Value Creation Plan

9 Months Ended

Sep. 30, 2017

Restructuring And Related Activities [Abstract]

Restructuring And Related Activities Disclosure [Text Block]

2. Value Creation Plan

Overview

On October 7, 2016, the Company entered into a strategic partnership with Oaktree Capital Management L.P., a private equity investor (together with its affiliates, “Oaktree”). On October 7, 2016, Oaktree invested $85.0 million through the purchase of cumulative, non-participating Series A Preferred Stock (the “Preferred Stock”) of the Company’s wholly-owned subsidiary, SunOpta Foods Inc. (“SunOpta Foods”) (see note 9). The Company conducted, with the assistance of Oaktree, a thorough review of its operations, management and governance, with the objective of maximizing the Company’s ability to deliver long-term value to its shareholders. Through this review, the Company developed a Value Creation Plan built on four pillars: portfolio optimization, operational excellence, go-to-market effectiveness and process sustainability. The Company engaged management consulting firms to support the design and implementation of the Value Creation Plan.

In the fourth quarter of 2016, measures taken under the Value Creation Plan included the closure of the Company’s San Bernardino, California, juice facility and the Company’s soy extraction facility in Heuvelton, New York. In addition, effective November 11, 2016, Hendrik Jacobs stepped down as the Company’s President and Chief Executive Officer (“CEO”).

In the first three quarters of 2017, further measures were taken under the Value Creation Plan, including the exit from the San Bernardino facility and equipment leases, as well as the planned exits from flexible resealable pouch and nutrition bar product lines and operations (as described below). In addition, the Company made organizational changes within its management and executive teams, including the appointment of David Colo as President and CEO effective February 6, 2017, and the recruitment of new employees in the areas of quality, sales, marketing, operations and engineering. The Company also made capital investments at several of its manufacturing facilities to enhance food safety and production efficiencies.

Exiting Flexible Resealable Pouch and Nutrition Bar Product Lines and Operations

On July 26, 2017, SunOpta Foods entered an agreement with Skjodt-Barrett Contract Packaging LLC to sell equipment used in the production of flexible resealable pouches at the Company’s Allentown, Pennsylvania facility for gross proceeds of $2.0 million ($1.2 million net of costs to sell). The transaction closed on November 3, 2017. The Company continued to produce flexible resealable pouch products for existing customers until the closing date. The Company’s aseptic beverage operations were not affected by the sale of assets, and the Company will continue to produce aseptic beverages at its Allentown facility.

On September 27, 2017, the Company announced its intention to exit its nutrition bar product lines and operations in Carson City, Nevada. The Company expects to exit from these activities prior to the end of fiscal 2017, and will continue to produce nutrition bar products for existing customers until the exit date. The Company is in discussions with potential buyers interested in purchasing the nutrition bar equipment and assuming the facility lease.

As the flexible resealable pouch and nutrition bar product lines and operations do not qualify for presentation as discontinued operations, operating results from these activities were reported in continuing operations on the consolidated statements of operations for the current and comparative periods. Revenues from sales of these product lines were $13.5 million and $44.1 million for the quarter and three quarters ended September 30, 2017, respectively, compared with $14.3 million and $45.0 million for the quarter and three quarters ended October 1, 2016, respectively. Losses before income taxes from these operations were $8.6 million and $12.9 million for the quarter and three quarters ended September 30, 2017, respectively, compared with $0.2 million and $0.1 million for the quarter and three quarters ended October 1, 2016, respectively. For the quarter and three quarters ended September 30, 2017, losses before income taxes from these operations included impairment charges for inventory ($1.3 million) and long-lived assets ($4.5 million) related to the exit activities, as well as employee termination costs of $1.4 million. These operations are included in the Consumer Products operating segment.

Continuity of Costs Incurred Under the Value Creation Plan

The following table summarizes costs incurred since the inception of the Value Creation Plan to September 30, 2017:

		(a)	(b)	(c)
			Employee
		Asset	recruitment,	Consulting
		impairments	retention and	fees and
		and facility	termination	temporary
		closure costs	costs	labor costs	Total
		$	$	$	$
Fiscal 2016
Costs incurred and charged to expense		10,300	-	483	10,783
Cash payments		-	-	(483)	(483)
Non-cash adjustments		(10,300)	-	-	(10,300)
	Balance payable, October 1, 2016	-	-	-	-

Costs incurred and charged to expense		1,222	2,763	3,558	7,543
Cash payments		-	(694)	(1,901)	(2,595)
Non-cash adjustments		(1,222)	(266)	-	(1,488)
	Balance payable, December 31, 2016⁽¹⁾	-	1,803	1,657	3,460

Fiscal 2017
Costs incurred and charged to expense		4,095	3,478	9,710	17,283
Cash payments		(3,581)	(2,578)	(1,774)	(7,933)
Non-cash adjustments		(714)	276	-	(438)
	Balance payable (receivable), April 1, 2017⁽¹⁾	(200)	2,979	9,593	12,372

Costs incurred and charged to expense		262	2,550	4,876	7,688
Cash payments		(262)	(2,685)	(9,538)	(12,485)
Non-cash adjustments		-	51	-	51
	Balance payable (receivable), July 1, 2017⁽¹⁾	(200)	2,895	4,931	7,626

Costs incurred and charged to expense		5,754	3,284	1,218	10,256
Cash payments		-	(2,061)	(5,964)	(8,025)
Non-cash adjustments		(5,754)	240	-	(5,514)
	Balance payable (receivable), September 30, 2017⁽¹⁾	(200)	4,358	185	4,343

Balance payable was included in accounts payable and accrued liabilities and balance receivable was included in accounts receivable on the consolidated balance sheets.

(a) Asset impairments and facility closure costs

For fiscal 2016, represents asset impairment losses of $10.3 million recorded in the third quarter and $1.2 million recorded in the fourth quarter related to the closures of the San Bernardino and Heuvelton facilities, respectively.

For fiscal 2017, represents an additional asset impairment loss of $3.7 million recorded in the first quarter on the disposal of the San Bernardino assets, which included $3.2 million paid for the early buyout of the San Bernardino equipment leases. In exchange for the San Bernardino assets, the facility landlord agreed to release the Company from its remaining property lease obligation and to pay proceeds of $0.2 million on December 31, 2017. Facility closure costs reflect $0.4 million incurred by the Company for rent and maintenance of the San Bernardino facility prior to its disposal to the landlord.

In addition, represents asset impairment losses recorded in the third quarter of 2017 related to the exit from flexible resealable pouch and nutrition bar product lines and operations as described above.

(b) Employee recruitment, retention and termination costs

Represents third-party recruiting fees incurred to identify and retain new employees; reimbursement of relocation costs for new employees; retention and signing bonuses accrued for certain existing and new employees; and severance benefits, net of forfeitures of stock-based awards, and legal costs related to employee terminations. Some employee termination costs will be paid out in periods after termination. Retention bonuses will be paid out to employees who remain employed by the Company through specified retention dates. Certain employees will be entitled to pro-rata payouts of their retention bonuses if their employment terminates earlier than their retention payment date.

Represents the cost for third-party consultants and temporary labor engaged to support the design and implementation of the Value Creation Plan. In addition, consulting fees incurred in the third quarter of 2016 were related to external financial and legal advisors engaged to review the Company’s operating plan and evaluate a range of strategic and financial actions that the Company could take to maximize shareholder value, which concluded with the strategic partnership with Oaktree.

For the quarter and three quarters ended September 30, 2017, costs incurred and charged to expense were recorded in the consolidated statement of operations as follows:

	Quarter ended		Three quarters ended
	September 30, 2017	October 1, 2016	September 30, 2017	October 1, 2016
	$	$	$	$
Cost of goods sold⁽¹⁾	1,287	-	1,921	-
Selling, general and administrative expenses⁽²⁾	2,400	483	20,839	483
Other expense⁽³⁾	6,569	10,300	12,467	10,300
	10,256	10,783	35,227	10,783

(1) Inventory write-downs and facility closure costs recorded in cost of goods sold were allocated to the Consumer Products operating segment.

(2) Consulting fees and temporary labor costs, and employee recruitment, relocation and retention costs recorded in selling, general and administrative expenses were allocated to Corporate Services.

(3) Asset impairment and employee termination costs recorded in other expense were not allocated to the Company’s operating segments or Corporate Services.

The Company estimates third-party consulting and employee recruitment, retention and termination costs related to the Value Creation Plan to be incurred and expensed during the fourth quarter of fiscal 2017 will be approximately $10 million, which includes approximately $8.0 million related to the early termination of the flexible resealable pouch equipment leases that was paid on closing of the asset sale transaction. This estimate does not include currently unforeseen asset impairment charges or employee-related costs that may arise from future actions taken under the Value Creation Plan.