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 , 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-20220701_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, supply chain and logistical pressures which have negatively impacted the global economy and our business. 24
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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 financial results for the first six months of 2022. We believe these factors will continue to 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 ofJuly 1, 2022 , we have received cash proceeds of$63.3 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$138.3 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 granted our injunction with respect to the 2016 audit year, however denied our injunction with respect to the 2012-2015 audit years. We timely appealed the denial of the injunction, and an appellate hearing has been set forAugust 2022 . In the interim, the appellate court has stayed the tax collection action until the August hearing. 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 endedJuly 1, 2022 . To the extent that our appeal of the injunction for the 2012-2015 audit years is granted and the tax authorities collection efforts are enjoined, we estimate that additional collateral of approximately$25.0 million would be required to be posted. The registration of this real estate collateral does not affect our operations in the country. In the other foreign jurisdiction, the administrative court denied our appeal, and onMarch 4, 2020 we filed an action in the judicial court to contest the administrative court's decision. The case is still pending.
We will continue to vigorously contest the adjustments and to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process.
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RESULTS OF OPERATIONS
Consolidated Financial Results
The following summarizes the more significant factors impacting our operating results for the 13-week and 26-week periods endedJuly 1, 2022 (also referred to as the "second quarter of 2022" and "first six months of 2022," respectively) andJuly 2, 2021 (also referred to as the "second quarter of 2021" and "first six months of 2021," respectively). Quarter ended Six months ended July 1, July 2, July 1, July 2, 2022 2021 2022 2021 Net sales$ 1,211.9 $ 1,141.6 $ 2,348.9 $ 2,229.9 Gross profit 80.7 110.0 170.5 215.1 Selling, general and administrative 47.3 expenses 51.4 92.5 100.3 Operating income 34.3 59.3 74.1 119.0 Net sales - Net sales for the second quarter of 2022 increased by$70.3 million , or 6%, when compared with the second quarter of 2021, and increased by$119.0 million , or 5%, for the first six months of 2022 when compared with the first six months of 2021. In both periods, net sales benefited from inflation-justified price increases. Partially offsetting the increase in net sales was the negative impact of fluctuations in exchange rates primarily versus the Japanese yen and euro compared with the prior-year periods. The negative impact of fluctuations in exchange rates was partially mitigated by our foreign currency hedges. Gross profit - Gross profit for the second quarter of 2022 was$80.7 million compared with$110.0 million in the prior-year period, and$170.5 million in the first six months of 2022 compared with$215.1 million in the prior-year period. In both periods, despite higher net sales, gross profit continued to be negatively impacted by broad-based inflationary, supply chain, and logistical pressures compared to the prior-year. Higher costs across the board, including costs of packaging materials, fertilizers, ocean and inland freight, fuel and labor, offset our higher net sales. Selling, general and administrative expenses - Selling, general and administrative expenses decreased by$4.1 million , or 8%, in the second quarter of 2022 when compared with the second quarter of 2021, and decreased by$7.8 million , or 8%, in the first six months of 2022 when compared with the first six months of 2021. The decrease in both periods was primarily due to lower administrative and advertising expenses in the current year. Gain (loss) on disposal of property, plant and equipment, net - The gain (loss) on disposal of property, plant and equipment, net of$1.6 million during the second quarter of 2022 primarily related to a gain on the sale of vacant land inMexico . For the first six months of 2022, gain (loss) on disposal of property, plant and equipment, net of$(2.2) million also included a loss on the disposal of low-yielding banana plants inCentral America . The gain (loss) on disposal of property, plant and equipment, net of$1.1 million during the second quarter of 2021 primarily related to a gain on the sale of vacant land in theMiddle East , while the first six months of 2021 also included a gain on the sale of a refrigerated vessel. Asset impairment and other charges (credits), net - Asset impairment and other charges (credits), net of$0.7 million during the second quarter of 2022 primarily consisted of severance expense associated with the planned exit from a European facility. For the first six months of 2022, asset impairment and other charges (credits), net of$1.7 million also included severance expense in connection with the departure of our former President and Chief Operating Officer. Asset impairment and other charges (credits), net of$(0.4) million for the first six months of 2021 primarily related to an insurance recovery associated with hurricane damage to fixed assets inCentral America . Operating income - Operating income decreased by$25.0 million in the second quarter of 2022 and by$44.9 million in the first six months of 2022 when compared with the respective prior-year periods. The decrease in operating income in both periods was primarily driven by lower gross profit, partially offset by lower selling, general, and administrative expenses. The decrease for the first six months of 2022 compared with the first six months of 2021 was also partially driven by the net impact of disposals of property, plant, and equipment. Interest expense - Interest expense was higher in the second quarter and first six months of 2022 when compared with the prior-year periods, primarily due to higher interest rates and higher average debt balances. 26 -------------------------------------------------------------------------------- Table of Contents Other expense, net - Other expense, net increased by$1.0 million in the second quarter of 2022 when compared with the second quarter of 2021, mainly due to higher foreign exchange losses. For the first six months of 2022, other expense, net increased by$3.0 million when compared with the first six months 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. Income tax provision - Income tax provision was$4.9 million for the second quarter of 2022 compared with$4.8 million for the second quarter of 2021. The income tax provision for the second quarter of 2021 reflected the impact of return-to-provision adjustments related to a change in estimate which included a$0.8 million benefit associated with the net operating loss carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted inMarch 2020 . Income tax provision for the first six months of 2022 decreased to$10.7 million from$15.8 million in the first six months of 2021, primarily due to decreased earnings in certain higher tax jurisdictions.
Financial Results by Segment
The following table presents net sales and gross profit by segment (U.S. dollars in millions), and in each case, the percentage of the total represented thereby and gross margin percentage: Quarter ended July 1, 2022 July 2, 2021 Segment Net Sales Gross Profit Gross Margin Net Sales Gross Profit Gross Margin Fresh and value-added products$ 732.4 60 %$ 49.4 61 % 6.7 %$ 674.0 59 %$ 58.3 53 % 8.7 % Banana 421.6 35 % 22.2 28 % 5.3 % 426.7 37 % 48.1 44 % 11.3 % Other products and services 57.9 5 % 9.1 11 % 15.6 % 40.9 4 % 3.6 3 % 8.9 % Totals$ 1,211.9 100 %$ 80.7 100 % 6.7 %$ 1,141.6 100 %$ 110.0 100 % 9.6 % Six months ended July 1, 2022 July 2, 2021 Net Sales Gross Profit Gross Margin Net Sales Gross Profit Gross Margin Fresh and value-added products$ 1,405.1 60 %$ 93.8 55 % 6.7 %$ 1,305.0 59 %$ 110.6 51 % 8.5 % Banana 827.6 35 % 60.0 35 % 7.2 % 844.9 38 % 98.0 46 % 11.6 % Other products and services 116.2 5 % 16.7 10 % 14.4 % 80.0 3 % 6.5 3 % 8.1 % Totals$ 2,348.9 100 %$ 170.5 100 % 7.3 %$ 2,229.9 100 %$ 215.1 100 % 9.6 %
Second Quarter of 2022 Compared with Second Quarter of 2021
Fresh and value-added products
Net sales for the second quarter of 2022 increased by$58.4 million , or approximately 9%, when compared with the prior-year period. The increase in net sales was primarily driven by higher pricing in most product categories. Sales volume remained in line with the prior-year period. Gross profit for the second quarter of 2022 was$49.4 million compared with$58.3 million in the second quarter of 2021. The decrease in gross profit from the prior-year period was mainly due to lower gross profit on non-tropical fruit, primarily driven by the lack of availability of third-party shipping capacity on certain shipping routes, and lower gross profit on avocados, mainly due to market volatility. Additionally, despite higher net sales, gross profit continued to be negatively impacted by ongoing cost pressures in the current year period which resulted in higher per unit production and distribution costs, including ocean and inland freight. As a result, gross margin decreased to 6.7% compared with 8.7% in the prior-year period. Gross profit in the fresh and value-added products segment included$1.6 million of other product-related charges in the second quarter of 2021, mainly comprised of a$1.3 million inventory write-off incurred in theMiddle East . There were no other product-related charges in the second quarter of 2022. 27
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Banana
Net sales for the second quarter of 2022 decreased by$5.1 million , or 1%, when compared with the prior-year period. The decrease in net sales was primarily driven by lower sales volume and the negative impact of fluctuations in exchange rates inAsia .
Gross profit for the second quarter of 2022 was
Other products and services Net sales for the second quarter of 2022 increased by$17.0 million , or 42%, 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 market logistical constraints.
Gross profit increased by
First Six Months of 2022 Compared with First Six Months of 2021
Fresh and value-added products
Net sales for the first six months of 2022 increased by$100.1 million , or approximately 8%, when compared with the prior-year period. The increase in net sales was primarily driven by higher pricing in most product categories. Sales volume remained in line with the prior-year period. Gross profit for the first six months of 2022 was$93.8 million compared with$110.6 million in the prior-year period. The decrease in gross profit compared with the prior-year period was mainly due to lower gross profit on (i) non-tropical fruit, primarily driven by the lack of availability of third-party shipping capacity on certain shipping routes, (ii) avocados, mainly related to market volatility, and (iii) melons. Additionally, despite higher net sales, gross profit for the segment continued to be negatively impacted by ongoing cost pressures which resulted in higher per unit production and distribution costs, including ocean and inland freight. As a result, gross margin decreased to 6.7% compared with 8.5% in the prior-year period. Gross profit in the fresh and value-added products segment included$4.7 million of other product-related charges in the first six months of 2021 comprised of$3.4 million in non-tropical fruit inventory write-offs related to inclement weather inChile in the first quarter of 2021, and a$1.3 million inventory write-off incurred in theMiddle East . There were no other product-related charges in the first six months of 2022.
Banana
Net sales for the first six months of 2022 decreased by
Gross profit for the first six months of 2022 was$60.0 million compared with$98.0 million in the prior-year period. The decrease in gross profit was primarily driven by lower sales volume and higher per unit production and distribution costs, including ocean and inland freight. As a result of these factors, gross margin decreased to 7.2% compared with 11.6% in the prior-year period.
Gross profit for the banana segment included a
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Table of Contents Other products and services Net sales for the first six months of 2022 increased by$36.2 million , or 45%, 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 market logistical constraints.
Gross profit increased by
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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