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DOLE > SEC Filings for DOLE > Form 10-Q on 25-Jul-2013All Recent SEC Filings

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Form 10-Q for DOLE FOOD CO INC


25-Jul-2013

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 29, 2012 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 half year ended June 15, 2013 were as follows:

On April 1, 2013, the previously announced sale of Dole's worldwide packaged foods and Asia fresh produce businesses (collectively, "Dole Asia") for $1.685 billion in cash, subject to certain adjustments ("sale transaction") to ITOCHU Corporation ("ITOCHU") was completed. After adjustments, the total cash proceeds received from the sale were $1.69 billion, which included a $200 million advance deposit that was received during February 2013. Dole recorded a $241.4 million pre-tax gain on the sale. The proceeds from the sale and Dole's new capital structure were used to pay off Dole's previous indebtedness of approximately $1.7 billion, including capital lease obligations of approximately $50 million related to two vessels.

As a result of the sale transaction, Dole is now a commodity produce company with two lines of business-fresh fruit and fresh vegetables. Dole has begun to realign and streamline its global operating structure to conform to the specific needs of the remaining fresh produce businesses, in which Dole will remain a leading producer, marketer and distributor of fresh fruit and fresh vegetables. As a result of the sale of the Asia fresh produce business, the fresh fruit business line will be approximately 30% smaller in terms of revenues, and Dole will remain one of the largest producers of bananas and pineapples, and an industry leader in packaged salads, fresh-packed vegetables and fresh berries. Dole will also 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.

On May 2, 2013, following the planned syndication of the April 1, 2013 credit agreement that Dole entered into with five of Dole's principal relationship banks, Dole entered into an amended and restated credit agreement, which replaced the April 1, 2013 credit agreement. The amended and restated credit agreement contains a $180 million revolving credit facility, divided between U.S. and non-U.S. borrowings, and a $675 million term loan, which reflects the $500 million drawn on April 1, 2013, the borrowing of $125 million that Dole was entitled to request through the end of September 2013 under the April 1, 2013 credit agreement and an additional $50 million. The new credit agreement also allows Dole to request certain future incremental loans. The annual interest rate on the term loan is, at Dole's option, either (i) LIBOR plus 2.75%, with a LIBOR floor of 1.00% or (ii) a base rate plus 1.75%. The interest rate on amounts borrowed under the revolver is, at Doles option, either (i) LIBOR plus 2.50% to 2.75%, with no LIBOR floor, or (ii) a base rate plus 1.50% to 1.75%, in each case, based upon Dole's consolidated leverage ratio, but beginning at the upper number in the range.

On March 14, 2013, the European General Court in Luxembourg issued a judgment affirming the European Commission's October 15, 2008 Decision finding violations of the European competition (antitrust) laws and imposing 45.6 million in fines on Dole. Dole has fully provided for the results of


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the General Court's judgment. On June 21, 2013, Dole paid, in full, the judgment plus interest totaling approximately 48.3 million ($64.7 million). Dole strongly believes that the European competition laws were not violated and has appealed the judgment to the EU Court of Justice.

Net revenues from continuing operations for the second quarter of 2013 increased 10% from the second quarter of 2012 to $1.19 billion. For the first half of 2013, net revenues increased 4% from the first half of 2012 to $2.24 billion. Excluding sales from our former German ripening and distribution subsidiary of $114.7 million, which was sold in the first quarter of 2012, sales for the first half of 2013 increased 9%. Sales were higher in both our fresh fruit and fresh vegetables reporting segments.

Operating income for the second quarter of 2013 decreased 59% from the second quarter of 2012 to $22.6 million. Operating income decreased primarily due to $11.8 million of higher ITOCHU transaction related costs and lower operating income in Dole's fresh fruit and fresh vegetables operations. Fresh fruit operating income decreased primarily due to higher fruit costs and lower pricing of North America bananas. Fresh vegetables operating income decreased mainly due to lower pricing and higher product costs for strawberries.

Operating income from continuing operations for the first half of 2013 decreased 73% from the first half of 2012 to $22.4 million. The decrease in operating income was primarily driven by a $33.7 million legal provision related to the European Union antitrust decision, which Dole has appealed, and an $18.7 million increase in ITOCHU transaction related costs.

During the second quarter of 2013, 240,000 shares of Dole's outstanding common stock were repurchased for approximately $2.7 million, in accordance with the previously announced share repurchase program. During the quarter, Dole announced that its Board of Directors has approved updating Dole's owned vessel fleet, with the acquisition of three new specialty built refrigerated container ships for its U.S. West Coast operations, and that the share repurchase program is being suspended indefinitely.

On July 9, 2013, Dole executed three separate shipbuilding contracts with Hyundai Mipo Dockyard Co., Ltd. to construct refrigerated container vessels with a contractual price of $54.8 million per vessel ($164.4 million in total) with a total cost to the Company of approximately $168 million. These new vessels, that are important strategically to the Company's competitive differentiation and future growth prospects, will replace Dole's existing U.S. West Coast vessels that will be approximately 27 years old at the time of replacement. The new ships will be more fuel efficient, built to Dole's exacting specifications and design, and have a higher capacity up to 788 FEU compared to the replacement ships with 491 FEU. The contractual delivery for each of the new vessels is expected to occur during the fourth quarter of 2015, the first quarter of 2016, and the second quarter of 2016, respectively. Under the terms of each of the contracts, five equal progress payments will be made to Hyundai Mipo Dockyard Co., Ltd. as construction milestones are achieved. The first payment of approximately $32.9 million in aggregate was made upon signing, the second payment made under each of the contracts will be made during January 2014, and the remaining three payments will be made during 2015 and 2016.

On June 10, 2013, Dole received an unsolicited proposal from David H. Murdock to acquire all of the outstanding shares of common stock of Dole not already owned by Mr. Murdock or his family for $12.00 per share in cash. On June 25, 2013, Dole announced that it has designated a special committee of its Board of Directors to act on behalf of Dole in respect of this acquisition proposal.


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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                   Half Year Ended
                                           June 15,        June 16,         June 15,        June 16,
                                             2013            2012             2013            2012
                                                                (In thousands)
Net income                                $  234,838       $  65,539       $  169,241       $  82,683
(Income) loss from discontinued
operations, net of income taxes               11,644          (9,565 )         81,105          (1,139 )
Gain on disposal of discontinued
operations, net of income taxes             (244,700 )            -          (244,700 )            -
Interest expense from continuing
operations                                     7,487           2,429           17,735           4,502
Income taxes from continuing
operations                                     1,317             570           (2,584 )         5,783

EBIT before discontinued operations           10,586          58,973           20,797          91,829
Depreciation and amortization from
continuing operations                         14,765          15,727           29,865          30,927
Net unrealized (gain) loss on
derivative instruments from continuing
operations                                      (502 )         3,000              622           1,545
Foreign currency exchange (gain) loss
on vessel obligations                            507            (891 )         (2,591 )           503
Net unrealized (gain) loss on foreign
denominated instruments from
continuing operations                          3,899             940             (155 )        (2,900 )
Share-based compensation from
continuing operations                          2,669           2,397           11,878           4,839
Charges for restructuring and
long-term receivables from continuing
operations                                     4,181           1,977            4,181           3,308
ITOCHU transaction related costs              12,692             891           19,746           1,088
Gain on asset sales from continuing
operations                                    (3,954 )        (1,954 )         (5,275 )        (6,157 )
Refinancing charges from continuing
operations                                    10,749              -            10,749              -
Shareholder proposal costs                        45              -                45              -
Share repurchase program costs                    95              -                95              -

Adjusted EBITDA                           $   55,732       $  81,060       $   89,957       $ 124,982

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 taxes, adding the loss or subtracting the income from discontinued operations, net of income taxes, and subtracting the gain on disposal of 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 derivative instruments 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 from continuing operations; (6) adding charges for restructuring and long-term receivables from continuing operations; (7) adding ITOCHU transaction related costs;
(8) subtracting the gain on asset sales from continuing operations; (9) adding refinancing charges from continuing operations; (10) adding shareholder proposal costs; and (11) adding share repurchase program costs. 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


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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 half years ended June 15,
2013 and June 16, 2012 were as follows:



                                               Quarter Ended                      Half Year Ended
                                        June 15,          June 16,          June 15,          June 16,
                                          2013              2012              2013              2012
                                                                (In thousands)
Revenues, net                          $ 1,188,414       $ 1,079,981       $ 2,242,219       $ 2,166,360
Operating income                            22,551            54,774            22,417            83,198
Other income (expense), net                (14,366 )             601            (7,115 )           2,894
Interest expense                            (7,487 )          (2,429 )         (17,735 )          (4,502 )
Income taxes                                (1,317 )            (570 )           2,584            (5,783 )
Income from continuing operations,
net of income taxes                          1,782            55,974             5,646            81,544
Income from discontinued
operations, net of income taxes            (11,644 )           9,565           (81,105 )           1,139
Gain on disposal of discontinued
operations, net of income taxes            244,700                -            244,700                -
Net income                                 234,838            65,539           169,241            82,683
Less: Net income attributable to
noncontrolling interests                      (751 )          (1,410 )          (1,882 )          (2,187 )
Net income attributable to
shareholders of Dole Food Company,
Inc.                                   $   234,087       $    64,129       $   167,359       $    80,496

Revenues

Revenues in the quarter ended June 15, 2013 increased 10% to $1.19 billion from $1.08 billion for the quarter ended June 16, 2012. Fresh fruit revenues increased $96.2 million primarily due to higher volumes and improved pricing of diversified fruit in Europe and higher volumes of deciduous fruit sourced from Chile. Fresh vegetables sales increased $11.7 million due primarily to higher pricing for fresh-packed vegetables and higher sales volumes of packaged salads. These improvements were partially offset by lower pricing for strawberries and blueberries. Net favorable foreign currency exchange movements in Dole's selling locations resulted in higher revenues of approximately $8.2 million.

Revenues in the half year ended June 15, 2013 increased 4% to $2.24 billion from $2.17 billion for the half year ended June 16, 2012. Excluding 2012 sales from Dole's German ripening and distribution subsidiary of


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$114.7 million, which was sold during the first quarter of 2012, fresh fruit sales increased 8%, or $127.1 million. This increase is primarily attributable to higher volumes and pricing of bananas in Europe and higher volumes of deciduous fruit sourced from Chile. Fresh vegetables sales increased $62.9 million. This increase is primarily attributable to improved pricing for fresh-packed vegetables and higher volumes of packaged salads. These improvements were partially offset by lower pricing for strawberries. Net favorable foreign currency exchange movements in Dole's selling locations resulted in higher revenues of approximately $16 million.

Operating Income

For the quarter ended June 15, 2013, operating income from continuing operations decreased 59% to $22.6 million from $54.8 million for the quarter ended June 16, 2012. The decline in operating income is primarily attributable to higher ITOCHU transaction related costs and lower fresh fruit and fresh vegetables operating results. Fresh fruit operating income decreased due to higher fruit costs of Latin sourced bananas and lower banana pricing in North America. Fresh vegetables operating income decreased due to lower pricing of strawberries and blueberries and higher growing costs for strawberries. This decline was partially offset by higher pricing in fresh-packed vegetables.

For the half year ended June 15, 2013, operating income from continuing operations decreased 73% to $22.4 million from $83.2 million for the half year ended June 16, 2012. The decline in operating income is primarily attributable to a legal provision of $33.7 million that was recorded during the first quarter of 2013 in connection with the March 2013 decision by the European Union General Court affirming the European Commission's fine imposed during fiscal 2008. Higher ITOCHU transaction related costs of $18.7 million also contributed to the decrease. Fresh fruit and fresh vegetables operating income decreased for the half year mainly due to the same factors impacting the decrease in the second quarter of 2012.

Other Income (Expense), Net

For the quarter ended June 15, 2013, other income (expense), net was an expense of $14.4 million compared to income of $0.6 million for the quarter ended June 16, 2012. The decrease was primarily attributable to the $10.7 million loss on the early retirement of debt in 2013 as well as an unrealized loss of $3.9 million on foreign denominated borrowings in 2013.

For the half year ended June 15, 2013, other income (expense), net was an expense of $7.1 million compared to income of $2.9 million for the half year ended June 16, 2012. The half year decline was primarily attributable to the $10.7 million loss on the early retirement of debt in 2013. This was partially offset by an unrealized foreign exchange gain of $3.1 million generated on Dole's British pound sterling vessel obligations recognized during the first quarter of the year.

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 have been reclassified into discontinued operations for all periods presented.

Interest Expense

As a result of reflecting Dole Asia's operations as discontinued operations, all interest expense associated with Dole's notes and debentures, term loans and revolving credit facilities that were outstanding through the close of the sale of Dole Asia, have been reclassified into discontinued operations. Interest expense incurred on outstanding term loan facilities subsequent to April 1, 2013 have been included in interest expense in the condensed consolidated statement of operations. Refer to Note 5 to the condensed consolidated financial statements for additional information.

Interest expense for the quarter ended June 15, 2013 was $7.5 million compared to $2.4 million for the quarter ended June 16, 2012. Interest expense increased due to the classification of interest expense on Dole's notes and debentures, term loans, and revolving credit facilities for the quarter ended June 16, 2012 within discontinued operations.


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Interest expense for the half year ended June 15, 2013 was $17.7 million compared to $4.5 million for the half year ended June 16, 2012. The increase was primarily due to a $9.3 million accrual of interest expense that was recorded during the first half of 2013 in connection with the March 2013 decision by the European Union General Court affirming the European Commission's 45.6 million fine imposed during fiscal 2008. The increase was also due to the classification of interest expense on Dole's notes and debentures, term loans, and revolving credit facilities for the half year ended June 16, 2012 within discontinued operations.

Income Taxes

Dole recorded an income tax benefit of $2.6 million on a $0.2 million pretax loss from continuing operations for the half year ended June 15, 2013. The income tax benefit included interest expense of $0.1 million related to Dole's unrecognized tax benefits. Income tax expense of $5.8 million on $84 million of pretax income from continuing operations was recorded for the first half ended June 16, 2012, which included an interest benefit of $3.2 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 half year ended June 15, 2013, Dole's income tax benefit differs from the U.S. federal statutory rate applied to Dole's pretax loss primarily due to losses generated in the U.S. that are benefitted at statutory rates higher than the statutory rates used to determine tax on income earned outside of the U.S. For the half year ended June 16, 2012, Dole's effective tax rate differed from the U.S. federal statutory rate applied to Dole's pre-tax income primarily due to a decrease in Dole's total amount of unrecognized tax benefits of $17 million as a result of the expiration of the statute of limitations 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.

Income tax expense for the quarters ended June 15, 2013 and June 16, 2012 were $1.3 million and $0.6 million, respectively.

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. This 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

Due to the sale of the packaged foods reportable operating segment, 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


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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.

Revenues from continuing operations were as follows:

                                  Quarter Ended                  Half Year Ended
                            June 15,        June 16,        June 15,        June 16,
                              2013            2012            2013            2012
                                                 (In thousands)
        Fresh fruit        $   878,918     $   782,670     $ 1,642,706     $ 1,630,293
        Fresh vegetables       308,670         296,965         598,324         535,376
        Corporate                  826             346           1,189             691

                           $ 1,188,414     $ 1,079,981     $ 2,242,219     $ 2,166,360

The table above includes intersegment revenues from the Dole Asia business of $0.0 million and $17.4 million for the quarters ended June 15, 2013 and June 16, 2012, respectively, and $8 million and $26.3 million for the half years ended June 15, 2013 and June 16, 2012, respectively.

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