FRESH DEL MONTE PRODUCE INC. 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 inEurope ,Africa and theMiddle East . We market our products worldwide under the Del Monte® brand, a symbol of product innovation, quality, freshness and reliability since 1892. Our major sales markets are organized as follows:North America ,Europe (which includesKenya ), theMiddle East (which includesNorth Africa ) andAsia . 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 andSouth America ,Asia andAfrica . Our business is comprised of three reportable segments, two of which represent our primary businesses of fresh and value-added products and banana, and one that represents our other ancillary businesses.
•Fresh and value-added products - includes pineapples, fresh-cut fruit, fresh-cut vegetables (which includes fresh-cut salads), melons, vegetables, non-tropical fruit (including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries and kiwis), other fruit and vegetables, avocados, and prepared foods (including prepared fruit and vegetables, juices, other beverages, and meals and snacks).
•Banana
•Other products and services - includes our ancillary businesses consisting of sales of poultry and meat products, a plastic product business, and third-party freight services.
Our vision is to inspire healthy lifestyles through wholesome and convenient products. Our strategy is founded on six goals:
[[Image Removed: fdp-20220401_g1.jpg]]COVID-19 Pandemic and Current Economic Environment
InMarch 2020 , theWorld Health Organization declared the outbreak of coronavirus ("COVID-19") a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. These factors have resulted in inflationary and cost pressures that have significantly increased, and continue to adversely impact, our production and distribution costs, including costs of packaging materials, fertilizer, labor, fuel, and ocean and inland freight. We are also experiencing pressure on our supply chain due to strained transportation capacity and lack of sufficient labor availability. In addition, the invasion ofUkraine byRussia in early 2022 has led to further economic disruption. While we do not operate inUkraine and while our operations inRussia are not material, the conflict has exacerbated inflationary cost pressures and supply chain constraints which have negatively impacted the global economy and our business. 21
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In response to these ongoing inflationary and cost pressures, we began instituting price increases on the majority of our products during the latter part of 2021. Additionally, certain of our contracts for key products include contractually indexed fuel and freight surcharges that vary depending on commodity pricing. While we expect that these inflation-justified price increases and surcharges will continue to help mitigate our increased costs, our gross profit continues to be negatively impacted by these unfavorable market conditions as reflected in our first quarter of 2022 financial results. We believe these factors will continue to adversely impact our financial performance in future periods. The recent events surrounding the global economy and COVID-19 pandemic continue to evolve. Although we believe that we will ultimately emerge from these events well positioned for long-term growth, uncertainties remain and, as such, we cannot reasonably estimate the duration or extent of these adverse factors on our business, operating results, and long-term liquidity position.
Optimization Program
During fiscal 2020, we performed a comprehensive review of our asset portfolio aimed at identifying non-strategic and underutilized assets to dispose of while reducing costs and driving further efficiencies in our operations (hereon referred to as the "Optimization Program"). As a result of the review, we identified assets across all of our regions, primarily consisting of underutilized facilities and land, which we made a strategic decision to sell for total anticipated cash proceeds of approximately$100.0 million . As of the quarter endedApril 1, 2022 , we have received cash proceeds of$58.6 million in connection with asset sales under the Optimization Program (approximately$57.0 million of which was received during fiscal years 2020 and 2021). Due to challenging market conditions which have resulted in delays of some of the asset sales, in part driven by COVID-19 travel restrictions, the completion of the program has extended beyond the originally anticipated timeframe of the first quarter of 2022. Income Taxes In connection with the examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately$156.5 million (including interest and penalties) for tax years 2012 through 2016. We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as we believe that the proposed adjustments are without technical merit. In one of the foreign jurisdictions, we are currently contesting tax assessments related to the 2012-2015 audit years and the 2016 audit year in both the administrative court and the judicial court. During 2019 and 2020, we filed actions contesting the tax assessment in the administrative office. Our initial challenge to each of these tax assessments was rejected and we subsequently lost our appeals at the administrative court. We have subsequently filed actions to contest each of these tax assessments in the country's judicial courts. In addition, we have filed a request for injunction to the judicial court to stay the tax authorities collection efforts for these two tax assessments, pending final judicial decisions. The court has granted our injunction with respect to the 2016 audit year and has not yet ruled with respect to the 2012-2015 audit years. Pursuant to local law, we registered real estate collateral with an approximate fair market value of$5.7 million in connection with the grant of the 2016 audit year injunction. This real estate collateral has a net book value of$4.1 million as of the quarter endedApril 1, 2022 . To the extent that we are granted the injunction for the 2012-2015 audit years, we currently anticipate that additional collateral of approximately$25.0 million would be required to be posted. The registration of this real estate collateral does not affect our operations in the country. In the other foreign jurisdiction, the administrative court denied our appeal, and onMarch 4, 2020 we filed an action in the judicial court to contest the administrative court's decision. The case is still pending.
We will continue to vigorously contest the adjustments and to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process.
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RESULTS OF OPERATIONS
Consolidated Financial Results
The following summarizes the more significant factors impacting our operating results for the quarter endedApril 1, 2022 (also referred to as the "first quarter of 2022") andApril 2, 2021 (also referred to as the "first quarter of 2021"). Quarter ended April 1, April 2, 2022 2021 Net sales$ 1,136.9 $ 1,088.3 Gross profit 89.8 105.0 Selling, general and administrative expenses 45.2 48.9 Operating income 39.8 59.7Net Sales - Net sales for the first quarter of 2022 increased$48.6 million , or approximately 5%, when compared with the first quarter of 2021. Net sales benefited from the inflation-justified price increases we implemented in the fourth quarter of 2021. Partially offsetting the increase in net sales was the negative impact of fluctuations in exchange rates primarily versus the euro and Japanese yen compared with the prior-year period. Additionally, lack of availability of third-party shipping capacity on certain shipping routes substantially limited the sales of various products. However, due to fluctuating market conditions, the impact cannot be quantified. Gross Profit - Gross profit for the first quarter of 2022 was$89.8 million compared with$105.0 million in the first quarter of 2021. Despite higher net sales, gross profit was negatively impacted by worsening inflationary and other cost pressures compared to the prior-year period. Higher costs across-the-board including costs of packaging materials, fertilizers, ocean and inland freight, fuel and labor offset our higher net sales. Additionally, fluctuations in exchange rates were also unfavorable. Selling, General and Administrative Expenses - Selling, general and administrative expenses decreased$3.7 million , or 8%, in the first quarter of 2022 when compared with the first quarter of 2021. The decrease was primarily due to lower administrative expenses in the current period.
(Loss) Gain on Disposal of Property, Plant and Equipment, Net - The loss on
disposal of property, plant and equipment, net of
Asset Impairment and Other Charges (Credits), Net - Asset impairment and other charges (credits), net were$1.0 million during the first quarter of 2022, as compared with$(0.9) million during the first quarter of 2021. Asset impairment and other charges (credits), net for the first quarter of 2022 primarily related to severance expenses in connection with the departure of our former President and Chief Operating Officer. For the first quarter of 2021, asset impairment and other charges (credits), net primarily consisted of an insurance recovery associated with damages to fixed assets inGuatemala caused by two hurricanes in the fourth quarter of 2020.
Operating Income - Operating income decreased by
Interest Expense - Interest expense in the first quarter of 2022 was relatively flat when compared with the prior-year period.
Other Expense, Net - Other expense, net increased by$1.9 million in the first quarter of 2022 when compared with the first quarter of 2021 primarily as a result of the prior-year period including a gain related to fuel derivatives that were no longer designated as hedging instruments, partially offset by lower foreign exchange losses in the current year period. Income Tax Provision - Income tax provision was$5.8 million for the first quarter of 2022 when compared with$11.0 million for the first quarter of 2021. The decrease in the income tax provision was primarily due to decreased earnings in certain higher tax jurisdictions. 23
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Financial Results by Segment
The following table presents net sales and gross profit by segment (U.S. dollars in millions), and in each case, the percentage of the total represented thereby and gross margin percentage: Quarter ended April 1, 2022 April 2, 2021 Segment Net Sales Gross Profit Gross Margin Net Sales Gross Profit Gross Margin Fresh and value-added products$ 672.7 59 %$ 44.4 49 % 6.6 %$ 631.0 58 %$ 52.2 50 % 8.3 % Banana 406.0 36 % 37.7 42 % 9.3 % 418.2 38 % 50.0 47 % 12.0 % Other products and services 58.2 5 % 7.7 9 % 13.1 % 39.1 4 % 2.8 3 % 7.3 % Totals$ 1,136.9 100 %$ 89.8 100 % 7.9 %$ 1,088.3 100 %$ 105.0 100 % 9.7 %
First Quarter of 2022 Compared with First Quarter of 2021
Fresh and value-added products
Net sales for the first quarter of 2022 increased by$41.7 million , or 7%, when compared with the prior-year period, as a result of increased net sales across most product categories primarily due to higher pricing. Gross profit for the first quarter of 2022 was$44.4 million compared with$52.2 million in the first quarter of 2021. Despite higher net sales, gross profit in the segment continued to be negatively impacted by inflationary and other cost pressures, which resulted in higher per unit production and distribution costs. Specifically, the cost of packaging materials, fertilizers, ocean and inland freight, labor, and fuel increased compared with the prior-year period. In addition, lower gross profit of melons, a seasonal product, negatively impacted segment performance. As a result, gross margin decreased to 6.6% compared with 8.3% in the prior-year period. Gross profit in the fresh and value-added products segment included$3.1 million of other product-related charges in the first quarter of 2021 related to inventory write-offs of non-tropical fruit caused by severe rainstorms inChile . There were no other product-related charges in the first quarter of 2022.
Banana
Net sales for the first quarter of 2022 decreased by$12.2 million , or 3%, when compared with the prior-year period, primarily as a result of lower sales volume inNorth America , partially offset by increased pricing. Gross profit for the first quarter of 2022 was$37.7 million compared with$50.0 million in the first quarter of 2021. Despite higher pricing compared to the prior-year period, higher cost and lower sales volume negatively impacted gross profit. Specifically, the cost of packaging materials, fertilizers, ocean and inland freight, fuel, and labor increased compared with the first quarter of 2021. As a result of these factors, gross margin decreased to 9.3% compared with 12.0% in the prior-year period.
Gross profit for the banana segment included a
Other products and services
Net sales for the first quarter of 2022 increased$19.1 million , or 49%, when compared with the prior-year period mainly due to higher net sales of third-party freight services. Our fleet of vessels has enabled the expansion of our commercial cargo services, which are benefiting from elevated shipping rates and demand due to current supply chain constraints and inflationary pressures.
Gross profit increased
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Liquidity and Capital Resources
Fresh Del Monte Produce Inc. is a holding company with limited business operations of its own.Fresh Del Monte Produce Inc.'s only significant asset is the outstanding capital stock of our subsidiaries that directly or indirectly own all of our assets. We conduct all of our business operations through our subsidiaries. Accordingly, our only source of cash to pay our obligations, other than financings, depends primarily on the net earnings and cash flow generated by these subsidiaries. Our primary sources of cash flow are net cash provided by operating activities and borrowings under our credit facility. Our primary uses of net cash flow are capital expenditures to increase and expand our product offerings and geographic reach, investments to increase our productivity and investments in businesses such as Mann Packing.
A summary of our cash flows is as follows (
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