FRESH DEL MONTE PRODUCE INC. Overview
We are one of the world's leading vertically integrated producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, as well as a leading producer and marketer of prepared fruit and vegetables, juices, beverages and snacks inEurope ,Africa and theMiddle East . We market our products worldwide under the Del Monte® brand, a symbol of product innovation, quality, freshness and reliability since 1892. Our major sales markets are organized as follows:North America ,Europe (which includesKenya ), theMiddle East (which includesNorth Africa ) andAsia . Our global sourcing and logistics system allows us to provide regular delivery of consistently high-quality produce and value-added services to our customers. Our major producing operations are located in North, Central andSouth America ,Asia andAfrica . Our business is comprised of three reportable segments, two of which represent our primary businesses of fresh and value-added products and banana, and one that represents our other ancillary businesses. •Fresh and value-added products - includes pineapples, fresh-cut fruit, fresh-cut vegetables, 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-20210402_g1.jpg]]COVID-19 Pandemic Impact
InMarch 2020 , theWorld Health Organization declared the current outbreak of coronavirus ("COVID-19") a global pandemic. In response to the COVID-19 pandemic, we have taken various preventative and protective measures to support our team members, customers, suppliers, and local communities. These measures included additional operating procedures and safety protocols at our production facilities, activation of our supply chain contingency plans to mitigate service disruptions, and the implementation of remote working arrangements across various of our administrative locations. 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. The COVID-19 pandemic began having a material adverse impact on our results of operations during the first quarter of 2020 which has continued, to a lesser extent, into the first quarter of 2021. Government imposed mandatory closures and restrictions across various of our key global markets have resulted in volatile supply and demand conditions for certain of our products as well as reduced demand in our foodservice distribution channel, factors which continue to persist through the date of this report. During fiscal 2020, we were also negatively impacted by service cancellations and containers that could not clear at certain ports inAsia as well as increased expenses, particularly in our farming operations inCentral America where we incurred 29 -------------------------------------------------------------------------------- Table of Contents incremental costs to implement social distancing protocols and more frequent cleaning cycles. While service at the ports have improved during the current year, to the extent that various regions of the world implement significant shut-downs we could experience similar delays in 2021. 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 is currently underway, mass distribution is unlikely to occur until late 2021 or, in the case of certain other major countries we operate in, 2022. However, actual vaccination results are ultimately dependent on, among other factors, vaccine availability and their acceptance by individuals which are difficult to predict. Accordingly, the pace of the recovery from the COVID-19 pandemic as well as the potential for significant resurgences of the virus are not presently known. While we believe that we will ultimately emerge from these events well positioned for long-term growth, and have seen a lesser negative impact on our financial results thus far in fiscal 2021 when compared to prior year, the uncertainties with respect to the COVID-19 pandemic remain and, as such, we cannot reasonably estimate the duration or extent of its adverse impact on our business, operating results, and long-term liquidity position.
Refer to the "Results of Operations" and "Liquidity and Capital Resources" sections below 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 the quarter endedApril 2, 2021 , we have received cash proceeds of$42.4 million in connection with asset sales under the Optimization Program (approximately$40.0 million of which was received in our 2020 fiscal year). 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. We completed our move toGonzales in the third quarter of 2020, 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 which we expect to achieve by the end of fiscal 2021.
Income Taxes
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$146.6 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. Member States of theEuropean Union in which our European distributors operate have enacted, or are in the process of drafting, anti-hybrid legislation which may impact our ability to deduct the cost of certain purchases in those jurisdictions. We 30 -------------------------------------------------------------------------------- Table of Contents have analyzed the enacted and proposed draft legislation and have determined that the impact is not material to our consolidated financial results. In theU.S. , the new administration may implement substantial changes to fiscal and tax policies, which could include comprehensive tax reform. We cannot predict the impact, if any, of these potential changes to our business. However, it is possible that these changes could adversely affect our business, financial position and results of operations.
RESULTS OF OPERATIONS
Consolidated Financial Results
The following summarizes the more significant factors impacting our operating results for the quarter endedApril 2, 2021 (also referred to as the "first quarter of 2021") andMarch 27, 2020 (also referred to as the "first quarter of 2020"). Quarter ended April 2, March 27, 2021 2020 Net sales$ 1,088.3 $ 1,118.0 Gross profit 105.0 68.5 Selling, general and administrative expenses 48.9 52.7 Operating income 59.7 17.8Net Sales - Net sales for the first quarter of 2021 decreased$29.7 million compared with the first quarter of 2020. The decrease in net sales for the first quarter was attributable to lower net sales in our fresh and value-added products and banana business segments, partially offset by an increase in net sales in our other products and services segment. The overall decrease in net sales during the quarter was primarily the result of lower sales volumes in our fresh and value-added products and banana segments, partially due to the continued negative effect of the COVID-19 pandemic on our foodservice distribution channel, as well as the negative impact of hurricanes Eta and Iota which resulted in damages to our crops inGuatemala in the fourth quarter of 2020. The COVID-19 pandemic negatively impacted our net sales within the fresh and value-added products segment during the first quarter of 2021 by an estimated$19.4 million as based on historical trends in our foodservice distribution channel when compared to the prior year period. Gross Profit - Gross profit for the first quarter of 2021 increased$36.5 million when compared to the first quarter of 2020. The increase was driven by higher gross profit in all of our business segments. Our banana segment realized the most significant increase in gross profit, primarily driven by higher per unit sales prices which helped to mitigate the negative impact caused by hurricanes Eta and Iota in the fourth quarter of 2020 combined with lower per unit ocean freight costs. The overall increase in gross profit was partially offset by higher fruit production, procurement, and distribution costs per unit. Selling, General and Administrative Expenses - Selling, general and administrative expenses decreased$3.8 million in the first quarter of 2021 when compared with the first quarter of 2020. The decrease was primarily due to cost saving initiatives in ourNorth America region which resulted in reduced promotional expenses and lower selling and marketing costs. Gain on Disposal of Property, Plant and Equipment, Net - The gain on disposal of property, plant and equipment, net of$2.7 million during the first quarter of 2021 primarily related to a gain on the sale of a refrigerated vessel. The gain on disposal of property, plant and equipment, net during the first quarter of 2020 of$0.2 million primarily related to a gain on the sale of marine equipment. Asset Impairment and Other (Credits) Charges, Net - Asset impairment and other (credits) charges, net, were$(0.9) million during the first quarter of 2021, as compared with$(1.8) million during the first quarter of 2020. Asset impairment and other (credits) charges, net, for the first quarter of 2021 were primarily related to a$0.8 million insurance recovery associated with damages to certain of our banana segment fixed assets inGuatemala caused by hurricanes Eta and Iota in the fourth quarter of 2020. Asset impairment and other (credits) charges, net, for the first quarter of 2020 were primarily comprised of the following: •a$(4.0) million credit due to an insurance recovery related to the 2019 product recall in the fresh and value-added products segment; 31 -------------------------------------------------------------------------------- Table of Contents •a$1.3 million charge relating to a settlement with the California Air Resource Board, related to both the banana and fresh and value-added products segments; and •$0.9 million in asset impairment charges of leasehold improvements due to the relocation of a facility inCalifornia related to the fresh and value-added products segment. Operating Income - Operating income for the first quarter of 2021 increased by$41.9 million when compared with the first quarter of 2020. This increase was primarily due to higher gross profit and lower selling, general and administrative expenses.
Interest Expense - Interest expense for the first quarter of 2021 was flat when compared with the first quarter of 2020.
Other Expense (Income), Net - Other expense (income), net, was$2.1 million for the first quarter of 2021 as compared with$(0.8) million for the first quarter of 2020. The increase in other expense of$2.9 million was principally attributable to higher foreign exchange losses during the first quarter of 2021 as compared with the first quarter of 2020. The foreign exchange losses in the first quarter of 2021 were partially offset by gains associated with fuel derivatives no longer designated as hedging instruments. Provision for Income Taxes - Provision for income taxes was$11.0 million for the first quarter of 2021 compared to$0.3 million for the first quarter of 2020. The increase in the provision for income taxes of$10.7 million is primarily due to increased earnings in certain jurisdictions. The tax provision for the first quarter of 2020 also reflects a$1.7 million benefit relating to the NOL carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted onMarch 27, 2020 .
Financial Results by Segment
The following table presents net sales and gross profit by segment, and in each case, the percentage of the total represented thereby (U.S. dollars in millions): Quarter ended April 2, 2021 March 27, 2020 Segment Net Sales Gross Profit Net Sales Gross Profit Fresh and value-added products$ 631.0 58 %$ 51.6 49 %$ 660.9 59 %$ 42.5 62 % Banana 418.2 38 % 49.2 47 % 427.0 38 % 24.5 36 % Other products and services 39.1 4 % 4.2 4 % 30.1 3 % 1.5 2 % Totals$ 1,088.3 100 %$ 105.0 100 %$ 1,118.0 100 %$ 68.5 100 %
Fresh and value-added products
First Quarter of 2021 Compared with First Quarter of 2020
Net sales in the fresh and value-added products segment decreased$29.9 million , primarily as a result of lower net sales of melons, fresh-cut vegetables, vegetables, avocados and tomatoes. Partially offsetting the decrease were increases in net sales of pineapples and prepared food products. We estimate that the COVID-19 pandemic negatively impacted our net sales within the fresh and value-added products segment by an estimated$19.4 million as based on historical trends in our foodservice distribution channel when compared to the prior year period. •Melon net sales decreased primarily due to reduced sales volumes inNorth America as a result of lower volumes from ourGuatemala crops which were damaged by hurricanes Eta and Iota in the fourth quarter of 2020. The decrease in net sales was partially offset by higher per unit sales price. •Fresh-cut vegetable and vegetable net sales decreased primarily due to lower sales volume in our Mann Packing business inNorth America , mainly as a result of lower demand in our foodservice distribution channel driven by the continued impact of the COVID-19 pandemic which did not affect our first quarter of 2020 net sales until mid-March of last year. •Avocado net sales decreased primarily due to lower per unit sales prices inNorth America as a result of normalized industry supplies in the market when compared to the first quarter of 2020, partially offset by a 12% increase in sales volume. 32 -------------------------------------------------------------------------------- Table of Contents •Tomato net sales decreased due to lower sales volumes and per unit sales prices inNorth America , primarily due to lower demand in our foodservice distribution channel as a result of the continued negative impact of the COVID-19 pandemic. •Pineapple net sales increased across most of our regions primarily due to a 22% increase in worldwide sales volumes. Sales volumes in the first quarter of 2020 were negatively impacted by lower yields in our growing regions due to adverse weather conditions and by the negative impact on demand caused by the start of the COVID-19 pandemic. •Prepared food products net sales increased primarily inEurope , mainly driven by higher per unit sales prices of canned pineapples, canned non-tropical fruit and pineapple concentrate. Gross profit increased$9.1 million primarily due to higher gross profit on melons, prepared food products, avocados and pineapples. Partially offsetting the increase were decreases in vegetable, non-tropical fruit and fresh-cut vegetable gross profit. •Melon gross profit increased primarily inNorth America due to higher per unit sales prices of cantaloupes and lower ocean freight costs, partially offset by higher per unit product costs as a result of lower volumes due to the impact of the two hurricanes in the fourth quarter of 2020. •Prepared food products gross profit increased across most of our regions, primarily due to higher per unit sales prices. •Avocado gross profit increased inNorth America primarily benefiting from lower per unit procurement and production costs from ourMexico packing plant. •Pineapple gross profit increased primarily inEurope ,Asia and theMiddle East .Europe andAsia benefited from higher sales volumes and per unit sales prices compared to the first quarter of 2020 which was negatively impacted by the start of the COVID-19 pandemic, while theMiddle East realized higher per unit sales prices driven by product mix. •Fresh-cut vegetable and vegetable gross profit decreased primarily in our Mann Packing business inNorth America driven by higher per unit product costs as a result of lower sales volume. •Non-tropical fruit gross profit decreased primarily due to severe rainstorms which caused damages to certain of our farms inChile , resulting in$3.1 million in inventory write-offs. Additionally, non-tropical fruit gross profit inAsia decreased primarily due to lower per unit sales prices driven by excess industry supply. Banana
First Quarter of 2021 Compared with First Quarter of 2020
Net sales of bananas decreased by$8.8 million principally due to lower net sales inNorth America and theMiddle East , partially offset by higher net sales inAsia . Worldwide banana sales volume decreased 8% while pricing increased 7%. •North America banana net sales decreased due to lower sales volumes, partially offset by higher per unit sales prices. The higher per unit sales prices helped mitigate the negative impact caused by hurricanes Eta and Iota to our banana crops in the fourth quarter of 2020. •Middle East banana net sales decreased primarily due to lower sales volume and per unit sales prices. •Asia banana sales increased primarily due to improved demand compared to the first quarter of 2020 which was negatively impacted by the start of the COVID-19 pandemic. Gross profit in the banana segment increased$24.7 million , primarily driven by ourNorth America region and, to a lesser extent,Europe . The improved gross profit inNorth America andEurope was primarily driven by higher per unit sales prices and lower per unit ocean freight costs. Gross profit in the banana segment also reflects a$2.5 million insurance recovery associated with damages caused by the two hurricanes in the fourth quarter of 2020. Partially offsetting the increase in gross profit were higher per unit production and procurement costs, primarily inNorth America , compared to the first quarter of 2020. Other products and services First Quarter of 2021 Compared with First Quarter of 2020 Net sales and gross profit in the other products and services segment for the first quarter of 2021 increased compared to the first quarter of 2020 primarily due to higher sales of commercial cargo services and higher per unit sales prices in our Jordanian poultry business. 33
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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 (
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