SunOpta - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended April 2, 2011

OR

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

For the transition period from ______________ to _____________.

Commission file number: 001-34198

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

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

Yes [X]    No [  ]

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

Yes [  ]    No [  ]

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

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 shares of the registrant’s common stock outstanding as of May 2, 2011 was 65,539,104.

All financial information is expressed in United States Dollars. The closing rate of exchange on May 2, 2011 was CDN $1 = U.S. $0.9508.

Forward-Looking Statements

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

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

• we have continuing indemnification obligations relating to our recent dispositions;

• our credit agreement restricts how we may operate our business, and our business may be materially and adversely affected if these restrictions prevent us from implementing our business plan;

• our inability to meet the covenants of our credit facilities could materially and adversely affect our business;

• we may require additional capital to maintain current growth rates, which may not be available on favourable terms or at all;

• our customers generally are not obligated to continue purchasing products from us;

• consumer preferences for natural and organic food products are difficult to predict and may change;

• we operate in a highly competitive industry;

• an interruption at one of our manufacturing facilities could negatively affect our business;

• if we lose the services of our key management, our business could suffer;

• if we do not manage our supply chain effectively, our operating results may be adversely affected;

• volatility in the prices of raw materials, packaging and energy could increase our cost of sales and reduce our gross margins;

• climate change legislation could have an impact on our financial condition and consolidated results of operations;

• adverse weather conditions could impose costs on our business;

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

• impairment charges in goodwill or other intangible assets could adversely impact our financial condition and consolidated results of operations;

• technological innovation by our competitors could make our food products less competitive;

• we rely on protection of our intellectual property and proprietary rights;

• we are subject to substantial environmental regulation and policies;

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

• our operations are influenced by agricultural policies;

• product liability suits, recalls and threatened market withdrawals, could have a material adverse effect on our business;

• litigation and regulatory enforcement concerning marketing and labeling of our food products could negatively affect our business;

• our lack of management and operational control over Mascoma may limit our ability to protect or increase the value of our interest in Mascoma;

• loss of a key customer could materially reduce revenues and earnings;

• fluctuations in exchange rates, interest rates and certain commodities could adversely affect our results of operations, financial condition and liquidity;

• we may not be able to effectively manage our growth and integrate acquired companies; and

• our operating results and share price are subject to significant volatility

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

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

Consolidated Financial Statements

SunOpta Inc.

For the quarters ended April 2, 2011 and April 3, 2010

(Unaudited)

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

(See accompanying notes to consolidated financial statements)

Basis of presentation

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

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

Fiscal year-end

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

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

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

Intangible assets, consisting of a sales order backlog and customer relationships, acquired in this acquisition are not deductible for tax purposes and are being amortized over the estimated useful lives of these assets. The estimated useful life of the sales order backlog is one year, and the estimated useful life of customer relationships is 12 years. Dahlgren is an integrated processor and global supplier of confection sunflower seed products including in-shell and kernel products, roasted sunflower and soy nuts, bird food, hybrid seed and other products. Dahlgren serves the snack food, bakery, food ingredients and bird feed industries. Dahlgren’s products are marketed internationally to customers in Europe, Asia, Australia, Canada and South America, as well as in the United States. The results of operations for Dahlgren have been consolidated since the November 8, 2010 acquisition date, and are included in the Grains and Foods Group.

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

Intangible assets consisting of customer relationships acquired in this acquisition are deductible for tax purposes and are being amortized over their estimated useful lives of approximately 9 years. Goodwill acquired in this acquisition is deductible for tax purposes. Edner produces a variety of nutritious portable foods such as nutrition bars and grains and fruit based snack bars from its 104,000 square foot facility located in Carson City, Nevada. The results of operations of Edner have been consolidated since the December 14, 2010 acquisition date, and are included in the Fruit Group.

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

On April 2, 2011, the Company entered into an agreement to sell certain assets related to fruit processing plants located in Mexico (“Mexican Assets” or the “Mexico Transaction”) to Fruvemex Mexicali, S.A. de C.V. (“Fruvemex”). The Mexico Transaction closed on April 29, 2011 for cash consideration of $3,150, to be received by the Company through a deposit of $750 made on April 5, 2011, and instalment payments of $650 on September 30, 2011, $1,000 on December 29, 2011 and $750 on March 29, 2012. The assets sold, consisting primarily of machinery and equipment, are presented as non-current assets held for sale on the consolidated balance sheet as at April 2, 2011, and have been reclassified as non-current assets held for sale as at January 1, 2011. The Company also entered into a strategic raw material supply agreement and a facility lease at market value rates for the use of land and building still owned in Irapuato, Mexico.

On June 11, 2010, the Company sold its Canadian Food Distribution assets (“CFD” or the “CFD Transaction”) to UNFI Canada Inc., a wholly-owned subsidiary of United Natural Foods Inc., for cash consideration of Cdn $68,000 (U.S. - $65,809). The net proceeds are subject to post closing adjustments, in accordance with the asset purchase agreement, which are expected to be finalized by June 2011.

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

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

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

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

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

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

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

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

There were 200,000 options granted to the Company’s Chief Executive Officer during the quarter ended April 2, 2011 (April 3, 2010 – nil). The inputs used in the Black-Scholes model to determine the fair value of the options granted were as follows:

The fair value of the options granted for the quarter ended April 2, 2011 amounted to $4.79 per option (April 3, 2010 - $nil).

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

For the quarter ended April 2, 2011, options to purchase 606,600 (April 3, 2010 – 1,310,825) common shares have been excluded from the calculations of diluted earnings per share due to their anti-dilutive effect.

The Company has a Canadian line of credit of Cdn $5,000 (U.S. – $5,185). As at April 2, 2011, Cdn $3,296 (U.S. – $3,418) (January 1, 2011 – $nil) of this facility was utilized, including Cdn $2,411 (U.S. – $2,500) (January 1, 2011 –$nil) committed through letters of credit. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including Canadian or U.S. bank prime, or Canadian bankers’ acceptances, plus a margin based on certain financial ratios. At April 2, 2011, the interest rate on this facility was 5.50% (January 1, 2011 – 5.00%), calculated as Canadian prime plus a premium of 2.50%. The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of the Company’s Canadian business as defined in the Credit Agreement. At April 2, 2011, the borrowing base supported draws to $5,185. At April 2, 2011, the Company incurs standby fees equal to 0.75% of the undrawn balances on this facility in accordance with the terms of the Credit Agreement.

The Company has a U.S. line of credit of $100,000. As at April 2, 2011, $74,772 (January 1, 2011 – $44,254) of this facility was utilized, including $2,375 (January 1, 2011 – $2,464) committed through letters of credit. Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. bank prime, or U.S. LIBOR, plus a margin based on certain financial ratios. At April 2, 2011, the weighted average interest rate on this facility was 3.74% (January 1, 2011 – 3.26%), based on LIBOR plus a premium of 3.50%. The maximum availability of this line is based on the borrowing base which includes certain accounts receivables and inventories of the Company’s U.S. business as defined in the Credit Agreement. At April 2, 2011, the borrowing base supported draws to $100,000. At April 2, 2011, the Company incurs standby fees equal to 0.75% of the undrawn balances on this facility in accordance with the terms of the Credit Agreement.

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

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

Opta Minerals has a line of credit facility of Cdn $15,000 (U.S. – $15,429). At March 31, 2011, Cdn $8,463 (U.S. - $8,705) (January 1, 2011 - Cdn $4,713 (U.S. – $4,712) of this facility has been utilized, including letters of credit in the amount of Cdn $1,159 (U.S. - $1,192) (January 1, 2011 - Cdn $1,166 (U.S. – $1,166)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including prime, U.S. dollar base rate, bankers’ acceptances or LIBOR plus a margin based on certain financial ratios of the Company. At March 31, 2011, the weighted average interest rate on this facility was 6.93% (January 1, 2011 – 6.93%).

Opta Minerals’ line of credit facility, along with its unused portion of the revolving acquisition facility (note 8(d)), is subject to annual extensions, and were extended on July 15, 2010 to August 16, 2011.

The Organic Corporation (“TOC”) has a line of credit facility of € 30,500 (U.S. – $43,377). At April 2, 2011, € 29,446 (U.S. -$41,879) (January 1, 2011 – € 22,589 (U.S. – $30,249)) of this facility had been utilized, including letters of credit in the amount of € 3,371 (U.S. – $4,794) (January 1, 2011 – € 181 (U.S. – $243)). Interest on borrowings under this facility accrues at the borrower’s option based on various reference rates including U.S. LIBOR and Euro LIBOR plus a premium of 1.85%. At April 2, 2011, the weighted average interest rate on this facility was 2.83%. The maximum availability of this line is based on a borrowing base which includes certain accounts receivables and inventories of TOC and its subsidiaries. At April 2, 2011, the borrowing base securing this facility supported draws to € 30,500 (U.S. – $43,377) (January 1, 2011 - € 22,938 (U.S. – $30,716)).

In the first quarter of 2011, a wholly owned subsidiary of TOC entered into a line of credit facility with capacity of € 5,000 (U.S. – $7,111). As at April 2, 2011, this line is guaranteed through a $2,500 letter of credit issued by the Company on its U.S. line of credit facility. As at April 2, 2011, € 751 (U.S. – $1,068) of this facility had been used. Interest on borrowings under this facility accrues at the Chinese central bank’s interest rate, as published by the People’s Bank of China, multiplied by 125%, or 7.58% at April 2, 2011.

A less-than-wholly owned subsidiary of TOC has line of credit facilities with availability of $1,802 (January 1, 2011 –$1,297) which are fully guaranteed by TOC. As at April 2, 2011, $1,662 (January 1, 2011 – $568) of these facilities had been used. Interest on borrowings under these facilities accrues at either a base rate of 0.4% plus a premium of 6.00%, or a fixed rate of 9.75%. At April 2, 2011, the weighted average interest rate on these facilities was 6.4% (January 1, 2011 – 9.8%) and TOC is in compliance with all material requirements under this facility.

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

The non-revolving real estate term facility has a maximum available borrowing amount of $13,000. This facility matures on October 31, 2012, and has quarterly minimum repayments of approximately $217. At April 2, 2011, $12,783 (January 1, 2011 - $13,000) was drawn on this facility, and the weighted average interest rate was 4.24% (January 1, 2011 - 3.76%), based on the level of borrowings, and a credit spread based on either U.S. prime or LIBOR rates.

The non-revolving machinery and equipment term facility has a maximum available borrowing amount of $17,000. This facility matures on October 31, 2012, and has quarterly minimum repayments of approximately $850. At April 2, 2011, $16,150 (January 1, 2011 - $17,000) was drawn on this facility, and the weighted average interest rate was 4.24% (January 1, 2011 - 3.76%), based on the level of borrowings, and a credit spread based on either U.S. prime or LIBOR rates.

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

The term loan facility has a maximum available borrowing amount of Cdn $7,456 (U.S. - $7,669). This facility matures on August 30, 2012, is renewable at the option of the lender and Opta Minerals, and has quarterly principal repayments of Cdn $312 (U.S. - $321). At March 31, 2011 and December 31, 2010, the term loan facility was fully drawn. At March 31, 2011, the weighted average interest rate on this facility was 7.38% (December 31, 2010 – 7.61%).

The revolving acquisition facility has a maximum available borrowing amount of Cdn $14,043 (U.S. - $14,445) to finance future acquisitions and capital expenditures. Principal is payable quarterly equal to 1/40 of the drawdown amount. Any remaining outstanding principal under this facility is due upon maturity. The facility is revolving for one year, with a five year term out option. The outstanding balance on the revolving acquisition facility at March 31, 2011 was Cdn $10,996 (U.S. - $11,310) (December 31, 2010 – Cdn $11,421 (U.S. - $11,419)). At March 31, 2011, the weighted average interest rate on this facility was 6.87% (December 31, 2010 - 7.05%).

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

Opta Minerals entered into a cash flow hedge in 2007. The cash flow hedge entered into exchanged a notional amount of Cdn $17,200 (U.S. - $17,692) from a floating rate to a fixed rate of 5.25% from August 2008 to August 2012. The estimated fair value of the interest rate swap at March 31, 2011 was a loss of $734 (December 31, 2010 - loss of $891). The incremental gain in fair value of $110, net of income taxes of $47, has been recorded in other comprehensive earnings for the period. The fair value liability is included in long-term liabilities on the consolidated balance sheets.

In conjunction with the acquisition of TOC on April 2, 2008, its former shareholders provided a subordinated loan to TOC in the amount of €3,000 (U.S. - $4,267). The loan bears interest at 7% payable to the former shareholders on a semi-annual basis. The subordinated loan, as well as €453 (U.S. - $644), previously loaned to TOC, which was repayable in full on March 31, 2011, has been extended to July 8, 2011.

Promissory notes consist of notes issued to former shareholders as a result of business acquisitions. As consideration in the acquisition of TOC, the Company issued a total of €9,000 (U.S. - $12,800) in promissory notes which are secured by a pledge of the common shares of TOC. Of the €9,000 (U.S. - $12,800) issued, €1,000 (U.S. - $1,436) was paid in cash on April 5, 2010. The remaining €8,000 (U.S. - $11,378), previously due on March 31, 2011 has been extended and will be repaid in four €2,000 tranches on October 7, 2011, January 6, 2012, April 6, 2012 and July 6, 2012. The outstanding balance will accrue interest at 5% per annum. As part of the extension, the former shareholders can demand full repayment of the remaining amount owing. Due to TOC’s opening balance sheet not meeting pre-determined working capital targets, and an undisclosed liability that existed prior to the Company’s April 2, 2008 acquisition, € 528 (U.S. - $751) of the promissory notes extended above will not be paid. Accordingly, the balance of the promissory notes at April 2, 2011 is €7,472 (U.S. -$10,627).

In addition, $578 remains owing to various former shareholders at a weighted average interest of 5.65%. Of the $11,205 in total promissory notes, $10,877 are due in the next 12 months, or on demand, with the remaining balances due in varying installments through 2012.

A less-than-wholly owned subsidiary of TOC has a maximum borrowing amount of 6,500 Ethiopia Birr (“ETB”) (U.S. -$391). The outstanding balance at April 2, 2011, was $271 (January 1, 2011 - $264). At April 2, 2011, the weighted average interest rate on borrowed funds was 10.3% (January 1, 2011 - 10.3%).

Term loans payable bear a weighted average interest rate of 5.1% (January 1, 2011 – 5.3%) due in varying installments through 2013 with principal payments of $165 due in the next 12 months.

Capital lease obligations are due in monthly payments, with a weighted average interest rate of 6.7% (January 1, 2011 –6.9%).

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

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

In September 2008, a single plaintiff and a former employee filed a wage and hour dispute against SunOpta Fruit Group, Inc., a wholly-owned subsidiary of the Company, as a class action alleging various violations of California’s labour laws (the “Vargas Class Action”). A tentative settlement of all claims was reached at mediation on January 15, 2010 and the parties executed a settlement agreement resolving all claims of the class. The terms of the proposed settlement are still to be finalized by the court. As a result of the tentative settlement, the Company accrued a liability of $1,200 as at December 31, 2009 which remains in accounts payable and accrued liabilities at April 2, 2011.

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

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

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

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

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

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

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

Effective July 3, 2010, the former Distribution Group was eliminated as an operating segment due to the sale of the Canadian Food Distribution assets (note 3(b)). In addition, the Company merged its Canadian-based natural health products division with the former International Sourcing and Trading Group to create a new operating segment called the International Foods Group. This realignment of operating segments effectively merges our international operations into one reporting group. The segmented information for the quarter ended April 3, 2010 have been updated to reflect the current year’s segment presentation.

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

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

The Company’s assets, operations and employees are principally located in the United States, Canada, Europe, Mexico (see note 3(a)), China and Africa. Revenues are allocated to the United States, Canada and Europe and other external markets based on the location of the customer. Other expense net, interest expense, net, and provision for income taxes are not allocated to the segments.

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

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

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

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

Other expense, net for the quarter ended April 2, 2011 included rationalization costs of $427, related to employee terminations in the Fruit Group and Corporate Services. In addition, the Company recorded other income of $65 related to the reversal of contingent consideration related to the acquisition of Dahlgren in 2010 due to changes in earnings expectations for 2011, offset by additional acquisition related expenses.

Other expense, net for the quarter ended April 3, 2010 included $151 in rationalization related costs, as well as a $164 non-cash impairment charge for the write-off of long-lived assets within the Ingredients Group. Of the total of $151 in rationalization costs, $87 related to severance costs incurred in connection with consolidation of manufacturing facilities from British Columbia, Canada to Omak, Washington, and $64 related to moving assets from a closed facility to another operating facility in the first quarter of 2010. Both of these rationalization projects were completed in 2010 and occurred with the Fruit Group segment.

Included in cash and cash equivalents is $3,519 (January 1, 2011 - $495) that is specific to Opta Minerals that cannot be utilized by the Company for general corporate purposes, and is maintained in separate bank accounts of Opta Minerals.

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

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

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

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

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 April 2, 2011:

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

These exchange-traded commodity futures and forward commodity purchase and sale contracts are used as part of the Company’s risk management strategy, and represent economic hedges to limit risk related to fluctuations in the price of certain commodity grains. These derivative instruments are not designated as hedging instruments. For the quarter ended April 2, 2011, a $2,985 gain has been recorded in cost of goods sold on the consolidated statement of operations related to changes in the fair value of these derivatives.

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

In addition to the notional corn and soybean open futures and forward purchase and sale contracts noted above, the Company also had open forward contracts to sell 101 lots of cocoa at April 2, 2011.

(b) Inventories carried at market
Grains inventory carried at fair value is determined using quoted market prices from the Chicago Board of Trade (“CBoT”). Estimated fair market values for grains inventory quantities at period end are valued using the quoted price on the CBoT adjusted for differences in local markets, and broker or dealer quotes. These assets are placed in level 2 of the fair value hierarchy, as there are observable quoted prices for similar assets in active markets. Gains and losses on commodity grains inventory are included in cost of sales on the consolidated statements of operations. At April 2, 2011, the Company had 548 bushels of commodity corn and 1,056 bushels of commodity soybeans, in inventories carried at market.

(c) Interest rate swap
Opta Minerals entered into an interest rate swap to minimize its exposure to interest rate risk. A notional amount of Cdn $17,200 (U.S. - $17,692) of floating rate debt was effectively converted to fixed rate debt at a rate of 5.25% for the period August 2008 to August 2012. At each period end, management calculates the mark-to-market fair value using a valuation technique using quoted observable prices for similar instruments as the primary input. Based on this valuation, the previously recorded fair value is adjusted to the current mark-to-market position. The mark-to-market gain or loss is placed in level 2 of the fair value hierarchy. The interest rate swap is designated as a cash flow hedge for accounting purposes and accordingly, gains and losses on changes in the fair value of the interest rate swap are included in other comprehensive earnings on the consolidated statements of operations. For the quarters ended April 2, 2011, a $110 gain (net of income taxes of $47) has been recorded in other comprehensive earnings due to the change in fair value for this derivative.

(d) Foreign forward currency contracts
As part of its risk management strategy, the Company enters into forward foreign exchange contracts to reduce its exposure to fluctuations in foreign currency exchange rates. For any open forward foreign exchange contracts at period end, the contract rate is compared to the forward rate, and a gain or loss is recorded. These contracts are placed in level 2 of the fair value hierarchy, as the inputs used in making the fair value determination are derived from and are corroborated by observable market data. These forward foreign exchange contracts represent economic hedges and are not designated as hedging instruments. At April 2, 2011 the Company had open forward foreign exchange contracts with a notional value of € 11,027 and $6,862 that resulted in an unrealized loss of $576 which is included in foreign exchange (loss) gain on the consolidated statements of operations.

(e) Embedded foreign currency derivatives
A foreign subsidiary of the Company enters into a number of purchase and sales contracts that are subject to currency risk, which can modify the cash flows of the contract due to movements in foreign currencies. Certain of these purchase and sale contracts contain embedded foreign currency derivatives, such that the currency risk component can be separated from the purchase or sale component. The fair value of these derivatives is measured based on the forward foreign exchange rate at April 2, 2011. These embedded derivatives are placed in level 2 of the fair value hierarchy, as the inputs used in determining the fair value are derived from and corroborated by observable market data. For the quarter ended April 2, 2011, an unrealized gain of $700 has been recorded in cost of goods sold on the consolidated statement of operations for these embedded foreign currency derivatives.

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

The Company has reclassified comparative balances on the consolidated statement of operations for the quarter ended April 3, 2010 to conform to the current quarter’s presentation. The comparative balance for cost of goods sold has been increased by $1,070, reflecting the amount of warehousing and distribution (“W&D”) expenses that were previously disclosed on a separate line item in the consolidated statement of operations. Total W&D costs for the quarter ended April 2, 2011 were $1,171. The comparative reclassification did not have an impact on earnings, net assets, shareholder’s equity or cash and cash equivalents.

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

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

Significant Developments During the Quarter Ended April 2, 2011

On May 2, 2011, we announced the sale of our frozen fruit processing assets in Rosarito and Irapuato, Mexico to Fruvemex Mexicali, S.A. de C.V. (“Fruvemex”) for proceeds of $3,150 to be received in a series of instalments over a twelve month period. An initial instalment of $750 was received in advance of closing the transaction. As part of this transaction we also entered into a strategic raw material supply agreement with Fruvemex and a long term market value lease for the use of the facilities in Irapuato. This divestiture is expected to simplify our frozen foods business model and improve profitability by increasing focus on our value-added operations and core areas of expertise, while also expanding our strategic supply relationships.

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

Consolidated

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

Revenues for the quarter ended April 2, 2011 increased by 20.4% to $260,923 from $216,749 for the quarter ended April 3, 2010. Revenues in SunOpta Foods increased by 20.4% to $239,317 and revenues in Opta Minerals increased by 20.5% to $21,606. Excluding the impact of acquisitions made late in 2010, revenues increased 9.7% in the first quarter of 2011. The acquisition of Dahlgren & Company, Inc. and Edner of Nevada, Inc. added incremental acquisition revenues of $20,428 and $2,640, respectively. The underlying base growth rate for the business was approximately 7.0% after accounting for changes including movements in foreign exchange and commodity prices. The increase in revenue was due primarily to the changes in sales volume and pricing described below in “Segmented Operations Information”.

Gross profit increased $79, or 0.2%, for the quarter ended April 2, 2011 to $35,555 from $35,476 for the quarter ended April 3, 2010. As a percentage of revenues, gross profit for the quarter ended April 2, 2011 was 13.6% compared to 16.4% for the quarter ended April 3, 2010, a decrease of 2.8%. Within SunOpta Foods, higher volumes of consumer products and grains were offset by lower volumes of fiber and fruit-based ingredients contributing to a $478 decrease in gross profit. Offsetting the decrease in SunOpta Foods was increased gross profit at Opta Minerals of $557 due to the continued rebound in the steel industry. The improvement in gross profit for Opta Minerals was due primarily to a lower overall cost of goods sold, as a result of the variances described below under “Segmented Operations Information”.

Selling, General and Administrative costs (“SG&A”) including intangible asset amortization decreased $2,579 to $24,392 for the quarter ended April 2, 2011 compared to $26,971 for the quarter ended April 3, 2010. The decrease in SG&A was due primarily to a $1,596 decrease in corporate costs as a result of lower professional fees, stock-based compensation, depreciation and other corporate overhead costs, a $945 decrease in SG&A within our Natural Health Products group as a result of lower marketing costs, and a $1,137 decrease in other SG&A, largely due to headcount reductions in the Fruit Group. These decreases were offset by $1,099 in incremental SG&A associated with the acquisitions of Dahlgren and Edner in the fourth quarter of 2010. As a percentage of revenues, SG&A costs and intangible asset amortization costs were 9.3% for the quarter ended April 2, 2011 compared to 12.4% for the quarter ended April 3, 2010.

Foreign exchange losses were $135 for the quarter ended April 2, 2011 as compared to gains of $1,117 for the quarter ended April 3, 2010. The decrease was primarily due to unfavourable exchange rate movements for the Euro and Canadian dollar relative to the U.S. dollar.

Operating income for the quarter ended April 2, 2011 increased by $1,406 to $11,028 compared to operating income of $9,622 for the quarter ended April 3, 2010 due to the factors noted above. As a percentage of revenue, operating income was 4.2% for the quarter ended April 2, 2011, compared to 4.4% for the quarter ended April 3, 2010. Further details on revenue, gross margins and operating income variances are provided below under “Segmented Operations Information”.

Other expense for the quarter ended April 2, 2011 of $362 reflects rationalization costs associated within the Fruit Group and Corporate Services segments, offset by a reduction in accrued contingent consideration relating to the acquisition of Dahlgren. Other expense of $315 in the first quarter of 2010 reflects rationalization efforts in the Fruit Group and a write-down of long-lived assets in the Ingredients Group.

Interest expense for the quarter ended April 2, 2011 was $1,984 compared to $3,022 for the quarter ended April 3, 2010, a $1,038 decrease. Borrowing costs were lower for the quarter ended April 2, 2011 due to lower debt levels outstanding on our real estate and machinery and equipment term loan facilities, a lower base interest rate on borrowed funds as compared to the first quarter of 2010, and a reduction of non-cash amortization of deferred financing fees, partially offset by higher borrowed amounts on our credit lines.

Income tax provision for the quarter ended April 2, 2011 was $3,009, or 34.7% of earnings before taxes as compared to $2,076, or 33.0% for the quarter ended April 3, 2010, due to the higher earnings from continuing operations before income taxes in the current period. The expected annual effective income tax rate for 2011 is between 34% and 36%.

Earnings from continuing operations for the quarter ended April 2, 2011 were $5,673 as compared to $4,209 for the quarter ended April 3, 2010, a $1,464 or 34.8% increase. Basic and diluted earnings per share from continuing operations was $0.08 and $0.08 respectively for the quarter ended April 2, 2011 compared to $0.07 and $0.07 respectively for the quarter ended April 3, 2010.

Earnings attributable to non-controlling interests for the quarter ended April 2, 2011 were $592 compared to earnings of $28 for the quarter ended April 3, 2010. The $564 increase is due to higher net earnings in our less than wholly-owned subsidiaries.

Earnings from discontinued operations, net of income taxes in the first quarter of 2010, reflect the results of the former Canadian food distribution business and SunOpta BioProcess Inc., which were divested on June 11, 2010 and August 31, 2010, respectively.

On a consolidated basis, earnings and basic and diluted earnings per share were $5,081, $0.08 and $0.08 respectively, for the quarter ended April 2, 2011, compared to $4,613, $0.07 and $0.07, respectively, for the quarter ended April 3, 2010.

Segmented Operations Information

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

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

SunOpta Foods contributed $239,317 or 91.7% of consolidated revenue for the quarter ended April 2, 2011 compared to $198,818 or 91.7% of consolidated revenues for the quarter ended April 3, 2010, a $40,499 increase. Excluding the impact of acquisitions made late in 2010, revenues in SunOpta Foods increased 8.8% in the first quarter of 2011. The acquisition of Dahlgren and Edner added incremental revenues of $20,428 and $2,640, respectively. The underlying base growth rate for the business was approximately 6.0% after accounting for changes including movements in foreign exchange and commodity prices. The table below explains the increase in revenue by group:

Gross margin in SunOpta Foods decreased by $478 for the quarter ended April 2, 2011 to $30,404, or 12.7% of revenues, compared to $30,882, or 15.5% of revenues for the quarter ended April 3, 2010. The table below explains the decrease in gross margin by group:

Operating income in SunOpta Foods decreased by $928 for the quarter ended April 2, 2011 to $10,463 or 4.4% of revenues, compared to $11,391 or 5.7% of revenues for the quarter ended April 3, 2010. The table below explains the decrease in operating income:

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

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

The Grains and Foods Group contributed $115,601 in revenues for the quarter ended April 2, 2011, compared to $78,845 for the quarter ended April 3, 2010, a $36,756 or 46.6% increase. The table below explains the increase in revenue:

Gross margin in the Grains and Foods Group increased by $2,130 to $12,023 for the quarter ended April 2, 2011 compared to $9,893 for the quarter ended April 3, 2010, and the gross margin percentage decreased by 2.1% to 10.4%. The decrease in gross margin as a percentage of revenue is primarily due to unfavourable pricing in the sunflower market caused by increasing commodity costs and a large, low-cost supply from South America, offset by improved efficiencies at our aseptic processing and packaging facilities due in part to increased volumes. The table below explains the increase in gross margin:

Operating income in the Grains and Foods Group increased by $691, or 13.8%, to $5,707 for the quarter ended April 2, 2011, compared to $5,016 for the quarter ended April 3, 2010. The table below explains the increase in operating income:

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

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

The Ingredients Group contributed $15,751 in revenues for the quarter ended April 2, 2011, compared to $18,150 for the quarter ended April 3, 2010, a $2,399 or 13.2% decrease. The table below explains the decrease in revenue:

The Ingredients Group gross margin decreased by $2,467 to $3,599 for the quarter ended April 2, 2011 compared to $6,066 for the quarter ended April 3, 2010, and the gross margin percentage decreased by 10.6% to 22.8%. Lower customer demand for fiber, due in part to pipeline fills in the prior year, the loss of a significant customer in the first quarter of 2011, and higher inefficiencies due to lower production volumes led to the decrease in gross margin and rates versus the first quarter of 2010. The table below explains the decrease in gross margin: