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FDP > SEC Filings for FDP > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for FRESH DEL MONTE PRODUCE INC

Form 10-Q for FRESH DEL MONTE PRODUCE INC


30-Apr-2013

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 products 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 $7.6 million for the first quarter of 2013 as compared with $37.1 million for the first quarter of 2012, a decrease of $29.5 million. The decrease in cash provided by operating activities was principally attributable to lower net income combined with higher levels of prepared food and fresh produce inventory, partially offset by higher levels of accounts payable and accrued expenses that resulted from higher sales volume.

Working capital was $618.9 million at March 29, 2013 compared with $563.5 million at December 28, 2012, an increase of $55.4 million. This increase in working capital is primarily due to higher trade accounts receivables and fresh produce inventory, partially offset by higher accounts payable and accrued expenses. This increase is principally attributable to seasonal fluctuation resulting from higher sales of Central America melons and non-tropical fruit from Chile during the first quarter of the year.

Net cash used in investing activities for the first quarter of 2013 was $24.5 million compared with $9.9 million for the first quarter of 2012. Net cash used in investing activities for the first quarter of 2013 consisted of capital expenditures of $32.8 million, partially offset by proceeds from sales of property, plant and equipment of $0.6 million and proceeds from sale of securities available for sale of $7.7 million. Capital expenditures for the first quarter of 2013 were primarily for expansion and improvements of production facilities in Costa Rica, Chile and the Philippines related to the other fresh produce and banana segments and expansion of our distribution facilities in North America primarily in the banana segment. Capital expenditures during the first quarter of 2013 also included expansion and improvements of our production facilities in Kenya and distribution facilities in Saudi Arabia related to the prepared food and banana segments and the acquisition of two pre-owned refrigerated vessels. Proceeds from sale of property, plant and equipment for the first quarter of 2013 consisted primarily of the sale of surplus equipment. During the first quarter of 2013, we sold $7.7 million of available-for-sale securities that were acquired during 2012 and recognized a gain of $2.3 million.

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

Net cash provided by financing activities for the first quarter of 2013 was $1.7 million compared with net cash used in financing activities of $46.4 million for the first quarter of 2012. Net cash provided by financing activities for the first quarter of 2013 consisted of net borrowings on long-term debt of $20.4 million, contributions from noncontrolling interests, net of $3.6 million and proceeds from stock options exercised of $12.8 million, partially offset by $7.2 million of dividends paid and $27.9 million of repurchases of our ordinary shares.

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

We finance our working capital and other liquidity requirements primarily through cash from operations and borrowings under our $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 lead manager. Borrowings under the Credit Facility bear interest at a spread over the London Interbank Offer Rate ("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


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use the Credit Facility from time to time for our working capital needs, capital expenditures, funding of possible acquisitions, possible share repurchase and satisfaction of other obligations.

At March 29, 2013, we had $147.0 million outstanding under the Credit Facility bearing interest at a per annum rate of 1.45%. In addition, we pay a fee on unused commitments.

The Credit Facility is unsecured as long as we meet a certain leverage ratio and also requires us to comply with certain financial and other covenants, including limitations on capital expenditures, the amount of dividends that can be paid in the future, the amount and types of liens and indebtedness, material asset sales and mergers. As of March 29, 2013, we were in compliance with all of the financial and other covenants contained in the Credit Facility.

At March 29, 2013, we had $361.7 million available under committed working capital facilities, primarily under the Credit Facility. At March 29, 2013, we applied $13.4 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 $17.6 million in other letters of credit and bank guarantees not included in the letter of credit facility.

As of March 29, 2013, we had $151.2 million of long-term debt and capital lease obligations, including the current portion, consisting of $147.0 million outstanding under the Credit Facility, $0.9 million of capital lease obligations and $3.3 million of other long-term debt and notes payable.

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

As of March 29, 2013, we had cash and cash equivalents of $25.9 million.

As a result of the closure of distribution centers in the United Kingdom, we paid approximately $1.4 million in contractual obligations and termination benefits during the first quarter of 2013. We expect to make additional payments of approximately $4.1 million principally related to the previously announced closure of our Hawaii pineapple operations and the closure of certain facilities in the United Kingdom.

The fair value of our derivatives changed from a net liability of $13.9 million as of December 28, 2012, to a net asset of $10.5 million as of March 29, 2013 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, British pound and Japanese yen when compared to the contracted exchange rates. We also entered into bunker fuel swap agreements during the fourth quarter of 2012 that are in a net asset position of $0.2 million. We expect that $8.9 million and $1.6 million will be transferred to earnings during the next 12 months and last nine months of 2014, respectively, along with the earnings effect of the related forecasted transactions.


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Results of Operations

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

Net sales by geographic region:

                            Quarter ended
                March 29, 2013        March 30, 2012
North America $    516.4     56 %   $    489.0     54 %
Europe             182.0     20 %        205.1     23 %
Asia                95.4     10 %        103.4     12 %
Middle East        107.9     12 %         81.1      9 %
Other               17.1      2 %         19.3      2 %
Total         $    918.8    100 %   $    897.9    100 %

Product net sales and gross profit:

                                                   Quarter ended
                               March 29, 2013                         March 30, 2012
                       Net Sales         Gross Profit         Net Sales         Gross Profit
Banana              $ 406.0     44 %   $   30.5     31 %   $ 397.5     44 %   $   38.8     34 %
Other fresh produce   433.7     47 %       59.3     60 %     421.1     47 %       60.3     54 %
Prepared food          79.1      9 %        8.8      9 %      79.3      9 %       13.3     12 %
Totals              $ 918.8    100 %   $   98.6    100 %   $ 897.9    100 %   $  112.4    100 %

First Quarter 2013 Compared with First Quarter 2012

Net Sales. Net sales for the first quarter of 2013 were $918.8 million compared with $897.9 million for the first quarter of 2012. The increase in net sales of $20.9 million was principally attributable to higher net sales of other fresh produce and bananas.

• Net sales in the other fresh produce segment increased $12.6 million principally as a result of higher net sales of fresh-cut products, non-tropical fruit and melons, partially offset by lower net sales of other non-produce operations.

?         Net sales of fresh-cut products increased principally due to higher
          sales volumes in North America that resulted from an expanded customer
          base and improved demand for our products. Also contributing to the
          increase were higher sales volumes and per unit sales prices in the
          Middle East that resulted from expansion into new markets and
          introduction of new products combined with higher sales volumes in Asia
          from improved customer demand. 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 during the second quarter of 2012.


?         Net sales of non-tropical fruit increased principally due to higher
          sales volumes of avocados in North America, apples in the Middle East
          and citrus in the Middle East and Asia principally from increased
          customer demand. Partially offsetting these increases in net sales on
          non-tropical fruit were lower net sales of grapes in North America and
          Europe as a result of unfavorable growing conditions in Chile.


?         Net sales of melons increased as a result of higher sales volume in
          North America, partially offset by lower per unit sales price as a
          result of higher industry volumes and lower volumes shipped to Europe.


?         Net sales of our other non-produce operations decreased due to lower
          net sales in our Chilean plastic product operation due to a temporary
          volume reduction that resulted from downtime for plant improvement.


•      Net sales of bananas increased by $8.5 million principally due to higher
       sales volumes and per unit sales prices in the Middle East and higher
       sales volumes in North America and Europe, partially offset by lower sales
       volumes in Asia. Worldwide banana sales volume increased 3% and per unit
       sales prices decreased 1%.


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?         Middle East banana net sales increased principally due to higher sales
          volumes that resulted from increased shipments from Central America to
          new markets in the region combined with higher per unit sales prices.


?         North America banana net sales increased due to higher sales volume
          primarily as a result of higher customer demand, partially offset by a
          slight reduction in per unit sales price.


?         Europe banana net sales increased primarily due to higher sales volume
          principally as a result of an expanded customer base in Germany
          combined with our increased direct sales initiative in the Southern
          European markets. Partially offsetting these increases were lower per
          unit sales prices as a result of higher industry volumes and lower
          consumer demand due to a weak economy combined with unfavorable
          exchange rates.


?         Asia banana net sales decreased principally due to lower sales volumes
          resulting from lower production in the Philippines due to the effects
          of a typhoon during the fourth quarter of 2012, partially offset by
          higher per unit sales prices which resulted from lower industry
          volumes.


•      Net sales of prepared food were flat during the first quarter of 2013.
       Lower net sales of canned pineapple and deciduous fruit in Europe and
       lower net sales of industrial products were offset by higher net sales of
       beverage products in the Middle East and Europe and higher net sales of
       poultry and meat products in Jordan.

Cost of Products Sold. Cost of products sold was $820.2 million for the first quarter of 2013 compared with $785.5 million for the first quarter of 2012, an increase of $34.7 million. This increase was primarily attributable to higher sales volumes and fruit cost, partially offset by lower per unit ocean freight cost.

Gross Profit. Gross profit was $98.6 million for the first quarter of 2013 compared with $112.4 million for the first quarter of 2012, a decrease of $13.8 million. This decrease was primarily attributable to lower gross profit in all segments.

• Gross profit in the banana segment decreased $8.3 million primarily due to lower per unit sales price and higher distribution costs in Europe and North America combined with higher fruit cost, partially offset by higher per unit sales prices in Asia and the Middle East. Worldwide banana per unit sales prices decreased 1% and per unit cost increased 2%.

• Gross profit in the prepared food segment decreased by $4.5 million principally as a result of lower selling prices for industrial products due to higher industry supplies and lower sales volumes of canned deciduous and pineapple products principally due to weak customer demand.

• Gross profit in the other fresh produce segment decreased $1.0 million principally due to lower gross profit on melons and non-produce operations, partially offset by higher gross profit on non-tropical fruit and pineapples.

?         Gross profit on melons decreased principally due to higher industry
          volume in North America which resulted in an 11% decrease in per unit
          sales prices.


?         Gross profit on non-produce operations decreased as a result of lower
          net sales in our Chilean plastic operations due to a temporary volume
          reduction that resulted from downtime for plant improvement.


?         Gross profit on pineapples increased principally due to higher per unit
          sales prices in North America as a result of increased customer demand
          and higher per unit sales prices in Europe principally due to lower
          volumes. Partially offsetting this increase in gross profit were lower
          selling prices in Asia principally due to weak customer demand.
          Worldwide pineapple per unit sales prices increased 2% and per unit
          cost increased 1%.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.1 million from $45.4 million in the first quarter of 2012 to $45.3 million for the first quarter of 2013. The decrease was principally due to lower selling and marketing expenses in Europe combined with lower professional fees, partially offset by higher executive compensation expense.

Loss or (Gain) on Disposal of Property, Plant and Equipment. The gain on disposal of property, plant and equipment of $0.3 million during the first quarter of 2013 was principally related to the sale of surplus equipment. The loss on disposal of property, plant and equipment of $1.4 million during the first quarter of 2012 was principally related to the disposal of banana plants in certain areas of our Costa Rica plantation in order to replant and improve productivity.

Asset Impairment and Other Charges, Net. Asset impairment and other charges, net were $0.1 million during the first quarter of 2013 and 2012. During the first quarter of 2013, we recorded $0.1 million principally related to other costs in Hawaii. During the first quarter of 2012, we recorded $1.8 million in asset impairments related to an under-utilized facility in the United Kingdom in the banana segment and a credit of $1.8 million due to the sale of assets impaired in 2011 due to our melon program rationalization


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in Guatemala related to the other fresh produce segment and $0.1 million in other charges in Hawaii related to the other fresh produce segment.

Operating Income. Operating income for the first quarter of 2013 decreased by $12.0 million from $65.5 million in the first quarter of 2012 to $53.5 million for the first quarter of 2013. This decrease was due to lower gross profit, partially offset by a slight decrease in selling, general and administrative expenses and gain on disposal of property, plant and equipment.

Interest Expense. Interest expense decreased by $0.5 million during the first quarter of 2013 as compared with the first quarter of 2012. Interest expense was lower during the first quarter of 2013 as a result of lower average debt balances and lower interest rates.

Other Expense (Income), Net. Other expense (income), net was $1.6 million for the first quarter of 2013 compared to $(0.5) million for the first quarter of 2012. The change in other expense (income) of $2.1 million was principally attributable to foreign exchange losses incurred during the first quarter of 2013 which which were partially offset by a gain on the sale of equity securities compared with a foreign exchange gains recorded during the first quarter of 2012.

Provision for Income Taxes. Provision for income taxes was $9.5 million for the first quarter of 2013 compared to $2.1 million for the first quarter of 2012. The tax provision for the first quarter of 2013 includes approximately $3.1 million of expense primarily related to the settlement of a tax audit in a foreign jurisdiction. For the first quarter of 2012, the tax provision included approximately $8.1 million of credits due primarily due to reversals of uncertain tax positions due to a lapse in the statute of limitations and settlements of tax audits and litigation in certain foreign jurisdictions.

Fair Value Measurements

Potential impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than the carrying value of the reporting unit. The amount of the impairment to recognize, if any, is calculated as the amount by which the carrying value of goodwill exceeds its implied value. Future changes in the estimates used to conduct the impairment review, including revenue projection, market values and changes in the discount rate used, could cause the analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of goodwill. The discount rate used is based on independently calculated risks, our capital mix and an estimated market risk premium. The fair value of the banana, tomato and other vegetable, prepared food reporting unit's goodwill and prepared food reporting unit's trademarks is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of these assets. If we are unable to recover from weak market conditions related to bananas, the banana reporting unit goodwill may be at risk for future impairment. If we are unable to recover from current challenging economic conditions in Europe, the prepared food reporting unit goodwill and trademarks may be at risk for future impairment. If we are unable to recover from the weak tomato pricing and volumes in North America and we are unable to increase our customer base in the U.S. related to tomatoes and vegetables, the tomato and vegetable reporting unit's goodwill may be at risk for future impairment. We disclosed the sensitivities related to the banana reporting unit's goodwill, prepared food reporting unit's goodwill and trademarks and tomato and vegetable reporting unit's goodwill in our annual financial statements included in our Annual Report on Form 10-K for the year ended December 28, 2012.

Seasonality

Interim results are subject to significant variations and may not be indicative of the results of operations that may be expected for the entire 2013 fiscal year. See the information under the caption "Seasonality" provided in Item 1. Business, of our Annual Report on Form 10-K for the year ended December 28, 2012.

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