Business Acquisitions

12 Months Ended

Jan. 02, 2016

Business Combinations [Abstract]

Business Combination Disclosure Text Block

2. Business Acquisitions

Sunrise Holdings (Delaware), Inc.

On October 9, 2015, the Company completed the Sunrise Acquisition. Sunrise is a processor of conventional and organic individually quick frozen (“IQF”) fruit in the U.S. and Mexico.The acquisition of Sunrise has been accounted for as a business combination under the acquisition method of accounting. The results of Sunrise have been included in the Company’s consolidated financial statements since the date of acquisition and are reported in the Consumer Products operating segment. The acquisition of Sunrise is aligned with the Company’s strategic focus on healthy and organic foods.

Total consideration for the Sunrise Acquisition was $472.7 million in cash paid as at the acquisition date, which included the repayment of all outstanding obligations under Sunrise’s senior credit facility in the amount of $171.5 million. In addition, the total consideration included $23.0 million paid by the Company to the holders of Sunrise stock options. As all outstanding Sunrise stock options vested upon the consummation of the Sunrise Acquisition, pursuant to the terms of Sunrise’s pre-existing stock option agreements, the cash consideration paid to the optionholders has been attributed to services prior to the Sunrise Acquisition and included as a component of the purchase price. The total consideration also included $20.9 million paid by the Company to settle acquisition-related transaction costs incurred by Sunrise in connection with the Sunrise Acquisition. As none of these costs were incurred by Sunrise on behalf of the Company, the cash consideration paid to settle these costs has been included as a component of the purchase price.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as at the acquisition date.The following amounts recognized for the assets acquired and liabilities assumed are provisional and subject to change: (i) amounts for working capital pending final evaluation of certain pre-acquisition contingencies; (ii) amounts for property, plant and equipment, and intangible assets pending final validation of the inputs and assumptions used in the valuation analysis; (iii) amounts for income tax assets and liabilities pending finalization of estimates and assumptions in respect of certain tax implications of the Sunrise Acquisition and filing of Sunrise’s pre-acquisition tax returns; and (iv) amount of goodwill pending the completion of the valuations of assets acquired and liabilities assumed. The Company expects to finalize these amounts no later than one year from the acquisition date.

	$
Cash and cash equivalents	1,728
Accounts receivable(1)	26,090
Inventories(2)	124,829
Income taxes recoverable	12,025
Other current assets	3,982
Property, plant and equipment(3)	46,068
Intangible assets(4)	170,000
Accounts payable and accrued liabilities	(24,169)
Long-term debt, including current portion	(7,620)
Deferred income taxes, net	(75,193)
Net identifiable assets acquired	277,740
Goodwill(5)	196,709
Non-controlling interest(6)	(1,781)
Net assets acquired	472,668

(1) The gross amount of accounts receivable acquired was $26.2 million, of which the Company expects $0.2 million will be uncollectible.

(2) Includes an estimated fair value adjustment to inventory of $19.0 million.

(3) Includes an estimated fair value adjustment to property, plant and equipment of $3.7 million.

(4) The identified intangible assets relate to customer relationships in existence at the acquisition date between Sunrise and major U.S. retail and foodservice customers. The customer relationships intangible assets will be amortized over an estimated weighted-average useful life of approximately 23 years. The estimated fair value of the intangible asset was determined using a discounted cash flow analysis (income approach), which applied a risk-adjusted discount rate of approximately 12.0%.

(5)Goodwill is calculated as the difference between the acquisition-date fair values of the total consideration and the net assets acquired. The total amount of goodwill has been assigned to the Consumer Products operating segment and is not expected to be deductible for tax purposes. The goodwill recognized is attributable to: (i) cost savings, operating synergies, and other benefits expected to result from combining the operations of Sunrise with those of the Company; (ii) the value of longer-term growth prospects in the private label frozen fruit market; (iii) the value of acquiring the current capabilities and low-cost position of the existing Sunrise business (i.e., the higher rate of return on the assembled net assets versus acquiring all of the net assets separately); and (iv) the value of Sunrise’s assembled workforce.

(6) Represents the estimated fair value of the non-controlling interest in Sunrise’s 75%-owned Mexican subsidiary.

Niagara Natural Fruit Snack Company Inc.

On August 11, 2015, the Company acquired the net operating assets of Niagara Natural Fruit Snack Company Inc. (“Niagara Natural”). Niagara Natural is a manufacturer of all-natural fruit snacks located in the Niagara Region of Ontario. The acquisition of the net operating assets of Niagara Natural has been accounted for as a business combination under the acquisition method of accounting. The results of Niagara Natural have been included in the Company’s consolidated financial statements since the date of acquisition and are reported in the Consumer Products operating segment.

The following table summarizes the preliminary fair values of the consideration transferred as at the acquisition date:

	$
Cash	6,475
Preliminary working capital adjustment	237
Contingent consideration(1)	2,330
Total consideration transferred	9,042

(1)The Company may pay the owners of Niagara Natural an additional amount of up to approximately $2.8 million over a period of two years subject to adjustment based on certain performance targets. The fair value of the contingent consideration was determined to be $2.3 million as of the acquisition date.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as at the acquisition date, which are subject to change pending finalization of the working capital adjustment and valuation of tangible and intangible assets. The Company expects to finalize these amounts no later than one year from the acquisition date.

	$
Current assets	2,220
Machinery and equipment	3,414
Intangible assets(1)	2,459
Current liabilities	(687)
Net identifiable assets acquired	7,406
Goodwill(2)	1,636
Net assets acquired	9,042

(1)Intangible assets comprise customer relationships and non-competition arrangements, which will be amortized over an estimated weighted-average useful life of approximately 19 years.

(2) The total amount of goodwill has been assigned to the Consumer Products operating segment.

Citrusource, LLC

On March 2, 2015, the Company acquired 100% of the issued and outstanding units of Citrusource, LLC (“Citrusource”), a producer of premium not-from-concentrate private label organic and conventional orange juice and citrus products in the U.S. The acquisition of Citrusource has been accounted for as a business combination under the acquisition method of accounting. The results of Citrusource have been included in the Company’s consolidated financial statements since the date of acquisition and are reported in the Consumer Products operating segment. The acquisition of Citrusource aligns with the Company’s strategy of growing its value-added consumer products portfolio and leveraging its integrated operating platform.

The following table summarizes the fair values of the consideration transferred as at the acquisition date:

	Provisional		Final
	Amounts		Amounts
	Recognized		Recognized
	as at the	Measurement	as at the
	Acquisition	Period	Acquisition
	Date	Adjustments(1)	Date
	$	$	$
Cash(2)	13,300	-	13,300
Working capital adjustment(3)	(265)	(54)	(319)
Settlement of pre-existing relationship(4)	749	-	749
Contingent consideration(5)	20,000	(2,000)	18,000
Total consideration transferred	33,784	(2,054)	31,730

(1)The measurement period adjustments reflect the final determination of net working capital as at the acquisition date and the refinement of inputs and assumptions used in contingent consideration valuation analysis that reflect facts and circumstances existing as at the acquisition date. These adjustments did not have a significant impact on the Company’s consolidated results of operations.

(2) Represents upfront cash consideration paid as at the acquisition date.

(3)Determined based on net working capital as at the acquisition date relative a pre-determined target level.

(4) Prior to the date of acquisition, the Company had a pre-existing relationship to supply Citrusource with organic citrus raw materials. As at the acquisition date, the Company had accounts receivable owing from Citrusource of $0.7 million related to product delivered prior to the acquisition date. No gain or loss was recognized by the Company on the effective settlement of this accounts receivable as at the acquisition date.

(5)The contingent consideration arrangement with the former unitholders of Citrusource comprises two components: (i) deferred consideration calculated based on a seven-times multiple of the incremental growth in Citrusource’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) in fiscal year 2015 versus EBITDA for fiscal year 2014; and (ii) an earn-out calculated based on 25% of the incremental growth in the sum of Citrusource’s EBITDA and the EBITDA of the Company’s San Bernardino, California, juice production facility (the “Combined EBITDA”) in each of fiscal years 2016, 2017 and 2018 versus the Combined EBITDA for fiscal year 2015. There are no upper limits to the amount of each of the components. The fair value measurement of the contingent consideration arrangement was determined to be approximately $18.0 million as at the acquisition date, based on a probability-weighted present value analysis, of which approximately $15.0 million is related to the deferred consideration and approximately $3.0 million is related to the earn-out. The deferred consideration is payable in four equal annual installments commencing in 2016. Of the total contingent consideration obligation, $4.0 million is included in current portion of long-term liabilities and $11.0 million is included in long-term liabilities on the consolidated balance sheet. The fair value of the contingent consideration arrangement is based on significant level 3 unobservable inputs, including the following factors: (i) estimated range of EBITDA values in each of the earn-out periods; and (ii) the probability-weighting applied to each of the EBITDA values within the estimated range for each earn-out period. The resultant probability-weighted EBITDA values for each earn-out period were discounted at a credit risk-adjusted discount rate of approximately 3.5%.

The following table summarizes thefair values of the assets acquired and liabilities assumed as at the acquisition date.

	Provisional		Final
	Amounts		Amounts
	Recognized		Recognized
	as at the	Measurement	as at the
	Acquisition	Period	Acquisition
	Date	Adjustments(1)	Date
	$	$	$
Accounts receivable	2,405	(54)	2,351
Inventories	1,745	-	1,745
Machinery and equipment	164	-	164
Customer relationships intangible asset(2)	14,000	-	14,000
Accounts payable and accrued liabilities	(1,666)	-	(1,666)
Net identifiable assets acquired	16,648	(54)	16,594
Goodwill(3)	17,136	(2,000)	15,136
Net assets acquired	33,784	(2,054)	31,730

(1)The measurement period adjustments reflect the final determination of net working capital and the decrease in the total fair value of the consideration transferred as at the acquisition date.

(2)The customer relationships intangible asset was recognized based on contracts in existence at the acquisition date between Citrusource and major U.S. retail customers. This intangible asset will be amortized over an estimated useful life of approximately 12 years. The estimated fair value of the intangible asset was determined using a discounted cash flow analysis (income approach), which applied a risk-adjusted discount rate of approximately 15.0%.

(3)Goodwill is calculated as the difference between the acquisition-date fair values of the consideration transferred and net assets acquired. The total amount of goodwill has been assigned to the Consumer Products operating segment and is expected to be fully deductible for tax purposes. The goodwill recognized is attributable to: (i) operating synergies expected to result from combining the operations of Citrusource with the Company’s vertically-integrated juice production and supply chain capabilities; and (ii) opportunities to leverage the business experience of Citrusource’s management team to grow the Company’s existing citrus beverage program.

Acquisition-Related Transaction Costs

The Company incurred $7.4 million of transaction costs directly related to the acquisitions of Sunrise, Niagara Natural and Citrusource. These costs have been expensed as incurred and are included in other expense, net on the statement of operations for the year ended January 2, 2016.

Revenue and Earnings

Revenues of Sunrise, Niagara Natural and Citrusourcefor the periods from the respective acquisition dates to January 2, 2016 were $83.6 million, in the aggregate, and earnings, net of income taxes, were approximately $1.0 million, in the aggregate, which included the effects of the acquisition accounting adjustments.

Unaudited Pro Forma Consolidated Results of Operations

The following table presentsunaudited pro forma consolidated results of operations for years ended January 2, 2016 and January 3, 2015, as if the acquisitions of Sunrise, Niagara Natural and Citrusource had occurred as of December 29, 2013.

		January 2, 2016	January 3, 2015
		$	$
Pro forma revenues		1,391,637	1,385,473
Pro forma loss attributable to SunOpta Inc.		(24,337)	(1,448)
Pro forma loss per share:
	Basic	(0.29)	(0.02)
	Diluted	(0.29)	(0.02)

The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on historical financial information of the Company, Sunrise, Niagara Natural and Citrusource. Except to the extent realized, the unaudited pro forma information does not reflect any operating synergies or other benefits that the Company may achieve as a result of these acquisitions, or the costs that may be necessary to achieve these operating synergies and other benefits. The unaudited pro forma information reflects primarily the following adjustments:

• elimination of historical intangible asset amortization expense of Sunrise;

• additional amortization expense related to the fair value of the identifiable intangible assets acquired;

• additional depreciation expense related to fair value adjustments to property, plant and equipment acquired;

• additional interest expense associated with the debt financing obtained by the Company in connection with the Sunrise Acquisition, including the amortization of debt issuance costs incurred and expected to be incurred over the estimated term of the financing;

• additional interest costs associated with an increase in borrowings under the Company’s North American credit facilities to fund a portion of the Sunrise Acquisition, and to fund the Niagara Natural and Citrusource upfront payments;

• exclusion from unaudited pro forma earnings for the year endedJanuary 2, 2016 of acquisition-related transaction costs incurred by Sunrise and stock-based compensation costs recognized by Sunrise on the acceleration of vesting of stock options upon the consummation of the Sunrise Acquisition as these costs have been included as a component of the purchase price for Sunrise;

• exclusion from unaudited pro forma earnings for the year endedJanuary 2, 2016 of the acquisition accounting adjustment related to Sunrise’s inventory that was sold subsequent to the acquisition date of $4.0 million and the exclusion of$7.4 million of transaction costs related to the acquisitions of Sunrise, Niagara Naturals and Citrusource, and the inclusion of those costs in unaudited pro forma earnings for the year endedJanuary 3, 2015; and

• consequential tax effects of the preceding adjustments.

In addition, the unaudited pro forma basic and diluted loss per share is based on the basic and diluted weighted-average number of common shares outstanding of the Company after giving effect to the issuance of 16,670,000 common shares in connection with the financing of the Sunrise Acquisition (see note 12), as if the share issuance had occurred on December 29, 2013.

The unaudited pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisitions of Sunrise, Niagara Natural and Citrusource been completed on December 29, 2013. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company.

Bulgarian Processing Operation

On December 31, 2012, the Company acquired a grains handling and processing facility located in Silistra, Bulgaria and operated as the Organic Land Corporation OOD (“OLC”). The facility is located near a protected and chemical-free agricultural area, which produces organic products including sunflower, flax seed, corn, barley and soybeans. This acquisition diversified the Company’s organic sunflower processing operations and should allow it to expand its capabilities into the other organic products grown in the region following the expansion of production capabilities. The Company had been sourcing non-genetically modified sunflower kernel from OLC from late 2011 through to the date of acquisition. Since the acquisition date, the results of operations of OLC have been included in the Global Ingredients reportable segment.

This transaction has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the fair values of the assets acquired and liabilities assumed, as well as the total consideration transferred to effect the acquisition of OLC as of the acquisition date.

	$
Cash and cash equivalents	70
Accounts receivables	378
Inventories	55
Other current assets	21
Property, plant and equipment	4,067
Accounts payable and accrued liabilities	(228)
Long-term debt(1)	(465)
Total cash consideration	3,898

(1)Subsequent to the acquisition date, the Company fully repaid OLC’s existing bank loans.