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EX-32 - EXHIBIT 32 - SunOpta Inc.exhibit32.htm
EX-31 - EXHIBIT 31 - SunOpta Inc.exhibit31.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2011

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission file number: 001-34198

SUNOPTA INC.
(Exact name of registrant as specified in its charter)

CANADA Not Applicable
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
2838 Bovaird Drive West  
Brampton, Ontario L7A 0H2, Canada (905) 455-1990
(Address of principal executive offices) (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]      No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [   ]      No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

  Large accelerated filer [   ] Accelerated filer [X]
  Non-accelerated filer [   ] Smaller reporting company [   ]
  (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]      No [X]

The number of the registrant’s common shares outstanding as of August 2, 2011 was 65,691,007.


SUNOPTA INC.
FORM 10-Q
For the quarterly period ended July 2, 2011
TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements  
Consolidated Statements of Operations for the quarter and two quarters ended July 2, 2011 and July 3, 2010 4
Consolidated Statements of Comprehensive Earnings (Loss) for the quarter and two quarters ended July 2, 2011 and July 3, 2010 6
  Consolidated Balance Sheets as at July 2, 2011 and January 1, 2011 8
Consolidated Statements of Shareholders’ Equity as at and for the two quarters ended July 2, 2011 and July 3, 2010 9
Consolidated Statements of Cash Flows for the quarter and two quarters ended July 2, 2011 and July 3, 2010 10
  Notes to Consolidated Financial Statements 12
     
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 35
Item 3 Quantitative and Qualitative Disclosures about Market Risk 61
Item 4 Controls and Procedures 63
     
     
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 64
Item 1A Risk Factors 64
Item 6 Exhibits 64

All financial information is expressed in United States Dollars. The closing rate of exchange on August 2, 2011 was CDN $1 = U.S. $1.0414.

Forward-Looking Statements

This quarterly report of SunOpta Inc. (the “Company”) for the quarterly period ended July 2, 2011 contains forward-looking statements which are based on our current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as “anticipate,” “estimate,” “intend,” “project,” “potential,” “continue,” “believe,” “expect,” “could,” “would,” “should,” “might,” “plan,” “will,” “may,” the negatives of such terms, and words and phrases of similar impact and include, but are not limited to references to possible operational consolidation, reduction of non-core assets and operations, business strategies, plant and production capacities, revenue generation potential, competitive strengths, goals, capital expenditure plans, business and operational growth and expansion plans, anticipated operating margins and operating income increases, gains or losses associated with business transactions, cost reductions, rationalization and improved efficiency initiatives, potential new product offerings, and references to the future growth of the business and global markets for the Company’s products. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on certain assumptions and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments as well as other factors that we believe are appropriate in the circumstances.

Whether actual results and developments will agree with our expectations and predictions is subject to many risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from our expectations and predictions. We believe these factors include, but are not limited to, the following:

  • we have continuing indemnification obligations relating to our recent dispositions;
SUNOPTA INC. 1 July 2, 2011 10-Q

  • our credit agreement restricts how we may operate our business, and our business may be materially and adversely affected if these restrictions prevent us from implementing our business plan;
  • our inability to meet the covenants of our credit facilities could materially and adversely affect our business;
  • we may require additional capital to maintain current growth rates, which may not be available on favourable terms or at all;
  • our customers generally are not obligated to continue purchasing products from us;
  • consumer preferences for natural and organic food products are difficult to predict and may change;
  • we operate in a highly competitive industry;
  • an interruption at one of our manufacturing facilities could negatively affect our business;
  • if we lose the services of our key management, our business could suffer;
  • if we do not manage our supply chain effectively, our operating results may be adversely affected;
  • volatility in the prices of raw materials, packaging and energy could increase our cost of sales and reduce our gross margins;
  • climate change legislation could have an impact on our financial condition and consolidated results of operations;
  • adverse weather conditions could impose costs on our business;
  • the exercise of stock options, participation in our employee stock purchase plan and issuance of additional securities could dilute the value of our common shares;
  • impairment charges in goodwill or other intangible assets could adversely impact our financial condition and consolidated results of operations;
  • technological innovation by our competitors could make our food products less competitive;
  • we rely on protection of our intellectual property and proprietary rights;
  • we are subject to substantial environmental regulation and policies;
  • SunOpta Foods is subject to significant food and health regulations;
  • our operations are influenced by agricultural policies;
  • product liability suits, recalls and threatened market withdrawals, could have a material adverse effect on our business;
  • litigation and regulatory enforcement concerning marketing and labeling of our food products could negatively affect our business;
  • our lack of management and operational control over Mascoma may limit our ability to protect or increase the value of our interest in Mascoma;
  • loss of a key customer could materially reduce revenues and earnings;
  • fluctuations in exchange rates, interest rates and certain commodities could adversely affect our results of operations, financial condition and liquidity;
  • we may not be able to effectively manage our growth and integrate acquired companies; and
  • our operating results and share price are subject to significant volatility.

Consequently all forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that our actual results or the developments we anticipate will be realized. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.

SUNOPTA INC. 2 July 2, 2011 10-Q

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

Consolidated Financial Statements

SunOpta Inc.

For the quarter and two quarters ended July 2, 2011 and July 3, 2010

(Unaudited)

SUNOPTA INC. 3 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Statements of Operations
For the quarter ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

    Quarter ended     Quarter ended  
    July 2, 2011     July 3, 2010  
             

Revenues

$  290,757   $  233,885  

 

           

Cost of goods sold

  257,055     196,942  

 

           

Gross profit

  33,702     36,943  

 

           

Selling, general and administrative expenses

  24,330     24,224  

Intangible asset amortization

  1,393     1,144  

Other (income) expense, net (note 12)

  (3,189 )   1,044  

Foreign exchange gain

  (57 )   (319 )

 

           

Earnings from continuing operations before the following

  11,225     10,850  

 

           

Interest expense, net

  2,520     2,567  

 

           

Earnings from continuing operations before income taxes

  8,705     8,283  

 

           

Provision for income taxes

  3,672     1,854  

 

           

Earnings from continuing operations

  5,033     6,429  

 

           

Discontinued operations (note 3)

           

Earnings from discontinued operations, net of income taxes

  -     414  

Gain on sale of discontinued operations, net of income taxes

  -     13,809  
             

Earnings from discontinued operations, net of taxes

  -     14,223  
             

Earnings

  5,033     20,652  
             

Earnings attributable to non-controlling interests

  632     186  
             

Earnings attributable to SunOpta Inc.

$  4,401   $  20,466  
             

Earnings per share - basic (note 6)

           

-from continuing operations

$  0.07   $  0.09  

-from discontinued operations

  -     0.22  
  $  0.07   $  0.31  

Earnings per share - diluted (note 6)

           

-from continuing operations

$  0.07   $  0.09  

-from discontinued operations

  -     0.22  
  $  0.07   $  0.31  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 4 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Statements of Operations
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

    Two quarters ended     Two quarters ended  
    July 2, 2011     July 3, 2010  
             

Revenues

$  551,680   $  450,634  

 

           

Cost of goods sold

  482,423     378,215  

 

           

Gross profit

  69,257     72,419  

 

           

Selling, general and administrative expenses

  47,337     50,020  

Intangible asset amortization

  2,778     2,319  

Other (income) expense, net (note 12)

  (2,827 )   1,359  

Foreign exchange loss (gain)

  78     (1,436 )

 

           

Earnings from continuing operations before the following

  21,891     20,157  

 

           

Interest expense, net

  4,504     5,589  

 

           

Earnings from continuing operations before income taxes

  17,387     14,568  

 

           

Provision for income taxes

  6,681     3,930  

 

           

Earnings from continuing operations

  10,706     10,638  

 

           

Discontinued operations (note 3)

           

Earnings from discontinued operations, net of income taxes

  -     846  

Gain on sale of discontinued operations, net of income taxes

  -     13,809  
             

Earnings from discontinued operations, net of income taxes

  -     14,655  
             

Earnings

  10,706     25,293  
             

Earnings attributable to non-controlling interests

  1,224     214  
             

Earnings attributable to SunOpta Inc.

$  9,482   $  25,079  
             

Earnings per share – basic (note 6)

           

-from continuing operations

$  0.14   $  0.16  

-from discontinued operations

  -     0.23  
  $  0.14   $  0.39  

Earnings per share – diluted (note 6)

           

-from continuing operations

$  0.14   $  0.16  

-from discontinued operations

  -     0.22  
  $  0.14   $  0.38  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 5 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Statements of Comprehensive Earnings (Loss)
For the quarter ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

    Quarter ended     Quarter ended  
    July 2, 2011     July 3, 2010  
             

Earnings from continuing operations

$  5,033   $  6,429  

Earnings from discontinued operations, net of income taxes

  -     14,223  

 

  5,033     20,652  

 

           

Currency translation adjustment

  1,439     (4,855 )

Change in fair value of interest rate swap, net of income taxes

  103     20  

Other comprehensive earnings (loss), net of income taxes

  1,542     (4,835 )

 

           

Comprehensive earnings

  6,575     15,817  

 

           

Comprehensive earnings (loss) attributable to non-controlling interests

  740     (258 )
             
  $  5,835   $  16,075  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 6 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Statements of Comprehensive Earnings (Loss)
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

    Two quarters ended     Two quarters ended  
    July 2, 2011     July 3, 2010  
             

Earnings from continuing operations

$  10,706   $  10,638  

Earnings from discontinued operations, net of income taxes

  -     14,655  

 

  10,706     25,293  

 

           

Currency translation adjustment

  3,497     (4,165 )

Change in fair value of interest rate swap, net of taxes

  213     140  

Other comprehensive earnings (loss), net of income taxes

  3,710     (4,025 )

 

           

Comprehensive earnings

  14,416     21,268  

 

           

Comprehensive earnings (loss) attributable to non-controlling interests

1,461 (457 )

 

           

Comprehensive earnings attributable to SunOpta Inc.

$  12,955   $  21,725  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 7 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Balance Sheets
As at July 2, 2011 and January 1, 2011
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

    July 2, 2011     January 1, 2011  
             
Assets         (see note 3)
             
Current assets            

Cash and cash equivalents (note 13)

$  5,573   $  2,643  

Accounts receivable

  116,116     98,875  

Inventories (note 4)

  208,946     200,278  

Prepaid expenses and other current assets

  24,899     30,041  

Deferred income taxes

  624     870  
    356,158     332,707  
             
Investments (note 3)   33,345     33,345  
Property, plant and equipment   119,186     116,249  
Goodwill   49,251     48,558  
Intangible assets   59,300     60,200  
Deferred income taxes   11,940     11,889  
Other assets   2,219     2,930  
Non-current assets held for sale (note 3)   -     3,806  
             
  $  631,399   $  609,684  
             
Liabilities            
             
Current liabilities            

Bank indebtedness (note 7)

$  107,258   $  75,910  

Accounts payable and accrued liabilities

  105,814     124,031  

Customer and other deposits

  2,076     2,858  

Income taxes payable

  1,682     973  

Other current liabilities

  1,582     7,674  

Current portion of long-term debt (note 8)

  22,826     22,247  

Current portion of long-term liabilities

  582     571  
    241,820     234,264  
             
Long-term debt (note 8)   37,689     42,735  
Long-term liabilities   5,920     6,642  
Deferred income taxes   24,591     20,808  
    310,020     304,449  
             
             
Equity            
SunOpta Inc. shareholders’ equity            

Capital Stock (note 5)

  181,489     180,661  

65,683,807 common shares (January 1, 2011 - 65,500,091)

           

Additional paid in capital (note 5)

  13,236     12,336  

Retained earnings

  104,694     95,212  

Accumulated other comprehensive income

  6,306     2,833  
    305,725     291,042  
Non-controlling interests   15,654     14,193  
Total equity   321,379     305,235  
             
  $  631,399   $  609,684  
Commitments and contingencies (note 10)            
Subsequent events (note 16)            

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 8 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Statements of Shareholders’ Equity
As at and for the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

                      Accumulated              
          Additional           other     Non-        
    Capital     paid in     Retained     comprehensive     controlling        
    stock     capital     earnings     income     interests     Total  
  $   $   $   $   $   $  
                                     

Balance at January 1, 2011

  180,661     12,336     95,212     2,833     14,193     305,235  

 

                                   

Employee share purchase plan

  339     -     -     -     -     339  

Exercise of options

  489     (81 )   -     -     -     408  

Stock based compensation

  -     981     -     -     -     981  

Earnings from continuing operations

  -     -     9,482     -     1,224     10,706  

Currency translation adjustment

  -     -     -     3,332     165     3,497  

Change in fair value of interest rate swap, net of income taxes

- - - 141 72 213

 

                                   

Balance at July 2, 2011

  181,489     13,236     104,694     6,306     15,654     321,379  

                      Accumulated              
          Additional           other     Non-        
    Capital     paid in     Retained     comprehensive     controlling        
    stock     capital     earnings     income     interests     Total  
  $   $   $   $   $   $  
                                     

Balance at December 31, 2009

  178,694     7,934     34,146     12,079     13,658     246,511  

 

                                   

Employee share purchase plan and compensation grants

427 - - - - 427

Exercise of options

  97     (12 )   -     -     -     85  

Issuance of warrants (note 5)

  -     2,163     -     -     -     2,163  

Stock based compensation

  -     979     -     -     -     979  

Earnings from continuing operations

  -     -     10,424     -     214     10,638  

Earnings from discontinued operations, net of income taxes

- - 14,655 (7,772 ) - 6,883

Currency translation adjustment

  -     -     -     (3,447 )   (718 )   (4,165 )

Non-controlling interest contributions

  -     -     -     -     243     243  

Change in fair value of interest rate swap, net of income taxes

- - - 93 47 140

 

                                   

Balance at July 3, 2010

  179,218     11,064     59,225     953     13,444     263,904  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 9 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Statements of Cash Flows
For the quarter ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

    Quarter ended     Quarter ended  
    July 2, 2011     July 3, 2010  
             

Cash provided by (used in)

           
             

Operating activities

           

Earnings

$  5,033   $  20,652  

Earnings from discontinued operations

  -     14,223  

Earnings from continuing operations

  5,033     6,429  
             

Items not affecting cash

           

Depreciation and amortization

  4,863     3,912  

Unrealized loss (gain) on foreign exchange

  246     (326 )

Deferred income taxes

  2,212     482  

Stock-based compensation

  552     800  

Gain on sale of property, plant and equipment

  (3,824 )   -  

Unrealized (gain) loss on derivative instruments

  (233 )   955  

Other

  248     763  

Changes in non-cash working capital (note 9)

  11,384     5,547  

Net cash flows from operations - continuing operations

  20,481     18,562  

Net cash flows from operations - discontinued operations

  -     (2,552 )

 

  20,481     16,010  

Investing activities

           

Purchases of property, plant and equipment

  (5,312 )   (2,880 )

Proceeds from sale of property, plant and equipment

  2,773     -  

Payment of deferred purchase consideration

  -     (221 )

Purchases of patents, trademarks and other intangible assets

  (9 )   (333 )

Other

  (441 )   (131 )

Cash flows from investing activities - continuing operations

  (2,989 )   (3,565 )

Cash flows from investing activities - discontinued operations

  -     65,156  

 

  (2,989 )   61,591  

Financing activities

           

Decrease in line of credit facilities

  (14,124 )   (58,182 )

Borrowings under long-term debt

  -     247  

Proceeds from the issuance of common shares

  534     305  

Repayment of long-term debt

  (4,722 )   (3,067 )

Other

  632     (55 )

Cash flows from financing activities - continuing operations

  (17,680 )   (60,752 )

 

           

Foreign exchange gain (loss) on cash held in a foreign currency

  41     (834 )

 

           

(Decrease) increase in cash and cash equivalents during the period

  (147 )   16,015  

 

           

Discontinued operations cash activity included above:

           

Add: Balance included at beginning of period

  -     20,135  

Less: Balance included at end of period

  -     (17,974 )

 

           

Cash and cash equivalents - beginning of the period

  5,720     2,205  
             

Cash and cash equivalents - end of the period

  5,573     20,381  
             

Supplemental cash flow information (notes 9 and 13)

           

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 10 July 2, 2011 10-Q


SunOpta Inc.
Consolidated Statements of Cash Flows
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

    Two quarters ended     Two quarters ended  
    July 2, 2011     July 3, 2010  
             

Cash provided by (used in)

           
             

Operating activities

           

Earnings

$  10,706   $  25,293  

Earnings from discontinued operations

  -     14,655  

Earnings from continuing operations

  10,706     10,638  
             

Items not affecting cash

           

Depreciation and amortization

  9,696     8,240  

Unrealized loss (gain) on foreign exchange

  969     (1,418 )

Deferred income taxes

  3,978     1,648  

Stock-based compensation

  981     1,420  

Gain on sale of property, plant and equipment

  (3,824 )   -  

Unrealized (gain) loss on derivative instruments

  (3,918 )   1,009  

Other

  (66 )   1,248  

Changes in non-cash working capital (note 9)

  (31,944 )   (17,807 )

Net cash flows from operations - continuing operations

  (13,422 )   4,978  

Net cash flows from operations - discontinued operations

  -     (3,303 )

 

  (13,422 )   1,675  

Investing activities

           

Purchases of property, plant and equipment

  (9,221 )   (8,831 )

Proceeds from sale of property, plant and equipment

  2,773     -  

Payment of deferred purchase consideration

  -     (721 )

Purchases of patents, trademarks and other intangible assets

  (90 )   (363 )

Other

  (441 )   165  

Cash from investing activities - continuing operations

  (6,979 )   (9,750 )

Cash from investing activities - discontinued operations

  -     64,783  

 

  (6,979 )   55,033  

Financing activities

           

Increase (decrease) in line of credit facilities

  28,427     (34,796 )

Borrowings under long-term debt

  37     247  

Proceeds from the issuance of common shares

  747     512  

Repayment of long-term debt

  (6,726 )   (4,169 )

Financing costs

  (120 )   -  

Other

  755     (243 )

Cash from financing activities - continuing operations

  23,120     (38,449 )

 

           

Foreign exchange gain (loss) on cash held in a foreign currency

  211     (627 )

 

           

Increase in cash and cash equivalents during the period

  2,930     17,632  

 

           

Discontinued operations cash activity included above:

           

Add: Balance included at beginning of period

  -     18,971  

Less: Balance included at end of period

  -     (17,974 )
             

Cash and cash equivalents - beginning of the period

  2,643     1,752  
             

Cash and cash equivalents - end of the period

$  5,573   $  20,381  
             

Supplemental cash flow information (notes 9 and 13)

           

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 11 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

1.

Basis of presentation, fiscal year-end and new accounting pronouncements

Basis of presentation

The interim consolidated financial statements of SunOpta Inc. (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with accounting principles generally accepted in the United States of America. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and two quarters ended July 2, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011 or for any other period. For further information, see the Company’s consolidated financial statements, and notes thereto, included in the Annual Report on Form 10-K for the year ended January 1, 2011.

The interim consolidated financial statements include the accounts of the Company and its subsidiaries, and have been prepared on a basis consistent with the financial statements for the year ended January 1, 2011. Intercompany accounts and transactions have been eliminated on consolidation.

Fiscal year-end

The Company’s fiscal year ends on the Saturday closest to December 31, based on a 52 week calendar, wherein every fiscal quarter is comprised of 13 weeks or 91 days. Under our floating year-end methodology, the fiscal 2011 year-end occurs on December 31, 2011 and the quarterly periods for fiscal 2011 end on April 2, July 2 and October 1. The fiscal year of Opta Minerals Inc. (“Opta Minerals”), which is 66.4% owned by the Company, ends on December 31, 2011, and its quarterly periods for fiscal 2011 end on March 31, June 30 and September 30. The consolidated statements of operations, cash flows and balance sheets for the Company in the current quarter include the results of Opta Minerals through June 30, 2011.

Recently issued accounting pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS’s” (“ASU 2011-04”). The amendments in ASU 2011-04 change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company will reflect the nature of these amendments, if any, beginning with the Company’s quarterly report on form 10-Q for the quarterly period ended March 31, 2012. The Company does not anticipate a material impact to the Company’s financial position, results of operations or cash flows as a result of ASU 2011-04.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 requires registrants to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, registrants will be required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. As ASU 2011-05 does not change the items that are currently reported on the Consolidated Statements of Comprehensive Earnings (Loss), the Company does not anticipate a material impact to the Company’s financial position, results of operations or cash flows as a result of ASU 2011-05.

SUNOPTA INC. 12 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

2.

Business acquisitions

During the year ended January 1, 2011, the Company completed two acquisitions, which have been accounted for using the purchase method. The consolidated financial statements include the results of operations from these businesses from the date of acquisition. These business combinations are subject to post-closing adjustments, in accordance with the respective acquisition agreements. These adjustments are expected to be finalized by December 2011.

 

  Dahlgren &     Edner of        

 

  Company, Inc.     Nevada, Inc.     Total  

 

$   $   $  

Net assets acquired

                 

 

                 

Cash

  4,239     -     4,239  

Current assets

  23,231     2,376     25,607  

Property, plant and equipment

  12,402     1,418     13,820  

Goodwill

  15,940     2,730     18,670  

Intangible assets

  11,013     1,823     12,836  

Other assets

  624     -     624  

Current liabilities

  (12,288 )   (449 )   (12,737 )

Deferred income taxes

  (7,670 )   -     (7,670 )

 

  47,491     7,898     55,389  

 

                 

Consideration

                 

 

                 

Cash consideration

  44,000     4,000     48,000  

Due to former shareholders

  2,303     458     2,761  

Contingent consideration

  1,188     3,440     4,628  

 

  47,491     7,898     55,389  

(a)

Dahlgren & Company, Inc.

On November 8, 2010, a wholly-owned subsidiary of the Company acquired 100% of the outstanding shares of Dahlgren & Company, Inc. (“Dahlgren”) for total consideration of $47,491. Included as part of the total consideration was cash of $44,000, contingent consideration of $1,188 based on future earnings targets as defined in the purchase and sale agreement, and a working capital adjustment of $2,303 as a result of working capital exceeding pre-determined targets at the acquisition date. The $2,303 working capital adjustment was paid in cash on January 3, 2011 to the former Dahlgren shareholders. During the quarter ended April 2, 2011, management re-measured the fair value of the contingent consideration, and reduced the fair value of this liability by $290 (note 12).

Intangible assets, consisting of a sales order backlog and customer relationships, acquired in this acquisition are not deductible for tax purposes and are being amortized over the estimated useful lives of these assets. The estimated useful life of the sales order backlog is one year, and the estimated useful life of customer relationships is 12 years.

Dahlgren is an integrated processor and global supplier of confection sunflower seed products including in-shell and kernel products, roasted sunflower and soy nuts, bird food, hybrid seed and other products. Dahlgren serves the snack food, bakery, food ingredients and bird feed industries. Dahlgren’s products are marketed internationally to customers in Europe, Asia, Australia, Canada and South America, as well as in the United States. The results of operations for Dahlgren have been consolidated since the November 8, 2010 acquisition date, and are included in the Grains and Foods Group.

SUNOPTA INC. 13 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)

2. Business acquisitions, continued
   
(b) Edner of Nevada, Inc.

On December 14, 2010, a wholly-owned subsidiary of the Company acquired the operating assets of Edner of Nevada, Inc. (“Edner”) for total consideration of $7,898. Consideration included $4,000 of cash, contingent consideration of $3,440 based on future revenue targets in the asset purchase agreement and a working capital adjustment of $458 as a result of working capital exceeding pre-determined targets at the acquisition date.

Intangible assets consisting of customer relationships acquired in this acquisition are deductible for tax purposes and are being amortized over their estimated useful lives of approximately 9 years. Goodwill acquired in this acquisition is deductible for tax purposes.

Edner produces a variety of nutritious portable foods such as nutrition bars and grains and fruit based snack bars from its 104,000 square foot facility located in Carson City, Nevada. The results of operations of Edner have been consolidated since the December 14, 2010 acquisition date, and are included in the Fruit Group.

(c)

Pro forma data

The following condensed pro-forma consolidated statements of operations reflects the Dahlgren and Edner acquisitions as if they had occurred on January 1, 2010:

    Quarter ended  
    July 2, 2011     July 3, 2010  
  $   $  

Pro-forma revenue

  290,757     261,182  

Pro-forma earnings attributable to SunOpta Inc.

  4,493     22,603  

Pro-forma earnings per share

           

Basic

  0.07     0.35  

Diluted

  0.07     0.34  

    Two quarters ended  
    July 2, 2011     July 3, 2010  
  $   $  

Pro-forma revenue

  551,680     502,512  

Pro-forma earnings attributable to SunOpta Inc.

  9,836     27,345  

Pro-forma earnings per share

           

Basic

  0.15     0.42  

Diluted

  0.15     0.42  

SUNOPTA INC. 14 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

3. Divestitures
   
(a) Divestiture of Assets in the Fruit Group

On June 30, 2011, the Company completed a transaction to sell land and buildings located in Irapuato, Mexico (the “Mexico Land & Building Transaction”) to parties related to Fruvemex Mexicali, S.A. de C.V. (“Fruvemex”). In addition, on April 29, 2011 the Company completed a transaction to sell certain assets related to fruit processing plants located in Mexico to Fruvemex (the “Mexico Processing Assets Transaction”, and together with the Mexico Land & Building Transaction, the “Transactions”). Total cash consideration for the Transactions was $5,650, with $1,000 received in cash upon closing of the applicable Transaction. The remaining consideration of $4,650 is to be received by the Company through instalment payments over the following twelve months. The land, buildings and processing assets sold have been reclassified and are presented as non-current assets held for sale on the consolidated balance sheet as at January 1, 2011. For the quarter and two quarters ended July 2, 2011, the Company recorded a gain of $3,824, before transaction and related costs.

On May 24, 2011, the Company completed the sale of frozen fruit processing equipment located in Salinas, California to Cal Pacific Specialty Foods, LLC (“Cal Pacific”). The assets, which were previously leased to Cal Pacific, were sold for their book value of $1,773, paid in cash on closing the transaction. The frozen fruit processing equipment sold have been reclassified and are presented as non-current assets held for sale on the consolidated balance sheet at January 1, 2011.

(b)

Divestiture of Canadian Food Distribution Business

On June 11, 2010, the Company sold its Canadian Food Distribution assets (“CFD” or the “CFD Transaction”) to UNFI Canada Inc., a wholly-owned subsidiary of United Natural Foods Inc., for cash consideration of Cdn $68,000 (U.S. - $65,809).

The following is a summary of the CFD Transaction, recorded in the quarter and two quarters ended July 3, 2010:

  $  

Cash consideration

  65,809  

Transaction and related costs

  (4,937 )

Net proceeds

  60,872  

Net assets sold

  (51,655 )

Accumulated other comprehensive income related to assets sold

  7,772  

Pre-tax gain on sale

  16,989  

Provision for income taxes

  (3,180 )

Gain on sale of discontinued operations

  13,809  

The gain on sale of discontinued operations has been recorded in discontinued operations on the consolidated statements of operations.

The operating results of the CFD business for the quarter and two quarters ended July 3, 2010, which are included within earnings from discontinued operations, net of income taxes, on the consolidated statement of operations, were as follows:

SUNOPTA INC. 15 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

3.

Divestitures, continued


 

  Quarter ended     Two quarters ended  

 

  July 3, 2010     July 3, 2010  

 

$   $  

 

           

Revenues

  34,130     82,859  

 

           

(Loss) earnings from discontinued operations before taxes

  (523 )   879  

(Recovery of) provision for income taxes

  (157 )   265  

(Loss) earnings from discontinued operations

  (366 )   614  

The assets sold in the CFD Transaction were part of the former Distribution Group segment.

(c)

Divestiture of SunOpta BioProcess Inc.

On August 31, 2010, the Company completed a transaction to sell its ownership interest in SunOpta BioProcess Inc. (“SBI” or the “SBI Transaction”) to Mascoma Canada Inc., a wholly-owned subsidiary of Mascoma Corporation (“Mascoma”). As consideration for selling all the outstanding common shares of SBI, the Company received non-cash consideration through a combination of preferred and common shares, as well as warrants, valued at $50,925. The non-cash consideration includes 11,268,868 series D preferred shares, 3,756,290 common shares and 1,000,000 warrants to purchase common shares of Mascoma. In conjunction with the sale, the Company settled the preferred share liability of SBI with the former SBI preferred shareholders, through the transfer of 4,688,000 of the series D preferred shares received. In addition, as a result of the change in control of SBI, the vesting of previously issued SBI stock options were accelerated, and the 800,000 restricted stock units (“RSU”) were settled in cash at a value of $4.49 per RSU. The fair value of consideration received, net of the settlement to the former SBI preferred shareholders, resulted in a $33,345 investment in Mascoma, which is presented as a non-current asset on the Company’s balance sheet. The investment in Mascoma is accounted for under the cost method of accounting, based on the 19.61% voting interest the Company originally received in Mascoma, and the inability of the Company to exert significant influence over the operations of Mascoma. This transaction is subject to post closing adjustments, in accordance with the share purchase agreement, which are expected to be finalized by August 2011. At July 2, 2011, the Company’s voting position in Mascoma was 19.13%.

The operating results of SBI for the quarter and two quarters ended July 3, 2010, which are included within earnings from discontinued operations, net of income taxes, on the consolidated statement of operations, were as follows:

 

  Quarter ended     Two quarters ended  

 

  July 3, 2010     July 3, 2010  

 

$   $  

 

           

Revenues

  2,052     2,676  

 

           

Earnings from discontinued operations before income taxes

  780     232  

Provision for income taxes

  -     -  

Earnings from discontinued operations

  780     232  

The business sold was part of the former SunOpta BioProcess segment.

SUNOPTA INC. 16 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

4.

Inventories


    July 2, 2011     January 1, 2011  
  $   $  
             

Raw materials and work-in-process

  113,164     98,140  

Finished goods

  80,093     84,529  

Company-owned grain

  20,983     21,897  

Inventory reserves

  (5,294 )   (4,288 )
    208,946     200,278  

5. Capital stock
   
(a) Capital stock

Transactions involving capital stock for the quarter and two quarters ended July 2, 2011 and July 3, 2010 were as follows:

 

  Quarter ended     Quarter ended  

 

  July 2, 2011     July 3, 2010  

 

  Number     Amount     Number     Amount  

 

      $         $  

Balance, beginning of period

  65,539,104     180,881     65,065,907     178,901  

Common shares issued on exercise of options by employees and directors

118,739 438 49,480 97

Common shares issued as part of the Company's employee stock purchase plan

25,964 170 54,944 220

Balance, end of period

  65,683,807     181,489     65,170,331     179,218  

 

  Two quarters ended     Two quarters ended  

 

  July 2, 2011     July 3, 2010  

 

  Number     Amount     Number     Amount  

 

       

  $

         

  $

 

Balance, beginning of period

  65,500,091     180,661     64,982,968     178,694  

Common shares issued on exercise of options by employees and directors

128,739 489 49,480 97

Common shares issued as part of the Company's employee stock purchase plan

54,977 339 135,383 427

Common shares issued to the Company's Chief Executive Officer as part of an award granted February 8, 2007

- - 2,500 -

Balance, end of period

  65,683,807     181,489     65,170,331     179,218  

(b)

Warrants

On February 5, 2010 (the “First Tranche”), and June 11, 2010 (the “Second Tranche”), the Company issued warrants pursuant to an Advisory Services Agreement. A fair value of $441 and $1,722, respectively, was assigned to these warrants using the Black-Scholes option pricing model, and were expensed in full during the quarter of issuance with the offset recorded as an increase to additional paid in capital. The Second Tranche of warrants were issued following the consummation of the sale of the Canadian Food Distribution business (note 3 (b)) and the cost was included as part of the gain on sale of discontinued operations. As at July 2, 2011, the First Tranche and Second Tranche of warrants had not been exercised. Inputs used in the Black-Scholes option pricing model for the warrants were as follows:

SUNOPTA INC. 17 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

5.

Capital stock, continued


    February 5, 2010     June 11, 2010  
             

Number of warrants issued

  250,000     600,000  

Exercise price

$ 3.25   $ 5.11  

Expected volatility

  72.0%     72.1%  

Risk-free interest rate

  2.5%     2.1%  

Dividend yield

  0%     0%  

Expected life (in years)

  5     5  

The fair value of the warrants is based on estimates of the number of warrants that management expects to vest, which was estimated to be 100% of the granted amounts.

(c)

Options

There were 792,000 options granted to employees and directors during the two quarters ended July 2, 2011 (July 3, 2010 – 664,000). The inputs used in the Black-Scholes model to determine the fair value of the options granted were as follows:

 

  Two quarters ended     Two quarters ended  

 

  July 2, 2011     July 3, 2010  

 

           

Number of options issued

  792,000     664,000  

Weighted average exercise price

$ 7.44   $ 4.45  

Weighted average expected volatility

  68.0%     68.2%  

Weighted average risk-free interest rate

  1.9%     2.3%  

Dividend yield

  0%     0%  

Expected life (in years)

  6     6  

The weighted average fair value of the options granted during the two quarters ended July 2, 2011 amounted to $4.60 per option (July 3, 2010 - $2.78) . The fair value of the options is based on estimates of the number of options that management expects to vest, which was estimated to be 85% of the granted amounts.

On May 19, 2011, the Company’s shareholders approved an amendment to the Company’s 2002 Amended and Restated Stock Option Plan to increase the number of common shares reserved for issuance upon the exercise of options granted thereunder by 2,500,000 common shares. The amendment was approved by the Company’s Board of Directors on March 8, 2011 based on the recommendation of the Compensation Committee, subject to shareholder approval. At July 2, 2011, 2,559,280 (January 1, 2011 - 823,480) options are remaining to be granted under this plan.

SUNOPTA INC. 18 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

6.

Earnings per share

The calculation of basic earnings per share is based on the weighted average number of shares outstanding. Diluted earnings per share reflect the dilutive effect of the exercise of warrants and options. The number of shares for the diluted earnings per share was calculated as follows:

 

  Quarter ended     Two quarters ended  

 

  July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  

 

                       

Earnings from continuing operations attributable to SunOpta Inc.

$ 4,401 $ 6,243 $ 9,482 $ 10,424

Earnings from discontinued operations, net of income taxes

- 14,223 - 14,655

Earnings attributable to SunOpta Inc.

$ 4,401   $ 20,466   $ 9,482   $ 25,079  

 

                       

Weighted average number of shares used in basic earnings per share

65,574,269 65,033,526 65,556,686 65,049,223

Dilutive potential of the following:

                       

Employee/director stock options

  935,016     677,828     931,972     591,555  

Warrants

  316,775     74,904     316,378     55,730  

Diluted weighted average number of shares outstanding

66,826,060 65,786,258 66,805,036 65,696,508

 

                       

Earnings per share - basic:

                       

From continuing operations

$ 0.07   $ 0.09   $ 0.14   $ 0.16  

From discontinued operations

  -     0.22     -     0.23  

 

$ 0.07   $ 0.31   $ 0.14   $ 0.39  

 

                       

Earnings per share - diluted:

                       

From continuing operations

$ 0.07   $ 0.09   $ 0.14   $ 0.16  

From discontinued operations

  -     0.22     -     0.22  

 

$ 0.07   $ 0.31   $ 0.14   $ 0.38  

For the quarter ended July 2, 2011, options to purchase 1,193,600 (July 3, 2010 – 1,243,150) common shares have been excluded from the calculations of diluted earnings per share due to their anti-dilutive effect. For the two quarters ended July 2, 2011, options to purchase 1,193,600 (July 3, 2010 – 1,907,950) common shares have been excluded from the calculations of diluted earnings per share due to their anti-dilutive effect.

7.

Bank indebtedness


 

  July 2, 2011     January 1, 2011  

 

$   $  

 

           

Canadian line of credit facility (a)

  1,456     -  

U.S. line of credit facility (b)

  57,387     41,790  

Opta Minerals Canadian line of credit facility (c)

  7,623     3,546  

TOC line of credit facilities (d)

  40,792     30,574  

 

  107,258     75,910  

SUNOPTA INC. 19 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

7. Bank indebtedness, continued
   
(a) Canadian line of credit facility:

The Company has a Canadian line of credit of Cdn $5,000 (U.S. – $5,184). As at July 2, 2011, Cdn $2,562 (U.S. – $2,656) (January 1, 2011 – $nil) of this facility was utilized, including Cdn $1,157 (U.S. – $1,200) (January 1, 2011 –$nil) committed through letters of credit. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including Canadian or U.S. bank prime, or Canadian bankers’ acceptances, plus a margin based on certain financial ratios. At July 2, 2011, the interest rate on this facility was 6.00% (January 1, 2011 – 5.00%), calculated as Canadian prime plus a premium of 3.00% . The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of the Company’s Canadian business as defined in the Credit Agreement. At July 2, 2011, the borrowing base supported draws to $5,184. At July 2, 2011, the Company incurs standby fees equal to 0.87% of the undrawn balances on this facility in accordance with the terms of the Credit Agreement.

(b)

U.S. line of credit facility:

The Company has a U.S. line of credit of $100,000. As at July 2, 2011, $60,182 (January 1, 2011 – $44,254) of this facility was utilized, including $2,795 (January 1, 2011 – $2,464) committed through letters of credit. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. bank prime, or U.S. LIBOR, plus a margin based on certain financial ratios. At July 2, 2011, the weighted average interest rate on this facility was 4.24% (January 1, 2011 – 3.26%), based on LIBOR plus a premium of 4.00% . The maximum availability of this line is based on the borrowing base which includes certain accounts receivables and inventories of the Company’s U.S. business as defined in the Credit Agreement. At July 2, 2011, the borrowing base supported draws to $100,000. At July 2, 2011, the Company incurs standby fees equal to 0.87% of the undrawn balances on this facility in accordance with the terms of the Credit Agreement.

The Canadian and U.S. line of credit facilities as well as certain long-term debt balances (note 8) are collateralized by a first priority security interest on substantially all of the Company’s assets in Canada and the United States, excluding the assets of Opta Minerals and The Organic Corporation.

The Company is required to comply with certain financial covenants, which are measured against on a quarterly basis. See note 8 for a discussion of the Company’s compliance with respect to these covenants.

(c)

Opta Minerals Canadian line of credit facility:

Opta Minerals has a line of credit facility of Cdn $15,000 (U.S. – $15,361). At June 30, 2011, Cdn $8,604 (U.S. - $8,811) (January 1, 2011 - Cdn $4,713 (U.S. – $4,712)) of this facility has been utilized, including letters of credit in the amount of Cdn $1,160 (U.S. - $1,188) (January 1, 2011 - Cdn $1,166 (U.S. – $1,166)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including prime, U.S. dollar base rate, bankers’ acceptances or LIBOR plus a margin based on certain financial ratios of the Company. At June 30, 2011, the weighted average interest rate on this facility was 6.93% (January 1, 2011 – 6.93%).

Opta Minerals’ line of credit facility, along with its unused portion of the revolving acquisition facility (note 8(d)), is subject to annual extensions, and were extended on June 2, 2011 to August 15, 2012.

SUNOPTA INC. 20 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

7. Bank indebtedness, continued
   
(d) TOC line of credit facilities:

The Organic Corporation (“TOC”) has a line of credit facility of €35,000 (U.S. – $50,754). At July 2, 2011, €32,523 (U.S. - $47,162) (January 1, 2011 – €22,589 (U.S. – $30,249)) of this facility had been utilized, including letters of credit in the amount of €5,878 (U.S. – $8,524) (January 1, 2011 – €181 (U.S. – $243)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. LIBOR and Euro LIBOR plus a premium of 1.85% . At July 2, 2011, the weighted average interest rate on this facility was 3.18% . The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of TOC and its subsidiaries. At July 2, 2011, the borrowing base securing this facility supported draws to €35,000 (U.S. – $50,754) (January 1, 2011 - €22,938 (U.S. – $30,716)).

In the first quarter of 2011, a wholly owned subsidiary of TOC entered into a line of credit facility with capacity of €5,000 (U.S. – $7,251). As at July 2, 2011, this line is guaranteed through a $1,200 letter of credit issued by the Company on its U.S. line of credit facility. As at July 2, 2011, €747 (U.S. – $1,083) of this facility had been used. Interest on borrowings under this facility accrues at the Chinese central bank’s interest rate, as published by the People’s Bank of China, multiplied by 125%, or 7.89% at July 2, 2011.

A less-than-wholly owned subsidiary of TOC has line of credit facilities with availability of $1,805 (January 1, 2011 – $1,297) which are fully guaranteed by TOC. As at July 2, 2011, $1,071 (January 1, 2011 – $568) of these facilities had been used. Interest on borrowings under these facilities accrues at either a base rate of 0.4% plus a premium of 6.00%, or a fixed rate of 9.75% . At July 2, 2011, the weighted average interest rate on these facilities was 6.3% (January 1, 2011 – 9.8%) and TOC is in compliance with all material requirements under this facility.

8.

Long-term debt


    July 2, 2011     January 1, 2011  
  $   $  
             

Syndicated Lending Agreement:

           

Non-revolving real estate term facility (a)

  12,566     13,000  

Non-revolving machinery and equipment term facility (b)

  12,777     17,000  
             

Other Long-Term Debt

           

Opta Minerals term loan facility (c)

  7,315     7,766  

Opta Minerals revolving acquisition facility (d)

  10,928     11,419  

Subordinated debt to former shareholders of TOC (e)

  4,645     4,569  

Promissory notes (f)

  11,420     10,840  

Other long-term debt (g)

  231     264  

Term loans payable and capital lease obligations (h)

  633     124  
    60,515     64,982  

Less: current portion

  22,826     22,247  
    37,689     42,735  


SUNOPTA INC. 21 July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)
 

8.

Long-term debt, continued

Details of the Company’s long-term debt are as follows:

(a)

Non-revolving real estate term facility:

The non-revolving real estate term facility has a maximum available borrowing amount of $13,000. This facility matures on October 30, 2012, and has quarterly minimum repayments of approximately $217. At July 2, 2011, $12,566 (January 1, 2011 - $13,000) was drawn on this facility, and the weighted average interest rate was 4.75% (January 1, 2011 - 3.76%), based on the level of borrowings, and a credit spread based on either U.S. prime or LIBOR rates.

(b)

Non-revolving machinery and equipment term facility:

The non-revolving machinery and equipment term facility has a maximum available borrowing amount of $17,000. This facility matures on October 30, 2012, and has quarterly minimum repayments of approximately $850. At July 2, 2011, $12,777 (January 1, 2011 - $17,000) was drawn on this facility, and the weighted average interest rate was 4.75% (January 1, 2011 - 3.76%), based on the level of borrowings, and a credit spread based on either U.S. prime or LIBOR rates. As a result of the sale of property, plant and equipment in the quarter ended July 2, 2011, an additional $2,523 was repaid on this facility, in accordance with the credit agreement.

The above term facilities, and the Canadian and U.S. line of credit facility (see note 7 (a) and (b)), are collateralized by a first priority security against substantially all of the Company’s assets in Canada and the United States, excluding the assets of Opta Minerals and TOC.

(c)

Opta Minerals term loan facility:

The term loan facility has a maximum available borrowing amount of Cdn $7,143 (U.S. - $7,315). This facility matures on August 30, 2012, is renewable at the option of the lender and Opta Minerals, and has quarterly principal repayments of Cdn $312 (U.S. - $320). At June 30, 2011 and December 31, 2010, the term loan facility was fully drawn. At June 30, 2011, the weighted average interest rate on this facility was 7.04% (December 31, 2010 – 7.61%).

(d)

Opta Minerals revolving acquisition facility:

The revolving acquisition facility has a maximum available borrowing amount of Cdn $14,043 (U.S. - $14,381) to finance future acquisitions and capital expenditures. Principal is payable quarterly equal to 1/40 of the drawdown amount. Any remaining outstanding principal under this facility is due upon maturity. The facility is revolving for one year, with a five year term out option. The outstanding balance on the revolving acquisition facility at June 30, 2011 was Cdn $10,671 (U.S. - $10,928) (December 31, 2010 – Cdn $11,421 (U.S. - $11,419)). At June 30, 2011, the weighted average interest rate on this facility was 6.74% (December 31, 2010 - 7.05%).

The Opta Minerals’ credit facilities described above are collateralized by a first priority security interest on substantially all of the Opta Minerals assets in both Canada and the United States.

Opta Minerals entered into a cash flow hedge in 2007. The cash flow hedge entered into exchanged a notional amount of Cdn $17,200 (U.S. - $17,835) from a floating rate to a fixed rate of 5.25% from August 2008 to August 2012. The estimated fair value of the interest rate swap at June 30, 2011 was a loss of $604 (December 31, 2010 - loss of $891). The incremental gain in fair value of $213, net of income taxes of $74, has been recorded in other comprehensive earnings for the period. The fair value liability is included in long-term liabilities on the consolidated balance sheets.

SUNOPTA INC. 22 July 2, 2011 10-Q

SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)


8. Long-term debt, continued
   
(e) Subordinated debt to former shareholders of TOC:

In conjunction with the acquisition of TOC on April 2, 2008, its former shareholders provided a subordinated loan to TOC in the amount of €3,000 (U.S. - $4,350). The loan bears interest at 7% payable to the former shareholders on a semi-annual basis. The subordinated loan, including all accrued interest, which was originally repayable in full on March 31, 2011 was extended to July 8, 2011, and paid in full subsequent to the quarter ended July 2, 2011.

(f) Promissory notes:

Promissory notes consist of notes issued to former shareholders as a result of business acquisitions. As consideration in the acquisition of TOC, the Company issued a total of €9,000 (U.S. - $13,051) in promissory notes which are secured by a pledge of the common shares of TOC. Of the €9,000 (U.S. - $13,051) issued, €1,000 (U.S. - $1,436) was paid in cash on April 5, 2010. The remaining €8,000 (U.S. - $11,601), previously due on March 31, 2011 has been extended and will be repaid in four €2,000 tranches on October 7, 2011, January 6, 2012, April 6, 2012 and July 6, 2012. The outstanding balance will accrue interest at 5% per annum. As part of the extension, the former shareholders can demand full repayment of the remaining amount owing. Due to TOC’s opening balance sheet not meeting pre-determined working capital targets, and an undisclosed liability that existed prior to the Company’s April 2, 2008 acquisition, € 528 (U.S. - $766) of the promissory notes extended above will not be paid. Accordingly, the balance of the promissory notes at July 2, 2011 is €7,472 (U.S. -$10,835).

In addition, $585 remains owing to various former shareholders at a weighted average interest of 5.64% . Of the $11,420 in total promissory notes, $11,085 are due in the next 12 months, or on demand, with the remaining balances due in varying installments through 2013.

(g) Other long-term debt:

A less-than-wholly owned subsidiary of TOC has a maximum borrowing amount of 6,500 Ethiopia Birr (“ETB”) (U.S. -$396). The outstanding balance at July 2, 2011, was $231 (January 1, 2011 - $264). At July 2, 2011, the weighted average interest rate on borrowed funds was 10.3% (January 1, 2011 - 10.3%).

(h) Term loans payable and capital lease obligations:

Term loans payable bear a weighted average interest rate of 5.2% (January 1, 2011 – 5.3%) due in varying installments through 2013 with principal payments of $171 due in the next 12 months.

Capital lease obligations are due in monthly payments, with a weighted average interest rate of 6.5% (January 1, 2011 –6.9%).

The long-term debt and capital leases described above require the following repayments during the next five years:

 

$  

June 30, 2012

22,826  

June 29, 2013

24,754  

July 5, 2014

2,678  

July 4, 2015

2,664  

July 2, 2016

2,664  

Thereafter

4,929  

 

60,515  

SUNOPTA INC.

23

July 2, 2011 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the two quarters ended July 2, 2011 and July 3, 2010
Unaudited
(Expressed in thousands of U.S. dollars, except per share amounts)


8. Long-term debt, continued

At July 2, 2011, the Company was in compliance in all material respects with its covenants, as required by the Canadian line of credit facility, the U.S. line of credit facility (notes 7(a) and (b)), as well as the term facilities. In addition, Opta Minerals was in compliance in all material respects with its financial covenants as required by the Canadian Line of Credit Facility (see note 7(c)), as well as the term loan facility and revolving acquisition facility.

9. Supplemental cash flow information

  Quarter ended    Two quarters ended  
    July 2, 2011     July 3, 2010     July 2, 2011     July 3, 2010  
    $     $     $     $  
                         

Changes in non-cash working capital:

                       

Accounts receivable

  (2,773 )   (2,186 )   (15,664 )   (22,001 )

Inventories

  19,902     6,085     (5,277 )   8,974  

Income tax recoverable

  936     1,119     709     1,523  

Prepaid expenses and other current assets

  8,734     (146 )   8,197     469  

Accounts payable and accrued liabilities

  (13,852 )   1,747     (19,129 )   (6,922 )

Customer and other deposits

  (1,563 )   (1,072 )   (780 )   150  
    11,384     5,547     (31,944 )   (17,807 )
                         

Cash paid for:

                       

Interest

  3,805     2,074     1,998     4,638  

Income taxes

  29     212     1,064     1,029  

10. Commitments and contingencies

(a) Vargas Class Action

In September 2008, a single plaintiff and a former employee filed a wage and hour dispute against SunOpta Fruit Group, Inc., a wholly-owned subsidiary of the Company, as a class action alleging various violations of California’s labour laws (the “Vargas Class Action”). A tentative settlement of all claims was reached at mediation on January 15, 2010, subject to final court approval, and the parties executed a settlement agreement resolving all claims of the class. As a result of the tentative settlement, the Company accrued a liability of $1,200 as at December 31, 2009. Final approval of the settlement was received from the court on May 20, 2011, and the final settlement amount was reduced to approximately $700. Included in other income (note 12) for the quarter and two quarters ended July 2, 2011 is $500 which represents the difference between the tentative and final settlement amounts. The Company paid the settlement in cash in July 2011.

(b) Colorado Sun Oil Processors, LLC dispute

Colorado Mills LLC (“Colorado Mills”) and SunOpta Grains and Foods Inc. (formally Sunrich LLC, herein “Grains and Foods”), a wholly–owned subsidiary of the Company, organized a joint venture in 2008 to construct and operate a vegetable oil refinery adjacent to Colorado Mills’ sunflower seed crush plant located in Lamar, Colorado. During the relationship, disputes arose between the parties concerning management of the joint venture, record–keeping practices, certain unauthorized expenses incurred on behalf of the joint venture by Colorado Mills, procurement of crude oil by Sunrich from Colorado Mills for processing at the joint venture refinery, and the contract price of crude oil offered for sale under the joint venture agreement.

SUNOPTA INC.

24

July 2, 2011 10-Q



10. Commitments and contingencies, continued

The parties initiated a dispute resolution process as set forth in the joint venture agreement, which Colorado Mills aborted prematurely through the initiation of suit in Colorado State Court. Subsequent to the filing of that suit, Colorado Mills acted with an outside creditor of the joint venture to involuntarily place the joint venture into bankruptcy. The involuntary bankruptcy has been opposed by Grains and Foods. After a preliminary hearing on Grains and Foods’ motion to dismiss the involuntary bankruptcy, the bankruptcy court appointed a trustee to act on behalf of the joint venture. The court appointed trustee actively solicited bids to sell the assets of the joint venture. On February 3, 2011, Grains and Foods executed an Asset Purchase Agreement with the trustee to purchase certain of the assets of the joint venture and assume rights to an equipment lease. Colorado Mills also made an offer to purchase certain of the assets of the joint venture and assume rights to an equipment lease. The bankruptcy court held an evidentiary hearing on June 30 through July 1, 2011 to determine which of the pending offers should proceed to a closing. The bankruptcy court has not yet made a ruling. A separate arbitration proceeding is also pending between Grains and Foods and Colorado Mills to resolve direct claims each party has asserted against the other. Although management believes the claims asserted by Colorado Mills are baseless, management cannot conclude whether the prospect of an unfavourable outcome in this matter is probable, or estimate the loss, if any, that might arise from an unfavourable outcome. Accordingly, no accrual has been made at this time for this contingency.

(c) Other claims

In addition, various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.

11. Segmented information

The Company operates in two industries divided into six operating segments:

(a) SunOpta Foods sources, processes, packages, markets and distributes a wide range of natural, organic and specialty food products and ingredients with a focus on soy, corn, sunflower, fruit, fiber and other natural and organic food and natural health products. There are four operating segments within SunOpta Foods:

  i)

Grains and Foods Group is focused on vertically integrated sourcing, processing, packaging and marketing of grains, grain-based ingredients and packaged products;

   
  ii)

Ingredients Group is focused primarily on insoluble oat and soy fiber products and works closely with its customers to identify product formulation, cost and productivity opportunities aimed at transforming raw materials into value- added food ingredient solutions;

   
  iii)

Fruit Group consists of berry processing and fruit ingredient operations that process natural and organic frozen fruits and vegetables into bulk, ingredients and packaged formats for the food service, private label retail and industrial ingredient markets. The group also includes the healthy snacks operations which produce natural and organic fruit snacks and nutritional bars; and

   
  iv)

International Foods Group consists of operations which internationally source raw material ingredients, trade organic commodities and provide natural and organic food solutions to major global food manufacturers, distributors and supermarket chains with a variety of industrial and private label retail products. In addition, this group manufactures, packages and distributes retail natural health products, primarily in the Canadian marketplace.

(b) Opta Minerals processes, distributes and recycles silica-free loose abrasives, roofing granules, industrial minerals and specialty sands for the foundry, steel, roofing shingles and bridge and ship-cleaning industries.

SUNOPTA INC.

25

July 2, 2011 10-Q



11. Segmented information, continued

(c) Corporate Services provide a variety of management, financial, information technology, treasury and administration services to the operating segments from the head office in Ontario, Canada, and information and shared services offices in Minnesota, U.S.A.

Effective August 31, 2010, the former SunOpta BioProcess operating segment was eliminated due to the sale of SunOpta BioProcess Inc. (note 3(c)). Because this was a stand-alone operating segment, no re-alignment was required for segmented information purposes.

Effective January 2, 2011, the brokerage operation that was previously included in the Fruit Group was transferred to the International Foods Group, as the sourcing of raw materials performed by the operation more closely aligns with other sourcing operations included within the International Foods Group. The segmented information for the quarter and two quarters ended July 3, 2010 have been updated to reflect the current year’s segment presentation.

The Company’s assets, operations and employees are principally located in the United States, Canada, Europe, China and Africa. Revenues are allocated to the United States, Canada and Europe and other external markets based on the location of the customer. Other expense net, interest expense, net, and provision for income taxes are not allocated to the segments.

The following segmented information relates to each of the Company’s segments for the quarter ended July 2, 2011:

 

 

 

 

Quarter ended

 

 

 

 

July 2, 2011

 

SunOpta

Opta

Corporate

 

 

Foods

Minerals

Services

Consolidated

External revenues by market:

 

 

 

 

     United States

180,941

16,523

-

197,464

     Canada

22,253

4,134

-

26,387

     Europe and other

62,776

4,130

-

66,906

Total revenues from external customers

265,970

24,787

-

290,757

 

 

 

 

 

Segment earnings (loss) from continuing operations before the following:

7,857

2,159

(1,980)

8,036

 

 

 

 

 

Other income, net

 

 

 

(3,189)

Interest expense, net

 

 

 

2,520

Provision for income taxes

 

 

 

3,672

Earnings from continuing operations

 

 

 

5,033

 
SUNOPTA INC.

26

July 2, 2011 10-Q



11. Segmented information, continued

SunOpta Foods had the following segmented reporting for the quarter ended July 2, 2011:

 

 

 

   

 

   

 

   

 

   

Quarter ended

 

 

 

 

   

 

   

 

   

 

   

July 2, 2011

 

 

 

Grains and

   

Ingredients

   

Fruit

   

International

   

SunOpta

 

 

 

Foods Group

   

Group

   

Group

   

Foods Group

   

Foods

 

External revenues by market:

 

 

   

 

   

 

   

 

   

 

 

     United States

 

103,452

   

11,050

   

40,975

   

25,464

   

180,941

 

     Canada

 

3,814

   

1,591

   

600

   

16,248

   

22,253

 

     Europe and other

 

18,046

   

1,283

   

102

   

43,345

   

62,776

 

Total revenues from external customers

 

125,312

   

13,924

   

41,677

   

85,057

   

265,970

 

 

 

 

   

 

   

 

   

 

   

 

 

Segment earnings (loss) from continuing operations

 

4,654

   

899

   

(217)

   

2,521

   

7,857

 

The following segmented information relates to each of the Company’s segments for the quarter ended July 3, 2010:

 

 

 

   

 

   

 

   

Quarter ended

 

 

 

 

   

 

   

 

   

July 3, 2010

 

 

 

SunOpta

   

Opta

   

Corporate

   

 

 

 

 

Foods

   

Minerals

   

Services

   

Consolidated

 

External revenues by market:

 

 

   

 

   

 

   

 

 

     United States

 

151,261

   

13,789

   

-

   

165,050

 

     Canada

 

23,727

   

4,372

   

-

   

28,099

 

     Europe and other

 

37,756

   

2,980

   

-

   

40,736

 

Total revenues from external customers

 

212,744

   

21,141

   

-

   

233,885

 

 

 

 

   

 

   

 

   

 

 

Segment earnings (loss) from continuing operations before the following:

 

12,824

   

1,719

   

(2,649

)

 

11,894

 

 

 

 

   

 

   

 

   

 

 

Other expense, net

 

 

   

 

   

 

   

1,044

 

Interest expense, net

 

 

   

 

   

 

   

2,567

 

Provision for income taxes

 

 

   

 

   

 

   

1,854

 

Earnings from continuing operations

 

 

   

 

   

 

   

6,429

 

SUNOPTA INC.

27

July 2, 2011 10-Q



11. Segmented information, continued

SunOpta Foods had the following segmented reporting for the quarter ended July 3, 2010:

 

 

 

   

 

   

 

   

Quarter ended

 

 

 

 

   

 

   

 

   

  July 3, 2010

 

 

 

Grains and

   

Ingredients

   

Fruit

   

International

   

SunOpta

 

 

 

Foods Group

   

Group

   

Group

   

Foods Group

   

Foods

 

External revenues by market:

 

 

   

 

   

 

   

 

   

 

 

     United States

 

73,182

   

14,695

   

38,624

   

24,760

   

151,261

 

     Canada

 

2,963

   

2,075

   

785

   

17,904

   

23,727

 

     Europe and other

 

15,943

   

878

   

122

   

20,813

   

37,756

 

Total revenues from external customers

 

92,088

   

17,648

   

39,531

   

63,477

   

212,744

 

 

 

 

   

 

   

 

   

 

   

 

 

Segment earnings from continuing operations

 

7,188

   

3,006

   

1,404

   

1,226

   

12,824

 

The following segmented information relates to each of the Company’s segments for the two quarters ended July 2, 2011:

 

 

 

Two quarters ended

 

 

 

July 2, 2011

 

SunOpta

Opta

Corporate

 

 

Foods

Minerals

Services

Consolidated

External revenues by market:

 

 

 

 

     United States

 

363,739

   

31,256

   

-

   

394,995

 

     Canada

45,044

7,405

-

52,449

     Europe and other

 

96,504

   

7,732

   

-

   

104,236

 

Total revenues from external customers

505,287

46,393

-

551,680

 

 

 

   

 

   

 

   

 

 

Segment earnings (loss) from continuing operations before the following:

18,320

4,610

(3,866

)

19,064

 

 

 

   

 

   

 

   

 

 

Other expense, net

 

 

 

(2,827

)

Interest expense, net

 

 

   

 

   

 

   

4,504

 

Provision for income taxes

 

 

 

6,681

Earnings from continuing operations

 

 

   

 

   

 

   

10,706

 

SUNOPTA INC.

28

July 2, 2011 10-Q



11. Segmented information, continued

SunOpta Foods had the following segmented reporting for the two quarters ended July 2, 2011:

 

 

 

   

 

   

 

   

 

   

Two quarters ended
July 2, 2011

 

 

 

Grains and

   

Ingredients

   

Fruit

   

International

   

SunOpta

 

 

 

Foods Group

   

Group

   

Group

   

Foods Group

   

Foods

 

External revenues by market:

 

 

   

 

   

 

   

 

   

 

 

     United States

 

200,746

   

23,722

   

77,203

   

62,068

   

363,739

 

     Canada

 

6,581

   

4,045

   

1,293

   

33,125

   

45,044

 

     Europe and other

 

33,586

   

1,908

   

191

   

60,819

   

96,504

 

Total revenues from external customers

 

240,913

   

29,675

   

78,687

   

156,012

   

505,287

 

 

 

 

   

 

   

 

   

 

   

 

 

Segment earnings from continuing operations

 

10,361

   

2,794

   

171

   

4,994

   

18,320

 

The following segmented information relates to each of the Company’s segments for the two quarters ended July 3, 2010:

               

Two quarters ended

 

 

 

 

   

 

   

July 3, 2010

 

 

 

SunOpta

   

Opta

   

Corporate

   

 

 

 

 

Foods

   

Minerals

   

Services

   

Consolidated

 

External revenues by market:

 

 

   

 

   

 

   

 

 

     United States

 

288,296

   

25,799

   

-

   

314,095

 

     Canada

 

45,117

   

7,522

   

-

   

52,639

 

     Europe and other

 

78,149

   

5,751

   

-

   

83,900

 

Total revenues from external customers

 

411,562

   

39,072

   

-

   

450,634

 

 

 

 

   

 

   

 

   

 

 

Segment earnings (loss) from continuing operations before the following:

 

24,215

   

3,432

   

(6,131)

   

21,516

 

 

 

 

   

 

   

 

   

 

 

Other expense, net

 

 

   

 

   

 

   

1,359

 

Interest expense, net

 

 

   

 

   

 

   

5,589

 

Provision for income taxes

 

 

   

 

   

 

   

3,930

 

Earnings from continuing operations

 

 

   

 

   

 

   

10,638

 

SUNOPTA INC.

29

July 2, 2011 10-Q



11. Segmented information, continued

SunOpta Foods had the following segmented reporting for the two quarters ended July 3, 2010:

                            Two quarters ended  
   

 

   

 

   

 

   

 

   

July 3, 2010

 
   

Grains and

   

Ingredients

   

Fruit

   

International

   

SunOpta

 
   

Foods Group

   

Group

   

Group

   

Foods Group

   

Foods

 

External revenues by market:

 

 

   

 

   

 

   

 

   

 

 

     United States

 

135,742

   

30,022

   

77,540

   

44,992

   

288,296

 

     Canada

 

4,102

   

3,954

   

2,070

   

34,991

   

45,117

 

     Europe and other

 

31,089

   

1,822

   

261

   

44,977

   

78,149

 

Total revenues from external customers

 

170,933

   

35,798

   

79,871

   

124,960

   

411,562

 

 

 

 

   

 

   

 

   

 

   

 

 

Segment earnings from continuing operations

 

12,204

   

7,218

   

3,268

   

1,525

   

24,215

 
   
12. Other (income) expense, net

Quarter ended

Two quarters ended

 

July 2, 2011

July 3, 2010

July 2, 2011

July 3, 2010

 

$

$

$

$

 

 

 

 

 

(a) Sale of assets in Mexico

 

(3,048)

   

-

   

(3,048)

   

-

 

(b) Settlement of class action lawsuit

(500)

-

(500)

-

(c) Rationalizations

 

67

   

1,044

   

494

   

1,195

 

(d) Write-off intangible assets

-

-

-

164

(e) Other

 

292

   

-

   

227

   

-

 

 

(3,189)

1,044

(2,827)

1,359

   
(a) Sale of assets in Mexico

During the quarter ended July 2, 2011, the Company completed the sales of processing equipment and land and buildings located in Mexico to Fruvemex for proceeds of $5,650 (note 3(a)). The gain on the sales, after deducting the carrying value of the assets and related transaction costs, was $3,048.

(b) Settlement of class action lawsuit

During the fourth quarter of 2009, the Company recorded a charge of $1,200 for a tentative settlement of a class action lawsuit with a former employee (note 10(a)). During the quarter ended July 2, 2011, the class action lawsuit was settled for approximately $700. As a result of the settlement amount being lower than the previously accrued amount, the Company recorded a gain of $500.

(c) Rationalizations

Rationalization expense for the quarter and two quarters ended July 2, 2011 related to employee terminations in the Fruit Group, International Foods Group and Corporate Services. For the quarter and two quarters ended July 3, 2010, rationalization expense included severance costs of $636 at a distribution facility in Acton, Ontario, as well as $408 and $559 of costs related to the consolidation of manufacturing facilities within our Healthy Snacks operation.

SUNOPTA INC.

30

July 2, 2011 10-Q


   
12. Other (income) expense, net, continued
   
(d) Write-off of intangible assets

Represents a non-cash impairment charge for the write-off of long-lived assets within the Ingredients Group.

(e) Other

Other for the quarter ended July 2, 2011 includes costs related to an acquisition. For the two quarters ended July 2, 2011, other includes additional acquisition expenses, offset by the reversal of contingent consideration related to the Dahlgren acquisition in 2010 (note 2(a)).

13. Cash and cash equivalents

Included in cash and cash equivalents is $2,033 (January 1, 2011 - $495) that is specific to Opta Minerals that cannot be utilized by the Company for general corporate purposes, and is maintained in separate bank accounts of Opta Minerals.

14. Derivative financial instruments and fair value measurement

Effective January 1, 2008, the Company adopted the provisions of ASC 820-10-55 (formerly FASB FSP 157-2/SFAS 157, “Effective Date of FASB Statement No. 157”) applicable to financial assets and liabilities and to certain non-financial assets and liabilities that are measured at fair value on a recurring basis. Additionally, the Company applies the provisions of this standard to financial and non-financial assets and liabilities. This standard defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In addition, this standard requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

This standard also provides a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions with respect to how market participants would price an asset or liability. These two inputs used to measure fair value fall into the following three different levels of the fair value hierarchy:

  • Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that are observable
  • Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are non-active; inputs other than quoted prices that are observable and derived from or are corroborated by observable market data
  • Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable due to little or no market activity

This hierarchy requires the use of observable market data when available.

SUNOPTA INC.

31

July 2, 2011 10-Q


   
14. Derivative financial instruments and fair value measurement, continued

The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of July 2, 2011:

 

Fair Value

 

 

 

Asset (Liability)

Level 1

Level 2

 

$

$

$

(a) Commodity futures and forward contracts(1)

 

 

 

      Unrealized short-term derivative gain

6,041

882

5,159

      Unrealized long-term derivative gain

231

-

231

      Unrealized short-term derivative loss

(1,190)

-

(1,190)

      Unrealized long-term derivative loss

(19)

-

(19)

(b) Inventories carried at market(2)

21,523

-

21,523

(c) Interest rate swap(3)

(604)

-

(604)

(d) Forward foreign currency contracts(4)

(195)

-

(195)

(e) Embedded foreign currency derivatives(1)

 

 

 

      Unrealized short-term derivative gain

920

-

920

      Unrealized short-term derivative loss

(393)

-

(393)


  (1)

On the consolidated balance sheet, unrealized short-term derivative gain is included in prepaid expenses and other current assets, unrealized long-term derivative gain is included in other assets, unrealized short-term derivative loss is included in other current liabilities and unrealized long-term derivative loss is included in long-term liabilities.

  (2)

Inventories carried at market are included in inventories on the consolidated balance sheet.

  (3)

The interest rate swap is included in long-term liabilities on the consolidated balance sheet.

  (4)

The forward foreign currency contracts are included in accounts receivable on the consolidated balance sheet.

(a) Commodity futures and forward contracts

The Company’s derivative contracts that are measured at fair value include exchange-traded commodity futures and forward commodity purchase and sale contracts. Exchange-traded futures are valued based on unadjusted quotes for identical assets priced in active markets and are classified as level 1. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. Local market adjustments use observable inputs or market transactions for similar assets or liabilities, and, as a result, are classified as level 2. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk, and the Company’s knowledge of current market conditions, the Company does not view non-performance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts.

These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains. These derivative instruments are not designated as hedging instruments. For the quarter and two quarters ended July 2, 2011, a $323 gain and $3,309 gain has been recorded in cost of goods sold on the consolidated statement of operations related to changes in the fair value of these derivatives.

At July 2, 2011, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows:

 

 

Number of bushels

 

 

Purchase (sale)

 

Corn

Soybeans

Forward commodity purchase contracts

1,911

1,334

Forward commodity sale contracts

(988)

(565)

Commodity futures contracts

(1,503)

(1,715)

 

SUNOPTA INC.

32

July 2, 2011 10-Q


   
14. Derivative financial instruments and fair value measurement, continued

In addition to the notional corn and soybean open futures and forward purchase and sale contracts noted above, the Company also had open forward contracts to sell 92 lots of cocoa at July 2, 2011.

(b) Inventories carried at market

Grains inventory carried at fair value is determined using quoted market prices from the Chicago Board of Trade (“CBoT”). Estimated fair market values for grains inventory quantities at period end are valued using the quoted price on the CBoT adjusted for differences in local markets, and broker or dealer quotes. These assets are placed in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on commodity grains inventory are included in cost of sales on the consolidated statements of operations. At July 2, 2011, the Company had 583 bushels of commodity corn and 918 bushels of commodity soybeans, in inventories carried at market.

(c) Interest rate swap

Opta Minerals entered into an interest rate swap to minimize its exposure to interest rate risk. A notional amount of Cdn $17,200 (U.S. - $17,833) of floating rate debt was effectively converted to fixed rate debt at a rate of 5.25% for the period August 2008 to August 2012. At each period end, management calculates the mark-to-market fair value using a valuation technique using quoted observable prices for similar instruments as the primary input. Based on this valuation, the previously recorded fair value is adjusted to the current mark-to-market position. The mark-to-market gain or loss is placed in level 2 of the fair value hierarchy. The interest rate swap is designated as a cash flow hedge for accounting purposes and accordingly, gains and losses on changes in the fair value of the interest rate swap are included in other comprehensive earnings on the consolidated statements of operations. For the quarter and two quarters ended July 2, 2011, a $103 gain (net of income taxes of $27) and $213 gain (net of income taxes of $74) have been recorded in other comprehensive earnings due to the change in fair value for this derivative.

(d) Foreign forward currency contracts

As part of its risk management strategy, the Company enters into foreign forward exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are placed in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. These forward foreign exchange contracts represent economic hedges and are not designated as hedging instruments. At July 2, 2011 the Company had open forward foreign exchange contracts with a notional value of Cdn $3,140, € 9,944 and $8,681 that resulted in an unrealized loss of $195 which is included in foreign exchange (loss) gain on the consolidated statements of operations.

(e) Embedded foreign currency derivatives

A foreign subsidiary of the Company enters into a number of purchase and sale contracts that are subject to currency risk, which can modify the cash flows of the contract due to movements in foreign currencies. Certain of these purchase and sale contracts contain embedded foreign currency derivatives, such that the currency risk component can be separate from the purchase or sale component. The fair value of these derivatives is measured based on the forward foreign exchange rate at July 2, 2011. These embedded derivatives are placed in level 2 of the fair value hierarchy, as the inputs used in determining the fair value are derived from and corroborated by observable market data. For the quarter and two quarters ended July 2, 2011, an unrealized loss of $173 and an unrealized gain of $527 have been recorded in cost of goods sold on the consolidated statement of operations for these embedded foreign currency derivatives.

SUNOPTA INC.

33

July 2, 2011 10-Q


   
14. Derivative financial instruments and fair value measurement, continued

At July 2, 2011, the notional amounts of open purchase and sale contracts containing embedded derivatives were as follows:

 

$

Open purchase contracts

25,875

Open sale contracts

5,737

   
15. Comparative balances

The Company has reclassified comparative balances on the consolidated statement of operations for the quarter and two quarters ended July 3, 2010 to conform to the current quarter’s presentation. The comparative balance for cost of goods sold has been increased by $1,122 and $2,192 for the quarter and two quarters ended July 3, 2010, reflecting the amount of warehousing and distribution (“W&D”) expenses that were previously disclosed on a separate line item in the consolidated statement of operations. Total W&D costs for the quarter and two quarters ended July 2, 2011 was $1,171 and $2,286, respectively. The comparative reclassification did not have an impact on earnings, net assets, shareholder’s equity or cash and cash equivalents.

16. Subsequent events
   
(a) Amended banking facility

On July 4, 2011, a wholly-owned subsidiary of the Company amended its existing banking agreement to increase the availability by €11,000 (U.S. - $15,951) to fund operations. Interest on amounts borrowed under the amended agreement continues to accrue on similar terms. Amounts borrowed are secured through a letter of credit drawn on the Company’s U.S. line of credit facility (note 7(b)). Subsequent to quarter-end, €3,000 (U.S. - $4,350) was drawn on the amended facility to repay amounts owed to former shareholders (note 8(e)).

In addition, the wholly-owned subsidiary arranged for a €30,000 (U.S. - $43,503) temporary line of credit facility with its existing bank (note 7(d)) to provide security for commodity quota bids. Interest on amounts borrowed under the temporary facility accrues on terms similar to existing borrowings. The temporary facility expires in August 2011 and is not renewable.

(b) Mascoma subordinated note 

On August 3, 2011, the Company purchased a $500 convertible subordinated note issued by Mascoma. The notes earn 8% interest over a five year period, and are convertible into common shares of Mascoma upon an initial public offering, or qualified external financing received by Mascoma.

(c) Acquisition of Lorton’s

On August 5, 2011, the Company completed the acquisition of the assets and business of Lorton’s Fresh Squeezed Juices, Inc. (“Lorton’s”). At closing, the Company paid $2,500 in cash. Additional consideration may become payable based on the company’s achievement of pre-determined earnings targets over a three-year period, as described in the asset purchase agreement. The acquisition is subject to customary post-closing adjustments, which are expected to be completed within 12 months. Lorton’s is a vertically integrated producer of a variety of citrus-based products in both industrial and packaged formats.

SUNOPTA INC.

34

July 2, 2011 10-Q


Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

All financial numbers presented in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” are expressed in thousands of U.S. dollars, unless otherwise noted.

Significant Developments During the Quarter Ended July 2, 2011

On August 5, 2011, we completed the acquisition of the assets and business of Lorton’s Fresh Squeezed Juices, Inc. (“Lorton’s”) for cash consideration of $2,500, plus an earnout based on pre-determined earnings targets over a four-year period. Lorton’s is a vertically integrated producer of a variety of citrus based products in both industrial and packaged formats. This acquisition expands our vertically integrated operations into the extracting, processing and packaging of citrus-based ingredients through consumer packaged products, and provides increased capacity for future growth and expansion.

On June 10, 2011 we announced the notification by Eric Davis that he would resign as the Company's Vice President and Chief Financial Officer, effective June 30, 2011, to pursue other opportunities. The Company is conducting a search for a new Chief Financial Officer, which will include a review of both internal and external candidates. Steve Bromley, the Company's President and Chief Executive Officer, will serve as the Company's principal financial officer until the search is completed. Mr. Bromley will not receive any additional compensation for performing these functions. Mr. Bromley joined the Company in June 2001 and has served in a number of key operating and financial roles since that time, including Chief Financial Officer.

On May 31, 2011 we completed the sale of frozen fruit processing equipment located in Salinas, California to Cal Pacific Specialty Foods, LLC ("Cal Pacific") for proceeds of $1,773 which was paid in cash on closing. These assets were previously leased to Cal Pacific. Cal Pacific will continue to supply IQF strawberries and other products to SunOpta under an existing long-term supply agreement.

On April 29, 2011, we completed the sale of frozen fruit processing assets in Rosarito and Irapuato, Mexico to Fruvemex Mexicali, S.A. de C.V. (“Fruvemex”) for proceeds of $3,150. Prior to closing we received a deposit for $750 of the proceeds in cash. The remaining proceeds are scheduled to be received in a series of instalments over a twelve month period. As part of this transaction we also entered into a strategic raw material supply agreement with Fruvemex and a long term market value lease for the use of the facilities in Irapuato. Subsequently, on June 30, 2011, we completed the sale of land and buildings in Irapuato, Mexico to parties related to Fruvemex for $2,500. Upon closing, we received $250 of the proceeds in cash. The remaining proceeds are scheduled to be received in a series of instalments over a twelve month period. The sale of the land and buildings was the final step in the sale of our Mexican frozen fruit assets. The divestiture of our Mexican frozen fruit assets is expected to simplify our frozen foods business model and improve profitability by increasing focus on our value-added operations and core areas of expertise, while also expanding our strategic supply relationships.

SUNOPTA INC.

35

July 2, 2011 10-Q


Operations for the quarter ended July 2, 2011 compared to the quarter ended July 3, 2010

Consolidated

 

July 2, 2011

July 3, 2010

Change

 Change

 
Revenue        
     SunOpta Foods

265,970

212,744

53,226

25.0%
     Opta Minerals

24,787

21,141

3,646

17.2%
 

 

 

 

 
Total Revenue

290,757

233,885

56,872

24.3%
   

 

 

 
Gross Profit  

 

   
     SunOpta Foods

28,244

31,554

(3,310) -10.5%
     Opta Minerals

5,458

5,389

69

1.3%
   

 

 

 
Total Gross Profit

33,702

36,943

(3,241) -8.8%
   

 

   
Operating Income  

 

   
     SunOpta Foods

7,857

12,824

(4,967) -38.7%
     Opta Minerals

2,159

1,719

440

25.6%
     Corporate Services (1,980) (2,649)

669

25.3%
         
Total Operating Income

8,036

11,894

(3,858) -32.4%
   

 

   
Other (income) expense , net (3,189)

1,044

(4,233) -405.5%
Interest expense, net

2,520

2,567

(47) -1.8%
Provision for income taxes

3,672

1,854

1,818

98.1%
Earnings from continuing operations

5,033

6,429

(1,396) -21.7%
   

 

   
Earnings attributable to non-controlling interests

632

186

446

239.8%
Earnings from discontinued operations, net of taxes

-

414

(414) n/m
Gain on sale of discontinued operations, net of taxes

-

13,809

(13,809) n/m
   

 

   
Earnings attributable to SunOpta Inc.

4,401

20,466

(16,065) -78.5%

(Operating Income is defined as “Earnings before the following” excluding the impact of “Other (income) expense, net”)

Revenues for the quarter ended July 2, 2011 increased by 24.3% to $290,757 from $233,885 for the quarter ended July 3, 2010. Revenues in SunOpta Foods increased by 25.0% to $265,970 and revenues in Opta Minerals increased by 17.2% to $24,787. Excluding the impact of acquisitions made late in 2010, revenues increased 13.2% in the second quarter of 2011 compared to the second quarter of 2010. The acquisition of Dahlgren & Company, Inc. and Edner of Nevada, Inc. added incremental acquisition revenues of $22,945 and $2,943, respectively. The underlying base growth rate for the business was approximately 9.4% after accounting for changes including movements in foreign exchange and commodity prices. The increase in revenue was due primarily to the changes in sales volume and pricing described below in “Segmented Operations Information”.

SUNOPTA INC.

36

July 2, 2011 10-Q


Gross profit decreased $3,241, or 8.8% for the quarter ended July 2, 2011 to $33,702 from $36,943 for the quarter ended July 3, 2010. As a percentage of revenues, gross profit for the quarter ended July 2, 2011 was 11.6% compared to 15.8% for the quarter ended July 3, 2010, a decrease of 4.2% . Gross profit was negatively impacted by decreased demand and unfavourable commodity prices in our sunflower operations, due mainly to competition in the international marketplace. Additionally, volume declines at our frozen foods operation, our fiber and fruit ingredients operations, and at our natural health products operation all contributed to the decline in gross margin versus the same period in 2010. Partially offsetting these, we realized increased gross margin from a combination of higher volumes and improved efficiencies at our aseptic, healthy snacks, consumer products and international trading operations. The acquisition of Dahlgren on November 8, 2010 added an incremental $1,658 to gross margin. The decrease in gross margin was also due to a higher overall cost of goods sold, as a percentage of revenues, as a result of the variances described below under “Segmented Operations Information”.

Selling, General and Administrative costs (“SG&A”), including intangible asset amortization, increased $355 to $25,723 for the quarter ended July 2, 2011 compared to $25,368 for the quarter ended July 3, 2010. The stronger Canadian dollar and Euro relative to the U.S. dollar led to a $942 increase in SG&A on foreign denominated costs compared to the second quarter of 2010. The remaining $587 decrease in SG&A is attributable to lower professional fees, lower marketing costs in support of our branded natural health products, and lower overall compensation costs, offset by incremental SG&A added from the acquisitions of Dahlgren and Edner in the fourth quarter of 2010. As a percentage of revenues, SG&A and intangible asset amortization costs were 8.8% for the quarter ended July 2, 2011 compared to 10.8% for the quarter ended July 3, 2010.

Foreign exchange gains were $57 for the quarter ended July 2, 2011 as compared to gains of $319 for the quarter ended July 3, 2010. The decrease is primarily due to less favourable exchange rate movements for the Canadian dollar and the Euro relative to the U.S. dollar.

Operating income for the quarter ended July 2, 2011 decreased by $3,858 or 32.4% to $8,036 compared to operating income of $11,894 for the quarter ended July 3, 2010 due to the factors noted above. As a percentage of revenue, operating income was 2.8% for the quarter ended July 2, 2011, compared to 5.1% for the quarter ended July 3, 2010. Further details on revenue, gross margins and operating income variances are provided below under “Segmented Operations Information”.

Other income for the quarter ended July 2, 2011 of $3,189 includes the gains recognized on the sales of our frozen foods assets located in Mexico, as well as a gain recognized on the settlement of a lawsuit. Other expense for the quarter ended July 3, 2010 of $1,044 reflects costs associated with the closing and consolidation of manufacturing facilities in our healthy snacks operation, and severance costs at our natural health products operation.

Interest expense for the quarter ended July 2, 2011 was $2,520 compared to $2,567 for the quarter ended July 3, 2010, a $47 decrease. Borrowing costs were lower for the quarter ended July 2, 2011 due to a lower base interest rate on funds borrowed against our syndicated bank facilities and a reduction in amortization of non-cash deferred financing fees, partially offset by higher borrowing levels on our credit lines.

Income tax provision for the quarter ended July 2, 2011 was $3,672 compared to $1,854 for the quarter ended July 3, 2010, due to the quarterly effect of a number of timing differences and realization of tax benefits, plus increased consolidated earnings before tax. The annual effective income tax rate for 2011 is expected to be between 35% and 37%.

Earnings from continuing operations for the quarter ended July 2, 2011 were $5,033 as compared to $6,429 for the quarter ended July 3, 2010, a $1,396 decrease. Basic and diluted earnings per share from continuing operations was $0.07 and $0.07, respectively, for the quarter ended July 2, 2011 compared to $0.09 and $0.09, respectively, for the quarter ended July 3, 2010.

Earnings attributable to non-controlling interest for the quarter ended July 2, 2011 were $632 compared to earnings of $186 for the quarter ended July 3, 2010. The $446 increase is due to higher net earnings in our less than wholly-owned subsidiaries compared to the second quarter of 2010.

Earnings from discontinued operations, net of taxes of $414 for the quarter ended July 3, 2010 reflect the results of operations of the Canadian Food Distribution business and SunOpta BioProcess Inc., which were both divested in 2010.

Gain on the sale of discontinued operations, net of taxes of $13,809 for the quarter ended July 3, 2010, represents the gain realized on the sale of the Canadian Food Distribution business, which was sold on June 11, 2010.

On a consolidated basis, earnings and basic and diluted earnings per share were $4,401, $0.07 and $0.07, respectively, for the quarter ended July 2, 2011, compared to $20,466, $0.31 and $0.31, respectively, for the quarter ended July 3, 2010.

SUNOPTA INC.

37

July 2, 2011 10-Q


Segmented Operations Information

(Note: Certain prior year figures have been adjusted to conform with current year presentation and segmented reporting.)

SunOpta Foods        
For the quarter ended July 2, 2011 July 3, 2010 Change % Change
         
Revenue 265,970 212,744

53,226

25.0%
Gross Margin 28,244 31,554 (3,310) -10.5%
Gross Margin % 10.6% 14.8%   -4.2%
         
Operating Income 7,857 12,824 (4,967) -38.7%
Operating Income % 3.0% 6.0%   -3.0%

(Operating Income is defined as “Earnings before the following” excluding the impact of “Other (income) expense, net”)

SunOpta Foods contributed $265,970 or 91.5% of consolidated revenue for the quarter ended July 2, 2011 compared to $212,744 or 91.0% of consolidated revenues for the quarter ended July 3, 2010, an increase of $53,226. Excluding the impact of acquisitions made late in 2010, revenues in SunOpta Foods increased 12.9% in the second quarter of 2011 compared to the second quarter of 2010. The acquisition of Dahlgren and Edner added incremental revenues of $22,945 and $2,943, respectively. The underlying base growth rate for the business was approximately 8.6% after accounting for changes including movements in foreign exchange and commodity prices. The table below explains the increase in revenue by group for SunOpta Foods:

SunOpta Foods Revenue Changes  
Revenue for the quarter ended July 3, 2010 $212,744
               Increase in the Grains and Foods Group 33,224
               Decrease in the Ingredients Group (3,724)
               Increase in the Fruit Group 2,146
               Increase in the International Foods Group 21,580
Revenue for the quarter ended July 2, 2011 $265,970

Gross margin in SunOpta Foods decreased by $3,310 for the quarter ended July 2, 2011 to $28,244, or 10.6% of revenues, compared to $31,554, or 14.8% of revenues for the quarter ended July 3, 2010. The table below explains the decrease in gross margin by group:

SunOpta Foods Gross Margin Changes  
Gross Margin for the quarter ended July 3, 2010 $31,554
               Decrease in the Grains and Foods Group (1,391)
               Decrease in the Ingredients Group (2,278)
               Decrease in the Fruit Group (1,998)
               Increase in the International Foods Group 2,357
Gross Margin for the quarter ended July 2, 2011 $28,244

 

SUNOPTA INC.

38

July 2, 2011 10-Q


Operating income in SunOpta Foods decreased by $4,967 for the quarter ended July 2, 2011 to $7,857 or 3.0% of revenues, compared to $12,824 or 6.0% of revenues for the quarter ended July 3, 2010. The table below explains the decrease in operating income:

SunOpta Foods Operating Income Changes  
Operating Income for the quarter ended July 3, 2010 $12,824
               Decrease in gross margin, as noted above ($3,310)
               Decrease in foreign exchange gains (670)
               Increase in SG&A costs (987)
Operating Income for the quarter ended July 2, 2011 $7,857

Further details on revenue, gross margin and operating income variances within SunOpta Foods are provided in the segmented operations information that follows.

Grains and Foods Group        
For the quarter ended July 2, 2011 July 3, 2010 Change % Change
         
Revenue 125,312 92,088

33,224

36.1%
Gross Margin 10,868 12,259 (1,391) -11.3%
Gross Margin % 8.7% 13.3%   -4.6%
         
Operating Income 4,654 7,188 (2,534) -35.3%
Operating Income % 3.7% 7.8%   -4.1%

(Operating Income is defined as “Earnings before the following” excluding the impact of “Other (income) expense, net”)

The Grains and Foods Group contributed $125,312 in revenues for the quarter ended July 2, 2011, compared to $92,088 for the quarter ended July 3, 2010, a $33,224 or 36.1% increase. The table below explains the increase in revenue:

Grains and Foods Group Revenue Changes  
Revenue for the quarter ended July 3, 2010 $92,088

Incremental revenue from the acquisition of Dahlgren on November 8, 2010

22,945

Increase in price for commodity soy and corn as well as organic grains and grain-based food ingredients

7,880

Higher volumes of organic grain and grain-based food ingredients, as well as higher volumes of corn

5,950

New customer contracts for aseptically packaged soymilk and alternative beverages

2,092

Lower volume and price for in-shell sunflower products, and lower price for sunflower kernel, offset by increased volume in the bakery kernel market

(4,997)

Lower volumes at our roasted grains operation

(646)
Revenue for the quarter ended July 2, 2011 $125,312

Gross margin in the Grains and Foods Group decreased by $1,391 to $10,868 for the quarter ended July 2, 2011 compared to $12,259 for the quarter ended July 3, 2010, and the gross margin percentage decreased by 4.6% to 8.7% . The decrease in gross margin as a percentage of revenue is primarily due to unfavourable pricing in the sunflower market caused by increasing commodity costs and a large, low-cost supply from South America, as well as increased raw material costs and inefficiencies in specialty oils production, offset by improved efficiencies at our aseptic processing and packaging facilities due in part to increased volumes. The table below explains the decrease in gross margin:

SUNOPTA INC.

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July 2, 2011 10-Q



Grains and Foods Group Gross Margin Changes  
Gross Margin for the quarter ended July 3, 2010 $12,259

Incremental gross margin added by the acquisition of Dahlgren on November 8, 2010

1,658

Improvements at our joint venture vegetable oil refinery operation due to increased volumes and improved throughput

229

Increased volumes of soymilk, alternative beverages and broth products as well as improved plant efficiencies

216

Decreased demand for in-shell sunflower products, and pricing pressure for in-shell and bakery kernel products in international markets, combined with decreased plant efficiencies

(2,854)

Increased raw material and crushing costs for specialty oils and lower volume of milled corn, partially offset by higher margins on soy and corn and increased volumes of grain- based food ingredients

(640)
Gross Margin for the quarter ended July 2, 2011 $10,868

Operating income in the Grains and Foods Group decreased by $2,534 or 35.3% to $4,654 for the quarter ended July 2, 2011, compared to $7,188 for the quarter ended July 3, 2010. The table below explains the decrease in operating income:

Grains and Foods Group Operating Income Changes  
Operating Income for the quarter ended July 3, 2010 $7,188

Decrease in gross margin, as explained above

(1,391)

Incremental SG&A from the acquisition of Dahlgren on November 8, 2010

(741)

Increased professional and consulting fees due mainly to the dispute with Colorado Mills LLC

(534)

Increase in corporate cost allocations

(482)

Lower compensation costs, bad debt expense and other SG&A expenses, partially offset by higher utilities and insurance

436

Lower foreign exchange losses

178
Operating Income for the quarter ended July 2, 2011 $4,654

Looking forward, we believe the Grains and Foods business is well positioned in growing natural and organic food categories. We expect our aseptic packaging expansion on the West Coast to continue to enhance our capacity to manufacture aseptic soy and alternate beverages. We also intend to focus our efforts on growing our sunflower and IP grains business, expanding revenues from organic ingredients and continuing to focus on value-added ingredient and packaged product offerings. We believe the acquisition of Dahlgren & Company, Inc. positions us as a global leader in the confection sunflower business with solid growth potential. We intend to pursue internal growth and acquisition opportunities that are aligned with the Group’s core business model. Additionally, the international expansion of our soy base sales via strategic relationships for procurement of product is expected to drive incremental sales volume. Our long-term target for this group is to achieve a segment operating margin of 6% to 8% which assumes we are able to secure consistent quantity and quality grains and sunflower stocks, improve product mix, and control costs. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Increased supply pressure in the commodity-based markets in which we operate, volume decreases or loss of customers, or our inability to secure quality inputs or achieve our product mix or cost reduction goals, along with the other factors described above under “Forward-Looking Statements,” could adversely impact our ability to meet these forward-looking expectations.

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July 2, 2011 10-Q



Ingredients Group        
For the quarter ended July 2, 2011 July 3, 2010 Change % Change
         
Revenue 13,924 17,648 (3,724) -21.1%
Gross Margin 2,724 5,002 (2,278) -45.5%
Gross Margin % 19.6% 28.3%   -8.7%
         
Operating Income 899 3,006 (2,107) -70.1%
Operating Income % 6.5% 17.0%   -10.5%

(Operating Income is defined as “Earnings before the following” excluding the impact of “Other (income) expense, net”)

The Ingredients Group contributed $13,924 in revenues for the quarter ended July 2, 2011, compared to $17,648 for the quarter ended July 3, 2010, a $3,724 or 21.1% decrease. The table below explains the decrease in revenue:

Ingredients Group Revenue Changes  
Revenue for the quarter ended July 3, 2010 $17,648

Lower customer demand for oat and soy fiber, primarily due to loss of a significant customer in the first quarter of 2011

(2,698)

Lower demand for blended food ingredients, particularly for dairy blends, partially offset by improved pricing

(632)

Lower volumes in contract manufacturing, partially offset by higher pricing

(515)

Higher oat and wheat bran volumes and prices

121
Revenue for the quarter ended July 2, 2011 $13,924

Gross margin in the Ingredients Group decreased by $2,278 to $2,724 for the quarter ended July 2, 2011 compared to $5,002 for the quarter ended July 3, 2010, and the gross margin percentage decreased by 8.7% to 19.6% . Lower customer demand for fiber, due mainly to the loss of a significant customer in the first quarter of 2011, and lower production efficiencies due to the decline in volume led to the decrease in gross margin and rates compared to the second quarter of 2010. The table below explains the decrease in gross margin:

Ingredients Group Gross Margin Changes  
Gross Margin for the quarter ended July 3, 2010 $5,002

Lower customer demand for oat and soy fiber products, combined with plant inefficiencies due to lower production volumes, and increased raw material and input costs

(2,088)

Costs associated with the idling of a manufacturing facility in the first quarter of 2011

(267)

Lower contribution from dairy blends, and lower plant efficiencies

(184)

Improved pricing and product mix in contract manufacturing, higher demand for oat and wheat brans, and improved pricing on starches

261
Gross Margin for the quarter ended July 2, 2011 $2,724

 

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July 2, 2011 10-Q


Operating income in the Ingredients Group decreased by $2,107, or 70.1%, to $899 for the quarter ended July 2, 2011, compared to $3,006 for the quarter ended July 3, 2010. The table below explains the decrease in operating income:

Ingredients Group Operating Income Changes  
Operating Income for the quarter ended July 3, 2010 $3,006

Decrease in gross margin, as explained above

(2,278)

Increased spending on travel and meals, research and product development, and general office costs, partially offset by decreased professional fees

(44)

Decrease in compensation costs

215
Operating Income for the quarter ended July 2, 2011 $899

Looking forward, we intend to continue to concentrate on growing the Ingredients Group’s fiber portfolio and customer base through product and process innovation and diversification of both soluble and insoluble fiber applications. Replacing volume cost early in 2011 as a result of a significant customer changing to an alternative fiber product is a significant focus of the Group. We will also focus on maintaining the continuous improvement culture of this group to further increase capacity utilization, reduce costs, and sustain margins. Our long-term target for the Ingredients Group is to maintain segment operating margins of 12% to 15%. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. An unexpected increase in input costs, loss of key customers, an inability to introduce new products to the market, or implement our strategies and goals relating to pricing, capacity utilization or cost reductions, along with the other factors described above under “Forward- Looking Statements,” could adversely impact our ability to meet these forward-looking expectations.

Fruit Group        
For the quarter ended July 2, 2011 July 3, 2010 Change % Change
         
Revenue 41,677 39,531

2,146

5.4%
Gross Margin 3,386 5,384 (1,998) -37.1%