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FDP > SEC Filings for FDP > Form 10-Q on 31-Jul-2012All Recent SEC Filings

Show all filings for FRESH DEL MONTE PRODUCE INC

Form 10-Q for FRESH DEL MONTE PRODUCE INC


31-Jul-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 $193.9 million for the first six months of 2012 as compared with $243.6 million for the first six months of 2011, a decrease of $49.7 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 inventory and lower levels of accounts payable and accrued expenses as compared to June of the prior year, partially offset by higher net income.

Working capital was $446.4 million at June 29, 2012 compared with $522.2 million at December 30, 2011, a decrease of $75.8 million. This decrease in working capital is principally attributable to the classification of the outstanding amount of the Credit Facility of $37.0 million that as of June 29, 2012 is classified as current portion of long-term debt due to its January 17, 2013 maturity date combined with lower inventory balances and higher income taxes and other taxes payable, partially offset by higher balances in trade accounts receivable as a result of seasonal variations.

Net cash used in investing activities for the first six months of 2012 was $38.9 million compared with $41.3 million for the first six months of 2011. Net cash used in investing activities for the first six months of 2012 consisted of capital expenditures of $34.1 million and purchases of available-for-sale investments of $11.0 million, partially offset by proceeds from sales of property, plant and equipment of $6.0 million and proceeds from sale of unconsolidated subsidiary of $0.2 million. Capital expenditures for the first six months 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 and Guatemala related to the other fresh produce and banana segments. Capital expenditures for the first six months of 2012 also included improvements of distribution facilities in North America and Costa Rica principally related to the banana segment and additional transportation equipment in North America. The purchases of available-for-sale investments consisted of purchases of publicly traded equity securities which we plan to hold as investments. Proceeds from sales of property, plant and equipment for the first six months of 2012 consisted primarily of the sale of surplus land in Guatemala and the sale of a refrigerated vessel and other surplus equipment.

Net cash used in investing activities for the first six months of 2011 consisted of capital expenditures of $42.4 million, partially offset by proceeds from sales of property, plant and equipment of $1.1 million. Capital expenditures for the first six months of 2011 were primarily for improvements and expansion of production facilities in Jordan, Kenya and Greece related to the prepared food segment and Costa Rica, Guatemala and the Middle East related to the other fresh produce segment. Capital expenditures for the first six months of 2011 also included improvements of distribution facilities in North America and production facilities in Guatemala principally related to the banana segment. Proceeds from sale of property, plant and equipment for the first six months of 2011 consisted primarily of the sale of surplus equipment.

Net cash used in financing activities for the first six months of 2012 was $171.1 million compared with $196.4 million for the first six months of 2011. Net cash used in financing activities for the first six months of 2012 consisted of net repayments on long-term debt of $173.0 million and $11.6 million of dividends paid, partially offset by contributions from noncontrolling interests, net of $5.0 million and proceeds from stock options exercised of $4.5 million.

Net cash used in financing activities for the first six months of 2011 consisted of net repayments on long-term debt of $208.3 million, $5.9 of dividends paid and $3.1 million of distributions to noncontrolling interests, partially offset by $20.9 million of proceeds from options exercised.


Table of Contents

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 subsidiaries. At June 29, 2012, we had $37.0 million outstanding under the Credit Facility bearing interest at a per annum rate of 1.99%. 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 June 29, 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 June 29, 2012, we had $273.1 million available under committed working capital facilities, primarily under the Credit Facility. At June 29, 2012, we applied $12.2 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 $8.5 million in other letters of credit and bank guarantees not included in the letter of credit facility.

As of June 29, 2012, we had $41.5 million of long-term debt and capital lease obligations, including the current portion, consisting of $37.0 million outstanding under the Credit Facility, $0.8 million of capital lease obligations and $3.7 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 June 29, 2012, we had cash and cash equivalents of $32.0 million.

As a result of the closure of distribution centers in the United Kingdom, we paid approximately $1.5 million in contractual obligations during the first six months of 2012. We expect to make additional payments of approximately $4.2 million principally related to the previously announced closure of our Hawaii pineapple operations and the closure of certain facilities in the United Kingdom. In addition, during the first six months 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 our 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 $6.3 million as of June 29, 2012 related to our foreign currency cash flow and bunker fuel swap hedges. For foreign currency hedges, these fluctuations are primarily related to a stronger U.S. dollar relative to the euro offset by the weaker U.S. dollar relative to the Japanese yen when compared to the contracted exchange rates. We also entered into Bunker Fuel Swap agreements during the first six months of 2012 that are in a net liability position of $1.7 million. We expect that $6.6 million will be transferred to earnings during the next 12 months, along with the earnings effect of the related forecasted transactions.


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Recent Development
On July 25, 2012, we voluntarily lowered the borrowing capacity under the Credit Facility from $300 million to $150 million in order to reduce our unused commitment fee.
On July 28th and 29th, 2012, we experienced flooding in our Costa Rica banana operations. At this time, we are not able to determine the effect on our financial condition or results of operations due to this event.

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                           Six months ended
                June 29, 2012         July 1, 2011        June 29, 2012         July 1, 2011
North America $   504.7     53 %   $   514.0     50 %   $   993.7     54 %   $ 1,030.7     51 %
Europe            195.4     20 %       258.1     25 %       400.5     21 %       492.1     25 %
Asia              138.2     14 %       138.4     13 %       241.6     13 %       247.6     12 %
Middle East       100.7     11 %       115.5     11 %       181.8     10 %       210.1     10 %
Other              18.6      2 %        13.7      1 %        37.9      2 %        33.2      2 %
Total         $   957.6    100 %   $ 1,039.7    100 %   $ 1,855.5    100 %   $ 2,013.7    100 %

Product net sales and gross profit:

                                                    Quarter ended
                               June 29, 2012                            July 1, 2011
                       Net Sales         Gross Profit          Net Sales          Gross Profit
Banana              $ 424.9     45 %   $   37.5     32 %   $   466.0     45 %   $   40.7     40 %
Other fresh produce   453.8     47 %       65.9     57 %       476.6     46 %       44.6     43 %
Prepared food          78.9      8 %       13.0     11 %        97.1      9 %       17.6     17 %
Totals              $ 957.6    100 %   $  116.4    100 %   $ 1,039.7    100 %   $  102.9    100 %



                                                   Six months ended
                                  6/29/2012                                 7/1/2011
                        Net Sales          Gross Profit          Net Sales          Gross Profit
Banana              $   822.4     44 %   $   76.4     33 %   $   893.5     44 %   $   92.2     41 %
Other fresh produce     874.9     47 %      126.1     55 %       929.2     46 %       99.7     44 %
Prepared food           158.2      9 %       26.3     12 %       191.0     10 %       33.8     15 %
Totals              $ 1,855.5    100 %   $  228.8    100 %   $ 2,013.7    100 %   $  225.7    100 %


Table of Contents

Second Quarter 2012 Compared with Second Quarter 2011

Net Sales. Net sales for the second quarter of 2012 were $957.6 million compared with $1,039.7 million for the second quarter of 2011. The decrease in net sales of $82.1 million was attributable to lower net sales of bananas, other fresh produce and prepared food.

• Net sales of bananas decreased by $41.1 million principally due to lower sales volume in Europe and the Middle East, and lower per unit sales prices in North America and Asia. Worldwide banana sales volume decreased 5% and per unit sales prices decreased 4%.

?         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
          and higher per unit sales prices.


?         Middle East banana net sales decreased principally due to lower sales
          volumes that resulted from reduced shipments from Central America into
          secondary Middle East markets combined with lower purchases from
          independent growers in the Philippines, partially offset by higher per
          unit sales prices.


?         North America banana net sales decreased principally due to lower per
          unit sales prices partially offset by higher sales volumes. 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 latter part
          of first quarter of 2011 as a result of industry shortages. Sales
          volumes increased primarily as a result of higher production volumes in
          Costa Rica.


?         Asia banana net sales decreased principally due to lower per unit sales
          prices that resulted from increased industry supplies.

• Net sales in the other fresh produce segment decreased $22.8 million principally as a result of lower net sales of pineapples, tomatoes, melons and non-tropical fruit, partially offset by higher net sales of fresh-cut products.

?         Net sales of pineapples decreased principally as a result of lower
          sales volume in Europe, the Middle East and Asia as a result of reduced
          production from our Costa Rican and Philippines operations. Per unit
          sales prices were higher in all regions principally due to improved
          customer demand.


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


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


?         Net sales of non-tropical fruit decreased principally due to lower
          sales volumes of apples in Europe and South America, citrus in the
          Middle East and other deciduous fruit in South America as a result of
          lower supplies. Partially offsetting these decreases in net sales of
          non-tropical fruit were higher per unit sales prices and sales volumes
          of grapes in Europe and higher sales volumes of grapes in Asia due to
          favorable market conditions.


?         Net sales of fresh-cut products increased primarily due to higher per
          unit sales prices and sales volume in North America 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. Partially offsetting these increases in net sales of
          fresh-cut products were lower sales volumes in Europe that resulted
          from our planned closure of a fresh-cut prepared salad facility in the
          United Kingdom.


•      Net sales in the prepared food segment decreased $18.2 million principally
       due to lower net sales of pineapple products in Europe as a result of
       reduced sales volumes of canned pineapple due to lower yields, combined
       with lower pricing for industrial products which resulted from higher
       industry supplies. Also contributing to the decrease in net sales of
       prepared food was lower net sales of canned deciduous products primarily
       as a result of lower customer demand.

Cost of Products Sold. Cost of products sold was $841.2 million for the second quarter of 2012 compared with $936.8 million for the second quarter of 2011, a decrease of $95.6 million. This decrease in cost of products sold was primarily attributable to lower sales volumes of bananas and other fresh produce combined with lower ocean freight costs as a result of lower fuel cost and improved vessel utilization.

Gross Profit. Gross profit was $116.4 million for the second quarter of 2012 compared with $102.9 million for the second quarter of 2011, an increase of $13.5 million. The increase in gross profit was primarily attributable to higher gross profit on other fresh produce, partially offset by lower gross profit on prepared food and bananas.


Table of Contents

• Gross profit in the other fresh produce segment increased $21.3 million principally due to higher gross profit on pineapples, melons and fresh-cut products.

?         Gross profit on pineapples increased principally due to higher per unit
          sales prices in all regions as a result of favorable market conditions
          combined with lower ocean freight costs principally due to lower fuel
          costs and improved vessel utilization. Worldwide per unit sales prices
          increased 14% and per unit cost increased 3%.


?         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 fresh-cut products increased principally due to
          improved pricing in Europe, the Middle East and North America,
          partially offset by higher fruit procurement costs.

• Gross profit in the prepared food segment decreased by $4.6 million principally as a result of reduced sales volumes of canned pineapples as a result of lower yields and 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 improved pricing and lower per unit costs principally as a result of operational improvements.

• Gross profit in the banana segment decreased $3.2 million primarily due to lower per unit sales prices in North America and Asia. Partially offsetting these decreases in gross profit were lower ocean freight costs as a result of lower fuel cost and improved vessel utilization and lower fruit costs principally due to improved yields. Worldwide per unit sales prices decreased 4% and per unit cost decreased 4%.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $2.8 million from $48.4 million in the second quarter of 2011 to $45.6 million for the second quarter of 2012. The decrease was principally due to lower legal expenses.

Loss or (Gain) on Disposal of Property, Plant and Equipment. The gain on disposal of property, plant and equipment of $0.7 million during the second 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 $1.0 million during the second quarter of 2012 as compared with $10.3 million during the second quarter of 2011. During the second quarter of 2012, we recorded $1.0 million in termination benefits related to an under-performing fresh-cut facility in the United Kingdom. During the second quarter of 2011, we recorded $4.9 million in asset impairments and contract termination charges and a $3.3 million goodwill impairment charge as a result of our Central American melon program rationalization and we also recorded $1.1 million in other charges related to legal costs in Hawaii. These charges were related to the other fresh produce segment. In addition, during the second quarter of 2011, we recorded $1.0 million in asset impairments and other charges related to our banana segment in Costa Rica and the Philippines as a result of abandoned low-production areas.

Operating Income. Operating income for the second quarter of 2012 increased by $24.9 million from $44.9 million in the second quarter of 2011 to $69.8 million for the second quarter of 2012. The increase in operating income was primarily due to higher gross profit combined with lower selling, general and administrative expenses and lower asset impairment and other charges.

Interest Expense. Interest expense was $0.9 million for the second quarter of 2012 as compared with $1.5 million for the second quarter of 2011, a decrease of $0.6 million. This decrease was principally due to lower average debt balances.

Other Expense, Net. Other expense, net was $3.1 million for the second quarter of 2012 as compared with $0.4 million for the second quarter of 2011. The increase in other expense of $2.7 million was principally attributable to foreign exchange losses recorded during the second quarter of 2012 as compared with a slight foreign exchange gain in the second quarter of 2011.

Provision for Income Taxes. Provision for income taxes was $7.4 million for the second quarter of 2012 as compared with $6.4 million for the second quarter of 2011. The increase in the provision for income taxes of $1.0 million is primarily due to increased earnings in certain higher tax jurisdictions during the second quarter of 2012.


Table of Contents

First Six Months of 2012 Compared with First Six Months of 2011

Net Sales. Net sales for the first six months of 2012 were $1,855.5 million compared with $2,013.7 million for the first six months of 2011. The decrease in net sales of $158.2 million was attributable to lower net sales of bananas, other fresh produce and prepared food.

• Net sales of bananas decreased by $71.1 million principally due to lower sales volume in Europe, the Middle East and Asia combined with lower per unit sales prices in North America. Worldwide banana sales volume decreased by 5% and per unit sales prices decreased 3%.

?         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
          and higher per unit sales prices.


?         Middle East banana net sales decreased principally due to lower sales
          volumes that resulted from reduced shipments from Central America into
          secondary Middle East markets combined with lower purchases from
          independent growers in the Philippines, partially offset by higher per
          unit sales prices.


?         Asia banana net sales decreased principally due to lower per unit sales
          prices that resulted from increased industry supplies.


?         North America banana net sales decreased principally due to lower per
          unit sales prices partially offset by higher sales volumes. 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 latter part
          of the first quarter of 2011 as a result of industry shortages. Sales
          volumes increased primarily as a result of higher production volumes in
          Costa Rica.

• Net sales in the other fresh produce segment decreased $54.3 million principally as a result of lower net sales of tomatoes, pineapples, non-tropical fruit and melons, partially offset by higher net sales of fresh-cut products.

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


?         Net sales of pineapples decreased principally as a result of lower
          sales volume in Europe, the Middle East and Asia as a result of reduced
          production from our Costa Rican and Philippines operations. Per unit
          sales prices were higher in all regions principally due to improved
          customer demand.


?         Net sales of non-tropical fruit decreased principally due to lower
          sales volumes of stonefruit in North America, apples in Europe and
          South America, citrus in the Middle East and other deciduous fruit in
          South America as a result of lower supplies. Partially offsetting these
          decreases in net sales of non-tropical fruit were higher per unit sales
          prices of grapes in Europe and higher grape sales volumes in Europe,
          the Middle East and Asia due to favorable market conditions.


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


?         Net sales of fresh-cut products increased primarily due to higher per
          unit sales prices and sales volume in North America 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. Partially offsetting these increases in net sales of
          fresh-cut products were lower sales volumes in Europe that resulted
          from our planned closure of a fresh-cut prepared salad facility in the
          United Kingdom.

. . .

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