UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10–Q10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedOctoberApril 2, 20102011
OR
[ ]TRANSITION] 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: 001–34198001-34198
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) |
(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–TS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–acceleratednon-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b–212b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [X] |
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–212b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant’s common stock outstanding as of November 1, 2010May 2, 2011 was 65,299,048.65,539,104.
SUNOPTA INC. |
FORM |
For the quarterly period ended |
TABLE OF CONTENTS |
PART I | ||
Item 1. | Financial Statements | |
Consolidated Statements of Operations for the | 4 | |
Consolidated Statements of Comprehensive Earnings | ||
Consolidated Balance Sheets as at | ||
Consolidated Statements of Shareholders’ Equity as at and for the | ||
Consolidated Statements of Cash Flows for the | ||
Notes to Consolidated Financial Statements | ||
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3 | ||
Item 4 | ||
PART II | ||
Item 1 | ||
Item 1A | ||
Item 6 |
All financial information is expressed in United States Dollars. The closing rate of exchange on November 1, 2010May 2, 2011 was CDN $1 = U.S. $0.9842.$0.9508.
Forward–LookingForward-Looking Statements
This quarterly report of SunOpta Inc. (the “Company”) for the quarterly period ended OctoberApril 2, 20102011 contains forward–lookingforward-looking statements which are based on our current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward–lookingforward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as “anticipate,” “estimate,” “intend,” “project,” “potential,” “continue,” “believe,” “expect,” “could,” “would,” “should,” “might,” “plan,” “will,” “may,” the negatives of such terms, and words and phrases of similar impact and include, but are not limited to references to possible operational consolidation, reduction of non–corenon-core assets and operations, business strategies, plant and production capacities, revenue generation potential and anticipated construction costs, competitive strengths, goals, capital expenditure plans, business and operational growth and expansion plans, anticipated operating margins and operating income increases, gains or losses associated with business transactions, cost reductions, rationalization and improved efficiency initiatives, proposedpotential new product offerings, and references to the future growth of the business and global markets for the Company’s products. These forward–lookingforward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward–lookingforward-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.
Whether actual results and developments will agree with our expectations and predictions is subject to many risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from our expectations and predictions. We believe these factors include, but are not limited to, the following:
we have continuing indemnification obligations relating to our recent dispositions;
our credit agreement aboutrestricts how we may operate our business;
SUNOPTA INC. | 1 | April 2, 2011 10-Q |
our inability to refinancemeet the covenants of our term debt when it becomes due;
we may require additional capital to maintain current operations,growth rates, which may not be available on favourable terms or at all;
our customers generally are not obligated to continue purchasing products from us;
consumer preferences for natural and organic food products are difficult to predict and may change;
we operate in a highly competitive industry;
an interruption at one of our manufacturing facilities;
if we lose the loss of serviceservices of our key management;
if we do not manage our supply chain;
volatility in the prices of raw materials, packaging and energy;
climate change legislation;
adverse weather conditions could impose costs on our business;
the exercise of stock options, participation in our employee stock purchase plan and issuance of additional securities could dilute the value of our common shares;
impairment charges in goodwill or other long–lived assets;
technological innovation by our competitors;
we rely on protection of our intellectual property and proprietary rights;
we are subject to substantial environmental regulation and policiespolicies;
SunOpta Foods is subject to which we are subject;
our operations are influenced by agricultural policies that influence our operations;
product liability suits, thatrecalls and threatened market withdrawals, could have a material adverse effect on our business;
litigation and regulatory enforcement concerning marketing and labeling of our food products could negatively affect our business;
our lack of management and operational control over Mascoma may be brought againstlimit our Company;
loss of a key customer;
fluctuations in exchange rates, interest rates and certain commodities;
we may not be able to effectively manage our growth and integrate acquired companies;
our operating results and share price;
Consequently all forward–lookingforward-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–K10-K for the fiscal year ended December 31, 2009.January 1, 2011. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors in Item 1A, Risk Factors, in our Annual Report on Form 10–K10-K for the fiscal year ended December 31, 2009.January 1, 2011.
SUNOPTA INC. | 2 |
PART I –- FINANCIAL INFORMATION
Item 1 – Financial Statements
Consolidated Financial Statements
SunOpta Inc.
For the quarter and three quarters ended OctoberApril 2, 20102011 and September 30, 2009April 3, 2010
(Unaudited)
SUNOPTA INC. | 3 |
SunOpta Inc. |
Consolidated Statements of Operations |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
Quarter ended | Quarter ended | |||||
October 2, 2010 | September 30, 2009 | |||||
Revenues | $ | 217,905 | $ | 212,488 | ||
| ||||||
Cost of goods sold | 184,698 | 183,949 | ||||
| ||||||
Gross profit | 33,207 | 28,539 | ||||
| ||||||
Warehousing and distribution expenses | 702 | 1,036 | ||||
Selling, general and administrative expenses | 21,412 | 21,747 | ||||
Intangible asset amortization | 1,155 | 1,300 | ||||
Other expense (income), net (note 12) | 7,453 | (270 | ) | |||
Goodwill impairment (note 4) | 1,654 | 8,341 | ||||
Foreign exchange gain | (58 | ) | (639 | ) | ||
| ||||||
Earnings (loss) from continuing operations before the following | 889 | (2,976 | ) | |||
| ||||||
Interest expense, net | 2,036 | 3,883 | ||||
| ||||||
Loss from continuing operations before income taxes | (1,147 | ) | (6,859 | ) | ||
| ||||||
Recovery of income taxes | (1,258 | ) | (145 | ) | ||
| ||||||
Earnings (loss) from continuing operations | 111 | (6,714 | ) | |||
| ||||||
Discontinued operations(note 2) | ||||||
Loss from discontinued operations, net of taxes | (15,415 | ) | (150 | ) | ||
Gain on sale of discontinued operations, net of taxes | 49,867 | – | ||||
Earnings (loss) from discontinued operations, net of taxes | 34,452 | (150 | ) | |||
Earnings (loss) | 34,563 | (6,864 | ) | |||
Earnings (loss) attributable to non–controlling interests | 496 | (2,192 | ) | |||
Earnings (loss) attributable to SunOpta Inc. | $ | 34,067 | $ | (4,672 | ) | |
(Loss) earnings per share – basic(note 6) | ||||||
–from continuing operations | $ | (0.01 | ) | $ | (0.07 | ) |
–from discontinued operations | 0.53 | – | ||||
$ | 0.52 | $ | (0.07 | ) | ||
(Loss) earnings per share – diluted(note 6) | ||||||
–from continuing operations | $ | – | $ | (0.07 | ) | |
–from discontinued operations | 0.52 | – | ||||
$ | 0.52 | $ | (0.07 | ) |
Quarter ended | Quarter ended | |||||
April 2, 2011 | April 3, 2010 | |||||
Revenues | $ | 260,923 | $ | 216,749 | ||
Cost of goods sold | 225,368 | 181,273 | ||||
Gross profit | 35,555 | 35,476 | ||||
Selling, general and administrative expenses | 23,007 | 25,796 | ||||
Intangible asset amortization | 1,385 | 1,175 | ||||
Other expense, net (note 12) | 362 | 315 | ||||
Foreign exchange loss (gain) | 135 | (1,117 | ) | |||
Earnings from continuing operations before the following | 10,666 | 9,307 | ||||
Interest expense, net | 1,984 | 3,022 | ||||
Earnings from continuing operations before income taxes | 8,682 | 6,285 | ||||
Provision for income taxes | 3,009 | 2,076 | ||||
Earnings from continuing operations | 5,673 | 4,209 | ||||
Earnings from discontinued operations,net of income taxes(note 3) | - | 432 | ||||
Earnings | 5,673 | 4,641 | ||||
Earnings attributable to non-controlling interests | 592 | 28 | ||||
Earnings attributable to SunOpta Inc. | $ | 5,081 | $ | 4,613 | ||
Earnings per share – basic(note 6) | ||||||
-from continuing operations | $ | 0.08 | $ | 0.06 | ||
-from discontinued operations | - | 0.01 | ||||
$ | 0.08 | $ | 0.07 | |||
Earnings per share – diluted(note 6) | ||||||
-from continuing operations | $ | 0.08 | $ | 0.06 | ||
-from discontinued operations | - | 0.01 | ||||
$ | 0.08 | $ | 0.07 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 4 |
SunOpta Inc. |
Consolidated Statements of |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
Three quarters ended | Three quarters ended | |||||
October 2, 2010 | September 30, 2009 | |||||
Revenues | $ | 668,539 | $ | 619,772 | ||
| ||||||
Cost of goods sold | 560,721 | 538,859 | ||||
| ||||||
Gross profit | 107,818 | 80,913 | ||||
| ||||||
Warehousing and distribution expenses | 2,894 | 3,034 | ||||
Selling, general and administrative expenses | 71,432 | 64,833 | ||||
Intangible asset amortization | 3,474 | 3,577 | ||||
Other expense (income), net (note 12) | 8,812 | (342 | ) | |||
Goodwill impairment (note 4) | 1,654 | 8,341 | ||||
Foreign exchange gain | (1,494 | ) | (156 | ) | ||
| ||||||
Earnings from continuing operations before the following | 21,046 | 1,626 | ||||
| ||||||
Interest expense, net | 7,625 | 10,159 | ||||
| ||||||
Earnings (loss) from continuing operations before income taxes | 13,421 | (8,533 | ) | |||
| ||||||
Provision for (recovery of) income taxes | 2,672 | (1,207 | ) | |||
| ||||||
Earnings (loss) from continuing operations | 10,749 | (7,326 | ) | |||
| ||||||
Discontinued operations(note 2) | ||||||
(Loss) earnings from discontinued operations, net of taxes | (14,569 | ) | 29 | |||
Gain on sale of discontinued operations, net of taxes | 63,676 | – | ||||
Earnings from discontinued operations, net of taxes | 49,107 | 29 | ||||
| ||||||
Earnings (loss) | 59,856 | (7,297 | ) | |||
| ||||||
Earnings (loss) attributable to non–controlling interests | 710 | (2,748 | ) | |||
| ||||||
Earnings (loss) attributable to SunOpta Inc. | $ | 59,146 | $ | (4,549 | ) | |
| ||||||
Earnings (loss) per share – basic(note 6) | ||||||
–from continuing operations | $ | 0.16 | $ | (0.07 | ) | |
–from discontinued operations | 0.75 | – | ||||
$ | 0.91 | $ | (0.07 | ) | ||
Earnings (loss) per share – diluted(note 6) | ||||||
–from continuing operations | $ | 0.15 | $ | (0.07 | ) | |
–from discontinued operations | 0.75 | – | ||||
$ | 0.90 | $ | (0.07 | ) |
Quarter ended | Quarter ended | |||||
April 2, 2011 | April 3, 2010 | |||||
Earnings from continuing operations | $ | 5,673 | $ | 4,209 | ||
Earnings from discontinued operations, net of taxes | - | 432 | ||||
5,673 | 4,641 | |||||
Currency translation adjustment | 2,058 | 690 | ||||
Change in fair value of interest rate swap, net of taxes | 110 | 120 | ||||
Other comprehensive earnings, net of taxes | 2,168 | 810 | ||||
Comprehensive earnings | 7,841 | 5,451 | ||||
Comprehensive earnings (loss) attributable to non-controlling interests | 721 | (199 | ) | |||
Comprehensive earnings attributable to SunOpta Inc. | $ | 7,120 | $ | 5,650 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 5 |
SunOpta Inc. |
Consolidated |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
Quarter ended | Quarter ended | |||||
October 2, 2010 | September 30, 2009 | |||||
Earnings (loss) from continuing operations | $ | 111 | $ | (6,714 | ) | |
Earnings (loss) from discontinued operations, net of taxes | 34,452 | (150 | ) | |||
| 34,563 | (6,864 | ) | |||
| ||||||
Currency translation adjustment | 3,313 | 7,090 | ||||
Change in fair value of interest rate swap, net of taxes | 63 | 14 | ||||
Other comprehensive earnings, net of taxes | 3,376 | 7,104 | ||||
| ||||||
Comprehensive earnings | 37,939 | 240 | ||||
| ||||||
Comprehensive earnings (loss) attributable to non–controlling interests | 724 | (2,120 | ) | |||
| ||||||
Comprehensive earnings attributable to SunOpta Inc. | $ | 37,215 | $ | 2,360 |
April 2, 2011 | January 1, 2011 | |||||
Assets | (see note 3 | ) | ||||
Current assets | ||||||
Cash and cash equivalents (note 13) | $ | 5,720 | $ | 2,643 | ||
Accounts receivable | 112,038 | 98,875 | ||||
Inventories (note 4) | 227,462 | 200,278 | ||||
Prepaid expenses and other current assets | 32,837 | 30,041 | ||||
Deferred income taxes | 740 | 870 | ||||
378,797 | 332,707 | |||||
Investments(note 3) | 33,345 | 33,345 | ||||
Property, plant and equipment | 120,063 | 118,924 | ||||
Goodwill | 49,078 | 48,558 | ||||
Intangible assets | 60,321 | 60,200 | ||||
Deferred income taxes | 11,796 | 11,889 | ||||
Other assets | 2,841 | 2,930 | ||||
Non-current assets held for sale(note 3) | 1,131 | 1,131 | ||||
$ | 657,372 | $ | 609,684 | |||
Liabilities | ||||||
Current liabilities | ||||||
Bank indebtedness (note 7) | $ | 120,643 | $ | 75,910 | ||
Accounts payable and accrued liabilities | 118,528 | 124,031 | ||||
Customer and other deposits | 3,627 | 2,858 | ||||
Income taxes payable | 746 | 973 | ||||
Other current liabilities | 6,068 | 7,674 | ||||
Current portion of long-term debt (note 8) | 22,892 | 22,247 | ||||
Current portion of long-term liabilities | 292 | 571 | ||||
272,796 | 234,264 | |||||
Long-term debt(note 8) | 42,088 | 42,735 | ||||
Long-term liabilities | 6,419 | 6,642 | ||||
Deferred income taxes | 22,351 | 20,808 | ||||
343,654 | 304,449 | |||||
Equity | ||||||
SunOpta Inc. shareholders’ equity | ||||||
Capital Stock(note 5) 65,539,104 common shares (January 1, 2011 - 65,500,091) | 180,881 | 180,661 | ||||
Additional paid in capital(note 5) | 12,758 | 12,336 | ||||
Retained earnings | 100,293 | 95,212 | ||||
Accumulated other comprehensive income | 4,872 | 2,833 | ||||
298,804 | 291,042 | |||||
Non-controlling interest | 14,914 | 14,193 | ||||
Total equity | 313,718 | 305,235 | ||||
$ | 657,372 | $ | 609,684 | |||
Commitments and contingencies(note 10) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. | 6 |
Three quarters ended | Three quarters ended | |||||
October 2, 2010 | September 30, 2009 | |||||
Earnings (loss) from continuing operations | $ | 10,749 | $ | (7,326 | ) | |
Earnings from discontinued operations, net of taxes | 49,107 | 29 | ||||
| 59,856 | (7,297 | ) | |||
| ||||||
Currency translation adjustment | (852 | ) | 9,500 | |||
Change in fair value of interest rate swap, net of taxes | 203 | 334 | ||||
Other comprehensive (loss) earnings, net of taxes | (649 | ) | 9,834 | |||
| ||||||
Comprehensive earnings | 59,207 | 2,537 | ||||
| ||||||
Comprehensive earnings (loss) attributable to non–controlling interests | 267 | (2,690 | ) | |||
| ||||||
Comprehensive earnings attributable to SunOpta Inc. | $ | 58,940 | $ | 5,227 |
(See accompanying notes to consolidated financial statements)
October 2, 2010 | December 31, 2009 | |||||
Assets | (see note 2 | ) | ||||
Current assets | ||||||
Cash and cash equivalents (note 13) | $ | 21,067 | $ | 1,752 | ||
Accounts receivable | 94,618 | 78,483 | ||||
Inventories (note 3) | 158,049 | 157,541 | ||||
Prepaid expenses and other current assets | 13,573 | 10,001 | ||||
Current income taxes recoverable | – | 442 | ||||
Deferred income taxes | 5,173 | 5,457 | ||||
Current assets held for sale (note 2) | – | 56,140 | ||||
292,480 | 309,816 | |||||
Investments(note 2) | 33,345 | – | ||||
Property, plant and equipment | 100,266 | 103,561 | ||||
Goodwill(note 4) | 30,134 | 31,431 | ||||
Intangible assets | 48,424 | 55,229 | ||||
Deferred income taxes | 10,680 | 15,257 | ||||
Other assets | 2,037 | 2,876 | ||||
Non–current assets held for sale(note 2) | – | 33,120 | ||||
$ | 517,366 | $ | 551,290 | |||
Liabilities | ||||||
Current liabilities | ||||||
Bank indebtedness (note 7) | $ | 23,690 | $ | 63,481 | ||
Accounts payable and accrued liabilities | 100,167 | 87,519 | ||||
Customer and other deposits | 963 | 1,064 | ||||
Income taxes payable | 1,612 | – | ||||
Other current liabilities | 1,187 | 1,566 | ||||
Current portion of long–term debt (note 8) | 53,842 | 52,455 | ||||
Current portion of long–term liabilities | 373 | 683 | ||||
Current liabilities held for sale (note 2) | – | 19,135 | ||||
181,834 | 225,903 | |||||
Long–term debt(note 8) | 17,183 | 34,734 | ||||
Long–term liabilities | 2,595 | 2,760 | ||||
Deferred income taxes | 13,126 | 12,708 | ||||
Non–current liabilities held for sale(note 2) | – | 487 | ||||
214,738 | 276,592 | |||||
Preferred shares of a subsidiary company held for sale(note 2) | – | 28,187 | ||||
Equity | ||||||
SunOpta Inc. shareholders’ equity | ||||||
Capital Stock(note 5) | 179,587 | 178,694 | ||||
65,299,048 common shares (December 31, 2009 – 64,982,968) | ||||||
Additional paid in capital(note 5) | 11,480 | 7,934 | ||||
Retained earnings | 93,292 | 34,146 | ||||
Accumulated other comprehensive income | 4,101 | 12,079 | ||||
288,460 | 232,853 | |||||
Non–controlling interest | 14,168 | 13,658 | ||||
Total equity | 302,628 | 246,511 | ||||
$ | 517,366 | $ | 551,290 | |||
Commitments and contingencies(note 10) | ||||||
Subsequent events(note 15) |
(See accompanying notes to consolidated financial statements)
SunOpta Inc. |
Consolidated Statements of Shareholders’ Equity |
As at and for the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
Accumulated | ||||||||||||||||||
Additional | other | Non– | ||||||||||||||||
Capital | paid in | Retained | comprehensive | controlling | ||||||||||||||
stock | capital | earnings | income (loss) | interest | Total | |||||||||||||
Balance at December 31, 2009 | 178,694 | 7,934 | 34,146 | 12,079 | 13,658 | 246,511 | ||||||||||||
| ||||||||||||||||||
Employee share purchase plan and compensation grants | 596 | – | – | – | – | 596 | ||||||||||||
Exercise of options (note 5) | 297 | (43 | ) | – | – | – | 254 | |||||||||||
Issuance of warrants (note 5) | – | 2,163 | – | – | – | 2,163 | ||||||||||||
Stock based compensation | – | 1,426 | – | – | – | 1,426 | ||||||||||||
Earnings from continuing operations | – | – | 10,039 | – | 710 | 10,749 | ||||||||||||
Earnings from discontinued operations, net of income taxes | – | – | 49,107 | (7,772 | ) | – | 41,335 | |||||||||||
Currency translation adjustment | – | – | – | (341 | ) | (511 | ) | (852 | ) | |||||||||
Non–controlling interest contributions | – | – | – | – | 243 | 243 | ||||||||||||
Change in fair value of interest rate swap, net of income taxes | – | – | – | 135 | 68 | 203 | ||||||||||||
| ||||||||||||||||||
Balance at October 2, 2010 | 179,587 | 11,480 | 93,292 | 4,101 | 14,168 | 302,628 |
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||
Additional | other | Non– | Additional | other | Non- | |||||||||||||||||||||||||||||||
Capital | paid in | Retained | comprehensive | controlling | Capital | paid in | Retained | comprehensive | controlling | |||||||||||||||||||||||||||
stock | capital | earnings | income (loss) | interest | Total | stock | capital | earnings | income | interests | Total | |||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Balance at December 31, 2008 | 177,858 | 6,778 | 40,909 | 1,266 | 15,102 | 241,913 | ||||||||||||||||||||||||||||||
Balance at January 1, 2011 | 180,661 | 12,336 | 95,212 | 2,833 | 14,193 | 305,235 | ||||||||||||||||||||||||||||||
Employee share purchase plan | 169 | - | - | - | - | 169 | ||||||||||||||||||||||||||||||
Exercise of options | 51 | (7 | ) | - | - | - | 44 | |||||||||||||||||||||||||||||
Stock based compensation | - | 429 | - | - | - | 429 | ||||||||||||||||||||||||||||||
Earnings from continuing operations | - | - | 5,081 | - | 592 | 5,673 | ||||||||||||||||||||||||||||||
Currency translation adjustment | - | - | - | 1,966 | 92 | 2,058 | ||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of income taxes | - | - | - | 73 | 37 | 110 | ||||||||||||||||||||||||||||||
Balance at April 2, 2011 | 180,881 | 12,758 | 100,293 | 4,872 | 14,914 | 313,718 | ||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | other | Non- | ||||||||||||||||||||||||||||||||||
Capital | paid in | Retained | comprehensive | controlling | ||||||||||||||||||||||||||||||||
stock | capital | earnings | income | interests | Total | |||||||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Balance at December 31, 2009 | 178,694 | 7,934 | 34,146 | 12,079 | 13,658 | 246,511 | ||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Employee share purchase plan and compensation grants | 627 | – | – | – | – | 627 | 207 | - | - | - | - | 207 | ||||||||||||||||||||||||
Issuance of warrants (note 5) | - | 441 | - | - | - | 441 | ||||||||||||||||||||||||||||||
Stock based compensation | – | 1,061 | – | – | – | 1,061 | - | 359 | - | - | - | 359 | ||||||||||||||||||||||||
Loss from continuing operations | – | – | (4,578 | ) | – | (2,748 | ) | (7,326 | ) | |||||||||||||||||||||||||||
Earnings from continuing operations | - | - | 4,181 | - | 28 | 4,209 | ||||||||||||||||||||||||||||||
Earnings from discontinued operations, net of income taxes | – | – | 29 | – | – | 29 | - | - | 432 | - | - | 432 | ||||||||||||||||||||||||
Currency translation adjustment | – | – | – | 9,554 | (54 | ) | 9,500 | - | - | - | 957 | (267 | ) | 690 | ||||||||||||||||||||||
Non–controlling interest contributions | – | – | – | – | 110 | 110 | ||||||||||||||||||||||||||||||
Non-controlling interest contributions | - | - | - | - | 243 | 243 | ||||||||||||||||||||||||||||||
Change in fair value of interest rate swap, net of income taxes | – | – | – | 222 | 112 | 334 | - | - | - | 80 | 40 | 120 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||
Balance at September 30, 2009 | 178,485 | 7,839 | 36,360 | 11,042 | 12,522 | 246,248 | ||||||||||||||||||||||||||||||
Balance at April 3, 2010 | 178,901 | 8,734 | 38,759 | 13,116 | 13,702 | 253,212 |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
SunOpta Inc. |
Consolidated Statements of Cash Flows |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
Quarter ended | Quarter ended | Quarter ended | Quarter ended | |||||||||
October 2, 2010 | September 30, 2009 | April 2, 2011 | April 3, 2010 | |||||||||
Cash provided by (used in) | ||||||||||||
Operating activities | ||||||||||||
Earnings (loss) | $ | 34,563 | $ | (6,864 | ) | |||||||
Earnings (loss) from discontinued operations | 34,452 | (150 | ) | |||||||||
Earnings (loss) from continuing operations | 111 | (6,714 | ) | |||||||||
Earnings | $ | 5,673 | $ | 4,641 | ||||||||
Earnings from discontinued operations | - | 432 | ||||||||||
Earnings from continuing operations | 5,673 | 4,209 | ||||||||||
Items not affecting cash | ||||||||||||
Amortization | 4,110 | 4,187 | 4,833 | 4,328 | ||||||||
Unrealized loss (gain) on foreign exchange | 829 | (169 | ) | 723 | (1,092 | ) | ||||||
Deferred income taxes | (1,909 | ) | (1,459 | ) | 1,766 | 1,166 | ||||||
Goodwill impairment (note 4) | 1,654 | 8,341 | ||||||||||
Impairment of long–lived assets (note 12) | 7,505 | – | ||||||||||
Unrealized (gain) loss on derivative instruments | (3,685 | ) | 1,443 | |||||||||
Other | 21 | 2,254 | 115 | (284 | ) | |||||||
Changes in non–cash working capital (note 9) | 8,371 | 13,683 | ||||||||||
Net cash flows from operations – continuing operations | 20,692 | 20,123 | ||||||||||
Net cash flows from operations – discontinued operations | (5,362 | ) | (857 | ) | ||||||||
Changes in non-cash working capital (note 9) | (43,328 | ) | (23,354 | ) | ||||||||
Net cash flows from operations - continuing operations | (33,903 | ) | (13,584 | ) | ||||||||
Net cash flows from operations - discontinued operations | - | (751 | ) | |||||||||
| 15,330 | 19,266 | (33,903 | ) | (14,335 | ) | ||||||
Investing activities | ||||||||||||
Purchases of property, plant and equipment, net | (4,714 | ) | (1,871 | ) | (3,909 | ) | (5,951 | ) | ||||
Payment of deferred purchase consideration | - | (500 | ) | |||||||||
Purchases of patents, trademarks and other intangible assets | (37 | ) | (77 | ) | (81 | ) | (30 | ) | ||||
Other | 116 | 2,041 | - | 296 | ||||||||
Cash from investing activities – continuing operations | (4,635 | ) | 93 | |||||||||
Cash from investing activities – discontinued operations | (12,485 | ) | 1,120 | |||||||||
Cash from investing activities - continuing operations | (3,990 | ) | (6,185 | ) | ||||||||
Cash from investing activities - discontinued operations | - | (373 | ) | |||||||||
| (17,120 | ) | 1,213 | (3,990 | ) | (6,558 | ) | |||||
Financing activities | ||||||||||||
Decrease in line of credit facilities | (4,359 | ) | (18,996 | ) | ||||||||
Increase in line of credit facilities | 42,551 | 23,386 | ||||||||||
Borrowings under long-term debt | 37 | - | ||||||||||
Proceeds from the issuance of common shares | 338 | 215 | 213 | 207 | ||||||||
Repayment of long–term debt | (12,158 | ) | (3,141 | ) | ||||||||
Repayment of long-term debt | (2,004 | ) | (1,102 | ) | ||||||||
Financing costs | (25 | ) | - | |||||||||
Other | (44 | ) | (1 | ) | 28 | (188 | ) | |||||
Cash flows from financing activities – continuing operations | (16,223 | ) | (21,923 | ) | ||||||||
Cash flows from financing activities – discontinued operations | – | – | ||||||||||
Cash from financing activities - continuing operations | 40,800 | 22,303 | ||||||||||
| (16,223 | ) | (21,923 | ) | ||||||||
Foreign exchange gain on cash held in a foreign currency | 725 | 573 | 170 | 207 | ||||||||
Decrease in cash and cash equivalents during the period | (17,288 | ) | (871 | ) | ||||||||
Increase in cash and cash equivalents during the period | 3,077 | 1,617 | ||||||||||
Discontinued operations cash activity included above: | ||||||||||||
Add: Balance included at beginning of period | 17,974 | 19,136 | - | 18,971 | ||||||||
Less: Balance included at end of period | – | (19,400 | ) | - | (20,135 | ) | ||||||
Cash and cash equivalents – beginning of the period | 20,381 | 2,456 | ||||||||||
Cash and cash equivalents - beginning of the period | 2,643 | 1,752 | ||||||||||
Cash and cash equivalents – end of the period | 21,067 | 1,321 | ||||||||||
Cash and cash equivalents - end of the period | $ | 5,720 | $ | 2,205 | ||||||||
Supplemental cash flow information (notes 9 and 13) |
(See accompanying notes to consolidated financial statements)
SUNOPTA INC. |
Three quarters ended | Three quarters ended | |||||
October 2, 2010 | September 30, 2009 | |||||
Cash provided by (used in) | ||||||
Operating activities | ||||||
Earnings (loss) | $ | 59,856 | $ | (7,297 | ) | |
Earnings from discontinued operations | 49,107 | 29 | ||||
Earnings (loss) from continuing operations | 10,749 | (7,326 | ) | |||
Items not affecting cash | ||||||
Amortization | 12,350 | 12,806 | ||||
Unrealized gain on foreign exchange | (589 | ) | (403 | ) | ||
Deferred income taxes | (784 | ) | (354 | ) | ||
Goodwill impairment (note 4) | 1,654 | 8,341 | ||||
Impairment of long–lived assets (note 12) | 7,895 | – | ||||
Other | 1,603 | 337 | ||||
Changes in non–cash working capital (note 9) | (10,434 | ) | 14,628 | |||
Net cash flows from operations – continuing operations | 22,444 | 28,029 | ||||
Net cash flows from operations – discontinued operations | (5,439 | ) | (1,808 | ) | ||
| 17,005 | 26,221 | ||||
Investing activities | ||||||
Purchases of property, plant and equipment, net | (13,545 | ) | (9,490 | ) | ||
Payment of deferred purchase consideration | (721 | ) | (1,500 | ) | ||
Purchases of patents, trademarks and other intangible assets | (400 | ) | (214 | ) | ||
Other | 281 | (191 | ) | |||
Cash from investing activities – continuing operations | (14,385 | ) | (11,395 | ) | ||
Cash from investing activities – discontinued operations | 52,298 | (1,669 | ) | |||
| 37,913 | (13,064 | ) | |||
Financing activities | ||||||
Decrease in line of credit facilities | (39,155 | ) | (9,750 | ) | ||
Borrowings under long–term debt | 247 | 716 | ||||
Proceeds from the issuance of common shares | 850 | 627 | ||||
Repayment of long–term debt | (16,327 | ) | (9,670 | ) | ||
Other | (287 | ) | 60 | |||
Cash flows from financing activities – continuing operations | (54,672 | ) | (18,017 | ) | ||
Cash flows from financing activities – discontinued operations | – | – | ||||
| (54,672 | ) | (18,017 | ) | ||
Foreign exchange gain on cash held in a foreign currency | 98 | 826 | ||||
| ||||||
Increase (decrease) in cash and cash equivalents during the period | 344 | (4,034 | ) | |||
Discontinued operations cash activity included above: | ||||||
Add: Balance included at beginning of period | 18,971 | 22,877 | ||||
Less: Balance included at end of period | – | (19,400 | ) | |||
Cash and cash equivalents – beginning of the period | 1,752 | 1,878 | ||||
Cash and cash equivalents – end of the period | $ | 21,067 | $ | 1,321 | ||
Supplemental cash flow information (notes 9 and 13) |
(See accompanying notes to consolidated financial statements)
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
1. Basis of presentation, fiscal year–end
1. | Basis of presentation, fiscal year-end and new accounting pronouncements |
Basis of presentation
The interim consolidated financial statements of SunOpta Inc. (the “Company”) have been prepared in accordance with the instructions to Form 10–Q10-Q and Rule 10–0110-01 of Regulation S–XS-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with accounting principles generally accepted in the United States of America. Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and three quarters ended OctoberApril 2, 20102011 are not necessarily indicative of the results that may be expected for the full year ending January 1,December 31, 2011 or for any other period. For further information, see the Company’s consolidated financial statements, and notes thereto, included in the Annual Report on Form 10–K10-K for the year ended December 31, 2009.January 1, 2011.
The interim consolidated financial statements include the accounts of the Company and its subsidiaries, and have been prepared on a basis consistent with the financial statements for the year ended December 31, 2009, except for the effects of the sales of the Canadian Food Distribution business and SunOpta BioProcess Inc., as outlined in note 2.January 1, 2011. Intercompany accounts and transactions have been eliminated on consolidation.
Fiscal year–endyear-end
On March 9, 2010, the Board of Directors of the Company approved a change to theThe Company’s fiscal year period from a fiscal year ending on December 31 to a floating year–endends on the Saturday closest to December 31, based on a 52 week calendar, wherein every fiscal quarter (except for the first quarter which included two additional days) is comprised of 13 weeks or 91 days. This change is effective forUnder our floating year-end methodology, the fiscal 2010, resulting in a year–end of January 1,2011 year-end occurs on December 31, 2011 and the quarterly periods for fiscal 2010 ending2011 end on April 3,2, July 32 and October 2.1. The fiscal year of Opta Minerals Inc. (“Opta Minerals”), which is 66.4% owned by the Company, ends on December 31, 2010,2011, and its quarterly periods for fiscal 20102011 end on March 31, June 30 and September 30. The consolidated statements of operations, cash flows and balance sheets for the Company in the current quarter include the results of Opta Minerals through September 30, 2010.
New accounting pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 810 (formerly Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)”). This accounting standard is a revision to a previous FASB Interpretation and changes how a reporting entity evaluates whether an entity is a variable interest entity (“VIE”) and which entity is considered the primary beneficiary of a VIE and is therefore required to consolidate the VIE. This accounting standard will also require continuous reassessments of which party within the VIE is considered the primary beneficiary. ASC 810 became effective January 1, 2010.As a result of adopting this standard, the Company reassessed its investments and did not change its position as the primary beneficiary of its VIEs.
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010–06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Topic 820, “Fair Value Measures and Disclosures.” ASU No. 2010–06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value measurements. The Company adopted the guidance in ASU No. 2010–06 on January 1, 2010, except for the requirements related to Level 3 disclosures, which will be effective for annual and interim reporting periods beginning after December 15, 2010 (January 1, 2011 for the Company). This guidance requires expanded disclosures only, and did not have any impact on the Company’s consolidated financial statements.March 31, 2011.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
2. | Business acquisitions |
2. Discontinued operations
(a) DivestitureDuring the year ended January 1, 2011, the Company completed two acquisitions, which have been accounted for using the purchase method. The consolidated financial statements include the results of Canadian Food Distribution Businessoperations from these businesses from the date of acquisition. These business combinations are subject to post-closing adjustments, in accordance with the respective acquisition agreements. These adjustments are expected to be finalized by December 2011.
Dahlgren & | Edner of | ||||||||
Company, Inc. | Nevada, Inc. | Total | |||||||
$ | $ | $ | |||||||
Net assets acquired | |||||||||
| |||||||||
Cash | 4,239 | - | 4,239 | ||||||
Current assets | 23,231 | 2,376 | 25,607 | ||||||
Property, plant and equipment | 12,402 | 1,418 | 13,820 | ||||||
Goodwill | 15,940 | 2,730 | 18,670 | ||||||
Intangible assets | 11,013 | 1,823 | 12,836 | ||||||
Other assets | 624 | - | 624 | ||||||
Current liabilities | (12,288 | ) | (449 | ) | (12,737 | ) | |||
Deferred income taxes | (7,670 | ) | - | (7,670 | ) | ||||
| 47,491 | 7,898 | 55,389 | ||||||
| |||||||||
Consideration | |||||||||
| |||||||||
Cash consideration | 44,000 | 4,000 | 48,000 | ||||||
Due to former shareholders | 2,303 | 458 | 2,761 | ||||||
Contingent consideration | 1,188 | 3,440 | 4,628 | ||||||
47,491 | 7,898 | 55,389 |
(a) | Dahlgren & Company, Inc. |
On May 10,November 8, 2010, a wholly-owned subsidiary of the Company acquired 100% of the outstanding shares of Dahlgren & Company, Inc. (“Dahlgren”) for total consideration of $47,491. Included as part of the total consideration was cash of $44,000, contingent consideration of $1,188 based on future earnings targets as defined in the purchase and sale agreement, and a working capital adjustment of $2,303 as a result of working capital exceeding pre-determined targets at the acquisition date. The $2,303 working capital adjustment was paid in cash on January 3, 2011 to the former Dahlgren shareholders. During the quarter ended April 2, 2011, management re-measured the fair value of the contingent consideration, and reduced the fair value of this liability by $290 (note 12).
Intangible assets, consisting of a sales order backlog and customer relationships, acquired in this acquisition are not deductible for tax purposes and are being amortized over the estimated useful lives of these assets. The estimated useful life of the sales order backlog is one year, and the estimated useful life of customer relationships is 12 years. Dahlgren is an integrated processor and global supplier of confection sunflower seed products including in-shell and kernel products, roasted sunflower and soy nuts, bird food, hybrid seed and other products. Dahlgren serves the snack food, bakery, food ingredients and bird feed industries. Dahlgren’s products are marketed internationally to customers in Europe, Asia, Australia, Canada and South America, as well as in the United States. The results of operations for Dahlgren have been consolidated since the November 8, 2010 acquisition date, and are included in the Grains and Foods Group.
SUNOPTA INC. | 10 | April 2, 2011 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters ended April 2, 2011 and April 3, 2010 |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
2. | Business acquisitions, continued |
(b) | Edner of Nevada, Inc. |
On December 14, 2010, a wholly-owned subsidiary of the Company acquired the operating assets of Edner of Nevada, Inc. (“Edner”) for total consideration of $7,898. Consideration included $4,000 of cash, contingent consideration of $3,440 based on future revenue targets in the asset purchase agreement and a working capital adjustment of $458 as a result of working capital exceeding pre-determined targets at the acquisition date.
Intangible assets consisting of customer relationships acquired in this acquisition are deductible for tax purposes and are being amortized over their estimated useful lives of approximately 9 years. Goodwill acquired in this acquisition is deductible for tax purposes. Edner produces a variety of nutritious portable foods such as nutrition bars and grains and fruit based snack bars from its 104,000 square foot facility located in Carson City, Nevada. The results of operations of Edner have been consolidated since the December 14, 2010 acquisition date, and are included in the Fruit Group.
(c) | Pro forma data |
The following condensed pro-forma consolidated statements of operations reflects the Dahlgren and Edner acquisitions as if they had occurred on January 1, 2010:
Quarter ended | ||||||
April 2, 2011 | April 3, 2010 | |||||
$ | $ | |||||
Pro-forma revenue | 260,923 | 241,330 | ||||
Pro-forma earnings attributable to SunOpta Inc. | 5,344 | 4,743 | ||||
Pro-forma earnings per share | ||||||
Basic | 0.08 | 0.07 | ||||
Diluted | 0.08 | 0.07 |
3. | Divestitures |
(a) | Divestiture of Assets in Mexico |
On April 2, 2011, the Company entered into an agreement to sell certain assets related to fruit processing plants located in Mexico (“Mexican Assets” or the “Mexico Transaction”) to Fruvemex Mexicali, S.A. de C.V. (“Fruvemex”). The Mexico Transaction closed on April 29, 2011 for cash consideration of $3,150, to be received by the Company through a deposit of $750 made on April 5, 2011, and instalment payments of $650 on September 30, 2011, $1,000 on December 29, 2011 and $750 on March 29, 2012. The assets sold, consisting primarily of machinery and equipment, are presented as non-current assets held for sale on the consolidated balance sheet as at April 2, 2011, and have been reclassified as non-current assets held for sale as at January 1, 2011. The Company also entered into a strategic raw material supply agreement and a facility lease at market value rates for the use of land and building still owned in Irapuato, Mexico.
(b) | Divestiture of Canadian Food Distribution Business |
On June 11, 2010, the Company sold its Canadian Food Distribution assets (“CFD” or the “CFD Transaction”) to UNFI Canada Inc., a wholly–ownedwholly-owned subsidiary of United Natural Foods Inc. The CFD Transaction closed on June 11, 2010, for cash consideration of Cdn $68,000 (U.S. –- $65,809). The net proceeds are subject to post closing adjustments, in accordance with the asset purchase agreement, which are expected to be finalized by June 2011.
The following is a summary of the CFD Transaction:
| |||
| |||
| |||
| |||
| |||
| |||
| |||
|
The gain on sale of discontinued operations has been recorded in discontinued operations on the consolidated statements of operations.
The operating results of the CFD business are included within (loss) earnings from discontinued operations, net of income tax, on the consolidated statement of operations. The operating results for the three quarters ended October 2, 2010 reflect the operating results from January 1, 2010 through to the date of the sale, June 11, 2010. The summary comparative financial results of discontinued operations related to the CFD business were as follows:
| Quarter ended | Three quarters ended | ||||||||||
| October 2, | September 30, | October 2, | September 30, | ||||||||
| 2010 | 2009 | 2010 | 2009 | ||||||||
| ||||||||||||
Revenues | $ | – | $ | 41,324 | $ | 82,859 | $ | 123,707 | ||||
| ||||||||||||
Earnings before taxes from discontinued operations up to the date of sale | – | 1,076 | 2,168 | 3,681 | ||||||||
Costs allocated to discontinued operations as a result of sale | – | – | (1,289 | ) | – | |||||||
Earnings from discontinued operations before taxes | – | 1,076 | 879 | 3,681 | ||||||||
Provision for income taxes | – | 342 | 265 | 1,171 | ||||||||
| $ | – | $ | 734 | $ | 614 | $ | 2,510 |
The assets sold in the CFD Transaction were part of the former Distribution Group segment.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
3. | Divestitures, continued |
2. DiscontinuedThe operating results of the CFD business for the quarter ended April 3, 2010, which are included within earnings from discontinued operations, continuednet of income taxes, on the consolidated statement of operations, were as follows:
Quarter ended | |||
April 3, 2010 | |||
$ | |||
Revenues | 48,729 | ||
Earnings from discontinued operations before taxes | 1,402 | ||
Provision for income taxes | 422 | ||
Earnings from discontinued operations | 980 |
(b) The assets sold in the CFD Transaction were part of the former Distribution Group segment.
(c) | Divestiture of SunOpta BioProcess Inc. |
On August 31, 2010, the Company completed a transaction to sell its 100% ownership interest in SunOpta BioProcess Inc. (“SBI” or the “SBI Transaction”) to Mascoma Canada Inc., a wholly–ownedwholly-owned subsidiary of Mascoma Corporation (“Mascoma”). As consideration for selling all the outstanding common shares of SBI, the Company received non–cashnon-cash consideration equal to a 19.55% ownership interest in Mascoma, through a combination of preferred and common shares, as well as warrants, valued at $50,925. The non–cashnon-cash consideration includes 11,268,868 series D preferred shares, 3,756,290 common shares and 1,000,000 warrants to purchase common shares of Mascoma. In conjunction with the sale, the Company settled the preferred share liability of SBI with the former SBI preferred shareholders, through the transfer of 4,688,000 of the series D preferred shares received. In addition, as a result of the change in control of SBI, the vesting of previously issued SBI stock options were accelerated, and the 800,000 restricted stock units (“RSU”) were settled in cash at a value of $4.49 per RSU. The fair value of consideration received, net of the settlement to the former SBI preferred shareholders, resulted in a $33,345 investment in Mascoma, which is presented as a non–currentnon-current asset on the Company’s balance sheet. The investment in Mascoma will beis accounted for under the cost method of accounting, based on the 19.65%19.61% ownership interest taken back,the Company received in Mascoma, and the inability of the Company to exert significant influence over the operations of Mascoma. This transaction is subject to post closing adjustments, in accordance with the share purchase agreement, which are expected to be finalized withinby August 2011. At April 2, 2011, the next 12 months.Company’s ownership position was 19.13%.
The following is a summaryoperating results of SBI for the SBI Transaction:quarter ended April 3, 2010, which are included within earnings from discontinued operations, net of income taxes, on the consolidated statement of operations, were as follows:
| | Quarter ended | ||
April 3, 2010 | ||||
| ||||
| ||||
| ||||
| ||||
Loss from discontinued operations before income taxes | (548 | ) | ||
Provision for income taxes | ||||
| ) |
The gain on salebusiness sold was part of discontinued operations has been recorded in discontinued operations on the consolidated statements of operations.former SunOpta BioProcess segment.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
2. Discontinued operations, continued
The operating results of SunOpta BioProcess Inc. are included within (loss) earnings from discontinued operations, net of income tax, on the consolidated statement of operations. The operating results for the quarter ended October 2, 2010 and the three quarters ended October 2, 2010, reflect the operating results through to the date of sale, August 31, 2010. The summary comparative financial results of discontinued operations related to SunOpta BioProcess Inc. were as follows:
| Quarter ended | Three quarters ended | ||||||||||
| October 2, | September 30, | October 2, | September 30, | ||||||||
| 2010 | 2009 | 2010 | 2009 | ||||||||
| ||||||||||||
Revenues | $ | 1,329 | $ | – | $ | 4,005 | $ | 132 | ||||
| ||||||||||||
Loss before taxes from discontinued operations up to the date of sale | (15,348 | ) | (884 | ) | (14,916 | ) | (2,481 | ) | ||||
Costs allocated to discontinued operations as a result of sale | (67 | ) | – | (267 | ) | – | ||||||
Loss from discontinued operations before taxes | (15,415 | ) | (884 | ) | (15,183 | ) | (2,481 | ) | ||||
Provision for income taxes | – | – | – | – | ||||||||
| $ | (15,415 | ) | $ | (884 | ) | $ | (15,183 | ) | $ | (2,481 | ) |
Included in loss before income taxes from discontinued operations up to the date of sale is $15,280 of stock–based and other compensation rewards that were triggered upon the change in control of SBI.
The business sold was part of the former SunOpta BioProcess segment.
Included in current assets held for sale (as at December 31, 2009) are cash and cash equivalents related to SBI of $18,954 that could not be used by the Company for general corporate purposes, and was maintained in separate bank accounts of SBI.
Inventories |
April 2, 2011 | January 1, 2011 | |||||
Raw materials and work-in-process | $ | 119,270 | $ | 98,140 | ||
Finished goods | 87,155 | 84,529 | ||||
Company-owned grain | 25,874 | 21,897 | ||||
Inventory reserve | (4,837 | ) | (4,288 | ) | ||
| $ | 227,462 | $ | 200,278 |
Capital stock |
2. Discontinued operations, continued
The assets and liabilities related to the CFD Transaction and SBI Transaction have been reclassified as assets and liabilities held for sale on the Company's balance sheet at December 31, 2009, as follows:
CFD Transaction | SBI Transaction | Held for Sale | |||||||
Cash and cash equivalents | $ | 17 | $ | 18,954 | $ | 18,971 | |||
Accounts receivable | 15,451 | 307 | 15,758 | ||||||
Inventories | 20,593 | 6 | 20,599 | ||||||
Prepaid expenses and other current assets | 713 | 99 | 812 | ||||||
Current assets held for sale | 36,774 | 19,366 | 56,140 | ||||||
Property, plant and equipment | $ | 7,196 | $ | 1,872 | $ | 9,068 | |||
Goodwill | 18,286 | – | 18,286 | ||||||
Intangible assets | 5,344 | 422 | 5,766 | ||||||
Non–current assets held for sale | 30,826 | 2,294 | 33,120 | ||||||
Accounts payable and accrued liabilities | $ | 17,852 | $ | 882 | $ | 18,734 | |||
Customer and other deposits | 23 | 349 | 372 | ||||||
Current portion of long–term liabilities | 29 | – | 29 | ||||||
Current liabilities held for sale | 17,904 | 1,231 | 19,135 | ||||||
Long–term liabilities | $ | 487 | $ | – | $ | 487 | |||
Non–current liabilities held for sale | 487 | – | 487 | ||||||
Preferred shares of a subsidiary company held for sale | $ | – | $ | 28,187 | $ | 28,187 | |||
Preferred shares of a subsidiary company held for sale | – | 28,187 | 28,187 |
3. Inventories
| October 2, 2010 | December 31, 2009 | ||||
| ||||||
Raw materials and work–in–process | $ | 69,328 | $ | 66,052 | ||
Finished goods | 83,130 | 87,497 | ||||
Company–owned grain | 10,407 | 13,791 | ||||
Inventory reserve | (4,816 | ) | (9,799 | ) | ||
| $ | 158,049 | $ | 157,541 |
4. Goodwill impairment
During the quarter ended October 2, 2010, the Company determined that there were external market conditions and other circumstances that suggested the carrying value of the natural health products reporting unit, which is part of the International Foods segment, may exceed its fair value. These external market conditions and other circumstances included reduced sales levels, increased competition leading to price concessions and decreased market share, shift in product mix causing lower gross margins, and product de–listing at certain retailers. As a result of completing the test for goodwill impairment, the Company determined that the carrying value of goodwill in its natural health reporting unit exceeded its fair value, and recorded a non–cash goodwill impairment charge of $1,654. The fair value of the natural health products reporting unit was estimated using the expected present value of future cash flows. The Company’s other reporting units will be tested for impairment in the fourth quarter as part of the annual impairment test.
4. Goodwill impairment, continued
During the quarter ended September 30, 2009, Opta Minerals determined that there were external market conditions and other circumstances that suggested the carrying value of certain reporting units in Opta Minerals may exceed their fair value. These external market conditions and other circumstances included continued operating losses and extended periods of facility under–utilization due to continued weakness in the steel, abrasives and foundry markets. As a result of completing a test for goodwill impairment, Opta Minerals determined that the carrying value of goodwill in certain of its mill and foundry and abrasive products reporting units exceeded their fair value, and recorded a non–cash impairment charge of $8,341. The Company has recorded this charge in its Opta Minerals operating segment.
5. Capital stock
(a) Capital stock
Transactions involving capital stock for the quarter ended October 2, 2010 and September 30, 2009 and for the three quarters ended OctoberApril 2, 20102011 and September 30, 2009,April 3, 2010 were as follows:
| Quarter ended | Quarter ended | ||||||||||
| October 2, 2010 | September 30, 2009 | ||||||||||
| Number | Amount | Number | Amount | ||||||||
| $ | $ | ||||||||||
Balance, beginning of period | 65,170,331 | 179,218 | 64,846,560 | 178,270 | ||||||||
Common shares issued on exercise of options by employees and directors | 90,940 | 201 | – | – | ||||||||
Common shares issued as part of the Company's employee stock purchase plan | 37,777 | 168 | 68,883 | 215 | ||||||||
Balance, end of period | 65,299,048 | 179,587 | 64,915,443 | 178,485 |
| Three quarters ended | Three quarters ended | Quarter ended | Quarter ended | ||||||||||||||||||||
| October 2, 2010 | September 30, 2009 | April 2, 2011 | April 3, 2010 | ||||||||||||||||||||
| Number | Amount | Number | Amount | Number | Amount | Number | Amount | ||||||||||||||||
| $ | $ | ||||||||||||||||||||||
Balance, beginning of period | 64,982,968 | 178,694 | 64,493,320 | 177,858 | 65,500,091 | 180,661 | 64,982,968 | 178,694 | ||||||||||||||||
Common shares issued on exercise of options by employees and directors | 140,420 | 297 | – | – | 10,000 | 51 | - | - | ||||||||||||||||
Common shares issued as part of the Company's employee stock purchase plan | 173,160 | 596 | 419,623 | 627 | 29,013 | 169 | 80,439 | 207 | ||||||||||||||||
Common shares issued to the Company's Chief Executive Officer as part of an award granted February 8, 2007 | 2,500 | – | 2,500 | – | ||||||||||||||||||||
Common shares issued to the Company's Chief Executive Officer as part of an award granted on February 8, 2007 | - | - | 2,500 | - | ||||||||||||||||||||
Balance, end of period | 65,299,048 | 179,587 | 64,915,443 | 178,485 | 65,539,104 | 180,881 | 65,065,907 | 178,901 |
Warrants |
5. Capital stock, continued
(b) Warrants
On February 5, 2010 (the “First Tranche”"First Tranche"), and June 11, 2010 (the “Second Tranche”"Second Tranche"), the Company issued warrants pursuant to an Advisory Services Agreement. A fair value of $441 and $1,722, respectively, was assigned to these warrants, using the Black–ScholesBlack-Scholes option pricing model, and were expensed in full during the quarter of issuance with the offset recorded as an increase to additional paid in capital. The Second Tranche of warrants were issued following the consummation of the sale of the Canadian Food Distribution business (see note 2(a)(note 3 (b)) and the cost was included as part of the gain on sale of discontinued operations. As at April 2, 2011, the First Tranche and Second Tranche of warrants had not been exercised. Inputs used in the Black–ScholesBlack-Scholes option pricing model for the warrants were as follows:
| First Tranche | Second Tranche | |||||||||||
| February 5, 2010 | June 11, 2010 | February 5, 2010 | June 11, 2010 | |||||||||
| |||||||||||||
Number of warrants issued | 250,000 | 600,000 | 250,000 | 600,000 | |||||||||
Exercise price | 3.25 | 5.11 | $ | 3.25 | $ | 5.11 | |||||||
Expected volatility | 72.0% | 72.1% | 72.0% | 72.1% | |||||||||
Risk–free interest rate | 2.5% | 2.1% | |||||||||||
Risk-free interest rate | 2.5% | 2.1% | |||||||||||
Dividend yield | 0% | 0% | 0% | 0% | |||||||||
Expected life (in years) | 5 | 5 | 5 | 5 |
The fair value of the warrants is based on estimates of the number of warrants that management expects to vest, which was estimated to be 100% of the granted amounts.
(c) Options
There were 681,000 options granted to employees and directors in the three quarters ended October 2, 2010 (September 30, 2009 – 1,078,000). The inputs used in the Black–Scholes model to determine the fair value of the options granted were as follows:
| Three quarters ended | Three quarters ended | ||||
| October 2, 2010 | September 30, 2009 | ||||
| ||||||
Number of options issued | 681,000 | 1,078,000 | ||||
Exercise price | $4.45 – $5.62 | $0.91 – $1.92 | ||||
Weighted average expected volatility | 68.2% | 70.6% | ||||
Weighted average risk–free interest rate | 2.3% | 2.0% | ||||
Dividend yield | 0% | 0% | ||||
Expected life (in years) | 6 | 6 |
The weighted average fair value of the options granted for the three quarters ended October 2, 2010 amounted to $2.79 (September 30, 2009 – $1.05). The fair value of the options is based on estimates of the number of options that management expects to vest, which is estimated to be 85% of the granted amounts.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
5. | Capital stock, continued |
(c) | Options |
6. There were 200,000 options granted to the Company’s Chief Executive Officer during the quarter ended April 2, 2011 (April 3, 2010 – nil). The inputs used in the Black-Scholes model to determine the fair value of the options granted were as follows:
Quarter ended | |||
April 2, 2011 | |||
Number of options issued | 200,000 | ||
Exercise price | $ | 7.72 | |
Expected volatility | 68.2% | ||
Risk-free interest rate | 2.0% | ||
Dividend yield | 0% | ||
Expected life (in years) | 6 |
The fair value of the options granted for the quarter ended April 2, 2011 amounted to $4.79 per option (April 3, 2010 - $nil).
6. | Earnings per share |
The calculation of basic earnings per share is based on the weighted average number of shares outstanding. Diluted earnings per share reflect the dilutive effect of the exercise of warrants and options. The number of shares for the diluted earnings per share was calculated as follows:
Quarter ended | Three quarters ended | Quarter ended | ||||||||||||||||
October 2, | September 30, | October 2, | September 30, | April 2, 2011 | April 3, 2010 | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||||
(Loss) earnings from continuing operations attributable to SunOpta Inc. | $ | (385 | ) | $ | (4,522 | ) | $ | 10,039 | $ | (4,578 | ) | |||||||
Earnings (loss) from discontinued operations, net of taxes | 34,452 | (150 | ) | 49,107 | 29 | |||||||||||||
Earnings (loss) attributable to SunOpta Inc. | $ | 34,067 | $ | (4,672 | ) | $ | 59,146 | $ | (4,549 | ) | ||||||||
Earnings from continuing operations attributable to SunOpta Inc. | $ | 5,081 | $ | 4,181 | ||||||||||||||
Earnings from discontinued operations, net of income taxes | - | 432 | ||||||||||||||||
Earnings attributable to SunOpta Inc. | $ | 5,081 | $ | 4,613 | ||||||||||||||
Weighted average number of shares used in basic earnings per share | 65,120,570 | 64,866,777 | 65,112,908 | 64,714,881 | 65,516,643 | 65,004,317 | ||||||||||||
Dilutive potential of the following: | ||||||||||||||||||
Employee/director stock options | 736,460 | 503,332 | 561,136 | 286,753 | 997,397 | 529,752 | ||||||||||||
Warrants | 129,004 | – | 90,821 | – | 314,472 | 13,173 | ||||||||||||
Diluted weighted average number of shares outstanding | 65,986,034 | 65,370,109 | 65,764,865 | 65,001,634 | 66,828,512 | 65,547,242 | ||||||||||||
(Loss) earnings per share – basic: | ||||||||||||||||||
Earnings per share - basic: | ||||||||||||||||||
From continuing operations | $ | (0.01 | ) | $ | (0.07 | ) | $ | 0.16 | (0.07 | ) | $ | 0.08 | $ | 0.06 | ||||
From discontinued operations | 0.53 | – | 0.75 | – | - | 0.01 | ||||||||||||
$ | 0.52 | $ | (0.07 | ) | $ | 0.91 | (0.07 | ) | $ | 0.08 | $ | 0.07 | ||||||
(Loss) earnings per share – diluted: | ||||||||||||||||||
Earnings per share - diluted: | ||||||||||||||||||
From continuing operations | $ | – | $ | (0.07 | ) | $ | 0.15 | (0.07 | ) | $ | 0.08 | $ | 0.06 | |||||
From discontinued operations | 0.52 | – | 0.75 | – | - | 0.01 | ||||||||||||
$ | 0.52 | $ | (0.07 | ) | $ | 0.90 | (0.07 | ) | $ | 0.08 | $ | 0.07 |
For the quarter ended OctoberApril 2, 2010,2011, options to purchase 875,300 (September 30, 2009606,600 (April 3, 2010 – 1,815,375)1,310,825) common shares have been excluded from the calculations of diluted earnings per share due to their anti–dilutive effect. For the three quarters ended October 2, 2010, options to purchase 1,010,000 (September 30, 2009 – 1,815,375) common shares have been excluded from the calculations of diluted earnings per share due to their anti–dilutiveanti-dilutive effect.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
7. | Bank indebtedness |
April 2, 2011 | January 1, 2011 | |||||
| ||||||
Canadian line of credit facility (a) | $ | 918 | $ | - | ||
U.S. line of credit facility (b) | 72,397 | 41,790 | ||||
Opta Minerals Canadian line of credit facility (c) | 7,513 | 3,546 | ||||
TOC line of credit facilities (d) | 39,815 | 30,574 | ||||
| $ | 120,643 | $ | 75,910 |
(a) |
|
The Company has a Canadian line of credit of Cdn $20,000$5,000 (U.S. – $19,598)$5,185). As at OctoberApril 2, 2010, nil (December 31, 20092011, Cdn $3,296 (U.S. – nil)$3,418) (January 1, 2011 – $nil) of this facility was utilized, and there were no amountsincluding Cdn $2,411 (U.S. – $2,500) (January 1, 2011 –$nil) committed through letters of credit. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including Canadian or U.S. bank prime, or Canadian bankers’ acceptances, plus a margin based on certain financial ratios. At OctoberApril 2, 2010,2011, the interest rate on this facility was 5.00% (December 31, 20095.50% (January 1, 2011 – 7.50%5.00%), calculated as Canadian prime plus a premium of 2.00%2.50%. The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of the Company’s Canadian business as defined in the Credit Agreement. At OctoberApril 2, 2010,2011, the borrowing base supported draws to $8,861.$5,185. At OctoberApril 2, 2010,2011, the Company incurs standby fees equal to 0.75% of the undrawn balances on this facility are charged toin accordance with the Company as standby fees, based onterms of the Credit Agreement.
(b) |
|
The Company has a U.S. line of credit of $80,000.$100,000. As at OctoberApril 2, 2010, $2,524 (December 31, 20092011, $74,772 (January 1, 2011 – $45,754)$44,254) of this facility was utilized, representing $2,524 (December 31, 2009including $2,375 (January 1, 2011 – $1,624)$2,464) committed through letters of credit. During the second quarter, cash proceeds from the sale of the Canadian Food Distribution Assets (see note 2), were used to repay the outstanding balance. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. bank prime, or U.S. LIBOR, plus a margin based on certain financial ratios. At OctoberApril 2, 2010,2011, the weighted average interest rate on this facility was 3.26% (December 31, 20093.74% (January 1, 2011 – 3.73%3.26%), based on LIBOR plus a premium of 3.00%3.50%. The maximum availability of this line is based on the borrowing base which includes certain accounts receivables and inventories of the Company’s U.S. business as defined in the Credit Agreement. At OctoberApril 2, 2010,2011, the borrowing base supported draws to $62,318.$100,000. At OctoberApril 2, 2010,2011, the Company incurs standby fees equal to 0.75% of the undrawn balances on this facility are charged toin accordance with the Company as standby fees, based onterms of the Credit Agreement.
The aboveCanadian and U.S. line of credit facilities as well as certain long–termlong-term debt balances (see note(note 8) are collateralized by a first priority security againstinterest on substantially all of the Company’s assets in Canada, the United States and Mexico, excluding the assets of Opta Minerals and The Organic Corporation.
The Company hasis required to comply with certain financial covenants, that it iswhich are measured against on a quarterly basis. See note 8 for a discussion of the Company’s compliance with respect to these covenants.
(c) |
|
Opta Minerals has a line of credit facility of Cdn $15,000 (U.S. – $14,699)$15,429). At September 30, 2010,March 31, 2011, Cdn $4,203$8,463 (U.S. - $8,705) (January 1, 2011 - Cdn $4,713 (U.S. – $4,119) ((December 31, 2009 – Cdn $4,686 (U.S. – $4,459))$4,712) of this facility has been utilized, including letters of credit in the amount of Cdn $1,162$1,159 (U.S. - $1,192) (January 1, 2011 - Cdn $1,166 (U.S. – $1,139) (December 31, 2009 – Cdn $1,160 (U.S. – $1,104)$1,166)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including prime, U.S. dollar base rate, bankers’ acceptances or LIBOR plus a margin based on certain financial ratios of the Company. At September 30, 2010,March 31, 2011, the weighted average interest rate on this facility was 7.69% (December 31, 20096.93% (January 1, 2011 – 7.50%6.93%).
Opta Minerals’ line of credit facility, along with its unused portion of the revolving acquisition facility (note 8(d)), is subject to annual extensions, and were extended on July 15, 2010 to August 16, 2011.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
7. | Bank indebtedness, continued |
(d) |
|
The Organic Corporation (“TOC”) has a line of credit facility of € 30,00030,500 (U.S. – $41,340)$43,377). At OctoberApril 2, 2010,2011, € 16,54729,446 (U.S. -$41,879) (January 1, 2011 – € 22,589 (U.S. – $22,801) (December 31, 2009 – € 12,746 (U.S. – $18,247)$30,249)) of this facility had been utilized, including letters of credit in the amount of € 2,3223,371 (U.S. – $3,200) (December 31, 2009$4,794) (January 1, 2011 – € 2,119181 (U.S. – $3,034)$243)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. LIBOR and Euro LIBOR plus a premium of 1.85%. At OctoberApril 2, 2010,2011, the weighted average interest rate on this facility was 2.55%2.83%. The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of TOC and its subsidiaries. At OctoberApril 2, 2010,2011, the borrowing base securing this facility supported draws to € 21,04330,500 (U.S. – $28,997) (December 31, 2009 –$43,377) (January 1, 2011 - € 17,01922,938 (U.S. – $24,364)$30,716)).
In the first quarter of 2011, a wholly owned subsidiary of TOC entered into a line of credit facility with capacity of € 5,000 (U.S. – $7,111). As at April 2, 2011, this line is guaranteed through a $2,500 letter of credit issued by the Company on its U.S. line of credit facility. As at April 2, 2011, € 751 (U.S. – $1,068) of this facility had been used. Interest on borrowings under this facility accrues at the Chinese central bank’s interest rate, as published by the People’s Bank of China, multiplied by 125%, or 7.58% at April 2, 2011.
A less–than–whollyless-than-wholly owned subsidiary of TOC has line of credit facilities with availability of $1,302 (December 31, 2009 – $1,394)$1,802 (January 1, 2011 –$1,297) which are fully guaranteed by TOC. As at OctoberApril 2, 2010, $1,109 (December 31, 20092011, $1,662 (January 1, 2011 – $783)$568) of these facilities had been used. Interest on borrowings under these facilities accrues at either a base rate of 0.4% plus a premium of 6.00%, or a fixed rate of 9.75%. At OctoberApril 2, 2010,2011, the weighted average interest rate on these facilities was 8.9% (December 31, 2009 –8.6%6.4% (January 1, 2011 – 9.8%) and TOC is in compliance with all material requirements under this facility.
8. Long–term debt
October 2, 2010 | December 31, 2009 | |||||
Syndicated Lending Agreement: | ||||||
Term loan facility (a) | $ | 33,716 | $ | 45,000 | ||
Other Long–Term Debt: | ||||||
Opta Minerals term loan facility (b) | 7,850 | 8,830 | ||||
Opta Minerals revolving acquisition facility (c) | 11,448 | 12,362 | ||||
Subordinated debt to former shareholders of TOC (d) | 4,758 | 4,944 | ||||
Promissory notes (e) | 12,847 | 15,504 | ||||
Other long–term debt (f) | 268 | 380 | ||||
Term loans payable (g) | 43 | 52 | ||||
Capital lease obligations (h) | 95 | 117 | ||||
71,025 | 87,189 | |||||
Less: current portion | 53,842 | 52,455 | ||||
$ | 17,183 | $ | 34,734 |
8. | Long-term debt |
April 2, 2011 | January 1, 2011 | |||||
$ | $ | |||||
Syndicated Lending Agreement: | ||||||
Non-revolving real estate term facility (a) | 12,783 | 13,000 | ||||
Non-revolving machinery and equipment term facility (b) | 16,150 | 17,000 | ||||
| ||||||
Other Long-Term Debt | ||||||
Opta Minerals term loan facility (c) | 7,669 | 7,766 | ||||
Opta Minerals revolving acquisition facility (d) | 11,310 | 11,419 | ||||
Subordinated debt to former shareholders of TOC (e) | 4,911 | 4,569 | ||||
Promissory notes (f) | 11,205 | 10,840 | ||||
Other long-term debt (g) | 271 | 264 | ||||
Term loans payable and capital lease obligations (h) | 681 | 124 | ||||
| 64,980 | 64,982 | ||||
Less: current portion | 22,892 | 22,247 | ||||
42,088 | 42,735 |
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
8. Long–term
8. | Long-term debt, continued |
Details of the Company’s long–termlong-term debt are as follows:
(a) Term loan
(a) | Non-revolving real estate term facility: |
The non-revolving real estate term loan facility balance athas a maximum available borrowing amount of $13,000. This facility matures on October 2, 2010 was $33,716 (December 31, 2009 – $45,000). The entire loan principal is due December 20, 2012, and at that time, is renewable at the optionhas quarterly minimum repayments of the lenderapproximately $217. At April 2, 2011, $12,783 (January 1, 2011 - $13,000) was drawn on this facility, and the Company. Interest on the term loan facility is payable at a fixed rate of 6.44% plus a margin of up to 360 basis points based on certain financial ratios of the Company. As at October 2, 2010, theweighted average interest rate was 8.04% (December4.24% (January 1, 2011 - 3.76%), based on the level of borrowings, and a credit spread based on either U.S. prime or LIBOR rates.
(b) | Non-revolving machinery and equipment term facility: |
The non-revolving machinery and equipment term facility has a maximum available borrowing amount of $17,000. This facility matures on October 31, 2009 – 9.74%2012, and has quarterly minimum repayments of approximately $850. At April 2, 2011, $16,150 (January 1, 2011 - $17,000) was drawn on this facility, and the weighted average interest rate was 4.24% (January 1, 2011 - 3.76%). As, based on the level of borrowings, and a result of the sale ofcredit spread based on either U.S. prime or LIBOR rates.
The above term facilities, and the Canadian Food Distribution assets (see note 2), $11,284 was repaid on July 16, 2010 in accordance with the terms of the loan agreement.
The term loan facility, and the U.S. line of credit facility (see note 6)7 (a) and (b)), are collateralized by a first priority security against substantially all of the Company’s assets in Canada, the United States and Mexico, excluding the assets of Opta Minerals and TOC.
(c) |
|
The term loan facility has a maximum available borrowing amount of Cdn $8,011$7,456 (U.S. – $7,850)- $7,669). This facility matures on August 30, 2012, is renewable at the option of the lender and Opta Minerals, and has quarterly principal repayments of Cdn $312 (U.S. – $306)- $321). At September 30,March 31, 2011 and December 31, 2010, the term loan facility was fully drawn (2009 – $9,280 (U.S. – $8,830)).drawn. At September 30, 2010,March 31, 2011, the weighted average interest rate on this facility was 7.66%7.38% (December 31, 20092010 – 7.50%7.61%).
(d) |
|
The revolving acquisition facility has a maximum available borrowing amount of Cdn $14,043 (U.S. – $13,761)- $14,445) to finance future acquisitions and capital expenditures. Principal is payable quarterly equal to 1/40 of the drawdown amount. Any remaining outstanding principal under this facility is due upon maturity. The facility is revolving for one year, with a five year term out option. The outstanding balance on the revolving acquisition facility at September 30, 2010March 31, 2011 was Cdn $11,683$10,996 (U.S. – $11,448) (2009- $11,310) (December 31, 2010 – Cdn $12,992$11,421 (U.S. – $12,362)- $11,419)). At September 30, 2010,March 31, 2011, the weighted average interest rate on this facility was 7.24% (2009 – 6.99%6.87% (December 31, 2010 - 7.05%).
The Opta Minerals’ credit facilities described above are collateralized by a first priority security againstinterest on substantially all of the Opta Minerals assets in both Canada and the United States.
Opta Minerals entered into a cash flow hedge in 2007. The cash flow hedge entered into exchanged a notional amount of Cdn $17,200 (U.S. – $16,854)- $17,692) from a floating rate to a fixed rate of 5.25% from August 2008 to August 2012. The estimated fair value of the interest rate swap at September 30, 2010March 31, 2011 was a loss of $1,095$734 (December 31, 2009 –2010 - loss of $1,387)$891). The incremental gain in fair value of $292 (net$110, net of income taxes of $89)$47, has been recorded in other comprehensive lossearnings for the period. The fair value liability is included in long–termlong-term liabilities on the consolidated balance sheets.
(e) |
|
In conjunction with the acquisition of TOC on April 2, 2008, its former shareholders provided a subordinated loan to TOC in the amount of €3,000 (U.S. – $4,134)- $4,267). The loan bears interest at 7% payable to the former shareholders on a semi–annualsemi-annual basis. The subordinated loan, as well as €453 (U.S. – $624)- $644), previously loaned to TOC, iswhich was repayable in full on March 31, 2011, has been extended to July 8, 2011.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
8. Long–term
8. | Long-term debt, continued
|
(f) | Promissory notes: |
Promissory notes consist of notes issued to former shareholders as a result of business acquisitions. As consideration in the acquisition of TOC, the Company issued a total of €9,000 (U.S. – $12,402)- $12,800) in promissory notes which are secured by a pledge of the common shares of TOC. Of the €9,000 (U.S. – $12,402)- $12,800) issued, €1,000 (U.S. –- $1,436) was paid in cash on April 5, 2010, with the2010. The remaining €8,000 (U.S. – $11,024)- $11,378), previously due on March 31, 2011.2011 has been extended and will be repaid in four €2,000 tranches on October 7, 2011, January 6, 2012, April 6, 2012 and July 6, 2012. The outstanding balance will accrue interest at 5% per annum. As part of the extension, the former shareholders can demand full repayment of the remaining amount owing. Due to TOC’s opening balance sheet not meeting pre–determinedpre-determined working capital targets, and an undisclosed liability that existed prior to the Company’s April 2, 2008 acquisition, € 528 (U.S. – $728)- $751) of the promissory notes due March 31, 2011extended above will not be paid. Accordingly, the balance of the promissory notes at OctoberApril 2, 20102011 is €7,472 (U.S. – $10,296)-$10,627).
In addition, $2,551$578 remains owing to various former shareholders at a weighted average interest of 5.38%5.65%. Of the $12,847$11,205 in total promissory notes, $12,535$10,877 are due in the next 12 months, or on demand, with the remaining balances due in varying installments through 2012.
(f) Other long–term
(g) | Other long-term debt: |
A less–than–whollyless-than-wholly owned subsidiary of TOC has a maximum borrowing amount of 6,500 Ethiopia Birr (“ETB”) (U.S. – $453)-$391). The outstanding balance at OctoberApril 2, 2010,2011, was $268 (December 31, 2009 – $380)$271 (January 1, 2011 - $264). At OctoberApril 2, 2010,2011, the weighted average interest rate on borrowed funds was 10.3% (December 31, 2009 – 10.1%(January 1, 2011 - 10.3%).
(g) Term loans payable:
(h) | Term loans payable and capital lease obligations: |
Term loans payable bear a weighted average interest rate of 5.3% (December 31, 20095.1% (January 1, 2011 – 4.9%5.3%) due in varying installments through 2013 with principal payments of $13$165 due in the next 12 months.
(h) Capital lease obligations:
Capital lease obligations are due in monthly payments, with a weighted average interest rate of 6.8% (December 31, 2009 – 6.9%6.7% (January 1, 2011 –6.9%).
The long–termlong-term debt and capital leases described above have required repayment terms inrequire the following repayments during the next five years ending Octoberyears:
$ | |||
March 31, 2012 | 22,892 | ||
March 30, 2013 | 28,436 | ||
April 5, 2014 | 2,695 | ||
April 4, 2015 | 2,674 | ||
April 2, 2016 | 2,674 | ||
Thereafter | 5,609 | ||
64,980 |
At April 2, as follows:
2011 | $ | 53,842 | |
2012 | 3,419 | ||
2013 | 2,801 | ||
2014 | 2,784 | ||
2015 | 2,780 | ||
Thereafter | 5,399 | ||
$ | 71,025 |
At October 2, 2010,2011, the Company was in compliance in all material respects with its covenants, which relate toas required by the Canadian line of credit facility, the U.S. line of credit facility (see notes(notes 7(a) and (b)), as well as the term loan facilities. In addition, Opta Minerals was in compliance in all material respects with its financial covenants which relate toas required by the Canadian Line of Credit Facility (see note 7(c)), as well as the term loan facility and revolving acquisition facility.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
9. Supplemental cash flow information
Quarter ended | Three quarters ended | |||||||||||
October 2, | September 30, | October 2, | September 30, | |||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
Changes in non–cash working capital: | ||||||||||||
Accounts receivable | $ | 5,955 | $ | 3,003 | $ | (16,161 | ) | $ | (4,955 | ) | ||
Inventories | (9,840 | ) | 20,988 | (441 | ) | 27,074 | ||||||
Income tax recoverable | 534 | 580 | 2,054 | (118 | ) | |||||||
Prepaid expenses and other current assets | (4,710 | ) | (96 | ) | (4,271 | ) | (1,970 | ) | ||||
Accounts payable and accrued liabilities | 16,685 | (10,549 | ) | 8,836 | (4,667 | ) | ||||||
Customer and other deposits | (253 | ) | (243 | ) | (451 | ) | (736 | ) | ||||
$ | 8,371 | $ | 13,683 | $ | (10,434 | ) | $ | 14,628 | ||||
Cash paid for: | ||||||||||||
Interest | $ | 2,136 | $ | 2,580 | $ | 6,774 | $ | 8,429 | ||||
Income taxes | 41 | 373 | 1,070 | 658 |
10.
9. | Supplemental cash flow information |
| Quarter ended | |||||
| April 2, 2011 | April 3, 2010 | ||||
| $ | $ | ||||
| ||||||
Changes in non-cash working capital: | ||||||
Accounts receivable | (12,891 | ) | (19,814 | ) | ||
Inventories | (25,179 | ) | 2,889 | |||
Income tax recoverable | (227 | ) | 404 | |||
Prepaid expenses and other current assets | (538 | ) | 614 | |||
Accounts payable and accrued liabilities | (5,276 | ) | (8,669 | ) | ||
Customer and other deposits | 783 | 1,222 | ||||
| (43,328 | ) | (23,354 | ) | ||
| ||||||
Cash paid for: | ||||||
Interest | 1,807 | 2,563 | ||||
Income taxes | 1,035 | 817 |
In addition, various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that these claims or potential claims are without merit and the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.
11. |
|
The Company operates in two industries divided into six operating segments:
(a)SunOpta Foods sources, processes, packages, markets and distributes a wide range of natural, organic and specialty food products and ingredients with a focus on soy, corn, sunflower, fruit, fiber and other natural and organic food and natural health products. There are four operating segments within SunOpta Foods:
i) | Grains and Foods Groupis focused on vertically integrated sourcing, processing, packaging and marketing of grains, | |
ii) | Ingredients Groupis focused primarily on insoluble oat and soy fiber products and works closely with its customers to identify product formulation, cost and productivity opportunities aimed at transforming raw materials into | |
iii) | Fruit Groupconsists of berry processing and fruit ingredient operations that process natural and organic frozen fruits and vegetables into bulk, ingredients and packaged formats for the food service, private label retail and industrial ingredient markets. The group also includes the healthy | |
iv) | International Foods Groupcomprises |
(b)Opta Mineralsprocesses, distributes and recycles silica–freesilica-free loose abrasives, roofing granules, industrial minerals and specialty sands for the foundry, steel, roofing shingles and bridge and ship–cleaningship-cleaning industries.
SUNOPTA INC. | 20 | April 2, 2011 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters ended April 2, 2011 and April 3, 2010 |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
11. | Segmented information, continued |
(c)Corporate Services provide a variety of management, financial, information technology, treasury and administration services to the operating segments from the head office in Ontario, Canada, and information and shared services offices in Minnesota, U.S.A.
Effective July 3, 2010, the former Distribution Group was eliminated as an operating segment due to the sale of the Canadian Food Distribution assets (see note 2(a)(note 3(b)). In addition, the Company merged its Canadian-based natural health products division with the former International Sourcing and Trading Group to create a new operating segment called the International Foods Group. This realignment of operating segments effectively merges our international operations into one reporting group. The segmented information for the quarter and three quarters ended September 30, 2009April 3, 2010 have been updated to reflect the current year’s segment presentation.
Effective August 31, 2010, the former SunOpta BioProcess operating segment was eliminated due to the sale of SunOpta BioProcess Inc. (see note 2(b)3(c)). Because this was a stand–alonestand-alone operating segment, no re–alignmentre-alignment was required for segmented information purposes.
11. SegmentedEffective January 2, 2011, the brokerage operation that was previously included in the Fruit Group was transferred to the International Foods Group, as the sourcing of raw materials performed by the operation more closely aligns with other sourcing operations included within the International Foods Group. The segmented information continuedfor the quarter ended April 3, 2010 have been updated to reflect the current year’s segment presentation.
The Company’s assets, operations and employees are principally located in the United States, Canada, Europe, Mexico (see note 3(a)), China and Africa. Revenues are allocated to the United States, Canada and Europe and other external markets based on the location of the customer. Other expense (income) net, interest expense, net, and provision for (recovery of) income taxes are not allocated to the segments.
The following segmented information relates to each of the Company’s segments for the quarter ended OctoberApril 2, 2010:2011:
Quarter ended | ||||||||||||
October 2, 2010 | ||||||||||||
SunOpta | Opta | Corporate | ||||||||||
Foods | Minerals | Services | Consolidated | |||||||||
External revenues by market: | ||||||||||||
United States | 135,069 | 13,410 | – | 148,479 | ||||||||
Canada | 25,844 | 4,358 | – | 30,202 | ||||||||
Europe and other | 36,571 | 2,653 | – | 39,224 | ||||||||
Total revenues from external customers | 197,484 | 20,421 | – | 217,905 | ||||||||
Segment earnings (loss) from continuing operations before the following: | 9,710 | 2,792 | (2,506 | ) | 9,996 | |||||||
Other expense, net | 7,453 | |||||||||||
Goodwill impairment | 1,654 | |||||||||||
Interest expense, net | 2,036 | |||||||||||
Recovery of income taxes | (1,258 | ) | ||||||||||
Earnings from continuing operations | 111 |
Other expense for the quarter ended October 2, 2010 includes $7,033 related to the impairment of long–lived assets in the Fruit Group (see note 12). The goodwill impairment charge of $1,654 for the quarter ended October 2, 2010 is related to the International Foods Group (see note 4).
SunOpta Foods has the following segmented reporting for the quarter ended October 2, 2010:
Quarter ended | |||||||||||||||||||||||||||
October 2, 2010 | |||||||||||||||||||||||||||
Quarter ended | Quarter ended | ||||||||||||||||||||||||||
April 2, 2011 | April 2, 2011 | ||||||||||||||||||||||||||
Grains and | Ingredients | Fruit | International | SunOpta | SunOpta | Opta | Corporate | ||||||||||||||||||||
Foods Group | Group | Group | Foods Group | Foods | Foods | Minerals | Services | Consolidated | |||||||||||||||||||
External revenues by market: | |||||||||||||||||||||||||||
United States | 71,466 | 13,992 | 33,742 | 15,869 | 135,069 | 173,945 | 14,732 | - | 188,677 | ||||||||||||||||||
Canada | 1,537 | 2,286 | 1,049 | 20,972 | 25,844 | 22,792 | 3,272 | - | 26,064 | ||||||||||||||||||
Europe and other | 13,949 | 856 | 33 | 21,733 | 36,571 | 42,580 | 3,602 | - | 46,182 | ||||||||||||||||||
Total revenues from externalcustomers | 86,952 | 17,134 | 34,824 | 58,574 | 197,484 | 239,317 | 21,606 | - | 260,923 | ||||||||||||||||||
Segment earnings from continuing operations | 5,353 | 3,104 | 707 | 546 | 9,710 | ||||||||||||||||||||||
Segment earnings (loss) from continuing | |||||||||||||||||||||||||||
operations before the following: | 10,463 | 2,451 | (1,886 | ) | 11,028 | ||||||||||||||||||||||
| |||||||||||||||||||||||||||
Other expense, net | 362 | ||||||||||||||||||||||||||
Interest expense, net | 1,984 | ||||||||||||||||||||||||||
Provision for income taxes | 3,009 | ||||||||||||||||||||||||||
Earnings from continuing operations | 5,673 |
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
11. | Segmented information, continued |
SunOpta Foods had the following segmented reporting for the quarter ended April 2, 2011:
Quarter ended | |||||||||||||||
April 2, 2011 | |||||||||||||||
Grains and | Ingredients | Fruit | International | SunOpta | |||||||||||
Foods Group | Group | Group | Foods Group | Foods | |||||||||||
External revenues by market: | |||||||||||||||
United States | 97,293 | 12,672 | 36,228 | 27,752 | 173,945 | ||||||||||
Canada | 2,768 | 2,454 | 693 | 16,877 | 22,792 | ||||||||||
Europe and other | 15,540 | 625 | 89 | 26,326 | 42,580 | ||||||||||
Total revenues from externalcustomers | 115,601 | 15,751 | 37,010 | 70,955 | 239,317 | ||||||||||
| |||||||||||||||
Segment earnings from continuing operations | 5,707 | 1,895 | 388 | 2,473 | 10,463 |
The following segmented information relates to each of the Company’s segments for the quarter ended April 3, 2010:
Quarter ended | ||||||||||||
April 3, 2010 | ||||||||||||
SunOpta | Opta | Corporate | ||||||||||
Foods | Minerals | Services | Consolidated | |||||||||
External revenues by market: | ||||||||||||
United States | 137,035 | 12,010 | - | 149,045 | ||||||||
Canada | 21,390 | 3,150 | - | 24,540 | ||||||||
Europe and other | 40,393 | 2,771 | - | 43,164 | ||||||||
Total revenues from external customers | 198,818 | 17,931 | - | 216,749 | ||||||||
| ||||||||||||
Segment earnings (loss) from continuing operations before the following: | 11,391 | 1,713 | (3,482 | ) | 9,622 | |||||||
| ||||||||||||
Other expense, net | 315 | |||||||||||
Interest expense, net | 3,022 | |||||||||||
Provision for income taxes | 2,076 | |||||||||||
Earnings from continuing operations | 4,209 |
SUNOPTA INC. | 22 | April 2, 2011 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters ended April 2, 2011 and April 3, 2010 |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
11. |
|
SunOpta Foods hashad the following segmented reporting for the quarter ended September 30, 2009:April 3, 2010:
Quarter ended | Quarter ended | |||||||||||||||||||||||||||||
September 30, 2009 | April 3, 2010 | |||||||||||||||||||||||||||||
Grains and | Ingredients | Fruit | International | SunOpta | Grains and | Ingredients | Fruit | International | SunOpta | |||||||||||||||||||||
Foods Group | Group | Group | Foods Group | Foods | Foods Group | Group | Group | Foods Group | Foods | |||||||||||||||||||||
External revenues by market: | ||||||||||||||||||||||||||||||
United States | 69,124 | 14,217 | 34,789 | 19,028 | 137,158 | 62,560 | 15,327 | 38,916 | 20,232 | 137,035 | ||||||||||||||||||||
Canada | 2,642 | 2,016 | 947 | 15,866 | 21,471 | 1,139 | 1,879 | 1,285 | 17,087 | 21,390 | ||||||||||||||||||||
Europe and other | 14,524 | 1,152 | 134 | 21,304 | 37,114 | 15,146 | 944 | 139 | 24,164 | 40,393 | ||||||||||||||||||||
Total revenues from externalcustomers | 86,290 | 17,385 | 35,870 | 56,198 | 195,743 | 78,845 | 18,150 | 40,340 | 61,483 | 198,818 | ||||||||||||||||||||
Segment earnings (loss) from continuing operations | 5,257 | 2,859 | (1,745 | ) | (1,079 | ) | 5,292 | |||||||||||||||||||||||
Segment earnings from continuing operations | 5,016 | 4,212 | 1,864 | 299 | 11,391 |
Other expense, net |
11. Segmented information, continued
The following segmented information relates to each of the Company’s segments for the three quarters ended October 2, 2010:
Three quarters ended | ||||||||||||
October 2, 2010 | ||||||||||||
SunOpta | Opta | Corporate | ||||||||||
Foods | Minerals | Services | Consolidated | |||||||||
External revenues by market: | ||||||||||||
United States | 418,145 | 39,210 | – | 457,355 | ||||||||
Canada | 76,182 | 11,880 | – | 88,062 | ||||||||
Europe and other | 114,719 | 8,403 | – | 123,122 | ||||||||
Total revenues from external customers | 609,046 | 59,493 | – | 668,539 | ||||||||
Segment earnings (loss) from continuing operations before the following: | 33,919 | 6,224 | (8,631 | ) | 31,512 | |||||||
Other expense, net | 8,812 | |||||||||||
Goodwill impairment | 1,654 | |||||||||||
Interest expense, net | 7,625 | |||||||||||
Provision for income taxes | 2,672 | |||||||||||
Earnings from continuing operations | 10,749 |
Quarter ended | ||||||
| April 2, 2011 | April 3, 2010 | ||||
| $ | $ | ||||
| ||||||
Rationalizations | 427 | 151 | ||||
Write-off of intangible assets | - | 164 | ||||
Other | (65 | ) | - | |||
| 362 | 315 |
Other expense, net for the three quartersquarter ended OctoberApril 2, 2010 includes $7,0332011 included rationalization costs of $427, related to the impairment of long–lived assetsemployee terminations in the Fruit Group (see note 12). The goodwill impairment chargeand Corporate Services. In addition, the Company recorded other income of $1,654 for the three quarters ended October 2, 2010 is$65 related to the International Foods Group (see note 4).
SunOpta Foods has the following segmented reporting for the three quarters ended October 2, 2010:
Three quarters ended | |||||||||||||||
October 2, 2010 | |||||||||||||||
Grains and | Ingredients | Fruit | International | SunOpta | |||||||||||
Foods Group | Group | Group | Foods Group | Foods | |||||||||||
External revenues by market: | |||||||||||||||
United States | 207,208 | 44,014 | 116,064 | 50,859 | 418,145 | ||||||||||
Canada | 5,639 | 6,240 | 3,119 | 61,184 | 76,182 | ||||||||||
Europe and other | 45,038 | 2,678 | 293 | 66,710 | 114,719 | ||||||||||
Total revenues from externalcustomers | 257,885 | 52,932 | 119,476 | 178,753 | 609,046 | ||||||||||
Segment earnings from continuing operations | 17,557 | 10,322 | 3,867 | 2,173 | 33,919 |
11. Segmented information, continued
The following segmented information relates to eachreversal of the Company’s segments for the three quarters ended September 30, 2009:
Three quarters ended | ||||||||||||
September 30, 2009 | ||||||||||||
SunOpta | Opta | Corporate | ||||||||||
Foods | Minerals | Services | Consolidated | |||||||||
External revenues by market: | ||||||||||||
United States | 360,448 | 29,143 | – | 389,591 | ||||||||
Canada | 67,844 | 9,965 | – | 77,809 | ||||||||
Europe and other | 145,670 | 6,702 | – | 152,372 | ||||||||
Total revenues from external customers | 573,962 | 45,810 | – | 619,772 | ||||||||
Segment earnings (loss) from continuing operations before the following: | 14,051 | 429 | (4,855 | ) | 9,625 | |||||||
Other income, net | (342 | ) | ||||||||||
Goodwill impairment | 8,341 | |||||||||||
Interest expense, net | 10,159 | |||||||||||
Recovery of income taxes | (1,207 | ) | ||||||||||
Loss from continuing operations | (7,326 | ) |
The goodwill impairment charge of $8,341 for the three quarters ended September 30, 2009 iscontingent consideration related to the Opta Minerals segment.acquisition of Dahlgren in 2010 due to changes in earnings expectations for 2011, offset by additional acquisition related expenses.
SunOpta Foods has the following segmented reportingOther expense, net for the three quartersquarter ended September 30, 2009:
Three quarters ended | |||||||||||||||
September 30, 2009 | |||||||||||||||
Grains and | Ingredients | Fruit | International | SunOpta | |||||||||||
Foods Group | Group | Group | Foods Group | Foods | |||||||||||
External revenues by market: | |||||||||||||||
United States | 167,888 | 38,428 | 106,294 | 47,838 | 360,448 | ||||||||||
Canada | 8,589 | 5,608 | 3,800 | 49,847 | 67,844 | ||||||||||
Europe and other | 73,869 | 3,102 | 3,237 | 65,462 | 145,670 | ||||||||||
Total revenues from externalcustomers | 250,346 | 47,138 | 113,331 | 163,147 | 573,962 | ||||||||||
Segment earnings (loss) from continuing operations | 14,405 | 5,571 | (2,279 | ) | (3,646 | ) | 14,051 |
12. Other expense (income), net
Quarter ended | Three quarters ended | |||||||||||
October 2, | September 30, | October 2, | September 30, | |||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
(a) Asset impairment in the Mexican Fruit operation | $ | 3,524 | $ | – | $ | 3,524 | $ | – | ||||
(b) Asset impairment in the California Fruit operation | 1,154 | – | 1,154 | – | ||||||||
(c) Intangible asset impairment in the Brokerage operation | 2,355 | – | 2,355 | – | ||||||||
(d) Rationalizations | 18 | – | 1,214 | – | ||||||||
Other | 402 | (270 | ) | 565 | (342 | ) | ||||||
$ | 7,453 | $ | (270 | ) | $ | 8,812 | $ | (342 | ) |
The Company's long−lived assets are tested for recoverability whenever events or changesApril 3, 2010 included $151 in circumstances indicate that the carrying value may not be recoverable. If such events or changes in circumstances are present, the Company assesses the recoverability of the long−lived assets by determining whether the carrying value of such assets can be recovered through projected undiscounted cash flows. If the sum of expected future cash flows, undiscounted, is less than net book value, the excess of the net book value over the estimated fair value, based on discounted future cash flows and appraisals, is charged to operations in the period in which suchrationalization related costs, as well as a $164 non-cash impairment is determined by management. The long−lived assets consist of property, plant and equipment and intangible assets.
(a) Asset impairment in the Mexican Fruit Operations
The Company operates two fruit processing facilities in Mexico that process fresh fruitcharge for the food service and industrial fruit markets. In responsewrite-off of long-lived assets within the Ingredients Group. Of the total of $151 in rationalization costs, $87 related to the needsseverance costs incurred in connection with consolidation of the Fruit Group operations, lack of profitability in the food service and industrial channels of the Fruit Group, and upon completion of the preliminary 2011 business plan for the Fruit Group, management has decided to rationalize operations at both of these facilities. Accordingly, a non−cash impairment charge of $3,524 was required to write the carrying value of property, plant and equipment used at these facilities down to its fair value. Management has estimated the fair value of these properties based on their future cash flows and estimated salvage value.
(b) Asset impairment in the California Fruit Operation
The Company tested equipment used to process fresh fruit located at our facility located in Buena Park, California upon completion of the preliminary 2011 business plan. Previously, the Company expected that use of the equipment would be suspended for one year, and then re–deployed to a Mexican fruit processing facility. Based on the preliminary 2011 business plan, management no longer expects that this equipment will be put back to productive use and accordingly, a non−cash impairment charge of $700 was required to write the carrying value of the equipment down to its estimated fair value. The fair value of the equipment represents its expected salvage value. Following the same circumstances, a non−cash impairment charge of $454 was also required to write the carrying value of a supplier relationship intangible asset down to its fair value, as these relationships no longer have value without fresh processing capabilities. As there is no future operating stream of cash flows associated with these long–lived assets, and management believes there is no market for these assets to be sold, their estimated fair value is zero.
12. Other expense (income), net, continued
(c) Intangible asset impairment in the Brokerage Operation
The Company tested the long–lived assets, which consisted principally of the customer relationship intangible asset, in the brokerage operation upon completion of its preliminary 2011 business plan. Expectations of customer retention and revenue growth have not materialized, and the expected sales volumes for the operation cannot cover its back–office sales costs. Based on the preliminary 2011 business plan of the brokerage operation, its estimated undiscounted cash flows were not sufficient to recover the carrying value of the long−lived assets. Accordingly, a non−cash impairment charge of $2,355 was required to write the carrying value of the customer relationship asset down to zero. The Brokerage Operation is included in the Fruit Group segment.
(d) Rationalizations
During the fourth quarter of 2009, the Company approved the decision to permanently close a distribution center in Toronto, Canada, consolidate manufacturing facilities from British Columbia, Canada to Omak, Washington, and cease processing of fresh fruit at$64 related to moving assets from a leasedclosed facility in Buena Park, California. In the second quarter of 2010, the Company approved a rationalization plan at a distributionto another operating facility in Acton, Ontario, Canada to reduce selling and administrative costs in response to market conditions, and the sale of the Canadian Food Distribution assets.
The Company closed the distribution center in Toronto, Canada in the first quarter of 2010. In addition, the consolidationBoth of the British Columbia manufacturing facility was substantiallythese rationalization projects were completed in the third quarter,2010 and occurred with minimal dismantling and other period costs expected to be incurred in the fourth quarter of 2010. Future costs will be recorded as incurred. The Company also ceased production of fresh fruit processing at a leased facility in Buena Park, California, during the fourth quarter of 2009 and incurred costs to move assets to another facility during the first quarter of 2010.
A summary of the expected total costs, and costs incurred to date included in other expense with respect to each of the rationalizations, is included in the table below.
| Costs | |||||||||||
| recognized in | |||||||||||
| the three | Further costs | ||||||||||
| Costs | quarters ended | expected to be | Total expected | ||||||||
| recognized in | October 2, | recognized in | rationalization | ||||||||
| 2009 | 2010 | 2010 | costs | ||||||||
| ||||||||||||
Toronto, Canada closure | $ | 348 | $ | – | $ | – | $ | 348 | ||||
British Columbia, Canada consolidation | 287 | 514 | 114 | 915 | ||||||||
California, cease fresh processing | 1,016 | 64 | – | 1,080 | ||||||||
Acton, Canada rationalization | – | 636 | – | 636 | ||||||||
| $ | 1,651 | $ | 1,214 | $ | 114 | $ | 2,979 |
Rationalization costs recognized in other expense for the three quarters ended October 2, 2010 include $865 for severance and $64 of period costs to transfer property, plant and equipment to another location, and $285 of other closure costs recorded as incurred. Of the costs incurred, $578 related to the Fruit Group and $636 related to the International Foods Group.
As at October 2, 2010, there were $450 in accrued severances related to rationalization activities.segment.
13. Cash and cash equivalents
Included in cash and cash equivalents is $909 (December 31, 2009 – $781)$3,519 (January 1, 2011 - $495) that is specific to Opta Minerals that cannot be utilized by the Company for general corporate purposes, and is maintained in separate bank accounts of Opta Minerals.
14. Derivative financial instruments and fair value measurement
SUNOPTA INC. | 23 | April 2, 2011 10-Q |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the quarters ended April 2, 2011 and April 3, 2010 |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
14. | Derivative financial instruments and fair value measurement |
Effective January 1, 2008, the Company adopted the provisions of ASC 820–10–55820-10-55 (formerly FASB FSP 157–2/157-2/SFAS 157, “Effective Date of FASB Statement No. 157”) applicable to financial assets and liabilities and to certain non–financialnon-financial assets and liabilities that are measured at fair value on a recurring basis. Additionally, the Company applies the provisions of this standard to financial and non–financialnon-financial assets and liabilities. This standard defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. In addition, this standard requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
This standard also provides a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions with respect to how market participants would price an asset or liability. These two inputs used to measure fair value fall into the following three different levels of the fair value hierarchy:
This hierarchy requires the use of observable market data when available.
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 OctoberApril 2, 2010:2011:
Fair Value | |||||||||
Asset | |||||||||
(Liability) | Level 1 | Level 2 | |||||||
(a) Commodity futures and forward contracts (1) | |||||||||
Unrealized short–term derivative gain | $ | 931 | $ | (2,080 | ) | $ | 3,011 | ||
Unrealized long–term derivative gain | 194 | – | 194 | ||||||
Unrealized short–term derivative loss | (1,187 | ) | – | (1,187 | ) | ||||
Unrealized long–term derivative loss | (15 | ) | – | (15 | ) | ||||
(b) Inventories carried at market (2) | 7,488 | – | 7,488 | ||||||
(c) Interest rate swap (3) | (1,095 | ) | – | (1,095 | ) | ||||
(d) Forward foreign currency contracts (4) | 447 | – | 447 |
Fair Value | |||||||||
Asset (Liability) | Level 1 | Level 2 | |||||||
$ | $ | $ | |||||||
(a) Commodity futures and forward contracts(1) | |||||||||
Unrealized short-term derivative gain | 9,795 | - | 9,795 | ||||||
Unrealized long-term derivative gain | 498 | - | 498 | ||||||
Unrealized short-term derivative loss | (5,474 | ) | (4,199 | ) | (1,275 | ) | |||
Unrealized long-term derivative loss | (79 | ) | - | (79 | ) | ||||
(b) Inventories carried at market(2) | 19,967 | - | 19,967 | ||||||
(c) Interest rate swap(3) | (734 | ) | - | (734 | ) | ||||
(d) Forward foreign currency contracts(4) | (576 | ) | - | (576 | ) | ||||
(e) Embedded foreign currency derivatives(1) | |||||||||
Unrealized short-term derivative gain | 1,294 | - | 1,294 | ||||||
Unrealized short-term derivative loss | (594 | ) | - | (594 | ) |
(1) | On the consolidated balance sheet, unrealized | |
(2) | Inventories carried at market are included in inventories on the consolidated balance sheet. | |
(3) | The interest rate swap is included in | |
(4) | The forward foreign currency contracts are included in accounts receivable on the consolidated balance sheet. |
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
14. |
|
(a) Commodity futures and forward contracts
The Company’s derivative contracts that are measured at fair value include exchange–tradedexchange-traded commodity futures and forward commodity purchase and sale contracts. Exchange–tradedExchange-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–quotedexchange-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–performancenon-performance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts. Local market adjustments use observable inputs or market transactions for similar assets or liabilities, and, as a result, are classified as level 2.
These exchange–tradedexchange-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 OctoberApril 2, 2010,2011, a $680$2,985 gain and $329 loss, respectively, ishas been recorded in cost of goods sold on the consolidated statementsstatement of operations related to changes in the fair value of these derivatives.
At OctoberApril 2, 2010,2011, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows:
Number of bushels | Number of bushels | |||||||||||
Purchase (sale) | Purchase (sale) | |||||||||||
Corn | Soybeans | Corn | Soybeans | |||||||||
Forward commodity purchase contracts | 2,092 | 1,654 | 2,003 | 1,748 | ||||||||
Forward commodity sale contracts | (1,168 | ) | (476 | ) | (831 | ) | (650 | ) | ||||
Commodity futures contracts | (510 | ) | (1,603 | ) | (1,605 | ) | (2,160 | ) |
In addition to the notional corn and soybean open futures and forward purchase and sale contracts noted above, the Company also had open forward contracts to sell 101 lots of cocoa at April 2, 2011.
(b) Inventories carried at market
Grains inventory carried at fair value is determined using quoted market prices from the Chicago Board of Trade (“CBoT”). Estimated fair market values for grains inventory quantities at period end are valued using the quoted price on the CBoT adjusted for differences in local markets, and broker or dealer quotes. These assets are placed in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on commodity grains inventory are included in cost of sales on the consolidated statements of operations. At OctoberApril 2, 2010,2011, the Company had 239548 bushels of commodity corn and 5201,056 bushels of commodity soybeans, in inventories carried at market.
(c) Interest rate swap
Opta Minerals entered into an interest rate swap to minimize its exposure to interest rate risk. A notional amount of Cdn $17,200 (U.S. – $16,854)- $17,692) of floating rate debt was effectively converted to fixed rate debt at a rate of 5.25% for the period August 2008 to August 2012. At each period end, management calculates the mark–to–marketmark-to-market fair value using a valuation technique using quoted observable prices for similar instruments as the primary input. Based on this valuation, the previously recorded fair value is adjusted to the current mark–to–marketmark-to-market position. The mark–to–marketmark-to-market gain or loss is placed in level 2 of the fair value hierarchy. The interest rate swap is designated as a cash flow hedge for accounting purposes and accordingly, gains and losses on changes in the fair value of the interest rate swap are included in other comprehensive incomeearnings on the consolidated statements of operations. For the quarter and three quarters ended OctoberApril 2, 2010,2011, a $92 gain and $292$110 gain (net of income taxes of $29 and $89, respectively)$47) has been recorded in other comprehensive earnings due to the change in fair value for this derivative.
SUNOPTA INC. |
SunOpta Inc. |
Notes to Consolidated Financial Statements |
For the |
Unaudited |
(Expressed in thousands of U.S. dollars, except per share amounts) |
14. Derivative financial instruments and fair value measurement, continued
14. | Derivative financial instruments and fair value measurement, continued |
(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. These forward foreign exchange contracts represent economic hedges and are not designated as hedging instruments. At OctoberApril 2, 20102011 the Company had open forward foreign exchange contracts with a notional value of €3,113, Cdn $527€ 11,027 and U.S. $7,431$6,862 that resulted in an unrealized gainloss of $447$576 which is included in foreign exchange (loss) gain (loss) on the consolidated statements of operations.
15. Subsequent events
On November 8, 2010(e) Embedded foreign currency derivatives
A foreign subsidiary of the Company completedenters into a number of purchase and sales contracts that are subject to currency risk, which can modify the acquisition of 100%cash flows of the outstanding sharescontract due to movements in foreign currencies. Certain of Dahlgren & Company, Inc. (“Dahlgren”). At closing,these purchase and sale contracts contain embedded foreign currency derivatives, such that the Company paid cash considerationcurrency risk component can be separated from the purchase or sale component. The fair value of $44,000. Additional consideration may become payablethese derivatives is measured based on Dahlgren’s achieving pre–determined earnings targets overthe forward foreign exchange rate at April 2, 2011. These embedded derivatives are placed in level 2 of the fair value hierarchy, as the inputs used in determining the fair value are derived from and corroborated by observable market data. For the quarter ended April 2, 2011, an unrealized gain of $700 has been recorded in cost of goods sold on the consolidated statement of operations for these embedded foreign currency derivatives.
At April 2, 2011, the notional amounts of open purchase and sales contracts containing embedded derivatives were as follows:
$ | |||
Open purchase contracts | 27,636 | ||
Open sales contracts | 7,635 |
15. | Comparative balances |
The Company has reclassified comparative balances on the consolidated statement of operations for the quarter ended April 3, 2010 to conform to the current quarter’s presentation. The comparative balance for cost of goods sold has been increased by $1,070, reflecting the amount of warehousing and distribution (“W&D”) expenses that were previously disclosed on a two–year period, as definedseparate line item in the Stock Purchase Agreement.consolidated statement of operations. Total W&D costs for the quarter ended April 2, 2011 were $1,171. The acquisition was financed withcomparative reclassification did not have an impact on earnings, net assets, shareholder’s equity or cash and the U.S. line of credit facility (see note 8(b)). This acquisition is subject to normal post closing adjustments, which are expected to be completed within 12 months.
Dahlgren is an integrated processor and global supplier of confection sunflower seed products including in–shell and kernel products, roasted sunflower and soy nuts, bird food, hybrid seed and other products. Dahlgren serves customers in the United States and Canada, as well as Europe, Asia, Australia and South America.cash equivalents.
SUNOPTA INC. |
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
All financial numbers presented in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” are expressed in thousands of U.S. dollars, unless otherwise noted.
Significant Developments During the Quarter Ended OctoberApril 2, 20102011
On November 8, 2010 we announced the acquisition of 100% of the outstanding shares of Dahlgren & Company Inc. (“Dahlgren”) for cash consideration of $44,000, plus an earnout based on pre–determined earnings targets over a two–year period, as defined in the Stock Purchase Agreement. Dahlgren is an integrated processor and global supplier of confection sunflower seed products including in–shell and kernel products, roasted sunflower and soy nuts, bird food, hybrid seed and other products. Dahlgren serves customers in the United States and Canada, as well as Europe, Asia, Australia and South America. The combination of the Dahlgren business with the Company’s existing confection sunflower business is expected to be synergistic and create one of the largest confection sunflower businesses in the world.
On September 1, 2010May 2, 2011, we announced the sale of SunOpta BioProcess Inc. ("SBI"our frozen fruit processing assets in Rosarito and Irapuato, Mexico to Fruvemex Mexicali, S.A. de C.V. (“Fruvemex”) for proceeds of $3,150 to Mascoma Corporation ("Mascoma"). The combinationbe received in a series of instalments over a twelve month period. An initial instalment of $750 was received in advance of closing the transaction. As part of this transaction we also entered into a strategic raw material supply agreement with Fruvemex and a long term market value lease for the use of the two companies brings together SBI's fiber preparationfacilities in Irapuato. This divestiture is expected to simplify our frozen foods business model and pretreatment technology with Mascoma's consolidated bioprocessing ("CBP") technology, to create a company with comprehensive capabilities for converting non–food cellulose (wood chips, energy cropsimprove profitability by increasing focus on our value-added operations and organic solid waste) into ethanol and high value co–products. As consideration for selling allcore areas of the outstanding common shares of SBI, we received a 19.55% ownership interest in Mascoma, which included a combination of preferred and common shares valued at $33,455, after settling the preferred share liability with the former SBI preferred shareholders. Before settling with the preferred shareholders, the transaction valued SBI at $50,925. Following the transaction, we will account forexpertise, while also expanding our ownership position in Mascoma on a cost basis and as a result will not include the ongoing financial results of Mascoma in operational results.strategic supply relationships.
SUNOPTA INC. |
Operations for the quarter ended OctoberApril 2, 20102011 compared to the quarter ended September 30, 2009April 3, 2010
Consolidated
October 2, | September 30, | |||||||||||||||||||||||
2010 | 2009 | Change | % Change | April 2, 2011 | April 3, 2010 | Change | Change | |||||||||||||||||
$ | $ | $ | % | |||||||||||||||||||||
Revenue | ||||||||||||||||||||||||
SunOpta Foods | 197,484 | 195,743 | 1,741 | 0.9% | 239,317 | 198,818 | 40,499 | 20.4% | ||||||||||||||||
Opta Minerals | 20,421 | 16,745 | 3,676 | 22.0% | 21,606 | 17,931 | 3,675 | 20.5% | ||||||||||||||||
Total Revenue | 217,905 | 212,488 | 5,417 | 2.5% | 260,923 | 216,749 | 44,174 | 20.4% | ||||||||||||||||
Gross Profit | ||||||||||||||||||||||||
SunOpta Foods | 28,016 | 24,360 | 3,656 | 15.0% | 30,404 | 30,882 | (478 | ) | -1.5% | |||||||||||||||
Opta Minerals | 5,191 | 4,179 | 1,012 | 24.2% | 5,151 | 4,594 | 557 | 12.1% | ||||||||||||||||
Total Gross Profit | 33,207 | 28,539 | 4,668 | 16.4% | 35,555 | 35,476 | 79 | 0.2% | ||||||||||||||||
Operating Income | ||||||||||||||||||||||||
SunOpta Foods | 9,710 | 5,292 | 4,418 | 83.5% | 10,463 | 11,391 | (928 | ) | -8.1% | |||||||||||||||
Opta Minerals | 2,792 | 1,290 | 1,502 | 116.4% | 2,451 | 1,713 | 738 | 43.1% | ||||||||||||||||
Corporate Services | (2,506 | ) | (1,487 | ) | (1,019 | ) | –68.5% | (1,886 | ) | (3,482 | ) | 1,596 | 45.8% | |||||||||||
Total Operating Income | 9,996 | 5,095 | 4,901 | 96.2% | 11,028 | 9,622 | 1,406 | 14.6% | ||||||||||||||||
| ||||||||||||||||||||||||
Other expense (income), net | 7,453 | (270 | ) | 7,723 | 2860.4% | |||||||||||||||||||
Goodwill impairment | 1,654 | 8,341 | (6,687 | ) | –80.2% | |||||||||||||||||||
Other expense, net | 362 | 315 | 47 | 14.9% | ||||||||||||||||||||
Interest expense, net | 2,036 | 3,883 | (1,847 | ) | –47.6% | 1,984 | 3,022 | (1,038 | ) | -34.3% | ||||||||||||||
Recovery of income taxes | (1,258 | ) | (145 | ) | (1,113 | ) | –767.6% | |||||||||||||||||
Provision for income taxes | 3,009 | 2,076 | 933 | 44.9% | ||||||||||||||||||||
Earnings from continuing operations | 111 | (6,714 | ) | 6,825 | 101.7% | 5,673 | 4,209 | 1,464 | 34.8% | |||||||||||||||
| ||||||||||||||||||||||||
Earnings (loss) attributable to non–controlling interests | 496 | (2,192 | ) | 2,688 | 122.6% | |||||||||||||||||||
(Loss) earnings from discontinued operations, net of taxes | (15,415 | ) | (150 | ) | (15,265 | ) | n/m | |||||||||||||||||
Gain on sale of discontinued operations, net of taxes | 49,867 | – | 49,867 | n/m | ||||||||||||||||||||
Earnings attributable to non-controlling interests | 592 | 28 | 564 | n/m | ||||||||||||||||||||
Earnings from discontinued operations, net of taxes | - | 432 | (432 | ) | n/m | |||||||||||||||||||
| ||||||||||||||||||||||||
Earnings attributable toSunOpta Inc. | 34,067 | (4,672 | ) | 38,739 | 829.2% | 5,081 | 4,613 | 468 | 10.1% |
(Operating Income is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
Revenues for the quarter ended OctoberApril 2, 20102011 increased by 2.5%20.4% to $217,905$260,923 from $212,488$216,749 for the quarter ended September 30, 2009.April 3, 2010. Revenues in SunOpta Foods increased by 0.9%20.4% to $197,484$239,317 and revenues in Opta Minerals increased by 22.0%20.5% to $20,421. The increased revenue is due entirely to internal growth as there have been no acquisitions to contribute to the increased revenue. Internal growth includes the impact of foreign exchange movements and its effect on translation of foreign denominated revenue to U.S. dollars and the impact of changes in commodity related pricing.$21,606. Excluding the impact of acquisitions made late in 2010, revenues increased 9.7% in the first quarter of 2011. The acquisition of Dahlgren & Company, Inc. and Edner of Nevada, Inc. added incremental acquisition revenues of $20,428 and $2,640, respectively. The underlying base growth rate for the business was approximately 7.0% after accounting for changes including movements in foreign exchange and commodity related pricing, revenues increased approximately 7.6% over the prior year.prices. The increase in revenue was due primarily to the changes in sales volume and pricing described below in “Segmented Operations Information”.
Gross profit increased $4,668,$79, or 16.4%0.2%, for the quarter ended OctoberApril 2, 20102011 to $33,207$35,555 from $28,539$35,476 for the quarter ended September 30, 2009.April 3, 2010. As a percentage of revenues, gross profit for the quarter ended OctoberApril 2, 20102011 was 15.2%13.6% compared to 13.4%16.4% for the quarter ended September 30, 2009, an increaseApril 3, 2010, a decrease of 1.8%2.8%. Gross profit was affectedWithin SunOpta Foods, higher volumes of consumer products and grains were offset by increaseslower volumes of fiber and fruit-based ingredients contributing to a $478 decrease in gross profit fromprofit. Offsetting the decrease in SunOpta Foods driven by the Fruit Group, International Foods Group and Ingredients Group, offset slightly by decreases inwas increased gross profit from the Grains and Foods Group. Also contributingat Opta Minerals of $557 due to the increase in gross profit was acontinued rebound in the steel and abrasive markets for Opta Minerals.industry. The improvement in gross profit from SunOpta Foodsfor Opta Minerals was due primarily to a lower overall cost of goods sold, as a percentage of revenues, as a result of the variances described below under “Segmented Operations Information”.
Warehouse and Distribution (“W&D”) costs for the quarter ended October 2, 2010 were $702, a $334 decrease compared to $1,036 for the quarter ended September 30, 2009. These costs are solely related to the International Foods Group and specifically the Group’s Canadian–based natural health product distribution operation as warehousing and distribution costs for all other operations are considered part of cost of goods sold.
SUNOPTA INC. | 28 | April 2, 2011 10-Q |
Selling, General and Administrative costs (“SG&A”), including intangible asset amortization decreased $480$2,579 to $22,567$24,392 for the quarter ended OctoberApril 2, 20102011 compared to $23,047$26,971 for the quarter ended September 30, 2009.April 3, 2010. The combination of a stronger Canadian dollar and a weaker Euro in the third quarter of 2010 led to a $340 increase in SG&A on foreign denominated costs. The remaining decrease in SG&A was due primarily to a $1,596 decrease in corporate costs as a result of $820 relates to lower professional fees, stock-based compensation, depreciation and other corporate overhead costs, a $945 decrease in SG&A within our Natural Health Products group as a result of lower marketing costs, and a $1,137 decrease of marketing spend in support ofother SG&A, largely due to headcount reductions in the 2009 re–launch of certain branded health products,Fruit Group. These decreases were offset by increased compensation$1,099 in incremental SG&A associated with the acquisitions of Dahlgren and general overhead expenses.Edner in the fourth quarter of 2010. As a percentage of revenues, SG&A costs and intangible asset amortization costs were 10.4%9.3% for the quarter ended OctoberApril 2, 20102011 compared to 10.8%12.4% for the quarter ended September 30, 2009.April 3, 2010.
Foreign exchange gainslosses were $58$135 for the quarter ended OctoberApril 2, 20102011 as compared to gains of $639$1,117 for the quarter ended September 30, 2009.April 3, 2010. The decrease iswas primarily due to less favourableunfavourable exchange rate movements for the Euro and Canadian dollar and the Euro relative to the U.S. dollar.
Operating income for the quarter ended OctoberApril 2, 20102011 increased by $4,901 or 96.2%$1,406 to $9,996$11,028 compared to operating income of $5,095$9,622 for the quarter ended September 30, 2009April 3, 2010 due to the factors noted above. As a percentage of revenue, operating income was 4.6%4.2% for the quarter ended OctoberApril 2, 2010,2011, compared to 2.4%4.4% for the quarter ended September 30, 2009.April 3, 2010. Further details on revenue, gross margins and operating income variances are provided below under “Segmented Operations Information”.
Other expense for the quarter ended OctoberApril 2, 2011 of $362 reflects rationalization costs associated within the Fruit Group and Corporate Services segments, offset by a reduction in accrued contingent consideration relating to the acquisition of Dahlgren. Other expense of $315 in the first quarter of 2010 of $7,453 reflects non–cash long–lived asset impairment charges recordedrationalization efforts in the Fruit Group and a write-down of $7,034 and $419long-lived assets in other costs associated with rationalization efforts that began in fiscal 2009 and continued into 2010, primarily at our healthy fruit snacks operation.
Goodwill impairment of $1,654 reflects a non–cash impairment charge recorded as the Company determined that the carrying value of goodwill in its natural health reporting unit exceeded its fair value.Ingredients Group.
Interest expense for the quarter ended OctoberApril 2, 20102011 was $2,036$1,984 compared to $3,883$3,022 for the quarter ended September 30, 2009,April 3, 2010, a $1,847$1,038 decrease. Borrowing costs were lower for the quarter ended OctoberApril 2, 20102011 due to lower debt levels and LIBOR based interest charges, improved interest costsoutstanding on our pricing grid duereal estate and machinery and equipment term loan facilities, a lower base interest rate on borrowed funds as compared to improved results,the first quarter of 2010, and $675a reduction of non–cash interest charges incurrednon-cash amortization of deferred financing fees, partially offset by higher borrowed amounts on our credit lines.
Income tax provision for the quarter ended September 30, 2009 relatedApril 2, 2011 was $3,009, or 34.7% of earnings before taxes as compared to the waiver and amendment of our credit facilities, which occurred on April 30, 2009.
Income tax recovery$2,076, or 33.0% for the quarter ended October 2,April 3, 2010, was $1,258 compared to $145 for the quarter ended September 30, 2009, due to the lower consolidatedhigher earnings from continuing operations before taxincome taxes in the current period, excluding the impact of the goodwill impairment.period. The expected annual effective income tax rate for 20102011 is between 23%34% and 25%36%.
Earnings from continuing operations for the quarter ended OctoberApril 2, 20102011 were $111$5,673 as compared to a loss of $6,714$4,209 for the quarter ended September 30, 2009,April 3, 2010, a $6,825 decrease in losses.$1,464 or 34.8% increase. Basic and diluted lossearnings per share from continuing operations was $0.01$0.08 and $0.00$0.08 respectively for the quarter ended OctoberApril 2, 20102011 compared to $0.07 and $0.07 respectively for the quarter ended September 30, 2009.April 3, 2010.
Earnings attributable to non–controlling interestnon-controlling interests for the quarter ended OctoberApril 2, 2010were $4962011 were $592 compared to lossesearnings of $2,192$28 for the quarter ended September 30, 2009.April 3, 2010. The $2,688$564 increase is due to higher net earnings in our less than wholly–owned subsidiaries, due primarily to a goodwill write–off in the third quarter of 2009.wholly-owned subsidiaries.
LossesEarnings from discontinued operations, net of income taxes were $15,415 forin the first quarter ended October 2,of 2010, compared to lossesreflect the results of $150 for the quarter ended September 30, 2009. The $15,265 increase is primarily due to costs of $15,280 relating to stock–basedformer Canadian food distribution business and other compensation costs that were realized upon the sale of SunOpta BioProcess Inc.
Gain, which were divested on the sale of discontinued operations of $49,867 represents the after tax gain realized on the disposition of SunOpta BioProcess Inc.June 11, 2010 and August 31, 2010, respectively.
On a consolidated basis, earnings and basic and diluted earnings per share were $34,067, $0.52and $0.52$5,081, $0.08 and $0.08 respectively, for the quarter ended OctoberApril 2, 2010,2011, compared to losses of $4,672, $0.07and$4,613, $0.07 and $0.07, respectively, for the quarter ended September 30, 2009.April 3, 2010.
SUNOPTA INC. |
Adjusted Earnings from Operations
Following is a calculation of our adjusted earnings from operations and adjusted net earnings per share for the third quarterof 2010.
Diluted | ||||||
Earnings per | ||||||
Share(2) | ||||||
Earnings attributable to SunOpta Inc. | 34,067 | 0.52 | ||||
Adjusted for: | ||||||
Gain on sale of discontinued operations, net of taxes | (49,867 | ) | (0.76 | ) | ||
Costs included in discontinued operations incurred as a result of the sale of SunOpta BioProcess Inc. | 15,281 | 0.23 | ||||
Impairment of long–lived assets and goodwill, net of taxes of $2,321 | 6,367 | 0.10 | ||||
Reversal of tax valuation allowance | (549 | ) | (0.01 | ) | ||
Adjusted earnings from operations(1) | 5,299 | 0.08 |
Adjusted net earnings per share (1) for the third quarter of 2010 were $0.08 per diluted common share. During the third quarter of 2010, we recognized certain gains and recorded specific expenses against income that we do not believe are reflective of normal business operations. As a result, we believe it is useful to eliminate these gains and expenses to compute an adjusted net earnings per share (1) amount for the quarter ended October 2, 2010 which we believe is more reflective of normal business operations.
During the third quarter of 2010, we recorded a gain on the sale of SunOpta BioProcess Inc. Losses from discontinued operations, net of income taxes, include costs incurred as a result of the sale including stock–based and other compensation rewards that were triggered upon the change in control of SBI. We also recorded asset write–downs relating to property, plant and equipment and intangible assets within the Fruit Group, recognized a goodwill impairment charge relating to our natural health products division, and reversed a tax valuation allowance relating to a tax position that is no longer uncertain. We believe that earnings for the period attributable to SunOpta Inc. is the performance measure calculated and presented in accordance with GAAP that is most directly comparable to Adjusted earnings from operations(1), and that earnings per share is the performance measure calculated and presented in accordance with GAAP that is most directly comparable to Adjusted net earnings per share(1).
The table above reconciles earnings attributable to SunOpta Inc. to Adjusted earnings from operations (1)and reconciles earnings per share to Adjusted net earnings per share(1), in each case for the quarter ended October 2, 2010.
(1) Adjusted net earnings per share and Adjusted earnings from operationsare non–GAAP financial measures. We believe these non–GAAP measures, which have been adjusted for the impact of the items listed in the table above, assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Adjusted net earnings per share and Adjusted earnings from operations should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.
(2) The Diluted weighted average number of shares outstanding for the quarter ended October 2, 2010 is 65,986,034 (see Note 6).
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with current year presentation and segmented reporting.)
SunOpta Foods | ||||||||||||||||||||||||
For the quarter ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||||||||||||||
For the quarters ended | April 2, 2011 | April 3, 2010 | Change | % Change | ||||||||||||||||||||
Revenue | 197,484 | 195,743 | 1,741 | 0.9% | 239,317 | 198,818 | 40,499 | 20.4% | ||||||||||||||||
Gross Margin | 28,016 | 24,360 | 3,656 | 15.0% | 30,404 | 30,882 | (478 | ) | -1.5% | |||||||||||||||
Gross Margin % | 14.2% | 12.4% | 1.8% | 12.7% | 15.5% | -2.8% | ||||||||||||||||||
Operating Income | 9,710 | 5,292 | 4,418 | 83.5% | 10,463 | 11,391 | (928 | ) | -8.1% | |||||||||||||||
Operating Income % | 4.9% | 2.7% | 2.2% | 4.4% | 5.7% | -1.3% |
(Operating Income is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
SunOpta Foods contributed $197,484$239,317 or 90.6%91.7% of consolidated revenue for the quarter ended OctoberApril 2, 20102011 compared to $195,743$198,818 or 92.1%91.7% of consolidated revenues for the quarter ended September 30, 2009, an increase of $1,741. The increased revenue is due entirely to internal growth as there have been no acquisitions to contribute to the increased revenue.April 3, 2010, a $40,499 increase. Excluding the impact of acquisitions made late in 2010, revenues in SunOpta Foods increased 8.8% in the first quarter of 2011. The acquisition of Dahlgren and Edner added incremental revenues of $20,428 and $2,640, respectively. The underlying base growth rate for the business was approximately 6.0% after accounting for changes including movements in foreign exchange and commodity relating pricing, revenue in SunOpta Foods increased 6.4%.prices. The table below explains the increase in revenue by group for SunOpta Foods:group:
SunOpta Foods Revenue Changes | |
Revenue for the quarter ended | $ |
Increase in the Grains and Foods Group | |
Decrease in the Ingredients Group | |
Decrease in the Fruit Group | |
Increase in the International Foods Group | |
Revenue for the quarter ended | $ |
Gross margin in SunOpta Foods increaseddecreased by $3,656$478 for the quarter ended OctoberApril 2, 20102011 to $28,016,$30,404, or 14.2%12.7% of revenues, compared to $24,360,$30,882, or 12.4%15.5% of revenues for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increasedecrease in gross margin by group:
SunOpta Foods Gross Margin Changes | |
Gross Margin for the quarter ended | $ |
| |
| |
| |
Increase in the International Foods Group | |
Gross Margin for the quarter ended | $ |
Operating income in SunOpta Foods increaseddecreased by $4,418$928 for the quarter ended OctoberApril 2, 20102011 to $9,710$10,463 or 4.9%4.4% of revenues, compared to $5,292$11,391 or 2.7%5.7% of revenues for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increasedecrease in operating income:
SUNOPTA INC. | 30 | April 2, 2011 10-Q |
SunOpta Foods Operating Income Changes | |
Operating Income for the quarter ended | $ |
| |
Decrease in foreign exchange gains | |
Decrease in SG&A costs | |
| |
Operating Income for the quarter ended | $ |
Further details on revenue, gross marginmargins and operating income variances within SunOpta Foods are provided in the segmented operations information that follows.
Grains and Foods Group | ||||||||||||||||||||||||
For the quarter ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||||||||||||||
Grains & Foods Group | ||||||||||||||||||||||||
For the quarters ended | April 2, 2011 | April 3, 2010 | Change | % Change | ||||||||||||||||||||
Revenue | 86,952 | 86,290 | 662 | 0.8% | 115,601 | 78,845 | 36,756 | 46.6% | ||||||||||||||||
Gross Margin | 9,865 | 9,890 | (25 | ) | –0.3% | 12,023 | 9,893 | 2,130 | 21.5% | |||||||||||||||
Gross Margin % | 11.3% | 11.5% | –0.2% | 10.4% | 12.5% | -2.1% | ||||||||||||||||||
Operating Income | 5,353 | 5,257 | 96 | 1.8% | 5,707 | 5,016 | 691 | 13.8% | ||||||||||||||||
Operating Income % | 6.2% | 6.1% | 0.1% | 4.9% | 6.4% | -1.5% |
(Operating Income is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
The Grains and Foods Group contributed $86,952$115,601 in revenues for the quarter ended OctoberApril 2, 2010,2011, compared to $86,290$78,845 for the quarter ended September 30, 2009,April 3, 2010, a $662$36,756 or 0.8%46.6% increase. The table below explains the increase in revenue:
Grains and Foods Group Revenue Changes | |
Revenue for the quarter ended | $ |
Incremental revenue from the acquisition of Dahlgren & Company, Inc. on November 8, 2010 | 20,428 |
Increase in price for commodity soy and corn as well as organic grains and grain-based food ingredients | 9,307 |
Higher soymilk and | |
| |
Higher volume of | 2,335 |
Incremental revenue generated from our South African soy base operation | |
| |
| |
| |
Revenue for the quarter ended | $ |
Gross margin in the Grains and Foods Group decreasedincreased by $25$2,130 to $9,865$12,023 for the quarter ended OctoberApril 2, 20102011 compared to $9,890$9,893 for the quarter ended September 30, 2009,April 3, 2010, and the gross margin percentage decreased by 0.2%2.1% to 11.3%10.4%. The decrease in gross margin as a percentage of revenue is primarily due to unfavourable pricing in the sunflower market caused by increasing commodity costs and a large, low-cost supply from South America, offset by improved efficiencies at our aseptic processing and packaging facilities due in part to increased volumes. The table below explains the decreaseincrease in gross margin:
SUNOPTA INC. | 31 | April 2, 2011 10-Q |
Grains and Foods Group Gross Margin Changes | |
Gross Margin for the quarter ended | $ |
| |
| |
| |
| |
| |
| 2,487 |
| 1,368 |
Higher volumes of | |
Improvements at our joint venture vegetable oil refinery operation due to increased volumes and improved throughput | 315 |
Lower volumes of in-shell sunflower product and lower plant efficiencies combined with lower margin rates | (2,572) |
Gross Margin for the quarter ended | $ |
Operating income in the Grains and Foods Group increased by $96$691, or 1.8%13.8%, to $5,353$5,707 for the quarter ended OctoberApril 2, 2010,2011, compared to $5,257$5,016 for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increase in operating income:
Grains and Foods Group Operating Income Changes | |
Operating Income for the quarter ended | $ |
| |
| |
Incremental SG&A added by the acquisition of Dahlgren & Company, Inc. on November 8, 2010 | (965) |
Increased corporate cost allocations | (482) |
Increased professional and consulting fees | |
| |
Operating Income for the quarter ended | $ |
Looking forward, we expect our aseptic packaging expansion on the West Coast to continue to enhance our capacity to manufacture aseptic soy and alternate beverages. We also intend to focus our efforts on growing our sunflower and IP grains business, expanding revenues from organic ingredients and continuing to focus on value–addedvalue-added ingredient and packaged product offerings. We believe the acquisition of Dahlgren & Company, Inc. positions us as a global leader in the confection sunflower business with solid growth potential. Additionally, the international expansion of our soy base sales via strategic relationships for procurement of product is expected to drive incremental sales volume. Our long–term expectationlong-term target for this group is to achieve a segment operating margin of 6% to 8% which assumes we are able to secure consistent quantity and quality grains and sunflower stocks, improve product mix, and control costs. The statements in this paragraph are forward–lookingforward-looking statements. See “Forward–Looking“Forward-Looking Statements” above. Increased supply pressure in the commodity–basedcommodity-based markets in which we operate, volume decreases or loss of customers, or our inability to secure quality inputs or achieve our product mix or cost reduction goals, along with the other factors described above under “Forward–Looking“Forward-Looking Statements,” could adversely impact our ability to meet these forward–lookingforward-looking expectations.
Ingredients Group | ||||||||||||
For the quarter ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 17,134 | 17,385 | (251 | ) | –1.4% | |||||||
Gross Margin | 5,148 | 4,689 | 459 | 9.8% | ||||||||
Gross Margin % | 30.0% | 27.0% | 3.0% | |||||||||
Operating Income | 3,104 | 2,859 | 245 | 8.6% | ||||||||
Operating Income % | 18.1% | 16.4% | 1.7% |
SUNOPTA INC. | 32 | April 2, 2011 10-Q |
Ingredients Group | ||||||||||||
For the quarters ended | April 2, 2011 | April 3, 2010 | Change | % Change | ||||||||
Revenue | 15,751 | 18,150 | (2,399 | ) | -13.2% | |||||||
Gross Margin | 3,599 | 6,066 | (2,467 | ) | -40.7% | |||||||
Gross Margin % | 22.8% | 33.4% | -10.6% | |||||||||
Operating Income | 1,895 | 4,212 | (2,317 | ) | -55.0% | |||||||
Operating Income % | 12.0% | 23.2% | -11.2% |
(Operating Income is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
The Ingredients Group contributed $17,134$15,751 in revenues for the quarter ended OctoberApril 2, 2010,2011, compared to $17,385$18,150 for the quarter ended September 30, 2009,April 3, 2010, a $251$2,399 or 1.4%13.2% decrease. The table below explains the decrease in revenue:
Ingredients Group Revenue Changes | |
Revenue for the quarter ended | $ |
Decreased oat and soy fiber volumes due to lower customer demand, loss of a significant customer in the first quarter of 2011, combined with a slight decrease in pricing | (2,259) |
Decrease in blended food | (378) |
Decrease in brans sales due to lower volumes in corn as well as the | |
| |
| |
Revenue for the quarter ended | $ |
Gross margin in theThe Ingredients Group increasedgross margin decreased by $459$2,467 to $5,148$3,599 for the quarter ended OctoberApril 2, 20102011 compared to $4,689$6,066 for the quarter ended September 30, 2009,April 3, 2010, and the gross margin percentage increaseddecreased by 3.0%10.6% to 30.0%22.8%. The increaseLower customer demand for fiber, due in part to pipeline fills in the prior year, the loss of a significant customer in the first quarter of 2011, and higher inefficiencies due to lower production volumes led to the decrease in gross margin as a percentageand rates versus the first quarter of revenue is due to continued process improvements implemented in our manufacturing facilities and lower raw material costs.2010. The table below explains the increasedecrease in gross margin:
Ingredients Group Gross Margin Changes | |
Gross Margin for the quarter ended | $ |
| |
| |
| (2,077) |
Decrease in starch and brans due primarily to lower volumes and reduced overhead absorption | (217) |
Decrease in production volumes due to lower customer demand for dairy blends, as well as higher manufacturing costs due to lower volumes | (135) |
Scheduled down time and reduced pricing on contract manufacturing due to product mix, partially offset by higher production volumes | (38) |
Gross Margin for the quarter ended | $ |
SUNOPTA INC. |
Operating income in the Ingredients Group increaseddecreased by $245,$2,317, or 8.6%55.0%, to $3,104$1,895 for the quarter ended OctoberApril 2, 2010,2011, compared to $2,859$4,212 for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increasedecrease in operating income:
Ingredients Group Operating Income Changes | |
Operating Income for the quarter ended | $ |
| |
Increased spending on travel and | (92) |
| |
Operating Income for the quarter ended | $ |
Looking forward, we willintend to continue to concentrate on growing the Ingredients Group’s fiber portfolio and customer base through product innovation and diversification of both soluble and insoluble fiber applications. We will also focus on maintaining the continuous improvement culture of this group to further increase capacity utilization, reduce costs, and sustain margins. Our long–term expectationlong-term target for the Ingredients Group is to maintain segment operating margins of 12% to 15%. The statements in this paragraph are forward–lookingforward-looking statements. See “Forward–Looking“Forward-Looking Statements” above. An unexpected increase in input costs, or ourloss 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–“Forward- Looking Statements,” could adversely impact our ability to meet these forward - lookingforward-looking expectations.
Fruit Group | ||||||||||||||||||||||||
For the quarter ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||||||||||||||
For the quarters ended | April 2, 2011 | April 3, 2010 | Change | % Change | ||||||||||||||||||||
Revenue | 34,824 | 35,870 | (1,046 | ) | –2.9% | 37,010 | 40,340 | (3,330 | ) | -8.3% | ||||||||||||||
Gross Margin | 4,403 | 1,716 | 2,687 | 156.6% | 3,893 | 5,598 | (1,705 | ) | -30.5% | |||||||||||||||
Gross Margin % | 12.6% | 4.8% | 7.8% | 10.5% | 13.9% | -3.4% | ||||||||||||||||||
Operating Income | 707 | (1,745 | ) | 2,452 | 140.5% | 388 | 1,864 | (1,476 | ) | -79.2% | ||||||||||||||
Operating Income % | 2.0% | –4.9% | 6.9% | 1.0% | 4.6% | -3.6% |
(Operating Income is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
The Fruit Group contributed $34,824$37,010 in revenues for the quarter ended OctoberApril 2, 2010,2011, compared to $35,870$40,340 for the quarter ended September 30, 2009,April 3, 2010, a $1,046$3,330 or 2.9%8.3% decrease. The table below explains the decrease in revenue:
Fruit Group Revenue Changes | |
Revenue for the quarter ended | $ |
| (3,754) |
| (2,663) |
Incremental revenue from the acquisition of | |
Higher volume as a result of new customers and increased demand | |
| 446 |
Revenue for the quarter ended | $ |
SUNOPTA INC. |
Gross margins in the Fruit Group increaseddecreased by $2,687$1,705 to $4,403$3,893 for the quarter ended OctoberApril 2, 20102011 compared to $1,716$5,598 for the quarter ended September 30, 2009,April 3, 2010, and the gross margin percentage increaseddecreased by 7.8%3.4% to 12.6%10.5%. The increasedecrease in gross margin as a percentage of revenue iswas due to liquidation and rationalization costs incurred in the third quarterlower sales volume of 2009 that did not reoccur in the third quarter of 2010, as well as production efficiencies at our fruit ingredient and frozen foods operations,into the retail market and ingredients to the industrial market plus increased material costs not passed onto customers, offset by cost benefits realized from process improvement initiatives implemented in our healthy fruit snacks and fruit ingredients operations. The table below explains the increasedecrease in gross margin:
Fruit Group Gross Margin Changes | |
Gross Margin for the quarter ended | $ |
| (1,007) |
Lower volumes, reduced plant efficiencies and | (993) |
| |
| 295 |
Gross Margin for the quarter ended | $ |
Operating income in the Fruit Group increaseddecreased by $2,452,$1,476, or 140.5%79.2%, to $707$388 for the quarter ended OctoberApril 2, 2010,2011, compared to ($1,745)$1,864 for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increasedecrease in operating income:
Fruit Group Operating Income Changes | |
Operating Loss for the quarter ended | |
| |
| (134) |
Reduced consulting and product development costs in the fruit ingredients operations | 223 |
Lower compensation costs due to | |
| |
| |
| |
| 140 |
Operating Income for the quarter ended | $ |
Looking forward, we expect improvement in margins and operating income in the Fruit Group through the growth of our fruit ingredients and healthy fruit snacks operations, and from our rationalizedstreamlined frozen foods division. TheWe believe the decision to rationalize operations atsell our Mexican frozen fruit processing facilitiesassets and increaseto enter into a strategic raw material supply agreement to service our growing mix of value added retail offerings is expected towill help enhance the margins of the group. We remain customer focused and continue to explore new ways to bring value added product offerings to market, such as the Garden Green Garbanzo™, as well as. We also intend to continue to explore opportunities to improve plantoperating efficiencies. A new aseptic packaging line in our fruit ingredient division is expected to increase capacity and drive incremental volumes and cost savings when completed in 2011.mid-2011. Long term we expectare targeting 6% to 8% operating margins from the Fruit Group. The statements in this paragraph are forward–lookingforward-looking statements. See “Forward–Looking“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“Forward-Looking Statements,” could have an adverse impact on these forward–lookingforward-looking expectations.
SUNOPTA INC. |
International Foods Group | ||||||||||||||||||||||||
For the quarter ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||||||||||||||
For the quarters ended | April 2, 2011 | April 3, 2010 | Change | % Change | ||||||||||||||||||||
Revenue | 58,574 | 56,198 | 2,376 | 4.2% | 70,955 | 61,483 | 9,472 | 15.4% | ||||||||||||||||
Gross Margin | 8,600 | 8,065 | 535 | 6.6% | 10,889 | 9,325 | 1,564 | 16.8% | ||||||||||||||||
Gross Margin % | 14.7% | 14.4% | 0.3% | 15.3% | 15.2% | 0.1% | ||||||||||||||||||
Operating Income | 546 | (1,079 | ) | 1,625 | 150.6% | 2,473 | 299 | 2,174 | 727.1% | |||||||||||||||
Operating Income % | 0.9% | –1.9% | 2.8% | 3.5% | 0.5% | 3.0% |
(Operating Income is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
The International Foods Group contributed $58,574$70,955 in revenues for the quarter ended OctoberApril 2, 2010,2011, compared to $56,198$61,483 for the quarter ended September 30, 2009,April 3, 2010, a $2,376$9,472 or a 4.2%15.4% increase. The table below explains the increase in revenue:
International Foods Group Revenue Changes | |
Revenue for the quarter ended | $ |
Higher customer demand for natural and organic commodities such as processed fruits and vegetables, | 9,905 |
Improved pricing for sweeteners, coffee beans, seeds and | 2,875 |
Increased volume | 1,124 |
| 382 |
| (2,759) |
Decrease in brokerage operations due to lower volumes and lost customers | (2,055) |
Revenue for the quarter ended | $ |
Gross margins in the International Foods Group increased by $535$1,564 to $8,600$10,889 for the quarter ended OctoberApril 2, 20102011 compared to $8,065$9,325 for the quarter ended September 30, 2009,April 3, 2010, and the gross margin percentage increased by 0.3%0.1% to 14.7%15.3%. The increase in margin rate was generated viaby improved contract pricing on certain organic ingredients at The Organic Corporation as well as theand sales from new products at higher margin product offerings atmargins within our Consumer Product Solutions operation.operation, offset by lower margins in our Natural Health Products division. The table below explains the increase in gross margin:
SUNOPTA INC. |
International Foods | |
Gross Margin for the quarter ended | $ |
| 2,055 |
| |
| 390 |
Favourable impact on margin due to | 92 |
Lower shipment volumes on both branded and distributed natural health products in addition to higher warehousing and distribution costs | (597) |
Lower volumes | |
| |
Gross Margin for the quarter ended | $ |
Operating income in the International Foods Group increased by $1,625,$2,174, or 150.6%727.1%, to $546$2,473 for the quarter ended OctoberApril 2, 2010,2011, compared to ($1,079)$299 for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increase in operating income:
International Foods Group Operating Income Changes | |
Operating | |
| |
| |
| |
| |
Increase in | 1,564 |
Lower marketing costs related primarily to initiatives undertaken in the first quarter of 2010 in support of our owned brands in our Natural Health Products division | 945 |
Lower rent and maintenance, travel and meals, depreciation and professional fees, offset by increased corporate cost allocations and other SG&A expenses | 241 |
Lower compensation expense due primarily to restructuring in our Food Solutions and Natural Health Products divisions, offset by increased compensation at our European trading operations | 175 |
Foreign exchange losses on forward foreign exchange contracts entered into on U.S. | (707) |
Negative impact on Canadian borne SG&A | (44) |
Operating Income for the quarter ended | $ |
Looking forward, our realignedthe International Foods Group is focused on leveraging its sourcing, supply and distribution expertise to grow its portfolio of organic ingredients as well as to expand its range of consumer and natural health product offerings. Long–termLong-term group operating margins are targeted at 5% to 6% of revenues which is expected to be achieved through a combination of sourcing, pricing and product development strategies. We will also intend to strive to foster an environment of continuous improvement to help forward and backward integrate where opportunities exist, expand our processing expertise and increase our value–addedvalue-added capabilities. The statements in this paragraph are forward–lookingforward-looking statements. See “Forward–Looking“Forward-Looking Statements” above. Unfavourable fluctuations in foreign exchange, reduced demand for natural and organic ingredients and delayed synergies as well as our inability to realize our particular strategic expansion goals, along with the other factors described above under “Forward–Looking“Forward-Looking Statements,” could have an adverse impact on these forward–lookingforward-looking expectations.
Opta Minerals | ||||||||||||
For the quarter ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 20,421 | 16,745 | 3,676 | 22.0% | ||||||||
Gross Margin | 5,191 | 4,179 | 1,012 | 24.2% | ||||||||
Gross Margin % | 25.4% | 25.0% | 0.4% | |||||||||
Operating Income | 2,792 | 1,290 | 1,502 | 116.4% | ||||||||
Operating Income % | 13.7% | 7.7% | 6.0% |
SUNOPTA INC. | 37 | April 2, 2011 10-Q |
Opta Minerals | ||||||||||||
For the quarters ended | April 2, 2011 | April 3, 2010 | Change | % Change | ||||||||
Revenue | 21,606 | 17,931 | 3,675 | 20.5% | ||||||||
Gross Margin | 5,151 | 4,594 | 557 | 12.1% | ||||||||
Gross Margin % | 23.8% | 25.6% | -1.8% | |||||||||
Operating Income | 2,451 | 1,713 | 738 | 43.1% | ||||||||
Operating Income % | 11.3% | 9.6% | 1.7% |
(Operating Income is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
Opta Minerals contributed $20,421$21,606 in revenues for the quarter ended OctoberApril 2, 2010,2011, compared to $16,745$17,931 for the quarter ended September 30, 2009,April 3, 2010, a $3,676$3,675 or a 22.0%20.5% increase. The table below explains the increase in revenue:
Opta Minerals Revenue Changes | |
Revenue for the quarter ended | $ |
Increased | |
services | |
| (490) |
Revenue for the quarter ended | $ |
Gross margin for Opta Minerals increased by $1,012$557 to $5,191$5,151 for the quarter ended OctoberApril 2, 20102011 compared to $4,179$4,594 for the quarter ended September 30, 2009,April 3, 2010, and the gross margin percentage decreased by 1.8% to 23.8%. The decrease in gross margin as a percentage of revenue is due primarily to volume decreases in abrasives combined with increased by 0.4% to 25.4%.manufacturing and transportation costs. The table below explains the increase in gross margin:
Opta Minerals Gross Margin Changes | |
Gross Margin for the quarter ended | $ |
Increased volume of steel and related products due to higher demand, increased manufacturing and transportation costs | 1,080 |
services combined with increased manufacturing and transportation costs | |
| (523) |
Gross Margin for the quarter ended | $ |
Operating income for Opta Minerals increased by $1,502,$738, or 116.4%43.1%, to $2,792$2,451 for the quarter ended OctoberApril 2, 2010,2011, compared to $1,290$1,713 for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increase in operating income:
Opta Minerals Operating Income Changes | |
Operating Income for the quarter ended | $ |
Increase in gross margin, as explained above | |
Increase in foreign exchange gains | |
Decrease in bad debt expense | 124 |
Increase in office supplies, depreciation, professional fees | |
Increase in compensation | |
| |
Operating Income for the quarter ended | $ |
SUNOPTA INC. |
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 and, during 2009, Opta Minerals restructured operations to address the economic downturn. As a result, we believe the CompanyOpta Minerals is well positioned for continued future profitability as economic conditions improve. Opta Minerals recently expanded its abrasives processing operations in Texas and Florida to better serve the Southern U.S. markets. We own 66.4% of Opta Minerals and segment operating income is presented prior to minority interest expense. The statements in this paragraph are forward–lookingforward-looking statements. See “Forward–Looking“Forward-Looking Statements” above. An extended period of softness in the steel and foundry industries, slowdownslowdowns in economic improvement,the economy, or delays in bringing new facilitiesproducts and operations completely online, along with the other factors described above under “Forward–Looking“Forward-Looking Statements,” could have an adverse impact on these forward–lookingforward-looking expectations.
Corporate Services | ||||||||||||
For the quarters ended | April 2, 2011 | April 3, 2010 | Change | % Change | ||||||||
Operating Loss | (1,886 | ) | (3,482 | ) | 1,596 | 45.8% |
Corporate Services | ||||||||||||
For the quarter ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Operating Loss | (2,506 | ) | (1,487 | ) | (1,019 | ) | –68.5% |
(Operating Incomeloss is defined as “Earnings from continuing operations before the following” excluding the impact of “Other expense, (income), net”, and "Goodwill impairment")
Operating loss at SunOpta Corporate Services increaseddecreased by $1,019$1,596 to $2,506$1,886 for the quarter ended OctoberApril 2, 2010,2011, from costs of $1,487$3,482 for the quarter ended September 30, 2009.April 3, 2010. The table below explains the increasedecrease in operating loss:
Corporate Services Operating | |
Operating Loss for the quarter ended | ($ |
| |
| |
| |
Decreased professional fees primarily due to a reduction in legal costs related to the restatement of financial statements for the three quarters of 2007 | 1,136 |
Decreased compensation costs due mainly to lower stock-based compensation, a decrease in retirement allowances and lower workers compensation expense | 814 |
Increase in corporate management fees that are allocated to SunOpta operating groups | |
Lower depreciation expense due to certain corporate assets reaching the end of their estimated useful lives | 139 |
Decrease in other corporate overhead costs mainly due to lower consulting, utilities, taxes and bank charges | 117 |
Decrease in foreign exchange gains | (1,008) |
Increase in SG&A costs due to the strengthened Canadian Dollar causing Canadian borne expenses to be more costly when translated into U.S. Dollars | (192) |
Operating Loss for the quarter ended | ($ |
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 divisionoperating 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. As a result of the sale of the Canadian Food Distribution business and SunOpta BioProcess, a portion of the corporate management fees previously charged to these groups was reallocated as an expense of the Corporate Services operating segment. The operating loss for Corporate Services for the quarter ended September 30, 2009April 3, 2010 has been adjusted to reflect this change.
SUNOPTA INC. |
Operations for the three quarters ended October 2, 2010 compared to the three quarters ended September 30, 2009
Consolidated
October 2, | September 30, | |||||||||||
2010 | 2009 | Change | % Change | |||||||||
Revenue | ||||||||||||
SunOpta Foods | 609,046 | 573,962 | 35,084 | 6.1% | ||||||||
Opta Minerals | 59,493 | 45,810 | 13,683 | 29.9% | ||||||||
Total Revenue | 668,539 | 619,772 | 48,767 | 7.9% | ||||||||
Gross Profit | ||||||||||||
SunOpta Foods | 92,644 | 71,317 | 21,327 | 29.9% | ||||||||
Opta Minerals | 15,174 | 9,596 | 5,578 | 58.1% | ||||||||
Total Gross Profit | 107,818 | 80,913 | 26,905 | 33.3% | ||||||||
Operating Income | ||||||||||||
SunOpta Foods | 33,919 | 14,051 | 19,868 | 141.4% | ||||||||
Opta Minerals | 6,224 | 429 | 5,795 | 1350.8% | ||||||||
Corporate Services | (8,631 | ) | (4,855 | ) | (3,776 | ) | –77.8% | |||||
Total Operating Income | 31,512 | 9,625 | 21,887 | 227.4% | ||||||||
| ||||||||||||
Other expense (income), net | 8,812 | (342 | ) | 9,154 | 2676.6% | |||||||
Goodwill impairment | 1,654 | 8,341 | (6,687 | ) | –80.2% | |||||||
Interest expense, net | 7,625 | 10,159 | (2,534 | ) | –24.9% | |||||||
Provision for (recovery of) income taxes | 2,672 | (1,207 | ) | 3,879 | 321.4% | |||||||
Earnings from continuing operations | 10,749 | (7,326 | ) | 18,075 | 246.7% | |||||||
| ||||||||||||
Earnings (loss) attributable to non–controlling interests | 710 | (2,748 | ) | 3,458 | 125.8% | |||||||
(Loss) earnings from discontinued operations, net of taxes | (14,569 | ) | 29 | (14,598 | ) | n/m | ||||||
Gain on sale of discontinued operations, net of taxes | 63,676 | – | 63,676 | n/m | ||||||||
| ||||||||||||
Earnings attributable toSunOpta Inc. | 59,146 | (4,549 | ) | 63,695 | n/m |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
Revenues for the three quarters ended October 2, 2010 increased by 7.9% to $668,539 from $619,772 for the three quarters ended September 30, 2009. Revenues in SunOpta Foods increased by 6.1% to $609,046 and revenues in Opta Minerals increased by 29.9% to $59,493. The increased revenue is due entirely to internal growth as there have been no acquisitions to contribute to the increased revenue. Internal growth includes the impact of foreign exchange movements and its effect on translation of foreign denominated revenue to U.S. dollars and the impact of changes in commodity related pricing. Excluding the impact of changes in foreign exchange and commodity related pricing, revenues increased approximately 11.2% over the prior year. The increase in revenue was due primarily to the changes in sales volume and pricing described below in “Segmented Operations Information”.
Gross profit increased $26,905, or 33.3%, for the three quarters ended October 2, 2010 to $107,818 from $80,913 for the three quarters ended September 30, 2009. As a percentage of revenues, gross profit for the three quarters ended October 2, 2010 was 16.1% compared to 13.1% for the three quarters ended September 30, 2009, an increase of 3.0%. For the three quarters ended October 2, 2010, we experienced increased gross profit in all of our operating segments. Within SunOpta Foods, higher volumes of fiber, fruit ingredient products, grains, consumer products and plant efficiencies all contributed to the increased gross profit. Also contributing to the increase in gross profit was rebound in the steel and abrasive markets for Opta Minerals. The improvement in gross profit from SunOpta Foods was due primarily to a lower overall cost of goods sold, as a percentage of revenues, as a result of the variances described below under “Segmented Operations Information”.
Warehouse and Distribution (“W&D”) costs for the three quarters ended October 2, 2010 were $2,894, a $140 decrease compared to $3,034 for the three quarters ended September 30, 2009. These costs are solely related to the International Foods Group and specifically the Group’s Canadian based natural health products distribution operation as warehousing and distribution costs for all other operations are considered part of cost of goods sold.
Selling, General and Administrative costs (“SG&A”) including intangible asset amortization increased $6,496 to $74,906 for the three quarters ended October 2, 2010 compared to $68,410 for the three quarters ended September 30, 2009. The combination of a stronger Canadian dollar and a weaker Euro in the three quarters ended October 2, 2010 led to a $2,847 increase in SG&A on foreign denominated costs. Additional SG&A costs of $5,557 relating to higher compensation costs, non–cash stock compensation, professional fees and general overhead expenses were offset by a $1,908 reduction in costs relating to severance and facility rationalizations implemented during the second quarter of 2009 and costs incurred in support of a brand re–launch at our natural health products operation. As a percentage of revenues, SG&A costs and intangible asset amortization costs were 11.2% for the three quarters ended October 2, 2010 compared to 11.0% for the three quarters ended September 30, 2009.
Foreign exchange gains were $1,494 for the three quarters ended October 2, 2010 as compared to gains of $156 for the three quarters ended September 30, 2009. The increase is primarily due to favourable exchange rate movements for the Euro and Canadian dollar relative to the U.S. dollar.
Operating income for the three quarters ended October 2, 2010 increased by $21,887 to $31,512 compared to operating income of $9,625 for the three quarters ended September 30, 2009 due to the factors noted above. As a percentage of revenue, operating income was 4.7% for the three quarters ended October 2, 2010, compared to 1.6% for the three quarters ended September 30, 2009. Further details on revenue, gross margins and operating income variances are provided below under “Segmented Operations Information”.
Other expense for the three quarters ended October 2, 2010 of $8,812 reflects non–cash long–lived asset impairment charges recorded in the Fruit Group of $7,034 and $1,778 of severance, packaging inventory write–offs and other period costs expensed as incurred due to rationalization efforts that began in fiscal 2009 and continued into 2010, as well as the rationalization efforts at our natural health products operation which began in the second quarter of 2010. In addition, a non–cash impairment charge of $139 was recorded to write–off certain long–lived assets in our Ingredients Group.
Goodwill impairment of $1,654 reflects a non–cash impairment charge recorded as the Company determined that the carrying value of certain goodwill in the its natural health reporting unit exceeded its fair value.
Interest expense for the three quarters ended October 2, 2010 was $7,625 compared to $10,159 for the three quarters ended September 30, 2009, a $2,534 decrease. Borrowing costs were lower for the three quarters ended October 2, 2010 due to lower debt levels and LIBOR based interest charges, improved interest costs on our pricing grid due to improved operating results, and $1,125 of non–cash interest charges incurred for the three quarters ended September 30, 2009 related to the waiver and amendment of our credit facilities, which occurred on April 30, 2009.
Income tax provision for the three quarters ended October 2, 2010 was $2,672 compared to a recovery of $1,207 for the three quarters ended September 30, 2009, due to the higher consolidated earnings before tax in the current period. The expected annual effective income tax rate for 2010 is between 23% and 25%.
Earnings from continuing operations for the three quarters ended October 2, 2010 were $10,749 as compared to a loss of $7,326 for the three quarters ended September 30, 2009, a $18,075 increase. Basic and diluted earnings per share from continuing operations was $0.16 and $0.15 respectively for the three quarters ended October 2, 2010 compared to a loss of $0.07 and $0.07 respectively for the three quarters ended September 30, 2009.
Earnings attributable to non–controlling interest for the three quarters ended October 2, 2010were $710 compared to losses of $2,748 for the three quarters ended September 30, 2009. The $3,458 increase is due to higher net earnings in our less than wholly–owned subsidiaries.
Losses from discontinued operations, net of income taxes, were $14,569 for the three quarters ended October 2, 2010 compared to earnings of $29 for the three quarters ended September 30, 2009. The $14,598 decrease is due to $15,280 relating to stock–based and other compensation costs that were realized upon the sale of SunOpta BioProcess, costs of $1,289 incurred as a result of the sale of the Canadian Distribution Business including retention bonuses, severances and mandatory interest payments, offset by higher operating margins from discontinued operations.
Gain on the sale of discontinued operations of $63,676 represents after tax gains realized on the dispositions of the Canadian food distribution assets and the shares of SunOpta Bioprocess Inc.
On a consolidated basis, earnings and basic and diluted earnings per share were $59,146, $0.91 and $0.90 respectively, for the three quarters ended October 2, 2010, compared to losses of $4,549, $0.07 and $0.07, respectively, for the three quarters ended September 30, 2009.
Adjusted Earnings from Operations
Following is a calculation of our adjusted earnings from operations and adjusted net earnings per share for the three quarters ended October 2, 2010.
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Earnings attributable to SunOpta Inc. | $ | 59,146 | 0.90 | |||
Adjusted for: | ||||||
Gain on sale of discontinued operations, net of taxes | (63,676 | ) | (0.97 | ) | ||
Costs included in discontinued operations incurred as a result of the sale of the Canadian food distribution assets and SunOpta BioProcess Inc., net of taxes of $388 | 16,183 | 0.25 | ||||
Severance costs related to restructuring plan at our natural health products operation, net of taxes of $223 | 413 | 0.01 | ||||
Gain on dilution of SBI’s ownership position in Xylitol Canada | (1,242 | ) | (0.02 | ) | ||
Impairment of long–lived assets and goodwill, net of taxes of $2,321 | 6,367 | 0.10 | ||||
Reversal of tax valuation allowance | (549 | ) | (0.01 | ) | ||
Adjusted earnings from operations(1) | 16,642 | 0.25 |
Adjusted net earnings per share (1) for the first three quarters of 2010 were $0.25 per diluted common share. During the first three quarters of 2010, we recognized gains and recorded specific expenses against income that we do not believe are reflective of normal business operations. As a result, we believe it is useful to eliminate these gains and expenses to compute an adjusted net earnings per share (1) amount for the three quarters ended October 2, 2010 which we believe is more reflective of normal business operations.
During the first three quarters of 2010, we recorded gains on the sales of the Canadian food distribution assets and the sale of SunOpta BioProcess Inc. Losses from discontinued operations, net of income taxes, include costs incurred as a result of the sales including stock–based and other compensation rewards that were triggered upon closing of the sales, severances and mandatory interest payments. We also executed a restructuring plan at our natural health products operation as a result of market conditions and the sale of the Canadian Food Distribution assets which triggered severance costs. As a result of its dilution in ownership in an investment, SunOpta BioProcess recorded a non–taxable dilution gain in the second quarter of 2010. We also recorded asset write–downs relating to property, plant and equipment and intangible assets within the Fruit Group, recognized a goodwill impairment charge relating to our natural health products division, and reversed a tax valuation allowance relating to a tax position that is no longer uncertain. We believe that earnings attributable to SunOpta Inc. is the performance measure calculated and presented in accordance with GAAP that is most directly comparable to Adjusted earnings from operations(1), and that earnings per share is the performance measure calculated and presented in accordance with GAAP that is most directly comparable to Adjusted net earnings per share(1).
The table above reconciles earnings attributable to SunOpta Inc. to Adjusted earnings from operations(1)and reconciles earnings per share to Adjusted net earnings per share(1), in each case for the three quarters ended October 2, 2010.
(1) Adjusted net earnings per share and Adjusted earnings from operations are non–GAAP financial measures. We believe these non–GAAP measures, which have been adjusted for the impact of the items listed in the table above, assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Adjusted net earnings per share and Adjusted earnings from operations should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.
(2) The Diluted weighted average number of shares outstanding for the three quarters ended October 2, 2010 is 65,764,865 (see Note 6).
Segmented Operations Information
(Note: Certain prior year figures have been adjusted to conform with current year presentation and segmented reporting.)
SunOpta Foods | ||||||||||||
For the three quarters ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 609,046 | 573,962 | 35,084 | 6.1% | ||||||||
Gross Margin | 92,644 | 71,317 | 21,327 | 29.9% | ||||||||
Gross Margin % | 15.2% | 12.4% | 2.8% | |||||||||
Operating Income | 33,919 | 14,051 | 19,868 | 141.4% | ||||||||
Operating Income % | 5.6% | 2.4% | 3.2% |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
SunOpta Foods contributed $609,046 or 91.1% of consolidated revenue for the three quarters ended October 2, 2010 compared to $573,962 or 92.6% of consolidated revenues for the three quarters ended September 30, 2009, a $35,084 increase. The increased revenue is due entirely to internal growth as there have been no acquisitions to contribute to the increased revenue. Reflecting the impact of changes in foreign exchange and commodity related pricing, revenue in SunOpta Foods increased 9.7% over the prior year. For the three quarters ended October 2, 2010, all operating groups within SunOpta Foods realized increased revenues, primarily as a result of increased volumes stemming from higher customer demand and new customer and product initiatives. The table below explains the increase in revenue by group:
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Gross margin in SunOpta Foods increased by $21,327 for the three quarters ended October 2, 2010 to $92,644, or 15.2% of revenues, compared to $71,317, or 12.4% of revenues for the three quarters ended September 30, 2009. The table below explains the increase in gross margin by group:
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Operating income in SunOpta Foods increased by $19,868 for the three quarters ended October 2, 2010 to $33,919 or 5.6% of revenues, compared to $14,051 or 2.4% of revenues for the three quarters ended September 30, 2009. The table below explains the increase in operating income:
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Further details on revenue, gross margins and operating income variances within SunOpta Foods are provided in the segmented operations information that follows.
Grains & Foods Group | ||||||||||||
For the three quarters ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 257,885 | 250,346 | 7,539 | 3.0% | ||||||||
Gross Margin | 32,017 | 27,875 | 4,142 | 14.9% | ||||||||
Gross Margin % | 12.4% | 11.1% | 1.3% | |||||||||
Operating Income | 17,557 | 14,405 | 3,152 | 21.9% | ||||||||
Operating Income % | 6.8% | 5.8% | 1.0% |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
The Grains and Foods Group contributed $257,885 in revenues for the three quarters ended October 2, 2010, compared to $250,346 for the three quarters ended September 30, 2009, a $7,539 or 3.0% increase. The table below explains the increase in revenue:
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Gross margin in the Grains and Foods Group increased by $4,142 to $32,017 for the three quarters ended October 2, 2010 compared to $27,875 for the three quarters ended September 30, 2009, and the gross margin percentage increased by 1.3% to 12.4%. The increase in gross margin as a percentage of revenue is primarily due to a favourable shift in sales mix, as soymilk and alternative beverage sales as well as sunflower products have higher inherent margins than our grain–based sales as well as improved efficiencies at our West Coast aseptic packaging facility which was being commissioned in the same period of 2009. The table below explains the increase in gross margin:
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Operating income in the Grains and Foods Group increased by $3,152, or 21.9%, to $17,557 for the three quarters ended October 2, 2010, compared to $14,405 for the three quarters ended September 30, 2009. The table below explains the increase in operating income:
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Ingredients Group | ||||||||||||
For the three quarters ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 52,932 | 47,138 | 5,794 | 12.3% | ||||||||
Gross Margin | 16,216 | 11,228 | 4,988 | 44.4% | ||||||||
Gross Margin % | 30.6% | 23.8% | 6.8% | |||||||||
Operating Income | 10,322 | 5,571 | 4,751 | 85.3% | ||||||||
Operating Income % | 19.5% | 11.8% | 7.7% |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
The Ingredients Group contributed $52,932 in revenues for the three quarters ended October 2, 2010, compared to $47,138 for the three quarters ended September 30, 2009, a $5,794 or 12.3% increase. The table below explains the increase in revenue:
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The Ingredients Group gross margin increased by $4,988 to $16,216 for the three quarters ended October 2, 2010 compared to $11,228 for the three quarters ended September 30, 2009, and the gross margin percentage increased by 6.8% to 30.6%. Higher fiber volumes, combined with lower raw material costs, improved pricing and continued process improvements implemented in our manufacturing facilities led to increased gross margin and rates versus the three quarters ended September 30, 2009. The table below explains the increase in gross margin:
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Operating income in the Ingredients Group increased by $4,751, or 85.3% to $10,322 for the three quarters ended October 2, 2010, compared to $5,571 for the three quarters ended September 30, 2009. The table below explains the increase in operating income:
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Fruit Group | ||||||||||||
For the three quarters ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 119,476 | 113,331 | 6,145 | 5.4% | ||||||||
Gross Margin | 16,098 | 9,746 | 6,352 | 65.2% | ||||||||
Gross Margin % | 13.5% | 8.6% | 4.9% | |||||||||
Operating Income | 3,867 | (2,279 | ) | 6,146 | 269.7% | |||||||
Operating Income % | 3.2% | –2.0% | 5.2% |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
The Fruit Group contributed $119,476 in revenues for the three quarters ended October 2, 2010, compared to $113,331 for the three quarters ended September 30, 2009, a $6,145 or 5.4% increase. The table below explains the increase in revenue:
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Gross margins in the Fruit Group increased by $6,352 to $16,098 for the three quarters ended October 2, 2010 compared to $9,746 for the three quarters ended September 30, 2009, and the gross margin percentage increased by 4.9% to 13.5%. The increase in gross margin as a percentage of revenue is due to liquidation and rationalization costs incurred in the third quarter of 2009 that did not reoccur in the third quarter of 2010, improved pricing as well as production efficiencies at our fruit ingredient and frozen foods operations, and cost benefits realized from process improvement initiatives implemented in our healthy fruit snacks operations. The table below explains the increase in gross margin:
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Operating income in the Fruit Group increased by $6,146, or 269.7% to $3,867 for the three quarters ended October 2, 2010, compared to a loss of $2,279 for the three quarters ended September 30, 2009. The table below explains the increase in operating income:
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International Foods Group | ||||||||||||
For the three quarters ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 178,753 | 163,147 | 15,606 | 9.6% | ||||||||
Gross Margin | 28,313 | 22,468 | 5,845 | 26.0% | ||||||||
Gross Margin % | 15.8% | 13.8% | 2.0% | |||||||||
Operating Income | 2,173 | (3,646 | ) | 5,819 | 159.6% | |||||||
Operating Income % | 1.2% | –2.2% | 3.4% |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
The International Foods Group contributed $178,753 in revenues for the three quarters ended October 2, 2010, compared to $163,147 for the three quarters ended September 30, 2009, a $15,606 or 9.6% increase. The table below explains the increase in revenue:
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Gross margins in the International Foods Group increased by $5,845 to $28,313 for the three quarters ended October 2, 2010 compared to $22,468 for the three quarters ended September 30, 2009, and the gross margin percentage increased by 2.0% to 15.8%. The increase in margin rate was generated by improved contract pricing on certain organic ingredients at The Organic Corporation, a reduction in spending incurred in 2009 to support brand re–launches of natural health products, and sales from new products at higher margins within our Consumer Product Solutions operation. The table below explains the increase in gross margin:
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Operating income in the International Foods Group increased by $5,819, or 159.6%, to $2,173 for the three quarters ended October 2, 2010, compared to ($3,646) for the three quarters ended September 30, 2009. The table below explains the increase in operating income:
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Opta Minerals | ||||||||||||
For the three quarters ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Revenue | 59,493 | 45,810 | 13,683 | 29.9% | ||||||||
Gross Margin | 15,174 | 9,596 | 5,578 | 58.1% | ||||||||
Gross Margin % | 25.5% | 20.9% | 4.6% | |||||||||
Operating Income | 6,224 | 429 | 5,795 | 1350.8% | ||||||||
Operating Income % | 10.5% | 0.9% | 9.6% |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
Opta Minerals contributed $59,493 in revenues for the three quarters ended October 2, 2010, compared to $45,810 for the three quarters ended September 30, 2009, a $13,683 or 29.9% increase. The table below explains the increase in revenue:
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Gross margin for Opta Minerals increased by $5,578 to $15,174 for the three quarters ended October 2, 2010 compared to $9,596 for the three quarters ended September 30, 2009, and the gross margin percentage increased by 4.6% to 25.5%. The increase in gross margin as a percentage of revenue is due primarily to volume increases plus cost reduction measures undertaken by management of Opta Minerals during fiscal 2009. The table below explains the increase in gross margin:
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Operating income for Opta Minerals increased by $5,795, or 1350.8%, to $6,224 for the three quarters ended October 2, 2010, compared to $429 for the three quarters ended September 30, 2009. The table below explains the increase in operating income:
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Corporate Services | ||||||||||||
For the three quarters ended | October 2, 2010 | September 30, 2009 | Change | % Change | ||||||||
Operating Loss | (8,631 | ) | (4,855 | ) | (3,776 | ) | –77.8% |
(Operating Income is defined as “Earnings before the following” excluding the impact of “Other expense (income), net”, and "Goodwill impairment")
Operating loss at SunOpta Corporate Services increased by $3,776 to $8,631 for the three quarters ended October 2, 2010, from costs of $4,855 for the three quarters ended September 30, 2009. The table below explains the increase in operating loss:
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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 divisions, 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. As a result of the sale of the Canadian Food Distribution business and SunOpta BioProcess, a portion of the corporate management fees previously charged to these groups was reallocated as an expense of the Corporate Services operating segment. The operating loss for Corporate Services for the three quarters ended September 30, 2009 has been adjusted to reflect this change.
Liquidity and Capital Resources (at OctoberApril 2, 2010)2011)
We obtain our short–termshort-term financing through a combination of cash generated from operating activities, cash and cash equivalents, and available operating lines of credit. At OctoberApril 2, 2010,2011, we had availability under certain lines of credit of approximately $85,624 (December 31, 2009 – $69,817)$41,400 (January 1, 2011 - $63,181).
We have the following sources from which we can fund our operating cash requirements:
Included in cash and cash equivalents at OctoberApril 2, 20102011 is $909 (December 31, 2009 – $781)$3,519 (January 1, 2011 - $495) that is specific to Opta Minerals and cannot be used for general corporate purposes.
We intend to target a long term debt to equity ratio in the range of approximately 0.30 –- 0.50 to 1.00 versus the current position at OctoberApril 2, 20102011 of 0.250.22 to 1.00 (December 31, 2009 – 0.37(January 1, 2011 - 0.22 to 1.00) and a total debt ratio in the range of 0.50 –- 0.70 to 1.00 versus our current position of 0.330.62 to 1.00 (December 31, 2009 – 0.65(January 1, 2011 - 0.48 to 1.00).
On June 11, 2010, we completed the sale of our Canadian Food Distribution assets for cash proceeds of approximately Cdn $68,000, less transaction and related closing costs of approximately $4,937. This cash improved our overall liquidity position by reducing total debt, as well as lowering interest costs related to our syndicated banking facilities.
On August 31, 2010, we completed the sale of all the outstanding common shares of SunOpta BioProcess Inc. for non–cash consideration in the form of a combination of preferred and common shares of Mascoma Corporation. Apart from cash costs of approximately $3,478, this transaction did not have a significant impact on our overall liquidity position.
On November 8, 2010, we completed the acquisition of 100% of the outstanding shares of Dahlgren & Company Inc. for cash consideration of $44,000. The acquisition was financed with cash and our U.S. line of credit facility. The transaction decreased our overall liquidity position by increasing total debt, and increasing interest costs related to our syndicated banking facilities.
In order to finance significant acquisitions that may arise in the future, we may need additional sources of cash which we could attempt to obtain through a combination of additional bank or subordinated financing, a private or public offering, or the issuance of securities in relation to an acquisition or a divestiture. There can be no assurance that such 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 favorablefavourable terms, if at all, could be limited.
Cash flows – Three QuartersQuarter Ended OctoberApril 2, 20102011 compared to the Three QuartersQuarter Ended September 30, 2009April 3, 2010
Net cash and cash equivalents increased by $344$3,077 during the first three quartersquarter of 2011 (first quarter of 2010 (first three quarters of 2009 – decreased- increased by $4,034)$1,617) to $21,067$5,720 at OctoberApril 2, 2010.2011. The increase in cash and cash equivalents was primarily the result of gross cash proceedsincreased net debt borrowings of $65,809 received from the sale of the Canadian Food Distribution business that occurred on June 11, 2010 and cash provided by operations of $17,005,$40,584, offset by $39,155 of cash applied to line of credit facilities, $16,327 of cash used to repay long–term debt, $13,545 of cash used for capital expenditures and $12,142 of cash sold in the divesture of SunOpta BioProcess Inc.
Operating activities generated $17,005 of cash during the three quarters ended October 2, 2010, compared to $26,221 in the three quarters ended September 30, 2009. Excluding cash flows from operating activities of discontinued operations, cash flows from$33,903 and spending on property, plant and equipment of $3,909.
Cash used by operating activities offrom continuing operations decreased by $5,585. The decrease in cash generated from operating activitieswas $33,903 in the first three quartersquarter of 2010 is due2011, an increase of $20,319 compared to $25,062 morethe first quarter of 2010. The primary reason for the increased use of cash in operating activities was an $19,974 increase in cash used to fund working capital primarilyin the first quarter of 2011, due mainly to increaseda $28,068 increase in cash used to fund higher inventory andinventories, offset by a reduction in cash used to fund accounts receivable balances, offset byof $6,923 and a $3,393 reduction in cash provided byused to fund accounts payable and accrued liabilities. The increase in cash used to fund inventories is largely due to significant increases in commodity pricing which caused certain inventory to be costed at higher levels and also contributed to increased holdings of certain products including corn, soy and sunflower which we were able to procure in advance of expected price increases. The reduction in cash used to fund accounts receivable is largely due to an improvement in collection time, as during the first quarter of 2010 several of our customers extended their payments terms. The cash used to fund accounts payable and accrued liabilities balances and a $18,075 increase in earnings from continuing operations. Cash used by changes in inventory was $27,515 higher in the first three quarters of 2010 compared to the same period in 2009 which reflects the intense focus in 2009 to reduce inventory to lower levels, these efforts have stabilized in 2010 and consolidated inventory balances are largely consistent year–over–year. Cash used by changes in accounts receivable was $11,206 higher in the first three quarters of 2010 compared to the same period in 2009increased purchasing volume due in part, to higher sales levels and the extending of payment terms by some of our customers. Offsetting these uses of cash during the third quarter of 2010 was an increase in cash provided by changes in accounts payable and accrued liabilities of $13,503 compared to the same period in 2009. This increase is consistent with a higher day’s payables outstanding to our suppliers of 48.7 days at October 2, 2010 compared to 44.1 days at December 31, 2009. Cash flow from continuing operations for the first three quarters of 2010, after adding back items not affecting cash, increased by $19,477 as compared to the first three quarters of 2009, primarily due to an increase of $18,075 in earnings from continuing operations for the period.inventory purchases.
Cash used in investing activities of continuing operations was $14,385$3,990 in the first three quartersquarter of 2010,2011, compared to $11,395$6,185 in the same periodfirst quarter of 2009.2010. The increasedecrease in cash used of $2,990$2,195 is primarily due to higherlower capital spending in the current year. Significant purchases of property, plant and equipment in the first three quartersquarter of 20102011 include the expansion of our fiber facility in Cedar Rapids to increase processing capacity, spending on our new aseptic packaging line at our fruit ingredient operation, a methane extraction projectthe renovation of our frozen foods processing and packaging operation and equipment upgrades on our aseptic processing equipment at our Cambridge oat fiber ingredientAlexandria, Minnesota facility andas well as other plant–specificplant-specific improvement projects and general maintenance of viability projects across the organization. Cash providedused in investing activities from continuing operations for the quarter ended April 2, 2010 also included a $500 payment of deferred purchase consideration related to a previous acquisition. Cash used by investing activities of discontinued operations in the three quartersquarter ended OctoberApril 2, 2010 includes $65,809 of cash proceeds received on the sale of the Canadian food distribution assets, offset by $12,142 of cash sold in the divesture of SunOpta BioProcess Inc. andrepresents purchases of property, plant and equipment made withinby the discontinued operations.
SUNOPTA INC. | 40 | April 2, 2011 10-Q |
Financing activities usedprovided cash of $54,672$40,800 in the first three quartersquarter of 20102011 compared to $18,017$22,303 in the same period of 2009,2010, an increase in cash used of $36,655.$18,497. The increase in cash usedprovided reflects the applicationincreased borrowings of proceeds generated from the sale of the Canadian food distribution to pay down$19,165 on our U.S. line of credit facility and to repay $11,284 of our term loan facility in accordance with the terms of the loan agreement. Excluding changes in line of credit facilities andmainly to fund the mandatoryworking capital increases noted above, offset by $865 higher net repayments against our long-term debt repayment in 2010, cash used in financing activities during the first three quartersquarter of 2010 was $4,233, compared2011 based on the amendments to $8,267 in the same period of 2009, dueour syndicate banking facilities completed on December 20, 2010.
Off – Balance Sheet arrangements
There are currently no off-balance sheet arrangements that have or are reasonably likely to lower long–term debt repayments.have a current or future material effect on our financial condition.
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
All financial numbers presented in this “Item 3. Quantitative and Qualitative Disclosures about Market Risk” are expressed in thousands of U.S. dollar,dollars, unless otherwise noted.
Interest rate risk
The primary objective of our investment activities is to preserve principal and limit risk. To achieve this objective, we may invest in a variety of securities, including both government and corporate obligations and money market funds. These securities are generally classified as cash and cash equivalents or short–termshort-term investments and are recorded on the balance sheet at fair value with unrealized gains or losses reported on the consolidated statements of operations and comprehensive income. As at OctoberApril 2, 20102011 all of SunOpta’s excess funds were held in cash and cash equivalents with a maturity less than 90 days.
Debt in both fixed rate and floating rate interest carry different types of interest rate risk. FixedThe fair market value of fixed rate debt may have their fair market valuebe adversely affected by a decline in interest rates. In general, longer dateterm debts are subject to greater interest rate risk than shorter datedterm securities. Floating rate term debt gives less predictability to cash flows as interest rates change. As at OctoberApril 2, 2010,2011, the weighted average interest rate of theour fixed rate term debt was 6.6% (December 31, 2009 – 8.5%4.7% (January 1, 2011 - 4.5%) and $67,114 (December 31, 2009 – $83,449)$61,887 (January 1, 2011 - $61,669) of the Company’s outstanding term debt is at fixed interest rates. Variable rate term debt of $3,911 (December 31, 2009 – $3,911)$3,093 (January 1, 2011 - $3,313) at an interest rate of 6.1% (December 31, 2009 – 5.8%5.5% (January 1, 2011 - 5.6%) is partially hedged by variable rate cash equivalent investments. The Company looks at varying factors to determine the percentage of debt to hold at fixed rates including the interest rate spread between variable and fixed (swap rates), the Company’s view on interest rate trends, the percent of offset to variable rate debt through holding variable rate investments and the companiesCompany’s ability to manage with interest rate volatility and uncertainty. For every 1% increase (decrease) in interest rates on variable rate term debt the Company’s after tax earnings would (decrease) increase by approximately $30 (December 31, 2009 – 5.8%)$20 (January 1, 2011 - $25).
Foreign currency risk
All U.S. subsidiaries use the U.S. dollar as their functional currency and the U.S. dollar is also our reporting currency. The functional currency of all operations located in Canada is the Canadian dollar, except for SunOpta BioProcess and Opta Minerals, each of which uses the U.S. dollar as its functional currency. The functional currency of all operations located in Europe is the Euro. For these operations, all transaction gains or losses in relation to the U.S. dollar are recorded as foreign exchange gain (loss) in the consolidated statements of operations while gains (losses) on translation of net assets to U.S. dollars on consolidation are recorded in Accumulated Other Comprehensive Income within Shareholders’ Equity. The functional currency of the corporate headCorporate office is the U.S. dollar. For the Corporate office, transaction gains or losses as well as translation gains and losses on monetary assets and liabilities are recorded within foreign exchange gain or loss on the consolidated statements of operations.
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We are exposed to foreign exchange rate fluctuations as the financial results of SunOpta and its Canadian and European subsidiaries are translated into U.S. dollars on consolidation. The Canadian dollar appreciated relative to the U.S. dollar in the first three quartersquarter of 2010,2011, with closing rates moving from Cdn $1.0205$0.9946 at December 31, 2009January 1, 2011 to Cdn $1.0510$0.9644 at OctoberApril 2, 20102011 for each U.S. dollar. The Euro depreciatedappreciated against the U.S. dollar over the first three quartersquarter of 2010,2011, with closing rates moving from $1.4316$1.3391 at December 31, 2009January 1, 2011 to $1.3780$1.4222 at OctoberApril 2, 2010.2011. As a result of the appreciation of the Canadian dollar, and the sale of Canadian denominated assets to UNFI, and the depreciationappreciation of the Euro against the U.S. dollar in the first three quartersquarter of 2010,2011, we had decrease of $4,400 (December 31, 2009 –experienced a decrease of $12,623)$37 (January 1, 2011 - a decrease of $4,111) in Canadian denominated net Canadian assets and an increase of € 1,162 (December 31, 2009 –446 (January 1, 2011 - increase of € 332)175) in Euro denominated net Euro.assets. A 10% movement in the levels of foreign currency exchange rates in favour of (against) the Canadian dollar or Euro with all other variables held constant would result in an increase (decrease) in the fair value of our net assets by $2,518 (December 31, 2009 – $8,553)$2,693 (January 1, 2011 - $2,616) for a Canadian dollar exchange movement and $2,287 (December 31, 2009 – $2,134)$2,398 (January 1, 2011 - $2,090) for a Euro exchange movement.
SunOpta Foods’ operations based in the U.S. have limited exposure to other currencies since almost all sales and purchases are made in U.S. dollars. The Canadian based subsidiaries have significant transaction exposure as their sales are predominantly in Canadian dollars while a substantial portion of their purchases are in U.S. dollars. The European operations are also exposed to various currencies as they purchase product from a wide variety of countries in several currencies and primarily sell into the European market. It is the Company’s intention to hold excess funds in the currency in which the funds are likely to be used, which will from time to time potentially expose the Company to exchange rate fluctuations when converted into U.S. dollars.
WeOne of our foreign subsidiaries routinely enters into purchase and sale contracts which are not denominated in its functional currency. These purchase and sale contracts are subject to currency risk, due to movements in the underlying foreign currencies. For the quarter ended April 2, 2011, changes in the underlying foreign currencies of these purchase and sale contracts led to an unrealized gain of $700, which was recorded as a reduction in cost of goods sold on our consolidated statement of operations.
In addition, we enter into forward foreign exchange contracts to reduce exposure to fluctuations in foreign currency exchange rates. Open forward foreign exchange contracts were marked–to–marketmarked-to-market at OctoberApril 2, 2010,2011, resulting in a loss of $576 (January 1, 2011 - gain of $447 (December 31, 2009 – gain of $392);$244) which is included in foreign exchange on the consolidated statements of operations. In 2009, we began taking a more active role in an attempt to reduce exposure to foreign currency exchange rates by entering into forward foreign exchange contracts. The contracts entered into are primarily Canadian dollars and U.S. dollars as well as U.S. dollars and Euros. The net effect of all exchange based transactions, including realized foreign exchange contracts, unrealized open contracts and all other foreign exchange transactions, and including the translation gains and losses related to our Corporate net monetary assets, are recorded in foreign exchange on our consolidated statements of operations. For the three quartersquarter ended OctoberApril 2, 2010,2011, we recorded a gainloss of $1,494 (December 31, 2009 –$135 (January 1, 2011 - a gain of $156)$1,117).
The functional currency of all operations, located in Canada, is the Canadian dollar. For these operations all transaction gains or losses in relation to the U.S. dollar are recorded as foreign exchange gain (loss) in the Consolidated Statement of Earnings while gains (losses) on translation of net assets to U.S. dollars on consolidation are recorded in the Currency Translation Adjustment account within Shareholders’ Equity. The functional currency of the corporate head office is the Canadian dollar. Transaction gains or losses as well as translation gains and losses on monetary assets and liabilities are recorded within foreign exchange gains (losses) on the consolidated statement of operations. U.S. based SunOpta Foods’ operations have limited exposure to other currencies since almost all sales and purchases are made in U.S. dollars. It is the Company’s intention to hold excess funds in the currency in which the funds are likely to be used, which will from time to time potentially expose the Company to exchange rate fluctuations when converted into U.S. dollars.
Commodity risk
SunOpta Foods enters into exchange–tradedexchange-traded commodity futures and options contracts to hedge its exposure to price fluctuations on grain and certain other commodity transactions to the extent considered practicable for minimizing risk from market price fluctuations. Futures contracts used for hedging purposes are purchased and sold through regulated commodity exchanges. Inventories, however, may not be completely hedged, due in part to the Company’s assessment of its exposure from expected price fluctuations. Exchange purchase and sales contracts may expose the Company to risk in the event that a counter–partycounter-party to a transaction is unable to fulfill its contractual obligation. The Company manages its risk by entering into purchase contracts with pre–approvedpre-approved producers.
The Company has a risk of loss from hedge activity if a grower does not deliver as scheduled. Sales contracts are entered into with organizations of acceptable creditworthiness, as internally evaluated. All futures transactions are marked to market. Gains and losses on futures transactions related to grain inventories are included in cost of goods sold. At OctoberApril 2, 20102011 the Company owned 238,875 (December 31, 2009 – 425,282)547,724 (January 1, 2011 - 615,087) bushels of corn with a weighted average price of $4.27 (December 31, 2009 – $4.02)$7.09 (January 1, 2011 - $6.09) and 519,998 (December 31, 2009 – 577,041)1,056,269 (January 1, 2011 - 878,413) bushels of soy beans with a weighted average price of $11.82 (December 31, 2009 – $10.83)$14.04 (January 1, 2011 - $13.87). At OctoberApril 2, 2010,2011, the Company has a net longshort position on soy beans of 94,414 (December 31, 2009 – 20,834)5,903 (January 1, 2011 - 79,286) and a net long position on corn of 653,851 (December 31, 2009 – 58,140)114,924 (January 1, 2011 - 101,979) bushels. An increase/decrease in commodity prices of either soy or corn of 10% would result in an increase (decrease) in carrying value of these commodities by $391 (December 31, 2009 – $46)$73 (January 1, 2011 - $172). Although our corn and soybean positions can be hedged using futures transactions to reduce exposure to price fluctuations, there are other commodities, such as sunflowers and other grain ingredients, that cannot be hedged as effectively, because similar instruments are not available.
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In addition, the International Foods Group hedges the purchase of cocoa to minimize price fluctuations. Other than noted above, there are no futures contracts in the other SunOpta Foods segments, Opta Minerals or related to Corporate office activities.
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)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 OctoberApril 2, 2010.2011.
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)13a-15(f) promulgated under the Exchange Act) occurred during the thirdfirst quarter of fiscal 2010.2011. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the thirdfirst quarter of 2010fiscal 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II –- OTHER INFORMATION.
Item 1. Legal Proceedings
From time to time, we are involved in litigation incident to the ordinary conduct of our business. For a discussion of certain legal proceedings, see “Note 10. Commitmentsnote 10 “Commitments and Contingencies” to our consolidated financial statements included elsewhere in this report. Although disposition of our pending litigation is currently not expected by management to have a material adverse effect on our business, results of operation or financial condition, there matters are subject to inherent uncertainties and management’s view of these matters may change in the future.
Item 1A. Risk Factors
Certain risks associated with our operations are discussed in our Annual Report on Form 10–K10-K for the year ended December 31, 2009,January 1, 2011, under the heading “Risk Factors” in Item 1A of that report. There have been no material changes to the previously–previously reported Risk Factors as of the date of this quarterly report. All of such previously–reportedpreviously-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 provide updates to the previously–reported Risk Factors.
Our lack of management and operational control over Mascoma may prevent us from taking or causing to be taken actions to protect or increase the value of our interest in Mascoma
Following the SBI Transaction, we have a 19.65% ownership interest in Mascoma, through a combination of preferred and common shares. We do not have the ability to exercise day–to–day control over Mascoma. The management team of Mascoma could make business decisions without our consent that could impair the economic value of our interest in Mascoma. In addition, we have no ability to cause Mascoma to take actions that might be to our benefit, including but not limited to actions relating to a change of control of Mascoma and declarations of dividends to Mascoma’s stockholders. For the foregoing reasons, our lack of control over Mascoma could have an adverse impact on our investment in Mascoma.
We have continuing indemnification obligations relating to our recent dispositions.
On June 11, 2010, we sold our Canadian Food Distribution business (the “CFD Transaction”) to UNFI Canada, Inc. (“UNFI”), and on September 1, 2010, we sold 100% of our ownership in SunOpta BioProcess Inc. (the “SBI Transaction”) to Mascoma Canada Inc. (“Mascoma”). Pursuant to the terms of the agreements governing the CFD Transaction and the SBI Transaction, we agreed to indemnify the purchasers for losses incurred due to breaches of specified representations, warranties and covenants and for certain other matters, subject to the limitations set forth in those agreements. With respect to the SBI Transaction, in support of our indemnification obligations, certain of the shares of common stock and preferred stock of Mascoma issued to us in connection with the SBI Transaction are being be held in escrow to satisfy any indemnification claims made by Mascoma following the closing. In the event that UNFI, Mascoma or their respective affiliates make indemnification claims against us and are successful in those indemnification claims, we may become liable for money damages to the indemnified parties, or we may lose our rights to our Mascoma shares (with respect to the SBI Transaction). Also, any indemnification claims could require us to incur substantial expense and our management may have to devote a substantial amount of time resolving or defending against such claims. Any such payment or expense relating to an indemnification claim could significantly reduce the benefits that we anticipated receiving from the applicable transaction and could adversely affect our business, financial condition and results of operations.
Item 6. Exhibits
The list of exhibits in the Exhibit Index is incorporated herein by reference.
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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 hereuntothereunto duly authorized.
Date: November 10, 2010
SUNOPTA INC.
/s/ Eric Davis SUNOPTA INC. /s/ Eric Davis Date: May 12, 2011 by Eric Davis Vice President and Chief Financial Officer SunOpta Inc. by Eric DavisVice President and Chief Financial OfficerSunOpta Inc.
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EXHIBIT INDEX
Exhibit No. | Description | ||
31.1 | |||
31.2 | |||
32 | |||
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