG&A expenses ($0.1 million ).
(d) For the second quarter of 2021, represents asset impairment charges and
employee termination costs related to the exit from our South Gate, California ,
fruit ingredient processing facility, which were recorded in other expense.
(e) For the second quarters of 2022 and 2021, other mainly reflects the
settlement of certain legal and contractual matters.
(f) Reflects the tax effect of the preceding adjustments to earnings calculated
based on the statutory tax rates applicable in the tax jurisdiction of the
underlying adjustment.
We believe that investors' understanding of our financial performance is
enhanced by disclosing the specific items that we exclude to compute adjusted
earnings. However, adjusted earnings is not, and should not be viewed as, a
substitute for net earnings prepared under U.S. GAAP. Adjusted earnings is
presented solely to allow investors to more fully understand how we assess our
financial performance.
(3) We use a measure of adjusted earnings before interest, taxes, depreciation
and amortization ("EBITDA") when assessing the performance of our operations,
which we believe is useful to investors' understanding of our operating
profitability because it excludes non-operating expenses, such as interest and
income taxes, and non-cash expenses, such as depreciation, amortization, and
stock-based compensation, as well as other unusual items that affect the
comparability of operating performance. We also use this measure to assess
operating performance in connection with our employee incentive programs. We
define adjusted EBITDA as segment operating income plus depreciation,
amortization, and stock-based compensation, and excluding other unusual items as
identified in the determination of adjusted earnings (refer above to footnote
(2)). The following table presents a reconciliation of segment operating income
and adjusted EBITDA from earnings (loss) from continuing operations, which we
consider to be the most directly comparable U.S. GAAP financial measure.
--------------------------------------------------------------------------------
July 2, 2022 July 3, 2021
For the quarter ended $ $
Earnings (loss) from continuing operations 2,498 (918 )
Income tax expense (benefit) 939 (3,651 )
Interest expense, net 3,132 1,631
Other expense, net 1,540 4,661
Total segment operating income 8,109 1,723
Depreciation and amortization 9,372 8,910
Stock-based compensation 3,970 4,370
Business development costs(a) 616 1,143
Start-up costs(b) 281 -
Adjusted EBITDA 22,348 16,146
(a) Business development activities were related to our Investor Day and the
exploration of potential strategic opportunities in the second quarter of 2022,
and the integration of the Dream and WestSoy brands in the second quarter of
2021, which costs were recorded in SG&A expenses.
(b) For the second quarter of 2022, start-up costs mainly related to new
employee hires for our plant-based beverage facility under construction in
Midlothian, Texas , which were recorded in cost of goods sold.
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:
• adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest payments on our indebtedness;
• adjusted EBITDA does not include the recovery/payment of 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 does not reflect any cash requirements for such replacements; and
• adjusted EBITDA 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 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 otherU.S. GAAP and non-GAAP measures, such as revenues, gross profit, segment operating income/loss, net earnings, and adjusted earnings to measure our operating performance. Adjusted EBITDA is not a measurement of financial performance underU.S. GAAP and should not be considered as an alternative to our results of operations or cash flows from operations determined in accordance withU.S. GAAP, and our calculation of adjusted EBITDA may not be comparable to the calculation of a similarly titled measure reported by other companies. (4) In order to evaluate our results of operations, we use certain non-GAAP measures that we believe enhance an investor's ability to derive meaningful period-over-period comparisons and trends from our results of operations. In particular, we exclude specific items from our reported results that due to their nature or size, we do not expect to occur as part of our normal business on a regular basis. These items are identified above under footnote (2), and in the discussion of our results of operations below. These non-GAAP measures are presented solely to allow investors to more fully assess our results of operations and should not be considered in isolation of, or as substitutes for, an analysis of our results as reported underU.S. GAAP. Revenues for the quarter endedJuly 2, 2022 increased by 20.4% to$243.5 million from$202.3 million for the quarter endedJuly 3, 2021 , reflecting 31.0% revenue growth in thePlant-Based Foods and Beverages segment and 7.4% revenue growth in theFruit-Based Foods and Beverages segment. The change in revenues from the second quarter of 2021 to the second quarter of 2022 was due to the following:
© Edgar Online, source
