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FDP > SEC Filings for FDP > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for FRESH DEL MONTE PRODUCE INC

Form 10-K for FRESH DEL MONTE PRODUCE INC


21-Feb-2014

Annual Report


Item 7. 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 and the Middle East. 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 foods. Other fresh produce includes pineapples, melons, tomatoes, non-tropical fruit (including grapes, apples, pears, peaches, plums, nectarines, avocados, citrus and kiwis), fresh-cut produce and other fruit and vegetables and a plastic product and box manufacturing business and third-party ocean freight services. Prepared foods include prepared fruit and vegetables, juices, beverages, snacks, poultry and meat products.

Strategy

Our strategy is a combination of maximizing revenues from our existing infrastructure, entering new markets and strict cost control initiatives. We plan to continue to capitalize on the growing global demand for fresh produce and expand our reach into existing and new markets. We expect sales growth of our fresh produce products in key markets by increasing sales volume and per unit sales prices as permitted by market conditions. Our strategy includes increasing volumes from existing production and distribution facilities in order to improve operating efficiencies and reduce per unit costs. We plan additional investments in production facilities to expand our product offering in established markets and continue with our recent expansion in growth markets, such as the Middle East, Africa and countries formerly part of the Soviet Union. We also plan additional investments in our North America distribution and fresh-cut fruit facilities and production operations to support our planned growth in this market.

Net Sales

Our net sales are affected by numerous factors, including mainly the balance between the supply of and demand for our produce and competition from other fresh produce companies. Our net sales are also dependent on our ability to supply a consistent volume and quality of fresh produce to the markets we serve. For example, seasonal variations in demand for bananas as a result of increased supply and competition from other fruit are reflected in the seasonal fluctuations in banana prices, with the first six months of each year generally exhibiting stronger demand and higher prices, except in those years where an excess supply exists. In 2013, our overall banana sales volume increased by 7% and our average per unit sales prices increased by 3%. Our net sales of other fresh produce were positively impacted by higher sales volumes of non-tropical fruit, principally avocados, apples and grapes combined with higher sales volume of our fresh-cut products in the Middle East and North America and improved pricing of tomatoes. In our processed foods business, we generally realize the largest portion of our net sales and gross profit in the third and fourth quarters of the year. During 2013, our prepared food net sales increased principally as a result of higher beverage sales in the Middle East and Africa, principally as a result of increased production and higher sales of canned pineapples and industrial products, primarily due to increased customer demand for buyers own label products and higher production in our Kenya pineapple operation.

Since our financial reporting currency is the U.S. dollar, our net sales are significantly affected by fluctuations in the value of the currency in which we conduct our sales versus the dollar, with a strong dollar versus such currencies resulting in decreased net sales in dollar terms. Including the effect of our foreign currency hedges, net sales for 2013 were negatively impacted by $60.1 million, as compared to 2012, principally as a result of a weaker Japanese yen and euro versus the U.S. dollar.

During 2013, our net sales were positively affected by higher sales volumes of bananas and non-tropical fruit principally sourced from independent growers in Costa Rica, Ecuador, Colombia and Mexico and by higher sales volume of fresh-cut products in North America and the Middle East that resulted from an expanded customer base and improved demand for our products. Also positively affecting our net sales were our expansion into new markets in the Middle East. Our net sales growth in recent years has been achieved primarily through increased sales volume in existing markets of other fresh produce, primarily pineapples, fresh-cut products and non-tropical fruit and favorable pricing on our Del Monte Gold® Extra Sweet pineapple combined with increased sales volume and per unit sales prices of bananas in existing and new markets. Our net sales growth in recent years has also been attributable to a broadening of our product line with the expansion of our fresh-cut produce business, specifically increased sales to the foodservice sector and convenience stores combined with our expansion into new markets. We expect our net sales growth to continue to be driven by increased sales volumes across all of our segments. In the Middle East, we expect to continue


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to increase our net sales of our fresh produce and prepared food product offerings as a result of our expansion in various markets in the region such as Turkey, Saudi Arabia and other regional markets. We also expect to increase our sales by developing new products in the prepared food segment, targeting the convenience store and foodservice trade in selected European and Middle East markets and to continue to expand our sales of beverage products in the Middle East, European and Sub-Sahara African markets.

Cost of Products Sold

Cost of products sold is principally composed of two elements, product and logistics costs. Product cost for our produce is primarily composed of cultivation (the cost of growing crops), harvesting, packaging, labor, depreciation and farm administration. Product cost for produce obtained from independent growers is composed of procurement and packaging costs. Logistics costs include land and sea transportation and expenses related to port facilities and distribution centers. Sea transportation cost is the most significant component of logistics costs and is comprised of the cost of vessel operating expenses and chartering refrigerated vessels. Vessel operating expenses for our owned vessels include operations, maintenance, depreciation, insurance, fuel (the cost of which is subject to commodity price fluctuations), and port charges. For chartered vessels, operating expenses include the cost of chartering the vessels, fuel and port charges. Variations in containerboard prices, which affect the cost of boxes and other packaging materials, and fuel prices can have a significant impact on our product cost and our profit margins. Also, variations in the production yields, fertilizers and other input costs and the cost to procure products from independent growers can have a significant impact on our costs. Containerboard, plastic, resin and fuel prices have historically been volatile. During 2012, cost of fuel increased by 8%, mostly offset by an 8% decrease in containerboard prices, with negligible effect on our cost of products sold. Also included in 2012, were $0.7 million in inventory write-offs related to our previously discontinued pineapple and melon operations in Brazil and $0.4 million in inventory write-offs and clean-up costs and a credit of $(0.2) million for insurance reimbursements related to floods in Costa Rica. During 2013, cost of fuel decreased 7%, containerboard increased 4% and fertilizer decreased 13% resulting in a reduction of cost of product sold of approximately $10.8 million. Also included in 2013, were $1.4 million in inventory write-off due to adverse weather conditions in Chile and $0.1 million inventory write-off related to the shut-down of a watermelon farm in Costa Rica.

In general, changes in our volume of products sold can have a disproportionate effect on our gross profit. Within any particular year, a significant portion of our cost of products sold is fixed, both with respect to our operations and with respect to the cost of produce purchased from independent growers from whom we have agreed to purchase all the products they produce. Accordingly, higher volumes produced on company-owned farms directly reduce the average per-box cost, while lower volumes directly increase the average per-box cost. In addition, because the volume that will actually be produced on our farms and by independent growers in any given year depends on a variety of factors, including weather, that are beyond our control or the control of our independent growers, it is difficult to predict volumes and per-box costs.

Since our financial reporting currency is the U.S. dollar, our costs are affected by fluctuations in the value of the currency in which we have significant operations versus the dollar, with lower costs resulting from a strong U.S. dollar. During 2013, cost of products sold was positively impacted by approximately $16.1 million as compared with 2012 due to a stronger U.S. dollar versus the various currencies in which we have significant operations.

Selling, General and Administrative Expenses

Selling, general and administrative expenses primarily include the costs associated with selling in countries where we have our own sales force, advertising and promotional expenses, professional fees, general corporate overhead and other related administrative functions. During 2013, we increased our selling and marketing expenses in North America and the Middle East principally as a result of our expansion in these regions and our professional fees decreased.

Loss (Gain) on Disposal of Property, Plant and Equipment

Loss (gain) on disposal of property, plant and equipment was a loss of $4.9 million in 2013 principally resulting from the disposal of low-yield banana plants in Costa Rica and Guatemala in order to re-plant and improve yields, partially offset by a gain from the sale of a refrigerated vessel and other surplus equipment. In 2012, the gain on disposal of property, plant and equipment of $(0.2) million resulted primarily from the sale of shipping-related equipment, partially offset by the disposal of low-yield banana plants in Costa Rica.

Goodwill and Trademark Impairment

During the fourth quarter of 2013, we recorded a goodwill and trademark impairment of $99.6 million. We impaired 100% of the goodwill and partially impaired the trademark associated with our 2004 acquisition of the prepared food business in


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Europe, Africa, the Middle East and countries formerly part of the Soviet Union. This impairment was principally due to the failure of this business to meet our expectations due to under-performance of the prepared food business in Europe combined with the recent cyclical downturn in industrial products.

Asset Impairment and Other Charges, Net

In 2013, we recorded asset impairment and other charges totaling $37.1 million principally due to exit activity in Brazil related to bananas, pineapples and melons, the closure of under-utilized facilities in Germany, Poland and the United Kingdom, restructuring costs in the United Kingdom, France and Cameroon, the closure of under-performing banana areas in Costa Rica and the Philippines and the unfavorable settlement of litigation in the United States. Partially offsetting these charges was a gain on the sale of a previously impaired facility in the United Kingdom.

In 2012, we recorded asset impairment and other charges totaling $3.3 million principally related to an underutilized fresh-cut facility and distribution centers in the United Kingdom, flood damage in our Costa Rica banana operation net of insurance proceeds, credits from insurance proceeds related to prior years flood in our Guatemala banana operation and other costs in Hawaii.

In 2011, we recorded asset impairment and other charges totaling $16.3 million primarily related to asset impairments and other charges as a result of our Central American melon rationalization program, an under-utilized fresh-cut facility and distribution centers in the United Kingdom, our decision to abandon as isolated area in our banana operations in the Philippines and a low-productivity area in Costa Rica and legal costs in Hawaii related to the Kunia well site, partially offset by insurance claims proceeds related to damages that occurred in 2010 from flooding in Guatemala and an earthquake in Chile.

Interest Expense

Interest expense consists primarily of interest on borrowings under working capital facilities that we maintain and interest on other long-term debt primarily for capital lease obligations. In 2013, our interest expense declined slightly, reflecting primarily lower interest rates, partially offset by higher average outstanding debt.

Other (Income) Expense, Net

Other (income) expense, net, primarily consists of currency exchange gains or losses, equity gains and losses in unconsolidated companies and other miscellaneous income and expense items. During 2013, other (income) expense, net, includes a $16.6 million gain related to a favorable judgment awarded in litigation combined with lower foreign exchange losses and $1.6 million in financial charges as a result of an unfavorable court ruling related to value added tax reporting in South America.

Provision for Income Taxes

The provision for income taxes in 2013 was $17.2 million. Income taxes consist of the consolidation of the tax provisions, computed on a separate entity basis, in each country in which we have operations. Since we are a non-U.S. company with substantial operations outside the United States, a substantial portion of our results of operations is not subject to U.S. taxation. Several of the countries in which we operate have favorable tax rates. We are subject to U.S. taxation on our operations in the United States. From time to time, tax authorities in various jurisdictions in which we operate audit our tax returns and review our tax positions. There are audits presently pending in various countries. There can be no assurance that any tax audits, or changes in existing tax laws or interpretations in countries in which we operate, will not result in an increased effective tax rate for us.


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Results of Operations

The following table presents, for each of the periods indicated, certain income statement data expressed as a percentage of net sales:

                                                             Year ended
                                   December 27, 2013      December 28, 2012     December 30, 2011
Statement of Income Data:
Net sales                                  100.0  %                100.0 %               100.0 %
Gross profit                                 7.9                    10.0                   8.9
Selling, general and
administrative expenses                      4.8                     5.2                   5.3
Operating (loss) income                     (0.8 )                   4.7                   3.2
Interest expense                             0.1                     0.1                   0.2
Net (loss) income attributable to
Fresh Del Monte Produce Inc.                (0.9 )                   4.2                   2.6

The following tables present for each of the periods indicated (i) net sales by geographic region, (ii) net sales by product category and (iii) gross profit by product category and, in each case, the percentage of the total represented thereby:

                                                                Year ended
                               December 27, 2013             December 28, 2012             December 30, 2011
                                                        (U.S. dollars in millions)
Net sales by geographic
region:
North America             $     1,968.3          54 %   $     1,821.1          53 %   $     1,806.8          50 %
Europe                            713.4          19 %           704.3          21 %           854.8          24 %
Middle East                       524.3          14 %           387.4          11 %           429.2          12 %
Asia                              425.6          12 %           422.2          12 %           431.5          12 %
Other                              52.1           1 %            86.2           3 %            67.4           2 %
Total                     $     3,683.7         100 %   $     3,421.2         100 %   $     3,589.7         100 %



                                                                     Year ended
                                    December 27, 2013             December 28, 2012             December 30, 2011
                                                             (U.S. dollars in millions)
Net sales by product category:
Banana                         $     1,692.2          46 %   $     1,544.6          45 %   $     1,653.1          46 %
Other fresh produce                  1,638.5          44 %         1,544.8          45 %         1,581.6          44 %
Prepared food                          353.0          10 %           331.8          10 %           355.0          10 %
Total                          $     3,683.7         100 %   $     3,421.2         100 %   $     3,589.7         100 %

Gross profit by product category:
Banana                         $        62.1          21 %   $        89.7          26 %   $        88.3          28 %
Other fresh produce                    192.8          67 %           205.8          60 %           177.9          55 %
Prepared food                           35.5          12 %            46.2          14 %            53.3          17 %
Total                          $       290.4         100 %   $       341.7         100 %   $       319.5         100 %


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2013 Compared with 2012

Net Sales

Net sales in 2013 were $3,683.7 million compared with $3,421.2 million in 2012. The increase in net sales of $262.5 million was primarily attributable to higher net sales of bananas, other fresh produce and prepared food.

•         Net sales in the banana segment increased by $147.6 million due to
          higher sales in all regions. Worldwide banana sales volume increased
          7%.



•            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. Specifically, the opening of our new sales offices in
             Turkey and the Ukraine combined with continued expansion in other
             regional markets has allowed us to significantly increase our sales
             volume in the region.



•            Europe banana net sales increased primarily due to higher sales
             volume as a result of an expanded customer base in Germany combined
             with increased direct sales initiative in the Southern Europe
             markets such as the opening of a new sales office in Portugal.
             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, principally a weaker euro.



•            North America banana net sales increased primarily due to a 7%
             increase in sales volumes that resulted from higher customer demand.
             Partially offsetting these increases in net sales were lower per
             unit sales prices primarily a result of competition and high
             industry supplies.



•            Asia banana net sales increased principally due to higher per unit
             sales prices resulting from lower industry supply and favorable
             market conditions. Partially offsetting these increases in net sale
             were lower sales volumes as the effects of a typhoon during the
             fourth quarter of 2012 resulted in a significant volume reduction
             during the first half of 2013. Also contributing to the lower per
             unit sales prices was a weak Japanese yen.



•         Net sales in the other fresh produce segment increased by $93.7 million
          principally as a result of higher sales of non-tropical fruit,
          fresh-cut products and tomatoes, partially offset by lower net sales of
          non-produce operations and lower net sales of pineapples.



•            Net sales of non-tropical fruit increased principally due to an
             increase in sales volumes and per unit sales prices of avocados in
             North America combined with higher sales volumes of apples and
             citrus in the Middle East primarily a result of expansions in these
             markets. Also, contributing to the increase in net sales were higher
             sales volume of grapes in North America and the Middle East
             principally due to increased supplies from Chile.



•            Net sales of fresh-cut products increased primarily due to higher
             per unit sales prices and sales volumes in North America and the
             Middle East that resulted from an expanded customer base and
             improved demand for our products in North America combined with
             expansion into new markets and introduction of new products in the
             Middle East. In Asia, net sales of fresh-cut products increased due
             to improved demand for our fresh-cut pineapple 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
             fresh-cut prepared salad facility in the United Kingdom in 2012 and
             the loss of business in our fresh-cut fruit operation in the United
             Kingdom.



•            Net sales of tomatoes increased primarily due to higher per unit
             sales prices that resulted from low industry supplies caused by
             inclement weather.



•            Net sales of non-produce operations decreased principally due to a
             temporary volume reduction that resulted from downtime for plant
             improvement in our Chilean plastic operation.



•            Net sales of pineapples decreased slightly principally due to lower
             sales volume and per unit sales prices in Asia that resulted from
             decreased production in the Philippines and a weak Japanese yen.
             Also, contributing to the decrease in net sales were lower sales
             volume in Europe as a result of weak demand and unfavorable euro
             exchange rates. Partially offsetting these decreases in net sales
             were higher sales volumes in North America and the Middle East
             primarily as a result of increased customer demand. Worldwide
             pineapple sales volume decreased 2% and per unit sales prices
             increased 1%.


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•         Net sales in the prepared food segment increased by $21.2 million
          principally due to higher sales volume of canned pineapple and per unit
          sales prices of industrial products in Europe principally as a result
          of improved market conditions combined with higher beverage sales
          volumes in the Middle East and Africa as a result of expanded
          production in our new Saudi Arabian juice operation and our Kenya
          facility. Also contributing to the increase were higher net sales of
          poultry and meat products in Jordan due to improved market conditions.

Cost of Products Sold

Cost of products sold was $3,393.3 million in 2013 compared with $3,079.5 million in 2012, an increase of $313.8 million. This increase in cost of products sold was primarily attributable to an overall 6% increase in sales volumes; increased fruit cost that resulted from higher procurement and production cost; higher ocean freight cost primarily a result of shipping additional volumes of Central American bananas to the Middle East; increased vessel operating expenses and higher distribution costs in the Middle East, North America and Europe. Also contributing to the increase in 2013, was a $1.4 million deferred growing crop inventory write-off as a result of adverse weather condition in our Chilean non-tropical fruit growing operations. Partially offsetting these increases in cost of product sold were lower fuel and lower fertilizer costs. In 2012, we recorded $0.7 million in inventory write-offs related to our previously discontinued pineapple and melon operations in Brazil and $0.4 million in inventory write-offs and clean-up costs and a credit of $(0.2) million for insurance reimbursements related to floods in Costa Rica.

Gross Profit

Gross profit was $290.4 million in 2013 compared with $341.7 million in 2012, a
decrease of $51.3 million. The decrease in gross profit was attributable to
lower gross profit in all of our segments.

•         Gross profit on the banana segment decreased by $27.6 million
          principally due to higher fruit cost resulting from higher procurement
          and production costs, lower selling prices in Europe principally the
          result of unfavorable exchange rates and lower per unit selling prices
          in North America due to competitive market pricing. 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 were higher sales prices in Asia and
          the Middle East. Worldwide banana per unit sales prices increased 3%
          and per unit costs increased 5%.



•         Gross profit in the other fresh produce segment decreased by $13.0
          million due to lower gross profit on fresh-cut products, non-tropical
          fruit, non-produce operations and melons, partially offset by higher
          gross profit on pineapples.



•            Gross profit on fresh-cut products decreased principally due to
             higher production and logistics costs in North America and the
             Middle East, partially offset by higher per unit sale prices in
             North America,Europe and the Middle East and higher sales volumes in
             Asia.


•            Gross profit on non-tropical fruit decreased primarily due to higher
             fruit costs on apples in the Middle East and lower selling prices on
             grapes in Europe.


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


•            Gross profit on melons decreased primarily due to higher fruit,
             ocean freight and logistic costs.


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