10-Q 1 form10q.htm FORM 10-Q SunOpta Inc.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 29, 2012

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 [X]       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 November 2, 2012 was 65,980,314.


SUNOPTA INC.
FORM 10-Q
For the quarterly period ended September 29, 2012

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION  
Item 1. Financial Statements (unaudited)  
Consolidated Statements of Operations for the quarter and three quarters ended September 29, 2012 and October 1, 2011 4
Consolidated Statements of Comprehensive Earnings (Loss) for the quarter and three quarters ended September 29, 2012 and October 1, 2011 5
  Consolidated Balance Sheets as at September 29, 2012 and December 31, 2011 6
Consolidated Statements of Shareholders’ Equity as at and for the three quarters ended September 29, 2012 and October 1, 2011 7
Consolidated Statements of Cash Flows for the quarter and three quarters ended September 29, 2012 and October 1, 2011 8
  Notes to Consolidated Financial Statements 9
     
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3 Quantitative and Qualitative Disclosures about Market Risk 58
Item 4 Controls and Procedures 58
     
     
PART II OTHER INFORMATION  
Item 1 Legal Proceedings 59
Item 1A Risk Factors 59
Item 6 Exhibits 60

Basis of Presentation

Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (“Form 10-Q”) to the “Company”, “SunOpta”, “we”, “us”, “our” or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together. In this report, all currency amounts are expressed in thousands of United States (“U.S.”) dollars (“$”), except per share amounts, unless otherwise stated. Amounts expressed in Canadian dollars are preceded by the symbol “Cdn $” and amounts expressed in euros are preceded by the symbol “€”. As at September 29, 2012, the closing rates of exchange for the U.S. dollar, expressed in Canadian dollars and euro, were $1.00 = Cdn $0.9832 and $1.00 = €0.7782. These rates are provided solely for convenience and do not necessarily reflect the rates used by us in the preparation of our financial statements.

Forward-Looking Statements

This Form 10-Q 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”, “predict”, 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, anticipated construction costs, competitive strengths, goals, capital expenditure plans, business and operational growth and expansion plans, anticipated operating margins and operating income targets, gains or losses associated with business transactions, cost reductions, rationalization and improved efficiency initiatives, proposed 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 circumstance.

SUNOPTA INC. 1 September 29, 2012 10-Q

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:

  • our ability to renew our syndicated credit facilities when they become due of July 27, 2016;

  • restrictions in our syndicated credit agreement on how we may operate our business;

  • our ability to meet the covenants of our credit facilities;

  • our potential additional capital needs in order to maintain current growth rates, which may not be available on favorable terms or at all;

  • our customers’ ability to choose not to buy products from us;

  • loss of a key customer;

  • changes in and difficulty in predicting consumer preferences for natural and organic food products;

  • the highly competitive industry in which we operate;

  • an interruption at one or more of our manufacturing facilities;

  • the loss of service of our key management;

  • the effective management of our supply chain;

  • volatility in the prices of raw materials and energy;

  • enactment of climate change legislation;

  • unfavorable growing conditions due to adverse weather conditions;

  • dilution in the value of our common shares through the exercise of stock options, participation in our employee stock purchase plan and issuance of additional securities;

  • impairment charges in goodwill or other intangible assets;

  • technological innovation by our competitors;

  • our ability to protect our intellectual property and proprietary rights;

  • substantial environmental regulation and policies to which we are subject;

  • significant food and health regulations to which SunOpta Foods is subject;

  • agricultural policies that influence our operations;

  • product liability suits, recalls and threatened market withdrawals that may be brought against us;

  • litigation and regulatory enforcement concerning marketing and labeling of food products;

  • our lack of management and operational control over Mascoma Corporation;

  • fluctuations in exchange rates, interest rates and certain commodities;

  • our ability to effectively manage our growth and integrate acquired companies; and

SUNOPTA INC. 2 September 29, 2012 10-Q

  • the volatility of our operating results and share price.

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 December 31, 2011 (“Form 10-K”). For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors under Item 1A of Part II of this Form 10-Q and under Item 1A, Risk Factors, of the Form 10-K.

SUNOPTA INC. 3 September 29, 2012 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SunOpta Inc.
Consolidated Statements of Operations
For the quarter and three quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

 

  Quarter ended     Three quarters ended  

 

  September 29,     October 1,     September 29,     October 1,  

 

  2012     2011     2012     2011  

 

$   $   $   $  

 

                       

Revenues

  279,339     257,011     820,975     777,549  

 

                       

Cost of goods sold

  246,158     226,990     716,220     682,916  

 

                       

Gross profit

  33,181     30,021     104,755     94,633  

 

                       

Selling, general and administrative expenses

  19,395     20,591     61,911     61,497  

Intangible asset amortization

  1,225     1,045     3,653     3,078  

Other expense (income), net (note 9)

  264     7     2,006     (2,887 )

Foreign exchange (gain) loss

  (130 )   1,022     (629 )   1,176  

 

                       

Earnings from continuing operations before the following

  12,427     7,356     37,814     31,769  

 

                       

Interest expense, net

  2,339     2,033     7,480     6,537  

 

                       

Earnings from continuing operations before income taxes

  10,088     5,323     30,334     25,232  

 

                       

Provision for income taxes

  3,947     1,451     10,302     8,875  

 

                       

Earnings from continuing operations

  6,141     3,872     20,032     16,357  

 

                       

Discontinued operations (note 3)

                       

     Earnings (loss) from discontinued operations, net of income taxes

  112     (433 )   517     (2,057 )

     Gain on sale of discontinued operations, net of income taxes

  -     71     676     71  

 

                       

Earnings (loss) from discontinued operations, net of income taxes

  112     (362 )   1,193     (1,986 )

 

                       

Earnings

  6,253     3,510     21,225     14,371  

 

                       

Earnings attributable to non-controlling interests

  449     144     1,384     1,523  

 

                       

Earnings attributable to SunOpta Inc.

  5,804     3,366     19,841     12,848  

 

                       

Earnings (loss) per share – basic (note 10)

                       

     - from continuing operations

  0.09     0.06     0.28     0.23  

     - from discontinued operations

  -     (0.01 )   0.02     (0.03 )

 

  0.09     0.05     0.30     0.20  

 

                       

Earnings (loss) per share – diluted (note 10)

                       

     - from continuing operations

  0.09     0.06     0.28     0.22  

     - from discontinued operations

  -     (0.01 )   0.02     (0.03 )

 

  0.09     0.05     0.30     0.19  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 4 September 29, 2012 10-Q


SunOpta Inc.
Consolidated Statements of Comprehensive Earnings (Loss)
For the quarter and three quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

  Quarter ended     Three quarters ended  

 

  September 29,     October 1,     September 29,     October 1,  

 

  2012     2011     2012     2011  

 

$   $   $   $  

 

                       

Earnings from continuing operations

  6,141     3,872     20,032     16,357  

Earnings (loss) from discontinued operations, net of income taxes

  112     (362 )   1,193     (1,986 )

Earnings

  6,253     3,510     21,225     14,371  

 

                       

Currency translation adjustment

  590     (4,069 )   (238 )   (572 )

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

  (7 )   79     (162 )   292  

Other comprehensive earnings (loss), net of income taxes

  583     (3,990 )   (400 )   (280 )

 

                       

Comprehensive earnings (loss)

  6,836     (480 )   20,825     14,091  

 

                       

Comprehensive earnings attributable to non-controlling interests

  433     238     1,212     1,699  

 

                       

Comprehensive earnings (loss) attributable to SunOpta Inc.

  6,403     (718 )   19,613     12,392  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 5 September 29, 2012 10-Q


SunOpta Inc.
Consolidated Balance Sheets
As at September 29, 2012 and December 31, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

  September 29,     December 31,  

 

  2012     2011  

 

$   $  

ASSETS

           

Current assets

           

     Cash and cash equivalents (note 11)

  4,187     2,378  

     Accounts receivable

  115,979     88,898  

     Inventories (note 5)

  224,556     228,455  

     Prepaid expenses and other current assets

  22,851     21,378  

     Current income taxes recoverable

  1,106     1,503  

     Deferred income taxes

  4,946     4,773  

     Current assets held for sale (note 1)

  -     17,923  

 

  373,625     365,308  

 

           

Investments (note 6)

  33,845     33,845  

Property, plant and equipment

  135,709     120,584  

Goodwill

  57,008     49,387  

Intangible assets

  54,416     48,035  

Deferred income taxes

  12,435     11,751  

Other assets

  2,270     1,854  

Non-current assets held for sale (note 1)

  -     739  

 

           

 

  669,308     631,503  

 

           

LIABILITIES

           

Current liabilities

           

     Bank indebtedness (note 7)

  111,237     109,718  

     Accounts payable and accrued liabilities

  118,928     114,308  

     Customer and other deposits

  3,493     843  

     Income taxes payable

  3,117     1,229  

     Other current liabilities

  3,809     1,419  

     Current portion of long-term debt (note 7)

  5,924     35,198  

     Current portion of long-term liabilities

  569     995  

     Current liabilities held for sale (note 1)

  -     5,920  

 

  247,077     269,630  

 

           

Long-term debt (note 7)

  47,836     17,066  

Long-term liabilities

  6,586     5,586  

Deferred income taxes

  30,689     24,273  

 

  332,188     316,555  

 

           

 

           

EQUITY

           

SunOpta Inc. shareholders’ equity

           

     Common shares, no par value, unlimited shares authorized, 65,977,814 shares issued (December 31, 2011 - 65,796,398)

  182,916     182,108  

     Additional paid-in capital (note 8)

  16,147     14,134  

     Retained earnings

  120,349     100,508  

     Accumulated other comprehensive income

  795     2,382  

 

  320,207     299,132  

Non-controlling interests

  16,913     15,816  

Total equity

  337,120     314,948  

 

           

 

  669,308     631,503  

Commitments and contingencies (note 12)

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 6 September 29, 2012 10-Q


SunOpta Inc.
Consolidated Statements of Shareholders’ Equity
As at and for the three quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

                          Accumulated              

 

              Additional           other com-     Non-        

 

              paid-in     Retained     prehensive     controlling        

 

  Common shares     capital     earnings     income     interests     Total  

 

  000s   $   $   $   $   $   $  

 

                                         

Balance at December 31, 2011

  65,796     182,108     14,134     100,508     2,382     15,816     314,948  

Employee share purchase plan and compensation grants

  85     446     -     -     -     -     446  

Exercise of options

  97     362     (128 )   -     -     -     234  

Stock-based compensation

  -     -     2,141     -     -     -     2,141  

Earnings from continuing operations

  -     -     -     18,648     -     1,384     20,032  

Earnings from discontinued operations, net of income taxes

  -     -     -     1,193     (1,359 )   -     (166 )

Currency translation adjustment

  -     -     -     -     (121 )   (117 )   (238 )

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

  -     -     -     -     (107 )   (55 )   (162 )

Payment to non-controlling interests

  -     -     -     -     -     (115 )   (115 )

Balance at September 29, 2012

  65,978     182,916     16,147     120,349     795     16,913     337,120  

 

                          Accumulated              

 

              Additional           other com-     Non-        

 

              paid-in     Retained     prehensive     controlling        

 

  Common shares     capital     earnings     income     interests     Total  

 

  000s   $   $   $   $   $   $  

Balance at January 1, 2011

  65,500     180,661     12,336     95,212     2,833     14,085     305,127  

Employee share purchase plan and compensation grants

  150     504     -     -     -     -     504  

Exercise of options

  93     586     (101 )   -     -     -     485  

Stock-based compensation

  -     -     1,536     -     -     -     1,536  

Earnings from continuing operations

  -     -     -     14,834     -     1,523     16,357  

Loss from discontinued operations, net of income taxes

  -     -     -     (1,986 )   -     -     (1,986 )

Currency translation adjustment

  -     -     -     -     (650 )   78     (572 )

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

  -     -     -     -     194     98     292  

Balance at October 1, 2011

  65,743     181,751     13,771     108,060     2,377     15,784     321,743  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 7 September 29, 2012 10-Q


SunOpta Inc.
Consolidated Statements of Cash Flows
For the quarter and three quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

  Quarter ended     Three quarters ended  

 

  September 29,     October 1,     September 29,     October 1,  

 

  2012     2011     2012     2011  

 

$   $   $   $  

 

                       

Cash provided by (used in)

                       

 

                       

Operating activities

                       

Earnings

  6,253     3,510     21,225     14,371  

Earnings (loss) from discontinued operations

  112     (362 )   1,193     (1,986 )

Earnings from continuing operations

  6,141     3,872     20,032     16,357  

 

                       

Items not affecting cash:

                       

     Depreciation and amortization

  5,155     4,497     14,946     13,354  

     Unrealized gain on foreign exchange

  (76 )   (991 )   (169 )   (22 )

     Deferred income taxes

  (639 )   1,114     3,077     5,835  

     Stock-based compensation

  713     555     2,041     1,536  

     Loss (gain) on sale of property, plant and equipment

  -     584     -     (3,240 )

     Unrealized loss (gain) on derivative instruments

  (3,075 )   646     (1,178 )   (3,272 )

     Other

  508     375     1,217     310  

     Changes in non-cash working capital, net of business acquired (note 11)

  7,462     990     (1,921 )   (31,903 )

Net cash flows from operations - continuing operations

  16,189     11,642     38,045     (1,045 )

Net cash flows from operations - discontinued operations

  313     (903 )   (3 )   (1,638 )

 

  16,502     10,739     38,042     (2,683 )

Investing activities

                       

Acquisitions of businesses, net of cash acquired (note 2)

  (11,644 )   (2,500 )   (29,174 )   (2,500 )

Purchases of property, plant and equipment

  (5,709 )   (6,082 )   (17,623 )   (15,256 )

Proceeds from sale of property, plant and equipment

  -     -     -     2,773  

Payment of contingent consideration

  (61 )   -     (388 )   -  

Purchases of intangible assets

  (56 )   -     (81 )   (67 )

Other

  122     411     (84 )   (30 )

Net cash flows from investing activities - continuing operations

  (17,348 )   (8,171 )   (47,350 )   (15,080 )

Net cash flows from investing activities - discontinued operations

  -     (318 )   12,134     (388 )

 

  (17,348 )   (8,489 )   (35,216 )   (15,468 )

Financing activities

                       

Increase under line of credit facilities (note 7)

  56,959     4,759     46,434     33,186  

Repayment of line of credit facilities (note 7)

  (45,295 )   -     (45,296 )   -  

Borrowings under long-term debt (note 7)

  15,234     1,875     34,607     1,912  

Repayment of long-term debt (note 7)

  (24,136 )   (6,697 )   (34,959 )   (13,423 )

Financing costs

  (1,315 )   -     (2,490 )   (186 )

Proceeds from the issuance of common shares

  257     242     680     989  

Other

  53     (19 )   24     802  

Net cash flows from financing activities - continuing operations

  1,757     160     (1,000 )   23,280  

 

                       

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

  29     (457 )   (17 )   (246 )

 

                       

Increase in cash and cash equivalents in the period

  940     1,953     1,809     4,883  

 

                       

Discontinued operations cash activity included above:

                       

     Add: Balance included at beginning of period

  -     212     -     308  

 

                       

Cash and cash equivalents - beginning of the period

  3,247     5,361     2,378     2,335  

 

                       

Cash and cash equivalents - end of the period

  4,187     7,526     4,187     7,526  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 8 September 29, 2012 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

1. Description of business and significant accounting policies

SunOpta Inc. (the “Company” or “SunOpta”) was incorporated under the laws of Canada on November 13, 1973. The Company operates businesses focused on a healthy products portfolio that promotes sustainable well-being. The Company has two industry groups, the largest being SunOpta Foods, which consists of four operating segments that operate in the natural, organic and specialty foods sectors and utilizes a number of integrated business models to bring cost-effective and quality products to market. In addition to SunOpta Foods, the Company owned approximately 66.2% of Opta Minerals Inc. (“Opta Minerals”) as at September 29, 2012. Opta Minerals is a vertically integrated provider of custom process solutions and industrial minerals products for use primarily in the steel, foundry, loose abrasive cleaning, construction and marine/bridge cleaning industries. The Company also has an ownership position in Mascoma Corporation (“Mascoma”), an innovative biofuels company (see note 6).

Basis of presentation

The interim consolidated financial statements of 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 U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP 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 three quarters ended September 29, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 29, 2012 or for any other period. The interim consolidated financial statements include the accounts of the Company and its subsidiaries, and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended December 31, 2011 (except as described below under “Comparative balances” and “Adoption of new accounting standards”). For further information, see the consolidated financial statements, and notes thereto, included in the Company’s Current Report on Form 8-K filed on June 25, 2012.

Comparative balances

As a result of the divestiture of the Company’s interest in Purity Life Natural Health Products (“Purity”) on June 5, 2012 (see note 3), the operating results and cash flows of Purity for the quarter and three quarters ended October 1, 2011 have been reclassified to discontinued operations. In addition, the net assets of Purity have been reclassified and reported as held for sale on the consolidated balance sheet as at December 31, 2011.

As more fully described in note 13, segmented information for the quarter and three quarters ended October 1, 2011 has been restated to reflect the realignment of the Company’s operating segments within SunOpta Foods implemented during the first quarter of 2012, and the divestiture of Purity (as noted above). The realignment of the Company’s operating segments did not change the Company’s previously reported consolidated results of operations, financial position or cash flows.

Adoption of new accounting standards

Effective January 1, 2012, the Company adopted on a prospective basis the provisions of the following new accounting standards:

  • Amendments to fair value measurement and disclosure requirements.

  • Guidance related to the presentation of net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive statements. The amendments did not change the components of other comprehensive income as reported in the Company’s separate statement of comprehensive earnings.

  • Guidance on the accounting for goodwill that permits a qualitative approach to determining the likelihood of a goodwill impairment charge.

SUNOPTA INC. 9 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

The adoption of these new standards did not have a significant impact on the interim consolidated financial statements.

2. Business acquisitions

WGI Heavy Metals, Incorporated

On August 29, 2012, Opta Minerals paid $14,098 in cash to acquire approximately 94% of the outstanding common shares of WGI Heavy Metals, Incorporated (“WGI”), pursuant to an offer by Opta Minerals to acquire all of the outstanding common shares of WGI for Cdn $0.60 cash per share. The fair value of the remaining outstanding common shares of WGI amounted to $870 based on the terms of the offer. The fair value of the remaining outstanding common shares has been included in accrued liabilities, as Opta Minerals had commenced a compulsory acquisition of the outstanding common shares of WGI not tendered to the offer. The compulsory acquisition is expected to be completed on or about November 8, 2012, following which Opta Minerals will own 100% of WGI. WGI’s principal business is the processing and sale of industrial abrasive minerals, and the sourcing, assembly and sale of ultra-high pressure water jet cutting machine replacement parts and components. This acquisition complements Opta Minerals’ existing product portfolio and expands product line offerings to new and existing customers.

The acquisition of WGI has been accounted for as a business combination under the acquisition method of accounting. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. The amounts recognized for the assets acquired and liabilities assumed are provisional due to the short duration since the acquisition date to obtain the information necessary to complete the valuation process for intangible assets and property, plant and equipment. The Company expects to finalize these amounts no later than one year from the acquisition date.

 

  Amounts  

 

  Recognized as  

 

  of Acquisition  

 

  Date  

 

$  

Cash and cash equivalents

  2,454  

Accounts receivable(1)

  4,922  

Inventories

  7,404  

Other current assets

  111  

Property, plant and equipment

  4,991  

Intangible assets(2)

  630  

Deferred income tax

  290  

Accounts payable and accrued liabilities

  (5,056 )

Bank indebtedness and long-term debt

  (551 )

Other long-term liabilities

  (227 )

Total consideration

  14,968  

(1)

Includes trade accounts receivable with a fair value of $4,365. The gross contractual amount of trade accounts receivable was $5,097, of which $732 is expected to be uncollectible.

   
(2)

Intangible assets principally consist of acquired customer and other relationships, which are being amortized over their estimated useful lives of approximately 15 years.

The acquired assets, assumed liabilities and results of operations of WGI have been included in the Opta Minerals operating segment since the date of acquisition. The revenues and losses of WGI attributable to SunOpta Inc. that are included in the consolidated statement of operations for the period from the acquisition date to September 29, 2012 were $2,286 and $105, respectively.

SUNOPTA INC. 10 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

Babco Industrial Corp.

On February 10, 2012, Opta Minerals acquired all of the outstanding common shares of Babco Industrial Corp. (“Babco”), located in Regina, Saskatchewan. Babco is an industrial processor of petroleum coke. This acquisition complements Opta Minerals’ existing product portfolio and provides for additional product line offerings to new and existing customers in the region.

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

 

  Amounts  

 

  Recognized as  

 

  of Acquisition  

 

  Date  

 

$  

Net assets acquired

     

Accounts receivable(1)

  467  

Inventories

  372  

Other current assets

  20  

Property, plant and equipment

  4,909  

Goodwill(2)

  7,675  

Intangible assets(3)

  9,347  

Accounts payable and accrued liabilities

  (692 )

Deferred income taxes

  (2,808 )

Long-term debt(4)

  (1,145 )

 

  18,145  

 

     

Consideration

     

Cash consideration

  17,530  

Contingent consideration(5)

  615  

 

  18,145  

(1)

The fair value of accounts receivable acquired is equal to the gross contractual amount receivable.

   
(2)

Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. None of the goodwill is expected to be deductible for tax purposes. The goodwill recorded represents (i) synergies and economies of scale expected to result from combining the operations of Opta Minerals and Babco, (ii) the value of the going-concern element of Babco’s existing business (that is, the higher rate of return on the assembled net assets versus if Opta Minerals had acquired all of the net assets separately), and (iii) the value of Babco’s assembled workforce that does not qualify for separate recognition as an intangible asset.

   
(3)

Intangible assets consist of acquired customer relationships, which are being amortized over their estimated useful lives of approximately 15 years.

   
(4)

In conjunction with the acquisition, Opta Minerals fully repaid Babco’s existing banking facilities.

   
(5)

Represents the fair value of contingent consideration payments of up to approximately $1,300 if Babco achieves certain earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets over the next five years. The fair value of the contingent consideration was measured using a discounted cash flow analysis based on level 3 inputs, which included a forecasted EBITDA growth rate of 2.5% and a risk-adjusted discount rate of 18.0%.


SUNOPTA INC. 11 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

In addition to the recognition of the fair values of the assets acquired and liabilities assumed at the acquisition date, Opta Minerals determined that in connection with its subsequent amalgamation with Babco during the quarter ended June 30, 2012, it was more likely than not that the combined company would be able to realize a portion of Opta Minerals’ pre-existing non-capital loss carryforwards. As a result, Opta Minerals released $990 of a valuation allowance against its deferred tax assets, resulting in a corresponding deferred tax benefit (before non-controlling interest) recognized in the provision for income taxes for the three quarters ended September 29, 2012.

The acquired assets (including goodwill), assumed liabilities and results of operations of Babco have been included in the Opta Minerals operating segment since the date of acquisition. The revenues and earnings of Babco attributable to SunOpta Inc. that are included in the consolidated statement of operations for the period from the acquisition date to September 29, 2012 were $8,667 and $1,545, respectively.

Pro forma consolidated results of operations (unaudited)

The following table presents unaudited pro forma consolidated results of operations for the quarter and three quarters ended September 29, 2012 and October 1, 2011, as if the acquisitions of WGI and Babco had occurred as of January 2, 2011.

 

  Quarter ended     Three quarters ended  

 

  September 29,     October 1,     September 29,     October 1,  

 

  2012     2011     2012     2011  

 

$   $   $   $  

Pro forma revenues

  284,632     269,955     843,509     817,635  

Pro forma earnings attributable to SunOpta Inc.

  4,836     3,609     18,235     13,635  

Pro forma earnings per share

                       

     Basic

  0.07     0.06     0.28     0.21  

     Diluted

  0.07     0.05     0.27     0.20  

The pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on unaudited historical financial information of the Company, WGI and Babco. The pro forma information reflects primarily the following pro forma adjustments:

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

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

  • additional interest costs associated with an increase in borrowings under Opta Minerals’ non-revolving term credit facility, which were used to finance the acquisitions;

  • exclusion of acquisition-related transaction costs incurred by Opta Minerals from pro forma earnings for the quarter and three quarters ended September 29, 2012, and the inclusion of those costs in pro forma earnings for the quarter and three quarters ended October 1, 2011; and

  • consequential tax effects of the preceding adjustments.

The pro forma information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisitions of WGI and Babco been completed on January 2, 2011. In addition, the pro forma information does not purport to project the future results of operations of the Company.

SUNOPTA INC. 12 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

3. Divestitures

Purity Life Natural Health Products

On June 5, 2012, the Company completed the sale of Purity, its Canadian natural health products distribution business, for consideration of $13,443 (Cdn $14,000) in cash at closing, plus up to approximately $672 (Cdn $700) if Purity achieves certain earnings targets during the one-year period following the closing date. The contingent consideration will not be recognized by the Company until realized. The divestiture of Purity is consistent with the Company’s strategy to focus on its core natural and organic foods sourcing and processing business. Purity was formerly part of the Company’s International Foods Group operating segment.

The Company recognized the following gain on sale in discontinued operations:

Cash consideration

$  13,443  

Transaction and related costs

  (1,254 )

Net proceeds

  12,189  

Net assets sold

  12,939  

Accumulated currency translation adjustment related to net assets sold

  (1,359 )

Pre-tax gain on sale

  609  

Recovery of income taxes(1)

  67  

Gain on sale of discontinued operations, net of income taxes

$  676  

(1)

The divestiture resulted in a pre-tax accounting loss on sale of $750 (before giving effect to the accumulated currency translation adjustment). The Company recognized a recovery of income taxes for the associated loss for Canadian tax purposes.

The operating results of Purity for the current and comparative periods are included within earnings (loss) from discontinued operations, net of income taxes, as follows:

 

  Quarter ended     Three quarters ended  

 

  September 29,     October 1,     September 29,     October 1,  

 

  2012     2011     2012     2011  

 

$   $   $   $  

 

                       

Revenues

  -     15,409     26,914     46,013  

 

                       

Earnings (loss) before income taxes

  (20 )   (64 )   1,034     (1,378 )

Recovery of (provision for) income taxes

  5     14     (300 )   309  

Earnings (loss) from discontinued operations, net of income taxes

  (15 )   (50 )   734     (1,069 )

SUNOPTA INC. 13 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

Colorado Sun Oil Processing LLC

Colorado Sun Oil Processing LLC (“CSOP”) was organized in 2008 under the terms of a joint venture agreement with Colorado Mills, LLC (“Colorado Mills”) to construct and operate a vegetable oil refinery adjacent to Colorado Mills’ sunflower crush plant. On August 12, 2011, the U.S. Bankruptcy Court, District of Colorado, accepted an asset purchase agreement submitted by Colorado Mills for CSOP and rejected an asset purchase agreement submitted by the Company. Based on the bankruptcy court ruling, the Company disposed of its interest in the CSOP joint venture, which was previously consolidated as a variable interest entity as part of the Grains and Foods Group, and recognized a gain on sale of discontinued operations of $71 in the quarter ended October 1, 2011. In addition, the operating results of CSOP for the current and comparative periods, which include legal fees and interest costs incurred in connection with arbitration proceedings related to the joint venture agreement (see note 12), are included within earnings (loss) from discontinued operations, net of income taxes, as follows:

 

  Quarter ended     Three quarters ended  

 

  September 29,     October 1,     September 29,     October 1,  

 

  2012     2011     2012     2011  

 

$   $   $   $  

 

                       

Revenues

  -     204     -     538  

 

                       

Earnings (loss) before income taxes

  208     (764 )   (356 )   (1,974 )

Recovery of (provision for) income taxes

  (81 )   283     139     732  

Loss allocated to non-controlling interests

  -     98     -     254  

Earnings (loss) from discontinued operations, net of income taxes

  127     (383 )   (217 )   (988 )

SUNOPTA INC. 14 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

4. Derivative financial instruments and fair value measurements

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 September 29, 2012 and December 31, 2011:

  September 29, 2012  
      Fair value                    
      asset (liability)     Level 1     Level 2     Level 3  
    $   $   $   $  

(a)

Commodity futures and forward contracts(1 )                        

     

   Unrealized short-term derivative gain   5,382     -     5,382     -  

     

   Unrealized long-term derivative gain   262     -     262     -  

     

   Unrealized short-term derivative loss   (3,540 )   (891 )   (2,649 )   -  

     

   Unrealized long-term derivative loss   (10 )   -     (10 )   -  

(b)

Inventories carried at market(2 )   18,625     -     18,625     -  

(c)

Interest rate swaps(3 )   (497 )   -     (497 )   -  

(d)

Forward foreign currency contracts(4 )   304     -     304     -  

(e)

Contingent consideration(5 )   (4,487 )   -     -     (4,487 )

    December 31, 2011  
      Fair value                    
      asset (liability)     Level 1     Level 2     Level 3  
    $   $   $   $  

(a)

Commodity futures and forward contracts(1 )                        

     

Unrealized short-term derivative gain   2,125     34     2,091     -  

     

Unrealized long-term derivative gain   271     -     271     -  

     

Unrealized short-term derivative loss   (1,410 )   -     (1,410 )   -  

     

Unrealized long-term derivative loss   (70 )   -     (70 )   -  

(b)

Inventories carried at market(2 )   12,685     -     12,685     -  

(c)

Interest rate swaps(3 )   (256 )   -     (256 )   -  

(d)

Forward foreign currency contracts(4 )   (149 )   -     (149 )   -  

(e)

Contingent consideration(5 )   (4,456 )   -     -     (4,456 )

  (1)

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 on the consolidated balance sheets.

  (2)

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

  (3)

The interest rate swaps are included in long-term liabilities on the consolidated balance sheets.

  (4)

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

  (5)

Contingent consideration obligations are included in long-term liabilities (including the current portion thereof) on the consolidated balance sheets.


(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.


SUNOPTA INC. 15 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

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 three quarters ended September 29, 2012, gains of $3,074 and $1,178, respectively, were recorded in cost of goods sold on the consolidated statement of operations related to changes in the fair value of these derivatives, compared with a loss of $36 and a gain of $3,272 in the corresponding periods of 2011.

At September 29, 2012, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows (in thousands of bushels):

 

        Number of bushels  

 

        purchase (sale)  

 

  Corn     Soybeans  

Forward commodity purchase contracts

  1,515     698  

Forward commodity sale contracts

  (807 )   (662 )

Commodity futures contracts

  (1,292 )   (673 )

 

In addition, as at September 29, 2012, the Company also had open forward contracts to sell 132 lots of cocoa.

 

(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. As at September 29, 2012, the Company had 592,399 bushels of commodity corn and 644,928 bushels of commodity soybeans in inventories carried at market.

 

(c)

Interest rate swaps

 

Opta Minerals utilizes interest rate swaps to minimize its exposure to interest rate risk. In February 2012, Opta Minerals entered into a five-year interest rate swap with a notional value of Cdn $19,000 ($19,324) to pay a fixed rate of 1.85%, plus a margin of 2.0% to 3.5% based on certain financial ratios of Opta Minerals, and receive a variable rate based on various reference rates including prime, bankers’ acceptances or LIBOR, plus the same margin. In August 2012, the notional value of the interest rate swap increased to Cdn $34,000 ($34,581). The net notional value decreases in accordance with the quarterly principal repayments on the non-revolving term credit facility.

 

At each period end, the Company calculates the mark-to-market fair value of the interest rate swaps 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. As the interest rate swaps are designated as a cash flow hedge for accounting purposes, gains and losses on changes in the fair value of these derivative instruments are included on the consolidated statements of comprehensive earnings.

   
(d)

Foreign forward currency contracts

 

As part of its risk management strategy, the Company enters into forward foreign 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. While these forward foreign exchange contracts typically represent economic hedges that are not designated as hedging instruments, certain of these contracts may be designated as hedges. As at September 29, 2012, the Company had open forward foreign exchange contracts with a notional value of €10,129 and $7,403. For the quarter and three quarters ended September 29, 2012, the Company recognized an unrealized loss of $16 and an unrealized gain of $304, respectively, related to changes in the fair value of these derivatives, which was included in foreign exchange loss on the consolidated statements of operations, compared with an unrealized loss of $359 and an unrealized loss of $554 in corresponding periods of 2011.


SUNOPTA INC. 16 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

(e)

Contingent consideration

   

The fair value measurement of contingent consideration arising from business acquisitions is determined using unobservable (level 3) inputs. These inputs include: (i) the estimated amount and timing of the projected cash flows on which the contingency is based; and (ii) the risk-adjusted discount rate used to present value those cash flows. For the three quarters ended September 29, 2012, the change in the fair value of the contingent consideration liability reflected the addition of the acquisition-date fair value of the contingent consideration arising from the acquisition of Babco of $617 (see note 2) and the payment of $388 to the former owners of Edner of Nevada, Inc. The balance of the change in the fair value of the contingent consideration liability related to (i) changes in the probability of achievement of the factors on which the contingencies are based, (ii) the accretion of interest expense, and (iii) changes in foreign currency exchange rates, which were not material for the quarter and three quarters ended September 29, 2012.

5. Inventories

 

  September 29, 2012     December 31, 2011  

 

$   $  

Raw materials and work-in-process

  138,183     147,051  

Finished goods

  66,416     70,358  

Company-owned grain

  24,935     17,351  

Inventory reserves

  (4,978 )   (6,305 )

 

  224,556     228,455  

6. Investments

Mascoma Corporation

As at September 29, 2012, the Company held an 18.65% equity ownership position in Mascoma. Mascoma is a privately-held renewable fuels company headquartered in the U.S. that has developed innovative technology for the low-cost conversion of abundant biomass. On August 31, 2010, the Company sold 100% of its ownership interest in SunOpta Bioprocess Inc. to Mascoma in exchange for its equity ownership position in Mascoma. The Company is accounting for its investment in Mascoma using the cost method, as the Company does not have the ability to exercise significant influence over the operating and financial policies of Mascoma.

Although Mascoma has a history of recurring operating losses and negative cash flows, the Company considers the value of its investment to be predicated on the future prospects for Mascoma’s products and technologies. Mascoma’s ability to continue as a going concern is dependent on a number of factors, including its ability to raise additional capital to fund its operational, capital expenditure and debt service requirements, as well as to support its product-development activities. Each reporting period, the Company evaluates whether events or changes in circumstances have occurred that may have a significant adverse effect on its ability to recover the carrying value of its investment. The Company considers the pricing of recent arms-length private offerings of Mascoma’s equity securities, as well as other available information relating to Mascoma to assess the commercial viability and future earnings potential of its products and technologies, as well as its ability to secure additional funding as required. On the basis of its overall assessment, the Company determined that the carrying value of its investment in Mascoma was recoverable as at September 29, 2012.

SUNOPTA INC. 17 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

7. Bank indebtedness and long-term debt

  September 29, 2012     December 31, 2011  

 

$   $  

Bank indebtedness

           

Canadian line of credit facility(1)

  -     26  

U.S. line of credit facility(1)

  38,025     51,617  

Opta Minerals revolving term credit facility(2)

  7,057     -  

Opta Minerals Canadian line of credit facility(2)

  -     7,765  

European credit facilities(3)

  65,353     -  

TOC line of credit facilities(3)

  -     50,310  

Other

  802     -  

 

  111,237     109,718  

 

           

Long-term debt

           

Non-revolving real estate term facility(1)

  -     12,133  

Non-revolving machinery and equipment term facility(1)

  -     11,078  

Opta Minerals non-revolving term credit facility(2)

  52,219     -  

Opta Minerals term loan facility(2)

  -     6,392  

Opta Minerals revolving acquisition facility(2)

  -     12,420  

Promissory notes

  -     8,744  

Other

  1,541     1,497  

 

  53,760     52,264  

Less: current portion

  5,924     35,198  

 

  47,836     17,066  

(1)

Syndicated credit facilities

   

The syndicated credit facilities support the core North American food operations of the Company.

   

On July 27, 2012, the Company entered into an amended and restated credit agreement with a syndicate of lenders. The amended agreement provides secured revolving credit facilities of Cdn $10,000 (or the equivalent U.S. dollar amount) and $165,000, as well as an additional $50,000 in availability upon the exercise of an uncommitted accordion feature. These facilities mature on July 27, 2016, with the outstanding principal amount repayable in full on the maturity date. The facilities replaced the Company’s previous line of credit facilities of Cdn $10,000 and $115,000, and refinanced non-revolving term facilities totalling approximately $21,000, which were due to mature on October 30, 2012.

   

Interest on borrowings under the facilities accrues based on various reference rates including LIBOR, plus an applicable margin of 1.75% to 2.50%, which is set quarterly based on average borrowing availability. As at September 29, 2012, the weighted-average interest rate on the facilities was 2.46%.

   

The facilities are collateralized by substantially all of the assets of the Company and its subsidiaries, excluding Opta Minerals and The Organic Corporation (“TOC”).


SUNOPTA INC. 18 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

(2)

Opta Minerals credit facilities

   

These credit facilities are specific to the operations of Opta Minerals.

   

On July 24, 2012, Opta Minerals amended its credit agreement dated May 18, 2012, to provide for a Cdn $20,000 revolving term credit facility (reducing to Cdn $15,000 on January 1, 2013) and a Cdn $52,500 non-revolving term credit facility. The revolving term credit facility matures on August 14, 2013, with the outstanding principal amount repayable in full on the maturity date. The first tranche of the non-revolving term credit facility, in the amount of Cdn $37,500, was used by Opta Minerals to refinance borrowings under its existing term loan and revolving acquisition facilities. The principal is repayable in equal quarterly installments of approximately Cdn $938. The second tranche of Cdn $15,000 was primarily used to fund the acquisition of WGI (see note 2), with the principal being repayable in equal quarterly installments of Cdn $375. Opta Minerals may be required to make additional repayments on the non- revolving term credit facility if certain financial ratios are met. The non-revolving term credit facility matures on May 18, 2017, with the remaining outstanding principal amount repayable in full on the maturity date.

   

Interest on the borrowings under these facilities accrue at the borrower’s option based on various reference rates including LIBOR, plus an applicable margin of 2.00% to 3.50% based on certain financial ratios of Opta Minerals. As described in note 4, Opta Minerals utilizes interest rate swaps to hedge the interest payments on a portion of the borrowings under the non-revolving term credit facility. As at September 29, 2012, the weighted-average interest rate on the amended credit facilities was 5.80%, after taking into account the related interest rate hedging activities.

   

The credit facilities are collateralized by a first priority security interest on substantially all of the assets of Opta Minerals.

   
(3)

European credit facilities

   

The European credit facilities support the global sourcing, supply and processing capabilities of the Company’s International Foods Group.

   

On September 25, 2012, TOC and certain of its subsidiaries entered into a credit facilities agreement with two lenders, which provides for a €45,000 revolving credit facility covering working capital needs and a €3,000 pre-settlement facility covering currency hedging requirements. The revolving credit facility is secured by the working capital of TOC and certain of its subsidiaries. A portion of the revolving credit facility was used to repay an existing €35,000 line of credit facility of TOC. The revolving credit facility and pre-settlement facility are due on demand with no set maturity date, and the credit limit may be extended or adjusted upon approval of the lenders.

   

Interest costs under the facilities accrue based on either a loan margin of 1.75% or an overdraft margin of 1.85% plus the cost of funds as set by each of the lenders on a periodic basis. The initial applicable cost of funds was set by the lenders at 0.115%.


SUNOPTA INC. 19 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

8. Stock-based compensation

For the three quarters ended September 29, 2012, the Company granted 1,375,000 options to employees that vest ratably on each of the first through fifth anniversary of the grant date and expire on the tenth anniversary of the grant date. These options had a weighted-average grant-date fair value of $3.41 per option. The following table summarizes the weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the options granted:

Exercise price

$  5.56  

Dividend yield

  0%  

Expected volatility

  65.8%  

Risk-free interest rate

  1.2%  

Expected life of options (in years)

  6.5  

9. Other expense (income), net

    Quarter ended     Three quarters ended  

 

    September 29,     October 1,     September 29,     October 1,  

 

    2012     2011     2012     2011  

 

  $   $   $   $  

(a)

Severance and other rationalization costs   -     -     1,295     427  

(b)

Acquisition-related transaction costs   139     -     540     -  

(c)

Loss (gain) on sale of assets   51     110     51     (2,938 )

(d)

Legal settlements   -     -     -     (500 )

 

Other   74     (103 )   120     124  

 

    264     7     2,006     (2,887 )

(a)

Severance and other rationalization costs

   

For the three quarters ended September 29, 2012, the Company recorded employee severance and other costs in connection with the rationalization of a number of operations and functions in an effort to streamline operations. The Company incurred severance costs of $500 in total as a result of a reduction in its salaried workforce of approximately 6%. In addition, for the quarter ended June 30, 2012, the Company accrued $795 of severance payable to a former executive officer over a period of 15 months.

   

For the three quarters ended October 1, 2011, severance costs were related to employee terminations in the former Fruit Group, as well as the International Foods Group and Corporate Services.

   
(b)

Acquisition-related transaction costs

   

Represents transaction costs incurred by Opta Minerals in connection with the acquisitions of WGI and Babco (see note 2).

   
(c)

Gain on sale of assets

   

In the second quarter of 2011, the Company completed the sale of land, buildings and processing equipment located in Mexico for proceeds of $5,650. The gain on sale, after deducting the carrying value of the assets sold and related transaction costs, was $2,938.


SUNOPTA INC. 20 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

(d)

Legal settlement

   

In the second quarter of 2011, the Company recorded a recovery of $500 in connection with the settlement of a class action lawsuit with a former employee. In fiscal 2009, the Company had accrued $1,200 related to the tentative settlement of this matter.

10. Earnings per share

Earnings (loss) per share were calculated as follows:

 

  Quarter ended     Three quarters ended  

 

  September 29,           September 29,        

 

  2012     October 1, 2011     2012     October 1, 2011  

Earnings from continuing operations attributable to SunOpta Inc.

$  5,692   $  3,728   $  18,648   $  14,834  

Earnings (loss) from discontinued operations, net of income taxes

  112     (362 )   1,193     (1,986 )

Earnings attributable to SunOpta Inc.

$  5,804   $  3,366   $  19,841   $  12,848  

Basic weighted-average number of shares outstanding

  65,949,415     65,599,998     65,871,213     65,606,481  

Dilutive potential of the following:

                       

    Employee/director stock options

  571,131     603,756     525,840     771,796  

    Warrants

  171,829     148,543     143,054     270,130  

Diluted weighted-average number of shares outstanding

  66,692,375     66,352,297     66,540,107     66,648,407  

Earnings (loss) per share - basic:

                       

    - from continuing operations

$  0.09   $  0.06   $  0.28   $  0.23  

    - from discontinued operations

  -     (0.01 )   0.02     (0.03 )

 

$  0.09   $  0.05   $  0.30   $  0.20  

Earnings (loss) per share - diluted:

                       

    - from continuing operations

$  0.09   $  0.06   $  0.28   $  0.22  

    - from discontinued operations

  -     (0.01 )   0.02     (0.03 )

 

$  0.09   $  0.05   $  0.30   $  0.19  

For the quarter ended September 29, 2012, options to purchase 2,048,700 (October 1, 2011 - 1,334,700) common shares have been excluded from the calculation of diluted earnings per share due to their anti-dilutive effect. For the three quarters ended September 29, 2012, options to purchase 2,065,700 (October 1, 2011 – 1,061,600) common shares have been excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

SUNOPTA INC. 21 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

11. Supplemental cash flow information

  Quarter ended     Three quarters ended  

 

  September 29,     October 1,     September 29,     October 1,  

 

  2012     2011     2012     2011  

 

$   $   $   $  

 

                       

Changes in non-cash working capital:

                       

     Accounts receivable

  (3,319 )   1,821     (21,223 )   (13,751 )

     Inventories

  6,623     859     11,831     (3,323 )

     Income tax recoverable

  1,682     (2,014 )   3,179     (1,299 )

     Prepaid expenses and other current assets

  (57 )   87     2,837     8,629  

     Accounts payable and accrued liabilities

  3,619     379     (1,191 )   (21,237 )

     Customer and other deposits

  (1,086 )   (142 )   2,646     (922 )

 

  7,462     990     (1,921 )   (31,903 )

As at September 29, 2012, cash and cash equivalents included $2,092 (December 31, 2011 - $698) that was specific to Opta Minerals and cannot be utilized by the Company for general corporate purposes.

12. Commitments and contingencies

Colorado Sun Oil Processors, LLC dispute

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 through CSOP. The purpose of the joint venture was 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 an output term of the joint venture agreement.

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 Prowers County District Court, Colorado on March 16, 2010. 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. In August 2011, as part of the bankruptcy proceeding initiated in June 2010 in the U.S. Bankruptcy Court, District of Colorado, Colorado Mills purchased substantially all of the assets of the joint venture.

A separate arbitration proceeding occurred between Grains and Foods and Colorado Mills to resolve direct claims each party asserted against the other. The case was arbitrated during the week of August 8, 2011 and proposed findings were filed on September 13, 2011. On January 4, 2012 the arbitrator entered an award denying Grains and Foods’ claims and awarding Colorado Mills $4,816 for its breach of contract claim and $430 for accrued interest. The Company subsequently filed a motion to vacate the arbitration award on March 30, 2012 in Prowers County District Court. Colorado Mills filed a response on April 20, 2012. The Company filed a reply on April 27, 2012. The Prowers County District Court denied the Company’s motion and entered judgment on the arbitration award on July 6, 2012 in the amount of $4,816. On July 13, 2012, the Company bonded the judgment in the amount of $6,875, or approximately 125% of the judgment amount, to stay execution of the judgment pending the Company’s filing of an appeal to the Colorado Court of Appeals. Although management believes the claims asserted by Colorado Mills are baseless, that the arbitrator committed prejudicial error, and that vacatur of the award is warranted, management cannot predict whether the prospect of an unfavorable outcome in this matter is probable. As of December 31, 2011, the Company accrued the full value of the award, pending the outcome of post-arbitration judicial proceedings.

SUNOPTA INC. 22 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

Other claims

Various additional claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that 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.

13. Segmented information

In the first quarter of 2012, the Company implemented changes to its organizational structure to align the operations of SunOpta Foods according to the type of customers and markets served, rather than by product groupings. Consequently, the Company has realigned its reportable operating segments to reflect the resulting changes in management reporting and accountability to the Company’s Chief Executive Officer. With this realignment, SunOpta Foods now consists of the following four operating segments: Grains and Foods Group, Ingredients Group, Consumer Products Group and International Foods Group. This new structure is more closely aligned with the Company’s integrated business models that specialize in the sourcing, processing and packaging of natural, organic and specialty food products.

As a result of this realignment, the former Fruit Group was eliminated and the new Consumer Products Group was created to focus on non-grains based consumer packaged goods and is comprised of the Frozen Foods and Healthy Snacks operations which were part of the former Fruit Group, and the Food Solutions operations which were formerly part of the International Foods Group. The Fruit Ingredient operation of the former Fruit Group was merged with the existing Ingredients Group. The Grains and Foods Group remained unchanged.

Effective with the realignment, the Company operates in two industries divided into six operating segments as follows:

(a)

SunOpta Foods sources, processes, packages and markets 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 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 specialty fruit ingredients, 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.

Consumer Products Group provides natural and organic consumer packaged food products to major global food manufacturers, distributors and supermarket chains with a variety of branded and private label non-grains based products; and

     
  iv.

International Foods Group includes European and North American based operations that source and supply raw material ingredients and trade organic commodities.


(b)

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

   
(c)

Corporate Services provide a variety of management, financial, information technology, treasury and administration services to the operating segments from the head office in Brampton, Ontario, and information technology and shared services from its office in Edina, Minnesota.


SUNOPTA INC. 23 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

The following segmented information for the quarter and three quarters ended September 29, 2012 and October 1, 2011 is provided on the basis of the Company’s new operating segments alignment and the divestiture of Purity (see note 3):

 

              Quarter ended  

 

              September 29, 2012  

 

  SunOpta     Opta     Corporate        

 

  Foods     Minerals     Services     Consolidated  

 

$   $   $   $  

External revenues by market:

                       

     U.S.

  201,878     20,003     -     221,881  

     Canada

  6,294     7,999     -     14,293  

     Europe and other

  38,187     4,978     -     43,165  

Total revenues from external customers

  246,359     32,980     -     279,339  

 

                       

Segment operating income (loss)

  10,835     3,280     (1,424 )   12,691  

 

                       

Other expense, net

                    264  

Interest expense, net

                    2,339  

Provision for income taxes

                    3,947  

Earnings from continuing operations

                    6,141  

 

                    Quarter ended  

 

                    September 29, 2012  

 

  Grains and           Consumer     International        

 

  Foods     Ingredients     Products     Foods     SunOpta  

 

  Group     Group     Group     Group     Foods  

 

$   $   $   $   $  

External revenues by market:

                             

     U.S.

  123,661     18,268     41,310     18,639     201,878  

     Canada

  2,997     1,149     195     1,953     6,294  

     Europe and other

  13,259     856     131     23,941     38,187  

Total revenues from external customers

  139,917     20,273     41,636     44,533     246,359  

 

                             

Segment operating income (loss)

  8,780     878     (544 )   1,721     10,835  

SUNOPTA INC. 24 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

 

              Quarter ended  

 

              October 1, 2011  

 

  SunOpta     Opta     Corporate        

 

  Foods     Minerals     Services     Consolidated  

 

$   $   $   $  

External revenues by market:

                       

     U.S.

  171,864     16,360     -     188,224  

     Canada

  9,331     3,940     -     13,271  

     Europe and other

  51,714     3,802     -     55,516  

Total revenues from external customers

  232,909     24,102     -     257,011  

 

                       

Segment operating income (loss)

  8,563     1,606     (2,806 )   7,363  

 

                       

Other expense, net

                    7  

Interest expense, net

                    2,033  

Provision for income taxes

                    1,451  

Earnings from continuing operations

                    3,872  

 

                    Quarter ended  

 

                    October 1, 2011  

 

  Grains and           Consumer     International        

 

  Foods     Ingredients     Products     Foods     SunOpta  

 

  Group     Group     Group     Group     Foods  

 

$   $   $   $   $  

External revenues by market:

                             

     U.S.

  95,960     19,524     40,873     15,507     171,864  

     Canada

  3,559     1,723     1,064     2,985     9,331  

     Europe and other

  22,077     719     129     28,789     51,714  

Total revenues from external customers

  121,596     21,966     42,066     47,281     232,909  

 

                             

Segment operating income

  4,394     2,065     205     1,899     8,563  

SUNOPTA INC. 25 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

 

              Three quarters ended  

 

              September 29, 2012  

 

  SunOpta     Opta     Corporate        

 

  Foods     Minerals     Services     Consolidated  

 

$   $   $   $  

External revenues by market:

                       

     U.S.

  585,642     56,637     -     642,279  

     Canada

  24,393     22,764     -     47,157  

     Europe and other

  118,414     13,125     -     131,539  

Total revenues from external customers

  728,449     92,526     -     820,975  

 

                       

Segment operating income (loss)

  36,423     8,178     (4,781 )   39,820  

 

                       

Other expense, net

                    2,006  

Interest expense, net

                    7,480  

Provision for income taxes

                    10,302  

Earnings from continuing operations

                    20,032  

 

                    Three quarters ended  

 

                    September 29, 2012  

 

  Grains and           Consumer     International        

 

  Foods     Ingredients     Products     Foods     SunOpta  

 

  Group     Group     Group     Group     Foods  

 

$   $   $   $   $  

External revenues by market:

                             

     U.S.

  346,507     55,804     133,246     50,085     585,642  

     Canada

  12,238     4,049     1,311     6,795     24,393  

     Europe and other

  38,351     2,555     1,322     76,186     118,414  

Total revenues from external customers

  397,096     62,408     135,879     133,066     728,449  

 

                             

Segment operating income (loss)

  27,662     2,946     (549 )   6,364     36,423  

SUNOPTA INC. 26 September 29, 2012 10-Q

 
SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarters ended September 29, 2012 and October 1, 2011
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

 

              Three quarters ended  

 

              October 1, 2011  

 

  SunOpta     Opta     Corporate        

 

  Foods     Minerals     Services     Consolidated  

 

$   $   $   $  

External revenues by market:

                       

     U.S.

  534,600     47,613     -     582,213  

     Canada

  24,613     11,348     -     35,961  

     Europe and other

  147,841     11,534     -     159,375  

Total revenues from external customers

  707,054     70,495     -     777,549  

 

                       

Segment operating income (loss)

  29,835     6,216     (7,169 )   28,882  

 

                       

Other income, net

                    (2,887 )

Interest expense, net

                    6,537  

Provision for income taxes

                    8,875  

Earnings from continuing operations

                    16,357  

 

                    Three quarters ended  

 

                    October 1, 2011  

 

  Grains and           Consumer     International        

 

  Foods     Ingredients     Products     Foods     SunOpta  

 

  Group     Group     Group     Group     Foods  

 

$   $   $   $   $  

External revenues by market:

                             

     U.S.

  296,168     63,207     122,605     52,620     534,600  

     Canada

  10,140     5,768     2,482     6,223     24,613  

     Europe and other

  55,663     2,627     670     88,881     147,841  

Total revenues from external customers

  361,971     71,602     125,757     147,724     707,054  

 

                             

Segment operating income (loss)

  15,962     6,692     (151 )   7,332     29,835  

SUNOPTA INC. 27 September 29, 2012 10-Q

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

Forward-Looking Financial Information

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended September 29, 2012 contained under Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”) and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Current Report on Form 8-K that we filed on June 25, 2012.

Certain statements contained in this MD&A may constitute forward-looking statements as defined under securities laws. Forward-looking statements may relate to our future outlook and anticipated events or results and may include statements regarding our future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking statements can be identified by terms such as “anticipate”, “estimate”, “intend”, “project”, “potential”, “continue”, “believe”, “expect”, “could”, “would”, “should”, “might”, “plan”, “will”, “may”, “predict”, or other similar expressions concerning matters that are not historical facts. To the extent any forward-looking statements contain future-oriented financial information or financial outlooks, such information is being provided to enable a reader to assess our financial condition, material changes in our financial condition, our results of operations, and our liquidity and capital resources. Readers are cautioned that this information may not be appropriate for any other purpose, including investment decisions.

Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Forward-looking statements are also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what we currently expect. These factors are more fully described under Item 1A of Part II of this Form 10-Q and under Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (“2011 Form 10-K”).

Forward-looking statements contained in this commentary are based on our current estimates, expectations and projections, which we believe are reasonable as of the current date. You should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Other than as required under securities laws, we do not undertake to update any forward-looking information at any particular time.

Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to November 7, 2012. All dollar amounts in this MD&A are expressed in thousands of U.S. dollars, except per share amounts, unless otherwise noted.

Commodity Prices

Commodity prices for corn and soybeans have risen significantly over the course of this year as a consequence of supply shortfalls due to crop failures following the worst drought conditions experienced in North America in many years. Although the overall 2012 crop is expected to be of fair to average yield and quality, we anticipate that we will be able to maintain adequate supply for our value-added consumer packaged and ingredients businesses, as we source primarily from northern growing regions that were not as severely impacted by the extreme heat and lack of rain experienced in the southern regions of the U.S. In addition, through our global sourcing platform we expect to minimize any shortfalls in supply for our lower-margin commodity grain and feed sales. With respect to pricing, our contractual relationships with customers for consumer packaged and ingredients products, as well as commodity grain and feed sales, typically allow us to increase our prices to recover increased costs of supply. As a result, we do not anticipate that weather-related supply shortfalls and commodity price inflation will have a material negative impact to our results of operations for the fourth quarter of 2012 through 2013.

Segment Realignment and Rationalization Efforts

In February 2012, we announced that a process to streamline the operations and organizational structure of SunOpta Foods had been undertaken in order to drive efficiencies and better align product innovation and commercial activities. During the first quarter of 2012, operating segments within SunOpta Foods were re-aligned according to the type of customers and markets served, rather than by product groupings. As a result, the former Fruit Group was eliminated and a new Consumer Products Group was created to focus on non-grains based consumer packaged goods. The Consumer Products Group is comprised of the Frozen Foods and Healthy Snacks operations which were part of the former Fruit Group, and the Food Solutions operations which were formerly part of the International Foods Group. The Fruit Ingredient operation of the former Fruit Group was merged with the existing Ingredients Group. Following this realignment and the divestiture of Purity Life Natural Health Products (“Purity”) (as described below under “Business Developments”), the International Foods Group comprises solely our international sourcing and supply operations (Tradin Organic). The Grains and Foods Group remained unchanged. With this realignment, SunOpta Foods now consists of four operating segments: Grains and Foods Group, Ingredients Group, Consumer Products Group and International Foods Group. The segmented operations information provided in this MD&A for the current and comparative periods reflects these new operating segments. In addition, on June 25, 2012, we filed a Current Report on Form 8-K in order to update the historical financial statements and MD&A for all periods presented in the 2011 Form 10-K to reflect the realignment of the operating segments within SunOpta Foods implemented during the first quarter of 2012.

SUNOPTA INC. 28 September 29, 2012 10-Q

In hand with these efforts, we also announced the rationalization of a number of operations and functions which resulted in a reduction of approximately 6% of our salaried workforce. Once fully implemented, and after approximately $500 in severance charges, this rationalization is expected to reduce annual costs by approximately $3,000 before tax. In addition, we have recently taken steps towards the closure of the Chelmsford, Massachusetts office of the Ingredients Group which would involve the relocation of certain back office functions to our U.S. corporate office located in Edina, Minnesota. We expect that this office closure will result in annualized savings of approximately $1,200 once fully implemented. The costs associated with the closure and relocation are expected to be incurred during the fourth quarter of 2012 and first quarter of 2013; however, these costs are not expected to be material.

Business Developments

WGI Heavy Minerals, Incorporated

On August 29, 2012, Opta Minerals Inc. (“Opta Minerals”) paid $14,098 in cash to acquire approximately 94% of the outstanding common shares of WGI Heavy Metals, Incorporated (“WGI”), pursuant to an offer by Opta Minerals to acquire all of the outstanding common shares of WGI for Cdn $0.60 cash per share. Opta Minerals commenced a compulsory acquisition of the outstanding common shares of WGI not tendered to the offer, which is expected to be completed on or about November 8, 2012, following which Opta Minerals will own 100% of WGI. WGI’s principal business is the processing and sale of industrial abrasive minerals, and the sourcing, assembly and sale of ultra-high pressure water jet cutting machine replacement parts and components. This acquisition complements Opta Minerals’ existing product portfolio and expands product line offerings to new and existing customers.

Purity Life Natural Health Products

On June 5, 2012, we completed the sale of Purity, our Canadian natural health products distribution business, for consideration of $13,443 (Cdn $14,000) in cash at closing, plus up to approximately $672 (Cdn $700) if Purity achieves certain earnings targets during the one-year period following the closing date. We will not recognize the contingent consideration until realized. The divestiture of Purity is consistent with our strategy to focus on our core natural and organic foods sourcing and processing business. The operating results of Purity for the quarter and three quarters ended September 29, 2012 and October 1, 2011 have been reclassified to discontinued operations. Purity was formerly part of the International Foods Group.

Babco Industrial Corp.

In February 2012, Opta Minerals acquired all of the outstanding common shares of Babco Industrial Corp. (“Babco”) located in Regina, Saskatchewan for cash at closing of $17,530 plus contingent consideration of up to $1,300 based on the achievement of certain earnings targets over the next five years. Babco is an industrial processor of petroleum coke. This acquisition complements Opta Minerals existing product portfolio and provides for additional product line offerings to new and existing customers in the region.

Inland RC, LLC

In November 2011, Opta Minerals acquired the members’ interest in Inland RC, LLC, (“Inland”) a manufacturer of pre-cast refractory shapes, injection lances and electric furnace deltas for cash consideration of $658 plus contingent consideration based on the achievement of certain future targets. Inland’s business is complementary with current Opta Minerals product offerings and has capacity for growth and significant synergy opportunities.

Lorton’s Fresh Squeezed Juices, Inc.

In August 2011, we completed the acquisition of the assets and business of Lorton’s Fresh Squeezed Juices, Inc. (“Lorton’s”) for cash consideration and amounts payable for additional working capital of $2,602, plus potential additional consideration pursuant to an earn-out 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 expanded 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. Lorton’s operations are included in the Consumer Products Group.

SUNOPTA INC. 29 September 29, 2012 10-Q

Colorado Sun Oil Processing LLC

In August 2011, we disposed of our interest in the Colorado Sun Oil Processing LLC (“CSOP”) joint venture, pursuant to bankruptcy proceedings. As a result, the operating results of CSOP (including legal fees and interest costs incurred in connection with arbitration proceedings underway in respect of the related joint venture agreement – see note 12 to the interim consolidated financial statements) for the quarter and three quarters ended September 29, 2012 and October 1, 2011 have been included in discontinued operations. CSOP was part of the Grains and Foods Group.

Consolidated Results of Operations

For the quarter ended

  September 29, 2012     October 1, 2011     Change     Change  

 

$   $   $     %  

Revenue

                       

     SunOpta Foods

  246,359     232,909     13,450     5.8%  

     Opta Minerals

  32,980     24,102     8,878     36.8%  

Total Revenue

  279,339     257,011     22,328     8.7%  

Gross Profit

                       

     SunOpta Foods

  26,205     24,797     1,408     5.7%  

     Opta Minerals

  6,976     5,224     1,752     33.5%  

Total Gross Profit

  33,181     30,021     3,160     10.5%  

Segment Operating Income (Loss)(1)

                       

     SunOpta Foods

  10,835     8,563     2,272     26.5%  

     Opta Minerals

  3,280     1,606     1,674     104.2%  

     Corporate Services

  (1,424 )   (2,806 )   1,382     49.3%  

Total Segment Operating Income

  12,691     7,363     5,328     72.4%  

Other expense , net

  264     7     257     3671.4%  

Earnings from continuing operations before the following

  12,427     7,356     5,071     68.9%  

Interest expense, net

  2,339     2,033     306     15.1%  

Provision for income taxes

  3,947     1,451     2,496     172.0%  

Earnings from continuing operations

  6,141     3,872     2,269     58.6%  

Earnings attributable to non-controlling interests

  449     144     305     211.8%  

Earnings (loss) from discontinued operations, net of taxes

  112     (433 )   545     n/m  

Gain on sale of discontinued operations, net of taxes

  -     71     (71 )   n/m  

Earnings attributable to SunOpta Inc.

  5,804     3,366     2,438     72.4%  

(1)

When assessing the financial performance of our operating segments, we use an internal measure of operating income that excludes other income/expense items determined in accordance with U.S. generally accepted accounting principles (“GAAP”). This measure is the basis on which management, including the Chief Executive Officer, assesses the underlying performance of our operating segments. We believe that disclosing this non-GAAP measure assists investors in comparing financial performance across reporting periods on a consistent basis by excluding items that are not indicative of our core operating performance. However, the non-GAAP measure of operating income should not be considered in isolation or as a substitute for performance measures calculated in accordance with U.S. GAAP. The following table presents a reconciliation of segment operating income (loss) to “earnings (loss) from continuing operations before the following”, which we consider to be the most directly comparable U.S. GAAP financial measure.


SUNOPTA INC. 30 September 29, 2012 10-Q


 

  Grains           Consumer     International                          

 

  and Foods     Ingredients     Products     Foods     SunOpta     Opta     Corporate     Consol-  

 

  Group     Group     Group     Group     Foods     Minerals     Services     idated  

For the quarter ended

$   $   $   $   $   $   $   $  

September 29, 2012

                                               

Segment operating income (loss)

  8,780     878     (544 )   1,721     10,835     3,280     (1,424 )   12,691  

Other income (expense), net

  6     -     (46 )   -     (40 )   (208 )   (16 )   (264 )

Earnings (loss) from continuing operations before the following

  8,786     878     (590 )   1,721     10,795     3,072     (1,440 )   12,427  

 

                                               

October 1, 2011

                                               

Segment operating income (loss)

  4,394     2,065     205     1,899     8,563     1,606     (2,806 )   7,363  

Other income (expense), net

  202     -     (109 )   -     93     -     (100 )   (7 )

Earnings (loss) from continuing operations before the following

  4,596     2,065     96     1,899     8,656     1,606     (2,906 )   7,356  

We believe that investors’ understanding of our financial performance is enhanced by disclosing the specific items that we exclude from segment operating income. However, any measure of operating income excluding any or all of these items is not, and should not be viewed as, a substitute for operating income prepared under U.S. GAAP. These items are presented solely to allow investors to more fully understand how we assess financial performance.

Revenues for the quarter ended September 29, 2012 increased by 8.7% to $279,339 from $257,011 for the quarter ended October 1, 2011. Revenues in SunOpta Foods increased by 5.8% to $246,359 and revenues in Opta Minerals increased by 36.8% to $32,980. Excluding the impact of changes including foreign exchange rates, commodity-related pricing, acquisitions and rationalized product lines, revenues increased approximately 6% on a consolidated basis. Within SunOpta Foods, higher sales volumes of value-added aseptic and other consumer packaged goods contributed to the increase in revenues, as well as strong demand and higher pricing for corn and organic feed products due to the effects of the North American drought. Those factors were partially offset by lower revenues in our European organic ingredients operation due to economic uncertainty, as well as declines in volumes and pricing in the fruit snacks category at our Healthy Snacks operation due to increased competition from re-sealable pouch formats. At Opta Minerals, the increase in revenues reflected higher volumes of industrial minerals and abrasive products, as well as the incremental revenues of Babco and WGI, which were acquired in 2012.

Gross profit increased $3,160, or 10.5%, to $33,181 for the quarter ended September 29, 2012, compared with $30,021 for the quarter ended October 1, 2011. As a percentage of revenues, gross profit for the quarter ended September 29, 2012 was 11.9% compared to 11.7% for the quarter ended October 1, 2011, an increase of 0.2% . The increase in gross profit percentage reflected the strong growth in higher-margin aseptic and consumer packaged goods categories and reduced losses on export sales of sunflower kernel, as well as the positive impact of product rationalization efforts at our Frozen Foods operation. In addition, we generated stronger margins on sales of corn and organic feedstuffs as a result of higher pricing and favorable costing related to inventory carried over from 2011. Negatively impacting gross profit percentage for the quarter ended September 29, 2012 were reduced efficiencies in our Fiber and Fruit Ingredient operations due to lower production volumes, unfavorable product mix and higher production costs at our Healthy Snacks operation, and operating losses at our juice extraction and packaging operation. In addition, we incurred pre-production costs of $598 in the third quarter of 2012, related to our new pouch filling operation located in a facility on the U.S. east coast. The commissioning of this facility was completed in September 2012.

Total segment operating income for the quarter ended September 29, 2012 increased by $5,328, or 72.4%, to $12,691, compared with $7,363 for the quarter ended October 1, 2011. As a percentage of revenue, segment operating income was 4.5% for the quarter ended September 29, 2012, compared with 2.9% for the quarter ended October 1, 2011. The increase in segment operating income at SunOpta Foods reflected the strong performance of the aseptic and grains-based businesses, including sunflower, and gross margin and cost structure improvements at our Frozen Foods operation, partially offset by declines in our Ingredient and Healthy Snacks operations. The increase in segment operating income at Opta Minerals primarily reflected the incremental contribution from Babco and WGI. Also contributing to the increase in segment operating income were lower employee compensation-related costs, as a result of rationalization efforts undertaken in the first quarter of 2012 to streamline operations and improve efficiencies within SunOpta Foods, and the favorable impact of foreign exchange movements for the Canadian dollar relative to the U.S. dollar.

SUNOPTA INC. 31 September 29, 2012 10-Q

Further details on revenue, gross margin and segment operating income variances are provided below under “Segmented Operations Information”.

Other expense for the quarter ended September 29, 2012 of $264 included transaction costs incurred by Opta Minerals in connection with the acquisition of WGI.

The increase in interest expense of $306 to $2,339 for the quarter ended September 29, 2012, compared with $2,033 for the quarter ended October 1, 2011, reflected an increase in long-term debt at Opta Minerals in connection with the WGI and Babco acquisitions, partially offset by the repayment of borrowings under our syndicated credit facilities with cash generated from operations.

The provision for income tax for the quarter ended September 29, 2012 was $3,947, or 39.1% of earnings before taxes, compared with $1,451, or 27.3% of earnings before taxes, for the quarter ended October 1, 2011. The increase in the effective tax rate is primarily a result of increased earnings in higher tax jurisdictions in the third quarter of 2012, and the net effect of certain tax credits that were realized in the third quarter of 2011. The annual effective income tax rate for 2012 is expected to be between 37% and 39%, excluding discrete adjustments.

Earnings from continuing operations for the quarter ended September 29, 2012 were $6,141, as compared to $3,872 for the quarter ended October 1, 2011, an increase of $2,269 or 58.6% . Diluted earnings per share from continuing operations were $0.09 for the quarter ended September 29, 2012, compared with $0.06 for the quarter ended October 1, 2011.

Earnings attributable to non-controlling interests for the quarter ended September 29, 2012 were $449, compared with earnings of $144 for the quarter ended October 1, 2011. The $305 increase in earnings attributable to non-controlling interests reflected an increase in net earnings at Opta Minerals, including the incremental contribution from Babco.

Earnings from discontinued operations, net of taxes, of $112 for the quarter ended September 29, 2012 reflected $333 received in final settlement of the CSOP estate at the completion of bankruptcy proceedings, partially offset by legal fees and interest costs in connection with the ongoing arbitration proceedings related to the joint venture agreement. Discontinued operations for the quarter ended October 1, 2011 reflected losses from the operations of Purity and CSOP of $433 in the aggregate, partially offset by a gain recognized on the sale of CSOP of $71.

On a consolidated basis, we realized earnings of $5,804 (diluted earnings per share of $0.09) for the quarter ended September 29, 2012, compared with earnings of $3,366 (diluted earnings per share of $0.05) for the quarter ended October 1, 2011.

SUNOPTA INC. 32 September 29, 2012 10-Q

                         

Segmented Operations Information

                       
SunOpta Foods                        
                         
For the quarter ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  246,359   $  232,909   $  13,450     5.8%  
Gross Margin   26,205     24,797     1,408     5.7%  
Gross Margin %   10.6%     10.6%           0.0%  
                         
Operating Income $  10,835   $  8,563   $  2,272     26.5%  
Operating Income %   4.4%     3.7%           0.7%  

SunOpta Foods contributed $246,359 or 88.2% of consolidated revenue for the quarter ended September 29, 2012 compared to $232,909 or 90.6% of consolidated revenues for the quarter ended October 1, 2011, an increase of $13,450. Revenues in SunOpta Foods increased 5.8% compared to the quarter ended October 1, 2011. Excluding the impact of changes including foreign exchange rates, commodity-related pricing, acquisitions and rationalized product lines, revenues increased approximately 5% in SunOpta Foods, driven by strong growth in integrated packaged food product categories and corn and organic feedstuff volumes, offset by decreased volumes of fiber and fruit ingredients, as well as fruit snacks. The table below explains the increase in revenue by group for SunOpta Foods:

SunOpta Foods Revenue Changes  
Revenues for the quarter ended October 1, 2011 $232,909

Increase in the Grains and Foods Group

18,321

Decrease in the Ingredients Group

(1,693)

Decrease in the Consumer Products Group

(430)

Decrease in the International Foods Group

(2,748)
Revenues for the quarter ended September 29, 2012 $246,359

Gross margin in SunOpta Foods increased by $1,408 for the quarter ended September 29, 2012 to $26,205, or 10.6% of revenues, compared to $24,797, or 10.6% of revenues for the quarter ended October 1, 2011. The table below explains the increase in gross margin by group for SunOpta Foods:

SunOpta Foods Gross Margin Changes  
Gross Margin for the quarter ended October 1, 2011 $24,797

Increase in the Grains and Foods Group

4,555

Decrease in the Ingredients Group

(1,223)

Decrease in the Consumer Products Group

(1,199)

Decrease in the International Foods Group

(725)
Gross Margin for the quarter ended September 29, 2012 $26,205

SUNOPTA INC. 33 September 29, 2012 10-Q

Operating income in SunOpta Foods increased by $2,272 for the quarter ended September 29, 2012 to $10,835 or 4.4% of revenues, compared to $8,563 or 3.7% of revenues for the quarter ended October 1, 2011. The table below explains the increase in operating income for SunOpta Foods:

SunOpta Foods Operating Income Changes  
Operating Income for the quarter ended October 1, 2011 $8,563

Increase in gross margin, as noted above

1,408

Decrease in SG&A costs

923

Increase in foreign exchange loss

(59)
Operating Income for the quarter ended September 29, 2012 $10,835

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   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  139,917   $  121,596   $  18,321     15.1%  
Gross Margin   14,680     10,125     4,555     45.0%  
Gross Margin %   10.5%     8.3%           2.2%  
                         
Operating Income $  8,780   $  4,394   $  4,386     99.8%  
Operating Income %   6.3%     3.6%           2.7%  

The Grains and Foods Group contributed $139,917 in revenues for the quarter ended September 29, 2012, compared to $121,596 for the quarter ended October 1, 2011, an $18,321 or 15.1% increase. The table below explains the increase in revenue:

Grains and Foods Group Revenue Changes  
Revenues for the quarter ended October 1, 2011 $121,596

Increased volume and improved pricing on organic grains and commodity corn, as well as improved pricing on commodity soy, partially offset by lower volume of commodity soy

13,386

Increased volume and higher pricing of aseptically packaged beverages

4,759

Improved pricing on sunflower kernel products

1,551

Transfer of dairy blended food ingredient business from Ingredients Group

1,389

Lower volume of grain based food ingredients, partially offset by improved pricing

(2,357)

Lower volume of in-shell sunflower products due to continued softness in international markets, partially offset by increased bird food and other by-product streams

(407)
Revenues for the quarter ended September 29, 2012 $139,917

SUNOPTA INC. 34 September 29, 2012 10-Q

Gross margin in the Grains and Foods Group increased by $4,555 to $14,680 for the quarter ended September 29, 2012 compared to $10,125 for the quarter ended October 1, 2011, and the gross margin percentage increased by 2.2% to 10.5% . The increase in gross margin as a percentage of revenue was primarily due to higher volume and improved pricing on organic grains and commodity soy and corn, production efficiencies at our aseptic processing and packaging facilities, improved pricing on sunflower planting seeds and in-shell sunflower products, and lower export sunflower kernel sales that occurred at a loss in the third quarter of 2011. The table below explains the increase in gross margin:

Grains and Foods Group Gross Margin Changes  
Gross Margin for the quarter ended October 1, 2011 $10,125

Higher volume and improved pricing on organic grains and commodity corn, partially offset by the higher cost of commodity soy

2,514

Higher volumes and improved pricing of aseptically packaged beverages, as well as production efficiencies from increased volumes

1,404

Improved margins in the sunflower planting seed program and higher pricing for in- shell sunflower, partially offset by decreased plant efficiencies from lower sunflower volume

575

Lower volume of export sunflower kernel products that were sold at a loss in the prior year, partially offset by lower pricing and higher by-product costs

216

Lower volume and reduced pricing on grain based food ingredients, partially offset by improved margins on specialty oils that were sold at a loss in the prior year

(154)
Gross Margin for the quarter ended September 29, 2012 $14,680

Operating income in the Grains and Foods Group increased by $4,386 or 99.8% to $8,780 for the quarter ended September 29, 2012, compared to $4,394 for the quarter ended October 1, 2011. The table below explains the increase in operating income:

Grains and Foods Group Operating Income Changes  
Operating Income for the quarter ended October 1, 2011 $4,394

Increase in gross margin, as explained above

4,556

Decreased professional fees, utilities and insurance, offset by increased compensation costs

78

Decrease in foreign exchange gains

(130)

Increase in corporate cost allocations

(118)
Operating Income for the quarter ended September 29, 2012 $8,780

SUNOPTA INC. 35 September 29, 2012 10-Q

                         

Ingredients Group

                       
                         
For the quarter ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  20,273   $  21,966   $  (1,693 )   -7.7%  
Gross Margin   3,223     4,446     (1,223 )   -27.5%  
Gross Margin %   15.9%     20.2%           -4.3%  
                         
Operating Income $  878   $  2,065   $  (1,187 )   -57.5%  
Operating Income %   4.3%     9.4%           -5.1%  

The Ingredients Group contributed $20,273 in revenues for the quarter ended September 29, 2012, compared to $21,966 for the quarter ended October 1, 2011, a $1,693 or 7.7% decrease. The table below explains the decrease in revenue:

Ingredients Group Revenue Changes  
Revenues for the quarter ended October 1, 2011 $21,966

Transfer of non-dairy blended food ingredient business to the Grains and Foods Group

(1,389)

Decrease in customer demand for oat and soy fiber ingredients, as well as fruit ingredients to the industrial channel, partially offset by increased customer demand for fruit ingredients to the food service channel

(1,058)

Improved pricing for industrial and food service fruit ingredients products

654

Increase in customer demand for starches and brans, partially offset by lower pricing for other blended food ingredients

100
Revenues for the quarter ended September 29, 2012 $20,273

Gross margin in the Ingredients Group decreased by $1,223 to $3,223 for the quarter ended September 29, 2012 compared to $4,446 for the quarter ended October 1, 2011, and the gross margin percentage decreased by 4.3% to 15.9% . Higher raw material input costs, including organic sugar as well as oat and soy hulls, and decreased plant efficiencies from low production volumes were the main causes of the decrease in gross margin rate. The table below explains the decrease in gross margin:

Ingredients Group Gross Margin Changes  
Gross Margin for the quarter ended October 1, 2011 $4,446

Lower demand for oat and soy fiber, combined with an increase in raw material and other input costs including oat and soy hulls

(783)

Decreased demand for industrial fruit ingredients and decreased efficiencies from lower production, combined with increased input costs including organic sugar

(440)
Gross Margin for the quarter ended September 29, 2012 $3,223

SUNOPTA INC. 36 September 29, 2012 10-Q

Operating income in the Ingredients Group decreased by $1,187, or 57.5%, to $878 for the quarter ended September 29, 2012, compared to $2,065 for the quarter ended October 1, 2011. The table below explains the decrease in operating income:

Ingredients Group Operating Income Changes  
Operating Income for the quarter ended October 1, 2011 $2,065

Decrease in gross margin, as explained above

(1,223)

Increased spending on general office costs, as well as consulting costs related to product development and market research

(79)

Decrease in corporate cost allocations

70

Decrease in compensation costs, primarily due to headcount rationalization that occurred in the first quarter of 2012

45
Operating Income for the quarter ended September 29, 2012 $878

Consumer Products Group                        
                         
For the quarter ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  41,636   $  42,066   $  (430 )   -1.0%  
Gross Margin   2,798     3,997     (1,199 )   -30.0%  
Gross Margin %   6.7%     9.5%           -2.8%  
                         
Operating (loss) income $  (544 ) $  205   $  (749 )   -365.4%  
Operating Income %   -1.3%     0.5%           -1.8%  

The Consumer Products Group contributed $41,636 in revenues for the quarter ended September 29, 2012, compared to $42,066 for the quarter ended October 1, 2011, a $430 or 1.0% decrease. The table below explains the decrease in revenue:

Consumer Products Group Revenue Changes  
Revenues for the quarter ended October 1, 2011 $42,066

Decreased volume in our Frozen Foods operation as we wind down all industrial and food service product lines, partially offset by higher volumes on retail offerings

(3,492)

Reduced sales volume of healthy fruit snacks, offset partially by increased sales of nutrition bars

(1,024)

Increased sales from the launch of our flexible pouch filling lines on the U.S. west coast in the fourth quarter of 2011 as well as on the U.S. east coast in the third quarter of 2012

4,086
Revenues for the quarter ended September 29, 2012 $41,636

SUNOPTA INC. 37 September 29, 2012 10-Q

Gross margin in the Consumer Products Group decreased by $1,199 to $2,798 for the quarter ended September 29, 2012 compared to $3,997 for the quarter ended October 1, 2011, and the gross margin percentage decreased by 2.8% to 6.7% . The decrease in gross margin as a percentage of revenue is due to pre-production costs related to our U.S. east coast expansion project and higher production costs at our Healthy Snacks operation. The table below explains the decrease in gross margin:

Consumer Products Group Gross Margin Changes  
Gross Margin for the quarter ended October 1, 2011 $3,997

Higher production and raw material costs at our Healthy Snacks operations

(1,746)

Facility start-up costs related to the expansion of consumer packaged processing capabilities on the U.S. east coast, transition costs and plant inefficiencies at Lorton’s, partially offset by improved margins on other consumer product offerings including flexible pouch

(516)

Higher margins realized on retail format frozen food sales and decreased storage costs as a result of lower inventory levels

1,063
Gross Margin for the quarter ended September 29, 2012 $2,798

Operating income in the Consumer Products Group decreased by $749, or 365.4%, to a loss of $544 for the quarter ended September 29, 2012, compared to income of $205 for the quarter ended October 1, 2011. The table below explains the decrease in operating income:

Consumer Products Group Operating Income Changes  
Operating Income for the quarter ended October 1, 2011 $205

Decrease in gross margin, as explained above

(1,199)

Increase in corporate cost allocations

(145)

SG&A savings due to reduced headcount and lower short-term incentive accruals

551

Lower professional fees, travel and office expenses

44
Operating Loss for the quarter ended September 29, 2012 ($544)

SUNOPTA INC. 38 September 29, 2012 10-Q

                         

International Foods Group

                       
                         
For the quarter ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  44,533   $  47,281   $  (2,748 )   -5.8%  
Gross Margin   5,504     6,229     (725 )   -11.6%  
Gross Margin %   12.4%     13.2%           -0.8%  
                         
Operating Income $  1,721   $  1,899   $  (178 )   -9.4%  
Operating Income %   3.9%     4.0%           -0.1%  

The International Foods Group contributed $44,533 in revenues for the quarter ended September 29, 2012, compared to $47,281 for the quarter ended October 1, 2011, a $2,748 or 5.8% decrease. The table below explains the decrease in revenue:

International Foods Group Revenue Changes  
Revenues for the quarter ended October 1, 2011 $47,281

Unfavorable impact on revenues due to the weaker euro relative to the U.S. dollar

(5,638)

Higher volumes of organic commodities, driven by improved sales in North America, offset by weaker sales in Europe

1,712

Increased commodity prices for organic commodities such as sweeteners, nuts and fruits

1,178
Revenues for the quarter ended September 29, 2012 $44,533

Gross margins in the International Foods Group decreased by $725 to $5,504 for the quarter ended September 29, 2012 compared to $6,229 for the quarter ended October 1, 2011, and the gross margin percentage decreased by 0.8% to 12.4% . The decrease in margin rate was due primarily to sales mix as well as unfavorable margins realized on coffee. The table below explains the decrease in gross margin:

International Foods Group Gross Margin Changes  
Gross Margin for the quarter ended October 1, 2011 $6,229

Unfavorable impact on gross margins due to weaker euro relative to the U.S. dollar

(717)

Lower margins realized on coffee due to declining market prices which drove down margins on existing inventory on hand, partially offset by higher sales volumes of other organic commodities

(8)
Gross Margin for the quarter ended September 29, 2012 $5,504

SUNOPTA INC. 39 September 29, 2012 10-Q

Operating income in the International Foods Group decreased by $178, or 9.4%, to $1,721 for the quarter ended September 29, 2012, compared to $1,899 for the quarter ended October 1, 2011. The table below explains the decrease in operating income:

International Foods Group Operating Income Changes  
Operating Income for the quarter ended October 1, 2011 $1,899

Decrease in gross margin, as explained above

(725)

Increase in corporate allocations

(105)

Favorable impact on euro borne SG&A spending due to the weaker euro relative to the U.S. dollar

411

Decrease in short-term incentive costs, partially offset by increased compensation due to higher headcount

176

Foreign exchange gains on forward foreign exchange contracts

65
Operating Income for the quarter ended September 29, 2012 $1,721

Opta Minerals                        
                         
For the quarter ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  32,980   $  24,102   $  8,878     36.8%  
Gross Margin   6,976     5,224     1,752     33.5%  
Gross Margin %   21.2%     21.7%           -0.5%  
                         
Operating Income $  3,280   $  1,606   $  1,674     104.2%  
Operating Income %   9.9%     6.7%           3.2%  

Opta Minerals contributed $32,980 in revenues for the quarter ended September 29, 2012, compared to $24,102 for the quarter ended October 1, 2011, an $8,878 or a 36.8% increase. The table below explains the increase in revenue:

Opta Minerals Revenue Changes  
Revenues for the quarter ended October 1, 2011 $24,102

Incremental revenue due to the acquisitions of WGI on August 29, 2012, Babco on February 10, 2012 and Inland on November 10, 2011

5,964

Increased volumes of mill and foundry products as a result of increased demand for magnesium, chromite and lime blends

1,865

Increased volumes of abrasive and other industrial mineral products and services

1,049
Revenues for the quarter ended September 29, 2012 $32,980

SUNOPTA INC. 40 September 29, 2012 10-Q

Gross margin for Opta Minerals increased by $1,752 to $6,976 for the quarter ended September 29, 2012 compared to $5,224 for the quarter ended October 1, 2011, and the gross margin percentage decreased by 0.5% to 21.2% . The decrease in gross margin as a percentage of revenue was due primarily to product mix. The table below explains the increase in gross margin:

Opta Minerals Gross Margin Changes  
Gross Margin for the quarter ended October 1, 2011 $5,224

Incremental gross margin due to the acquisitions of WGI, Babco and Inland

1,592

Margin impact on higher sales volume of abrasive and other industrial mineral products combined with lower plant costs

475

Impact of unfavorable product mix on mill and foundry products, as volume increases were offset by higher sales of lower margin chromite and magnesium products

(315)
Gross Margin for the quarter ended September 29, 2012 $6,976

Operating income for Opta Minerals increased by $1,674, or 104.2%, to $3,280 for the quarter ended September 29, 2012, compared to $1,606 for the quarter ended October 1, 2011. The table below explains the increase in operating income:

Opta Minerals Operating Income Changes  
Operating Income for the quarter ended October 1, 2011 $1,606

Increase in gross margin, as explained above

1,752

Decrease in foreign exchange losses

464

Decrease in other SG&A, including stock compensation expense

104

Incremental SG&A due to the acquisitions of WGI, Babco and Inland

(646)
Operating Income for the quarter ended September 29, 2012 $3,280

Corporate Services                        
                         
For the quarter ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Operating Loss $  (1,424 ) $  (2,806 ) $  1,382     49.3%  

Operating loss at Corporate Services decreased by $1,382 to $1,424 for the quarter ended September 29, 2012, from a loss of $2,806 for the quarter ended October 1, 2011. The table below explains the decrease in operating loss:

Corporate Services Operating Income Changes  
Operating Loss for the quarter ended October 1, 2011 ($2,806)

Increase in foreign exchange gains

748

Lower compensation costs in part due to headcount rationalizations that occurred in the first quarter of 2012 and decreased benefits, partially offset by increased stock compensation and other general office costs

327

Increase in corporate management fees that are allocated to SunOpta operating groups

307
Operating Loss for the quarter ended September 29, 2012 ($1,424)

Management fees mainly consist of salaries of corporate personnel who perform back office functions for divisions, as well as costs related to the enterprise resource management system used within several of the divisions. These expenses are allocated to the groups based on (1) specific identification of allocable costs that represent a service provided to each division and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and number of people employed within each division.

SUNOPTA INC. 41 September 29, 2012 10-Q

Consolidated Results of Operations

For the three quarters ended

  September 29, 2012     October 1, 2011     Change     Change  

 

$   $   $     %  

Revenues

                       

     SunOpta Foods

  728,449     707,054     21,395     3.0%  

     Opta Minerals

  92,526     70,495     22,031     31.3%  

Total revenues

  820,975     777,549     43,426     5.6%  

Gross profit

                       

     SunOpta Foods

  84,681     78,800     5,881     7.5%  

     Opta Minerals

  20,074     15,833     4,241     26.8%  

Total gross profit

  104,755     94,633     10,122     10.7%  

Segment operating income (loss)(1)

                       

     SunOpta Foods

  36,423     29,835     6,588     22.1%  

     Opta Minerals

  8,178     6,216     1,962     31.6%  

     Corporate Services

  (4,781 )   (7,169 )   2,388     33.3%  

Total segment operating income

  39,820     28,882     10,938     37.9%  

Other expense (income), net

  2,006     (2,887 )   4,893     169.5%  

Earnings from continuing operations

                       

     before the following

  37,814     31,769     6,045     19.0%  

Interest expense, net

  7,480     6,537     943     14.4%  

Provision for income taxes

  10,302     8,875     1,427     16.1%  

Earnings from continuing operations

  20,032     16,357     3,675     22.5%  

Earnings attributable to non-controlling interests

  1,384     1,523     (139 )   -9.1%  

Loss from discontinued operations, net of taxes

  517     (2,057 )   2,574     125.1%  

Gain on sale of discontinued operations, net of taxes

  676     71     605     n/m  

Earnings attributable to SunOpta Inc.

  19,841     12,848     6,993     54.4%  

(1)

The following table presents a reconciliation of segment operating income (loss) to “earnings (loss) from continuing operations before the following”, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to page 30, note (1) regarding the use of non-GAAP measures).


 

  Grains           Consumer     International                          

 

  and Foods     Ingredients     Products     Foods     SunOpta     Opta     Corporate     Consol-  

 

  Group     Group     Group     Group     Foods     Minerals     Services     idated  

For the three quarters ended

$   $   $   $   $   $   $   $  

September 29, 2012

                                               

Segment operating income (loss)

  27,662     2,946     (549 )   6,364     36,423     8,178     (4,781 )   39,820  

Other income (expense), net

  28     (224 )   (159 )   -     (355 )   (647 )   (1,004 )   (2,006 )

Earnings (loss) from continuing operations before the following

  27,690     2,722     (708 )   6,364     36,068     7,531     (5,785 )   37,814  

 

                                               

October 1, 2011

                                               

Segment operating income (loss)

  15,962     6,692     (151 )   7,332     29,835     6,216     (7,169 )   28,882  

Other income (expense), net

  234     (59 )   3,540     -     3,715     -     (828 )   2,887  

Earnings (loss) from continuing operations before the following

  16,196     6,633     3,389     7,332     33,550     6,216     (7,997 )   31,769  

SUNOPTA INC. 42 September 29, 2012 10-Q

Revenues for the three quarters ended September 29, 2012 increased by 5.6% to $820,975 from $777,549 for the three quarters ended October 1, 2011. Revenues in SunOpta Foods increased by 3.0% to $728,449 and revenues in Opta Minerals increased by 31.3% to $92,526. Excluding the impact of changes including foreign exchange rates, commodity-related pricing, acquisitions and rationalized product lines, revenues increased approximately 5% on a consolidated basis. Contributing to the increase in revenues within SunOpta Foods were higher sales volumes of value-added aseptic and other consumer packaged goods, and strong demand and higher pricing for corn and organic feed products due to the effects of the North American drought, as well as increased sales of sunflower planting seeds into international markets. Those factors were partially offset by lower revenues in our European organic ingredients operation due to economic uncertainty, as well as lower volumes and pricing for fiber and fruit ingredient products. At Opta Minerals, the increase in revenues reflected higher volumes of industrial minerals and abrasive products, as well as the incremental revenues of Babco and WGI, which were acquired in 2012.

Gross profit increased $10,122, or 10.7%, to $104,755 for the three quarters ended September 29, 2012, compared with $94,633 for the three quarters ended October 1, 2011. As a percentage of revenues, gross profit for the three quarters ended September 29, 2012 was 12.8% compared to 12.2% for the three quarters ended October 1, 2011, an increase of 0.6% . The increase in gross profit percentage reflected the strong growth in higher-margin aseptic and consumer packaged goods categories and reduced losses on export sales of sunflower kernels, as well as the positive impact of product rationalization efforts at our Frozen Foods operation. In addition, we generated stronger margins on sales of corn and organic feedstuffs as a result of higher pricing and favorable costing relating to inventory carried over from 2011. Negatively impacting gross profit percentage for the three quarters ended September 29, 2012 were reduced efficiencies in our Fiber and Fruit Ingredient operations due to lower production volumes, unfavorable product mix and higher production costs at our Healthy Snacks operation, and operating losses at our juice extraction and packaging operation. In addition, we incurred pre-production costs of $1,065 in the first three quarters of 2012, related to the new pouch filling operation on the U.S. east coast that was fully commissioned in September 2012.

Total segment operating income for the three quarters ended September 29, 2012 increased by $10,938, or 37.9%, to $39,820, compared with $28,882 for the three quarters ended October 1, 2011. As a percentage of revenue, segment operating income was 4.9% for the three quarters ended September 29, 2012, compared with 3.7% for the three quarters ended October 1, 2011. The increase in segment operating income at SunOpta Foods reflected the strong performance of the aseptic and grains-based businesses including sunflower, and gross margin and cost structure improvements at our Frozen Foods operation, partially offset by declines in our Ingredient and Healthy Snacks operations. The increase in segment operating income at Opta Minerals primarily reflected the incremental contribution from Babco and WGI, partially offset by a $945 bad debt provision recorded in the second quarter of 2012, related to the bankruptcy filing of a large steel products customer. Also contributing to the increase in segment operating income were lower employee compensation-related costs, as a result of rationalization efforts undertaken in the first quarter of 2012 to streamline operations and improve efficiencies within SunOpta Foods, and the favorable impact of foreign exchange movements for the Canadian dollar and euro relative to the U.S. dollar.

Further details on revenue, gross margin and segment operating income variances are provided below under “Segmented Operations Information”.

Other expense for the three quarters ended September 29, 2012 of $2,006 included accrued severance of $795 payable to a former executive officer and other employee severances of $500 related to our rationalization efforts, as well as transaction costs incurred by Opta Minerals in connection with the acquisitions of WGI and Babco. Other income for the three quarters ended October 1, 2011 included a gain on sale of frozen food assets located in Mexico.

The increase in interest expense of $943 to $7,480 for the three quarters ended September 29, 2012, compared with $6,537 for the three quarters ended October 1, 2011, reflected an increase in long-term debt at Opta Minerals in connection with the WGI and Babco acquisitions, partially offset by the repayment of borrowings under our syndicated credit facilities with cash generated from operations.

The provision for income tax for the three quarters ended September 29, 2012 was $10,302, or 34.0% of earnings before taxes, compared with $8,875, or 35.2% of earnings before taxes, for the three quarters ended October 1, 2011. The reduction in the effective tax rate reflected the impacts of changes in enacted tax rates and the realizability of deferred tax assets recognized in the three quarters ended September 29, 2012. The annual effective income tax rate for 2012 is expected to be between 37% and 39%, excluding discrete adjustments.

Earnings from continuing operations for the three quarters ended September 29, 2012 were $20,032, as compared to $16,357 for the three quarters ended October 1, 2011, an increase of $3,675 or 22.5% . Diluted earnings per share from continuing operations were $0.28 for the three quarters ended September 29, 2012, compared with $0.22 for the three quarters ended October 1, 2011.

SUNOPTA INC. 43 September 29, 2012 10-Q

Earnings attributable to non-controlling interests for the three quarters ended September 29, 2012 were $1,384, compared with earnings of $1,523 for the three quarters ended October 1, 2011. The $139 decrease reflected lower net earnings in the speciality coffee operation of a less-than-wholly-owned subsidiary, partially offset by an increase in net earnings at Opta Minerals, including the incremental contribution from Babco.

Earnings from discontinued operations, net of taxes, of $517 for the three quarters ended September 29, 2012 reflected the results of operations of Purity, as well as proceeds of $333 received on final settlement of the CSOP bankruptcy proceedings, partially offset by costs incurred relating to the CSOP arbitration proceedings. In addition, we recognized a gain on sale of Purity of $676 in the second quarter of 2012. Discontinued operations for the three quarters ended October 1, 2011 reflected losses from the operations of Purity and CSOP, partially offset by a gain on sale of CSOP of $71.

On a consolidated basis, we realized earnings of $19,841 (diluted earnings per share of $0.30) for the three quarters ended September 29, 2012, compared with earnings of $12,848 (diluted earnings per share of $0.19) for the three quarters ended October 1, 2011.

Segmented Operations Information

SunOpta Foods                        
For the three quarters ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  728,449   $  707,054   $  21,395     3.0%  
Gross margin   84,681     78,800     5,881     7.5%  
Gross margin %   11.6%     11.1%           0.5%  
                         
Operating income $  36,423   $  29,835   $  6,588     22.1%  
Operating income %   5.0%     4.2%           0.8%  

SunOpta Foods contributed $728,449 or 88.7% of consolidated revenue for the three quarters ended September 29, 2012, compared with $707,054 or 90.9% of consolidated revenues for the three quarters ended October 1, 2011, an increase of $21,395. Revenues in SunOpta Foods increased 3.0% compared to the three quarters ended October 1, 2011. Excluding the impact of changes including foreign exchange rates, commodity-related pricing, acquisitions and rationalized product lines, revenues increased approximately 5% in SunOpta Foods, driven by strong growth in integrated packaged food product categories, offset by decreased volumes of fiber and fruit ingredients, and lower demand in Europe. The table below explains the increase in revenue by group for SunOpta Foods:

SunOpta Foods Revenue Changes  
Revenues for the three quarters ended October 1, 2011 $707,054

Increase in the Grains and Foods Group

35,125

Decrease in the Ingredients Group

(9,194)

Increase in the Consumer Products Group

10,122

Decrease in the International Foods Group

(14,658)
Revenues for the three quarters ended September 29, 2012 $728,449

SUNOPTA INC. 44 September 29, 2012 10-Q

Gross margin in SunOpta Foods increased by $5,881 for the three quarters ended September 29, 2012 to $84,681, or 11.6% of revenues, compared with $78,800, or 11.1% of revenues for the three quarters ended October 1, 2011. The table below explains the increase in gross margin by group for SunOpta Foods:

SunOpta Foods Gross Margin Changes  
Gross margin for the three quarters ended October 1, 2011 $78,800

Increase in the Grains and Foods Group

12,369

Decrease in the Ingredients Group

(3,915)

Decrease in the Consumer Products Group

(497)

Decrease in the International Foods Group

(2,076)
Gross margin for the three quarters ended September 29, 2012 $84,681

Operating income in SunOpta Foods increased by $6,588 for the three quarters ended September 29, 2012 to $36,423 or 5.0% of revenues, compared with $29,835 or 4.2% of revenues for the three quarters ended October 1, 2011. The table below explains the increase in operating income for SunOpta Foods:

SunOpta Foods Operating Income Changes  
Operating income for the three quarters ended October 1, 2011 $29,835

Increase in gross margin, as explained above

5,881

Decrease in SG&A costs

462

Decrease in foreign exchange loss

245
Operating income for the three quarters ended September 29, 2012 $36,423

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

SUNOPTA INC. 45 September 29, 2012 10-Q


Grains and Foods Group                        
                         
For the three quarters ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  397,096   $  361,971   $  35,125     9.7%  
Gross margin   45,424     33,055     12,369     37.4%  
Gross margin %   11.4%     9.1%           2.3%  
                         
Operating income $  27,662   $  15,962   $  11,700     73.3%  
Operating income %   7.0%     4.4%           2.6%  

The Grains and Foods Group contributed $397,096 in revenues for the three quarters ended September 29, 2012, compared to $361,971 for the three quarters ended October 1, 2011, a $35,125 or 9.7% increase. The table below explains the increase in revenue:

Grains and Foods Group Revenue Changes  
Revenues for the three quarters ended October 1, 2011 $361,971

Increased volume and improved pricing for organic grains, higher volume of commodity corn and improved pricing on commodity soy, partially offset by lower volume of commodity soy and lower pricing on commodity corn

17,786

Increased volume and higher pricing on aseptically packaged beverages

16,762

Improved pricing on sunflower kernel products

3,908

Transfer of dairy blended food ingredient business from Ingredients Group

3,686

Increased pricing of sunflower planting seeds sold into international market, partially offset by lower volume

2,499

Lower volume of grain based food ingredients, partially offset by improved pricing

(5,881)

Lower volume of in-shell sunflower products due to softness in international markets, partially offset by improved in-shell pricing and higher bird feed volume

(3,635)
Revenues for the three quarters ended September 29, 2012 $397,096

SUNOPTA INC. 46 September 29, 2012 10-Q

Gross margin in the Grains and Foods Group increased by $12,369 to $45,424 for the three quarters ended September 29, 2012 compared to $33,055 for the three quarters ended October 1, 2011, and the gross margin percentage increased by 2.3% to 11.4% . The increase in gross margin as a percentage of revenue was primarily due to increased production efficiencies at our aseptic processing and packaging facilities, improved margins on specialty oil contracts that negatively impacted margins in the first three quarters of 2011, increased pricing of organic grains, commodity corn and soy, as well as reduced export sunflower kernel sales that occurred at negative margins in the first three quarters of 2011, and improved pricing from the sunflower planting seed program. The table below explains the increase in gross margin:

Grains and Foods Group Gross Margin Changes  
Gross margin for the three quarters ended October 1, 2011 $33,055

Higher volume of organic grains and commodity corn, combined with improved pricing on organic grains and commodity soy, partially offset by higher cost of commodity soy

4,070

Higher volume and improved pricing on aseptically packaged beverages combined with plant efficiencies due to increased volumes

3,695

Lower volume of export sunflower kernel products that were sold at a loss in the prior year, partially offset by lower by-product contribution due to lower pricing and higher costs

2,413

Improved margins in the sunflower planting seed program and higher pricing for in- shell sunflower, partially offset by decreased plant efficiencies from lower sunflower volumes

1,531

Improved pricing on food ingredients, combined with lower volumes of specialty oils that were sold at a loss in the prior year, partially offset by lower food ingredient volumes

660
Gross margin for the three quarters ended September 29, 2012 $45,424

Operating income in the Grains and Foods Group increased by $11,700, or 73.3%, to $27,662 for the three quarters ended September 29, 2012, compared to $15,962 for the three quarters ended October 1, 2011. The table below explains the increase in operating income:

Grains and Foods Group Operating Income Changes  
Operating income for the three quarters ended October 1, 2011 $15,962

Increase in gross margin, as explained above

12,371

Decrease in spending on professional fees, utilities, insurance and general office spending

233

Decrease in foreign exchange gains

(550)

Increase in corporate cost allocations

(354)
Operating income for the three quarters ended September 29, 2012 $27,662

Looking forward, we believe the Grains and Foods business is well positioned in growing natural and organic food categories. We expect the aseptic processing and packaging expansion at our U.S. west coast facility to continue to enhance our capacity to manufacture aseptic soy and alternative beverages. We also intend to focus our efforts on growing our identity preserved, non-genetically modified ("non-GMO") and organic grains business, expanding revenues from natural and organic grains based ingredients and continuing to focus on value-added ingredient and packaged product offerings. We intend to pursue internal growth and acquisition opportunities that are aligned with the Group’s core vertically integrated grain business model. Additionally, the international expansion of our sales base via strategic relationships for procurement of product is expected to drive incremental sales volume. Our long-term target for the Grains and Foods Group is to achieve a segment operating margin of 6% to 8% which assumes we are able to secure a consistent quantity and quality of 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, increased competition, volume decreases or loss of customers, unexpected delays in our expansion plans, 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.

SUNOPTA INC. 47 September 29, 2012 10-Q

                         
Ingredients Group                        
                         
For the three quarters ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  62,408   $  71,602   $  (9,194 )   -12.8%  
Gross margin   10,364     14,279     (3,915 )   -27.4%  
Gross margin %   16.6%     19.9%           -3.3%  
                         
Operating income $  2,946   $  6,692   $  (3,746 )   -56.0%  
Operating income %   4.7%     9.3%           -4.6%  

The Ingredients Group contributed $62,408 in revenues for the three quarters ended September 29, 2012, compared to $71,602 for the three quarters ended October 1, 2011, a $9,194 or 12.8% decrease. The table below explains the decrease in revenue:

Ingredients Group Revenue Changes  
Revenues for the three quarters ended October 1, 2011 $71,602

Decrease in customer demand for oat and soy fiber ingredients, as well as fruit ingredient products to the food service and industrial channels

(6,850)

Transfer of non-dairy blended food ingredient business to the Grains and Foods Group

(3,686)

Decrease in fiber volumes due to a loss of a significant customer in the first quarter of 2011

(1,133)

Increase in customer demand for starches and other blended food ingredients

1,330

Improved pricing for industrial and food service fruit ingredients, partially offset by reduced fiber pricing due to competitive pressures

1,145
Revenues for the three quarters ended September 29, 2012 $62,408

The Ingredients Group gross margin decreased by $3,915 to $10,364 for the three quarters ended September 29, 2012 compared to $14,279 for the three quarters ended October 1, 2011, and the gross margin percentage decreased by 3.3% to 16.6% . Higher raw material input costs, pricing pressure and plant inefficiencies in the fiber market were the main drivers behind the decrease in the gross margin rate. Partially offsetting these margin rate decreases were improved efficiencies on higher production of fiber, starches and other blended food ingredients, as certain facilities were idled in the prior year. The table below explains the decrease in gross margin:

Ingredients Group Gross Margin Changes  
Gross margin for the three quarters ended October 1, 2011 $14,279

Lower volume and pricing of fiber and fruit ingredient offerings and reduced efficiencies resulting from lower production volume, combined with an increase in input costs including organic sugar and oat and soy hulls

(3,782)

Loss of a significant customer in the first quarter of 2011 and reduced fiber pricing

(672)

Increased customer demand for starches and improved efficiencies on higher production of starches and other blended food ingredients, partially offset by lower pricing on other blended food ingredients

539
Gross margin for the three quarters ended September 29, 2012 $10,364

SUNOPTA INC. 48 September 29, 2012 10-Q

Operating income in the Ingredients Group decreased by $3,746, or 56.0%, to $2,946 for the three quarters ended September 29, 2012, compared to $6,692 for the three quarters ended October 1, 2011. The table below explains the decrease in operating income:

Ingredients Group Operating Income Changes  
Operating income for the three quarters ended October 1, 2011 $6,692

Decrease in gross margin, as explained above

(3,915)

Increase in research and development costs related to new product offerings, consulting spending to explore sales opportunities in international markets, and the impact of recovering a previously written-off bad debt in the prior year

(321)

Decrease in compensation costs, primarily due to headcount rationalization that occurred in the first quarter of 2012

280

Decrease in corporate cost allocations

210
Operating income for the three quarters ended September 29, 2012 $2,946

Looking forward, we intend to concentrate on growing the Ingredients Group’s fruit, fiber and specialty ingredients portfolio and customer base through product and process innovation and diversification. We are focused on replacing the volume lost early in 2011 as a result of a significant customer changing to an alternative fiber product. We intend to continue to introduce alternative fiber offerings of our own and have recently introduced both rice and cellulose fiber. We also expect our new aseptic fruit ingredient line at our Southgate, California facility to increase capacity, expand our packaging capabilities, and drive incremental volumes and cost savings. The focus of the Ingredients Group continues to revolve around a culture of innovation and continuous improvement, to further increase capacity utilization, reduce costs, and sustain margins. Our long-term target for the Ingredients Group is to realize 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, increased competition, 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.

SUNOPTA INC. 49 September 29, 2012 10-Q


Consumer Products Group                        
                         
For the three quarters ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  135,879   $  125,757   $  10,122     8.0%  
Gross margin   10,948     11,445     (497 )   -4.3%  
Gross margin %   8.1%     9.1%           -1.0%  
                         
Operating loss $  (549 ) $  (151 ) $  (398 )   -263.6%  
Operating loss %   -0.4%     -0.1%           -0.3%  

The Consumer Products Group contributed $135,879 in revenues for the three quarters ended September 29, 2012, compared to $125,757 for the three quarters ended October 1, 2011, a $10,122 or 8.0% increase. The table below explains the increase in revenue:

Consumer Products Group Revenue Changes  
Revenues for the three quarters ended October 1, 2011 $125,757

Increased sales from the launch of our flexible pouch filling lines on the U.S. west coast in the fourth quarter of 2011, partially offset by decreased brokerage revenues

10,742

Higher sales of Healthy Snacks led by increased demand for nutrition bar offerings

5,790

Incremental revenue due to the acquisition of Lorton’s on August 8, 2011

2,928

Decreased volume as we wind down all industrial and food service product lines in our Frozen Foods operation, partially offset by higher volumes on retail offerings

(9,338)
Revenues for the three quarters ended September 29, 2012 $135,879

Gross margin in the Consumer Products Group decreased by $497 to $10,948 for the three quarters ended September 29, 2012 compared to $11,445 for the three quarters ended October 1, 2011, and the gross margin percentage decreased by 1.0% to 8.1% . The decrease in gross margin as a percentage of revenue was due to negative contributions from Lorton’s, preproduction costs related to our U.S. east coast expansion project and higher production costs at our Healthy Snacks operation. The table below explains the decrease in gross margin:

Consumer Products Group Gross Margin Changes  
Gross margin for the three quarters ended October 1, 2011 $11,445

Higher production and raw material costs at our Healthy Snacks operation

(2,079)

Incremental gross margin loss at Lorton’s due to plant inefficiencies, transition costs and a product withdrawal

(1,920)

Facility start-up costs related to the expansion of consumer packaged processing capabilities on the U.S. east coast

(1,065)

Higher volume and margin realized on retail format frozen food sales and decreased storage costs as a result of lower inventory levels

3,805

Increased margin due to sales of flexible pouch offerings on the U.S. west coast, offset partially by margin declines in other consumer packaged categories

762
Gross margin for the three quarters ended September 29, 2012 $10,948

SUNOPTA INC. 50 September 29, 2012 10-Q

Operating loss in the Consumer Products Group increased by $398, or 263.6%, to a loss of $549 for the three quarters ended September 29, 2012, compared to a loss of $151 for the three quarters ended October 1, 2011. The table below explains the increase in operating loss:

Consumer Products Group Operating Loss Changes  
Operating loss for the three quarters ended October 1, 2011 ($151)

Incremental SG&A expenses from the acquisition of Lorton’s

(553)

Decrease in gross margin, as explained above

(497)

Increase in corporate cost allocations

(436)

SG&A savings primarily due to reduced headcount at our Frozen Foods operation and lower short-term incentive accruals

734

Lower professional fees, travel and other office expenses

354
Operating loss for the three quarters ended September 29, 2012 ($549)

Looking forward, we expect improvements in margins and operating income from the Consumer Products Group through the growth of our Food Solutions and Healthy Snacks operations, and from a streamlined and focused Frozen Foods operation. We remain customer focused and continue to explore new ways to bring value-added product offerings and processes to market. We intend to continue to expand our operating platform into the processing and manufacturing of products in order to enhance value to our customer base. Recently, these efforts have included the installation of two flexible re-sealable pouch filling lines on the U.S. west coast, which commenced operations during 2011, and the installation of two more flexible pouch filling lines on the U.S. east coast, which commenced operations in September 2012. We intend to continue to expand these capabilities. Continued new product development and innovation in our Healthy Snacks operation combined with increasing demand for portable nutritious fruit offerings are expected to drive growth in this business. Long term we are targeting 8% to 10% operating margins from the Consumer Products Group. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Unexpected declines in volumes, shifts in consumer preferences, inefficiencies in our manufacturing processes, lack of consumer product acceptance, or our inability to successfully implement the particular goals and strategies indicated above, along with the other factors described above under “Forward-Looking Statements”, could have an adverse impact on these forward-looking expectations.

SUNOPTA INC. 51 September 29, 2012 10-Q


International Foods Group                        
                         
For the three quarters ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  133,066   $  147,724   $  (14,658 )   -9.9%  
Gross margin   17,945     20,021     (2,076 )   -10.4%  
Gross margin %   13.5%     13.6%           -0.1%  
                         
Operating income $  6,364   $  7,332   $  (968 )   -13.2%  
Operating income %   4.8%     5.0%           -0.2%  

The International Foods Group contributed $133,066 in revenues for the three quarters ended September 29, 2012, compared to $147,724 for the three quarters ended October 1, 2011, a $14,658 or 9.9% decrease. The table below explains the decrease in revenue:

International Foods Group Revenue Changes  
Revenues for the three quarters ended October 1, 2011 $147,724

Unfavorable impact on revenues due to the weaker euro relative to the U.S. dollar

(13,183)

Lower volumes of organic commodities including coffee, cocoa, fruits, seeds, sesame and feed ingredients, primarily due to a weaker European economy

(7,007)

Increased commodity prices for organic commodities including sweeteners, seeds, nuts and fruits

5,532
Revenues for the three quarters ended September 29, 2012 $133,066

Gross margin in the International Foods Group decreased by $2,076 to $17,945 for the three quarters ended September 29, 2012 compared to $20,021 for the three quarters ended October 1, 2011. Gross margin as a percentage of revenues was lower by 0.1% due to unfavorable margins realized on coffee, partially offset by improved margins on sweeteners. The table below explains the decrease in gross margin:

International Foods Gross Margin Changes  
Gross margin for the three quarters ended October 1, 2011 $20,021

Unfavorable impact on gross margin due to the weaker euro relative to the U.S. dollar

(1,778)

Lower margins realized on coffee due to declining market prices combined with reduced sales volumes of other organic ingredients, partially offset by favorable margins on sweeteners due to a carryover of inventory from 2011 at favorable prices

(298)
Gross margin for the three quarters ended September 29, 2012 $17,945

SUNOPTA INC. 52 September 29, 2012 10-Q

Operating income in the International Foods Group decreased by $968, or 13.2%, to $6,364 for the three quarters ended September 29, 2012, compared to $7,332 for the three quarters ended October 1, 2011. The table below explains the decrease in operating income:

International Foods Group Operating Income Changes  
Operating income for the three quarters ended October 1, 2011 $7,332

Decrease in gross margin, as explained above

(2,076)

Higher compensation costs due primarily to increased headcount, partially offset by lower short-term incentive costs

(358)

Increase in corporate allocations

(323)

Favorable impact on euro borne SG&A spending due to the weaker euro relative to the U.S. dollar

1,013

Foreign exchange gains on forward foreign exchange contracts

776
Operating income for the three quarters ended September 29, 2012 $6,364

Looking forward, the International Foods Group is focused on leveraging its sourcing, supply, processing and distribution expertise to grow its portfolio of organic ingredients. Long-term group operating margins are targeted at 5% to 6% of revenues, which are expected to be achieved through a combination of sourcing, pricing and product development strategies. We also intend to leverage the Group’s sourcing and supply capabilities and forward and backward integrate where opportunities exist, expanding our processing expertise and increasing our value-added capabilities. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Unfavorable fluctuations in foreign exchange, reduced demand for natural and organic ingredients, increased competition, delayed synergies, as well as our inability to realize our particular strategic expansion goals, along with the other factors described above under “Forward-Looking Statements”, could have an adverse impact on these forward-looking expectations.

Opta Minerals                        
                         
For the three quarters ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Revenues $  92,526   $  70,495   $  22,031     31.3%  
Gross margin   20,074     15,833     4,241     26.8%  
Gross margin %   21.7%     22.5%           -0.8%  
                         
Operating income $  8,178   $  6,216   $  1,962     31.6%  
Operating income %   8.8%     8.8%           0.0%  

Opta Minerals contributed $92,526 in revenues for the three quarters ended September 29, 2012, compared to $70,495 for the three quarters ended October 1, 2011, a $22,031 or 31.3% increase. The table below explains the increase in revenue:

Opta Minerals Revenue Changes  
Revenues for the three quarters ended October 1, 2011 $70,495

Incremental revenue due to the acquisition of WGI on August 29, 2012, Babco on February 10, 2012 and Inland on November 10, 2011

12,367

Increased volumes of mill and foundry products as a result of increased demand for magnesium, chromite and lime blends

9,070

Increased volumes of abrasive and other industrial mineral products and services

594
Revenues for the three quarters ended September 29, 2012 $92,526

SUNOPTA INC. 53 September 29, 2012 10-Q

Gross margin for Opta Minerals increased by $4,241 to $20,074 for the three quarters ended September 29, 2012 compared to $15,833 for the three quarters ended October 1, 2011, and the gross margin percentage decreased by 0.8% to 21.7% . The decrease in gross margin as a percentage of revenue is largely driven by changes in product mix. The table below explains the increase in gross margin:

Opta Minerals Gross Margin Changes  
Gross margin for the three quarters ended October 1, 2011 $15,833

Incremental gross margin due to the acquisitions of WGI, Babco and Inland

3,540

Margin impact on higher sales volume of abrasive and other industrial mineral products combined with lower plant costs

671

Impact of increased volumes of mill and foundry products

30
Gross margin for the three quarters ended September 29, 2012 $20,074

Operating income for Opta Minerals increased by $1,962, or 31.6%, to $8,178 for the three quarters ended September 29, 2012, compared to $6,216 for the three quarters ended October 1, 2011. The table below explains the increase in operating income:

Opta Minerals Operating Income Changes  
Operating income for the three quarters ended October 1, 2011 $6,216

Increase in gross margin, as explained above

4,241

Increased bad debt expense due mainly to the bankruptcy of a steel products customer

(979)

Incremental SG&A due to the acquisitions of WGI, Babco and Inland

(962)

Decrease in foreign exchange gains

(367)

Decrease in other SG&A

29
Operating income for the three quarters ended September 29, 2012 $8,178

Opta Minerals continues to develop and introduce new products into the marketplace, and is focused on leveraging the global platform that has been put in place both to drive these new products and to improve efficiencies. Opta Minerals continues to expand in core North American and European markets through a combination of internal growth and successfully integrating strategic acquisitions. We own 66.2% of Opta Minerals and segment operating income is presented prior to non-controlling interest expense. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. An extended period of softness in the steel and foundry industries, slowdowns in the economy, or delays in bringing new products and operations completely online, along with the other factors described above under “Forward-Looking Statements,” could have an adverse impact on these forward-looking expectations.

SUNOPTA INC. 54 September 29, 2012 10-Q


Corporate Services                        
                         
For the three quarters ended   September 29, 2012     October 1, 2011     Change     % Change  
                         
Operating loss $  (4,781 ) $  (7,169 ) $  2,388     33.3%  

Operating loss at SunOpta Corporate Services decreased by $2,388 to $4,781 for the three quarters ended September 29, 2012, from a loss of $7,169 for the three quarters ended October 1, 2011. The table below explains the decrease in operating loss:

Corporate Services Operating Loss Changes  
Operating loss for the three quarters ended October 1, 2011 ($7,169)

Increase in foreign exchange gains

1,932

Increase in corporate management fees that are allocated to SunOpta operating groups

912

Decrease in SG&A costs due to the strengthened Canadian dollar causing Canadian borne expenses to be less costly when translated into U.S. dollars

241

Lower net general office spending on insurance, utilities, consulting and recruitment fees, partially offset by increased spending on information technology and professional fees

56

Increased stock based compensation and short-term incentive accruals, partially offset by headcount rationalizations that occurred in the first quarter of 2012

(753)
Operating loss for the three quarters ended September 29, 2012 ($4,781)

Management fees mainly consist of salaries of corporate personnel who perform back office functions for divisions, as well as costs related to the enterprise resource management system used within several of the divisions. These expenses are allocated to the groups based on (1) specific identification of allocable costs that represent a service provided to each operating group, and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and number of people employed within each division.

Liquidity and Capital Resources

We have the following sources from which we can fund our operating cash requirements:

  • Existing cash and cash equivalents;

  • Available operating lines of credit;

  • Cash flows generated from operating activities;

  • Cash flows generated from the exercise, if any, of stock options or warrants during the year;

  • Additional long-term financing; and

  • Sale of non-core divisions, or assets.

On July 27, 2012, we entered into an amended and restated credit agreement with a syndicate of lenders. The amended agreement provides secured revolving credit facilities of Cdn $10,000 and $165,000, as well as an additional $50,000 in availability upon the exercise of an uncommitted accordion feature. These facilities mature on July 27, 2016, with the outstanding principal amount repayable in full on the maturity date. These facilities replaced our previous line of credit facilities of Cdn $10,000 and $115,000, and refinanced non-revolving term facilities totalling approximately $21,000, which were due to mature on October 30, 2012. These facilities support our core North American food operations.

SUNOPTA INC. 55 September 29, 2012 10-Q

On July 24, 2012, Opta Minerals amended and restated its credit agreement to include a Cdn $20,000 revolving term credit facility until December 31, 2012 (reducing to Cdn $15,000 on January 1, 2013) and a Cdn $52,500 non-revolving term credit facility. The first tranche of the non-revolving term credit facility is for an amount of Cdn $37,500, which was used by Opta Minerals to refinance its existing borrowings, with the principal repayable in equal quarterly installments of approximately Cdn $938. The second tranche is for an amount of Cdn $15,000 and was primarily used to fund the acquisition of WGI, with the principal repayable in equal quarterly installments of Cdn $375. The revolving term credit facility matures on August 14, 2013, with the outstanding principal amount repayable in full on the maturity date, and the non-revolving term credit facility matures on May 18, 2017, with the remaining outstanding principal amount repayable in full on the maturity date. These facilities are specific to the operations of Opta Minerals.

On September 25, 2012, The Organic Corporation (“TOC”) and certain of its subsidiaries entered into a credit facilities agreement with two lenders, which provides for a €45,000 revolving credit facility covering working capital needs and a €3,000 pre-settlement facility covering currency hedging requirements. A portion of the revolving credit facility was used to repay an existing €35,000 line of credit facility of TOC. The revolving credit facility and pre-settlement facility are due on demand with no set maturity date, and the credit limit can be extended or adjusted based on the needs of the business and upon approval of the lenders. These facilities support the global sourcing, supply and processing capabilities of our International Foods Group.

In order to finance significant acquisitions that may arise in the future, we may need additional sources of cash that we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering, or the issuance of common stock as consideration in an acquisition. There can be no assurance that these types of financing would be available or, if so, on terms that are acceptable to us.

In the event that we require additional liquidity due to market conditions, unexpected actions by our lenders, changes to our growth strategy, or other factors, our ability to obtain any additional financing on favorable terms, if at all, could be limited.

Cash Flows

Cash flows for the quarter ended September 29, 2012

Net cash and cash equivalents increased $940 in the third quarter of 2012 to $4,187 as at September 29, 2012, compared with $3,247 at June 30, 2012, which reflected the following sources of cash:

  • cash provided by continuing operating activities of $16,189; and

  • long-term debt borrowings of $15,234, mainly in connection with the acquisition of WGI.

Mostly offset by the following sources of cash:

  • net repayments of borrowings of $12,472, mainly under our syndicated credit facilities;

  • cash consideration paid to acquire WGI of $11,644, net of cash acquired; and

  • capital expenditures of $5,709, related to the expansion of our aseptic capacity and other manufacturing capabilities.

Cash provided by operating activities from continuing operations was $16,189 in the third quarter of 2012, compared with $11,642 in the third quarter of 2011, an increase of $4,547, reflecting the strong performance of the aseptic and grains-based businesses, including sunflower, and gross margin improvements at our Frozen Foods operation.

Cash used in investing activities of continuing operations was $17,348 in the third quarter of 2012, compared with $8,171 in the third quarter of 2011, an increase of $9,177, reflecting net cash paid to acquire WGI of $11,644 in the third quarter of 2012, compared with cash paid to acquire Lorton’s of $2,500 in the third quarter of 2011.

Cash provided by financing activities of continuing operations was $1,757 in the third quarter of 2012, compared with $160 in the third quarter of 2011, an increase of $1,597, reflecting a $15,234 increase in long-term debt mainly related to the WGI acquisition, partially offset by net repayments of other borrowings of $12,472, mainly under our syndicated credit facilities, and financing fees paid of $1,315 related to the amendments to our various credit facilities.

SUNOPTA INC. 56 September 29, 2012 10-Q

Cash flows for the three quarters ended September 29, 2012

Net cash and cash equivalents increased $1,809 in the first three quarters of 2012 to $4,187 as at September 29, 2012, compared with $2,378 at December 31, 2011, which reflected the following sources of cash:

  • cash provided by continuing operating activities of $38,045;

  • long-term debt borrowings of $34,607, mainly in connection with the acquisitions of WGI and Babco; and

  • net proceeds from the sale of Purity of $12,189.

Mostly offset by the following uses of cash:

  • net repayments of borrowings of $33,821, mainly under our syndicated credit facilities;

  • net cash consideration paid to acquire WGI and Babco of $29,174 in the aggregate; and

  • capital expenditures of $17,623, related to the expansion of our aseptic capacity and other manufacturing capabilities.

Cash provided by operating activities from continuing operations was $38,045 in the first three quarters of 2012, compared with cash used of $1,045 in the first three quarters of 2011, an increase of $39,090, reflecting the strong performance of the aseptic and grains-based businesses, including sunflower, and gross margin improvements at our Frozen Foods operation, as well as increases related to the timing of purchases of crop inventories and lower purchases of grain commodities including sunflower and soybeans in the first three quarters of 2012, due to a decision to carry over inventory from the 2011 crop year, and contract less acres in 2012, in order to realize the benefit from rising commodity prices. In addition, this increase reflected reduced purchases of fruit-based commodities due to product rationalization efforts at the Frozen Foods operation.

Cash used in investing activities of continuing operations was $47,350 in the first three quarters of 2012, compared with $15,080 in the first three quarters of 2011, an increase of $32,270, reflecting net cash paid to acquire WGI and Babco of $29,174 in the aggregate and an increase in capital expenditures of $2,367 in the first three quarters of 2012, compared with cash paid to acquire Lorton’s of $2,500 and proceeds of $2,773 from the sale of the Mexican frozen food assets in the first three quarters of 2011. Cash provided by investing activities of discontinued operations of $12,134 in the first three quarters of 2012, primarily reflected the net proceeds from the sale of Purity of $12,189.

Cash used in financing activities of continuing operations was $1,000 in the first three quarters of 2012, compared with cash provided by financing activities of $23,280 in the first three quarters of 2011, a decrease of $24,280, primarily due to net repayments of borrowings of $33,821 in the first three quarters of 2012, mainly under our syndicated credit facilities, and financing fees paid of $2,490 related to the amendments to our various credit facilities, partially offset by a $34,607 increase in long-term debt mainly related to the WGI and Babco acquisitions, compared with net borrowings of $21,675 in the first three quarters of 2011, mainly to fund inventory purchases.

Off-Balance Sheet Arrangements

There are currently no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition.

Contractual Obligations

With the exception of amendments to the credit facilities described above under “Liquidity and Capital Resources”, there have been no material changes outside the normal course of business in our contractual obligations since December 31, 2011.

Adoption of New Accounting Standards

Information regarding the adoption of new accounting standards is contained in note 1 to the interim consolidated financial statements.

SUNOPTA INC. 57 September 29, 2012 10-Q

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, of the 2011 Form 10-K. There have been no material changes to our exposures to market risks since December 31, 2011.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods specified in the Securities and Exchange Commission’s rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 29, 2012.

Changes in Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in our internal control over financial reporting (as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act) occurred during the quarter ended September 29, 2012. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the quarter ended September 29, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

SUNOPTA INC. 58 September 29, 2012 10-Q

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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 through Colorado Sun Oil Processors, LLC. The purpose of the joint venture was 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 an output term of the joint venture agreement.

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 Prowers County District Court, Colorado on March 16, 2010. 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. In August 2011, as part of the bankruptcy proceeding initiated in June 2010 in the U.S. Bankruptcy Court, District of Colorado, Colorado Mills purchased substantially all of the assets of the joint venture.

A separate arbitration proceeding occurred between Grains and Foods and Colorado Mills to resolve direct claims each party asserted against the other. The case was arbitrated during the week of August 8, 2011 and proposed findings were filed on September 13, 2011. On January 4, 2012 the arbitrator entered an award denying Grains and Foods’ claims and awarding Colorado Mills $4,816 for its breach of contract claim and $430 for accrued interest. The Company subsequently filed a motion to vacate the arbitration award on March 30, 2012 in Powers County District Court. Colorado Mills filed a response on April 20, 2012. The Company filed a reply on April 27, 2012. The Powers County District Court denied the Company’s motion and entered judgment on the arbitration award on July 6, 2012 in the amount of $4,816. On July 13, 2012, the Company bonded the judgment in the amount of $6,875, or approximately 125% of the judgment amount, to stay execution of the judgment pending the Company’s filing of an appeal to the Colorado Court of Appeals. Although management believes the claims asserted by Colorado Mills are baseless, that the arbitrator committed prejudicial error, and that vacatur of the award is warranted, management cannot predict whether the prospect of an unfavorable outcome in this matter is probable.

From time to time, we are involved in litigation incident to the ordinary conduct of our business. For a discussion of other legal proceedings, see note 12 to the interim consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

Certain risks associated with our operations are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. Other than as described below, there have been no material changes to the previously-reported risk factors as of the date of this quarterly report. All of such previously reported risk factors continue to apply to our business and should be carefully reviewed in connection with an evaluation of our Company. The following disclosures are in addition to or provide updates to the previously-reported risk factors.

Our business may be materially and adversely affected by our ability to renew our syndicated credit facilities when they become due on July 27, 2016

Our syndicated credit facilities mature on July 27, 2016. We may not be able to renew these facilities to the same level, or on as favorable terms as in previous years. A reduced facility may impact our ability to finance our business, requiring us to scale back our operations and our use of working capital. Alternatively, obtaining credit on less favorable terms would have a direct impact on our profitability and operating flexibility.

Our business could be materially and adversely affected if we are unable to meet the covenants of our credit facilities

Although we are currently in compliance with the financial covenants under our credit agreements and we believe that we are well positioned to comply with the financial covenants under our credit agreements in the future, compliance with these financial covenants will depend on the success of our business, our operating results, and our ability to achieve our financial forecasts. Various risks uncertainties and events beyond our control could affect our ability to comply with the financial covenants and terms of the credit agreements. Failure to comply with our financial covenants and other terms could result in an event of default and the acceleration of amounts owing under the credit agreements, unless we were able to negotiate a waiver. The lenders could condition any such waiver on an amendment to the credit agreements on terms that may be unfavorable to us. If we are unable to negotiate a covenant waiver or replace or refinance our credit agreements on favorable terms or at all, our business will be adversely impacted.

SUNOPTA INC. 59 September 29, 2012 10-Q

A substantial portion of our assets and certain of our executive officers and directors are located outside of the U.S.; it may be difficult to effect service of process and enforce legal judgments upon us and certain of our executive officers and directors

A substantial portion of our assets and certain of our executive officers and directors are located outside of the U.S. As a result, it may be difficult to effect service of process within the U.S. and enforce judgment of a U.S. court obtained against us or our executive officers and directors. Particularly, our stockholders may not be able to:

  • effect service of process within the U.S. on us or certain of our executive officers and directors;
  • enforce judgments obtained in U.S. courts against us or certain of our executive officers and directors based upon the civil liability provisions of the U.S. federal securities laws;
  • enforce, in a court outside of the U.S., judgements of U.S. courts based on the civil liability provisions of the U.S. federal securities laws; or
  • bring an original action in a court outside of the U.S. to enforce liabilities against us or any of our executive officers and directors based upon the U.S. federal securities laws.

Item 6. Exhibits

The list of exhibits in the Exhibit Index is incorporated herein by reference.

SUNOPTA INC. 60 September 29, 2012 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  SUNOPTA INC.
   
Date: November 7, 2012 /s/ Robert McKeracher
  Robert McKeracher
  Vice President and Chief Financial Officer

SUNOPTA INC. 61 September 29, 2012 10-Q

EXHIBIT INDEX

Exhibit No. Description
   
10.1 Letter Agreement, dated June 30, 2012, by and between SunOpta, Inc. and Hendrik (Rik) Jacobs (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8- K filed on July 6, 2012).
   
10.2 Seventh Amended and Restated Credit Agreement, dated as of July 27, 2012, among SunOpta, Inc. and SunOpta Foods Inc., as Borrowers, and Each of the Financial Institutions and Other Entities from Time to Time Parties Thereto, as Lenders, and Certain Affiliates of the Borrowers, as Obligors, and Bank of Montreal, as Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 1, 2012).
   
10.3 Multipurpose Facilities Agreement, dated as of September 25, 2012, among The Organic Corporation B.V., Tradin Organic Agriculture B.V., SunOpta Foods Europe B.V., Tradin Organics USA Inc. and Trabocca B.V., as Borrowers, and ING Bank N.V. and ABN AMRO Bank N.V., as Lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 1, 2012).
   
31.1 Certification by Steven Bromley, Chief Executive Officer, pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934, as amended.
   
31.2 Certification by Robert McKeracher, Vice President and Chief Financial Officer, pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934, as amended.
   
32 Certifications by Steven Bromley, Chief Executive Officer, and Robert McKeracher, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.
   
101.INS† XBRL Instance Document.
   
101.SCH† XBRL Taxonomy Extension Schema Document.
   
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.DEF† XBRL Taxonomy Extension Definition Linkbase Document.
   
101.LAB† XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.
 
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SUNOPTA INC. 62 September 29, 2012 10-Q