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FDP > SEC Filings for FDP > Form 10-Q on 1-May-2012All Recent SEC Filings

Show all filings for FRESH DEL MONTE PRODUCE INC

Form 10-Q for FRESH DEL MONTE PRODUCE INC


1-May-2012

Quarterly Report


Item 2. 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, the Middle East and countries formerly part of the Soviet Union. 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, other fruit and vegetables, a plastic product and box manufacturing business and a third-party ocean freight service. Prepared foods include prepared fruit and vegetables, juices, beverages, snacks, poultry and meat products.

Liquidity and Capital Resources

Net cash provided by operating activities was $37.1 million for the first quarter of 2012 as compared with $68.2 million for the first quarter of 2011, a decrease of $31.1 million. The decrease in cash provided by operating activities was principally attributable to changes in operating assets and liabilities, principally higher levels of finished goods and growing crop inventory and lower increases in accounts payable and accrued expense, partially offset by higher net income.

Working capital was $385.0 million at March 30, 2012 compared with $522.2 million at December 30, 2011, a decrease of $137.2 million. This decrease in working capital is principally attributable to the classification of the outstanding amount of the Credit Facility of $165.5 million that as of March 30, 2012 is classified as current portion of long-term debt due to its January 17, 2013 maturity date, partially offset by higher balances in trade accounts receivable as a result of seasonal variations.

Net cash used in investing activities for the first quarter of 2012 was $9.9 million compared with $20.8 million for the first quarter of 2011. Net cash used in investing activities for the first quarter of 2012 consisted of capital expenditures of $12.8 million, partially offset by proceeds from sales of property, plant and equipment of $2.9 million. Capital expenditures for the first quarter of 2012 were primarily for expansion and improvements of production facilities in Saudi Arabia and Kenya related to the prepared food segment and in Costa Rica related to the other fresh produce segment. Capital expenditures for the first quarter of 2012 also included improvements of distribution facilities in North America principally related to the banana segment. Proceeds from sales of property, plant and equipment for the first quarter of 2012 consisted primarily of the sale of surplus land in Guatemala and other surplus equipment.

Net cash used in investing activities for the first quarter of 2011 consisted of capital expenditures of $21.2 million, partially offset by proceeds from sales of property, plant and equipment of $0.4 million. Capital expenditures for the first quarter of 2011 were primarily for expansion of production facilities in Costa Rica, Guatemala, Chile and Saudi Arabia and port facilities in North America related to the banana and other fresh produce segments and production facilities in Kenya and Jordan related to the prepared food segments. Proceeds from sales of property, plant and equipment for the first quarter of 2011 consisted primarily of the sale of surplus equipment.

Net cash used in financing activities for the first quarter of 2012 was $46.4 million compared with $65.0 million for the first quarter of 2011. Net cash used in financing activities for the first quarter of 2012 consisted of net repayments on long-term debt of $44.9 million and $5.8 million of dividends paid, partially offset by contributions from noncontrolling interests, net of $3.5 million and proceeds from stock options exercised of $0.8 million.

Net cash used in financing activities for the first quarter of 2011 consisted of net repayments on long-term debt of $70.9 million and distributions to noncontrolling interests of $1.1 million, partially offset by proceeds from stock options exercised of $7.0 million.

We finance our working capital and other liquidity requirements primarily through cash from operations and borrowings under our $300 million senior secured revolving credit facility (the "Credit Facility") administered by Rabobank Nederland, New York Branch. The Credit Facility has a 3.5 years term, with a scheduled termination date of January 17, 2013. The Credit Facility includes a swing line facility and a letter of credit facility with a $100.0 million sub-limit. Borrowings under the Credit Facility bear interest at a spread over the London Interbank Offer Rate ("LIBOR") that varies with our leverage ratio. On March 28, 2011, we amended the Credit Facility by lowering the applicable margins over LIBOR or base rate borrowings that vary with our leverage ratio.

The Credit Facility is collateralized directly or indirectly by substantially all of our assets and is guaranteed by certain of our


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subsidiaries. At March 30, 2012, we had $165.5 million outstanding under the Credit Facility bearing interest at a per annum rate of 1.86%. In addition, we pay a fee on unused commitments.

The Credit Facility requires us to be in compliance with financial and other covenants, including limitations on capital expenditures, the amount of dividends that can be paid in the future, the amount and types of liens and indebtedness, material asset sales and mergers. As of March 30, 2012, we were in compliance with all of the financial and other covenants contained in the Credit Facility.

The credit facility expires on January 17, 2013 and represents our principal method of supplementing operating cash flows for our working capital and other liquidity requirements. We plan to refinance our Credit Facility during 2012. Our expectation is based on our history of earnings and positive cash flows along with our long-standing relationships with our current bank group and our credit rating. We expect that our interest rates will remain relatively flat or increase slightly from the current levels. In addition to the renewal of our current bank debt corporate loan, our capital market options include, among others, asset based loans, high-yield bonds and receivables-based credit facilities. We believe that our operating cash flows, together with our ability to renew the Credit Facility and obtain other available financing will be adequate to meet our operating, investing, and financing needs in the foreseeable future. There are no assurances that increased volatility and uncertainty in the global capital markets will not impair our ability to access these markets on terms that are favorable to us.

At March 30, 2012, we had $139.5 million available under committed working capital facilities, primarily under the Credit Facility. At March 30, 2012, we applied $17.2 million to the letter of credit facility, comprised primarily of certain contingent obligations and other governmental agencies and purchases of equipment guarantees. We also had $10.2 million in other letters of credit and bank guarantees not included in the letter of credit facility.

As of March 30, 2012, we had $170.6 million of long-term debt and capital lease obligations, including the current portion, consisting of $165.5 million outstanding under the Credit Facility, $1.0 million of capital lease obligations and $4.1 million of other long-term debt and notes payable.

Based on our operating plan, combined with our borrowing capacity under our Credit Facility, we believe we will have sufficient resources to meet our cash obligations in the foreseeable future.

As of March 30, 2012, we had cash and cash equivalents of $27.5 million.

As a result of the closure of distribution centers in the United Kingdom, we paid approximately $0.3 million in contractual obligations during the first quarter of 2012. We expect to make additional payments of approximately $4.5 million principally related to the previously announced closure of our Hawaii pineapple operations and the closure of certain facilities in the United Kingdom. During the second quarter of 2012, we also expect to pay termination benefits of $0.8 million related to an under-performing fresh-cut facility in the United Kingdom in the other fresh produce segment. In addition, during the first quarter of 2012, we paid $2.1 million as a result of an unfavorable outcome to litigation regarding a tax position in a foreign jurisdiction. These cash outlays will be funded from operating cash flows and available borrowings under credit facilities.

The fair value of our derivatives changed from a net asset of $7.5 million as of December 30, 2011, to a net asset of $10.0 million as of March 30, 2012 related to our foreign currency cash flow and bunker fuel swap hedges. For foreign currency hedges, these fluctuations are primarily related to the stronger U.S. dollar relative to the Japanese yen offset by a weaker U.S. dollar relative to the euro and British pound being hedged when compared to the contracted exchange rates. We also entered into Bunker Fuel Swap agreements during the first quarter of 2012 that are in a net asset position of $1.9 million. We expect that $10.5 million in net assets outstanding will be transferred to earnings during the next 12 months, along with the earnings effect of the related forecasted transactions.

Recent Developments

On April 6, 2012, the Company received a favorable jury verdict following a trial in the U.S. District Court for the Southern District of New York in Fresh Del Monte Produce Inc. vs. Del Monte Foods Company and Del Monte Corporation, awarding the Company damages of $13.2 million. Payment of the award is subject to appeal and therefore, no gain contingency has been recognized.


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Results of Operations

The following tables present for each of the periods indicated (i) net sales by
geographic region and (ii) net sales and gross profit by product category, and
in each case, the percentage of the total represented thereby (U.S. dollars in
millions, except percent data):

Net sales by geographic region:

                           Quarter ended
                March 30, 2012        April 1, 2011
North America $    489.0     54 %   $   516.7     53 %
Europe             205.1     23 %       234.1     24 %
Asia               103.4     12 %       109.2     11 %
Middle East         81.1      9 %        94.7     10 %
Other               19.3      2 %        19.3      2 %
Total         $    897.9    100 %   $   974.0    100 %

Product net sales and gross profit:

                                                   Quarter ended
                               March 30, 2012                         April 1, 2011
                       Net Sales         Gross Profit         Net Sales         Gross Profit
Banana              $ 397.5     44 %   $   38.8     34 %   $ 427.5     44 %   $   51.5     42 %
Other fresh produce   421.1     47 %       60.3     54 %     452.6     46 %       55.1     45 %
Prepared food          79.3      9 %       13.3     12 %      93.9     10 %       16.2     13 %
Total               $ 897.9    100 %   $  112.4    100 %   $ 974.0    100 %   $  122.8    100 %

First Quarter 2012 Compared with First Quarter 2011

Net Sales. Net sales for the first quarter of 2012 were $897.9 million compared with $974.0 million for the first quarter of 2011. The decrease in net sales of $76.1 million was attributable to lower net sales of other fresh produce, bananas and prepared food.

• Net sales in the other fresh produce segment decreased $31.5 million principally as a result of lower net sales of tomatoes, non-tropical fruit, melons and pineapples, partially offset by higher net sales of fresh-cut products.

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


?         Net sales of non-tropical fruit decreased principally due to lower per
          unit sales prices of avocados in North America due to higher industry
          supply combined with lower sales volumes of stone fruit and grapes in
          North America as a result of decreased supplies from Chile.


?         Net sales of melons decreased principally as a result of lower sales
          volume due to continued planned rationalization of melon operations,
          partially offset by higher per unit sales prices that resulted from
          improved market conditions.


?         Net sales of pineapples decreased principally as a result of lower
          sales volume in Europe and the Middle East as a result of reduced
          production from our Costa Rican and Philippines operations. Per unit
          sales prices were higher in Asia, the Middle East and Europe due to
          improved market conditions. Per unit sales prices were relatively flat
          in North America.


?         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 an expanded customer base and improved
          demand for our products in North America combined with expansion in new
          markets in the Middle East.


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• Net sales of bananas decreased by $30.0 million principally due to lower sales volume in Europe, the Middle East and Asia, and lower per unit sales prices in North America. Worldwide banana sales volume decreased 6% and per unit sales prices decreased 1%.

?         Europe banana net sales decreased primarily due to lower sales volumes
          in Germany and the United Kingdom as a result of our decision not to
          enter into unprofitable banana sales contracts with certain large
          retailers, partially offset by net sales increases in Southern Europe.


?         Middle East banana net sales decreased principally due to lower sales
          volume that resulted from reduced purchases from independent contract
          growers in the Philippines, partially offset by higher per unit sales
          prices.


?         Asia banana net sales decreased principally due to lower sales volume
          that resulted from reduced purchases from independent contract growers
          in Philippines, partially offset by higher per unit sales prices.


?         North America banana net sales were relatively flat as higher sales
          volumes were offset by lower per unit sales prices. The lower per unit
          sales prices in North America were primarily due to the absence of a
          per box surcharge that was implemented in the first quarter of 2011 as
          a result of industry shortages.


•      Net sales in the prepared food segment decreased $14.6 million principally
       due to lower net sales of pineapple products in Europe as a result of
       reduced sales volumes of canned pineapple, primarily private label
       products combined with lower pricing for industrial products which
       resulted from higher industry supplies. Partially offsetting these
       decreases in net sales were higher net sales of canned deciduous products
       that resulted from improved selling prices and higher sales volumes.

Cost of Products Sold. Cost of products sold was $785.5 million for the first quarter of 2012 compared with $851.2 million for the first quarter of 2011, a decrease of $65.7 million. This decrease in cost of products sold was primarily attributable to lower sales volumes, partially offset by higher fuel costs.

Gross Profit. Gross profit was $112.4 million for the first quarter of 2012 compared with $122.8 million for the first quarter of 2011, a decrease of $10.4 million. The decrease in gross profit was primarily attributable to lower gross profit on bananas and prepared food, partially offset by higher gross profit on other fresh produce.

• Gross profit in the banana segment decreased $12.7 million primarily due to lower per unit sales prices in North America combined with higher fuel costs. Partially offsetting these decreases in gross profit were lower ocean freight costs in Europe as a result of improved vessel utilization and higher per unit selling prices in the Middle East, Asia and Europe.

• Gross profit in the prepared food segment decreased by $2.9 million principally as a result of lower gross profit on canned pineapples which resulted from lower sales volumes and higher per unit costs as a result of lower yields. Also contributing to the decrease in gross profit for prepared food is lower selling prices for industrial products which resulted from higher industry supplies. Partially offsetting these decreases were higher gross profit on deciduous canned products due to higher sales volumes, improved pricing and lower per unit costs principally as a result of operational improvements.

• Gross profit in the other fresh produce segment increased $5.2 million principally due to higher gross profit on fresh-cut products, pineapples and melons, partially offset by lower gross profit on non-tropical fruit.

?         Gross profit on fresh-cut products increased principally due to
          improved pricing in all regions combined with higher sales volumes in
          North America, Europe and the Middle East. Partially offsetting these
          increases in gross profit were higher fruit procurement and
          distribution costs.


?         Gross profit on pineapples increased principally due to higher per unit
          sales prices in Asia , Europe and the Middle East, primarily the result
          of favorable market conditions combined with lower ocean freight costs
          that resulted from improved vessel utilization. Worldwide per unit
          sales prices increased 7% and per unit cost increased 2%.


?         Gross profit on melons increased principally due to higher per unit
          selling prices as a result of improved market conditions in North
          America.


?         Gross profit on non-tropical fruit decreased primarily due to higher
          fruit cost and lower sales volumes of grapes and stonefruit that
          resulted from unfavorable growing conditions in Chile.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.7 million from $46.1 million in the first quarter of 2011 to $45.4 million for the first quarter of 2012. The decrease was principally due to lower executive compensation expense partially offset by higher legal fees.


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Loss or (Gain) on Disposal of Property, Plant and Equipment. The loss on disposal of property, plant and equipment of $1.4 million during the first quarter of 2012 was principally related to the disposal of banana plants in certain areas of our Costa Rica plantation in order to replant and improve productivity. The gain on disposal of property, plant and equipment of $(0.1) million during the first quarter of 2011 was principally related to the sale of surplus equipment.

Asset Impairment and Other Charges, Net. Asset impairment and other charges, net were $0.1 million during the first quarter of 2012 as compared with $1.9 million during the first quarter of 2011. During the first quarter of 2012, we recorded $1.8 million in asset impairments related to an under-utilized facility in the United Kingdom in the banana segment and a credit of $1.8 million due to the sale of assets previously impaired in 2011 due to our melon program rationalization in Guatemala related to the other fresh produce segment and $0.1 million in other charges in Hawaii related to the other fresh produce segment.

In the first quarter of 2011, we recorded $1.1 million in contract termination and severance charges related to our decision to abandon an isolated area in our banana operations in the Philippines, $0.6 million in other charges related to our previously exited Hawaii pineapple operations and $0.2 million in other impairment charges.

Operating Income. Operating income for the first quarter of 2012 decreased by $9.4 million from $74.9 million in the first quarter of 2011 to $65.5 million for the first quarter of 2012. The decrease in operating income was due to lower gross profit combined with a loss on disposal of property, plant and equipment, partially offset by lower selling, general and administrative expenses and lower asset impairment and other charges.

Interest Expense. Interest expense was $1.3 million for the first quarter of 2012 as compared with $2.2 million for the first quarter of 2011, a decrease of $0.9 million. This decrease was principally due to lower average debt balances and interest rates.

Other (Income) Expense, Net. Other (income) expense, net was income of $(0.5) million for the first quarter of 2012 as compared with other expense of $3.0 million for the first quarter of 2011. The change in other (income) expense of $3.5 million was principally attributable to foreign exchange gains during the first quarter of 2012 as compared with foreign exchange losses during the first quarter of 2011.

Provision for Income Taxes. Provision for income taxes was $2.1 million for the first quarter of 2012 as compared with $13.9 million for the first quarter of 2011. The decrease in the tax provision includes approximately $8.1 million of credits due primarily to reversals of uncertain tax positions due to a lapse in the statue of limitations and settlement of tax audits and litigation in certain foreign jurisdictions.

Fair Value Measurements

During the first quarter 2012, we recognized $1.8 million in impairment charges related to an under-performing banana ripening facility in the United Kingdom. The carrying value of the assets was $6.2 million and was written down to $4.4 million. We estimated the fair value of the underlying assets by using the market approach. We used observable inputs based on market participant information, as such, we classify the fair value of these banana ripening assets within Level 2 of the fair value hierarchy.

Potential impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than the carrying value of the reporting unit. The amount of the impairment to recognize, if any, is calculated as the amount by which the carrying value of goodwill exceeds its implied value. Future changes in the estimates used to conduct the impairment review, including revenue projection, market values and changes in the discount rate used, could cause the analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of goodwill. The discount rate used is based on independently calculated risks, our capital mix and an estimated market risk premium. The fair value of the banana and prepared food reporting unit's goodwill is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of this asset. If we are unable to recover from poor market conditions related to bananas, the banana reporting unit goodwill may be at risk for impairment in the future. If we are unable to recover from current challenging economic conditions in Europe, the prepared food reporting unit goodwill may be at risk for impairment in the future. We disclosed the sensitivities related to the prepared food reporting unit's goodwill in our annual financial statements included in our Annual Report on Form 10-K for the year ended December 30, 2011.


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Seasonality

Interim results are subject to significant variations and may not be indicative of the results of operations that may be expected for the entire 2012 fiscal year. See the information under the caption "Seasonality" provided in Item 1. Business, of our annual report on Form 10-K for the year ended December 30, 2011.

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