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FDP > SEC Filings for FDP > Form 10-K on 28-Feb-2012All Recent SEC Filings

Show all filings for FRESH DEL MONTE PRODUCE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for FRESH DEL MONTE PRODUCE INC


28-Feb-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are one of the world's leading vertically integrated producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, as well as a leading producer and marketer of prepared fruit and vegetables, juices, beverages and snacks in Europe, Africa and the Middle East. We market our products worldwide under the DEL MONTE® brand, a symbol of product innovation, quality, freshness and reliability since 1892. Our global sourcing and logistics system allows us to provide regular delivery of consistently high-quality produce and value-added services to our customers. Our major producing operations are located in North, Central and South America, Asia and Africa. Production operations are aggregated on the basis of our products: bananas, other fresh produce and prepared foods. Other fresh produce includes pineapples, melons, tomatoes, non-tropical fruit (including grapes, apples, pears, peaches, plums, nectarines, avocados, citrus and kiwis), fresh-cut produce and other fruit and vegetables and a plastic product and box manufacturing business, a grain business (which we exited in 2010) and third-party ocean freight services (which we significantly curtailed in 2009). Prepared foods include prepared fruit and vegetables, juices, beverages, snacks, poultry and meat products. As a result of our decision to exit grain operations in Argentina during 2010 and the elimination of third-party ocean freight services from Northern Europe to the Caribbean during 2009, we have combined the other products and services segment with the other fresh produce segment in 2011 due to the relative size of the remaining operations. Prior year amounts have been reclassified to conform to the 2011 presentation.

Strategy

Our strategy is focused on a combination of maximizing revenues from our existing infrastructure, entering new markets and strict cost control initiatives. We plan to continue to capitalize on the growing global demand for fresh produce and expand our reach into existing and new markets. We expect sales growth of fresh produce in key markets by increasing sales volume and per unit sales prices as permitted by market conditions. Our strategy includes increasing volumes from existing production and distribution facilities in order to improve operating efficiencies and reduce per unit costs. We plan additional investments in production facilities in order to expand our product offering in established markets and continue with our recent expansion in growth markets, such as the Middle East, Africa and countries formerly part of the Soviet Union.

Net Sales

Our net sales are affected by numerous factors, including mainly the balance between the supply of and demand for our produce and competition from other fresh produce companies. Our net sales are also dependent on our ability to supply a consistent volume and quality of fresh produce to the markets we serve. For example, seasonal variations in demand for bananas as a result of increased supply and competition from other fruit are reflected in the seasonal fluctuations in banana prices, with the first six months of each year generally exhibiting stronger demand and higher prices, except in those years where an excess supply exists. During the first part of 2011 banana supplies were not as plentiful as in the prior year. In 2011, our overall banana sales volume decreased by 2% while our average per unit sales prices increased by 4%. Our net sales of other fresh produce were positively impacted by increased sales volumes of fresh-cut fruit, non-tropical fruit and pineapples. In the processed foods business, we generally realize the largest portion of our net sales and gross profit in the third and fourth quarters of the year. During 2011, our prepared food net sales decreased slightly principally as a result of lower sales of canned deciduous products that resulted from reduced sourcing from South Africa.

Since our financial reporting currency is the U.S. dollar, our net sales are significantly affected by fluctuations in the value of the currency in which we conduct our sales versus the dollar, with a weak dollar versus such currencies resulting in increased net sales in dollar terms. Including the effect of our foreign currency hedges, net sales for 2011 were positively impacted by $17.1 million, as compared to 2010, principally as a result of a stronger Korean won, British pound and Japanese yen, partially offset by a weaker euro and Kenya shilling, versus the U.S. dollar.

Our net sales growth in recent years has been achieved primarily through increased sales volume in existing markets of other fresh produce, primarily pineapples and non-tropical fruit, and favorable pricing on our Del Monte Gold® Extra Sweet pineapple combined with increased sales volume and per unit sales prices of bananas in existing and new markets. During 2011, our net sales were positively affected by higher sales volume of bananas and gold pineapples that resulted from our production expansion, which were offset principally by lower net sales of melons and other products and services. Our net sales growth in recent years is also attributable to a broadening of our product line with the expansion of our fresh-cut produce business, specifically increased sales to the foodservice sector, combined with our expansion into new markets. We expect our net sales growth to continue to be driven by increased sales volumes in our banana, other fresh produce and the prepared food segments. In the Middle


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East, we expect to continue to increase our net sales of our fresh produce and prepared food product offerings as a result of our expansion in the Saudi Arabian and other regional markets. We also expect to increase our sales by developing new products in the prepared food segment, targeting the convenience store and foodservice trade in selected European and Middle East markets. We also expect to continue to expand our sales of beverage products in the European and Sub-Sahara African markets.

Cost of Products Sold

Cost of products sold is principally composed of two elements, product and logistics costs. Product cost for our produce is primarily composed of cultivation (the cost of growing crops), harvesting, packaging, labor, depreciation and farm administration. Product cost for produce obtained from independent growers is composed of produce and packaging costs. Logistics costs include land and sea transportation and expenses related to port facilities and distribution centers. Sea transportation cost is the most significant component of logistics costs and is comprised of the cost of vessel operating expenses and chartering refrigerated vessels. Vessel operating expenses for our owned vessels include operations, maintenance, depreciation, insurance, fuel (the cost of which is subject to commodity price fluctuations), and port charges. For chartered vessels, operating expenses include the cost of chartering the vessels, fuel and port charges. Variations in containerboard prices, which affect the cost of boxes and other packaging materials, and fuel prices can have a significant impact on our product cost and our profit margins. Also, variations in the production yields, fertilizers and other input costs and the cost to procure products from independent growers can have a significant impact on our costs. Containerboard, plastic, resin and fuel prices have historically been volatile. During 2010, cost of fuel increased by 25% and containerboard increased by 7%, increasing our cost of product sold by $30.7 million. In addition, we incurred $8.7 million of increased costs for inventory write-downs and other costs associated with exit activities in Brazil, floods in Guatemala and damages caused by an earthquake in Chile, partially offset by insurance reimbursements. During 2011, cost of fuel increased by 37% and containerboard decreased 8%, increasing our cost of products sold by $49.7 million. In addition, we recorded a credit of $(3.3) million in 2011 related to insurance claims proceeds as a result of damages that occurred in 2010 from flooding in Guatemala and an earthquake in Chile and $1.9 million in inventory write-downs in Central America as a result of our melon program rationalization and write-down of packaging material and other inventory in one of our United Kingdom fresh-cut operations.

In general, changes in our volume of products sold can have a disproportionate effect on our gross profit. Within any particular year, a significant portion of our cost of products sold is fixed, both with respect to our operations and with respect to the cost of produce purchased from independent growers from whom we have agreed to purchase all the products they produce. Accordingly, higher volumes produced on company-owned farms directly reduce the average per-box cost, while lower volumes directly increase the average per-box cost. In addition, because the volume that will actually be produced on our farms and by independent growers in any given year depends on a variety of factors, including weather, that are beyond our control or the control of our independent growers, it is difficult to predict volumes and per-box costs.

Since our financial reporting currency is the U.S. dollar, our costs are affected by fluctuations in the value of the currency in which we have significant operations versus the dollar, with a weak dollar versus those currencies resulting in increased costs. During 2011, cost of products sold was negatively impacted by approximately $45.7 million as a result of a weaker U.S. dollar versus the various currencies in which we have significant operations.

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily include the costs associated with selling in countries where we have our own sales force, advertising and promotional expenses, professional fees, general corporate overhead and other related administrative functions.

Gain on Sales of Property, Plant and Equipment

Gain on sales of property, plant and equipment was $3.1 million in 2011 principally as a result of the sale of shipping-related equipment and other surplus equipment. In 2010, the gain on sales of property, plant and equipment of $9.2 million resulted primarily from the sale of four refrigerated vessels and properties in South America.

Asset Impairment and Other Charges, Net

Asset impairment and other charges, net were $16.3 million in 2011 as compared with $37.3 million in 2010, a decrease of $21.0 million. In 2011, we recorded asset impairment and other charges totaling $16.3 million primarily related to asset impairments and other charges as a result of our Central American melon rationalization program, an under-utilized fresh-cut facility and distribution center in the United Kingdom, our decision to abandon an isolated area in our banana operations in the Philippines and a low-productivity area in Costa Rica and legal costs in Hawaii related to the Kunia well site, partially offset by


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insurance claims proceeds related to damages that occurred in 2010 from flooding in Guatemala and an earthquake in Chile.

In 2010, we recorded asset impairment and other charges totaling $37.3 million related to plant disease affecting an isolated growing area in our banana operations in the Philippines that was abandoned during the first quarter of 2011, exit activities in South Africa and Brazil, damage caused by floods in our Guatemala banana farms and an earthquake in Chile, combined with an impairment charge of the DEL MONTE® perpetual, royalty-free brand name license for beverage products in the United Kingdom due to lower than expected sales volume and pricing and the relocation of a port facility in North America.

In 2009, we recorded asset impairment and other charges totaling $10.9 million as a result of our decision to discontinue pineapple planting in Brazil and our decision not to use certain property, plant and equipment as originally intended for other crop production. During 2009, we also incurred charges of $1.2 million for termination benefits and contract termination costs resulting from our decision to discontinue our commercial cargo service in Germany, a $2.0 million impairment charge of the DEL MONTE® perpetual, royalty-free brand name license for beverage products in the United Kingdom due to lower than expected sales volume and pricing and a $2.8 million asset impairment charge related to an intangible asset for a non-compete agreement as a result of the Caribana acquisition. These charges were partially offset by $5.5 million of credits due to the reversal of contract termination costs as a result of the closure of an under-utilized distribution center in the United Kingdom, and the discontinuance of retiree medical benefits and the reversal of contract termination costs related to the closing of our Hawaii pineapple operations. Also included in asset impairments and other charges, net, for 2009 was $3.4 million of insurance recoveries related to the 2008 floods of our Brazil banana operations.

Interest Expense

Interest expense consists primarily of interest on borrowings under working capital facilities that we maintain and interest on other long-term debt primarily for capital lease obligations. In 2011, our interest expense declined, reflecting primarily lower interest rates and a decrease in our average outstanding debt, partially offset by by a write-down of debt issuance costs as a result of our voluntary reduction of available borrowing capacity under our credit facility.

Other Income (Expense), Net

Other income (expense), net, primarily consists of currency exchange gains or losses, equity gains and losses in unconsolidated companies and other miscellaneous income and expense items. During 2011, we recorded higher currency exchange losses as compared with the prior year.

Provision for (Benefit from) Income Taxes

The provision for (benefit from) income taxes in 2011 was $5.7 million and includes the establishment of reserves for uncertain tax positions in various foreign jurisdictions combined with increased taxable income, partially offset by a favorable adjustment as a result of a change in the tax treatment of plantation costs in a foreign jurisdiction. Income taxes consist of the consolidation of the tax provisions, computed on a separate entity basis, in each country in which we have operations. Since we are a non-U.S. company with substantial operations outside the United States, a substantial portion of our results of operations is not subject to U.S. taxation. Several of the countries in which we operate have favorable tax rates. We are subject to U.S. taxation on our operations in the United States. From time to time, tax authorities in various jurisdictions in which we operate audit our tax returns and review our tax positions. There are audits presently pending in various countries. There can be no assurance that any tax audits, or changes in existing tax laws or interpretations in countries in which we operate, will not result in an increased effective tax rate for us.


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Results of Operations

The following table presents, for each of the periods indicated, certain income statement data expressed as a percentage of net sales:

                                              Year ended
                             December 30,    December 31,     January 1,
                                 2011            2010            2010
Statement of Income Data:
Net sales                          100 %           100 %          100 %
Gross profit                       8.9             7.7            8.9
Selling, general and
administrative expenses            5.3             4.7            4.7
Operating income                   3.2             2.2            4.2
Interest expense                   0.2             0.3            0.3
Net income attributable to
Fresh Del Monte Produce Inc.       2.6             1.8            4.1

The following tables present for each of the periods indicated (i) net sales by geographic region, (ii) net sales by product category and (iii) gross profit by product category and, in each case, the percentage of the total represented thereby:

                                                         Year ended
                                   December 30,         December 31,          January 1,
                                       2011                 2010                 2010
                                                 (U.S. dollars in millions)
Net sales by geographic region:
North America                   $ 1,806.8     50 %   $ 1,741.3     49 %   $ 1,675.9     48 %
Europe                              854.8     24 %       913.8     26 %       995.2     28 %
Asia                                431.5     12 %       411.1     11 %       420.2     12 %
Middle East                         429.2     12 %       421.1     12 %       314.1      9 %
Other                                67.4      2 %        65.6      2 %        91.0      3 %
Total                           $ 3,589.7    100 %   $ 3,552.9    100 %   $ 3,496.4    100 %



                                                        Year ended
                                  December 30,         December 31,          January 1,
                                      2011                 2010                 2010
                                                (U.S. dollars in millions)
Net sales by product category:
Banana                         $ 1,653.1     46 %   $ 1,620.3     46 %   $ 1,510.9     43 %
Other fresh produce              1,581.6     44 %     1,572.8     44 %     1,648.1     47 %
Prepared food                      355.0     10 %       359.8     10 %       337.4     10 %
Total                          $ 3,589.7    100 %   $ 3,552.9    100 %   $ 3,496.4    100 %

Gross profit by product category:
Banana                         $    88.3     28 %   $    31.4     11 %   $   108.7     35 %
Other fresh produce                177.9     55 %       195.4     72 %       149.9     48 %
Prepared food                       53.3     17 %        45.6     17 %        52.2     17 %
Total                          $   319.5    100 %   $   272.4    100 %   $   310.8    100 %


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2011 Compared with 2010

Net Sales

Net sales in 2011 were $3,589.7 million compared with $3,552.9 million in 2010. The increase in net sales of $36.8 million was primarily attributable to higher net sales of bananas and other fresh produce, partially offset by lower net sales of prepared foods.

•         Net sales in the banana segment increased by $32.8 million principally
          due to higher per unit sales prices and sales volume in North America
          and higher per unit sales prices in Asia, partially offset by lower
          sales volume in Europe and the Middle East.

? North America banana net sales increased primarily due to 7% higher per unit sales prices due to industry shortages.

? Europe banana net sales decreased principally due to lower sales volume, partially offset by slightly higher per unit sales prices.

? Middle East banana net sales decreased principally due to lower sales volume.

?            Asia banana net sales decreased slightly due to lower sales volume
             partially offset by higher per unit sales prices and favorable
             exchange rates.



•         Net sales in the other fresh produce segment increased by $8.8 million
          principally as a result of higher sales of non-tropical fruit,
          fresh-cut fruit products and pineapple, partially offset by lower net
          sales of melons, Argentine grain, strawberries and tomatoes.



?            Net sales of non-tropical fruit increased principally due to
             significantly higher per unit sales prices of avocados in North
             America as a result of reduced industry wide supply, combined with
             higher sales volume of grapes in Asia and North America and higher
             demand of cherries in Asia.



?            Net sales of fresh-cut products increased primarily due to higher
             per unit sales prices and sales volume in North America, Europe and
             the Middle East that resulted from improved market conditions and an
             expanded customer base.



?            Net sales of pineapples increased principally due to an increase in
             sales volume in Asia and the Middle East principally due to
             production expansion in Asia.



?            Net sales of melons decreased principally as a result of significant
             planned volume reductions. Per unit sales price were relatively flat
             as compared with prior year.

? Net sales of Argentine grain decreased as a result of our decision in 2010 to exit grain operations in Argentina.

? Net sales of strawberries decreased due to lower customer demand in North America.

? Net sales of tomatoes decreased principally due to lower customer demand and program rationalization.

•         Net sales in the prepared food segment decreased by $4.8 million
          principally due to lower net sales of canned deciduous and pineapple
          products as a result of reduced deciduous sourcing from South Africa
          and lower yields in our Kenya pineapple operations that resulted from
          drought conditions earlier in the year and unfavorable exchange rates
          in Europe. Partially offsetting these decreases in net sales in the
          prepared food segment were higher net sales in our Jordanian poultry
          and prepared meats business.


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Cost of Products Sold

Cost of products sold was $3,270.2 million in 2011 compared with $3,280.5 million in 2010, a decrease of $10.3 million. This decrease in cost of products sold was primarily attributable to an overall 3% reduction in sales volumes, partially offset by unfavorable exchange rates in producing countries and higher fuel and input costs. The higher fuel cost resulted in an increase of $38.6 million in our cost of product sold. Also contributing to the decrease in cost of products sold was a net credit of $(1.4) million recorded in 2011 related to insurance claims proceeds as a result of damages that occurred in 2010 from flooding in Guatemala and an earthquake in Chile, partially offset by the write-down of inventory in Central America due to our melon program rationalization and write-down of packaging material and other inventory in one of our United Kingdom fresh-cut operations. In 2010, we recorded $8.7 million in other net charges, principally related to the write-down of inventory caused by floods in our Guatemala banana farms, net of related insurance reimbursements, an earthquake in Chile and exit activities in Brazil related to the discontinuation of melon growing operations.

Gross Profit

Gross profit was $319.5 million in 2011 compared with $272.4 million in 2010, an
increase of $47.1 million. The increase in gross profit was attributable to
higher gross profit on bananas and prepared food, partially offset by lower
gross profit in other fresh produce.

•         Gross profit in the banana segment increased by $56.9 million as a
          result of higher per unit selling prices in all regions partially
          offset by higher fuel cost and a 2% reduction in sales volume.
          Worldwide per unit selling prices increased 4% and cost per box
          increased less than 1%.



•         Gross profit in the prepared food segment increased by $7.7 million
          principally as a result of lower costs of canned deciduous products
          that resulted from operational improvements made during 2010, combined
          with increases in per unit sales price of pineapple products that
          resulted from improved market conditions. These increase in gross
          profit were partially offset by higher costs in the Jordanian poultry
          business that resulted from lower yields and higher cost of corn feed
          combined with higher fruit cost in our Kenya canned pineapple
          operations, principally due to the continued effect of the drought.



•         Gross profit on the other fresh produce segment decreased by $17.5
          million principally as a result of lower gross profit on gold
          pineapples, non-tropical fruit and tomatoes.



?            Gross profit on gold pineapples decreased in 2011 principally as a
             result of lower per unit sales prices in all markets except North
             America due to unfavorable market conditions and unfavorable
             exchange rates combined with higher fuel cost. Worldwide per unit
             sales prices decreased 1% and per unit costs increased 2%.



?            Gross profit in non-tropical fruit decreased principally due to
             lower selling prices of grapes in North America and Asia and higher
             costs of grapes in North America as a result of increased fruit
             procurement and fuel costs. Also contributing to the decrease in
             gross profit were higher procurement cost of avocados and lower per
             unit selling prices of stonefruit in North America and Europe.
             Partially offsetting these decreases in gross profit on non-tropical
             fruit was higher sales volumes of stonefuit in Asia due to increased
             demand and higher per unit selling prices for grapes in the Middle
             East due to reduced supplies in the region.



?            Gross profit on tomatoes decreased principally due to higher
             procurement and production costs combined with lower sales volumes
             resulting from unfavorable growing conditions in Central America,
             lower customer demand and program rationalization.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $23.6 million to $190.4 million in 2011 compared with $166.8 million in 2010. The increase was primarily due to higher compensation combined with higher selling and marketing expenses in Europe due to our direct marketing efforts in Southern Europe combined with higher promotional expenses in North America.

Gain on Sales of Property, Plant and Equipment

Gain on sales of property, plant and equipment was $3.1 million in 2011 principally as a result of the sale of shipping-related and other surplus equipment.


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Asset Impairment and Other Charges

Asset impairment and other charges, net were $16.3 million in 2011 as compared
with $37.3 million in 2010, a decrease of $21.0 million.

Asset impairment and other charges (credits) for 2011 were as follows:

•         $5.1 million in asset impairments and contract termination charges and
          $3.3 million goodwill impairment charge as a result of our Central
          America melon program rationalization related to the other fresh
          produce segment;

. . .

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