SunOpta Inc.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 4, 2014

OR

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

For the transition period from to .

Commission file number: 001-34198

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

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

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

Yes [X]      No [_]

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

Yes [X]      No [_]

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

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

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

Yes [_]      No [X]

The number of the registrant’s common shares outstanding as of November 7, 2014 was 67,037,866.


SUNOPTA INC.
FORM 10-Q
For the quarterly period ended October 4, 2014

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 
Item 1.

Financial Statements (unaudited)

 

Consolidated Statements of Operations for the quarter and three quarters ended October 4, 2014 and September 28, 2013

5

Consolidated Statements of Comprehensive Earnings for the quarter and three quarters ended October 4, 2014 and September 28, 2013

6
 

Consolidated Balance Sheets as at October 4, 2014 and December 28, 2013

7

Consolidated Statements of Shareholders’ Equity as at and for the three quarters ended October 4, 2014 and September 28, 2013

8

Consolidated Statements of Cash Flows for the quarter and three quarters ended October 4, 2014 and September 28, 2013

9
 

Notes to Consolidated Financial Statements

10
 

 
Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23
Item 3

Quantitative and Qualitative Disclosures about Market Risk

50
Item 4

Controls and Procedures

50
 

 
 

 
PART II

OTHER INFORMATION

 
Item 1

Legal Proceedings

52
Item 1A

Risk Factors

52
Item 6

Exhibits

52

Basis of Presentation

Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (“Form 10-Q”) to the “Company”, “SunOpta”, “we”, “us”, “our” or similar words and phrases are to SunOpta Inc. and its subsidiaries, taken together.

In this report, all currency amounts are expressed in thousands of United States (“U.S.”) dollars (“$”), except per share amounts, unless otherwise stated. Amounts expressed in Canadian dollars are expressed in thousands of Canadian dollars and preceded by the symbol “Cdn $”, and amounts expressed in euros are expressed in thousands of euros and preceded by the symbol “€”. As at October 4, 2014, the closing rates of exchange for the U.S. dollar, expressed in Canadian dollars and euros, were $1.00 = Cdn $1.1259 and $1.00 = €0.7992. These rates are provided solely for convenience and do not necessarily reflect the rates used in the preparation of our financial statements.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements which are based on our current expectations and assumptions and involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and are typically accompanied by words such as “anticipate”, “estimate”, “intend”, “project”, “potential”, “continue”, “believe”, “expect”, “could”, “would”, “should”, “might”, “plan”, “will”, “may”, “predict”, the negatives of such terms, and words and phrases of similar impact and include, but are not limited to references to possible operational consolidation, reduction of non-core assets and operations, business strategies, plant and production capacities, revenue generation potential, anticipated construction costs, competitive strengths, goals, capital expenditure plans, business and operational growth and expansion plans, anticipated operating margins and operating income targets, gains or losses associated with business transactions, cost reductions, rationalization and improved efficiency initiatives, proposed new product offerings, and references to the future growth of the business and global markets for the Company’s products. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on certain assumptions and analyses we make in light of our experience and our interpretation of current conditions, historical trends and expected future developments, as well as other factors that we believe are appropriate in the circumstance.

SUNOPTA INC. 2 October 4, 2014 10-Q

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

SUNOPTA INC. 3 October 4, 2014 10-Q

Consequently all forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that our actual results or the developments we anticipate will be realized. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 (“Form 10-K”). For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read the “Risk Factors” section at Item 1A of the Form 10-K and Item 1A of this report.

SUNOPTA INC. 4 October 4, 2014 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SunOpta Inc.
Consolidated Statements of Operations
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)

 

  Quarter ended     Three quarters ended  

  October 4, 2014     September 28, 2013     October 4, 2014     September 28, 2013  

 

$   $   $   $  

 

                       

Revenues

  318,545     302,723     990,360     896,718  

 

                       

Cost of goods sold

  280,811     271,240     871,130     794,002  

 

                       

Gross profit

  37,734     31,483     119,230     102,716  

 

                       

Selling, general and administrative expenses

  24,608     20,678     74,826     66,428  

Intangible asset amortization

  1,028     1,180     3,248     3,628  

Other expense (income), net (note 9)

  98     787     (906 )   1,799  

Goodwill impairment

  -     3,552     -     3,552  

Foreign exchange gain

  (600 )   (211 )   (377 )   (1,152 )

 

                       

Earnings from continuing operations before the following

  12,600     5,497     42,439     28,461  

 

                       

Interest expense, net

  1,970     1,957     6,128     5,885  

Impairment loss on investment (note 6)

  8,441     -     8,441     21,495  

 

                       

Earnings from continuing operations before income taxes

  2,189     3,540     27,870     1,081  

 

                       

Provision for income taxes

  2,416     1,343     12,480     8,576  

 

                       

Earnings (loss) from continuing operations

  (227 )   2,197     15,390     (7,495 )

 

                       

Loss from discontinued operations, net of income taxes (note 3)

  -     -     -     (360 )

 

                       

Earnings (loss)

  (227 )   2,197     15,390     (7,855 )

 

                       

Earnings (loss) attributable to non-controlling interests

  157     (716 )   426     (612 )

 

                       

Earnings (loss) attributable to SunOpta Inc.

  (384 )   2,913     14,964     (7,243 )

 

                       

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

                       

   - from continuing operations

  (0.01 )   0.04     0.22     (0.10 )

   - from discontinued operations

  -     -     -     (0.01 )

 

  (0.01 )   0.04     0.22     (0.11 )

 

                       

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

                       

   - from continuing operations

  (0.01 )   0.04     0.22     (0.10 )

   - from discontinued operations

  -     -     -     (0.01 )

 

  (0.01 )   0.04     0.22     (0.11 )

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 5 October 4, 2014 10-Q


SunOpta Inc.
Consolidated Statements of Comprehensive Earnings
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

  Quarter ended     Three quarters ended  

  October 4, 2014     September 28, 2013     October 4, 2014     September 28, 2013  

 

$   $   $   $  

 

                       

Earnings (loss) from continuing operations

  (227 )   2,197     15,390     (7,495 )

Loss from discontinued operations, net of income taxes

  -     -     -     (360 )

Earnings (loss)

  (227 )   2,197     15,390     (7,855 )

 

                       

Currency translation adjustment

  (3,656 )   1,616     (4,126 )   1,108  

Change in fair value of interest rate swap, net of taxes (note 4)

  46     (66 )   10     154  

Other comprehensive income (loss), net of income taxes

  (3,610 )   1,550     (4,116 )   1,262  

 

                       

Comprehensive earnings (loss)

  (3,837 )   3,747     11,274     (6,593 )

 

                       

Comprehensive earnings (loss) attributable to non-controlling interests

  20     (637 )   368     (341 )

 

                       

Comprehensive earnings (loss) attributable to SunOpta Inc.

  (3,857 )   4,384     10,906     (6,252 )

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 6 October 4, 2014 10-Q


SunOpta Inc.
Consolidated Balance Sheets
As at October 4, 2014 and December 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

  October 4, 2014     December 28, 2013  

 

$   $  

 

           

ASSETS

           

Current assets

           

   Cash and cash equivalents (note 11)

  7,429     8,537  

   Accounts receivable

  136,662     109,917  

   Inventories (note 5)

  240,122     274,286  

   Prepaid expenses and other current assets

  21,458     16,067  

   Current income taxes recoverable

  3,541     6,116  

   Deferred income taxes

  3,809     4,806  

 

  413,021     419,729  

 

           

Investment (note 6)

  4,780     12,350  

Property, plant and equipment

  150,677     158,073  

Goodwill

  52,566     53,673  

Intangible assets

  42,744     47,991  

Deferred income taxes

  11,835     12,565  

Other assets

  1,896     1,554  

 

           

 

  677,519     705,935  

 

           

LIABILITIES

           

Current liabilities

           

   Bank indebtedness (note 7)

  108,186     141,853  

   Accounts payable and accrued liabilities

  122,462     129,829  

   Customer and other deposits

  4,249     3,408  

   Income taxes payable

  999     2,564  

   Other current liabilities

  7,760     2,114  

   Current portion of long-term debt (note 7)

  5,916     6,354  

   Current portion of long-term liabilities

  257     1,034  

 

  249,829     287,156  

 

           

Long-term debt (note 7)

  36,671     42,654  

Long-term liabilities

  1,649     3,072  

Deferred income taxes

  29,604     30,441  

 

  317,753     363,323  

 

           

EQUITY

           

SunOpta Inc. shareholders’ equity

           

   Common shares, no par value, unlimited shares authorized,

           

   67,040,176 shares issued (December 28, 2013 - 66,527,691)

  190,318     186,376  

   Additional paid-in capital

  21,261     19,323  

   Retained earnings

  131,172     116,208  

   Accumulated other comprehensive income (loss)

  (661 )   3,397  

 

  342,090     325,304  

Non-controlling interests

  17,676     17,308  

Total equity

  359,766     342,612  

 

           

 

  677,519     705,935  

Commitments and contingencies (note 12)

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 7 October 4, 2014 10-Q


SunOpta Inc.
Consolidated Statements of Shareholders’ Equity
As at and for the three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

                          Accumulated              

 

              Additional           other com-              

 

              paid-in     Retained     prehensive     Non-controlling        

 

  Common shares     capital     earnings     income (loss)     interests     Total  

 

  000s   $   $   $   $   $   $  

 

                                         

Balance at December 28, 2013

  66,528     186,376     19,323     116,208     3,397     17,308     342,612  

 

                                         

Employee stock purchase plan

  44     470     -     -     -     -     470  

Exercise of options

  468     3,472     (946 )   -     -     -     2,526  

Stock-based compensation

  -     -     2,884     -     -     -     2,884  

Earnings from continuing operations

  -     -     -     14,964     -     426     15,390  

Currency translation adjustment

  -     -     -     -     (4,065 )   (61 )   (4,126 )

Change in fair value of interest rate swap, net of income taxes (note 4)

  -     -     -     -     7     3     10  

 

                                         

Balance at October 4, 2014

  67,040     190,318     21,261     131,172     (661 )   17,676     359,766  

 

                          Accumulated              

 

              Additional           other com-              

 

              paid-in     Retained     prehensive     Non-controlling        

 

  Common shares     capital     earnings     income     interests     Total  

 

  000s   $   $   $   $   $   $  

 

                                         

Balance at December 29, 2012

  66,007     183,027     16,855     124,732     1,537     17,384     343,535  

 

                                         

Employee stock purchase plan

  64     419     -     -     -     -     419  

Exercise of options

  389     2,455     (839 )   -     -     -     1,616  

Stock-based compensation

  -     -     2,422     -     -     -     2,422  

Earnings from continuing operations

  -     -     -     (6,883 )   -     (612 )   (7,495 )

Loss from discontinued operations, net of income taxes

  -     -     -     (360 )   -     -     (360 )

Currency translation adjustment

  -     -     -     -     889     219     1,108  

Change in fair value of interest rate swap, net of income taxes (note 4)

  -     -     -     -     102     52     154  

 

                                         

Balance at September 28, 2013

  66,460     185,901     18,438     117,489     2,528     17,043     341,399  

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 8 October 4, 2014 10-Q


SunOpta Inc.
Consolidated Statements of Cash Flows
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars)

 

  Quarter ended     Three quarters ended  

  October 4, 2014     September 28, 2013     October 4, 2014     September 28, 2013  

 

$   $   $   $  

 

                       

CASH PROVIDED BY (USED IN)

                       

 

                       

Operating activities

                       

Earnings (loss)

  (227 )   2,197     15,390     (7,855 )

Loss from discontinued operations

  -     -     -     (360 )

Earnings (loss) from continuing operations

  (227 )   2,197     15,390     (7,495 )

 

                       

Items not affecting cash:

                       

   Depreciation and amortization

  5,962     5,494     17,748     16,343  

   Stock-based compensation

  1,079     881     2,884     2,422  

   Unrealized loss on derivative instruments (note 4)

  1,802     1,950     2,021     2,892  

   Deferred income taxes

  (988 )   (1,747 )   890     (242 )

   Impairment loss on investment (note 6)

  8,441     -     8,441     21,495  

   Gain on sale of assets (note 9)

  (1,018 )   -     (1,018 )   -  

   Fair value of contingent consideration (note 9)

  -     -     (1,373 )   -  

   Impairment of long-lived assets

  505     310     505     310  

   Goodwill impairment

  -     3,552     -     3,552  

   Other

  191     (766 )   7     (663 )

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

  2,253     (1,862 )   (6,909 )   (6,847 )

Net cash flows from operations - continuing operations

  18,000     10,009     38,586     31,767  

Net cash flows from operations - discontinued operations

  -     -     -     (4,608 )

 

  18,000     10,009     38,586     27,159  

 

                       

Investing activities

                       

Purchases of property, plant and equipment

  (5,258 )   (10,797 )   (12,545 )   (32,773 )

Increase in long-term investment (note 6)

  (871 )   -     (871 )   -  

Payment of contingent consideration (note 4)

  -     -     (800 )   (1,074 )

Proceeds from sale of assets (note 9)

  5,688     -     5,688     -  

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

  -     -     -     (3,828 )

Decrease in restricted cash

  -     6,495     -     6,495  

Other

  41     342     85     (496 )

Net cash flows from investing activities - continuing operations

  (400 )   (3,960 )   (8,443 )   (31,676 )

 

                       

Financing activities

                       

Increase (decrease) under line of credit facilities (note 7)

  (15,973 )   (4,928 )   (29,538 )   7,854  

Borrowings under long-term debt (note 7)

  -     142     210     486  

Repayment of long-term debt (note 7)

  (1,502 )   (1,677 )   (4,658 )   (5,697 )

Proceeds from the issuance of common shares

  749     804     2,996     2,035  

Other

  (75 )   (77 )   (154 )   (125 )

Net cash flows from financing activities - continuing operations

  (16,801 )   (5,736 )   (31,144 )   4,553  

 

                       

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

  (97 )   46     (107 )   (57 )

 

                       

Increase (decrease) in cash and cash equivalents in the period

  702     359     (1,108 )   (21 )

 

                       

Cash and cash equivalents - beginning of the period

  6,727     6,460     8,537     6,840  

 

                       

Cash and cash equivalents - end of the period

  7,429     6,819     7,429     6,819  

 

                       

Supplemental cash flow information (note 11)

                       

(See accompanying notes to consolidated financial statements)

SUNOPTA INC. 9 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

1. Description of Business and Significant Accounting Policies

SunOpta Inc. (the “Company” or “SunOpta”) was incorporated under the laws of Canada on November 13, 1973. The Company operates businesses focused on a healthy products portfolio that promotes sustainable well-being. The Company operates in two industry segments, the largest being SunOpta Foods, which consists of three reportable segments—Global Sourcing and Supply, Value Added Ingredients, and Consumer Products—that operate in the natural, organic and specialty food sectors and utilize an integrated business model to bring cost-effective and quality products to market. In addition to SunOpta Foods, the Company owned approximately 66% of Opta Minerals Inc. (“Opta Minerals”) as at October 4, 2014 and December 28, 2013, on a non-dilutive basis. Opta Minerals is a vertically integrated provider of custom process solutions and industrial mineral products for use primarily in the steel, foundry, loose abrasive cleaning, and municipal water filtration industries. As at October 4, 2014 and December 28, 2013, the Company also had an approximate 19% equity ownership position in Mascoma Corporation (“Mascoma”), on a non-dilutive basis. Mascoma is an innovative company leveraging internally developed technologies to drive bioconversion of biomass for petroleum replacements.

Basis of Presentation

The interim consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended, and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, these condensed interim consolidated financial statements do not include all of the disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and all such adjustments are of a normal, recurring nature. Operating results for the quarter and three quarters ended October 4, 2014 are not necessarily indicative of the results that may be expected for the full year ending January 3, 2015 or for any other period. The interim consolidated financial statements include the accounts of the Company and its subsidiaries, and have been prepared on a basis consistent with the annual consolidated financial statements for the year ended December 28, 2013. For further information, refer to the consolidated financial statements, and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which will supersede existing revenue recognition guidance under U.S. GAAP. Under the new standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance is effective for annual and interim periods beginning on or after December 15, 2016, and is to be applied on either a full retrospective or modified retrospective basis. Early adoption is not permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which raises the threshold for disposals to qualify as discontinued operations by focusing on strategic shift that have or will have a major effect on a company’s operations and financial results. The guidance allows companies to have significant continuing involvement and continuing cash flows with the disposed component. The guidance is effective for annual and interim periods beginning on or after December 15, 2014, and is to be applied on a prospective basis. The Company will apply the new standard to any divestitures occurring after January 3, 2015.

SUNOPTA INC. 10 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

2. Business Acquisition

Bulgarian Processing Operation

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

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

 

$  

Cash and cash equivalents

  70  

Accounts receivables

  378  

Inventories

  55  

Other current assets

  21  

Property, plant and equipment

  4,067  

Accounts payable and accrued liabilities

  (228 )

Long-term debt(1)

  (465 )

Total cash consideration

  3,898  

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

3. Discontinued Operations

On August 12, 2011, the Company disposed of its interest in the Colorado Sun Oil Processing LLC (“CSOP”) joint venture to Colorado Mills, LLC (“Colorado Mills”) pursuant to the outcome of related bankruptcy proceedings. CSOP operated a vegetable oil refinery adjacent to Colorado Mills’ sunflower crush plant and was formerly part of the former Grains and Foods Group operating segment. The operating results of CSOP were reclassified to discontinued operations, including legal fees and interest costs incurred in connection with a separate arbitration proceeding related to the joint venture agreement. The arbitration proceeding was settled on June 18, 2013. In connection with the settlement, the Company paid Colorado Mills $5,884, consisting of cash and equipment in use at the CSOP refinery.

SUNOPTA INC. 11 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

4. Derivative Financial Instruments and Fair Value Measurements

The following table presents for each of the fair value hierarchies, the assets and liabilities that are measured at fair value on a recurring basis as of October 4, 2014 and December 28, 2013:

      October 4, 2014  
      Fair value                    
      asset (liability)     Level 1     Level 2     Level 3  
    $   $   $   $  
(a) Commodity futures and forward contracts(1)                        
     Unrealized short-term derivative asset   5,077     309     4,768     -  
     Unrealized long-term derivative asset   31     -     31     -  
     Unrealized short-term derivative liability   (7,307 )   -     (7,307 )   -  
     Unrealized long-term derivative liability   (187 )   -     (187 )   -  
(b) Inventories carried at market(2)   2,468     -     2,468     -  
(c) Interest rate swaps(3)   (296 )   -     (296 )   -  
(d) Forward foreign currency contracts(4)   1,226     -     1,226     -  
(e) Contingent consideration(5)   (318 )   -     -     (318 )

      December 28, 2013  
      Fair value                    
      asset (liability)     Level 1     Level 2     Level 3  
    $   $   $   $  
(a) Commodity futures and forward contracts(1)                        
     Unrealized short-term derivative asset   1,459     284     1,175     -  
     Unrealized long-term derivative asset   29     -     29     -  
     Unrealized short-term derivative liability   (1,841 )   -     (1,841 )   -  
     Unrealized long-term derivative liability   (12 )   -     (12 )   -  
(b) Inventories carried at market(2)   11,836     -     11,836     -  
(c) Interest rate swaps(3)   (311 )   -     (311 )   -  
(d) Forward foreign currency contracts(4)   (371 )   -     (371 )   -  
(e) Contingent consideration(5)   (2,671 )   -     -     (2,671 )

  (1)

Unrealized short-term derivative asset is included in prepaid expenses and other current assets, unrealized long-term derivative asset is included in other assets, unrealized short-term derivative liability is included in other current liabilities and unrealized long-term derivative liability is included in long-term liabilities on the consolidated balance sheets.

  (2)

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

  (3)

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

  (4)

The forward foreign currency contracts are included in accounts receivable or accounts payable and accrued liabilities on the consolidated balance sheets.

  (5)

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


(a)

Commodity futures and forward contracts

   

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


SUNOPTA INC. 12 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)  
 

These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains, as well as the prices of cocoa and coffee. These derivative instruments are not designated as hedges for accounting purposes. Gains and losses on changes in fair value of these derivative instruments are included in cost of goods sold on the consolidated statement of operations. For the quarter ended October 4, 2014, the Company recognized a gain of $1,802 (September 28, 2013 – loss of $1,950) and for the three quarters ended October 4, 2014, the Company recognized a loss of $2,021 (September 28, 2013 – loss of $2,892) related to changes in the fair value of these derivatives.

At October 4, 2014, the notional amounts of open commodity futures and forward purchase and sale contracts were as follows (in thousands of bushels):

 

  Number of bushels purchased (sold)  

 

  Corn     Soybeans  

Forward commodity purchase contracts

  1,714     1,804  

Forward commodity sale contracts

  (1,419 )   (1,709 )

Commodity futures contracts

  (375 )   (245 )

In addition, as at October 4, 2014, the Company also had open forward contracts to sell 167 lots of cocoa and 26 lots of coffee.

   
(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 goods sold on the consolidated statements of operations. As at October 4, 2014, the Company had 78,549 bushels of commodity corn and 137,715 bushels of commodity soybeans in inventories carried at market.

   
(c)

Interest rate swaps

   

As at October 4, 2014, Opta Minerals held interest rate swaps with a notional value of Cdn $38,250 to pay fixed rates of 1.85% to 2.02%, plus a margin of 2.0% to 3.5% based on certain financial ratios of Opta Minerals, and receive a variable rate based on various reference rates including prime, bankers’ acceptances or LIBOR, plus the same margin, until May 2017. The net notional value decreases in accordance with the quarterly principal repayments on Opta Minerals’ non-revolving term credit facility (see note 7).

   

At each period end, the Company calculates the marked-to-market fair value of the interest rate swaps using a valuation technique using quoted observable prices for similar instruments as the primary input. Based on this valuation, the previously recorded fair value is adjusted to the current marked-to-market position. The marked-to-market gain or loss is placed in level 2 of the fair value hierarchy. As the interest rate swaps are designated as a cash flow hedge for accounting purposes, gains and losses on changes in the fair value of these derivative instruments are included on the consolidated statements of comprehensive earnings. For the quarter ended October 4, 2014, the Company recognized a $62 gain (September 28, 2013 – loss of $90), net of income tax expense of $16 (September 28, 2013 – income tax benefit of $24) and for the three quarters ended October 4, 2014, the Company recognized a $15 gain (September 28, 2013 – gain of $208), net of income tax expense of $5 (September 28, 2013 – income tax expense of $54) related to changes in the fair value of these derivatives.


SUNOPTA INC. 13 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

(d)

Foreign forward currency contracts

   

As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are placed in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. While these forward foreign exchange contracts typically represent economic hedges that are not designated as hedging instruments, certain of these contracts may be designated as hedges. As at October 4, 2014, the Company had open forward foreign exchange contracts with a notional value of €15,387 ($20,520). Gains and losses on changes in the fair value of these derivative instruments are included in foreign exchange loss or gain on the consolidated statement of operations. For the quarter ended October 4, 2014, the Company recognized a gain of $1,038 (September 28, 2013 – loss of $429) and for the three quarters ended October 4, 2014, the Company recognized a gain of $1,597 (September 28, 2013 – loss of $38) related to changes in the fair value of these derivatives.

   
(e)

Contingent consideration

   

The fair value measurement of contingent consideration arising from business acquisitions is determined using unobservable (level 3) inputs. These inputs include: (i) the estimated amount and timing of the projected cash flows on which the contingency is based; and (ii) the risk-adjusted discount rate used to present value those cash flows. For the three quarters ended October 4, 2014, the change in the fair value of the contingent consideration liability reflected a payment of $800 and a fair value adjustment of $1,373 (see note 9) in connection with the settlement of remaining earn- out related to the acquisition Edner of Nevada, Inc. (“Edner”) on December 14, 2010.

5. Inventories

 

  October 4, 2014     December 28, 2013  

 

$   $  

Raw materials and work-in-process

  164,826     177,407  

Finished goods

  70,431     77,984  

Company-owned grain

  10,121     23,773  

Inventory reserves

  (5,256 )   (4,878 )

 

  240,122     274,286  

6. Investment

During the second quarter of 2013, the Company recorded an other-than-temporary impairment loss of $21,495 to write down the carrying value of its investment in equity and debt securities of Mascoma to an estimated fair value of $12,350, attributable to shares of preferred stock fair valued at $11,850 and a convertible subordinated note fair valued at $500. On August 29, 2014, the Company invested an additional $871 in a convertible subordinated note issued by Mascoma, which increased the carrying value of the Company’s total investment in Mascoma to $13,221.

On October 31, 2014, Mascoma completed the sale of its yeast business in exchange for cash and certain royalty rights based on future sales of the yeast products by the purchaser. The Company estimated that the carrying value of its investment in shares of preferred stock and other equity securities of Mascoma was fully impaired and that the impairment was other-than-temporary. The Company also estimated that the fair value of its investment in the convertible subordinated notes of Mascoma was $4,780, including the value ascribed to certain accelerated payment features embedded in the notes that would result in a maximum payout to the Company of approximately $5,100 plus accrued interest thereon. As a result, the Company recorded an other-than-temporary impairment loss of $8,441 on the consolidated statement of operations for the quarter ended October 4, 2014, to write down the carrying value of its investment in equity and debt securities of Mascoma from $13,221 to $4,780.

SUNOPTA INC. 14 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

7. Bank Indebtedness and Long-Term Debt

 

  October 4, 2014     December 28, 2013  

 

$   $  

Bank indebtedness:

           

   North American credit facilities(1)

  35,169     64,382  

   European credit facilities(2)

  57,706     61,892  

   Opta Minerals revolving term credit facility(3)

  15,311     15,579  

 

  108,186     141,853  

 

           

Long-term debt:

           

   Opta Minerals non-revolving term credit facility(3)

  37,117     42,253  

   Lease obligations

  5,331     6,444  

   Other

  139     311  

 

  42,587     49,008  

Less: current portion

  5,916     6,354  

 

  36,671     42,654  

(1)

North American credit facilities

   

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

   

On July 27, 2012, the Company entered into an amended and restated credit agreement with a syndicate of lenders. The amended agreement provides secured revolving credit facilities of Cdn $10,000 (or the equivalent U.S. dollar amount) and $165,000, as well as an additional $50,000 in availability upon the exercise of an uncommitted accordion feature. These facilities mature on July 27, 2016, with the outstanding principal amount repayable in full on the maturity date.

   

Interest on borrowings under the facilities accrues based on various reference rates including LIBOR, plus an applicable margin of 1.75% to 2.50%, which is set quarterly based on average borrowing availability. As at October 4, 2014, the weighted-average interest rate on the facilities was 2.15%.

   

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

   
(2)

European credit facilities

   

The European credit facilities support the global sourcing, supply and processing capabilities of the international operations of Global Sourcing and Supply.

   

On September 25, 2012, TOC and certain of its subsidiaries entered into a credit facilities agreement with two lenders, which provided for a €45,000 revolving credit facility covering working capital needs and a €3,000 pre-settlement facility covering currency hedging requirements. On May 23, 2014, the lenders increased the amount available under the revolving credit facility to €51,000 until July 31, 2014. On July 24, 2014, the lenders further increased the amount available under the revolving credit facility to €54,000 until September 30, 2014. As of October 4, 2014 and December 28, 2013, €45,098 ($56,427) and €42,661 ($58,616), respectively, of this facility had been utilized. The revolving credit facility was secured by the working capital of TOC and certain of its subsidiaries. The revolving credit facility and pre- settlement facility were due on demand with no set maturity date. Interest costs under the facilities accrued based on either a loan margin of 1.75% or an overdraft margin of 1.85% plus the cost of funds as set by each of the lenders on a periodic basis.


SUNOPTA INC. 15 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

On October 14, 2014, TOC and certain of the Company’s other subsidiaries entered into a new multipurpose facilities agreement (see note 14), which replaced the existing credit facilities described above.

   

On April 29, 2014, a subsidiary of TOC amended its revolving credit facility agreement dated May 22, 2013, to provide up to €4,500 to cover the working capital needs of TOC’s Bulgarian operations. The facility is secured by the accounts receivable and inventories of the Bulgarian operations and is fully guaranteed by TOC. Interest accrues under the facility based on EURIBOR plus a margin of 2.75%, and borrowings under the facility are repayable in full on April 30, 2015. As of October 4, 2014 and December 28, 2013, €1,023 ($1,279) and €2,385 ($3,276), respectively, was borrowed under this facility.

   
(3)

Opta Minerals credit facilities

   

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

   

On May 8, 2014, Opta Minerals amended and extended its credit agreement dated May 18, 2012, which provides for a Cdn $20,000 revolving term credit facility and a Cdn $52,500 non-revolving term credit facility. The revolving term credit facility now matures on August 14, 2015, with the outstanding principal amount repayable in full on the maturity date. The principal amount of the non-revolving term credit facility is repayable in equal quarterly installments of approximately Cdn $1,312. Opta Minerals may be required to make additional repayments on the non-revolving term credit facility if certain financial covenants are not met. The non-revolving term credit facility matures on May 18, 2017, with the remaining outstanding principal amount repayable in full on the maturity date.

   

Interest on the borrowings under these facilities accrues at the borrower’s option based on various reference rates including LIBOR, plus an applicable margin of 2.00% to 5.50% based on certain financial ratios of Opta Minerals. Opta Minerals utilizes interest rate swaps to hedge the interest payments on a portion of the borrowings under the non- revolving term credit facility (see note 4). As at September 30, 2014, the weighted-average interest rate on the credit facilities was 6.51%, after taking into account the related interest rate hedging activities.

   

The credit facilities are collateralized by a first priority security interest on substantially all of the assets of Opta Minerals, and are without recourse to SunOpta Inc.

   

On May 8, 2014, certain financial covenants under the Opta Minerals credit agreement were amended for the quarterly periods ending June 30, 2014 through September 30, 2015. Opta Minerals was in compliance with all its financial covenants as at September 30, 2014.


SUNOPTA INC. 16 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

8. Stock-Based Compensation

Under the Company’s 2013 Stock Incentive Plan, the Company may grant a variety of stock-based awards including stock options, restricted stock units (“RSUs”) and performance share units (“PSUs”) to selected employees and directors of the Company.

Stock Options

For the three quarters ended October 4, 2014, the Company granted 423,778 options to employees that vest ratably on each of the first through fifth anniversaries of the grant date and expire on the tenth anniversary of the grant date. The weighted-average grant-date fair value of these options was $6.91, which is recognized on a straight-line basis over the five-year vesting period based on the number of stock options expected to vest.

The following table summarizes the weighted-average assumptions used in the Black-Scholes option-pricing model to determine the fair value of the stock options granted:

Exercise price

$  11.65  

Dividend yield

  0%  

Expected volatility

  61.0%  

Risk-free interest rate

  2.2%  

Expected life of options (in years)

  6.5  

Restricted Stock Units and Performance Share Units

For the three quarters ended October 4, 2014, the Company granted 72,173 RSUs and 102,167 PSUs to certain employees and directors of the Company.

Time-based RSUs vest ratably on each of the first through third anniversaries of the grant date. The fair value of each RSU granted was estimated to be $11.30 based on the fair market value of a share of the Company’s common stock on the date of grant. The grant-date fair value is recognized on a straight-line basis over the three-year vesting period based on the number of RSUs expected to vest.

Performance-based PSUs vest three years following the grant date. The number of PSUs that ultimately vest (up to a specified maximum) will be determined based on performance relative to predetermined performance measures of the Company. If the Company’s performance is below a specified performance level, no PSUs will vest. The fair value of each PSU granted was estimated to be $11.30 based on the fair market value of a share of the Company’s common stock on the date of grant. Each reporting period, the number of PSUs that are expected to vest is re-determined and the grant-date fair value of these PSUs is amortized on a straight-line basis over the remaining vesting period less amounts previously recognized.

Each vested RSU and PSU will be settled through the issuance of common shares of the Company and are therefore treated as equity awards.

SUNOPTA INC. 17 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

9. Other Expense (Income), Net

The components of other expense (income) are as follows:

 

  Quarter ended     Three quarters ended  

  October 4, 2014     September 28, 2013     October 4, 2014     September 28, 2013  

 

$   $   $   $  

Gain on sale of assets(1)

  (1,018 )   -     (1,018 )   -  

Fair value of contingent consideration(2)

  -     -     (1,373 )   -  

Severance and other rationalization costs(3)

  330     522     516     1,390  

Impairment of long-lived assets(4)

  505     310     505     310  

Acquisition-related transaction costs

  -     -     -     127  

Other

  281     (45 )   464     (28 )

 

  98     787     (906 )   1,799  

(1)

Gain on sale of assets

   

During the quarter ended October 4, 2014, the Company completed the sales of its Fargo, North Dakota, and Goodland/Edson, Kansas, sunflower production and storage facilities as part of a rationalization of its North American sunflower operations. These rationalization efforts are intended to lower the overall cost structure of the sunflower operations and improve production capacity utilization. The Company received total cash consideration of $5,688 and recognized a gain on sale of these facilities of $1,018 in the aggregate. These facilities were included in Global Sourcing and Supply.

   
(2)

Fair value of contingent consideration

   

For the three quarters ended October 4, 2014, the Company recorded a gain of $1,373 in connection with the settlement of the remaining earn-out related to the acquisition of Edner.

   
(3)

Severance and other rationalization costs

   

For the quarter and three quarters ended October 4, 2014, employee severance and other costs included costs incurred by the Company in connection with the closure and sale of the Goodland and Edson sunflower facilities.

   

For the quarter and three quarters ended September 28, 2013, employee severance and other costs included costs incurred by the Company in connection with the operational realignment within SunOpta Foods (see note 13), as well as the idling of the Fargo sunflower facility. In addition, Opta Minerals incurred severance and other costs in connection with the rationalization and integration of WGI Heavy Metals, Incorporated, which was acquired in August 2012.

   
(4)

Impairment of long-lived assets

   

For the quarter and three quarters ended October 4, 2014, Opta Minerals wrote down the carrying value of certain property, plant and equipment in connection with the closure of one its abrasive minerals plants. The impairment loss was determined based on the estimated proceeds from the sale of the assets less related dismantling and disposal costs.

   

For the quarter and three quarters ended September 28, 2013, Opta Minerals wrote off the carrying amounts of certain intangible assets related to long-term licensing agreements that were determined not to be recoverable, due to a decline in the cash flows generated under these arrangements.


SUNOPTA INC. 18 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

10. Earnings Per Share

Earnings (loss) per share are calculated as follows:

 

  Quarter ended     Three quarters ended  

  October 4, 2014     September 28, 2013     October 4, 2014     September 28, 2013  

Earnings (loss) from continuing operations attributable to SunOpta Inc.

$  (384 ) $  2,913   $  14,964   $  (6,883 )

Loss from discontinued operations, net of income taxes

  -     -     -     (360 )

Earnings (loss) attributable to SunOpta Inc.

$  (384 ) $  2,913   $  14,964   $  (7,243 )

 

                       

Basic weighted-average number of shares outstanding

  66,918,863     66,369,141     66,763,931     66,221,286  

Dilutive potential of the following:

                       

   Employee/director stock options and RSUs

  1,213,279     1,389,346     985,768     1,017,574  

   Warrants

  554,245     411,705     523,871     349,820  

Diluted weighted-average number of shares outstanding

  68,686,387     68,170,192     68,273,570     67,588,680  

 

                       

Earnings (loss) per share - basic:

                       

   - from continuing operations

$  (0.01 ) $  0.04   $  0.22   $  (0.10 )

   - from discontinued operations

  -     -     -     (0.01 )

 

$  (0.01 ) $  0.04   $  0.22   $  (0.11 )

Earnings (loss) per share - diluted:

                       

   - from continuing operations

$  (0.01 ) $  0.04   $  0.22   $  (0.10 )

   - from discontinued operations

  -     -     -     (0.01 )

 

$  (0.01 ) $  0.04   $  0.22   $  (0.11 )

For the quarter ended October 4, 2014, stock options to purchase 50,500 (September 28, 2013 - 24,000) common shares were excluded from the calculation of potential dilutive common shares due to their anti-dilutive effect. For the three quarters ended October 4, 2014, stock options to purchase 50,500 (September 28, 2013 - 144,000) common shares were excluded from the calculation of potential dilutive common shares due to their anti-dilutive effect.

For the quarter ended October 4, 2014 and for the three quarters ended September 28, 2013, all potential dilutive common shares were excluded from the calculation of diluted loss per share due to their anti-dilutive effect of reducing the loss per share.

SUNOPTA INC. 19 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

11. Supplemental Cash Flow Information

 

  Quarter ended     Three quarters ended  

  October 4, 2014     September 28, 2013     October 4, 2014     September 28, 2013  

 

$   $   $   $  

 

                       

Changes in non-cash working capital, net of businesses acquired:

               

   Accounts receivable

  (5,011 )   572     (27,989 )   (6,869 )

   Inventories

  9,368     1,847     27,815     7,351  

   Income tax recoverable

  (387 )   942     1,010     1,313  

   Prepaid expenses and other current assets

  574     1,649     (2,208 )   3,415  

   Accounts payable and accrued liabilities

  (2,644 )   (3,605 )   (6,368 )   (13,183 )

   Customer and other deposits

  353     (3,267 )   831     1,126  

 

  2,253     (1,862 )   (6,909 )   (6,847 )

As at October 4, 2014, cash and cash equivalents included $3,907 (December 28, 2013 - $4,084) that was specific to Opta Minerals and cannot be utilized by the Company for general corporate purposes.

12. Commitments and Contingencies

Various claims and potential claims arising in the normal course of business are pending against the Company. It is the opinion of management that the amount of potential liability, if any, to the Company is not determinable. Management believes the final determination of these claims or potential claims will not materially affect the financial position or results of the Company.

13. Segmented Information

In the fourth quarter of 2013, the Company implemented changes to its organizational structure to align and focus the operations of SunOpta Foods on three key “go-to-market” categories: raw material sourcing and supply; value-added ingredients; and consumer-packaged products. Consequently, the Company realigned the operating segments of SunOpta Foods to reflect the resulting changes in management reporting and accountability to the Company’s Chief Executive Officer. The Company believes this operational structure better aligns with SunOpta Foods’ integrated “field-to-table” business model and product portfolio. The segment information presented below for the quarter and three quarters ended September 28, 2013 has been restated to reflect the realigned operating segments of SunOpta Foods. The Opta Minerals operating segment remained unchanged.

Effective with the realignment, the Company operates in the following four reportable segments:

SUNOPTA INC. 20 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

In addition, Corporate Services provides a variety of management, financial, information technology, treasury and administration services to each of the SunOpta Foods operating segments from the Company’s offices in Brampton, Ontario and Edina, Minnesota.

When reviewing the operating results of the Company’s operating segments, management uses segment revenues from external customers and segment operating income to assess performance and allocate resources. Segment operating income excludes other income or expense items and goodwill impairment losses. In addition, interest expense and income amounts, and provisions for income taxes are not allocated to operating segments.

 

  Quarter ended  

 

  October 4, 2014  

 

  Global     Value                          

 

  Sourcing     Added     Consumer     SunOpta     Opta     Consol-  

 

  and Supply     Ingredients     Products     Foods     Minerals     idated  

 

$   $   $   $   $   $  

Segment revenues from external customers

  146,089     35,410     101,167     282,666     35,879     318,545  

Segment operating income

  6,381     2,581     6,090     15,052     898     15,950  

Corporate Services

                                (3,252 )

Other expense, net

                                (98 )

Interest expense, net

                                (1,970 )

Impairment loss on investment

                                (8,441 )

Earnings from continuing operations before income taxes

                      2,189  

 

  Quarter ended  

 

  September 28, 2013  

 

  Global     Value                          

 

  Sourcing     Added     Consumer     SunOpta     Opta     Consol-  

 

  and Supply     Ingredients     Products     Foods     Minerals     idated  

 

$   $   $   $   $   $  

Segment revenues from external customers

  136,083     34,083     97,630     267,796     34,927     302,723  

Segment operating income

  1,149     2,026     7,255     10,430     1,704     12,134  

Corporate Services

                                (2,298 )

Other expense, net

                                (787 )

Goodwill impairment

                                (3,552 )

Interest expense, net

                                (1,957 )

Earnings from continuing operations before income taxes

                      3,540  

SUNOPTA INC. 21 October 4, 2014 10-Q


SunOpta Inc.
Notes to Consolidated Financial Statements
For the quarter and three quarters ended October 4, 2014 and September 28, 2013
(Unaudited)
(Expressed in thousands of U.S. dollars, except per share amounts)
 

 

  Three quarters ended  

 

  October 4, 2014  

 

  Global     Value                          

 

  Sourcing     Added     Consumer     SunOpta     Opta     Consol-  

 

  and Supply     Ingredients     Products     Foods     Minerals     idated  

 

$   $   $   $   $   $  

Segment revenues from external customers

  446,913     106,720     331,060     884,693     105,667     990,360  

Segment operating income

  17,799     6,218     22,190     46,207     3,494     49,701  

Corporate Services

                                (8,168 )

Other income, net

                                906  

Interest expense, net

                                (6,128 )

Impairment loss on investment

                                (8,441 )

Earnings from continuing operations before income taxes

                      27,870  

 

  Three quarters ended  

 

  September 28, 2013  

 

  Global     Value                          

 

  Sourcing     Added     Consumer     SunOpta     Opta     Consol-  

 

  and Supply     Ingredients     Products     Foods     Minerals     idated  

 

$   $   $   $   $   $  

Segment revenues from external customers

  405,892     98,631     283,581     788,104     108,614     896,718  

Segment operating income

  6,874     5,979     21,485     34,338     5,070     39,408  

Corporate Services

                                (5,596 )

Other expense, net

                                (1,799 )

Goodwill impairment

                                (3,552 )

Interest expense, net

                                (5,885 )

Impairment loss on investment

                                (21,495 )

Earnings from continuing operations before income taxes

                      1,081  

14. Subsequent Event

Multipurpose Facilities Agreement

On October 14, 2014, TOC and certain of the Company’s other subsidiaries (collectively, the “Borrowers”) entered into a multipurpose facilities agreement with a syndicate of lenders (collectively, the “Lenders”), which provides for a total of €92,500 in financing via four main facilities: (i) an €80,000 revolving credit facility covering working capital needs; (ii) a €5,000 facility covering commodity hedging requirements; (iii) a €5,000 facility designated for letters of credit; and (iv) a €2,500 pre-settlement facility covering currency hedging requirements (collectively, the “Club Facility”).

The €80,000 revolving credit facility is secured by the working capital of the Borrowers and replaces the existing credit facilities of TOC and certain of its subsidiaries (see note 7). The Club Facility is due on demand with no set maturity date. Interest costs under the Club Facility accrue based on the aggregate of: (i) a fixed loan margin of 1.75%; and (ii) a variable rate based on LIBOR or EURIBOR plus an applicable spread as set by the Lenders on a periodic basis.

SUNOPTA INC. 22 October 4, 2014 10-Q

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

Forward-Looking Financial Information

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the interim consolidated financial statements, and notes thereto, for the quarter ended October 4, 2014 contained under Item 1 of this Quarterly Report on Form 10-Q (“Form 10-Q”) and in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Annual Report on Form 10-K for the fiscal year ended December 28, 2013 (“Form 10-K”). Unless otherwise indicated herein, the discussion and analysis contained in this MD&A includes information available to November 12, 2014.

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

Forward-looking statements contained in this MD&A are based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While we consider these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Forward-looking statements are also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what we currently expect. These factors are more fully described in the “Risk Factors” section at Item 1A of the Form 10-K and Item 1A of this report.

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

All dollar amounts in this MD&A are expressed in thousands of U.S. dollars, except per share amounts, unless otherwise noted.

Calendar Year

We operate on a fiscal calendar that results in a given fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to December 31. Fiscal year 2014 will be a 53-week period ending on January 3, 2015, with quarterly periods ending on April 5, July 5 and October 4, 2014, whereas fiscal year 2013 was a 52-week period ending on December 28, 2013, with quarterly periods ending on March 30, June 29 and September 28, 2013. As a result, the first three quarters of 2014 consisted of 40 weeks, compared with 39 weeks for the first three quarters of 2013. Except as otherwise noted in this MD&A, the impact of the additional week on our results of operations for the first three quarters of 2014 was insignificant relative to the first three quarters of 2013.

SUNOPTA INC. 23 October 4, 2014 10-Q

Operational Realignment

In the fourth quarter of 2013, we realigned the operating segments of SunOpta Foods to focus on three key “go-to-market” categories: raw material sourcing and supply; value-added ingredients; and consumer-packaged products. We believe this operational structure better aligns with our integrated “field to table” business model and product portfolio. In addition, we believe this structure better supports our strategy of growing our value-added packaged foods and ingredients portfolios, and leveraging our sourcing and supply capabilities and production capacity. Effective with the realignment, SunOpta Foods operates in the following three reportable segments: Global Sourcing and Supply (which incorporates our North American raw grain and sunflower operating segment and our international organic ingredient operating segment); Value Added Ingredients; and Consumer Products. The Opta Minerals operating segment remained unchanged. The segmented operations information provided in the Consolidated Financial Statements and this MD&A for the quarter and three quarters ended September 28, 2013 has been restated to reflect these realigned reportable segments.

Business Developments during the First Three Quarters of 2014

Opta Minerals

On June 19, 2014, we announced that the Board of Directors of Opta Minerals Inc. (“Opta Minerals”) had established a special committee of independent directors (the “Special Committee”) to conduct a review of strategic alternatives available to Opta Minerals with a view to enhancing value for all shareholders. The Special Committee will review and evaluate all proposals received as part of the strategic review process, and will make recommendations to the Board thereon. There is no defined timeline for the strategic alternatives review and there can be no assurance that the review of strategic alternatives will result in any specific action. We currently own approximately 66% of Opta Minerals on a non-dilutive basis. We have identified Opta Minerals as a non-core holding.

Expansion of Aseptic Processing and Packaging Operations

In the first quarter of 2014, we initiated a further expansion to our aseptic processing and packaging operations in Modesto, California, in order to meet committed customer demand and enable new growth opportunities. In connection with this expansion, we are adding a third processor at the Modesto facility, which is expected to be commissioned in the first quarter of 2015, as well as two additional multi-serve (liter/quart) fillers. The first of these new fillers is expected to be in production by the end of fiscal 2014, with the second expected to be commissioned in the second quarter of 2015. This expansion is necessary in order to meet increased product demand from new and existing customers across a broad array of categories including non-dairy, nutritional beverages and dairy. The continued investment in our aseptic platform is directly aligned with our core strategies to aggressively grow our value-added ingredients and packaged foods portfolio, and to leverage our integrated platform to become a pure play natural and organic foods company.

Other Developments

Appointment of New Director

On October 28, 2014, we announced the appointment of M. Shan Atkins to the Board of Directors of SunOpta. Ms. Atkins joins the board as an independent director and brings more than three decades of broad business experience to SunOpta, as well as extensive experience as a director of other publicly traded companies in both the U.S. and Canada.

Chair of the Board of Directors

On July 24, 2014, we announced the appointment of Alan Murray as Chair of the Board of Directors of SunOpta. Mr. Murray replaced Jeremy Kendall who retired after serving as Chair of the Board for 31 years. Mr. Kendall will remain active on the Board as a Director and Past Chair. Mr. Kendall also served as Chief Executive Officer until February 2007. Mr. Murray was appointed a director of SunOpta in July 2010, Vice Chair in March 2011, and served as Chair of the Compensation Committee and as a member of the Corporate Governance and Audit Committees at various times.

Corporate Social Responsibility Report

On June 23, 2014, we released our 2013 Corporate Social Responsibility Report, which provides an update on progress towards our sustainability goals covering social, environmental and economic objectives, and further reinforces our commitment to becoming an increasingly sustainable organization. This report covers the operations of SunOpta, including wholly-owned subsidiaries and joint venture operations, excluding Opta Minerals, and is available on our website.

SUNOPTA INC. 24 October 4, 2014 10-Q

The 2013 Corporate Social Responsibility Report and the other information included on our website is not included in, or incorporated by reference into, this Form 10-Q.

Impairment Loss on Investment in Mascoma

On August 31, 2010, we sold 100% of our ownership interest in SunOpta BioProcess Inc. to Mascoma Corporation (“Mascoma”) in exchange for an equity ownership position in Mascoma, consisting of preferred stock, common stock and warrants to purchase common stock of Mascoma. The fair value of the non-cash consideration received was estimated to be $33,345 as of the date of sale, and we recognized a non-cash gain on sale in discontinued operations in the third quarter of 2010. We account for our equity investment in Mascoma using the cost method, as we do not have the ability to exercise significant influence over the operating and financial policies of Mascoma. We have identified our investment in Mascoma as a non-core holding.

On August 5, 2011, we invested $500 in a subordinated convertible note issued by Mascoma. As at June 29, 2013, we concluded that the $33,845 carrying value of our investment equity and debt securities of Mascoma was impaired and that the impairment was other-than-temporary. We determined that the fair value of our investment in Mascoma was $12,350 as at June 29, 2013. As a result, we recorded an other-than-temporary impairment loss of $21,495 in the second quarter of 2013. On August 29, 2014, we invested an additional $871 in a convertible subordinated note of Mascoma, which increased the carrying value of our total investment in Mascoma to $13,221.

On October 31, 2014, Mascoma completed the sale of its yeast business in exchange for cash and certain royalty rights based on future sales of the yeast products by the purchaser. We estimated that the carrying value of our investment in shares of preferred stock and other equity securities of Mascoma was fully impaired and that the impairment was other-than-temporary. We also estimated that the fair value of our investment in the convertible subordinated notes of Mascoma was $4,780, including the value ascribed to certain accelerated payment features embedded in the notes that would result in a maximum payout to us of approximately $5,100 plus accrued interest thereon. As a result, we recorded an other-than-temporary impairment loss of $8,441 in the third quarter of 2014, to write down the carrying value of our investment in equity and debt securities of Mascoma from $13,221 to $4,780.

SUNOPTA INC. 25 October 4, 2014 10-Q

Consolidated Results of Operations for the quarters ended October 4, 2014 and September 28, 2013

For the quarter ended

  October 4, 2014     September 28, 2013     Change     Change  

 

$   $   $     %  

Revenues

                       

   SunOpta Foods

  282,666     267,796     14,870     5.6%  

   Opta Minerals

  35,879     34,927     952     2.7%  

Total revenues

  318,545     302,723     15,822     5.2%  

 

                       

Gross profit

                       

   SunOpta Foods

  32,458     25,758     6,700     26.0%  

   Opta Minerals

  5,276     5,725     (449 )   -7.8%  

Total gross profit

  37,734     31,483     6,251     19.9%  

 

                       

Segment operating income (loss)(1)

                       

   SunOpta Foods

  15,052     10,430     4,622     44.3%  

   Opta Minerals

  898     1,704     (806 )   -47.3%  

   Corporate Services

  (3,252 )   (2,298 )   (954 )   -41.5%  

Total segment operating income

  12,698     9,836     2,862     29.1%  

 

                       

Other expense, net

  98     787     (689 )   -87.5%  

Goodwill impairment

  -     3,552     (3,552 )   -100.0%  

Earnings from continuing operations before the following

  12,600     5,497     7,103     129.2%  

Interest expense, net

  1,970     1,957     13     0.7%  

Impairment loss on investment

  8,441     -     8,441     n/m  

Provision for income taxes

  2,416     1,343     1,073     79.9%  

Earnings from continuing operations

  (227 )   2,197     (2,424 )   -110.3%  

Earnings (loss) attributable to non-controlling interests

  157     (716 )   873     121.9%  

 

                       

Earnings (loss) attributable to SunOpta Inc.(2)

  (384 )   2,913     (3,297 )   -113.2%  

(1)

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


SUNOPTA INC. 26 October 4, 2014 10-Q


 

 

  Global     Value                                
 

 

  Sourcing     Added     Consumer     SunOpta     Opta     Corporate     Consol-  
 

 

  and Supply     Ingredients     Products     Foods     Minerals     Services     idated  
 

For the quarter ended

$   $   $   $   $   $   $  
 

October 4, 2014

                                         
 

Segment operating income (loss)

  6,381     2,581     6,090     15,052     898     (3,252 )   12,698  
 

Other income (expense), net

  687     (86 )   29     630     (782 )   54     (98 )
 

Earnings (loss) from continuing operations before the following

  7,068     2,495     6,119     15,682     116     (3,198 )   12,600  
 

 

                                         
 

September 28, 2013

                                         
 

Segment operating income (loss)

  1,149     2,026     7,255     10,430     1,704     (2,298 )   9,836  
 

Other income (expense), net

  (177 )   (192 )   (10 )   (379 )   (409 )   1     (787 )
 

Goodwill impairment

  -     -     -     -     (3,552 )   -     (3,552 )
 

Earnings (loss) from continuing operations before the following

  972     1,834     7,245     10,051     (2,257 )   (2,297 )   5,497  

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

   
(2)

When assessing our financial performance, we use an internal measure that excludes other income/expense items and any impairment losses from earnings attributable to SunOpta Inc. determined in accordance with U.S. GAAP. We believe that the identification of these items enhances an analysis of our financial performance when comparing our operating results between periods, as we do not consider these items to be reflective of normal business operations. The following table presents a reconciliation of “adjusted earnings” from “earnings/loss attributable to SunOpta Inc.”, which we consider to be the most directly comparable U.S. GAAP financial measure.


 

 

  Per Diluted Share  
 

For the quarter ended

$   $  
 

October 4, 2014

           
 

Loss attributable to SunOpta Inc.

  (384 )   (0.01 )
 

Adjusted for:

           
 

   Impairment loss on investment (net of taxes of $nil)

  8,441     0.12  
 

   Other expense, net (net of taxes and non-controlling interest of $125)

  (27 )   -  
 

Adjusted earnings

  8,030     0.12  
 

 

           
 

September 28, 2013

           
 

Earnings attributable to SunOpta Inc.

  2,913     0.04  
 

Adjusted for:

           
 

   Goodwill impairment (net of taxes and non-controlling interest of $2,032)

  1,520     0.02  
 

   Other expense, net (net of taxes and non-controlling interest of $381)

  406     0.01  
 

Adjusted earnings

  4,839     0.07  

We believe that investors’ understanding of our financial performance is enhanced by disclosing the specific items that we exclude from earnings/loss attributable to SunOpta Inc. to compute adjusted earnings. However, adjusted earnings is not, and should not be viewed as, a substitute for earnings prepared under U.S. GAAP. Adjusted earnings is presented solely to allow investors to more fully understand how we assess our financial performance.

Revenues for the quarter ended October 4, 2014 increased by 5.2% to $318,545 from $302,723 for the quarter ended September 28, 2013. Revenues in SunOpta Foods increased by 5.6% to $282,666 and revenues in Opta Minerals increased by 2.7% to $35,879. Excluding the impact of changes including foreign exchange rates and commodity-related pricing, revenues increased 10.1% on a consolidated basis and 11.0% within SunOpta Foods. Contributing to the increase in revenues within SunOpta Foods was stronger demand for organic ingredients in the U.S. and Europe; growth in consumer packaged categories including aseptic beverage products and retail frozen foods; and increased value-added fruit ingredient volumes. These positive factors within SunOpta Foods were partially offset by lower volumes and pricing for non-GMO corn. At Opta Minerals, the increase in revenues reflected higher volumes of steel products, mostly offset by lower volumes and pricing for industrial mineral products.

SUNOPTA INC. 27 October 4, 2014 10-Q

Gross profit increased $6,251, or 19.9%, to $37,734 for the quarter ended October 4, 2014, compared with $31,483 for the quarter ended September 28, 2013. As a percentage of revenues, gross profit for the quarter ended October 4, 2014 was 11.8% compared to 10.4% for the quarter ended September 28, 2013, an increase of 1.4% . Within SunOpta Foods, the gross profit percentage was 11.5% for the third quarter of 2014, compared with 9.6% for the third quarter of 2013, which reflected the effect of higher margins on organic ingredient sales in the U.S. and Europe; improved performance in our sunflower operations; and an increased contribution from higher margin aseptic beverage products. These positive factors were offset by lower margins on non-GMO corn sales; increased competitive pressures in the re-sealable pouch market; and lower plant utilization in our premium juice operation during the retrofit of this facility. The gross profit percentage at Opta Minerals declined to 14.7% in the third quarter of 2014, compared with 16.4% in the third quarter of 2013, primarily due to pricing pressures on certain steel and industrial mineral products, partially offset by the favorable impact of plant cost rationalizations.

Total segment operating income for the quarter ended October 4, 2014 increased by $2,862, or 29.1%, to $12,698, compared with $9,836 for the quarter ended September 28, 2013. As a percentage of revenues, segment operating income was 4.0% for the quarter ended October 4, 2014, compared with 3.2% for the quarter ended September 28, 2013. The increase in segment operating income reflected higher overall gross profit as described above, partially offset by a $3,930 increase in selling, general and administrative (“SG&A”) expenses, primarily due to increased headcount to support the growth of our international sourcing and supply operations; higher short-term incentive accruals reflecting the improved year-over-year operating performance within SunOpta Foods; and the addition of a number of senior leadership resources in 2013 in connection with the operational realignment within SunOpta Foods. A foreign exchange gain of $600 was recorded for the quarter ended October 4, 2014, mainly related to the positive impact of a strengthening of the U.S. dollar relative to the euro on open foreign exchange contracts within our international sourcing and supply operations, partially offset by the negative impact of the same exchange rate movement on intercompany and third-party loan balances at Opta Minerals. For the quarter ended September 28, 2013, we recorded a foreign exchange gain of $211, which mainly reflected the positive impact on Opta Minerals’ loan balances of a strengthening of the euro in that period relative to the U.S. dollar.

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

Other expense for the quarter ended October 4, 2014 of $98 included a gain on sale of assets of $1,018, related to the disposal of certain of our sunflower production and storage facilities in order to reduce the cost structure and improve the production capacity utilization within our North American sunflower operations, which was more than offset by employee severance costs (including employees affected by the closure and sale of the sunflower facilities) and an asset impairment charge of $505 at Opta Minerals related to the closure of one of its industrial minerals plants. Other expense for the quarter ended September 28, 2013 of $787 included employee severance and other costs in connection with the operational realignment within SunOpta Foods and the rationalization and integration of acquired businesses by Opta Minerals, as well as an asset impairment charge of $310 to write down certain intangible assets at Opta Minerals.

In the third quarter of 2013, Opta Minerals recognized a non-cash goodwill impairment loss of $3,552 relating to one of its reporting units due to increased competition and reduced demand for industrial mineral products.

The increase in interest expense of $13 to $1,970 for the quarter ended October 4, 2014, compared with $1,957 for the quarter ended September 28, 2013, primarily reflected higher applicable interest rates on borrowings under Opta Minerals’ credit facilities.

In the third quarter of 2014, we recognized an impairment loss of $8,441 on our non-core investment in Mascoma (as described above under “Impairment Loss on Investment in Mascoma”). We estimated that the fair value of our investment in Mascoma was $4,780 as at October 4, 2014.

The provision for income tax for the quarter ended October 4, 2014 was $2,416, or 22.7% of earnings before taxes (excluding the impairment loss on investment, for which the related deferred tax asset is considered more likely than not to be unrealized), compared with $1,343, or 37.9% of earnings before taxes, for the quarter ended September 28, 2013. The decrease in the effective tax rate reflected a change in the jurisdictional mix of earnings, as a result of growth in the profitability of our international sourcing and supply operations; the application of available tax credits; and a deferred tax recovery recorded by Opta Minerals.

SUNOPTA INC. 28 October 4, 2014 10-Q

Earnings attributable to non-controlling interests for the quarter ended October 4, 2014 were $157, compared with losses of $716 for the quarter ended September 28, 2013. The $873 increase reflected lower operating losses at Opta Minerals and an improved contribution from the specialty coffee operations of a less-than-wholly-owned subsidiary.

On a consolidated basis, we recognized a loss of $384 (diluted loss per share of $0.01) for the quarter ended October 4, 2014, compared with earnings of $2,913 (diluted earnings per share of $0.04) for the quarter ended September 28, 2013.

Adjusting for the impairment loss on investment, goodwill impairment and other expense, net, adjusted earnings were $8,030 or $0.12 per diluted share for the quarter ended October 4, 2014, compared with $4,839 or $0.07 per diluted share for the quarter ended September 28, 2013. Adjusted earnings is a non-GAAP financial measure. See footnote (2) to the table above for a reconciliation of “adjusted earnings” from “earnings/loss attributable to SunOpta Inc.”, which we consider to be the most directly comparable U.S. GAAP financial measure.

SUNOPTA INC. 29 October 4, 2014 10-Q

Segmented Operations Information

SunOpta Foods

                       
For the quarter ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  282,666   $  267,796   $  14,870     5.6%  
Gross Margin   32,458     25,758     6,700     26.0%  
Gross Margin %   11.5%     9.6%           1.9%  
                         
Operating Income $  15,052   $  10,430   $  4,622     44.3%  
Operating Income %   5.3%     3.9%           1.4%  

SunOpta Foods contributed $282,666 or 88.7% of consolidated revenue for the quarter ended October 4, 2014, compared with $267,796 or 88.5% of consolidated revenues for the quarter ended September 28, 2013, an increase of $14,870 or 5.6% . The table below explains the increase in revenue by reportable segment for SunOpta Foods:

SunOpta Foods Revenue Changes  
Revenues for the quarter ended September 28, 2013 $267,796

Increase in Global Sourcing and Supply

10,006

Increase in Value Added Ingredients

1,327

Increase in Consumer Products

3,537
Revenues for the quarter ended October 4, 2014 $282,666

Gross margin in SunOpta Foods increased by $6,700, or 26.0%, for the quarter ended October 4, 2014 to $32,458, or 11.5% of revenues, compared to $25,758, or 9.6% of revenues for the quarter ended September 28, 2013. The table below explains the increase in gross margin by group for SunOpta Foods:

SunOpta Foods Gross Margin Changes  
Gross margin for the quarter ended September 28, 2013 $25,758

Increase in Global Sourcing and Supply

5,906

Increase in Value Added Ingredients

1,203

Decrease in Consumer Products

(409)
Gross margin for the quarter ended October 4, 2014 $32,458

SUNOPTA INC. 30 October 4, 2014 10-Q

Operating income in SunOpta Foods increased by $4,622, or 44.3%, for the quarter ended October 4, 2014 to $15,052 or 5.3% of revenues, compared to $10,430 or 3.9% of revenues for the quarter ended September 28, 2013. The table below explains the increase in operating income for SunOpta Foods:

SunOpta Foods Operating Income Changes  
Operating Income for the quarter ended September 28, 2013 $10,430

Increase in gross margin, as noted above

6,700

Increase in foreign exchange gains

1,120

Increase in SG&A costs

(1,948)

Increase in corporate cost allocations

(1,250)
Operating Income for the quarter ended October 4, 2014 $15,052

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

Global Sourcing and Supply                        
For the quarter ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  146,089   $  136,083   $  10,006     7.4%  
Gross Margin   14,436     8,530     5,906     69.2%  
Gross Margin %   9.9%     6.3%           3.6%  
                         
Operating Income $  6,381   $  1,149   $  5,232     455.4%  
Operating Income %   4.4%     0.8%           3.6%  

Global Sourcing and Supply contributed $146,089 in revenues for the quarter ended October 4, 2014, compared to $136,083 for the quarter ended September 28, 2013, an increase of $10,006 or 7.4% . Excluding the impact of changes including foreign exchange rates, commodity-related pricing and the additional week of sales in the first quarter of 2014, Global Sourcing and Supply’s revenues increased approximately 14.6% . The table below explains the increase in revenue:

Global Sourcing and Supply Revenue Changes  
Revenues for the quarter ended September 28, 2013 $136,083

Higher volumes of organic raw materials including alternative sweeteners, chia, quinoa, agave, fruits, vegetables and feed products

27,498

Lower volumes of non-GMO corn and soy

(9,540)

Reduced pricing for non-GMO corn

(4,954)

Reduced corn and soy pricing for organic food and feed products offset by increased prices on specialty organic products including agave, chia and quinoa

(2,596)

Lower volumes of agronomy sales, offset by higher in-shell sunflower sales

(269)

Unfavorable impact on euro denominated sales due to the stronger U.S. dollar relative to euro

(133)
Revenues for the quarter ended October 4, 2014 $146,089

SUNOPTA INC. 31 October 4, 2014 10-Q

Gross margin in Global Sourcing and Supply increased by $5,906 to $14,436 for the quarter ended October 4, 2014 compared to $8,530 for the quarter ended September 28, 2013, and the gross margin percentage increased by 3.6% to 9.9% . The increase in gross margin as a percentage of revenue was primarily due to favorable sales mix of organic raw materials and improved sunflower processing yields, partially offset by lower pricing spreads on non-GMO and specialty soy and corn products. The table below explains the increase in gross margin:

Global Sourcing and Supply Gross Margin Changes  
Gross margin for the quarter ended September 28, 2013 $8,530

Margin impact on increased volumes of organic raw materials, including organic feed products, as well as improved plant efficiencies at our cocoa processing facility

6,151

Decreased losses on commodity futures contracts for cocoa and other commodities

1,060

Improved sunflower processing yields and operating efficiencies, as well as improved contribution from planting seeds

949

Lower pricing spreads on non-GMO and specialty soy and corn products

(2,254)
Gross margin for the quarter ended October 4, 2014 $14,436

Operating income in Global Sourcing and Supply increased by $5,232, or 455.4%, to $6,381 for the quarter ended October 4, 2014, compared to $1,149 for the quarter ended September 28, 2013. The table below explains the increase in operating income:

Global Sourcing and Supply Operating Income Changes  
Operating income for the quarter ended September 28, 2013 $1,149

Increase in gross margin, as explained above

5,906

Increased foreign exchange gains on forward contracts

1,120

Favorable impact on expenses due to the stronger U.S. dollar relative to the euro

141

Increased SG&A, due primarily to higher compensation costs from increased headcount and short-term incentives, as well as increased professional fees, bad debts, travel, and general office spending

(1,631)

Increase in corporate cost allocations

(304)
Operating income for the quarter ended October 4, 2014 $6,381

Looking forward, we believe Global Sourcing and Supply is well positioned in growing natural and organic food categories. We intend to focus our efforts on (i) growing our identity preserved, non-GMO and organic sourcing and supply capabilities; (ii) leveraging our international sourcing and supply capabilities internally, and forward and backward integrating where opportunities exist; (iii) expanding our processing expertise and increasing our value-added capabilities; and (iv) expanding our international sales base via strategic relationships for procurement of product to drive incremental sales volume. Our long-term target for Global Sourcing and Supply is to achieve a segment operating margin of 4% to 5%, which assumes we are able to secure a consistent quantity and quality of natural and organic raw materials, improve product mix, and control costs. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Increased supply pressure in the commodity-based markets in which we operate, increased competition, volume decreases or loss of customers, unexpected delays in our expansion plans, or our inability to secure quality inputs or achieve our product mix or cost reduction goals, along with the other factors described above under “Forward-Looking Statements”, could adversely impact our ability to meet these forward-looking expectations.

SUNOPTA INC. 32 October 4, 2014 10-Q


Value Added Ingredients                        
For the quarter ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  35,410   $  34,083   $  1,327     3.9%  
Gross Margin   5,586     4,383     1,203     27.4%  
Gross Margin %   15.8%     12.9%           2.9%  
                         
Operating Income $  2,581   $  2,026   $  555     27.4%  
Operating Income %   7.3%     5.9%           1.4%  

Value Added Ingredients contributed $35,410 in revenues for the quarter ended October 4, 2014, compared to $34,083 for the quarter ended September 28, 2013, an increase of $1,327 or 3.9% . The table below explains the increase in revenue:

Value Added Ingredients Revenue Changes  
Revenues for the quarter ended September 28, 2013 $34,083

Higher volumes of fruit ingredients

1,248

Increased volumes of oils and flour ingredients offset by lower sweetener and starch ingredients, as well as lower contract manufacturing sales

79
Revenues for the quarter ended October 4, 2014 $35,410

Value Added Ingredients gross margin increased by $1,203 to $5,586 for the quarter ended October 4, 2014 compared to $4,383 for the quarter ended September 28, 2013, and the gross margin percentage increased by 2.9% to 15.8% . The increase in gross margin as a percentage of revenue is due to price increases for fiber products combined with increased production volumes of fruit- and grain-based ingredients. The table below explains the increase in gross margin:

Value Added Ingredients Gross Margin Changes  
Gross margin for the quarter ended September 28, 2013 $4,383

Increased volumes and prices for fiber products along with increased volume for fruit- and grain-based ingredients

1,203
Gross margin for the quarter ended October 4, 2014 $5,586

Operating income in Value Added Ingredients increased by $555, or 27.4%, to $2,581 for the quarter ended October 4, 2014, compared to $2,026 for the quarter ended September 28, 2013. The table below explains the increase in operating income:

Value Added Ingredients Operating Income Changes  
Operating income for the quarter ended September 28, 2013 $2,026

Increase in gross margin, as explained above

1,203

Increase in SG&A, primarily due to higher compensation costs including short-term incentives

(438)

Increase in corporate cost allocations

(210)
Operating income for the quarter ended October 4, 2014 $2,581

SUNOPTA INC. 33 October 4, 2014 10-Q

Looking forward, we intend to concentrate on growing Value Added Ingredient’s fiber products and fruit- and grains-based ingredients portfolios and customer base through product and process innovation and diversification. We intend to continue to introduce alternative ingredients offerings of our own and have introduced rice and cellulose fibers; a novel fiber for beverage applications; and a new specialty starch among others. We also expect to leverage our expanded aseptic fruit ingredient line at our South Gate, California facility to drive incremental volumes and cost savings. The focus of Value Added Ingredients continues to revolve around a culture of innovation and continuous improvement, to further increase capacity utilization, reduce costs, and sustain margins. Our long-term target for Value Added Ingredients is to realize segment operating margins of 8% to 10%. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. An unexpected increase in input costs, increased competition, loss of key customers, an inability to introduce new products to the market, or implement our strategies and goals relating to pricing, capacity utilization or cost reductions, along with the other factors described above under “Forward-Looking Statements”, could adversely impact our ability to meet these forward-looking expectations.

Consumer Products                        
For the quarter ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  101,167   $  97,630   $  3,537     3.6%  
Gross Margin   12,436     12,845     (409 )   -3.2%  
Gross Margin %   12.3%     13.2%           -0.9%  
                         
Operating income $  6,090   $  7,255   $  (1,165 )   -16.1%  
Operating Income %   6.0%     7.4%           -1.4%  

Consumer Products contributed $101,167 in revenues for the quarter ended October 4, 2014, compared to $97,630 for the quarter ended September 28, 2013, a $3,537 or 3.6% increase. The table below explains the increase in revenue:

Consumer Products Revenue Changes  
Revenues for the quarter ended September 28, 2013 $97,630

Increased volume of aseptically packaged beverages, in particular almond beverage, private label and foodservice soymilk, dairy, as well as teas and broths

4,088

Higher volumes of private label retail frozen food offerings, partially offset by lower volumes of private label beverages

3,485

Decreased sales of re-sealable pouch products

(2,746)

Lower sales of fruit and protein snack products

(1,290)
Revenues for the quarter ended October 4, 2014 $101,167

SUNOPTA INC. 34 October 4, 2014 10-Q

Gross margin in Consumer Products decreased by $409 to $12,436 for the quarter ended October 4, 2014 compared to $12,845 for the quarter ended September 28, 2013, and the gross margin percentage decreased by 0.9% to 12.3% . The decrease in gross margin as a percentage of revenue was due to increased operating costs and lower production volumes in our re-sealable pouch facility, as well as increased costs associated with the retrofit of our premium juice facility. The table below explains the decrease in gross margin:

Consumer Products Gross Margin Changes  
Gross Margin for the quarter ended September 28, 2013 $12,845

Increased operating costs and decreased contribution from re-sealable pouch products

(1,175)

Margin impact of outsourcing extraction activities and low production volume during the retrofit of our premium juice facility

(105)

Higher volume of aseptically packaged beverages as a result of new product lines, offset by costs from filling line expansions, capability enhancements, and product development costs, combined with lower volume and pricing for healthy snack products

871
Gross Margin for the quarter ended October 4, 2014 $12,436

Operating income in Consumer Products decreased by $1,165, or 16.1%, to $6,090 for the quarter ended October 4, 2014, compared to $7,255 for the quarter ended September 28, 2013. The table below explains the decrease in operating income:

Consumer Products Operating Income Changes  
Operating Income for the quarter ended September 28, 2013 $7,255

Decrease in gross margin, as explained above

(409)

Increase in corporate cost allocations

(736)

Higher general SG&A expenses including travel and bad debts

(20)
Operating Income for the quarter ended October 4, 2014 $6,090

Looking forward, we expect improvements in margins and operating income from Consumer Products through the growth of our aseptic and non-aseptic beverage, snack and frozen food offerings. We remain customer focused and continue to develop new ways to bring new value-added packaged products and processes to market, leveraging our global raw material sourcing and supply, and value-added ingredient capabilities. We expect the multi-serve and single-serve fillers installed in 2013 at our Alexandria, Minnesota and Modesto, California facilities will continue to enhance our ability to serve the non-dairy alternative beverage category with both new and innovative packaging formats and a number of new product offerings beyond non-dairy beverages, including organic dairy and nutritional beverages. We recently announced further expansion of our Modesto operation (as described above under “Business Developments in the First Three Quarters of 2014”). Continued new product development, innovation in healthy snacks and the expansion of our integrated juice operations, combined with increasing demand for portable nutritious fruit and grain snack offerings are expected to drive growth in this business. Long term we are targeting 12% to 14% operating margins from Consumer Products. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. Unfavorable shifts in consumer preferences, increased competition, volume decreases or loss of customers, unexpected delays in our expansion plans, inefficiencies in our manufacturing processes, lack of consumer product acceptance, or our inability to successfully implement the particular goals and strategies indicated above, along with the other factors described above under “Forward-Looking Statements”, could have an adverse impact on these forward-looking expectations.

SUNOPTA INC. 35 October 4, 2014 10-Q


Opta Minerals                        
For the quarter ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  35,879   $  34,927   $  952     2.7%  
Gross Margin   5,276     5,725     (449 )   -7.8%  
Gross Margin %   14.7%     16.4%           -1.7%  
                         
Operating Income $  898   $  1,704   $  (806 )   -47.3%  
Operating Income %   2.5%     4.9%           -2.4%  

Opta Minerals contributed $35,879 in revenues for the quarter ended October 4, 2014, compared to $34,927 for the quarter ended September 28, 2013, an increase of $952 or 2.7% . The table below explains the increase in revenue:

Opta Minerals Revenue Changes  
Revenues for the quarter ended September 28, 2013 $34,927

Decreased volumes of abrasive and industrial mineral products

(2,194)

Higher volumes of steel and magnesium products, partially offset by reduced pricing

3,146
Revenues for the quarter ended October 4, 2014 $35,879

Gross margin for Opta Minerals decreased by $449 to $5,276 for the quarter ended October 4, 2014 compared to $5,725 for the quarter ended September 28, 2013, and the gross margin percentage decreased by 1.7% to 14.7% . The decrease in gross margin as a percentage of revenue was due primarily to unfavorable changes in product mix, increased raw material costs and select pricing reductions within the steel and magnesium market. The table below explains the decrease in gross margin:

Opta Minerals Gross Margin Changes  
Gross Margin for the quarter ended September 28, 2013 $5,725

Select pricing reductions for steel and magnesium products, mostly offset by margin impact on higher volumes

(48)

Margin impact of lower volumes of abrasive and industrial mineral products and increased raw material costs

(401)
Gross Margin for the quarter ended October 4, 2014 $5,276

Operating income for Opta Minerals decreased by $806, or 47.3%, to $898 for the quarter ended October 4, 2014, compared to $1,704 for the quarter ended September 28, 2013. The table below explains the decrease in operating income:

Opta Minerals Operating Income Changes  
Operating Income for the quarter ended September 28, 2013 $1,704

Decrease in gross margin, as explained above

(449)

Decrease in SG&A, primarily due to lower compensation costs through the rationalization and integration of acquired businesses

402

Increase in foreign exchange losses

(759)
Operating Income for the quarter ended October 4, 2014 $898

SUNOPTA INC. 36 October 4, 2014 10-Q

We have identified Opta Minerals as a non-core holding. As described above under “Business Developments during the First Three Quarters of 2014”, Opta Minerals is reviewing strategic alternatives. Opta Minerals is focused on leveraging its global platform to drive expansion of existing product offerings to a wider customer base and new geographies. In addition, it continues to focus on maximizing operating efficiencies and introducing new and innovative products to the markets it serves. We own approximately 66% of Opta Minerals and segment operating income is presented prior to non-controlling interest expense. The statements in this paragraph are forward-looking statements. See “Forward-Looking Statements” above. An extended period of softness in the steel and foundry industries, slowdowns in the economy, or delays in bringing new products and operations completely online, along with the other factors described above under “Forward-Looking Statements,” could have an adverse impact on these forward-looking expectations.

Corporate Services                        
For the quarter ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Operating Loss $  (3,252 ) $  (2,298 ) $  (954 )   -41.5%  

Operating loss at Corporate Services increased by $954 to $3,252 for the quarter ended October 4, 2014, from a loss of $2,298 for the quarter ended September 28, 2013. The table below explains the increase in operating loss:

Corporate Services Operating Income Changes  
Operating Loss for the quarter ended September 28, 2013 $(2,298)

Higher compensation-related costs due to increased headcount, short-term incentives, stock-based compensation and health benefits

(1,876)

Increased IT consulting, professional fees and other general office spending

(357)

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

1,250

Decrease in foreign exchange losses

29
Operating Loss for the quarter ended October 4, 2014 $(3,252)

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. These expenses are allocated to the groups based on (1) specific identification of allocable costs that represent a service provided to each segment and (2) a proportionate distribution of costs based on a weighting of factors such as revenue contribution and number of people employed within each segment.

SUNOPTA INC. 37 October 4, 2014 10-Q

Consolidated Results of Operations for the three quarters ended October 4, 2014 and September 28, 2013

For the three quarters ended

  October 4, 2014     September 28, 2013     Change     Change  

 

$   $   $     %  

Revenues

                       

   SunOpta Foods

  884,693     788,104     96,589     12.3%  

   Opta Minerals

  105,667     108,614     (2,947 )   -2.7%  

Total revenues

  990,360     896,718     93,642     10.4%  

 

                       

Gross profit

                       

   SunOpta Foods

  102,542     84,186     18,356     21.8%  

   Opta Minerals

  16,688     18,530     (1,842 )   -9.9%  

Total gross profit

  119,230     102,716     16,514     16.1%  

 

                       

Segment operating income (loss)(1)

                       

   SunOpta Foods

  46,207     34,338     11,869     34.6%  

   Opta Minerals

  3,494     5,070     (1,576 )   -31.1%  

   Corporate Services

  (8,168 )   (5,596 )   (2,572 )   -46.0%  

Total segment operating income

  41,533     33,812     7,721     22.8%  

 

                       

Other expense (income), net

  (906 )   1,799     (2,705 )   -150.4%  

Goodwill impairment

  -     3,552     (3,552 )   -100.0%  

Earnings from continuing operations before the following

  42,439     28,461     13,978     49.1%  

Interest expense, net

  6,128     5,885     243     4.1%  

Impairment loss on investment

  8,441     21,495     (13,054 )   -60.7%  

Provision for income taxes

  12,480     8,576     3,904     45.5%  

Earnings (loss) from continuing operations

  15,390     (7,495 )   22,885     305.3%  

 

                       

Earnings (loss) attributable to non-controlling interests

  426     (612 )   1,038     169.6%  

Loss from discontinued operations, net of taxes

  -     (360 )   360     100.0%  

 

                       

Earnings (loss) attributable to SunOpta Inc.(2)

  14,964     (7,243 )   22,207     306.6%  

(1)

The following table presents a reconciliation of segment operating income (loss) to “earnings (loss) from continuing operations before the following”, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (1) to the “Consolidated Results of Operations for the quarters ended October 4, 2014 and September 28, 2013” table regarding the use of non-GAAP measures).


 

 

  Global     Value                                
 

 

  Sourcing     Added     Consumer     SunOpta     Opta     Corporate     Consol-  
 

 

  and Supply     Ingredients     Products     Foods     Minerals     Services     idated  
 

For the three quarters ended

$   $   $   $   $   $   $  
 

October 4, 2014

                                         
 

Segment operating income (loss)

  17,799     6,218     22,190     46,207     3,494     (8,168 )   41,533  
 

Other income (expense), net

  757     (86 )   1,336     2,007     (1,063 )   (38 )   906  
 

Earnings (loss) from continuing operations before the following

  18,556     6,132     23,526     48,214     2,431     (8,206 )   42,439  
 

 

                                         
 

September 28, 2013

                                         
 

Segment operating income (loss)

  6,874     5,979     21,485     34,338     5,070     (5,596 )   33,812  
 

Other income (expense), net

  (216 )   (472 )   121     (567 )   (1,171 )   (61 )   (1,799 )
 

Goodwill impairment

  -     -     -     -     (3,552 )   -     (3,552 )
 

Earnings (loss) from continuing operations before the following

  6,658     5,507     21,606     33,771     347     (5,657 )   28,461  

SUNOPTA INC. 38 October 4, 2014 10-Q


(2)

The following table presents a reconciliation of “adjusted earnings” from “earnings/loss attributable to SunOpta Inc.”, which we consider to be the most directly comparable U.S. GAAP financial measure (refer to footnote (2) to the “Consolidated Results of Operations for the quarters ended October 4, 2014 and September 28, 2013”.


 

 

  Per Diluted Share  
 

For the three quarters ended

$   $  
 

October 4, 2014

           
 

Earnings attributable to SunOpta Inc.

  14,964     0.22  
 

Adjusted for:

           
 

   Impairment loss on investment (net of taxes of $nil)

  8,441     0.12  
 

   Other income, net (net of taxes and non-controlling interest of $331)

  (575 )   (0.01 )
 

Adjusted earnings

  22,830     0.33  
 

 

           
 

September 28, 2013

           
 

Loss attributable to SunOpta Inc.

  (7,243 )   (0.11 )
 

Loss from discontinued operations, net of income taxes

  (360 )   (0.01 )
 

Loss from continuing operations attributable to SunOpta Inc.

  (6,883 )   (0.10 )
 

Adjusted for:

           
 

   Impairment loss on investment (net of taxes of $nil)

  21,495     0.32  
 

   Goodwill impairment (net of taxes and non-controlling interest of $2,032)

  1,520     0.02  
 

   Other expense, net (net of taxes and non-controlling interest of $849)

  950     0.01  
 

Adjusted earnings

  17,082     0.25  

Revenues for the three quarters ended October 4, 2014 increased by 10.4% to $990,360 from $896,718 for the three quarters ended September 28, 2013. Revenues in SunOpta Foods increased by 12.3% to $884,693 and revenues in Opta Minerals decreased by 2.7% to $105,667. Excluding the impact of changes including foreign exchange rates and commodity-related pricing, as well as the impact of the additional week of sales in the first three quarters of 2014, revenues increased 11.4% on a consolidated basis and 13.3% within SunOpta Foods. Contributing to the increase in revenues within SunOpta Foods was stronger demand for organic ingredients in the U.S. and Europe; growth in consumer packaged categories including aseptic beverage products and retail frozen foods; and increased value-added fruit ingredient volumes. These positive factors within SunOpta Foods were partially offset by lower volumes and pricing for non-GMO corn. At Opta Minerals, the decrease in revenues reflected lower volumes and pricing for industrial mineral products and weather-related slowdowns in North America in the first quarter of 2014, partially offset by higher volumes of steel products.

Gross profit increased $16,514, or 16.1%, to $119,230 for the three quarters ended October 4, 2014, compared with $102,716 for the three quarters ended September 28, 2013. As a percentage of revenues, gross profit for the three quarters ended October 4, 2014 was 12.0% compared to 11.5% for the three quarters ended September 28, 2013, an increase of 0.5% . Within SunOpta Foods, the gross profit percentage was 11.6% for the first three quarters of 2014, compared with 10.7% for the first three quarters of 2013, which reflected the effect of higher margins on organic ingredient sales in the U.S. and Europe; improved performance in our sunflower operations; and an increased contribution from higher margin aseptic beverage products. These positive factors were offset by lower margins on non-GMO corn and organic feed sales; increased competitive pressures in the re-sealable pouch market; lower plant utilization in our premium juice operation during the retrofit of this facility; and higher operating costs in the first quarter of 2014 due in part to adverse weather conditions in North America. The gross profit percentage at Opta Minerals declined to 15.8% in the first three quarters of 2014, compared with 17.1% in the first three quarters of 2013, primarily due to pricing pressures on certain steel and industrial mineral products, as well as weather-related higher operating costs in the first quarter of 2014, partially offset by the favorable impact of plant cost rationalizations.

Total segment operating income for the three quarters ended October 4, 2014 increased by $7,721, or 22.8%, to $41,533, compared with $33,812 for the three quarters ended September 28, 2013. As a percentage of revenues, segment operating income was 4.2% for the three quarters ended October 4, 2014, compared with 3.8% for the three quarters ended September 28, 2013. The increase in segment operating income reflected higher overall gross profit as described above, partially offset by a $8,398 increase in SG&A expenses, primarily due to increased headcount to support the growth of our international sourcing and supply operations; higher short-term incentive accruals reflecting the improved year-over-year operating performance within SunOpta Foods; and the addition of a number of senior leadership resources in 2013 in connection with the operational realignment within SunOpta Foods. A foreign exchange gain of $377 was recorded for the three quarters ended October 4, 2014, mainly related to the positive impact of a strengthening of the U.S. dollar relative to the euro on open foreign exchange contracts within our international sourcing and supply operations, partially offset by the negative impact of the same exchange rate movement on intercompany and third-party loan balances at Opta Minerals. For the quarter ended September 28, 2013, we recorded a gain of $1,152, which mainly reflected the positive impact on Opta Minerals’ loan balances of a strengthening of the euro in that period relative to the U.S. dollar.

SUNOPTA INC. 39 October 4, 2014 10-Q

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

Other income for the three quarters ended October 4, 2014 of $906 included a gain on sale of assets of $1,018, related to the disposal of certain of our sunflower production and storage facilities in order to reduce the cost structure and improve the production capacity utilization within our North American sunflower operations, and a gain of $1,373 on the settlement of the earn-out related to the acquisition of Edner of Nevada, Inc. in December 2010. These gains were partially offset by employee severance costs (including employees affected by the closure and sale of our sunflower facilities) and an asset impairment charge of $505 at Opta Minerals related to the closure of one of its industrial minerals plants. Other expense for the three quarters ended September 28, 2013 of $1,799 included employee severance and other costs in connection with the operational realignment within SunOpta Foods and the rationalization and integration of acquired businesses by Opta Minerals, as well as an asset impairment charge of $310 to write down certain intangible assets at Opta Minerals.

In the third quarter of 2013, Opta Minerals recognized a non-cash goodwill impairment loss of $3,552 relating to one of its reporting units due to increased competition and reduced demand for industrial mineral products.

The increase in interest expense of $243 to $6,128 for the three quarters ended October 4, 2014, compared with $5,885 for the three quarters ended September 28, 2013, primarily reflected higher applicable interest rates on borrowings under Opta Minerals’ credit facilities.

In the third quarter of 2014 and second quarter of 2013, we recognized impairment losses of $8,441 and $21,495, respectively, on our non-core investment in Mascoma (as described above under “Impairment Loss on Investment in Mascoma”). We estimated that the fair value of our investment in Mascoma was $4,780 as at October 4, 2014.

The provision for income tax for the three quarters ended October 4, 2014 was $12,480, or 34.4% of earnings before taxes, compared with $8,576, or 38.0% of earnings before taxes, for the three quarters ended September 28, 2013 (in each case excluding the impairment losses on investment, for which the related deferred tax asset is considered more likely than not to be unrealized). The decrease in the effective tax rate reflected a change in the jurisdictional mix of earnings, as a result of growth in the profitability of our international sourcing and supply operations; the application of available tax credits; and a deferred tax recovery recorded by Opta Minerals.

Earnings attributable to non-controlling interests for the three quarters ended October 4, 2014 were $426, compared with losses of $612 for the three quarters ended September 28, 2013. The $1,038 increase reflected higher net earnings at Opta Minerals and an improved contribution from the specialty coffee operations of a less-than-wholly-owned subsidiary.

Earnings from continuing operations attributable to SunOpta Inc. for the three quarters ended October 4, 2014 were $14,964 (including the $8,441 impairment loss on investment), compared with a loss from continuing operations of $6,883 for the three quarters ended September 28, 2013 (including the $3,552 goodwill impairment loss and $21,495 impairment loss on investment), an increase of $21,847. Diluted earnings per share from continuing operations were $0.22 for the three quarters ended October 4, 2014, compared with a diluted loss per share from continuing operations of $0.10 for the three quarters ended September 28, 2013.

Loss from discontinued operations of $360 for the three quarters ended September 28, 2013 reflected legal fees and interest costs in connection with arbitration proceedings related to Colorado Sun Oil Processing LLC (“CSOP”), which were settled in June 2013. CSOP was disposed of in August 2011.

On a consolidated basis, we realized earnings of $14,964 (diluted earnings per share of $0.22) for the three quarters ended October 4, 2014, compared with a loss of $7,243 (diluted loss per share of $0.11) for the three quarters ended September 28, 2013.

Adjusting for the impairment loss on investment, goodwill impairment and other income/expense, net, adjusted earnings were $22,830 or $0.33 per diluted share for the three quarters ended October 4, 2014, compared with $17,082 or $0.25 per diluted share for the three quarters ended September 28, 2013. Adjusted earnings is a non-GAAP financial measure. See footnote (2) to the table above for a reconciliation of “adjusted earnings” from “earnings/loss attributable to SunOpta Inc.”, which we consider to be the most directly comparable U.S. GAAP financial measure.

SUNOPTA INC. 40 October 4, 2014 10-Q

Segmented Operations Information

SunOpta Foods                        
For the three quarters ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  884,693   $  788,104   $  96,589     12.3%  
Gross margin   102,542     84,186     18,356     21.8%  
Gross margin %   11.6%     10.7%           0.9%  
                         
Operating income $  46,207   $  34,338   $  11,869     34.6%  
Operating income %   5.2%     4.4%           0.8%  

SunOpta Foods contributed $884,693 or 89.3% of consolidated revenue for the three quarters ended October 4, 2014, compared with $788,104 or 87.9% of consolidated revenues for the three quarters ended September 28, 2013, an increase of $96,589 or 12.3% . The table below explains the increase in revenue by reportable segment for SunOpta Foods:

SunOpta Foods Revenue Changes  
Revenues for the three quarters ended September 28, 2013 $788,104

Increase in Global Sourcing and Supply

41,021

Increase in Value Added Ingredients

8,089

Increase in Consumer Products

47,479
Revenues for the three quarters ended October 4, 2014 $884,693

Gross margin in SunOpta Foods increased by $18,356, or 21.8%, for the three quarters ended October 4, 2014 to $102,542, or 11.6% of revenues, compared with $84,186, or 10.7% of revenues for the three quarters ended September 28, 2013. The table below explains the increase in gross margin by reportable segment for SunOpta Foods:

SunOpta Foods Gross Margin Changes  
Gross margin for the three quarters ended September 28, 2013 $84,186

Increase in Global Sourcing and Supply

13,080

Increase in Value Added Ingredients

2,187

Increase in Consumer Products

3,089
Gross margin for the three quarters ended October 4, 2014 $102,542

SUNOPTA INC. 41 October 4, 2014 10-Q

Operating income in SunOpta Foods increased by $11,869, or 34.6%, for the three quarters ended October 4, 2014 to $46,207 or 5.2% of revenues, compared with $34,338 or 4.4% of revenues for the three quarters ended September 28, 2013. The table below explains the increase in operating income for SunOpta Foods:

SunOpta Foods Operating Income Changes  
Operating income for the three quarters ended September 28, 2013 $34,338

Increase in gross margin, as explained above

18,356

Increase in foreign exchange gains

1,018

Increase in corporate cost allocations

(3,904)

Increase in SG&A costs

(3,601)
Operating income for the three quarters ended October 4, 2014 $46,207

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

Global Sourcing and Supply                        
For the three quarters ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  446,913   $  405,892   $  41,021     10.1%  
Gross margin   44,049     30,969     13,080     42.2%  
Gross margin %   9.9%     7.6%           2.3%  
                         
Operating income $  17,799   $  6,874   $  10,925     158.9%  
Operating income %   4.0%     1.7%           2.3%  

Global Sourcing and Supply contributed $446,913 in revenues for the three quarters ended October 4, 2014, compared to $405,892 for the three quarters ended September 28, 2013, an increase of $41,021 or 10.1% . Excluding the impact of changes including foreign exchange rates, commodity-related pricing and the additional week of sales in the first quarter of 2014, Global Sourcing and Supply’s revenues increased approximately 13.6% . The table below explains the increase in revenue:

Global Sourcing and Supply Revenue Changes  
Revenues for the three quarters ended September 28, 2013 $405,892

Higher volumes of organic raw materials including alternative sweeteners, chia, quinoa, agave, fruits, vegetables and feed products

78,873

Favourable impact on euro denominated sales due to the weaker U.S. dollar relative to euro

2,835

Reduced pricing for organic food and feed products

(15,322)

Lower volumes of non-GMO corn and soy

(14,094)

Reduced pricing for non-GMO corn and soy

(10,545)

Lower in-shell sunflower sales due to reduced exports, and lower by-product values, partially offset by higher volumes of planting seeds and agronomy products

(726)
Revenues for the three quarters ended October 4, 2014 $446,913

SUNOPTA INC. 42 October 4, 2014 10-Q

Gross margin in Global Sourcing and Supply increased by $13,080 to $44,049 for the three quarters ended October 4, 2014 compared to $30,969 for the three quarters ended September 28, 2013, and the gross margin percentage increased by 2.3% to 9.9% . The increase in gross margin as a percentage of revenue was primarily due to favorable sales mix of organic raw materials and improved sunflower processing yields, partially offset by lower pricing spreads on non-GMO and specialty soy and corn products. The table below explains the increase in gross margin:

Global Sourcing and Supply Gross Margin Changes  
Gross margin for the three quarters ended September 28, 2013 $30,969

Margin impact on increased volumes of organic raw materials, offset by lower pricing spread on organic feed and start-up costs and plant inefficiencies related to our cocoa processing facility

11,013

Improved sunflower processing yields and operating efficiencies, offset by lower contribution from planting seeds

4,364

Decreased losses on commodity futures contracts for cocoa and other commodities

660

Lower pricing spreads on non-GMO and specialty soy and corn products, and lower volumes of non-GMO corn

(2,957)
Gross margin for the three quarters ended October 4, 2014 $44,049

Operating income in Global Sourcing and Supply increased by $10,925, or 158.9%, to $17,799 for the three quarters ended October 4, 2014, compared to $6,874 for the three quarters ended September 28, 2013. The table below explains the increase in operating income:

Global Sourcing and Supply Operating Income Changes  
Operating income for the three quarters ended September 28, 2013 $6,874

Increase in gross margin, as explained above

13,080

Increased foreign exchange gains on forward contracts

1,018

Increased SG&A, due primarily to higher compensation costs from increased headcount and short-term incentives, as well as increased professional fees, bad debts, travel, and general office spending

(2,136)

Increase in corporate cost allocations

(936)

Unfavorable impact on expenses due to stronger euro in the current year against the U.S. dollar

(101)
Operating income for the three quarters ended October 4, 2014 $17,799

SUNOPTA INC. 43 October 4, 2014 10-Q


Value Added Ingredients                        
For the three quarters ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  106,720   $  98,631   $  8,089     8.2%  
Gross margin   15,846     13,659     2,187     16.0%  
Gross margin %   14.8%     13.8%           1.0%  
                         
Operating income $  6,218   $  5,979   $  239     4.0%  
Operating income %   5.8%     6.1%           -0.3%  

Value Added Ingredients contributed $106,720 in revenues for the three quarters ended October 4, 2014, compared to $98,631 for the three quarters ended September 28, 2013, an increase of $8,089 or 8.2% . Excluding the additional week of sales in the first quarter of 2014, revenues increased approximately 5.5% in Value Added Ingredients. The table below explains the increase in revenue:

Value Added Ingredients Revenue Changes  
Revenues for the three quarters ended September 28, 2013 $98,631

Higher volumes of fruit ingredients

7,713

Increase in pricing implemented on contract manufacturing and fiber sales partially offset by decreased sales of starches and other grain-based ingredients

376
Revenues for the three quarters ended October 4, 2014 $106,720

Value Added Ingredients gross margin increased by $2,187 to $15,846 for the three quarters ended October 4, 2014 compared to $13,659 for the three quarters ended September 28, 2013, and the gross margin percentage increased by 1.0% to 14.8% . The increase in gross margin as a percentage of revenue is due to improved efficiencies from higher production volumes of fruit ingredients. The table below explains the increase in gross margin:

Value Added Ingredients Gross Margin Changes  
Gross margin for the three quarters ended September 28, 2013 $13,659

Higher fruit ingredient margins due to increased volumes and pricing

2,187
Gross margin for the three quarters ended October 4, 2014 $15,846

Operating income in Value Added Ingredients increased by $239, or 4.0%, to $6,218 for the three quarters ended October 4, 2014, compared to $5,979 for the three quarters ended September 28, 2013. The table below explains the increase in operating income:

Value Added Ingredients Operating Income Changes  
Operating income for the three quarters ended September 28, 2013 $5,979

Increase in gross margin, as explained above

2,187

Increase in SG&A, primarily due to higher compensation costs including short-term incentives

(1,317)

Increase in corporate cost allocations

(631)
Operating income for the three quarters ended October 4, 2014 $6,218

SUNOPTA INC. 44 October 4, 2014 10-Q


Consumer Products                        
For the three quarters ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  331,060   $  283,581   $  47,479     16.7%  
Gross margin   42,647     39,558     3,089     7.8%  
Gross margin %   12.9%     13.9%           -1.0%  
                         
Operating income $  22,190   $  21,485   $  705     3.3%  
Operating income %   6.7%     7.6%           -0.9%  

Consumer Products contributed $331,060 in revenues for the three quarters ended October 4, 2014, compared to $283,581 for the three quarters ended September 28, 2013, an increase of $47,479 or 16.7% . Excluding the additional week of sales in the first quarter of 2014, revenues increased approximately 15.6% in Consumer Products. The table below explains the increase in revenue:

Consumer Products Revenue Changes  
Revenues for the three quarters ended September 28, 2013 $283,581

Increased volume of aseptically packaged beverages, in particular almond beverage, private label and foodservice soymilk, dairy, as well as teas and broths

33,611

Higher volumes of private label retail frozen food offerings, partially offset by lower volumes of private label beverages

8,690

Increased sales of re-sealable pouch products

4,365

Higher sales of fruit and protein snack products

813
Revenues for the three quarters ended October 4, 2014 $331,060

Gross margin in Consumer Products increased by $3,089 to $42,647 for the three quarters ended October 4, 2014 compared to $39,558 for the three quarters ended September 28, 2013, and the gross margin percentage decreased by 1.0% to 12.9% . The decrease in gross margin as a percentage of revenue was due to additional plant and operating costs associated with the significant growth and expansion of our aseptic business, increased operating costs and lower production volumes in our resealable pouch facility, as well as increased costs associated with the retrofit of our premium juice facility. The table below explains the increase in gross margin:

Consumer Products Gross Margin Changes  
Gross margin for the three quarters ended September 28, 2013 $39,558

Higher volume of aseptically packaged beverages as a result of new product lines offset by costs from plant expansions and lower volumes and pricing in fruit and protein snacks

5,916

Increased operating costs and decreased contribution from re-sealable pouch products

(1,475)

Margin impact of outsourcing extraction activities and low production volume during the retrofit of our premium juice facility

(1,352)
Gross margin for the three quarters ended October 4, 2014 $42,647

SUNOPTA INC. 45 October 4, 2014 10-Q

Operating income in Consumer Products increased by $705, or 3.3%, to $22,190 for the three quarters ended October 4, 2014, compared to $21,485 for the three quarters ended September 28, 2013. The table below explains the increase in operating income:

Consumer Products Operating Income Changes  
Operating income for the three quarters ended September 28, 2013 $21,485

Increase in gross margin, as explained above

3,089

Increase in corporate cost allocations

(2,337)

Higher general SG&A expenses

(47)
Operating income for the three quarters ended October 4, 2014 $22,190

Opta Minerals                        
For the three quarters ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Revenues $  105,667   $  108,614   $  (2,947 )   -2.7%  
Gross margin   16,688     18,530     (1,842 )   -9.9%  
Gross margin %   15.8%     17.1%           -1.3%  
                         
Operating income $  3,494   $  5,070   $  (1,576 )   -31.1%  
Operating income %   3.3%     4.7%           -1.4%  

Opta Minerals contributed $105,667 in revenues for the three quarters ended October 4, 2014, compared to $108,614 for the three quarters ended September 28, 2013, a decrease of $2,947 or 2.7% . The table below explains the decrease in revenue:

Opta Minerals Revenue Changes  
Revenues for the three quarters ended September 28, 2013 $108,614

Decreased volumes of abrasive and industrial mineral products

(6,943)

Higher volumes of steel and magnesium products, partially offset by reduced pricing

3,996
Revenues for the three quarters ended October 4, 2014 $105,667

Gross margin for Opta Minerals decreased by $1,842 to $16,688 for the three quarters ended October 4, 2014 compared to $18,530 for the three quarters ended September 28, 2013, and the gross margin percentage decreased by 1.3% to 15.8% . The decrease in gross margin as a percentage of revenue was due primarily to unfavorable changes in product mix, increased raw material costs and select pricing reductions within the steel and magnesium market. The table below explains the decrease in gross margin:

Opta Minerals Gross Margin Changes  
Gross margin for the three quarters ended September 28, 2013 $18,530

Select pricing reductions for steel and magnesium products, partially offset by margin impact of increased volumes

(1,264)

Margin impact of lower volumes of abrasive and industrial mineral products, as well as increased raw material costs and decreased plant utilization

(578)
Gross margin for the three quarters ended October 4, 2014 $16,688

SUNOPTA INC. 46 October 4, 2014 10-Q

Operating income for Opta Minerals decreased by $1,576, or 31.1%, to $3,494 for the three quarters ended October 4, 2014, compared to $5,070 for the three quarters ended September 28, 2013. The table below explains the decrease in operating income:

Opta Minerals Operating Income Changes  
Operating income for the three quarters ended September 28, 2013 $5,070

Decrease in gross margin, as explained above

(1,842)

Decrease in SG&A, primarily due to lower compensation costs through the rationalization and integration of acquired businesses

1,749

Increase in foreign exchange losses

(1,483)
Operating income for the three quarters ended October 4, 2014 $3,494

Corporate Services                        
For the three quarters ended   October 4, 2014     September 28, 2013     Change     % Change  
                         
Operating loss $  (8,168 ) $  (5,596 ) $  (2,572 )   -46.0%  

Operating loss at Corporate Services increased by $2,572 to $8,168 for the three quarters ended October 4, 2014, from a loss of $5,596 for the three quarters ended September 28, 2013. The table below explains the increase in operating loss:

Corporate Services Operating Loss Changes  
Operating loss for the three quarters ended September 28, 2013 $(5,596)

Higher compensation-related costs due to increased headcount, short-term incentives, stock-based compensation and health benefits

(4,525)

Increased IT consulting, professional fees and other general office spending, including rent, utilities, supplies and travel

(1,636)

Decrease in foreign exchange gains

(315)

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

3,904
Operating loss for the three quarters ended October 4, 2014 $(8,168)

SUNOPTA INC. 47 October 4, 2014 10-Q

Liquidity and Capital Resources

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

On October 14, 2014, The Organic Corporation (“TOC”) and certain of our other subsidiaries entered into a multipurpose facilities agreement with a syndicate of lenders (collectively, the “Lenders”), which provides for a total of €92,500 in financing via four main facilities: (i) an €80,000 revolving credit facility covering working capital needs; (ii) a €5,000 facility covering commodity hedging requirements; (iii) a €5,000 facility designated for letters of credit; and (iv) a €2,500 pre-settlement facility covering currency hedging requirements (collectively, the “Club Facility”). The €80,000 revolving credit facility replaces the previous €45,000 revolving credit facility of TOC and certain of its subsidiaries. The increased facility size will be used to support growth within our international sourcing and supply operations. There is no set maturity to the Club Facility and the Club Facility’s credit limit can be extended or adjusted based on the needs of the business and upon approval of the Lenders.

On May 8, 2014, Opta Minerals amended and extended its credit agreement dated May 18, 2012, which provides for a Cdn $20,000 revolving term credit facility and a Cdn $52,500 non-revolving term credit facility. The revolving term credit facility now matures on August 14, 2015, with the outstanding principal amount repayable in full on the maturity date. The principal amount of the non-revolving term credit facility is repayable in equal quarterly installments of approximately Cdn $1,312. Opta Minerals may be required to make additional repayments on the non-revolving term credit facility if certain financial covenants are not met. The non-revolving term credit facility matures on May 18, 2017, with the remaining outstanding principal amount repayable in full on the maturity date. These credit facilities are specific to the operations of Opta Minerals; are standalone and separate from facilities used to finance our core food operations; and are without recourse to SunOpta Inc.

Also on May 8, 2014, certain financial covenants under the Opta Minerals credit agreement were amended for the quarterly periods ending June 30, 2014 through September 30, 2015. Opta Minerals was in compliance with all its financial covenants as at September 30, 2014.

On July 27, 2012, we entered into an amended and restated credit agreement with a syndicate of lenders. The amended agreement provides secured revolving credit facilities of Cdn $10,000 and $165,000, as well as an additional $50,000 in availability upon the exercise of an uncommitted accordion feature. These facilities mature on July 27, 2016, with the outstanding principal amount repayable in full on the maturity date. These facilities support our core North American food operations.

We have an effective registration statement on file with the U.S. Securities and Exchange Commission, pursuant to which we may offer up to $200,000 of debt, equity and other securities. We also have a prospectus on file with Canadian securities regulators covering the offer and sale of up to $200,000 of debt, equity and other securities. While the U.S. registration statement and the Canadian prospectus could be used by us for a public offering of debt, equity or other securities to raise additional capital, our ability to conduct any such future offerings will be subject to market conditions.

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

SUNOPTA INC. 48 October 4, 2014 10-Q

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

Cash Flows

Cash flows for the quarter ended October 4, 2014

Net cash and cash equivalents increased $702 in the third quarter of 2014 to $7,429 as at October 4, 2014, compared with $6,727 at July 5, 2014, which primarily reflected operating cash flows of $18,000 and cash proceeds from the sales of assets of $5,688, mostly offset by the following uses of cash:

Cash provided by operating activities of continuing operations was $18,000 in the third quarter of 2014, compared with $10,009 in the third quarter of 2013, an increase of $7,991, reflecting the improved year-over-year operating performance within SunOpta Foods and a lower carryover of end-of-season inventories of raw grains and seeds, partially offset by increased working capital requirements to support the operating growth within SunOpta Foods.

Cash used in investing activities of continuing operations declined by $3,560 to $400 in the third quarter of 2014, compared with $3,960 in the third quarter of 2013, mainly due to a decrease in capital expenditures of $5,539, reflecting higher spending in the third quarter of 2013 related to an expansion of our aseptic processing and packaging operations, construction of our cocoa processing facility in the Netherlands, and expansion of production capabilities at OLC. We generated cash proceeds of $5,688 from the sale of certain of our sunflower production and storage facilities in the third quarter of 2014. In the third quarter of 2013, restricted cash of $6,495 was applied to the repayment of a credit facility used to pre-finance construction of equipment for our Dutch cocoa facility.

Cash used in financing activities of continuing operations was $16,801 in the third quarter of 2014, compared with $5,736 in the third quarter of 2013, an increase of $11,065, which mainly reflected a $11,045 increase in net repayments under our line of credit facilities, due primarily to higher operating cash flows and proceeds from the sale of assets, as well as reduced capital spending in the third quarter of 2014, compared with the third quarter of 2013.

Cash flows for the three quarters ended October 4, 2014

Net cash and cash equivalents decreased $1,108 in the first three quarters of 2014 to $7,429 as at October 4, 2014, compared with $8,537 at December 28, 2013, which primarily reflected the following uses of cash:

These uses of cash were mostly offset by operating cash flows of $38,586; cash proceeds from the sales of assets of $5,688; and cash proceeds on the exercise of employee stock options of $2,996.

Cash provided by operating activities of continuing operations was $38,586 in the first three quarters of 2014, compared with $31,767 in the first three quarters of 2013, an increase of $6,819, reflecting the improved year-over-year operating performance within SunOpta Foods and a lower carryover of end-of-season inventories of raw grains and seeds, partially offset by increased working capital requirements to support the operating growth within SunOpta Foods. Cash used in operating activities related to discontinued operations in the first three quarters of 2013 of $4,608 mainly related to cash paid in connection with the CSOP arbitration settlement.

SUNOPTA INC. 49 October 4, 2014 10-Q

Cash used in investing activities of continuing operations declined by $23,233 to $8,443 in the first three quarters of 2014, compared with $31,676 in the first three quarters of 2013, mainly due to a decrease in capital expenditures of $20,228, reflecting higher spending in the first three quarters of 2013 related to an expansion of our aseptic processing and packaging operations, construction of our cocoa processing facility, expansion of production capabilities at OLC and expansion of our grains milling and roasting capacity. In addition, we generated proceeds of $5,688 from the sale of the sunflower facilities in the first three quarters of 2014. Also contributing to the year-over-year decline in cash used in investing activities was net cash paid of $3,828 to acquire OLC in the first quarter of 2013, offset by the decrease in restricted cash of $6,495.

Cash used in financing activities of continuing operations was $31,144 in the first three quarters of 2014, compared with cash provided of $4,553 in the first three quarters of 2013, an increase in cash used of $35,697, which mainly reflected net repayments under our line of credit facilities of $29,538 in the first three quarters of 2014, compared with net borrowings under those facilities of $7,854 in the first three quarters of 2013, reflecting reduced capital and business acquisition spending in the first three quarters of 2014, compared with the corresponding period of 2013, as well as higher year-over-year operating cash flows and proceeds from the sale of assets.

Off-Balance Sheet Arrangements

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

Contractual Obligations

Other than the amendments to the TOC and Opta Minerals credit agreements described above under “Liquidity and Capital Resources”, there have been no material changes outside the normal course of business in our contractual obligations since December 28, 2013.

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. The estimates and assumptions made require us to exercise our judgment and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the information that forms the basis of our estimates and assumptions as our business and the business environment generally changes. The use of estimates is pervasive throughout our financial statements. There have been no material changes to the critical accounting estimates disclosed under the heading “Critical Accounting Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of the Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, of the Form 10-K. There have been no material changes to our exposures to market risks since December 28, 2013.

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.

SUNOPTA INC. 50 October 4, 2014 10-Q

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 4, 2014.

Changes in Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in our internal control over financial reporting (as such term is defined under Rule 13a-15(f) promulgated under the Exchange Act) occurred during the quarter ended October 4, 2014. Based on that evaluation, management concluded that there were no changes in our internal control over financial reporting during the quarter ended October 4, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

SUNOPTA INC. 51 October 4, 2014 10-Q

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 legal proceedings, see note 12 to the interim consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

Certain risks associated with our operations are discussed in our Annual Report on Form 10-K for the year ended December 28, 2013. Other than described below, there have been no material changes to the previously-reported risk factors as of the date of this quarterly report. All of such previously reported risk factors continue to apply to our business and should be carefully reviewed in connection with an evaluation of our Company. The following disclosures are in addition to the risk factors reported in the Annual Report on Form 10-K for the year ended December 28, 2013.

The Company Does Not Currently Intend to Pay any Cash Dividends on its Common Shares in the Foreseeable Future; Therefore, the Company’s Shareholders May Not be Able to Receive a Return on their Common Shares Until They Sell Them

The Company has never paid or declared any cash dividends on its common shares. The Company does not anticipate paying any cash dividends on its common shares in the foreseeable future because, among other reasons, the Company currently intends to retain any future earnings to finance its business. The future payment of dividends will be dependent on factors such as cash on hand and achieving profitability, the financial requirements to fund growth, the Company’s general financial condition and other factors the board of directors of the Company may consider appropriate in the circumstances. Until the Company pays dividends, which it may never do, its shareholders will not be able to receive a return on their common shares unless they sell them.

Item 6. Exhibits

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

SUNOPTA INC. 52 October 4, 2014 10-Q

SIGNATURES

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

  SUNOPTA INC.
   
Date: November 12, 2014 /s/ Robert McKeracher
  Robert McKeracher
  Vice President and Chief Financial Officer
  (Authorized Signatory and Principal Financial Officer)

SUNOPTA INC. 53 October 4, 2014 10-Q

EXHIBIT INDEX

Exhibit No. Description
   
10.1

Stock Deferral Plan for Non-Employee Directors dated August 12, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 5, 2014).

 

10.2

Amendment and Restatement Agreement, dated October 14, 2014, relating to a €92,500,000 Multipurpose Facilities Agreement, originally dated September 25, 2012, among The Organic Corporation B.V., Tradin Organic Agriculture B.V., SunOpta Foods Europe B.V., Tradin Organics USA Inc. and Trabocca B.V., as Borrowers, and ING Bank N.V., Cooperative Centrale Raiffeissen-Boerenleenbank B.A and Deutsche Bank AG, Amsterdam Branch, as Lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2014).

 

31.1

Certification by Steven Bromley, Chief Executive Officer, pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934, as amended.

 

31.2

Certification by Robert McKeracher, Vice President and Chief Financial Officer, pursuant to Rule 13a – 14(a) under the Securities Exchange Act of 1934, as amended.

 

32

Certifications by Steven Bromley, Chief Executive Officer, and Robert McKeracher, Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

 

 101.INS

XBRL Instance Document.

 

 101.SCH

XBRL Taxonomy Extension Schema Document.

 

 101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

 

 101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

 

 101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.


SUNOPTA INC. 54 October 4, 2014 10-Q