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DOLE > SEC Filings for DOLE > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for DOLE FOOD CO INC

Form 10-Q for DOLE FOOD CO INC


15-Nov-2012

Quarterly Report


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

AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis contains forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements, which are based on management's assumptions and describe Dole's future plans, strategies and expectations, are generally identifiable by the use of terms such as "anticipate," "will," "expect," "believe," "should" or similar expressions. The potential risks and uncertainties that could cause Dole's actual results to differ materially from those expressed or implied herein are set forth in Item 1A and Item 7A of Dole's Annual Report on Form 10-K for the year ended December 31, 2011 and include: weather-related phenomena; market responses to industry volume pressures; product and raw materials supplies and pricing; changes in interest and currency exchange rates; economic crises; quotas, tariffs and other governmental actions; and international conflict.

Overview

Significant highlights for Dole Food Company, Inc. and its consolidated subsidiaries ("Dole") for the quarter and three quarters ended October 6, 2012 were as follows:

• On September 17, 2012, Dole signed a definitive agreement (the "Agreement") with ITOCHU Corporation for the sale of Dole's worldwide packaged foods and Asia fresh produce businesses (collectively, "Dole Asia") for $1.685 billion in cash. Additional consideration of $29 million may be received if the acquirer chooses to exercise its option not to assume certain U.S. pension liabilities of Dole Asia. In the event of a termination of the Agreement, under certain very limited circumstances, Dole would be obligated to pay ITOCHU a termination fee of $50.4 million as provided in the Agreement. The transaction is subject to Dole stockholder approval and customary regulatory approvals in multiple countries. Dole will use substantially all the proceeds from the transaction and Dole's intended new capital structure to pay down its existing indebtedness and to provide funding for transaction-related taxes, costs and expenses. In connection with the transaction, Dole will realign and streamline its global operating structure to conform to the specific needs of the remaining fresh produce businesses. The operations of Dole Asia consist of Dole's Packaged Foods reportable operating segment and Asia Fresh, which is a component of Dole's Fresh Fruit reportable operating segment. Following the consummation of the transaction, Dole will have two lines of business - fresh fruit and fresh vegetables - and will remain a leading producer, marketer and distributor of fresh fruit and fresh vegetables, including Dole's expanding line of value-added products. As a result of the transaction, Dole's fresh fruit business line will be smaller than at present, with an approximate 30% reduction in revenue; Dole's fresh vegetables business line will not be impacted by the transaction. Dole will continue to be one of the world's largest producers of bananas and pineapples, and an industry leader in packaged salads, fresh-packed vegetables and fresh berries. Dole also will maintain its fully-integrated operating platform in the Americas and Europe, as well as its refrigerated supply chain, which features the largest dedicated refrigerated containerized fleet in the world, as well as a network of packaging, ripening and distribution centers, to deliver fresh Dole products to market.

• Net revenues for the third quarter of 2012 were $2 billion, a decrease of 6% from the third quarter of 2011. Excluding the sales from both our German ripening and distribution subsidiary, which was sold during the first quarter of 2012 and our Dole Spain ripening and distribution subsidiary, which was sold in the fourth quarter of 2011 ("European divested businesses"), as well as sales from SunnyRidge Farms, which was acquired in the fourth quarter of 2011 ("berry acquisition"), sales increased 2% and were higher in all three of our reporting segments.

• Operating income for the third quarter of 2012 was $18.2 million compared to $10.3 million in the third quarter of 2011. Earnings increased in our fresh fruit and packaged foods segments, partially offset by lower earnings in our fresh vegetables segment.

• Fresh fruit operating income increased primarily as a result of higher banana earnings in our European banana operations as well as higher earnings in our fresh pineapple operation and Chilean deciduous fruit business. These improvements were partially offset by lower pricing in North America and Asia bananas.


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• Fresh vegetables operating income decreased primarily due to lower earnings in fresh berries and packaged salads, partially offset by improved pricing in fresh-packed vegetables. Fresh berries earnings were impacted by higher growing costs. Packaged salads earnings decreased primarily due to costs related to the precautionary recall of a limited number of packaged salad products.

• Packaged foods operating income increased due to lower product costs for packaged fruit products in North America and improved pricing for frozen fruit products.

• Dole's 2011 restructuring plan in the fresh fruit segment in Europe, Latin America and Asia remains on track and is expected to be completed during the fourth quarter of 2012. Full year net cash savings for fiscal 2012 are estimated at $24 million, of which $18 million has already been realized in the first three quarters of 2012. The 2011 restructuring initiatives did not significantly impact fiscal 2012 revenues. Although cost of products sold for the first three quarters of 2012 benefitted from our shipping and farming restructuring initiatives, higher purchased fruit costs from Latin America growers more than offset these benefits. The remaining $6 million of estimated net cash savings are expected to be realized in the fourth quarter of fiscal 2012 and are expected to reduce cost of products sold.

Non-GAAP Financial Measures

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



                                                Quarter Ended                    Three Quarters Ended
                                         October 6,        October 8,        October 6,         October 8,
                                            2012              2011              2012               2011
                                                                  (In thousands)
Net income                              $    (13,864 )    $    (47,004 )    $      68,819      $     38,074
(Income) loss from discontinued
operations, net of income taxes                  234                43                266              (188 )
Gain on disposal of discontinued
operations, net of income taxes                   -                 -                  -               (339 )
Interest expense                              39,953            41,402            101,546           111,709
Income taxes                                  (8,055 )             123               (230 )          18,781

EBIT before discontinued operations           18,268            (5,436 )          170,401           168,037
Depreciation and amortization from
continuing operations                         31,694            31,666             80,225            79,064
Net unrealized loss on derivative
instruments                                     (116 )           2,487                711             8,381
(Gain) loss on long-term Japanese yen
hedges                                           855            (2,298 )            1,793            20,141
Foreign currency exchange (gain) loss
on vessel obligations                          2,177            (2,590 )            2,680               (51 )
Net unrealized (gain) loss on foreign
denominated instruments                        3,409            (1,645 )              538             5,802
Share-based compensation                       3,794             2,894              9,448             6,891
Charges for restructuring and
long-term receivables                            793            13,171              4,062            21,873
Strategic review transaction costs             7,194                -               8,282                -
Refinancing charges and loss on early
retirement of debt                                -             26,192                433            26,212
Gain on asset sales                           (5,759 )          (3,326 )          (11,916 )          (3,337 )

Adjusted EBITDA                         $     62,309      $     61,115      $     266,657      $    333,013

EBIT before discontinued operations and Adjusted EBITDA are measures commonly used by financial analysts in evaluating the performance of companies. EBIT before discontinued operations is calculated from net income by adding interest expense and income tax expense, and adding the loss or subtracting the income from discontinued operations, net of income taxes. Adjusted EBITDA is calculated from EBIT before discontinued


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operations by: (1) adding depreciation and amortization from continuing operations; (2) adding the net unrealized loss or subtracting the net unrealized gain on foreign currency and bunker fuel hedges and the cross currency swap which do not have a more than insignificant financing element present at contract inception; (3) adding the net loss or subtracting the net gain on the long-term Japanese yen hedges; (4) adding the foreign currency loss or subtracting the foreign currency gain on the vessel obligations; (5) adding the net unrealized loss or subtracting the net unrealized gain on foreign denominated instruments; (6) adding share-based compensation expense; (7) adding charges for restructuring and long-term receivables; (8) adding strategic review transaction costs; (9) adding refinancing charges and loss on early retirement of debt; and (10) subtracting the gain on asset sales. Due to the fact that the long-term Japanese yen hedges had more than an insignificant financing element at inception (as discussed in Note 14 to the condensed consolidated financial statements), the liability is treated similar to a debt instrument and the associated cash flows are classified as a financing activity. As a result, both the realized and unrealized gains and losses related to the long-term Japanese yen hedges are subtracted from or added back to EBIT before discontinued operations when calculating Adjusted EBITDA. These adjustments have been made because management excludes these amounts when evaluating the performance of Dole.

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

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

Results of Operations

Selected results of operations for the quarters and three quarters ended
October 6, 2012 and October 8, 2011 were as follows:



                                               Quarter Ended                   Three Quarters Ended
                                       October 6,        October 8,        October 6,        October 8,
                                          2012              2011              2012              2011
                                                                (In thousands)
Revenues, net                          $ 1,957,111       $ 2,086,032       $ 5,302,176       $ 5,687,681
Operating income                            18,173            10,265           162,651           211,578
Other income (expense), net                 (4,840 )         (18,956 )          (3,324 )         (53,970 )
Interest expense                           (39,953 )         (41,402 )        (101,546 )        (111,709 )
Income taxes                                 8,055              (123 )             230           (18,781 )
Net income (loss)                          (13,864 )         (47,004 )          68,819            38,074
Less: Net income attributable to
noncontrolling interests                    (1,456 )          (1,634 )          (3,644 )          (3,906 )
Net income (loss) attributable to
shareholders of
Dole Food Company, Inc.                    (15,320 )         (48,638 )          65,176            34,168


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Revenues

Revenues in the quarter ended October 6, 2012 decreased 6% to $2 billion from $2.1 billion for the quarter ended October 8, 2011. Excluding third quarter 2011 sales from Dole's European divested businesses of $186 million as well as third quarter 2012 sales from the berry acquisition of $13 million, sales increased 2%. Fresh fruit sales decreased $168 million. Excluding sales from divested businesses, fresh fruit sales increased $17 million. The increase is primarily related to higher sales in Europe, improved pricing in Dole's Chilean deciduous fruit business and other fresh fruit sold in Asia and higher volumes of North America fresh pineapple. These factors were partially offset by lower pricing in North America and Asia bananas. Fresh vegetables sales increased $29 million. Excluding sales from the berry acquisition, fresh vegetables sales increased $17 million due to improved pricing for fresh-packed vegetables and packaged salads. Packaged foods sales increased $10 million primarily due to higher sales in the North America frozen fruit and healthy snack businesses. The increase was partially offset by lower volumes of packaged fruit products sold in North America and Asia. Net unfavorable foreign currency exchange movements in Dole's selling locations resulted in lower revenues of approximately $32 million.

Revenues in the three quarters ended October 6, 2012 decreased 7% to $5.3 billion from $5.7 billion for the three quarters ended October 8, 2011. Excluding sales from Dole's European divested businesses of $421 million, as well as the first three quarters 2012 sales from the berry acquisition of $53 million, sales were comparable. Fresh fruit revenues decreased $481 million. Excluding sales from divested businesses, fresh fruit sales decreased $60 million primarily due to lower pricing in North America and lower volumes of fresh fruit sold in Europe as well as unfavorable euro and Swedish krona foreign currency exchange movements. These factors were partially offset by higher volumes of fresh pineapples sold worldwide and bananas sold in Asia. Fresh vegetables sales increased $65 million. Excluding sales from the berry acquisition, fresh vegetables sales increased $11 million. The increase was primarily due to higher pricing of packaged salads and improved volumes of strawberries, partially offset by lower pricing of fresh-packed vegetables. Packaged foods sales increased $31 million due primarily to the same factors that impacted sales during the third quarter, except for higher pricing in North America and Asia. Net unfavorable foreign currency exchange movements in Dole's selling locations resulted in lower revenues of approximately $77 million.

Operating Income

For the quarter ended October 6, 2012, operating income increased to $18.2 million compared with $10.3 million for the quarter ended October 8, 2011. Fresh fruit operating income increased primarily due to higher earnings in Dole Europe's banana operations, fresh pineapple operations worldwide and the Chilean deciduous fruit business, partially offset by lower earnings in the banana operations of North America and Asia. Packaged foods operating income increased primarily due to lower product costs in North America for packaged fruit products and improved pricing for frozen fruit. Fresh vegetables operating income decreased due to lower earnings in the fresh berries and packaged salads businesses, partially offset by improved pricing for iceberg lettuce and celery in the fresh-packed vegetable operations. If foreign currency exchange rates in Dole's significant foreign operations during the quarter ended October 6, 2012 had remained unchanged from those experienced during the quarter ended October 8, 2011, Dole estimates that its operating income would have been higher by approximately $7 million.

For the three quarters ended October 6, 2012, operating income decreased to $162.7 million compared with $211.6 million for the three quarters ended October 8, 2011. Fresh fruit operating income decreased primarily due to lower earnings in Dole's banana operations in North America and Asia, partially offset by higher earnings in Dole Europe's banana operations, North America fresh pineapple operations, and Chilean deciduous fruit business. Packaged foods operating income increased primarily due to improved pricing in North America and Asia and lower levels of marketing expenditures in North America as prior year first quarter results included additional spending for the introduction of FRUIT BOWLS® in 100% juice and fruit in jars in 100% juice. Fresh vegetables operating income decreased due to lower pricing in all major fresh-packed vegetable product lines,


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partially offset by higher earnings of packaged salads and fresh berries. If foreign currency exchange rates in Dole's significant foreign operations during the three quarters ended October 6, 2012 had remained unchanged from those experienced during the three quarters ended October 8, 2011, Dole estimates that its operating income would have been higher by approximately $12 million.

Other Income (Expense), Net

For the quarter ended October 6, 2012, other income (expense), net was expense of $4.8 million compared to expense of $19 million in the prior year. The improvement was primarily due to the absence of $26.2 million of charges recorded in connection with Dole's third quarter 2011 refinancing and early retirement of debt. The refinancing of Dole's term loan and asset-based revolving facility resulted in $12.7 million of charges related to the write-off of debt issuance costs and debt discounts. In addition, $13.5 million of charges were recorded related to the premiums paid as well as the write-off of debt issuance costs and debt discounts associated with the early retirement of debt. These improvements were partially offset by unrealized losses of $3.7 million recorded during the third quarter of 2012 on Dole's foreign denominated borrowings compared to unrealized gains of $2.2 million recorded in the third quarter of 2011. In addition, Dole's British pound sterling vessel obligation generated unrealized losses of $2.2 million during the third quarter of 2012 compared to unrealized gains of $2.6 million during the third quarter of 2011. There was also a $1.5 million decrease in unrealized gains generated on Dole's long-term Japanese yen hedges.

For the three quarters ended October 6, 2012, other income (expense), net was an expense of $3.3 million compared to an expense of $54 million in the prior year. The improvement was primarily due to the absence of $27.4 million of unrealized losses incurred in connection with the March 2011 unwinding of the cross currency swap and entering into a series of long-term Japanese yen hedges. In addition, other income (expense) benefited from the absence of $26.2 million of charges recorded in connection with Dole's third quarter 2011 refinancing and early extinguishment of debt.

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

Interest Expense

Interest expense for the quarter ended October 6, 2012 was $40 million compared to $41.4 million for the quarter ended October 8, 2011. Interest expense for the three quarters ended October 6, 2012 was $101.5 million compared to $111.7 million for the three quarters ended October 8, 2011. Interest expense decreased in both periods primarily as a result of lower effective borrowing rates due in part to the maturity of Dole's interest rate swap in the second quarter of 2011 as well as Dole's repurchase and retirement of $52.5 million of its 13.875% senior secured notes due 2014 during the third quarter of 2011.

Income Taxes

Dole recorded a tax benefit of $0.2 million on $61.9 million of pretax income from continuing operations for the three quarters ended October 6, 2012. Income taxes included an interest benefit of $3.4 million related to Dole's unrecognized tax benefits. Income tax benefit of $18.8 million on $49.7 million of pretax income from continuing operations was recorded for the three quarters ended October 8, 2011 which included an interest benefit of $2.9 million related to Dole's unrecognized tax benefits. Dole's effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in its various U.S. and foreign jurisdictions. For the three quarters ended October 6, 2012, Dole's income tax expense differs from the U.S.


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federal statutory rate applied to Dole's pretax income primarily due to a decrease in Dole's total amount of unrecognized tax benefits which included $17 million as a result of the expiration of the statute of limitations in the second quarter of 2012 concerning certain transfer pricing items. Including interest, net of tax benefits, the total amount recorded for this item was $18.7 million which was partially offset by an increase in Dole's U.S. federal valuation allowance. For the three quarters ended October 8, 2011, Dole's income tax expense differed from the U.S. federal statutory rate applied to Dole's pretax income primarily due to losses in certain jurisdictions for which it is more likely than not that a tax benefit will not be realized.

Income tax expense/(benefit) for the quarters ended October 6, 2012 and October 8, 2011 were ($8.1) million and $0.1 million, respectively. During the quarter ended October 6, 2012, income taxes benefited from lower expense associated with Dole's banana operations in Asia.

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

Segment Results of Operations

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

The fresh fruit reportable operating segment ("fresh fruit") primarily sells bananas, fresh pineapple and deciduous fruit, which are sourced from local growers or Dole-owned or leased farms located in Latin America and Asia, with significant selling locations in North America, Western Europe and Japan. The Asia component of fresh fruit not only sells fruit, but also sources and grows vegetables for sale primarily in Japan.

The fresh vegetables reportable operating segment ("fresh vegetables") sells packaged salads and has a line of fresh-packed products that includes iceberg and romaine lettuce, celery, and fresh berries including strawberries and blueberries. Substantially all of the sales for fresh vegetables are generated in North America.

During the fourth quarter of 2011, Dole changed the segment classification of its Asia fresh vegetables operations from the fresh vegetables operating segment to the fresh fruit operating segment, due to a change in operational reporting. The segment reporting change has been reflected for all periods presented.

The packaged foods reportable operating segment ("packaged foods") sells and distributes packaged fruit and frozen fruit products in North America, Europe and Asia, with North America as the primary market. The largest component of packaged foods sales are FRUIT BOWLS, canned pineapple and pineapple juice.

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


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

                                  Quarter Ended               Three Quarters Ended
                           October 6,      October 8,      October 6,      October 8,
                              2012            2011            2012            2011
. . .
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