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

Show all filings for FRESH DEL MONTE PRODUCE INC

Form 10-Q for FRESH DEL MONTE PRODUCE INC


30-Jul-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 $125.5 million for the first six months of 2013 as compared with $193.9 million for the first six months of 2012, a decrease of $68.4 million. The decrease in cash provided by operating activities was principally attributable to lower net income combined with higher levels of trade accounts receivable as a result of increased sales.

Working capital was $590.4 million at June 28, 2013 compared with $563.5 million at December 28, 2012, an increase of $26.9 million. This increase in working capital is primarily due to higher trade accounts receivables, partially offset by higher accounts payable and accrued expenses. These increases are primarily a result of higher net sales.

Net cash used in investing activities for the first six months of 2013 was $48.2 million compared with $38.9 million for the first six months of 2012. Net cash used in investing activities for the first six months of 2013 consisted of capital expenditures of $57.3 million, partially offset by proceeds from sales of property, plant and equipment of $1.3 million and proceeds from sale of securities available for sale of $7.8 million. Capital expenditures for the first six months 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 six months 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 six months of 2013 consisted primarily of the sale of surplus equipment. During the first six months of 2013, we sold $7.8 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 six months of 2012 consisted of capital expenditures of $34.1 million and purchase of available-for-sale investments of $11.0 million, partially offset by proceeds from sales of property, plant and equipment of $6.0 million and proceeds from sale of unconsolidated subsidiary of $0.2 million. Capital expenditures for the first six months of 2012 were primarily for expansion and improvements of production facilities in Saudi Arabia and Kenya related to the prepared food segment and in Costa Rica and Guatemala related to the other fresh produce and banana segments. Capital expenditures for the first six months of 2012 also included improvements of distribution facilities in North America and Costa Rica principally related to the banana segment and additional transportation equipment in North America. The purchase of available-for-sale investments consisted of purchases of publicly traded equity securities which we plan to hold as investments. Proceeds from sales of property, plant and equipment for the first six months of 2012 consisted primarily of the sale of surplus land in Guatemala and the sale of a refrigerated vessel and other surplus equipment.

Net cash used by financing activities for the first six months of 2013 was $87.9 million compared with net cash used in financing activities of $171.1 million for the first six months of 2012. Net cash used by financing activities for the first six months of 2013 consisted of net repayments on long-term debt of $4.6 million, dividends paid of $14.3 million and $92.2 million of repurchase of our ordinary shares, partially offset by contributions from noncontrolling interests, net of $3.6 million and proceeds from stock options exercised of $19.6 million.

Net cash used in financing activities for the first six months of 2012 consisted of net repayments on long-term debt of $173.0 million and $11.6 million of dividends paid, partially offset by contributions from noncontrolling interests, net of $5.0 million, proceeds from stock options exercised of $4.5 million and excess tax benefit from stock-based compensation of $4.0 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. Borrowings under the Credit Facility bear interest at a spread over the London


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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 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 June 28, 2013, we had $117.0 million outstanding under the Credit Facility bearing interest at a per annum rate of 1.49%. 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 June 28, 2013, we were in compliance with all of the financial and other covenants contained in the Credit Facility.

At June 28, 2013, we had $384.4 million available under committed working capital facilities, primarily under the Credit Facility. At June 28, 2013, we applied $11.8 million to the letter of credit facility, comprised primarily of certain contingent obligations and other governmental agencies and purchases of equipment guarantees. We also had $12.6 million in other letters of credit and bank guarantees not included in the letter of credit facility.

As of June 28, 2013, we had $122.8 million of long-term debt and capital lease obligations, including the current portion, consisting of $117.0 million outstanding under the Credit Facility, $0.8 million of capital lease obligations and $5.0 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 June 28, 2013, we had cash and cash equivalents of $30.8 million.

As a result of the closure of distribution centers in the United Kingdom and the previously announced closure of our Hawaii pineapple operations, we paid approximately $2.5 million in contractual obligations and termination benefits during the first six months of 2013. We expect to make additional payments of approximately $3.5 million principally related to the previously announced closure of our Hawaii pineapple operations and the closure of certain facilities in the United Kingdom and Germany.

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 $7.5 million as of June 28, 2013 related to our foreign currency cash flow and bunker fuel swap hedges. For foreign currency hedges, these fluctuations are primarily related to a weaker U.S. dollar relative to the euro and British pound and a stronger U.S. dollar relative to the Japanese yen when compared to the contracted exchange rates. We also entered into bunker fuel swap agreements that are in a net liability position of $0.7 million. We expect that $6.0 million and $1.5 million will be transferred to earnings during the next 12 months and last six 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                           Six months ended
                June 28, 2013        June 29, 2012        June 28, 2013        June 29, 2012
North America $   540.5     53 %   $   504.7     53 %   $ 1,056.9     54 %   $   993.7     54 %
Europe            204.1     20 %       195.4     20 %       386.1     20 %       400.5     21 %
Middle East       136.5     13 %       100.7     11 %       244.4     13 %       181.8     10 %
Asia              131.3     13 %       138.2     14 %       226.7     12 %       241.6     13 %
Other              11.5      1 %        18.6      2 %        28.6      1 %        37.9      2 %
Total         $ 1,023.9    100 %   $   957.6    100 %   $ 1,942.7    100 %   $ 1,855.5    100 %

Product net sales and gross profit:

                                                    Quarter ended
                                June 28, 2013                           June 29, 2012
                        Net Sales          Gross Profit         Net Sales         Gross Profit
Banana              $   457.0     45 %   $   34.7     33 %   $ 424.9     45 %   $   37.5     32 %
Other fresh produce     478.3     46 %       62.0     58 %     453.8     47 %       65.9     57 %
Prepared food            88.6      9 %        9.2      9 %      78.9      8 %       13.0     11 %
Totals              $ 1,023.9    100 %   $  105.9    100 %   $ 957.6    100 %   $  116.4    100 %



                                                   Six months ended
                                June 28, 2013                            June 29, 2012
                        Net Sales          Gross Profit          Net Sales          Gross Profit
Banana              $   863.0     44 %   $   65.2     32 %   $   822.4     44 %   $   76.4     33 %
Other fresh produce     912.0     47 %      121.3     59 %       874.9     47 %      126.1     55 %
Prepared food           167.7      9 %       18.0      9 %       158.2      9 %       26.3     12 %
Totals              $ 1,942.7    100 %   $  204.5    100 %   $ 1,855.5    100 %   $  228.8    100 %


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Second Quarter 2013 Compared with Second Quarter 2012

Net Sales. Net sales for the second quarter of 2013 were $1,023.9 million compared with $957.6 million for the second quarter of 2012. The increase in net sales of $66.3 million was principally attributable to higher net sales of bananas, other fresh produce and prepared food.

• Net sales of bananas increased by $32.1 million principally due to higher sales volumes and per unit sales prices in the Middle East and higher sales volumes in Europe and North America, partially offset by lower sales volumes in Asia. Worldwide banana sales volume increased 5%.

?         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.


?         Europe banana net sales increased primarily due to higher sales volume
          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 lower consumer demand due to a weak economy combined
          with unfavorable exchange rates.


?         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.


?         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 in the other fresh produce segment increased $24.5 million principally as a result of higher net sales of non-tropical fruit and fresh-cut products, partially offset by lower net sales of pineapples.

?         Net sales of non-tropical fruit increased principally due to higher
          sales volumes of grapes in North America which resulted from late
          seasonal production in Chile combined with increased sales volumes of
          avocados in North America principally as a result of increased supply.


?         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. Partially offsetting these increases in
          net sales of fresh-cut products were lower sales volumes in Europe that
          resulted from our closure of a prepared salad facility in the United
          Kingdom during the second quarter of 2012.


?         Net sales of pineapples decreased principally due to lower sales
          volumes in Asia and as a result of lower production combined with lower
          per unit sales prices in Europe which resulted from weak demand and
          unfavorable exchange rates. Worldwide sales volume decreased 5%.


•      Net sales in the prepared food segment increased $9.7 million during the
       second quarter of 2013 principally as a result of higher sales volumes of
       canned pineapple and industrial products in Europe combined with increased
       sales prices of our poultry and meat products in Jordan as a result of
       improved market conditions.

Cost of Products Sold. Cost of products sold was $918.0 million for the second quarter of 2013 compared with $841.2 million for the second quarter of 2012, an increase of $76.8 million. This increase was primarily attributable to higher sales volume and higher fruit cost as a result of higher procurement and production costs.

Gross Profit. Gross profit was $105.9 million for the second quarter of 2013 compared with $116.4 million for the second quarter of 2012, a decrease of $10.5 million. This decrease was primarily attributable to lower gross profit in all segments.

• Gross profit in the other fresh produce segment decreased $3.9 million principally due to lower gross profit on non-tropical fruit and pineapples, partially offset by higher gross profit on tomatoes and melons.

?         Gross profit on non-tropical fruit decreased principally as a result of
          higher procurement cost of apples from Chile combined with lower
          selling prices of grapes in North America and Europe that resulted from
          late seasonal production from Chile.


?         Gross profit on pineapples decreased principally due to lower pricing
          and sales volumes in Europe as a result of weak demand and unfavorable
          exchange rates combined with lower sales volumes in North America.
          Partially


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offsetting these decreases in gross profit on pineapple was higher per unit selling prices in Asia which resulted from lower industry volumes. Worldwide pineapple per unit sales prices decreased 1% and per unit cost decreased 1%. ? Gross profit on tomatoes increased principally as a result of higher per unit selling prices in North America due to lower industry volumes.

?         Gross profit on melons increased primarily due to higher sales prices
          in Europe as a result of our rationalization initiative which
          significantly reduced sales volumes in this region.

• Gross profit in the prepared food segment decreased by $3.8 million principally as a result of lower selling prices for canned pineapple and industrial products due to higher industry supplies and higher per unit cost of canned pineapples and deciduous fruit which resulted principally from higher production costs.

• Gross profit in the banana segment decreased $2.8 million primarily due to lower per unit selling prices in North America, higher fruit cost resulting from higher procurement costs and slightly lower yields in Costa Rica and higher ocean freight costs in the Middle East due to increased shipments from Central America. Partially offsetting these decreases in banana gross profit was higher per unit sales prices in Asia that resulted from lower industry volumes and higher sales volumes in North America, the Middle East and Europe. Worldwide banana per unit sales prices increased 2% and per unit cost increased 4%.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $2.6 million from $45.6 million in the second quarter of 2012 to $43.0 million for the second quarter of 2013. The decrease was principally due to lower legal expenses and professional fees.

Gain (loss) on Disposal of Property, Plant and Equipment. The gain on disposal of property, plant and equipment of $0.2 million during the second quarter of 2013 was principally related to the sale of surplus equipment.

Asset Impairment and Other Charges, Net. Asset impairment and other charges, net were $11.9 million during the second quarter of 2013 as compared with $1.0 million during the second quarter of 2012. During the second quarter of 2013, we recorded $7.1 million in asset impairment related to previously announced exit activities in Brazil in the other fresh produce segment, $4.0 million in asset impairment related to underperforming assets in Costa Rica in the banana segment, $0.9 million related to the closure of an underutilized distribution center in Germany in the banana segment, $0.3 million in asset impairments and other charges related to the shutdown of a watermelon farm in Costa Rica in the other fresh produce segment and a credit of $0.4 million related to over-accrued exit activity costs in Hawaii in the other fresh produce segment. During the second quarter of 2012, we recorded $1.0 million in termination benefits related to an underperforming fresh-cut facility in the United Kingdom in the other fresh produce segment.

Operating Income. Operating income for the second quarter of 2013 decreased by $18.6 million from $69.8 million in the second quarter of 2012 to $51.2 million for the second quarter of 2013. This decrease was due to lower gross profit and higher asset impairment and other charges, partially offset by lower selling, general and administrative expense and a gain on disposal of property, plant and equipment.

Interest Expense. Interest expense decreased by $0.2 million during the second quarter of 2013 as compared with the second quarter of 2012. Interest expense was lower during the second quarter of 2013 principally as a result of lower interest rates.

Other (Income) Expense, Net. Other (income) expense, net was income of $17.5 million for the second quarter of 2013 compared to expense of $3.1 million for the second quarter of 2012. The change in other (income) expense of $20.6 million was principally attributable to a $16.6 million gain related to the favorable judgment awarded in litigation combined with foreign exchange gains during the second quarter of 2013 as compared with foreign exchange losses during the second quarter of 2012.

Provision for Income Taxes. Provision for income taxes was $6.0 million for the second quarter of 2013 compared to $7.4 million for the second quarter of 2012. The decrease in the provision for income taxes of $1.4 million is primarily due to decreased earnings in certain jurisdictions during the second quarter of 2013.


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First Six Months of 2013 Compared with First Six Months of 2012

Net Sales. Net sales for the first six months of 2013 were $1,942.7 million compared with $1,855.5 million for the first six months of 2012. The increase in net sales of $87.2 million was attributable to higher net sales of bananas, other fresh produce and prepared food.

• Net sales of bananas increased by $40.6 million principally due to higher sales volume in the Middle East, Europe and North America, partially offset be lower sales volumes in Asia. Worldwide banana sales volume increased by 4%.

?         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.


?         Europe banana net sales increased primarily due to higher sales volume
          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 lower consumer demand due to a weak economy and
          unfavorable exchange rates.


?         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.


?         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 in the other fresh produce segment increased $37.1 million principally as a result of higher net sales of non-tropical fruit and fresh-cut products, partially offset by lower net sales of pineapples.

?         Net sales of non-tropical fruit increased principally due to higher
          sales volumes of avocados in North America and apples and citrus in the
          Middle East primarily a result of increased customer demand. Also,
          contributing to the increase in net sales were higher sales volumes of
          grapes in North America.


?         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. Partially offsetting these increases in
          net sales of fresh-cut products were lower sales volumes in Europe that
          resulted from our closure of a prepared salad facility in the United
          Kingdom during the second quarter of 2012.


?         Net sales of pineapples decreased principally as a result of lower
          sales volumes in Asia due to lower production. Also contributing to the
          decrease in pineapple net sales were lower per unit sales prices in
          Europe resulting from weak demand and unfavorable exchange rates.
          Partially offsetting these decreases were higher sales volumes and per
          unit sale prices in North America and higher sales volumes in the
          Middle East. Worldwide sales volume decreased by 4%.

• Net sales in the prepared food segment increased $9.5 million principally as a result of higher selling prices of our poultry and meat products in Jordan due to improved market conditions, increased sales volumes of canned pineapple in Europe and higher beverage sales in the Middle East as a result of expanded production.

Cost of Products Sold. Cost of products sold was $1,738.2 million for the first six months of 2013 compared with $1,626.7 million for the first six months of 2012, an increase of $111.5 million. This increase in cost of products sold was primarily attributable to a 4% increase in sales volumes combined with higher fruit cost as a result of higher procurement and production cost.

Gross Profit. Gross profit was $204.5 million for the first six months of 2013 compared with $228.8 million for the first six months of 2012, a decrease of $24.3 million. This decrease was primarily attributable to lower gross profit in all segments.

• Gross profit in the banana segment decreased $11.2 million primarily due to lower per unit selling prices in Europe principally the result of unfavorable exchange rates, lower per unit selling prices in North America and higher fruit cost resulting from higher procurement cost and a slight reduction in yields in Costa Rica. Also contributing to the decrease were higher ocean freight costs in the Middle East due to increased shipments from Central America. Partially offsetting these decreases in banana gross profit was higher per unit sales prices in Asia that resulted from lower industry volumes. Worldwide banana per unit sales prices increased 1% and per unit cost increased 3%.


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• Gross profit in the prepared food segment decreased by $8.3 million principally as a result of lower selling prices for industrial products and canned pineapple due to higher industry supplies and higher per unit cost of canned pineapples and deciduous fruit which resulted principally from higher production costs.

• Gross profit in the other fresh produce segment decreased $4.8 million principally due to lower gross profit on melons and non-produce operations.

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