The following discussion of our financial condition and results of operations should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto. The following discussion includes forward-looking statements that involve certain risks and uncertainties, including, but not limited to, those described in Item 1A. Risk Factors. Our actual results may differ materially from those discussed below. See "Special Note Regarding Forward-Looking Statements" and Item 1A. Risk Factors.
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 . Following our acquisition of Mann Packing in 2018 and the realignment of our business strategy to increase focus on our fresh and value-added products business as well as our core banana business, we changed our reportable segments in fiscal 2019 to better reflect the way we manage our operations. 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, 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. Certain reclassifications of prior period balances have been made for the years endedDecember 27, 2019 andDecember 28, 2018 to conform to current presentation which impacted cost of products sold, selling, general, and administrative expenses, and our segment data disclosures.
Fiscal Year
Our fiscal year end is the last Friday of the calendar year or the first Friday subsequent to the end of the calendar year, whichever is closest to the end of the calendar year. Fiscal year 2020 had 53 weeks and ended onJanuary 1, 2021 . Fiscal year 2019 had 52 weeks and ended onDecember 27, 2019 . Fiscal year 2018 had 52 weeks and ended onDecember 28, 2018 .
COVID-19 Pandemic Impact
InDecember 2019 , a novel strain of coronavirus, COVID-19, was identified inWuhan, China . The virus has spread globally and inMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. We have taken various preventative and protective measures in response to the COVID-19 pandemic to support our team members, customers, suppliers, and local communities. At our production facilities where food safety has always been a top priority, we introduced additional operating procedures and safety protocols to include social distancing, thermal screenings and increased cleaning cycles to protect our production teams. We activated our supply chain contingency plans to mitigate any disruptions in our ability to service our customers. Additionally, we implemented remote working arrangements across various of our administrative locations, having as many global employees as possible working remotely. These measures have allowed us to maintain our commitment to providing healthy, convenient and safe Del Monte® branded products around the world during this critical time. 32
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The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The COVID-19 pandemic had a material adverse impact on our results of operations during fiscal 2020. Government imposed mandatory closures and restrictions across various of our key global markets have resulted in volatile supply and demand conditions, particularly of our higher price point products such as pineapples, avocados, and fresh-cut fruit and vegetables, as well as reduced demand in our foodservice distribution channel and shifting demand in retail. Additionally, during the first quarter of 2020, our results were negatively impacted by service cancellations and containers that were unable to clear at certain of our Chinese ports. As a result, we had to redirect our products to markets such asJapan ,Korea , andHong Kong which had a negative impact on our financial performance due to oversupply in these markets. In addition to negatively impacting our net sales, the COVID-19 pandemic and related government restrictions have resulted in increased costs for our business, particularly in our farming operations inCentral America where we have incurred incremental costs to implement social distancing protocols and more frequent cleaning cycles. We continue to work collaboratively with our network of third-party growers and suppliers to mitigate the impact of COVID-19 on our supply chain and costs. Furthermore, during fiscal 2020, some of our workers contracted the COVID-19 virus which resulted in a temporary facility closure in one location, reduced production hours, increased cleaning and logistical costs, as well as an adverse impact on our net sales due to the perishability of our products. In early 2021, health agencies in certain regions where we operate (includingNorth America andEurope ) approved vaccines for combating the COVID-19 virus. While administration of the vaccines has begun, mass distribution is unlikely to occur until late 2021 as local governments have prioritized initial distribution to certain healthcare and essential workers as well as those more susceptible to the effects of the virus. As a result, government-imposed restrictions aimed at mitigating the spread of the virus across our key global markets and the related volatility in supply and demand conditions are expected to continue to negatively impact our future operating results. While we expect the impacts of COVID-19 to continue to have an effect on our business, the extent of the impact will depend on future developments, including the duration of the pandemic and related government restrictions, all of which are uncertain and cannot be predicted. In addition, we cannot predict whether future developments associated with the COVID-19 pandemic will materially adversely affect our long-term liquidity position. During fiscal 2020 we took several steps to conserve our liquidity position in response to the pandemic including reducing our quarterly cash dividend fromten cents ($0.10 ) per share in the first quarter of 2020 tofive cents ($0.05 ) per share in the second and third quarters of 2020 and delaying certain of our planned capital expenditures to 2021. As a result of our improved cash flow, our Board of Directors was able to declare an increased quarterly cash dividend often cents ($0.10 ) per share in the fourth quarter of 2020 and the first quarter of 2021.
Refer to the "Results of Operations" and "Liquidity and Capital Resources" sections below, as well as Part I. Item 1A, "Risk Factors" for further discussion.
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 which we plan to sell through the first quarter of 2022 for total anticipated cash proceeds of approximately$100.0 million . These assets primarily consist of underutilized facilities and land, some of which are currently reflected in assets held for sale on our Consolidated Balance Sheet as of fiscal 2020. During fiscal 2020, we received cash proceeds of approximately$40.0 million in connection with asset sales under the Optimization Program. The gain on the sales of these assets is reflected in the$22.2 million net gain on the sale of property, plant, and equipment on our Consolidated Statement of Operations for fiscal 2020. Included as part of this Optimization Program is the consolidation of our Mann Packing operations from four facilities into one facility inGonzales, California . The consolidation of Mann Packing will allow us the unique advantage of processing fresh-cut fruit and fresh-cut vegetables in one facility in theSalinas Valley and will optimize labor and distribution costs. During the third quarter of 2020, we completed our move toGonzales which we anticipate will enable us to improve gross profit in our fresh and value-added products segment by approximately$10 million on an annual basis, a benefit expected to be achieved by the fourth quarter of 2021.
Our net sales are affected by numerous factors, including mainly the balance between the supply of and demand for our products 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. As a result of seasonal sales price fluctuations, we have 33 -------------------------------------------------------------------------------- Table of Contents historically realized a greater portion of our net sales and gross profit during the first two calendar quarters of the year. 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 of 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 our fresh and value-added products segment, there are seasonal variations in sales of our prepared foods, which generally realize the largest portion of net sales in the third and fourth quarters of the year, and our non-tropical fruit products which reach peak sales season from October to May. Our strategy for net sales growth is focused on protecting and growing our core business as well as driving innovation and expansion of our value-added categories, including through the development of new products and by targeting the convenience store and foodservice trade in our major global markets. InNorth America , we expect additional net sales growth by further expanding the market reach of our Mann Packing products including fresh and fresh-cut vegetables and meals and snacks. Since our financial reporting currency is theU.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 weaker dollar versus such currencies resulting in increased net sales in dollar terms. Including the effect of our foreign currency hedges, net sales in 2020 were negatively impacted by$16.3 million primarily due to fluctuations in exchange rates versus the euro, Korean won, and Chilean peso. Cost of Products Sold
Cost of products sold is primarily composed of two elements:
Product costs - 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:
•Ship operating expenses - include operations, maintenance, depreciation, insurance, fuel (the cost of which is subject to commodity price fluctuations), and port charges.
•Chartered ship costs - include the cost of chartering the ships, fuel and port charges.
•Container equipment-related costs - include leasing expense and in the case of owned equipment, also depreciation expense.
•Third-party containerized shipping costs - include the cost of using third-party shipping in our logistics operations.
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. 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. Since our financial reporting currency is theU.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 cost resulting from a strongerU.S. dollar. During 2020, cost of products sold was positively impacted by approximately$5.5 million primarily driven by a stronger dollar as compared to the Chilean peso and Mexican peso, partially offset by the negative impact of a weaker dollar compared to the Philippine peso. 34 -------------------------------------------------------------------------------- Table of Contents Income Taxes The provision for income taxes in 2020 was$5.0 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 outsidethe United States , a substantial portion of our results of operations is not subject toU.S. taxation. Several of the countries in which we operate have lower tax rates thanthe United States . We are subject toU.S. taxation on our operations inthe 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. In connection with a current examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately$145.5 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. OnSeptember 10, 2020 , we were notified that we lost our final appeal at the Administrative level in one of the foreign jurisdictions under audit for the years 2012-2015, and likewise onDecember 21, 2020 for the audit year 2016. For the years 2012-2015, we have filed a request for an injunction in the judicial courts which would defer payment, if any, until the end of the judicial process. We intend to follow the same procedure for the year 2016. Additionally, we also plan to file an administrative injunction with the Tax Administration. In parallel with the administrative procedure, we filed an appeal in judicial court onApril 30, 2020 . We strongly believe we will prevail at the judicial level. If not, we will appeal to theSupreme Court . We will continue to vigorously contest the adjustments and expect to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process. We regularly assess the likelihood of adverse outcomes resulting from examinations such as these to determine the adequacy of our tax reserves. Accordingly, we have not accrued any additional amounts based upon the proposed adjustments. There can be no assurance that these matters will be resolved in our favor, and an adverse outcome of either matter, or any future tax examinations involving similar assertions, could have a material effect on our financial condition, results of operations and cash flows.
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 January 1, 2021 December 27, 2019 December 28, 2018 Statement of Income Data: Net sales 100.0 % 100.0 % 100.0 % Gross profit 6.0 6.8 6.4 Selling, general and administrative expenses 4.7 4.5 4.5 Operating income 1.8 2.5 0.9 Interest expense 0.5 0.6 0.5 Net income (loss) attributable to Fresh Del Monte Produce Inc. 1.2 1.5 (0.5) 35
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The following tables present for each of the periods indicated (i) net sales by geographic region, (ii) net sales by segment and (iii) gross profit by segment and, in each case, the percentage of the total represented thereby: Year ended January 1, 2021 December 27, 2019 December 28, 2018 (U.S. dollars in millions) Net sales by geographic region: North America$ 2,601.7 62 %$ 2,923.8 65 %$ 2,871.3 64 % Europe 648.6 16 % 645.2 14 % 653.7 15 % Asia 466.1 11 % 453.0 10 % 465.7 10 % Middle East 432.9 10 % 425.8 10 % 445.6 10 % Other 53.0 1 % 41.2 1 % 57.6 1 % Total$ 4,202.3 100 %$ 4,489.0 100 %$ 4,493.9 100 % Year ended January 1, 2021 December 27, 2019 December 28, 2018 (U.S. dollars in millions) Net sales by segment: Fresh and value-added products$ 2,484.1 59 %$ 2,704.4 60 %$ 2,654.7 59 % Banana 1,602.6 38 % 1,656.0 37 % 1,703.1 38 % Other products and services 115.6 3 % 128.6 3 % 136.1 3 % Total$ 4,202.3 100 %$ 4,489.0 100 %$ 4,493.9 100 % Gross profit by segment: Fresh and value-added products$ 158.4 63 %$ 193.2 63 %$ 187.3 66 % Banana 84.3 34 % 104.4 34 % 92.9 32 % Other products and services 8.2 3 % 8.8 3 % 5.7 2 % Total$ 250.9 100 %$ 306.4 100 %$ 285.9 100 %
2020 Compared with 2019
Net Sales . Net sales for 2020 were$4,202.3 million compared with$4,489.0 million in 2019. The decrease in net sales of$286.7 million was attributable to lower net sales in all of our business segments. The COVID-19 pandemic negatively impacted our net sales during fiscal 2020 by an estimated$303.6 million in our fresh and value-added products and banana segments, as compared with our net sales for these segments during the year endedDecember 27, 2019 . The effect of government imposed mandatory closures and restrictions and the lack of family gatherings for holidays, school graduations and summer events specifically inNorth America has significantly reduced demand for many of our fresh and value-added products. Partially offsetting the decrease in overall net sales was our fiscal year cycle which consisted of a 53-week year for fiscal 2020 as compared to a 52-week year for fiscal 2019, resulting in an estimated$72.0 million increase in net sales. •Fresh and value-added products - Net sales in the fresh and value-added products segment decreased$220.3 million primarily as a result of lower net sales of fresh-cut vegetables, fresh-cut fruit, avocados, vegetables, melons, prepared food products and tomatoes. The COVID-19 pandemic negatively affected our net sales of fresh and value-added products by an estimated$243.2 million during fiscal 2020 when compared with our net sales during the year endedDecember 27, 2019 . Partially offsetting the decrease in net sales was an increase in sales of non-tropical fruit and pineapples, and the impact of an additional week in the fiscal 2020 year which contributed an estimated$42.0 million in net sales. 36 -------------------------------------------------------------------------------- Table of Contents •Net sales of fresh-cut vegetables decreased primarily due to the effect of the COVID-19 pandemic which resulted in reduced demand in our foodservice distribution channel throughout the year. In addition, our voluntary product recall in the fourth quarter of 2019 continued to negatively impact our fresh-cut vegetable net sales during fiscal 2020 as volumes have not returned to pre-recall levels. Partially offsetting this decrease were higher per unit sales prices as compared to the prior year period. •Net sales of fresh-cut fruit decreased primarily due to lower sales volumes inNorth America as a result of the COVID-19 pandemic which led to reduced demand for our products, combined with a shortage of raw materials. Partially offsetting this decrease were higher per unit sales prices as compared to the prior year period. •Net sales of avocados decreased primarily inNorth America due to the combined impact of lower per unit sales prices, resulting from normalized industry supplies in the current year, and lower sales volumes due to the COVID-19 pandemic. Partially offsetting this decrease were higher sales across all other regions, primarilyAsia andEurope . •Net sales of vegetables decreased primarily inNorth America due to the effect of the COVID-19 pandemic which negatively impacted demand in our foodservice distribution channel. Partially offsetting this decrease were higher per unit sales prices. •Net sales of melons decreased primarily inNorth America as a result of lower sales volumes and lower per unit sales prices. The decrease in volume was driven by the COVID-19 pandemic's adverse impact on demand and lower volume sourced fromGuatemala due to hurricanes Eta and Iota which impacted the country in the fourth quarter of 2020 and led to lower yields as a result of the damages to our crops. •Net sales of prepared food products decreased due to lower sales volumes of meals and snacks which was primarily driven by the impact of the COVID-19 pandemic, the continuing impact of the 2019 product recall, and product rationalization efforts in our Mann Packing operations inNorth America which resulted in the discontinuance of low margin products. Partially offsetting this decrease were higher sales volumes and per unit sales prices of canned pineapple products and higher sales prices of canned non-tropical fruits, both as a result of improved customer demand, combined with higher per unit sales prices of pineapple concentrate products due to lower industry supply. •Net sales of tomatoes decreased primarily inNorth America driven by lower sales volumes due to lower industry supplies combined with our decision to rationalize sales channels with lower profitability. Partially offsetting this decrease were higher per unit sales prices. •Net sales of non-tropical fruit increased primarily as a result of higher sales volumes in theMiddle East due to increased sales in developing markets and higher sales volumes inEurope due to increased customer demand. Partially offsetting this increase in net sales were lower per unit sales prices, primarily inNorth America . •Net sales of pineapples increased primarily due to higher per unit sales prices inAsia ,Europe and theMiddle East . •Banana - Net sales of bananas decreased$53.4 million principally due to lower net sales inNorth America andEurope , partially offset by higher net sales in theMiddle East andAsia . We estimate that COVID-19 negatively affected our banana net sales by$60.4 million during fiscal 2020 when compared with our net sales during the year endedDecember 27, 2019 . Worldwide banana sales volume decreased by 2%. Partially offsetting the decrease was the impact of an additional week in our fiscal 2020 year which contributed an estimated$28.0 million in net sales. •North America andEurope banana net sales decreased primarily due to lower sales volumes, principally the result of COVID-19 related lower demand. Also contributing to the net sales decrease in both regions were lower per unit sales prices. Net sales inEurope were also impacted by unfavorable exchange rates. •Middle East banana net sales increased due to higher sales volumes. Partially offsetting this increase were lower per unit sales prices. •Asia banana net sales increased due to higher sales volumes, partially offset by lower per unit sales prices. •Other products and services - Net sales of other products and services decreased$13.0 million primarily due to lower per unit sales prices in our Jordanian poultry business as a result of reduced demand in the foodservice sector driven by the COVID-19 pandemic. Partially offsetting the decrease was the impact of an additional week in our fiscal 2020 year which contributed an estimated$2.0 million in net sales.
Cost of Products Sold. Cost of products sold was
37 -------------------------------------------------------------------------------- Table of Contents in both our fresh and value-added products and banana segments. Partially offsetting this decrease were higher ocean freight and distribution costs per unit and$33.6 million of other product-related charges which principally include$25.4 million of charges attributable to our fresh and value-added products segment, primarily relating to pineapples, melons, and fresh-cut vegetables, and$8.0 million of charges related to our banana segment. These charges primarily consist of$23.8 million in inventory write-offs due to the volatile supply and demand conditions caused by the COVID-19 pandemic and related incremental costs incurred for additional cleaning and social distancing protocols, as well as$12.0 million in inventory write-offs resulting from damages to our melon and banana operations inGuatemala due to hurricanes Eta and Iota in the fourth quarter of 2020. Other product-related charges also include$3.3 million in insurance recoveries associated with the storms. Gross Profit. Gross profit was$250.9 million for 2020 compared with$306.4 million for 2019, a decrease of$55.5 million . This decrease was attributable to lower gross profit in our fresh and value-added products and banana business segments. •Fresh and value-added products - Gross profit in the fresh and value-added products segment decreased$34.8 million principally due to lower gross profit on vegetables, melons, fresh-cut vegetables, fresh-cut fruit, and pineapples, partially offset by higher gross profit on prepared food products, avocados and tomatoes. •Gross profit on vegetables decreased primarily within our Mann Packing operations inNorth America due to higher per unit costs, including higher production and distribution costs. These higher per unit costs were primarily the result of lower sales volumes as a result of the COVID-19 pandemic. Partially offsetting this decrease were higher per unit sales prices. •Gross profit on melons decreased primarily inNorth America due to higher production, ocean freight and distribution costs per unit as a result of lower sales volumes and lower per unit sales prices. The decrease in sales volume was driven by the lower yields from our Guatemalan operations due to damages caused by the Eta and Iota hurricanes in the fourth quarter of 2020. Inventory write-offs due to the damages caused by the hurricanes as well as COVID-19 related inventory write-offs also negatively impacted gross profit. •Gross profit on fresh-cut vegetables decreased primarily within our Mann Packing operations inNorth America due to higher per unit costs, including higher production and distribution costs. These higher per unit costs were primarily the result of lower sales volumes as a result of the COVID-19 pandemic. Also impacting gross profit were inventory write-offs related to the COVID-19 pandemic. •Gross profit on fresh-cut fruit decreased across all of our regions. The decrease was primarily due to higher production and distribution costs per unit inEurope ,North America andAsia as a result of the COVID-19 pandemic which resulted in lower sales volumes. Partially offsetting the decrease were lower ocean freight costs and higher per unit sales prices. •Gross profit on pineapples decreased primarily due to higher costs, principally consisting of inventory write-offs and other incremental product costs related to the COVID-19 pandemic. Also contributing to the decrease in gross profit were lower sales volumes inEurope andNorth America and higher overall distribution costs per unit. Partially offsetting the decrease in gross profit were higher per unit sales prices inAsia ,Europe and theMiddle East . •Gross profit on prepared food products increased primarily due to higher per unit sales prices of canned pineapples, canned non-tropical fruit, and pineapple concentrate inEurope . Lower production costs per unit in ourKenya andGreece facilities also contributed to the increase in gross profit. Partially offsetting this increase were lower sales volumes and lower per unit sales prices of meals and snacks. •Gross profit on avocados increased primarily as a result of lower procurement and processing costs due to our new packing plant inMexico which opened inDecember 2019 and lower product costs due to favorable exchange rates. Partially offsetting this increase were lower net sales, primarily driven by lower per unit sales prices. •Gross profit on tomatoes increased primarily due to higher per unit sales prices and lower product costs per unit inNorth America . Partially offsetting the increase were lower sales volumes and higher distribution expenses per unit. •Banana - Gross profit in the banana segment decreased by$20.1 million . The decrease was primarily driven by lower per unit sales prices and lower sales volumes caused by the COVID-19 pandemic. Also contributing to the decrease in gross profit were inventory write-offs related to the COVID-19 pandemic as well as inventory write-offs, net of insurance recoveries, due to hurricanes Eta and Iota which caused damages to our Guatemalan banana operation in the fourth quarter of 2020. Partially offsetting the decrease in gross profit were lower costs per unit driven by improved 38 -------------------------------------------------------------------------------- Table of Contents production yield and lower raw material costs and distribution costs. Worldwide banana per unit sales prices decreased 2% and per unit costs decreased by 0.5%. •Europe gross profit on bananas decreased primarily due to lower net sales and unfavorable exchange rates, partially offset by lower distribution costs per unit. •Asia gross profit on bananas decreased primarily due to lower sales prices per unit and higher cost of product per unit. •North America gross profit on bananas increased due to lower costs per unit including lower distribution, production and ocean freight costs. This increase was partially offset by lower net sales. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased$5.3 million from$201.5 million in 2019 to$196.2 million in 2020. The decrease was primarily due to lower selling, marketing and administrative expenses inNorth America and theMiddle East , primarily as a result of a lower provision for credit losses and cost saving initiatives combined with lower travel expenses due to COVID-19 restrictions. Gain on Disposal of Property, Plant and Equipment, Net. The gain on disposal of property, plant and equipment, net of$22.2 million during 2020 primarily related to$13.7 million in gains on the sales of surplus lands inChile , a$5.6 million gain on the sale of a facility in theMiddle East , and$3.7 million in gains on the sales of two facilities inNorth America . These gains were partially offset by losses on asset disposals, mainly inCentral America . The gain on disposal of property, plant and equipment of$18.6 million during 2019 primarily related to the sale of surplus land inFlorida and a refrigerated vessel. Partially offsetting these gains was the loss on disposal of low-yielding banana plants inCosta Rica in order to replant and improve productivity and other losses on disposal of surplus assets.
Asset Impairment and Other Charges, Net. Asset impairment and other charges, net, was$0.4 million in 2020 as compared with$9.1 million in 2019. Asset impairments and other charges, net, for 2020 were primarily comprised of the following: •$(15.0) million insurance recovery related to the 2019 voluntary product recall in our fresh and value-added products segment; •$5.2 million in asset impairments of facilities and related equipment inNorth America , theMiddle East , andEurope related to our fresh and value-added products segment; •$4.8 million of asset impairments inGuatemala associated with damages caused by hurricanes Eta and Iota, related to our banana segment; •$2.0 million charge relating to a settlement with the California Air Resource Board, related to both the banana and fresh and value-added products segments; •$1.8 million in asset impairment charges associated with low-yielding banana plants inthe Philippines ; and •$1.5 million in severance expense for the reorganization of the sales and marketing function inNorth America related to the fresh and value-added products and banana segments. Asset impairments and other charges, net, for 2019 were primarily comprised of the following: •$5.2 million in asset impairments and other charges related to low-producing areas in our banana operations inthe Philippines ; •$2.9 million in asset impairment charges related to an equity investment, which was sold in 2019; and •$0.5 million in other costs related to the 2019 voluntary product recall related to our fresh and value-added products segment. Operating Income. Operating income was$76.5 million in 2020 compared with operating income of$114.1 million in 2019, a decrease of$37.6 million . The decrease in operating income was due to lower gross profit, partially offset by lower asset impairments and other charges, net, lower selling, general and administrative expenses, and higher gains on disposal of property, plant and equipment, net. Interest Expense. Interest expense was$21.4 million in 2020 compared with$25.4 million in 2019, a decrease of$4.0 million . The decrease was primarily due to lower interest rates and lower average debt balances. 39 -------------------------------------------------------------------------------- Table of Contents Other Expense (Income), Net. Other expense (income), net, was expense of$4.5 million for 2020 compared with income of$(0.9) million in 2019. The change in other expense (income), net, of$5.4 million was principally attributable to a net gain of$16.0 million reflected in the 2019 period as a result of the settlement of a business transaction litigation. Partially offsetting this change were lower foreign exchange losses during 2020 when compared to 2019. Provision for Income Taxes. Provision for income taxes was$5.0 million in 2020 compared with$21.4 million in 2019. The decrease in the provision for income taxes of$16.4 million is primarily due to reduced earnings in certain higher tax jurisdictions in conjunction with a benefit resulting from the restructuring of our European operations. The tax provision for 2020 also includes a$4.7 million benefit relating to the NOL carryback provision of the Coronavirus Aid, Relief and Economic Security Act (CARES) Act, which was enacted onMarch 27, 2020 . 2019 Compared with 2018Net Sales . Net sales for 2019 were$4,489.0 million compared with$4,493.9 million in 2018. The decrease in net sales of$4.9 million was attributable to lower net sales in our banana and other products and services segments, partially offset by higher net sales in our fresh and value-added products segment. •Banana - Net sales of bananas decreased$47.1 million principally due to lower net sales inNorth America ,Asia andEurope , partially offset by higher net sales theMiddle East . Worldwide banana sales volume decreased by 4%. •North America banana net sales decreased due to lower sales volumes principally as a result our efforts to reduce volume during less profitable times of the year combined with lower volumes fromCentral America , partially offset by a slight increase in per unit selling prices. •Asia banana net sales decreased due to lower supplies fromthe Philippines , principally due to lower purchases from independent growers combined with lower production at our company-operated farms that resulted from planned reductions of low-yield areas. Partially offsetting this decrease were higher per unit selling prices. •Europe banana net sales decreased due to lower sales volumes as a result of lower shipments from ourCosta Rica operations, partially offset by higher per unit selling prices. Also negatively affecting banana net sales inEurope were unfavorable exchange rates. •Middle East banana net sales increased due to higher sales volumes primarily as a result of increased shipments fromCentral America . Partially offsetting the increase in sales volumes were lower per unit selling prices as a result of unfavorable market conditions. •Other products and services - Net sales of other products and services decreased$7.5 million primarily due to planned volume reduction in ourJordan poultry business, partially offset by higher poultry pricing and higher revenues from our third-party ocean freight services. •Fresh and value-added products - Net sales in the fresh and value-added products segment increased$49.7 million principally as a result of higher net sales of fresh-cut products, avocados, vegetables, and prepared food. Partially offsetting these increases were lower net sales of pineapples, non-tropical fruit, melons and tomatoes. •Net sales of fresh-cut products increased primarily due to: ?Sales of fresh-cut vegetable products reflecting a full year of operating results for Mann Packing which was acquired at the end ofFebruary 2018 ; ?Higher fresh-cut vegetable per unit selling prices principally due to increased pricing and favorable product mix; and ?Higher per unit selling prices and volumes of fresh-cut fruit inNorth America primarily due to an expanded customer base and higher demand. These increases in net sales were partially offset by: ?Lower per unit selling prices of fresh-cut fruit inEurope , principally due to unfavorable exchange rates; ?Lower sales volumes and per unit selling prices of fresh-cut fruit in theMiddle East primarily due to lower customer demand; and ?The impact of our Mann Packing business voluntary recall in the fourth quarter of 2019. The voluntary recall was a response to a notification by theFood and Drug Administration and theCanadian Food Inspection Agency of a potential contamination of a series of our vegetable products which were processed at ourSalinas Valley ,California production facility. The voluntary recall had a negative effect 40 -------------------------------------------------------------------------------- Table of Contents on net sales, primarily of fresh-cut vegetables, resulting in an estimated$21.0 million in lost sales associated with the recalled products as compared to our original expectations for such products. In addition, we also recorded a reduction in net sales of approximately$6.0 million in the fourth quarter of 2019 to account for customer claims and customer-related charges associated with the recall. •Net sales of avocados increased due to higher per unit selling prices and sales volumes inNorth America principally as a result of tight industry supplies and higher customer demand. Also contributing to the increase were higher net sales inAsia ,Europe and theMiddle East primarily as a result of increased shipments fromMexico . •Net sales of vegetables increased primarily due to sales of Mann Packing vegetable products inNorth America such as broccoli, cauliflower and lettuce. Mann Packing was acquired at the end ofFebruary 2018 . •Net sales of prepared food products increased primarily due to higher sales volumes inNorth America ,Europe , and theMiddle East resulting from our increased focus on value-added products combined with higher customer demand. •Net sales of pineapples decreased due to lower sales volumes in all regions as a result of lower production from ourCosta Rica andPhilippines operations primarily due to unfavorable growing conditions. Worldwide pineapple sales volume decreased 12%. Partially offsetting this decrease were worldwide higher per unit selling prices. •Net sales of non-tropical fruit decreased principally due to our rationalization of sales volumes resulting in the planned reduction of sales of certain low margin products. Contributing to this decrease in net sales of non-tropical fruit were lower sales of apples in theMiddle East and grapes inNorth America . •Net sales of melons decreased due to lower industry volumes resulting from unfavorable growing conditions inCentral America which resulted in lower export quality fruit combined with lower production in ourU.S. growing operations. Partially offsetting this decrease were higher per unit selling prices inNorth America . •Net sales of tomatoes decreased primarily due to the discontinuance of ourU.S. growing operations during late summer of 2018, partially offset by higher per unit selling prices inNorth America . Cost of Products Sold. Cost of products sold was$4,182.6 million for 2019 compared with$4,208.0 million in 2018, a decrease of$25.4 million . The decrease was primarily attributable to lower sales volumes in our banana and fresh and value-added products segments. Partially offsetting this decrease related to lower sales volumes were: higher cost of products sold related to Mann Packing which was acquired at the end ofFebruary 2018 ; higher ocean freight costs, primarily due to lower vessel utilization; higher fruit production costs, primarily the result of lower yields of pineapples and melons; higher avocado procurement cost; and$4.4 million in inventory write-offs as a result of the Mann Packing voluntary recall of a series of our vegetable products during the fourth quarter of 2019. Gross Profit. Gross profit was$306.4 million for 2019 compared with$285.9 million for 2018, an increase of$20.5 million . This increase was attributable to higher gross profit in all of our business segments. •Banana - Gross profit in the banana segment increased by$11.5 million . Worldwide there was a slight increase in banana per unit selling prices and per unit cost remained relatively flat. The increase in gross profit was primarily driven by: •Higher local currency per unit selling prices inEurope which surpassed the negative effect of unfavorable exchange rates; •Higher per unit selling prices inAsia ; and •Our efforts to reduce volumes during less profitable times of the year. The increase in banana gross profit was partially offset by lower per unit selling prices in theMiddle East principally due to lower demand and higher ocean freight costs inNorth America andEurope . •Fresh and value-added products - Gross profit in our fresh and value-added products segment increased$5.9 million principally due to higher gross profit on non-tropical fruit, tomatoes, melons and fresh-cut fruit, partially offset by lower gross profit on fresh-cut vegetables, prepared food products and avocados. •Gross profit on non-tropical fruit increased principally due to lower per unit costs of grapes, stonefruit and berries and higher selling prices of stonefruit and citrus. The restructuring of our Chilean business in the prior year has significantly improved profitability in this product category as a result of reductions in volumes of low-margin products and reduced operating costs. 41 -------------------------------------------------------------------------------- Table of Contents •Gross profit on tomatoes increased principally due to higher per unit selling prices. The discontinuance of ourU.S. growing operations during late summer of 2018 resulted in improved margins during 2019. •Gross profit on melons increased due to higher per unit selling prices inNorth America primarily as a result lower industry volumes, partially offset by higher per unit ocean freight and production costs. •Gross profit on fresh-cut fruit increased primarily due to higher sales volumes inNorth America combined with improved productivity which resulted in lower production costs. Partially offsetting this increase were lower selling prices inEurope , theMiddle East andAsia . •Gross profit on fresh-cut vegetables decreased primarily due to the impact of the Mann Packing voluntary product recall during the fourth quarter of 2019 which had a negative effect on the sales of Mann Packing fresh-cut vegetable products and increased our cost of products sold. •Gross profit on prepared food products decreased primarily due to lower selling prices on canned pineapples, principally a result of high industry volumes and increased competition inEurope . Also contributing to the decrease in gross profit on prepared food was the effect of the Mann Packing voluntary product recall during the fourth quarter of 2019 that negatively affected the sales of Mann Packing prepared vegetable products and increased our cost of products sold. •Gross profit on avocados decreased due to higher fruit procurement costs as a result of tight supplies principally inMexico . Selling, General and Administrative Expenses. Selling, general and administrative expenses increased$0.7 million from$200.8 million in 2018 to$201.5 million in 2019. The increase was principally due to higher selling, marketing and administrative expenses inNorth America primarily as a result of the Mann Packing acquisition in lateFebruary 2018 combined with an increase in the allowance for bad debt in theMiddle East . Partially offsetting this increase were lower promotional and administrative expenses inAsia due to cost savings initiatives. Gain on Disposal of Property, Plant and Equipment, Net. The gain on disposal of property, plant and equipment of$18.6 million during 2019 primarily related to the sale of surplus land inFlorida and a refrigerated vessel. Partially offsetting these gains was the loss on disposal of low-yielding banana plants inCosta Rica in order to replant and improve productivity and other losses on disposal of surplus assets. The gain on disposal of property, plant and equipment of$7.1 million in 2018 consisted primarily of the gain on the sale of surplus land in theUnited Kingdom , the gain on the sale of a refrigerated vessel and the gain on the sale of surplus plant and equipment principally inChile ,Brazil andthe Philippines .Goodwill and Trademark Impairment. In 2019, we incurred$0.3 million for impairment of the Del Monte® perpetual, royalty-free brand name license for beverage products in theUnited Kingdom due to lower than expected sales volume and pricing. In 2018, we incurred$11.3 million for impairment of the Del Monte® perpetual, royalty-free brand name license for prepared food and beverage products inEurope , theMiddle East ,Africa and certain Central Asian countries due to lower than expected sales volume and pricing related to our prepared food products. Asset Impairment and Other Charges, Net. Asset impairment and other charges, net, was$9.1 million in 2019 as compared with$42.3 million in 2018. Asset impairments and other charges, net, for 2019 were primarily comprised of: •$5.2 million in asset impairments and other charges related to low-producing areas in our existing banana operations inthe Philippines ; •$0.5 million in other costs incurred related to the Mann Packing voluntary recall of a series of vegetable products during the fourth quarter of 2019; and •$2.9 million in asset impairment charges related to our equity investment in Purple Carrot. Asset impairments and other charges, net, for 2018 were primarily comprised of the following: •$32.3 million in asset impairment and other charges related to our decision to abandon certain low-yield areas in our banana operation inthe Philippines ; •$4.1 million in acquisition-related expenses, principally the Mann Packing acquisition; •$2.4 million in severance expense related to restructuring as a result of cost reduction initiatives in our Chilean non-tropical fruit operation; •$2.3 million in asset impairment charges related to underutilized assets inCentral America in the banana and fresh and value-added products segments; •$1.8 million in asset impairment charges related to cost reduction initiatives inCosta Rica in the banana segment; and 42 -------------------------------------------------------------------------------- Table of Contents •a credit of$(0.9) million related to insurance proceeds due to damage from inclement weather in one of ourCalifornia facilities related to the fresh and value-added products segment. Operating Income. Operating income was$114.1 million in 2019 compared with operating income of$38.6 million in 2018, an increase of$75.5 million . The increase in operating income was due to: higher gross profit; higher gain on disposal of property, plant and equipment; lower asset, goodwill and trademark impairment and other charges, net; partially offset by higher selling, general and administrative expenses. Interest Expense. Interest expense was$25.4 million in 2019 compared with$23.6 million in 2018, an increase of$1.8 million . The increase was primarily due to higher borrowing rates, partially offset by lower average loan balances. Other Expense (Income), Net. Other expense (income), net, was income of$(0.9) million for 2019 compared with expense of$15.7 million in 2018. The increase in other expense (income), net, of$16.6 million was principally attributable to a net gain of$16.0 million as a result of the settlement of a business transaction litigation combined with lower foreign exchange losses during 2019 as compared with 2018. Provision for Income Taxes. Provision for income taxes was$21.4 million in 2019 compared with$16.1 million in 2018. The increase in the provision for income taxes of$5.3 million is primarily due to higher taxable earnings in certain jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
We are a holding company with limited business operations of our own. Our only significant asset is 100% of 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 expend 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:
Year ended
January 1, 2021 December 27, 2019 December 28, 2018 Summary cash flow information: (in thousands) Net cash provided by operating activities $ 180.6 $ 169.1 $ 246.6 Net cash used in investing activities (108.8) (52.2) (494.8) Net cash (used in) provided by financing activities (85.8) (108.9) 242.0 Effect of exchange rate changes on cash (2.8) 4.0 2.4 Net (decrease) increase in cash and cash equivalents (16.8) 12.0 (3.8) Cash and cash equivalents, beginning 33.3 21.3 25.1 Cash and cash equivalents, ending $ 16.5 $ 33.3 $ 21.3 Operating activities Net cash provided by operating activities was$180.6 million for 2020 compared with$169.1 million for 2019, an increase of$11.5 million . The increase in net cash provided by operating activities in 2020 compared to 2019 was principally attributable to higher balances of accounts payable and accrued expenses and lower levels of inventory, principally due to our optimization efforts associated with working capital. Partially offsetting this increase was lower net income in 2020 compared with 2019 and higher levels of prepaid expenses and other current assets. Net cash provided by operating activities was$169.1 million for 2019 compared with$246.6 million for 2018, a decrease of$77.5 million . The decrease in net cash provided by operating activities in 2019 compared to 2018 was principally attributable 43 -------------------------------------------------------------------------------- Table of Contents to lower balances of accounts payable and accrued expenses, primarily as a result of the timing of year end payments to suppliers inNorth America . Partially offsetting this decrease was higher net income and lower levels of advances to suppliers and inventory. The lower levels of advances to suppliers and inventory were principally due to lower quantities and cost of paper inCentral America and lower levels of canned deciduous products as a result of lower production inGreece . Net cash provided by operating activities was$246.6 million for 2018 compared with$194.2 million for 2017, an increase of$52.4 million . The increase in net cash provided by operating activities in 2018 compared to 2017 was principally attributable to higher accounts payable and accrued expenses, primarily as a result of improved cash management including more beneficial payment terms with suppliers. Partially offsetting this increase was lower net income and higher accounts receivables, inventories and prepaid expenses and other current assets. Working capital was$457.5 million atJanuary 1, 2021 compared with$488.6 million atDecember 27, 2019 , a decrease of$31.1 million . The decrease in working capital was mainly due to lower levels of current assets, primarily lower levels of inventory inKenya and inNorth America . Partially offsetting this decrease were higher levels of prepaid and other current assets, higher levels of assets held for sale, and lower levels of accounts payable and accrued expenses. Investing activities Net cash used in investing activities was$108.8 million for 2020,$52.2 million for 2019 and$494.8 million for 2018. Net cash used in investing activities for 2020 consisted of$150.0 million in capital expenditures, partially offset by$39.5 million in proceeds from sales of property, plant and equipment. Net cash used in investing activities for 2019 consisted primarily of$122.3 million in capital expenditures, partially offset by proceeds from sales of property, plant, and equipment of$69.4 million . By comparison, net cash used in investing activities for 2018 consisted primarily of$150.5 million in capital expenditures and purchase of businesses, net of cash acquired of$357.5 million , for our acquisition of Mann Packing, partially offset by proceeds from sales of property, plant, and equipment of$17.4 million . Capital expenditures related to the fresh and value-added products segment accounted for$46.5 million , or 31%, of our 2020 capital expenditures and$77.5 million , or 63%, of our 2019 capital expenditures. During 2020, capital expenditures primarily related to projects initiated in 2019 including: (1) finalization of our new manufacturing facility inGonzales, California ; (2) expansion and improvements to fresh cut production facilities inJapan ,North America , andEurope ; (3) improvements to our pineapple operations inCentral America and to our non-tropical operations inChile ; and (4) information technology initiatives inNorth America . During 2019, these capital expenditures primarily related to (1) a new avocado packing and sorting facility inMexico ; (2) a new fresh-cut fruit production facility inJapan ; (3) expansion and improvements to the Mann Packing facilities, including the construction of the new manufacturing plant inGonzales, California ; (4) a new fresh pineapple packing facility inKenya ; (5) improvements to our pineapple production operations inCosta Rica andthe Philippines and to our non-tropical operations inChile ; and (6) expansion and improvements to our fresh-cut facilities inNorth America and information technology initiatives. Capital expenditures related to the banana segment accounted for$12.0 million , or 8%, of total 2020 capital expenditures and$25.5 million , or 21% of total 2019 capital expenditures. During both years, these capital expenditures consisted primarily of (1) expansion and improvements to our production operations inCentral America , including our continuing development of our newPanama operations; and (2) improvements to our distribution centers and for information technology initiatives. Capital expenditures related to the other products and services segment accounted for$0.7 million , less than 1%, of our 2020 capital expenditures and$5.0 million , or 4%, of our 2019 capital expenditures. During 2020 and 2019, these capital expenditures primarily related to improvements to our Jordanian poultry operations. During 2017 and 2018, we entered into definitive agreements for the building of six new refrigerated container ships. We received four of the ships during, and one ship subsequent to, fiscal 2020. We expect the final ship to be delivered during our 2021 fiscal year. We anticipate that this shipbuilding program will lead to the replacement of our entireU.S. east coast fleet of vessels. We made payments of$89.0 million in 2020,$12.2 million in 2019, and$36.4 million in 2018 in connection with these ships and we expect to make additional payments totaling$41.3 million in 2021. We expect that these capital expenditures will benefit both our fresh and value-added products segment and our banana segment. In addition to the ship building program, our principal capital expenditures planned for 2021 consist primarily of expansion and improvements to our operations and production facilities inPanama ,Costa Rica ,Guatemala ,Kenya , andthe Philippines . We also plan capital expenditures for expansion and improvements of our distribution and fresh-cut facilities and technology initiatives inthe United States ,Europe andAsia that will benefit our banana and fresh and value added segments. We expect to fund these capital expenditures through operating cash flows and bank borrowings. 44 -------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash used in financing activities was$85.8 million for 2020. Net cash used by financing activities was$108.9 million in 2019 while net cash provided by financing activities was$242.0 million for 2018. Net cash used in financing activities for 2020 consisted primarily of net payments on long-term debt of$45.0 million , repurchase and retirement of ordinary shares of$20.8 million , and dividends paid of$14.3 million . Net cash used by financing activities for 2019 consisted primarily of net payments on long-term debt of$74.8 million , repurchase and retirement of ordinary shares of$17.9 million and$6.7 million in dividends paid. Net cash provided by financing activities for 2018 consisted primarily of net borrowings on long term debt of$305.0 million , partially offset by$29.4 million in repurchase and retirement of ordinary shares and$29.0 million in dividends paid.
Debt Instruments and Debt Service Requirements
OnOctober 1, 2019 , we and certain of our subsidiaries entered into a Second Amended and Restated Credit Agreement (the "Second A&R Credit Agreement") with the financial institutions and other lenders named therein, includingBank of America, N.A . as administrative agent andBofA Securities, Inc. as sole lead arranger and sole bookrunner. The Second A&R Credit Agreement provides for a five-year,$1.1 billion syndicated senior unsecured revolving credit facility (the "Revolving Credit Facility") maturing onOctober 1, 2024 , which replaces our prior revolving credit facility, which had been scheduled to expire onApril 15, 2020 (the "Prior Credit Facility"). Certain of our direct and indirect subsidiaries have guaranteed the obligations under the Second A&R Credit Agreement. We intend to use funds borrowed under the Second A&R Credit Agreement from time to time for general corporate purposes, working capital, capital expenditures and other investment opportunities. Pursuant to the terms of the Second A&R Credit Agreement, amounts borrowed under the Revolving Credit Facility accrue interest, at our election, at either (i) the Eurocurrency Rate (as defined in the Second A&R Credit Agreement) plus a margin that ranges from 1.0% to 1.5% or (ii) the Base Rate (as defined in the Second A&R Credit Agreement) plus a margin that ranges from 0% to 0.5%, in each case based on our Consolidated Leverage Ratio (as defined in the Second A&R Credit Agreement). The Second A&R Credit Agreement revised the interest rate grid to provide for five pricing levels for interest rate margins, as compared to three pricing levels in the Prior Credit Facility. AtJanuary 1, 2021 , we had borrowings of$541.7 million outstanding under the Revolving Credit Facility bearing interest at a per annum rate of 1.59%. In addition, we pay an unused commitment fee. The Second A&R Credit Agreement provides for an accordion feature that permits us, without the consent of the other lenders, to request that one or more lenders provide us with increases in revolving credit facility or term loans up to an aggregate of$300 million ("Incremental Increases"). The aggregate amount of Incremental Increases can be further increased to the extent that after giving effect to the proposed increase in revolving credit facility commitments or term loans our Consolidated Leverage Ratio, on a pro forma basis, would not exceed 2.5 to 1.0. Our ability to request such increases in the Revolving Credit Facility or term loans is subject to its compliance with customary conditions set forth in the Second A&R Credit Agreement including compliance, on a pro forma basis, with the financial covenants and ratios set forth therein. Upon our request, each lender may decide, in its sole discretion, whether to increase all or a portion of its revolving credit facility commitment or provide term loans. The Second A&R Credit Agreement requires us to comply with certain financial and other covenants. Specifically, the Second A&R Credit Agreement requires us to maintain a 1) Consolidated Leverage Ratio of not more than 3.5 to 1.0 at any time during any period of four consecutive fiscal quarters, subject to certain exceptions and 2) a minimum Consolidated Interest Coverage Ratio of not less than 2.25 to 1.0 as of the end of any fiscal quarter. Additionally, consistent with the prior credit agreement, the Second A&R Credit Agreement requires us to comply with certain other covenants, including limitations on capital expenditures, stock repurchases, the amount of dividends that can be paid in the future, the amount and types of liens and indebtedness, material asset sales, and mergers. However, certain of these covenants were revised under the Second A&R Credit Agreement, including 1) the restricted payments covenant which was revised to permit us to declare or pay cash dividends in any fiscal year up to an amount that does not exceed the greater of (i) an amount equal to the greater of (A) 50% of the Consolidated Net Income (as defined in the Second A&R Credit Agreement) for the immediately preceding fiscal year or (B)$25 million or (ii) the greatest amount which would not cause the Consolidated Leverage Ratio (determined on a pro forma basis) to exceed 3.25 to 1.00 and (2) the restricted payments covenant which was revised to provide an annual allowance for stock repurchases to be an amount not exceeding the greater of (i)$150 million in the aggregate or (ii) the amount that, after giving pro forma effect thereto and any related borrowings, will not cause the Consolidated Leverage Ratio to exceed 3.25 to 1.00. As ofJanuary 1, 2021 , we were in compliance with all of the financial and other covenants contained in the Second A&R Credit Agreement.
We have a renewable 364-day,
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AtJanuary 1, 2021 , we had$582.8 million of borrowing availability under committed working capital facilities, primarily under the Revolving Credit Facility. AtJanuary 1, 2021 , we applied$10.3 million to letters of credit under theRabobank Nederland and Bank of America revolving credit facilities, in respect of certain contingent obligations and other governmental agencies and purchases of equipment and raw material guarantees and other trade related letters of credit. We also had$18.4 million in other letters of credit and bank guarantees not included in theRabobank letter of credit orBank of America revolving credit facilities. While we believe that our cash on hand, borrowing capacity available under our Revolving Credit Facility, and cash flows from operations for the next twelve months will be sufficient to service our outstanding debt during the next twelve months, we cannot predict whether future developments associated with the COVID-19 pandemic will materially adversely affect our long-term liquidity position. During 2020, we took several steps to conserve our liquidity position including reducing our quarterly cash dividend fromten cents ($0.10 ) per share in the first quarter of 2020 tofive cents ($0.05 ) per share in the second and third quarters of 2020 and delaying certain of our planned capital expenditures to 2021. As a result of our improved cash flow, our Board of Directors was able to declare an increased quarterly cash dividend often cents ($0.10 ) per share in the fourth quarter of 2020 and the first quarter of 2021. Our liquidity assumptions, the adequacy of our available funding sources, and our ability to meet our Revolving Credit Facility covenants are dependent on many additional factors, including those set forth in Part II. Item 1A, "Risk Factors" of this annual report Form 10-K. Derivatives We are exposed to fluctuations in currency exchange rates against theU.S. dollar on our results of operations and financial condition and we mitigate that exposure by entering into foreign currency forward contracts. Certain of our subsidiaries periodically enter into foreign currency forward contracts in order to hedge portions of forecasted sales or cost of sales denominated in foreign currencies with forward contracts and options, which generally expire within one year. The fair value of our derivatives related to our foreign currency cash flow hedges was in a net liability position of$6.9 million as ofJanuary 1, 2021 compared to a net asset position of$1 million as ofDecember 27, 2019 due to relative strengthening or weakening of exchange rates when compared to contracted rates. We are exposed to fluctuations in variable interest rates on our results of operations and financial condition, and we mitigate that exposure by entering into interest rate swaps from time to time. During 2018, we entered into interest rate swaps in order to hedge the risk of the fluctuation on future interest payments related to a portion of our variable rate LIBOR-based borrowings through 2028. The fair value of the derivatives related to our interest rate swap cash flow hedges was in a net liability position of$50.6 million as ofJanuary 1, 2021 compared to$30.3 million as ofDecember 27, 2019 . The increase in our liability position is due to the relative weakening of variable interest rates when compared to our contracted rates. We are exposed to fluctuations in bunker fuel prices on our results of operations and financial condition, and we mitigate that exposure by entering into bunker fuel swap agreements which permit us to lock in bunker fuel prices. During fiscal 2020, one of our subsidiaries entered into bunker fuel swap agreements in order to hedge portions of our fuel costs incurred by our owned and chartered vessels throughout 2020 and 2021. The fair value of our bunker fuel swap cash flow hedges was a net asset position of$1.4 million as ofJanuary 1, 2021 . During fiscal 2020, we dedesignated certain portions of our bunker fuel cash flow hedges due to decreases in our forecasted fuel consumption for certain fuel types which was partially driven by the delay of the receipt of three of our six new refrigerated container vessels due to the COVID-19 pandemic. The fair value of the dedesignated bunker fuel swap contracts was a net asset of$1.0 million as ofJanuary 1, 2021 . We enter into derivative instruments with counterparties that are highly rated and do not expect a deterioration of our counterparty's credit ratings; however, the deterioration of our counterparty's credit ratings would affect the Consolidated Financial Statements in the recognition of the fair value of the hedges that would be transferred to earnings as the contracts settle. We expect that$15.9 million of the net fair value of designated and dedesignated hedges recognized as a net loss in accumulated other comprehensive income ("AOCI") will be transferred to earnings during the next 12 months, and the remaining net loss of$40.0 million in AOCI over a period of 8 years, along with the earnings effect of the related forecasted transactions.
Other
We are involved in several legal and environmental matters that, if not resolved in our favor, could require significant cash outlays and could have a material adverse effect on our results of operations, financial condition and liquidity. See Item 1. Business Overview under "Environmental Proceedings" and Item 3. Legal Proceedings and Note 15, "Commitments and Contingencies" to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data. 46
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Commitments and Contractual Obligations
The following details information with respect to our contractual obligations as ofJanuary 1, 2021 . (U.S. dollars in millions) Less than More than Contractual obligations by period Total 1 year 1 - 3 years 3 - 5 years 5 years Fruit purchase agreements$ 1,145.3 $ 304.1
225.5 186.5 26.5 6.6 5.9 Operating leases and charter agreements 205.0 36.7 55.5 41.4 71.4 Finance lease obligations 0.3 0.2 0.1 - - Long-term debt 541.7 - - 541.7 - Interest on long-term debt and finance lease obligations (1) 66.5 10.8 32.3 23.4 - Retirement benefits 99.1 11.4 19.2 21.3 47.2 Uncertain tax positions 5.1 0.1 2.6 - 2.4 Totals$ 2,288.5 $ 549.8 $ 665.9 $ 931.8 $ 141.0
(1) We utilize a variable interest rate on our long-term debt, and for presentation purposes we have used an assumed average rate of 2.2%.
We have agreements to purchase the entire or partial production of certain products of our independent growers primarily inGuatemala ,Costa Rica ,Philippines ,Ecuador ,Chile , andColombia that meet our quality standards. Total purchases under these agreements amounted to$744.9 million for 2020,$691.8 million for 2019, and$763.9 million for 2018. In addition, as discussed above, during 2017 and 2018 we entered into definitive agreements for the building of six new refrigerated container ships. We received four of the ships during, and one ship subsequent to, fiscal 2020. We expect the final ship to be delivered during our 2021 fiscal year. Since entering into the agreements and through fiscal 2020, we expended$137.6 million on these vessels. The agreement requires a remaining payment of approximately$41.3 million in 2021 which is included within the purchase obligations line item in the table above. In 2017, we executed a contract with theRepublic of Panama and will invest a minimum of$100.0 million over a period of seven years upon the delivery of a minimum of approximately 10,000 acres of land. Our investment commitment contemplates development of the leased land for banana production, refurbishment of packing plants, buildings and other banana facilities and preparation of banana infrastructure including land, roads and water systems. The contract is for an initial period of 20 years and renews automatically for an additional 20 year period. During the years 2018 and 2019, we received 100% of the land from individual land owners and made a lease prepayment of$13.3 million . ThroughJanuary 1, 2021 , we have invested approximately$40.9 million in this project, inclusive of the$13.3 million lease prepayment. We are pending receipt of approximately 90% of the total lands belonging to the Government ofPanama .
Critical Accounting Policies and Estimates
We believe the following accounting polices used in the preparation of our Consolidated Financial Statements may involve a high degree of judgment and complexity and could have a material effect on our Consolidated Financial Statements.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. We record revenue based on a five-step model in accordance with the accounting guidance. For our customer contracts, we identify the performance obligations (products or services), determine the transaction price, allocate the contract transaction price to the performance obligations, and recognize the revenue when the performance obligation is fulfilled, which is when the product is shipped to or received by the customer, depending on the specific terms of the arrangement. Our revenues are recorded at a point in time. Product sales are recorded net of variable consideration, such as provisions for returns, discounts and allowances. Such provisions are calculated using historical averages adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that 47 -------------------------------------------------------------------------------- Table of Contents there is a distinct good or service, in which case the expense is classified as selling, general, and administrative expense. Provisions for customer volume rebates are based on achieving a certain level of purchases and other performance criteria that are established on a program by program basis. These rebates are estimated based on the expected amount to be provided to the customers and are recognized as a reduction of revenue. We elected the practical expedient to expense incremental costs of obtaining a contract, if the contract period is for one year or less. These costs are included in selling, general and administrative expenses. Otherwise, incremental contract costs are recognized as an asset on our Consolidated Balance Sheets and amortized over time as promised goods and services are transferred to a customer. We account for shipping and handling costs as costs to fulfill a contract and not as performance obligations to our customers. We also exclude taxes collected from our customers, assessed by government authorities that are both imposed on and concurrent with a specific revenue-producing transaction, from our determination of the transaction price. We utilize a practical expedient and do not adjust the promised amount of consideration for the effects of a significant financing component if the period between the transfer of the promised good or service to a customer and the customer payment is one year or less.
Refer to Note 20, "Business Segment Data" for additional description of our reportable business segments and disaggregated revenue disclosures. Growing Crops
Expenditures on pineapple, melon, tomatoes and non-tropical fruit, including grapes, growing crops are valued at the lower of cost or market and are deferred and charged to cost of products sold when the related crop is harvested and sold. The deferred growing costs consist primarily of land preparation, cultivation, irrigation and fertilization costs. The deferred growing crop calculation is dependent on an estimate of harvest yields and future crop expenditures. If there is an unexpected decrease in estimated harvest yields, a write-down of deferred growing costs may be required.
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in a business combination. We assess goodwill at the reporting unit level on an annual basis as of the first day of our fourth quarter, or more frequently if events or changes in circumstances suggest that goodwill may not be recoverable. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. For those reporting units where events or change in circumstances indicate that potential impairment indicators exist, we perform a quantitative assessment to determine whether the carrying amount of goodwill can be recovered. When performing the annual goodwill impairment test, we may start with an optional qualitative assessment as allowed for under the accounting guidance. As part of the qualitative assessment, we evaluate all events and circumstances, including both positive and negative events, in their totality, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we bypass the qualitative assessment, or if the qualitative assessment indicates that a quantitative analysis should be performed, we evaluate goodwill for impairment by comparing the fair value of a reporting unit to its carrying value, including the associated goodwill. We generally estimate a reporting unit's fair value using a discounted cash flow approach which is dependent on several significant estimates and assumptions related to forecasts of future revenues, cost of sales, expenses and the weighted-average cost of capital for each reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. The impairment of goodwill is limited to the total amount of goodwill allocated to the reporting unit. Any adverse changes in the significant estimates and assumptions used in our goodwill impairment test could have a significant impact on the recoverability of goodwill and could have a material impact on our Consolidated Financial Statements. As part of the 2004Del Monte Foods acquisition, we also acquired perpetual, royalty-free licenses to use the Del Monte® brand for processed and/or canned food in more than 100 countries throughoutEurope ,Africa , theMiddle East and certain Central Asian countries. We can also produce, market and distribute certain prepared food products inNorth America based on our agreement with Del Monte Pacific utilizing the Del Monte® brand. This indefinite-lived intangible asset is not amortized but is reviewed for impairment as of the first day of the fourth quarter of each fiscal year, or sooner if impairment indicators arise. We generally estimate the fair value of our indefinite-lived intangible assets using a discounted cash flow approach. The fair value of the banana reporting unit's goodwill, prepared reporting unit's goodwill and the Del Monte® prepared food reporting unit's trade names and trademarks are sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of these assets. If the banana and the prepared food reporting unit do not 48 -------------------------------------------------------------------------------- Table of Contents perform to expected levels, the related goodwill and the Del Monte® trade names and trademarks associated with the prepared food reporting unit may be at risk for impairment in the future.
The following table highlights the sensitivities of the indefinite-lived
intangibles at risk as of
Prepared Food Reporting Unit Banana Del Monte® Reporting Unit Prepared Food Reporting Trade Names and Goodwill Unit Goodwill Trademarks Carrying value of indefinite-lived intangible assets $ 64.5 $ 48.8 $ 30.8 Approximate percentage by which the fair value exceeds the carrying value based on the annual impairment test 7.0 % 7.5 % 6.9 % Amount that a one percentage point increase in the discount rate and a 5% decrease in cash flows would cause the carrying value to exceed the fair value and trigger an impairment $ 64.5 $ 35.5 $ 2.2
As of
Impairment of Long-Lived Assets
We review long-lived assets (or asset groups) with identifiable cash flows for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that an asset is not recoverable, and the carrying amount of an asset exceeds the asset's fair value, we measure and record an impairment loss for the excess. The fair value of an asset is measured by either determining the expected future discounted cash flows of the asset or by independent appraisal.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end, based on enacted tax laws and statutory tax rates applicable to the year in which the differences are expected to affect taxable income. Valuation allowances are established when it is deemed more likely than not that some portion or all of the deferred tax assets will not be realized. We account for income tax uncertainties consistent with the ASC guidance included in "Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The ASC also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Contingencies
Estimated losses from contingencies are recognized if it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Gain contingencies are not reflected in the financial statements until realized. We use judgment in assessing whether a loss contingency is probable and estimable. Actual results may differ from these estimates.
Derivative Financial Instruments
We recognize the value of derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has 49 -------------------------------------------------------------------------------- Table of Contents been designated as a hedge and qualifies as part of a hedging relationship. The accounting also depends on the type of hedging relationship, whether a cash flow hedge, a fair value hedge, or hedge of a net investment in a foreign operation. We use derivative financial instruments primarily to reduce our exposure to adverse fluctuations in foreign exchange rates, variable interest rates and bunker fuel prices. Upon entry into a derivative instrument, we formally designate and document the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction. Derivatives are recorded in the Consolidated Balance Sheets at fair value in prepaid expenses and other current assets, other non-current assets, accounts payable and accrued expenses or other non-current liabilities, depending on whether the amount is an asset or liability and is of a short-term or long-term nature. We designate our derivative financial instruments as cash flow hedges. A cash flow hedge requires that the change in the fair value of a derivative instrument be recognized in other comprehensive income, a component of shareholders' equity, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. We also classify the cash flows from our cash flow hedges in the same category as the items being hedged on our Consolidated Statements of Cash Flows based on the fact that our cash flow hedges do not contain an other-than-insignificant financing element at inception. In the event that hedge accounting is discontinued, any changes in fair value of the associated derivatives since the date of dedesignation are recognized in other income (expense), net. Cash flows subsequent to the date of dedesignation are classified within investing activities in our Consolidated Statements of Cash Flows. Fair Value Measurements Fair value is measured as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In developing its fair value estimates, we use the following hierarchy:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data.
•Level 3 - Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows using our own estimates and assumptions or those expected to be used by market participants. We measure fair value for financial instruments, such as derivatives, on an ongoing basis. We measure fair value for non-financial assets when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets when indicators of impairment exist. Our asset impairments for certain long-lived assets including property, plant, and equipment are generally estimated using a market approach. The fair value of these assets are classified as Level 3 in the fair value hierarchy due to the mix of unobservable inputs utilized. Our impairments of goodwill and indefinite-lived intangible assets are generally estimated using an income or market approach, or a combination thereof. Due to the mix of unobservable inputs utilized, these measurements are usually classified as Level 3 in the fair value hierarchy.
New Accounting Pronouncements
For a description of new applicable accounting pronouncements, refer to Note 2, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.
Off-Balance Sheet Arrangements We are not involved in any off-balance sheet arrangements. 50
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