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DOLE > SEC Filings for DOLE > Form 10-K on 12-Mar-2013All Recent SEC Filings

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Form 10-K for DOLE FOOD CO INC


12-Mar-2013

Annual Report


Item 7. 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 this Annual Report on Form 10-K for the year ended December 29, 2012 and include: weather-related phenomena; market responses to industry volume pressures; product and raw material 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" or the Company") for the year ended December 29, 2012 were as follows:

• On September 17, 2012, Dole signed a definitive agreement (the "Agreement") with ITOCHU Corporation ("ITOCHU") for the sale of Dole's worldwide packaged foods and Asia fresh produce businesses (collectively, "Dole Asia") for $1.685 billion in cash ("sale transaction"). Dole and ITOCHU have extended the term of the Agreement and the sale transaction is expected to close on April 1, 2013. On February 22, 2013, ITOCHU paid Dole a non-refundable cash deposit of $200 million to be applied towards the purchase price, which Dole has used to temporarily repay revolver borrowings, pay certain sale transaction related expenses and for general corporate purposes. The parties agreed that, with limited exceptions, the deposit would be forfeited and retained by Dole if the closing does not occur by April 1, 2013. 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. Dole will use substantially all of the proceeds from the transaction and our new, post-sale-transaction capital structure to pay down our existing indebtedness and to provide funding for transaction-related taxes, costs and expenses, extinguishment of our long-term Japanese yen hedges, the anticipated right-sizing of Dole and other post-closing restructuring expenses, and the possible resolution of the previously disclosed Honduran tax case, European Union Antitrust Inquiry and the DBCP cases. On March 8, 2013, Dole entered into an agreement to settle the long-term Japanese yen hedges, for $25.1 million payable after the close of the sale transaction.

The operations of Dole Asia consist of Dole's Packaged Foods reportable operating segment and Dole's Asia fresh produce business, which is a component of Dole's Fresh Fruit reportable operating segment. The results of operations for Dole Asia have been reclassified to discontinued operations for all periods presented.

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. Following the consummation of the transaction, Dole will be a commodity produce company with two lines of business - fresh fruit and fresh vegetables - and will remain a leading producer, marketer and distributor of fresh fruit and fresh vegetables. As a result of the sale transaction, Dole's fresh fruit business line will be smaller than at present, with an approximate 30% reduction in revenue; Dole's fresh vegetables reportable operating segment 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, Europe and Africa, as well as its refrigerated supply chain, which features a dedicated refrigerated containerized fleet, as well as a network of packaging, ripening and distribution centers, to deliver fresh Dole products to market.

• Revenues for 2012 were $4.2 billion, a decrease of 11%. Excluding sales from both the German and Spanish ripening and distribution subsidiaries ("European divested businesses"), as well as sales from


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SunnyRidge Farms, which was acquired in the fourth quarter of 2011 ("berry acquisition"), sales decreased 1%.

• Operating income in 2012 was $16.6 million compared to $101 million in 2011.

• Fresh fruit operating income decreased by $34 million primarily as a result of lower earnings in Dole's North America banana operations and European ripening and distribution business, partially offset by higher earnings in Europe bananas and North America fresh pineapples. In addition, earnings were impacted by provisions totaling $26 million recorded in the fourth quarter of 2012 in connection with the possible resolution of certain legal-related matters.

• Fresh vegetables operating income decreased by $6.7 million due to lower pricing of fresh-packed vegetables, partially offset by higher earnings of packaged salads.

• Operating income was also impacted by costs of $48.4 million related to the sale transaction.

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:



                                              Year Ended            Year Ended           Year Ended
                                             December 29,          December 31,          January 1,
                                                 2012                  2011                 2011
                                                                 (In thousands)
Net income (loss)                           $     (141,567 )      $       41,793        $    (30,166 )
Loss from discontinued operations, net
of income taxes                                    150,003                60,324             111,163
Gain on disposal of discontinued
operations, net of income taxes                     (7,231 )                (339 )            (2,957 )
Interest expense from continuing
operations                                          12,219                 9,628               8,256
Income taxes from continuing operations             10,755                (2,070 )             6,000

EBIT before discontinued operations                 24,179               109,336              92,296
Depreciation and amortization from
continuing operations                               65,856                63,899              75,903
Net unrealized loss on derivative
instruments from continuing operations               1,185                   900                 746
Foreign currency exchange (gain) loss
on vessel obligations                                2,387                  (125 )            (2,677 )
Net unrealized loss on foreign
denominated instruments from continuing
operations                                             811                 1,906               3,237
Share-based compensation from
continuing operations                               10,781                 7,925               5,996
Charges for restructuring and long-term
receivables from continuing operations               5,158                16,412              31,459
ITOCHU transaction related costs                    48,395                     -                   -
Gain on asset sales                                (12,913 )              (4,541 )            (3,017 )

Adjusted EBITDA                             $      145,839        $      195,712        $    203,943

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 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 from continuing operations; (3) adding the foreign currency loss or subtracting the foreign currency gain on the vessel obligations; (4) adding the net unrealized loss or subtracting the net unrealized gain on foreign denominated instruments from continuing operations; (5) adding share-based compensation expense from continuing operations; (6) adding charges for restructuring and long-term receivables from continuing operations; (7) adding ITOCHU transaction related costs; and (8) subtracting the gain on asset sales from continuing operations. These adjustments have been made because management excludes these amounts when evaluating the performance of Dole.


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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 7 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 years ended December 29, 2012, December 31, 2011, and January 1, 2011 were as follows:

                                                Year Ended           Year Ended         Year Ended
                                               December 29,         December 31,        January 1,
                                                   2012                 2011               2011
                                                                 (In thousands)
Revenues, net                                 $    4,246,708       $    4,778,424       $ 4,686,858
Operating income                                      16,592              101,035            80,130
Other income (expense), net                           (3,130 )               (380 )            (276 )
Interest expense                                     (12,219 )             (9,628 )          (8,256 )
Income taxes                                         (10,755 )              2,070            (6,000 )
Earnings from equity method investments                6,063                4,588             6,571
Income from continuing operations, net of
income taxes                                           1,205              101,778            78,040
Loss from discontinued operations, net of
income taxes                                        (150,003 )            (60,324 )        (111,163 )
Gain on disposal of discontinued
operations, net of income taxes                        7,231                  339             2,957
Net income (loss)                                   (141,567 )             41,793           (30,166 )
Less: Net income attributable to
noncontrolling interests                              (2,896 )             (3,434 )          (3,958 )
Net income (loss) attributable to
shareholders of Dole Food
Company, Inc.                                       (144,463 )             38,359           (34,124 )

Revenues

For the year ended December 29, 2012, revenues decreased 11% to $4.2 billion from $4.8 billion for the year ended December 31, 2011. Excluding sales from Dole's European divested businesses of $539 million for the first three quarters of fiscal 2011, as well as the first three quarters of 2012 sales from the berry acquisition of $53 million, sales decreased 1%. Fresh fruit sales decreased $615.9 million from 2011 to 2012. Excluding sales from divested businesses, fresh fruit sales decreased $77.3 million primarily due to lower pricing in North America bananas as well as unfavorable euro and Swedish krona foreign currency exchange movements in Europe. These factors were partially offset by higher volumes of North America fresh pineapple and improved local pricing in Europe and in Dole's Chilean deciduous fruit business. Fresh vegetables sales increased $84 million. Excluding sales from the berry acquisition, fresh vegetables sales increased $31 million. The increase


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was primarily due to improved pricing for packaged salads and higher sales of fresh berries, partially offset by lower pricing for fresh-packed vegetables. Net unfavorable foreign currency exchange movements in Dole's selling locations resulted in lower revenues of approximately $82 million.

For the year ended December 31, 2011, revenues increased 2% to $4.8 billion from $4.7 billion for the year ended January 1, 2011. Higher sales were reported in both of Dole's operating segments. Fresh fruit sales increased $62.5 million primarily due to improved banana pricing in North America and Europe, higher volumes of bananas sold in North America, favorable foreign currency exchange movements in Europe as well as higher sales of Chilean deciduous fruit. These improvements were partially offset by lower volumes of bananas sold in Europe due to the implementation of Dole's 2010 European restructuring plan as well as lower volumes sold in the European ripening and distribution business. Fresh vegetables sales increased $28.9 million due primarily to higher pricing of packaged salads and revenues associated with the October 2011 berry acquisition. Net favorable foreign currency exchange movements in Dole's selling locations resulted in higher revenues of approximately $113 million.

Operating Income

For the year ended December 29, 2012, operating income was $16.6 million compared with $101 million for the year ended December 31, 2011. Fresh fruit operating income decreased primarily due to lower earnings in Dole's North America banana operations partially offset by higher earnings in Dole Europe's banana operations and North America fresh pineapple operations. In addition, fresh fruit earnings were also impacted by provisions totaling $26 million recorded in the fourth quarter of 2012 in connection with the possible resolution of certain legal-related matters. Fresh vegetables operating income decreased due to lower pricing in all major fresh-packed vegetable product lines, partially offset by higher earnings of packaged salads. Operating income was also impacted by costs of $48.4 million related to the sale transaction. If foreign currency exchange rates in Dole's significant foreign operations during the year ended December 29, 2012 had remained unchanged from those experienced during the year ended December 31, 2011, Dole estimates that its operating income would have been higher by approximately $12 million.

For the year ended December 31, 2011, operating income increased $20.9 million or 26% to $101 million compared with $80.1 million for the year ended January 1, 2011. Excluding the $32.5 million gain on the legal settlements recorded in 2010, operating income increased $53.4 million or 67%. Fresh fruit operating results increased primarily due to higher earnings in Dole's North America and Europe banana operations, European ripening and distribution business and Chilean deciduous fruit business. Banana earnings benefitted from higher local pricing for bananas and lower shipping and distribution costs in Europe. Fresh vegetables operating results increased due primarily to higher earnings in packaged salads partially offset by lower earnings in the fresh-packed vegetables and berries operations. If foreign currency exchange rates in Dole's significant foreign operations during the year ended December 31, 2011 had remained unchanged from those experienced during the year ended January 1, 2011, Dole estimates that its operating income would have been lower by approximately $4 million.

Other Income (Expense), Net

Other income (expense), net was expense of $3.1 million in 2012 compared to expense of $0.4 million in 2011. The change was due primarily to unrealized losses of $2.4 million on Dole's British pound sterling vessel obligation in 2012 compared to unrealized gains of $0.1 million in 2011.

Other income (expense), net was expense of $0.4 million in 2011 compared to expense of $0.3 million in 2010.

As a result of reflecting Dole Asia's operations as discontinued operations, amounts previously recorded in other income (expense), net related to Dole's long-term Japanese yen hedges and cross currency swap as well as charges for premiums paid and the write-off of debt issuance costs and debt discounts in connection with refinancing transactions have been reclassified into discontinued operations for all periods presented.


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Interest Expense

Interest expense for the year ended December 29, 2012 was $12.2 million compared to $9.6 million in 2011. The increase was primarily due to a $4 million accrual recorded in the fourth quarter of 2012 in connection with the possible resolution of certain legal-related matters.

Interest expense for the year ended December 31, 2011 was $9.6 million compared to $8.3 million in 2010.

As a result of reflecting Dole Asia's operations as discontinued operations, all interest expense associated with Dole's notes and debentures, term loan and revolving credit facilities and interest rate swap has been reclassified into discontinued operations for all periods presented. Refer to Note 4 in the Consolidated Financial Statements for additional information.

Income Taxes

Dole recorded income tax expense of $10.8 million on $5.9 million of income from continuing operations before income taxes and equity earnings for the year ended December 29, 2012, reflecting a 182.4% effective tax rate for the year. Income tax expense increased $12.8 million in 2012 compared to 2011 due primarily to a higher level of foreign earnings taxed at U.S. rates in 2012 and the absence of the impact of a state law change that reduced deferred taxes in 2011, partially offset by the reduction in Dole's liability for unrecognized tax benefits in 2012 attributable to the expiration of the statute of limitations concerning certain transfer pricing items. The effective tax rate in 2011 was (2.2%). 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 2012, Dole's income tax provision differs from the U.S. federal statutory rate applied to Dole's pre-tax income primarily due to a higher level of foreign earnings taxed at U.S rates and the impact of non-deductible compensation arrangements and costs related to the sale transaction.

Income tax expense for fiscal year 2011 decreased by $8.1 million compared to 2010 due primarily to the impact of a state law change effective for 2011 that reduced the deferred taxes on certain of Dole's intangibles. The effective tax rate in 2010 was 7.7%. For 2011, Dole's income tax provision differed from the U.S. federal statutory rate applied to Dole's pre-tax income primarily due to the impact of a state law change that reduced the tax rate on certain of Dole's intangibles, a reduction of its U.S. federal valuation allowance partially offset by an increase in Dole's liability for unrecognized tax benefits, primarily attributable to potential issues with foreign investment in U.S. property. For 2010, Dole's income tax provision differed from the U.S. federal statutory rate applied to Dole's pretax income primarily due to operations in foreign jurisdictions that are taxed at a rate lower than the U.S. federal statutory rate and the reduction in Dole's liability for unrecognized tax benefits, primarily attributable to the lapse of the statute of limitations relating to a state unrecognized tax benefit.

As of December 29, 2012, Dole has not provided for U.S. federal income and foreign withholding taxes on approximately $2.2 billion of the excess of the amount for financial reporting over the tax basis of investments that are essentially permanent in duration. Management believes that such excess at December 29, 2012 will remain indefinitely invested at this time. Of this amount, $414 million relates to the Dole Asia non-U.S. operations. The repatriation of cash currently held by Dole's foreign subsidiaries at December 29, 2012 would not currently result in a material cash tax payment. In the event cash flow from U.S. operations combined with accumulated previously taxed income is insufficient to fund U.S. cash flow requirements, Dole may be required to provide U.S. federal income tax and foreign withholding taxes on a portion of its anticipated fiscal 2013 foreign earnings. As a result, Dole's overall effective tax rate may increase in fiscal 2013 versus the effective tax rate experienced in previous years.

Dole had state deferred tax assets totaling $47 million at December 29, 2012 which management believes are recoverable through the realization of income on appreciated non-core assets, including income to be generated from the reversal of the related existing taxable temporary differences upon the sale of such assets and the gain on the impending sale of the U.S. packaged foods assets to ITOCHU.


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Internal Revenue Service Audit: On September 4, 2012, the IRS completed its examination of Dole's U.S. federal income tax returns for the years 2006-2008 and issued a Revenue Agent's report ("RAR") that includes various proposed adjustments, including with respect to whether certain transactions with foreign affiliates or certain third party borrowings by Dole or its foreign affiliates created or are deemed to have created investments in U.S. property. The net tax deficiency associated with the RAR is $132 million, after net operating loss utilization, plus interest. On November 9, 2012, Dole filed a protest letter challenging the proposed adjustments contained in the RAR and will pursue resolution of these issues with the Appeals Division of the IRS. Dole believes, based in part upon the advice of its tax advisors, that its tax treatment of such transactions was appropriate. Although the timing and ultimate resolution of any issues arising from the IRS examination are highly uncertain, at this time Dole does not anticipate that the total unrecognized tax benefits will significantly change within the next twelve months nor does Dole believe that any material tax payments will be made related to these matters within the next twelve months.

Refer to Note 7 of the Consolidated Financial Statements for additional information about Dole's income taxes.

Earnings from Equity Method Investments

Earnings from equity method investments for the year ended December 29, 2012 increased to $6.1 million from $4.6 million in 2011. The increase was primarily related to higher earnings generated by Compagnie Financière de Participations ("CF"), a company in which Dole holds a non-controlling 40% ownership interest, and Healthy Foods, LLC ("Healthy Foods"), a company in which Dole holds a non-controlling 30% ownership interest. Higher earnings generated by CF were due in part to improved pricing and consumer demand in markets in which it sells. Healthy Foods produces the yonanas® frozen treat maker. The increase in Healthy Foods earnings was attributable to a full year of operations.

Earnings from equity method investments for the year ended December 31, 2011 decreased to $4.6 million from $6.6 million in 2010. The decrease was primarily related to lower earnings generated by CF. Lower earnings generated by CF were due in part to lower pricing and lower consumer demand in markets in which it sells.

Segment Results of Operations

Due to the reporting of the packaged foods reportable operating segment as discontinued operations, Dole has two reportable operating segments from continuing operations: fresh fruit and fresh vegetables. 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, with significant selling locations in North America and Western Europe. Dole Asia's fresh produce business formerly was included in the fresh fruit reportable operating segment, but is reported as discontinued operations in this report as a result of the sale transaction.

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.

Dole's management evaluates and monitors segment performance primarily through earnings before interest expense and income taxes before discontinued operations ("EBIT"). EBIT is calculated by adding interest expense and income taxes to income (loss) from continuing 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


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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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