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DOLE > SEC Filings for DOLE > Form 10-Q on 17-Nov-2011All Recent SEC Filings

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Form 10-Q for DOLE FOOD CO INC


17-Nov-2011

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis contains forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements, which are based on management's assumptions and describe Dole's future plans, strategies and expectations, are generally identifiable by the use of terms such as "anticipate," "will," "expect," "believe," "should" or similar expressions. The potential risks and uncertainties that could cause Dole's actual results to differ materially from those expressed or implied herein are set forth in Item 1A and Item 7A of Dole's Annual Report on Form 10-K for the year ended January 1, 2011 and include: weather-related phenomena; market responses to industry volume pressures; product and raw materials supplies and pricing; changes in interest and currency exchange rates; economic crises; quotas, tariffs and other governmental actions; and international conflict.

Overview

Significant highlights for Dole Food Company, Inc. and its consolidated subsidiaries ("Dole") for the quarter and three quarters ended October 8, 2011 were as follows:

• Net revenues for the third quarter of 2011 were $2.1 billion, an increase of 5% from the third quarter of 2010. Revenues in all three of our reporting segments increased, driven primarily by higher volumes sold in our fresh fruit segment as well as higher sales in all major product lines in our packaged foods segment.

• During the third quarter of 2011, Dole introduced two new frozen fruit products, Dole® Fruit Smoothie Shakers® and Dole® Frozen Fruit Single-serve cups.

• Operating income for the third quarter of 2011 was $10.3 million compared to $65.5 million in the third quarter of 2010, a decrease of $55.2 million. Excluding the $27.3 million gain on the container arbitration settlement recorded in the third quarter of 2010, operating income decreased $27.9 million. Lower earnings were driven primarily by our fresh fruit segment.

• Fresh fruit operating income decreased primarily as a result of higher fruit costs and commodity costs in our banana operations worldwide.

• Fresh vegetables operating income decreased slightly due to higher product costs in our fresh-packed vegetables business and packaged salads operations partially offset by higher pricing in packaged salads.

• Packaged foods operating income was comparable as higher pricing was offset by higher product costs and higher selling and general and administrative expenses worldwide.

• Dole committed to a new restructuring plan during the third quarter of 2011 in its fresh fruit segment in Europe and Latin America and the fresh vegetables operations in Asia. These restructuring efforts, coupled with our restructuring plan initiated during 2010, will further reduce costs by realigning supply with demand. During the third quarter of 2011, Dole incurred total restructuring costs of $13.2 million, bringing the total restructuring costs for the first three quarters of 2011 to $21.9 million. Dole expects to incur additional restructuring charges of $12.7 million, of which $10.4 million is expected to be incurred in the fourth quarter of 2011 and $2.3 million during 2012. As a result of the 2010 and 2011 plans, Dole estimates total restructuring charges to be $56 million. Associated with the 2010 plan, cost savings for fiscal 2011 are estimated to be $37 million, of which $28 million has been realized in the first three quarters of 2011. Beginning in fiscal 2012, Dole expects to realize additional cost savings of $24 million related to the 2011 restructuring plan.

• Dole signed a definitive agreement to sell our Dole Spain subsidiary, which is part of our European ripening and distribution business to a subsidiary of Compagnie Financière de Participations, a company in which Dole holds a non-controlling 40% ownership interest. The sale closed during the fourth quarter of 2011 and total sale proceeds were approximately 15.1 million euros.


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• Dole signed and closed a definitive merger agreement to acquire 100% of the capital stock of HCE Corporation and its subsidiaries ("SunnyRidge"), one of the top blueberry companies in the United States. The purchase price was $91.5 million and was paid primarily from cash on hand some of which was attributable to Dole's third quarter 2011 refinancing transactions.

• During the fourth quarter of 2011, Dole signed a definitive agreement to invest $6 million for a 30% ownership in Healthy Foods, LLC ("Healthy Foods"). Healthy Foods produces the yonanas® frozen treat maker.

• On October 3, 2011, Dole signed a definitive settlement agreement that, with full implementation, will bring to an end the 5 U.S. DBCP lawsuits brought by the Provost & Umphrey Law Firm, L.L.P., and all of its Nicaragua lawsuits and judgments. On November 3, 2011, the Los Angeles Superior Court judge presiding over the 4 California lawsuits granted Dole's good faith settlement motion as to the entire global settlement. This court approval was a significant condition to the Provost settlement and was supported by the plaintiffs and all but one of the defendants. The approval also provides support for the required dismissal by the Nicaragua courts of the local lawsuits and judgments, an additional condition to full implementation.

Non-GAAP Financial Measures

The following is a reconciliation of earnings before interest expense, income
taxes and discontinued operations ("EBIT before discontinued operations") and
adjusted earnings before interest expense, income taxes and depreciation and
amortization ("Adjusted EBITDA") to the most directly comparable U.S. Generally
Accepted Accounting Principles ("U.S. GAAP") financial measure:



                                              Quarter Ended                      Three Quarters Ended
                                      October 8,         October 9,         October 8,          October 9,
                                         2011               2010               2011                2010
                                                                 (In thousands)
Net income (loss)                    $    (47,004 )     $    (48,829 )     $      38,074       $      7,405
(Income) loss from discontinued
operations, net of income taxes                43               (202 )              (188 )             (876 )
Gain on disposal of discontinued
operations, net of income taxes                 -             (4,143 )              (339 )           (4,143 )
Interest expense                           41,402             49,187             111,709            127,375
Income taxes                                  123              7,522              18,781             19,764

EBIT before discontinued
operations                                 (5,436 )            3,535             168,037            149,525
Depreciation and amortization              31,666             37,599              79,064             87,621
Net unrealized loss on
derivative instruments                      2,487             43,527              35,104             59,164
Net gain on long-term Japanese
yen hedges                                 (2,298 )                -              (6,582 )                -
Foreign currency exchange (gain)
loss on vessel obligations                 (2,590 )            3,946                 (51 )           (1,147 )
Net unrealized (gain) loss on
foreign denominated instruments            (1,645 )           12,579               5,802              6,581
Gain on asset sales                        (3,326 )                -              (3,337 )           (2,921 )

Adjusted EBITDA                      $     18,858       $    101,186       $     278,037       $    298,823

EBIT before discontinued operations and Adjusted EBITDA are measures commonly used by financial analysts in evaluating the performance of companies. EBIT before discontinued operations is calculated from net income by adding interest expense and income tax expense, and subtracting income from discontinued operations, net of income taxes, and gain on disposal of discontinued operations, net of income taxes. Adjusted EBITDA is calculated from EBIT before discontinued operations by: (1) adding depreciation and amortization; (2) adding the net unrealized loss or subtracting the net unrealized gain on foreign currency and bunker fuel hedges and the cross currency swap which do not have a more than insignificant financing element present at contract inception;
(3) adding the net loss or subtracting the net gain on the long-term Japanese yen hedges;


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(4) adding the foreign currency loss or subtracting the foreign currency gain on the vessel obligations; (5) adding the net unrealized loss or subtracting the net unrealized gain on foreign denominated instruments; and (6) subtracting the gain on asset sales. Due to the fact that the long-term Japanese yen hedges had more than an insignificant financing element at inception (as discussed in Note 14 to the condensed consolidated financial statements), the liability is treated similar to a debt instrument and the associated cash flows are classified as a financing activity. As a result, both the realized and unrealized gains and losses related to the long-term Japanese yen hedges are subtracted from or added back to EBIT before discontinued operations when calculating Adjusted EBITDA. These adjustments have been made because management excludes these amounts when evaluating the performance of Dole.

EBIT before discontinued operations and Adjusted EBITDA are not calculated or presented in accordance with U.S. GAAP, and EBIT before discontinued operations and Adjusted EBITDA are not a substitute for net income attributable to shareholders of Dole Food Company, Inc., net income, income from continuing operations, cash flows from operating activities or any other measure prescribed by U.S. GAAP. Further, EBIT before discontinued operations and Adjusted EBITDA as used herein are not necessarily comparable to similarly titled measures of other companies. However, Dole has included EBIT before discontinued operations and Adjusted EBITDA herein because management believes that EBIT before discontinued operations and Adjusted EBITDA are useful performance measures for Dole. In addition, EBIT before discontinued operations and Adjusted EBITDA are presented because management believes that these measures are frequently used by securities analysts, investors and others in the evaluation of Dole.

EBIT before discontinued operations and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, operating income, cash flow or other combined income or cash flow data prepared in accordance with U.S. GAAP. Because of their limitations, EBIT before discontinued operations and Adjusted EBITDA and the related ratios presented throughout this Item 2 should not be considered as measures of discretionary cash available to invest in business growth or reduce indebtedness. Dole compensates for these limitations by relying primarily on its U.S. GAAP results and using EBIT before discontinued operations and Adjusted EBITDA only supplementally.

Results of Operations

Selected results of operations for the quarters and three quarters ended
October 8, 2011 and October 9, 2010 were as follows:



                                           Quarter Ended                   Three Quarters Ended
                                   October 8,        October 9,        October 8,        October 9,
                                      2011              2010              2011              2010
                                                            (In thousands)
Revenues, net                      $ 2,086,032       $ 1,988,571       $ 5,687,861       $ 5,335,967
Operating income                        10,265            65,527           211,578           205,005
Other income (expense), net            (18,956 )         (61,994 )         (53,970 )         (62,883 )
Interest expense                       (41,402 )         (49,187 )        (111,709 )        (127,375 )
Income taxes                              (123 )          (7,522 )         (18,781 )         (19,764 )
Net income (loss)                      (47,004 )         (48,829 )          38,074             7,405
Less: Net income attributable
to noncontrolling interests             (1,634 )          (1,547 )          (3,906 )          (3,307 )
Net income (loss) attributable
to shareholders of Dole Food
Company, Inc.                          (48,638 )         (50,376 )          34,168             4,098


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Revenues

Revenues in the quarter ended October 8, 2011 increased 5% to $2.1 billion from $2 billion for the quarter ended October 9, 2010. Higher sales were reported in all three of Dole's operating segments. Fresh fruit sales increased $65.7 million primarily due to improved pricing in North America bananas, higher banana volumes sold in North America and Asia, favorable foreign currency exchange movements in Europe and Japan as well as higher sales of Chilean deciduous fruit. These improvements were partially offset by lower volumes of bananas sold in Europe due to the implementation of the European restructuring plan as well as lower pricing and volumes sold in the European ripening and distribution business. Packaged foods sales increased $30.6 million primarily due to improved pricing worldwide and higher volumes sold in Asia and the North America frozen fruit business. Fresh vegetables sales increased slightly as higher pricing of packaged salads and higher local pricing for fresh-packed vegetables sold in Asia were partially offset by lower sales in the North America fresh-packed vegetables business. Net favorable foreign currency exchange movements in Dole's selling locations resulted in higher revenues of approximately $74 million.

Revenues in the three quarters ended October 8, 2011 increased 7% to $5.7 billion from $5.3 billion for the three quarters ended October 9, 2010. Higher sales were reported in all three of Dole's operating segments. Fresh fruit sales increased $258.7 million due primarily to the same factors that impacted sales during the third quarter except for higher local pricing in the European ripening and distribution business during the first half of 2011. Packaged foods sales increased $66.4 million due primarily to higher pricing worldwide and higher volumes sold in Asia, Europe, and the frozen fruit business. Fresh vegetables sales increased $26.8 million due primarily to higher pricing of packaged salads and higher pricing for fresh-packed vegetables sold in North America and Asia. Net favorable foreign currency exchange movements in Dole's selling locations resulted in higher revenues of approximately $194 million.

Operating Income

For the quarter ended October 8, 2011, operating income was $10.3 million compared with $65.5 million for the quarter ended October 9, 2010. Excluding the $27.3 million gain on the container arbitration settlement recorded in the third quarter of 2010, operating income decreased $27.9 million. Fresh fruit operating results decreased primarily due to higher product and shipping costs in Dole's worldwide banana operations and fresh pineapple operations in North America and Asia. Fresh vegetables operating results decreased slightly as a result of higher product costs and general and administrative expenses in Dole's fresh-packed vegetables and packaged salads operations, partially offset by higher pricing in packaged salads. Packaged foods operating results were comparable as higher pricing was offset by higher product costs and higher selling and general and administrative expenses. If foreign currency exchange rates in Dole's significant foreign operations during the quarter ended October 8, 2011 had remained unchanged from those experienced during the quarter ended October 9, 2010, Dole estimates that its operating income would have been lower by approximately $8 million.

For the three quarters ended October 8, 2011, operating income increased to $211.6 million compared with $205 million for the three quarters ended October 9, 2010. Fresh fruit operating results increased primarily due to higher earnings in Dole's worldwide banana operations. These improvements were partially offset by lower operating results in Dole's packaged foods segment due primarily to higher product costs worldwide and higher levels of marketing expenditures in North America associated with the product launch of FRUIT BOWLS in 100% juice and Fruit in Jars in 100% juice. Fresh vegetables operating results decreased due primarily to the same factors that impacted the quarter. If foreign currency exchange rates in Dole's significant foreign operations during the three quarters ended October 8, 2011 had remained unchanged from those experienced during the three quarters ended October 9, 2010, Dole estimates that its operating income would have been lower by approximately $14 million.

Other Income (Expense), Net

For the quarter ended October 8, 2011, other income (expense), net was an expense of $19 million compared to expense of $62 million for the quarter ended October 9, 2010. The improvement was primarily due to the absence of net losses of $43.5 million generated on Dole's cross currency swap, which was effectively


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unwound during the first quarter of 2011. In addition, unrealized gains were recorded during the third quarter of 2011 on Dole's foreign denominated borrowings and British pound sterling vessel obligation of $2.2 million and $2.6 million, respectively, compared with unrealized losses of $13.7 million and $3.9 million, respectively, recorded in the third quarter of 2010. These improvements were partially offset by $12.7 million of charges related to the write-off of debt issuance costs and debt discounts in connection with the third quarter 2011 refinancing of Dole's term loan and asset-based lending senior secured revolving credit facility. Dole also recorded charges of $13.5 million related to the premiums paid as well as the write-off of debt issuance costs and debt discounts in connection with the early retirement of debt.

For the three quarters ended October 8, 2011, other income (expense), net was an expense of $54 million compared to expense of $62.9 million for the three quarters ended October 9, 2010. The improvement was primarily due to a decrease in net losses of $51.3 million on Dole's cross currency swap as well as net gains of $7.2 million from Dole's long-term Japanese yen hedges. These improvements were partially offset by unrealized losses of $27.4 million incurred in connection with unwinding the cross currency swap and entering into a series of long-term Japanese yen hedges. In addition, other income (expense), net was impacted by $13.5 million of charges related to the early retirement of debt as well as an increase in the write-off of debt issuance costs of $8.1 million.

The cross currency swap was scheduled to mature in June 2011. During the first quarter of 2011, Dole effectively unwound the cross currency swap by entering into a transaction to refinance its obligation under the cross currency swap and through a series of long-term Japanese yen hedges that mature through December 2014. The value of these contracts will continue to fluctuate based on changes in the exchange rate over the life of the individual forward contracts. Refer to Note 14 - Derivative Financial Instruments for additional information.

Interest Expense

Interest expense for the quarter ended October 8, 2011 was $41.4 million compared to $49.2 million for the quarter ended October 9, 2010. Interest expense for the three quarters ended October 8, 2011 was $111.7 million compared to $127.4 million for the three quarters ended October 9, 2010. Interest expense in both periods decreased primarily as a result of lower effective borrowing rates due in part to the maturity of Dole's interest rate swap during the second quarter of 2011.

Income Taxes

Dole recorded $18.8 million of income tax expense on $49.7 million of pretax income from continuing operations for the three quarters ended October 8, 2011. Income tax expense included an interest benefit of $2.9 million related to Dole's unrecognized tax benefits. Income tax expense of $19.8 million on $19.5 million of pretax income from continuing operations was recorded for the three quarters ended October 9, 2010 which included interest expense of $0.7 million related to Dole's unrecognized tax benefits. Dole's effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in its various U.S. and foreign jurisdictions. For the periods presented, Dole's income tax expense differs from the U.S. federal statutory rate applied to Dole's pretax income primarily due to losses in certain jurisdictions for which it is more likely than not that a tax benefit will not be realized.

Income tax expense for the quarters ended October 8, 2011 and October 9, 2010 were $0.1 million and $7.5 million, respectively.

Dole is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. This could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

Internal Revenue Service Audit: On August 27, 2009, the IRS completed its examination of Dole's U.S. federal income tax returns for the years 2002-2005 and issued a Revenue Agent's Report ("RAR") that includes various proposed adjustments, including with respect to the 2003 going-private merger transactions. The IRS proposed that certain funding used in the going-private merger was taxable and that some related investment


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banking fees were not deductible. The net tax deficiency associated with the RAR is $122 million, plus interest. On October 27, 2009, Dole filed a protest letter challenging the proposed adjustments contained in the RAR and has been pursuing resolution of these issues with the Appeals Division of the IRS. During the quarter ended October 8, 2011, Dole reached a final settlement with the Appeals Division on all issues. As a result, Dole's total amount of unrecognized tax benefits will decrease by $41 million, of which $20 million represents a cash payment. The tax of $19 million was paid in the fourth quarter of 2011 and Dole expects to pay the remaining tax of $1 million and interest of approximately $11 million later in the fourth quarter.

Segment Results of Operations

Dole has three reportable operating segments: fresh fruit, fresh vegetables and packaged foods. These reportable segments are managed separately due to differences in their products, production processes, distribution channels and customer bases.

Management evaluates and monitors segment performance primarily through, among other measures, EBIT. EBIT before discontinued operations is calculated from net income by adding interest expense and income tax expense, and subtracting income from discontinued operations, net of income taxes, and gain on disposal of discontinued operations, net of income taxes. Management believes that segment EBIT provides useful information for analyzing the underlying business results as well as allowing investors a means to evaluate the financial results of each segment in relation to Dole as a whole. EBIT is not defined under U.S. GAAP and should not be considered in isolation or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of Dole's profitability. Additionally, Dole's computation of EBIT may not be comparable to other similarly titled measures computed by other companies, because not all companies calculate EBIT in the same manner.

Revenues from external customers and EBIT for the reportable operating segments and corporate were as follows:

                                              Quarter Ended                   Three Quarters Ended
                                      October 8,        October 9,        October 8,        October 9,
                                         2011              2010              2011              2010
                                                               (In thousands)
Revenues from external customers:
Fresh fruit                           $ 1,393,020       $ 1,327,317       $ 3,932,464       $ 3,673,718
Fresh vegetables                          327,225           325,992           852,164           825,387
Packaged foods                            365,601           335,028           902,722           836,332
Corporate                                     186               234               511               530

                                      $ 2,086,032       $ 1,988,571       $ 5,687,861       $ 5,335,967


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                                             Quarter Ended                       Three Quarters Ended
                                     October 8,          October 9,         October 8,         October 9,
                                        2011                2010               2011               2010
                                                                (In thousands)
Fresh fruit EBIT                    $      7,381        $     35,959        $   183,981        $   146,958
Fresh vegetables EBIT                      3,620               5,137             18,350             23,023
Packaged foods EBIT                       24,054              24,514             62,115             78,343

Total operating segments EBIT             35,055              65,610            264,446            248,324
Corporate:
Unrealized loss on cross
currency swap                                  -             (45,562 )           (3,787 )          (59,863 )
Net gain (loss) on long-term
Japanese yen hedges                        2,413                   -            (20,167 )                -
Net unrealized gain (loss) on
foreign denominated instruments            1,854             (12,491 )           (4,580 )           (6,026 )
Write-off of debt issuance
costs and refinancing fees               (12,739 )                 -            (12,759 )                -
Loss on early retirement of
notes                                    (13,453 )                 -            (13,453 )                -
Operating and other expenses             (18,566 )            (4,022 )          (41,663 )          (32,910 )

Corporate                                (40,491 )           (62,075 )          (96,409 )          (98,799 )
Interest expense                         (41,402 )           (49,187 )         (111,709 )         (127,375 )
Income taxes                                (123 )            (7,522 )          (18,781 )          (19,764 )

Income (loss) from continuing
operations                               (46,961 )           (53,174 )           37,547              2,386
Income (loss) from discontinued
operations, net of income taxes              (43 )               202                188                876
Gain from disposal of
discontinued operations, net of
income taxes                                   -               4,143                339              4,143
. . .
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