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FDP > SEC Filings for FDP > Form 10-Q on 30-Oct-2012All Recent SEC Filings

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

Form 10-Q for FRESH DEL MONTE PRODUCE INC


30-Oct-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 food. 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 food includes prepared fruit and vegetables, juices, beverages, snacks, poultry and meat products.

Liquidity and Capital Resources

Net cash provided by operating activities was $229.5 million for the first nine months of 2012 as compared with $248.8 million for the first nine months of 2011, a decrease of $19.3 million. The decrease in cash provided by operating activities was principally attributable to changes in operating assets and liabilities, principally higher levels of trade accounts receivables and lower levels of accounts payable and accrued expenses as compared to September of the prior year, partially offset by higher net income.

Working capital was $465.6 million at September 28, 2012 compared with $522.2 million at December 30, 2011, a decrease of $56.6 million. This decrease in working capital is principally attributable to the outstanding amount of the Existing Credit Facility of $24.3 million, that as of September 28, 2012 was classified as current portion of long-term debt due to its January 17, 2013 maturity date. Also contributing to the decrease in working capital was lower balances of other accounts receivable due to the collection of insurance claims and lower advances to suppliers combined with higher income taxes and other taxes payable.

Net cash used in investing activities for the first nine months of 2012 was $64.5 million compared with $58.8 million for the first nine months of 2011. Net cash used in investing activities for the first nine months of 2012 consisted of capital expenditures of $62.5 million and purchases of available-for-sale investments of $11.0 million, partially offset by proceeds from sales of property, plant and equipment of $8.8 million and proceeds from sale of unconsolidated subsidiary of $0.2 million. Capital expenditures for the first nine 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 nine months of 2012 also included the purchase of three refrigerated vessels, 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 nine months of 2012 consisted primarily of the sale of surplus land in Guatemala, the sale of a refrigerated vessel and shipping-related and other surplus equipment.

Net cash used in investing activities for the first nine months of 2011 consisted of capital expenditures of $62.7 million, partially offset by proceeds from sales of property, plant and equipment of $3.9 million. Capital expenditures for the first nine 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 nine 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 sales of property, plant and equipment for the first nine months of 2011 consisted primarily of the sale of surplus shipping-related equipment.

Net cash used in financing activities for the first nine months of 2012 was $187.2 million compared with $214.5 million for the first nine months of 2011. Net cash used in financing activities for the first nine months of 2012 consisted of net repayments on long-term debt of $187.2 million and $17.4 million of dividends paid, partially offset by contributions from noncontrolling interests, net of $7.0 million, proceeds from stock options exercised of $6.6 million and excess tax benefit from stock-based compensation of $3.8 million.

Net cash used in financing activities for the first nine months of 2011 consisted of net repayments on long-term debt of $183.4 million, $11.9 million of dividends paid , $3.1 million of distributions to noncontrolling interests and repurchase of shares of $37.9 million, partially offset by $21.8 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 senior secured revolving credit facility (the "Existing Credit Facility") administered by Rabobank Nederland, New York Branch. The Existing Credit Facility has a 3.5 years term, with a scheduled termination date of January 17, 2013. The Existing Credit Facility includes a swing line facility and a letter of credit facility with a $100.0 million sub-limit. Borrowings under the Existing 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 Existing Credit Facility by lowering the applicable margins over LIBOR or base rate borrowings that vary with our leverage ratio. On July 25, 2012, we voluntarily lowered the borrowing capacity under the Existing Credit Facility from $300 million to $150 million in order to reduce our unused commitment fee expense. (See Recent Development for explanation of replacement to the Existing Credit Facility.)

The Existing Credit Facility is collateralized directly or indirectly by substantially all of our assets and is guaranteed by certain of our subsidiaries. At September 28, 2012, we had $24.3 million outstanding under the Existing Credit Facility bearing interest at a per annum rate of 2.75%. In addition, we pay a fee on unused commitments.

The Existing 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 September 28, 2012, we were in compliance with all of the financial and other covenants contained in the Existing Credit Facility.

At September 28, 2012, we had $134.5 million available under committed working capital facilities, primarily under the Existing Credit Facility. At September 28, 2012, we applied $13.8 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 $7.9 million in other letters of credit and bank guarantees not included in the letter of credit facility.

As of September 28, 2012, we had $28.4 million of long-term debt and capital lease obligations, including the current portion, consisting of $24.3 million outstanding under the Existing Credit Facility, $0.7 million of capital lease obligations and $3.4 million of other long-term debt and notes payable.

Based on our operating plan, combined with our borrowing capacity under our Existing Credit Facility and the new credit facility as described in Recent Development, we believe we will have sufficient resources to meet our cash obligations in the foreseeable future.

As of September 28, 2012, we had cash and cash equivalents of $24.6 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 nine months of 2012. We expect to make additional payments of approximately $4.8 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 nine 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 were or 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 liability of $6.9 million as of September 28, 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 a 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 nine months of 2012 that are in a net asset position of $0.2 million. We expect that $4.2 million will be transferred to earnings during the next 12 months, along with the earnings effect of the related forecasted transactions.

Recent Development
On October 23, 2012, we replaced the Existing Credit Facility by entering into a 5 year, $500 million syndicated senior unsecured revolving credit facility maturing on October 23, 2017 (the "Credit Facility") with Bank of America, N.A. as administrative agent and Merrill Lynch, Pierce, Fenner & Smith Inc. as sole lead arranger and sole book manager. Borrowings under the Credit Facility bear interest at a spread over LIBOR that varies with our leverage ratio. The Credit Facility also includes a swing line facility and a letter of credit facility. We intend to use funds borrowed under the credit facility from time to time for general corporate purposes, which may include the repayment, redemption or refinancing of our existing indebtedness, working capital needs, capital expenditures, funding of possible acquisitions, possible share repurchases and satisfaction of other obligations.


Table of Contents

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                                              Nine months ended
                  September 28, 2012          September 30, 2011             September 28, 2012               September 30, 2011
North America  $      420.2         53 %   $      399.9         50 %   $     1,413.9             53 %   $     1,430.6              51 %
Europe                145.5         19 %          174.7         22 %           546.0             21 %           666.8              24 %
Asia                   91.2         12 %           93.6         12 %           332.8             13 %           341.2              12 %
Middle East           105.6         13 %          114.2         14 %           287.4             11 %           324.3              11 %
Other                  26.3          3 %           12.8          2 %            64.2              2 %            46.0               2 %

Total          $      788.8        100 %   $      795.2        100 %   $     2,644.3            100 %   $     2,808.9             100 %



Product net sales and gross profit:

                                                   Quarter ended
                             September 28, 2012                     September 30, 2011
                       Net Sales         Gross Profit         Net Sales         Gross Profit
Banana              $ 359.8     46 %   $   12.0     16 %   $ 375.1     47 %   $ (1.0 )    -2  %
Other fresh produce   335.2     42 %       50.8     68 %     337.0     42 %     52.1      83  %
Prepared food          93.8     12 %       11.6     16 %      83.1     11 %     11.8      19  %
Totals              $ 788.8    100 %   $   74.4    100 %   $ 795.2    100 %   $ 62.9     100  %



                                                   Nine months ended
                              September 28, 2012                       September 30, 2011
                        Net Sales          Gross Profit          Net Sales          Gross Profit
Banana              $ 1,182.2     45 %   $   88.4     29 %   $ 1,268.7     45 %   $   91.3     32 %
Other fresh produce   1,210.1     45 %      177.0     58 %     1,266.1     45 %      151.7     52 %
Prepared food           252.0     10 %       37.8     13 %       274.1     10 %       45.6     16 %
Totals              $ 2,644.3    100 %   $  303.2    100 %   $ 2,808.9    100 %   $  288.6    100 %


Table of Contents

Third Quarter 2012 Compared with Third Quarter 2011

Net Sales. Net sales for the third quarter of 2012 were $788.8 million compared with $795.2 million for the third quarter of 2011. The decrease in net sales of $6.4 million was attributable to lower net sales of bananas, other fresh produce and prepared food.

• Net sales of bananas decreased by $15.3 million principally due to lower net sales in the Middle East, Europe and Asia, partially offset by higher net sales in North America. Worldwide banana sales volume decreased 6% and per unit sales prices increased 2%.

?         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 in all markets.


?         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.


?         Asia banana net sales decreased principally due to lower sales volumes
          as a result of lower purchases from independent growers in the
          Philippines, partially offset by higher per unit sales prices resulting
          from improved local pricing in Japan.


?         North America banana net sales increased principally due to higher
          sales volumes primarily as a result of higher production volumes in
          Costa Rica.

• Net sales in the other fresh produce segment decreased $1.8 million principally as a result of lower net sales of pineapples and melons, partially offset by higher net sales of non-tropical fruit and fresh-cut fruit products.

?         Net sales of pineapples decreased principally as a result of lower per
          unit sales prices in North America due to higher supplies combined with
          lower volumes in the Middle East and Asia as a result of reduced
          shipments from our Philippines operations. Per unit sales prices were
          higher in Europe, the Middle East and Asia principally due to improved
          customer demand.


?         Net sales of melons decreased 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 increased principally due to higher
          sales volumes of apples in the Middle East and North America and other
          deciduous fruit in South America and Europe as a result increased
          demand.


?         Net sales of fresh-cut products increased primarily due to higher 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 were lower sales volumes in Europe
          that resulted from our closure of a fresh-cut prepared salad facility
          in the United Kingdom earlier in the year.


•      Net sales in the prepared food segment increased $10.7 million principally
       due to higher sales volumes in our Jordanian poultry business and higher
       sales volumes of canned pineapples in Europe as a result of improved
       market conditions. Partially offsetting these increases were lower sales
       volumes of deciduous canned products and lower pricing for industrial
       products which resulted from higher industry supplies.

Cost of Products Sold. Cost of products sold was $714.4 million for the third quarter of 2012 compared with $732.3 million for the third quarter of 2011, a decrease of $17.9 million. This decrease in cost of products sold was primarily attributable to lower ocean freight costs as a result of improved vessel utilization and lower charter costs.

Gross Profit. Gross profit was $74.4 million for the third quarter of 2012 compared with $62.9 million for the third quarter of 2011, an increase of $11.5 million. The increase in gross profit was primarily attributable to higher gross profit on bananas, partially offset by lower gross profit on other fresh produce and prepared food.

• Gross profit in the banana segment increased $13.0 million primarily due to higher per unit sales prices in all markets combined with lower ocean freight. Worldwide per unit sales prices increased 2% and per unit cost decreased 1%.

• Gross profit in the other fresh produce segment decreased $1.3 million principally due to lower gross profit on pineapples, partially offset by higher gross profit on fresh-cut products and non-tropical fruit.


Table of Contents

?         Gross profit on pineapples decreased principally due to lower per unit
          sales prices in North America combined with higher per unit costs as a
          result of lower yields. Worldwide per unit sales prices decreased 5%
          and per unit cost increased 4%.


?         Gross profit on fresh-cut products increased principally due to higher
          sales volumes in North America and the Middle East combined with
          improved pricing in Asia.

• Gross profit in the prepared food segment decreased by $0.2 million principally as a result of lower selling prices for industrial products and canned pineapple which resulted from higher industry supplies. Partially offsetting these decreases were higher gross profit on our Jordanian poultry business that resulted from higher sales volumes and higher gross profit on deciduous canned products due to improved pricing and lower per unit costs principally as a result of operational improvements.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.9 million from $47.1 million in the third quarter of 2011 to $46.2 million for the third quarter of 2012. The decrease was principally due to lower selling and marketing expenses in Europe.

Gain on Disposal of Property, Plant and Equipment. The gain on disposal of property, plant and equipment of $2.1 million during the third quarter of 2012 was principally related to the sale of shipping related and other surplus equipment. The gain on disposal of property, plant and equipment of $1.8 million during the third quarter of 2011 was principally related to the sale of shipping related equipment.

Asset Impairment and Other Charges, Net. Asset impairment and other charges, net were $2.1 million during the third quarter of 2012 as compared with $0.6 million during the third quarter of 2011. During the third quarter of 2012, we recorded $1.3 million in asset impairments and other charges related to floods in our Costa Rica banana operations, $0.5 million in termination benefits related to the closure of an under-performing fresh-cut facility in the United Kingdom in the other fresh produce segment and $0.3 million in other charges related to Hawaii in the other fresh produce segment. During the third quarter of 2011, we recorded $1.3 million in asset impairments and contract termination charges due to the closure of a distribution center in the United Kingdom related to the banana segment and a reversal of accrued legal expenses of $0.7 million in Hawaii related to the other fresh produce segment.

Operating Income. Operating income for the third quarter of 2012 increased by $11.2 million from $17.0 million in the third quarter of 2011 to $28.2 million for the third quarter of 2012. The increase in operating income was primarily due to higher gross profit combined with lower selling, general and administrative expenses and higher gain on disposal of property, plant and equipment, partially offset by higher asset impairment and other charges.

Interest Expense. Interest expense decreased by $2.1 million during the third quarter of 2012 as compared with the third quarter of 2011. Interest expense was lower during the third quarter of 2012 as a result of lower average debt balances and was fully offset by capitalized interest.

Other Expense, Net. Other expense, net was $3.3 million for the third quarter of 2012 as compared with $0.4 million for the third quarter of 2011. The increase in other expense of $2.9 million was principally attributable to $2.6 million of foreign exchange losses incurred during the third quarter of 2012 which resulted from converting Argentine pesos to U.S. dollars.

Provision for Income Taxes. Provision for income taxes was $0.2 million for the third quarter of 2012 as compared with $2.0 million for the third quarter of 2011. The decrease is principally due to higher taxable income in certain jurisdictions with lower tax rates.


Table of Contents

First Nine Months of 2012 Compared with First Nine Months of 2011

Net Sales. Net sales for the first nine months of 2012 were $2,644.3 million compared with $2,808.9 million for the first nine months of 2011. The decrease in net sales of $164.6 million was attributable to lower net sales of bananas, other fresh produce and prepared food.

• Net sales of bananas decreased by $86.5 million principally due to lower sales volume in Europe, the Middle East and Asia. Worldwide banana sales volume decreased by 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
          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 sales volumes
          as a result of reduced purchases from independent growers, partially
          offset by higher per unit sales prices.


?         North America banana net sales increased principally due to higher
          sales volumes that resulted from increased production volumes in Costa
          Rica, partially 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 latter part of the
          first quarter of 2011 through the second quarter as a result of
          industry shortages.

• Net sales in the other fresh produce segment decreased $56.0 million principally as a result of lower net sales of tomatoes, pineapples, melons and non-tropical fruit, partially offset by higher net sales of fresh-cut products.

?         Net sales of tomatoes decreased principally due to lower per unit sales
          prices as a result of higher industry volumes and decreased sales
          volumes due to 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 Europe, the Middle East and Asia due to
          improved customer demand. In North America, pineapple sales volume were
          higher as a result of increased shipments from Costa Rica resulting in
          a slight reduction in per unit sales prices.


?         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 primarily due to lower sales
          volumes of avocados and stonefruit in North America and citrus in the
          Middle East, principally as a result of lower supplies. Partially
          offsetting these decreases in net sales of non-tropical fruit were
          higher apple per unit sales prices in the Middle East, North America
          and Europe and higher apple sales volumes in the Middle East due
          principally 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 closure of a fresh-cut prepared salad facility in the United
          Kingdom earlier in the year.

• Net sales in the prepared food segment decreased $22.1 million principally as a result of lower sales volume of canned pineapples due to lower yields and lower selling prices for industrial products which resulted from higher industry supplies. Partially offsetting these decreases in net . . .

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