Del Monte Corp 10-Q for FY2022 Q3
Del Monte Corp (DMC)
10-Q
2022-11-02
For: 2022-09-30
View Original
Added on
April 06, 2026
About this 10-Q
Del Monte Corp filed this 10-Q on November 2, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.05B
- up 4.8% from $1B a year earlier
- Net income
- $33.3M
- up 2461.5% from net income of $1.3M a year earlier
- Diluted EPS
- $0.69
- up 2200.0% from $0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————————
FORM 10-Q
———————————
(Mark One)
For the quarterly period ended September 30, 2022
OR
For the transition period from to
(Commission file number)
———————————
(Exact Name of Registrant as Specified in Its Charter)
———————————
| N/A | |||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S Employer Identification No.) | ||||||||||
| Grand Cayman, | |||||||||||
| N/A | |||||||||||
| (Address of Registrant’s Principal Executive Office) | (Zip Code) | ||||||||||
(305 ) 520-8400
(Registrant’s telephone number including area code)
Please send copies of notices and communications from the Securities and Exchange Commission to:
c/o Del Monte Fresh Produce Company
241 Sevilla Avenue
Coral Gables, Florida 33134
(Address of Registrant’s U.S. Executive Office)
———————————
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | ||||||||||
| Smaller reporting company | |||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 21, 2022, there were 47,847,101 ordinary shares of Fresh Del Monte Produce Inc. issued and outstanding.
TABLE OF CONTENTS
| Page | ||||||||
| PART I: FINANCIAL INFORMATION | ||||||||
| PART II. OTHER INFORMATION | ||||||||
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(U.S. dollars in millions, except share and per share data)
| September 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Trade accounts receivable, net of allowance of $ | |||||||||||
Other accounts receivable, net of allowance of $ | |||||||||||
| Inventories, net | |||||||||||
| Assets held for sale | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Investments in and advances to unconsolidated companies | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders' equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Current maturities of debt and finance leases | |||||||||||
| Current maturities of operating leases | |||||||||||
| Income taxes and other taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt and finance leases | |||||||||||
| Retirement benefits | |||||||||||
| Deferred income taxes | |||||||||||
| Operating leases, less current maturities | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (See note 9) | |||||||||||
| Redeemable noncontrolling interest | |||||||||||
| Shareholders' equity: | |||||||||||
Preferred shares, $ authorized; | |||||||||||
Ordinary shares, $ | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total Fresh Del Monte Produce Inc. shareholders' equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total shareholders' equity | |||||||||||
Total liabilities, redeemable noncontrolling interest and shareholders' equity | $ | $ | |||||||||
See accompanying notes.
1
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(U.S. dollars in millions, except share and per share data)
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Gain (loss) on disposal of property, plant and equipment, net | ( | ||||||||||||||||||||||
| Asset impairment and other (credits) charges, net | ( | ( | ( | ||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Other expense, net | |||||||||||||||||||||||
| Income before income taxes | ( | ||||||||||||||||||||||
| Income tax provision (benefit) | ( | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Less: Net (loss) income attributable to redeemable and noncontrolling interests | ( | ( | ( | ||||||||||||||||||||
| Net income attributable to Fresh Del Monte Produce Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Net income per ordinary share attributable to Fresh Del Monte Produce Inc. - Basic | $ | $ | $ | $ | |||||||||||||||||||
| Net income per ordinary share attributable to Fresh Del Monte Produce Inc. - Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Dividends declared per ordinary share | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of ordinary shares: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes.
2
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(U.S. dollars in millions)
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Net unrealized gain (loss) on derivatives, net of tax | ( | ||||||||||||||||||||||
| Net unrealized foreign currency translation loss | ( | ( | ( | ( | |||||||||||||||||||
| Net change in retirement benefit adjustment, net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ||||||||||||||||||
| Less: Comprehensive (loss) income attributable to redeemable and noncontrolling interests | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income (loss) attributable to Fresh Del Monte Produce Inc. | $ | $ | ( | $ | $ | ||||||||||||||||||
See accompanying notes.
3
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(U.S. dollars in millions)
| Nine months ended | |||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Share-based compensation expense | |||||||||||
| Asset impairments | |||||||||||
| Change in uncertain tax positions | |||||||||||
| Loss (gain) on disposal of property, plant and equipment | ( | ||||||||||
| Deferred income taxes | ( | ||||||||||
| Adjustment of Kunia Well Site accrual | ( | ||||||||||
| Other, net | ( | ||||||||||
Changes in operating assets and liabilities | |||||||||||
| Receivables | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Other assets and liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sales of property, plant and equipment | |||||||||||
| Cash (paid) received from settlement of derivatives not designated as hedges | ( | ||||||||||
| Investments in unconsolidated companies | ( | ( | |||||||||
| Other investing activities | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Proceeds from debt | |||||||||||
| Payments on debt | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Share-based awards settled in cash for taxes | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Other financing activities | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | |||||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents, beginning | |||||||||||
| Cash and cash equivalents, ending | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
| Non-cash financing and investing activities: | |||||||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | $ | |||||||||
| Dividends on restricted stock units | $ | $ | |||||||||
See accompanying notes.
4
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Unaudited) (U.S. dollars in millions, except share data)
| Ordinary Shares Outstanding | Ordinary Shares | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Fresh Del Monte Produce Inc. Shareholders' Equity | Noncontrolling Interests | Total Shareholders' Equity | Redeemable Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Disposal of noncontrolling interest | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | ( | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation loss | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 1, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Exercises of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of noncontrolling interest | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation loss | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 1, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment of noncontrolling interest | — | — | — | — | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation loss | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
5
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Unaudited) (U.S. dollars in millions, except share data)
| Ordinary Shares Outstanding | Ordinary Shares | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Fresh Del Monte Produce Inc. Shareholders' Equity | Noncontrolling Interests | Total Shareholders' Equity | Redeemable Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | ( | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation loss | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 2, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Exercises of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interests | — | — | — | — | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivatives, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation gain | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at July 2, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Exercises of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivatives, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation loss | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
6
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. General
Reference in this Report to “Fresh Del Monte”, “we”, “our” and “us” and the “Company” refer to Fresh Del Monte Produce Inc. and its subsidiaries, unless the context indicates otherwise.
Nature of Business
We were incorporated under the laws of the Cayman Islands in 1996. We are one of the world’s leading vertically integrated producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, as well as a leading producer and marketer of prepared fruit and vegetables, juices, beverages and snacks in Europe, Africa and the Middle East. We market our products worldwide under the Del Monte® brand, a symbol of product innovation, quality, freshness and reliability since 1892. Our major sales markets are organized as follows: North America, Europe, the Middle East (which includes North Africa) and Asia. Our global sourcing and logistics system allows us to provide regular delivery of consistently high-quality produce and value-added services to our customers. Our major producing operations are located in North, Central and South America, Asia and Africa. Our products are sourced from company-owned operations, through supply contracts with independent growers, and through joint venture arrangements.
Our business is comprised of three reportable segments, two of which represent our primary businesses of fresh and value-added products and banana, and one that represents our other ancillary businesses.
•Fresh and value-added products - includes pineapples, fresh-cut fruit, fresh-cut vegetables (which includes fresh-cut salads), melons, vegetables, non-tropical fruit (including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries and kiwis), other fruit and vegetables, avocados, and prepared foods (including prepared fruit and vegetables, juices, other beverages, and meals and snacks).
•Banana
•Other products and services - includes our ancillary businesses consisting of sales of poultry and meat products, a plastic product business, and third-party freight services.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements for the quarter and nine months ended September 30, 2022 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2022 are subject to significant seasonal variations and are not necessarily indicative of the results that may be expected for the year ending December 30, 2022. For further information, refer to the Consolidated Financial Statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 31, 2021.
We are required to evaluate events occurring after September 30, 2022 for recognition and disclosure in the unaudited Consolidated Financial Statements for the quarter and nine months ended September 30, 2022. Events are evaluated based on whether they represent information existing as of September 30, 2022, which require recognition in the unaudited Consolidated Financial Statements, or new events occurring after September 30, 2022 which do not require recognition but require disclosure if the event is significant to the unaudited Consolidated Financial Statements. We evaluated events occurring subsequent to September 30, 2022 through the date of issuance of these unaudited Consolidated Financial Statements.
Certain reclassification of prior period balances have been made to conform to current presentation. Refer to Note 12. Business Segment Data for further information.
7
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
2. Recently Issued Accounting Pronouncements
8
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
3. Asset Impairment and Other (Credits) Charges, Net
The following represents a summary of asset impairment and other (credits) charges, net recorded during the quarters and nine months ended September 30, 2022 and October 1, 2021 (U.S. dollars in millions):
| Quarter ended | Nine months ended | ||||||||||||||||||||||||||||||||||
| September 30, 2022 | September 30, 2022 | ||||||||||||||||||||||||||||||||||
| Long-lived and other asset impairment | Exit activity and other (credits) charges | Total | Long-lived and other asset impairment | Exit activity and other (credits) charges | Total | ||||||||||||||||||||||||||||||
| Banana segment: | |||||||||||||||||||||||||||||||||||
Exit costs related to European facility(1) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Fresh and value-added products segment: | |||||||||||||||||||||||||||||||||||
Adjustment of Kunia Well Site environmental liability in Hawaii(2) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Impairment of South America farm and other charges | |||||||||||||||||||||||||||||||||||
| Other fresh and value-added products segment charges | |||||||||||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||||||||
| Former President/COO severance expense | |||||||||||||||||||||||||||||||||||
Total asset impairment and other (credits) charges, net | $ | $ | ( | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
| Quarter ended | Nine months ended | ||||||||||||||||||||||||||||||||||
| October 1, 2021 | October 1, 2021 | ||||||||||||||||||||||||||||||||||
| Long-lived and other asset impairment | Exit activity and other (credits) charges | Total | Long-lived and other asset impairment | Exit activity and other (credits) charges | Total | ||||||||||||||||||||||||||||||
| Banana segment: | |||||||||||||||||||||||||||||||||||
Insurance recovery related to hurricanes(3) | $ | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Philippines asset impairment of low-yield area | |||||||||||||||||||||||||||||||||||
| Fresh and value-added products segment: | |||||||||||||||||||||||||||||||||||
Exit costs related to European facility(1) | ( | ( | |||||||||||||||||||||||||||||||||
| Other fresh and value-added products segment charges | ( | ( | |||||||||||||||||||||||||||||||||
Total asset impairment and other (credits) charges, net | $ | $ | ( | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
(1) $0.4 million and $0.3 million charge for the nine months ended September 30, 2022 and October 1, 2021, respectively, primarily related to severance expenses incurred in connection with the planned exits from two facilities in Europe.
(2) $(9.9 ) million reduction in our environmental liability related to the Kunia Well Site clean-up. Refer to Note 9, “Commitments and contingencies,” for further information.
(3) $(0.8 ) million insurance recovery for the nine months ended October 1, 2021 associated with damage to certain of our banana fixed assets in Guatemala caused by hurricanes Eta and Iota in the fourth quarter of 2020.
9
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
4. Income Taxes
In connection with the examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately $144.3 million (including interest and penalties) for tax years 2012 through 2016. We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as we believe that the proposed adjustments are without technical merit.
In one of the foreign jurisdictions, we are currently contesting tax assessments related to the 2012-2015 audit years and the 2016 audit year in both the administrative court and the judicial court. During 2019 and 2020, we filed actions contesting the tax assessment in the administrative office. Our initial challenge to each of these tax assessments was rejected, and we subsequently lost our appeals at the administrative court. We have subsequently filed actions to contest each of these tax assessments in the country’s judicial courts. In addition, we have filed a request for injunction to the judicial court to stay the tax authorities' collection efforts for these two tax assessments, pending final judicial decisions. The court granted our injunction with respect to the 2016 audit year, however denied our injunction with respect to the 2012-2015 audit years. We timely appealed the denial of the injunction, and on August 10, 2022 the appellate court overturned the denial and granted our injunction for the 2012-2015 audit years. Pursuant to local law, we registered real estate collateral with an approximate fair market value of $6.0 million in connection with the grant of the 2016 audit year injunction. This real estate collateral has a net book value of $3.8 million as of the quarter ended September 30, 2022. In addition, in connection with the grant of the 2012-2015 audit year injunction, we registered real estate collateral with an approximate fair market value of $24.0 million, and a net book value of $4.6 million as of the quarter ended September 30, 2022. The registration of this real estate collateral does not affect our operations in the country.
In the other foreign jurisdiction, the administrative court denied our appeal, and on March 4, 2020 we filed an action in the judicial court to contest the administrative court's decision. The case is still pending.
We will continue to vigorously contest the adjustments and to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process.
Income tax provision (benefit) was $3.3 million for the quarter ended September 30, 2022 compared with $(6.6 ) million for the quarter ended October 1, 2021, and was $13.9 million for the nine months ended September 30, 2022 compared with $9.1 million for the nine months ended October 1, 2021. The increase in the income tax provision in both the quarter and nine months ended September 30, 2022 was primarily due to increased earnings in certain higher tax jurisdictions, and the impact of a $1.5 0.8 million benefit associated with the net operating loss carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in March 2020.
5. Allowance for Credit Losses
We estimate expected credit losses on our trade receivables and financing receivables in accordance with Accounting Standards Codification (“ASC”) 326 - Financial Instruments - Credit Losses.
Trade Receivables
Trade receivables as of September 30, 2022 were $346.6 million, net of an allowance of $22.1 million. Our allowance for trade receivables consists of two components: a $9.5 million allowance for credit losses and a $12.6 million allowance for customer claims accounted for under the scope of ASC 606 - Revenue Recognition.
As a result of our robust credit monitoring practices, the industry in which we operate, and the nature of our customer base, the credit losses associated with our trade receivables have historically been insignificant in comparison to our annual net sales. We measure the allowance for credit losses on trade receivables on a collective (pool) basis when similar risk characteristics exist.
We generally pool our trade receivables based on the geographic region or country to which the receivables relate. Receivables that do not share similar risk characteristics are evaluated for collectability on an individual basis.
10
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
5. Allowance for Credit Losses (continued)
Our historical credit loss experience provides the basis for our estimation of expected credit losses. We generally use a three-year average annual loss rate as a starting point for our estimation, and make adjustments to the historical loss rate to account for differences in current conditions impacting the collectability of our receivable pools. We generally monitor macroeconomic indicators to assess whether adjustments are necessary to reflect current conditions.
The table below presents a rollforward of our trade receivable allowance for credit losses for the nine months ended September 30, 2022 and October 1, 2021 (U.S. dollars in millions):
| Nine months ended | |||||||||||||||||||||||
| Trade receivables | September 30, 2022 | October 1, 2021 | |||||||||||||||||||||
Allowance for credit losses: | |||||||||||||||||||||||
| Balance, beginning of period | $ | $ | |||||||||||||||||||||
| Provision for uncollectible amounts | |||||||||||||||||||||||
| Deductions to allowance related to write-offs | ( | ||||||||||||||||||||||
| Foreign exchange effects | ( | ||||||||||||||||||||||
Reclassifications(1) | ( | ( | |||||||||||||||||||||
Balance, end of period | $ | $ | |||||||||||||||||||||
(1) Reclassifications of $0.3 million and $2.6 million to the long-term allowance for credit losses, presented in other noncurrent assets on our Consolidated Balance Sheets, from short-term during the nine months ended September 30, 2022 and October 1, 2021, respectively. The amounts in the long-term allowance related to customer trade receivables as of September 30, 2022 and October 1, 2021 are not material to our Consolidated Financial Statements.
Financing Receivables
Financing receivables are included in other accounts receivable, net on our Consolidated Balance Sheets and are recognized at amortized cost less an allowance for estimated credit losses. Financing receivables include seasonal advances to growers and suppliers, which are usually short-term in nature, and other financing receivables.
A significant portion of the fresh produce we sell is acquired through supply contracts with independent growers. In order to ensure the consistent high quality of our products and packaging, we make advances to independent growers and suppliers. These growers and suppliers typically sell all of their production to us and make payments on their advances as a deduction to the agreed upon selling price of the fruit or packaging material. The majority of the advances to growers and suppliers are for terms less than one year and typically span a growing season. In certain cases, there may be longer term advances with terms of up to five years .
We measure the allowance for credit losses on advances to suppliers and growers on a collective (pool) basis when similar risk characteristics exist. We generally pool our advances based on the country to which they relate, and further disaggregate them based on their current or past-due status. We generally consider an advance to a grower to be past due when the advance is not fully paid within the respective growing season. The allowance for advances to growers and suppliers that do not share similar risk characteristics are determined on a case-by-case basis, depending on the expected production for the season and other contributing factors. The advances are typically collateralized by property liens and pledges of the respective season’s produce. Occasionally, we agree to a payment plan with these growers or take steps to recover the advance via established collateral. We may write-off uncollectible financing receivables after our collection efforts are exhausted. Historically, our credit losses associated with our advances to suppliers and growers have not been significant.
Our historical credit loss experience provides the basis for our estimation of expected credit losses. We generally use a three-year average annual loss rate as a starting point for our estimation, and make adjustments to the historical loss rate to account for differences in current or expected future conditions. We generally monitor macroeconomic indicators as well as other factors, including unfavorable weather conditions and crop diseases, which may impact the collectability of the advances when assessing whether adjustments to the historical loss rate are necessary.
11
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
5. Allowance for Credit Losses (continued)
The following table details the advances to growers and suppliers based on their credit risk profile (U.S. dollars in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Current | Past-Due | Current | Past-Due | ||||||||||||||||||||
| Gross advances to growers and suppliers | $ | $ | $ | $ | |||||||||||||||||||
The allowance for advances to growers and suppliers for the nine months ended September 30, 2022 and October 1, 2021 were as follows (U.S. dollars in millions):
| Nine months ended | |||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||||||||||||||
| Allowance for advances to growers and suppliers: | |||||||||||||||||||||||
| Balance, beginning of period | $ | $ | |||||||||||||||||||||
| Provision for uncollectible amounts | ( | ||||||||||||||||||||||
| Deductions to allowance related to write-offs | ( | ( | |||||||||||||||||||||
| Balance, end of period | $ | $ | |||||||||||||||||||||
6. Share-Based Compensation
On June 2, 2022, our shareholders approved and ratified the 2022 Omnibus Share Incentive Plan (the “2022 Plan”). The 2022 Plan allows us to grant equity-based compensation awards including restricted stock units (“RSUs”), performance stock units (“PSUs”), stock options, and restricted stock awards. The 2022 Plan replaces and supersedes the 2014 Omnibus Share Incentive Plan (the “Prior Plan”). Under the 2022 Plan, the Board of Directors is authorized to award up to 2,800,000 ordinary shares plus approximately 230,000 ordinary shares which remained available under the Prior Plan at the time of adoption.
Stock-based compensation expense related to RSUs and PSUs is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations and is comprised as follows (U.S. dollars in millions):
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| RSUs/PSUs | $ | $ | $ | $ | |||||||||||||||||||
12
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
6. Share-Based Compensation (continued)
Restricted Stock Units and Performance Stock Units
The following table lists the RSUs and PSUs awarded under the 2022 Plan and the Prior Plan for the nine months ended September 30, 2022 and October 1, 2021:
| Date of Award | Type of award | Units awarded | Price per share | ||||||||||||||
| For the nine months ended September 30, 2022 | |||||||||||||||||
| July 6, 2022 | PSU | $ | |||||||||||||||
| June 15, 2022 | RSU | ||||||||||||||||
| June 15, 2022 | PSU | ||||||||||||||||
| June 2, 2022 | RSU | ||||||||||||||||
| For the nine months ended October 1, 2021 | |||||||||||||||||
| October 1, 2021 | RSU | $ | |||||||||||||||
| May 4, 2021 | RSU | ||||||||||||||||
| March 30, 2021 | RSU | ||||||||||||||||
| March 1, 2021 | RSU | ||||||||||||||||
| March 1, 2021 | PSU | ||||||||||||||||
Under the 2022 Plan and Prior Plan, each RSU/PSU represents a contingent right to receive one of our ordinary shares. The PSUs are subject to meeting minimum performance criteria set by the Compensation Committee of our Board of Directors. The actual number of shares the recipient receives is determined based on the results achieved versus performance goals. Those performance goals are based on exceeding a measure of our earnings. Depending on the results achieved, the actual number of shares that an award recipient receives at the end of the period may range from 0 % to 100 % of the award units granted. Provided such criteria are met, the PSUs granted during the nine months ended September 30, 2022 will vest in three equal installments in 1) June and July 2023, 2) March 2024 and 3) March 2025. PSUs granted prior to 2022 will vest in three equal annual installments on each of the next three anniversary dates. All PSU vesting is contingent on the recipient's continued employment with us.
Expense for RSUs is recognized on a straight line basis over the requisite service period for the entire award. RSUs granted in 2022 vest in three equal installments in June 2023, March 2024 and March 2025, with the exception of RSUs granted to our Board of Directors which vest after a one-year period. RSUs granted in 2021 vest annually in three equal installments over a three -year service period while RSUs granted prior to 2021 vested 20 % on the grant date, with 20 % vesting on each of the next four anniversaries.
The fair market value for RSUs and PSUs is based on the closing price of our stock on the grant date. We recognize expenses related to RSUs and PSUs based on the fair market value, as determined on the grant date, ratably over the vesting period, provided the performance condition, if any, is probable. Forfeitures are recognized as they occur.
RSUs and PSUs do not have the voting rights of ordinary shares, and the shares underlying the RSUs and PSUs are not considered issued and outstanding. However, shares underlying RSUs/PSUs are included in the calculation of diluted earnings per share to the extent the performance criteria are met, if any.
RSUs and PSUs are eligible to earn Dividend Equivalent Units (“DEUs”) equal to the cash dividend paid to ordinary shareholders. DEUs are subject to the same performance and/or service conditions as the underlying RSUs and PSUs and are forfeitable.
13
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
7. Inventories, net
Inventories consisted of the following (U.S. dollars in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Raw materials and packaging supplies | |||||||||||
| Growing crops | |||||||||||
| Total inventories, net | $ | $ | |||||||||
8. Debt and Finance Lease Obligations
The following is a summary of long-term debt and finance lease obligations (U.S. dollars in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Senior unsecured revolving credit facility (see Credit Facility below) | $ | $ | |||||||||
| Finance lease obligations | |||||||||||
| Total debt and finance lease obligations | |||||||||||
| Less: Current maturities | ( | ( | |||||||||
| Long-term debt and finance lease obligations | $ | $ | |||||||||
Credit Facility
On October 1, 2019, we entered into a Second Amended and Restated Credit Agreement (as amended, the “Second A&R Credit Agreement”) with Bank of America, N.A. as administrative agent and BofA Securities, Inc. as sole lead arranger and sole bookrunner and certain other lenders. 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 on October 1, 2024. Effective September 13, 2022, we exercised our option as included in the Second A&R Credit Agreement to reduce the borrowing limit on the Revolving Credit Facility from $1.1 billion to $0.9 billion. Certain of our direct and indirect subsidiaries have guaranteed the obligations under 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 interest rate grid provides for five pricing levels for interest rate margins.
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 2.50 to 1.00. Our ability to request such increases in the revolving credit facility or term loans is subject to our 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.
14
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
8. Debt and Finance Lease Obligations (continued)
The Second A&R Credit Agreement requires us to comply with certain financial and other covenants. Specifically, it requires us to maintain a 1) Consolidated Leverage Ratio of not more than 3.50 to 1.00 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 1.00 as of the end of any fiscal quarter. Additionally, it 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. Under the Second A&R Credit Agreement, we are permitted 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. It also provides an 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 of September 30, 2022, we were in compliance with all of the covenants contained in the Second A&R Credit Agreement.
Debt issuance costs of $0.7 million and $1.3 million are included in other noncurrent assets on our Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, respectively.
We have a renewable 364 -day, $25.0 million letter of credit facility with Rabobank Nederland.
The following is a summary of the material terms of the Revolving Credit Facility and other working capital facilities at September 30, 2022 (U.S. dollars in millions):
| Term | Maturity date | Interest rate | Borrowing limit | Available borrowings | |||||||||||||||||||||||||
| Bank of America credit facility | $ | $ | |||||||||||||||||||||||||||
| Rabobank letter of credit facility | Varies | ||||||||||||||||||||||||||||
| Other working capital facilities | Varies | Varies | Varies | ||||||||||||||||||||||||||
| $ | $ | ||||||||||||||||||||||||||||
The current margin for LIBOR advances is 1.375 %. We intend to use funds borrowed under the Revolving Credit Facility from time to time for general corporate purposes, working capital, capital expenditures and other permitted investment opportunities.
The Revolving Credit Facility permits borrowings under the revolving commitment with an interest rate determined based on our leverage ratio and spread over LIBOR. In addition, we pay a fee on unused commitments.
As of September 30, 2022, we applied $27.9 million to letters of credit and bank guarantees issued from Rabobank Nederland, Bank of America, and other banks.
During 2018, we entered into interest rate swaps in order to hedge the risk of the fluctuation on future interest payments related to our variable rate LIBOR-based borrowings from our Revolving Credit Facility. Refer to Note 13, “Derivative Financial Instruments.”
As a result of reference rate reform, we are currently working with our counterparties to amend our Revolving Credit Facility and interest rate swaps to reference the Secured Overnight Financing Rate (SOFR) effective the first quarter of 2023. Refer to Note 2, "Recently Issued Accounting Pronouncements."
15
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
9. Commitments and Contingencies
Kunia Well Site
In 1980, elevated levels of certain chemicals were detected in the soil and ground-water at a plantation leased by one of our U.S. subsidiaries in Honolulu, Hawaii (the “Kunia Well Site”). In 2005, our subsidiary signed a Consent Decree (“Consent Decree”) with the Environmental Protection Agency (“EPA”) for the performance of the clean-up work for the Kunia Well Site. Based on findings from remedial investigations, our subsidiary coordinated with the EPA to evaluate the clean-up work required in accordance with the Consent Decree. On July 25, 2022, an Explanation of Significant Differences (ESD) for the Kunia Well Site was filed by the EPA, which formally transitioned the remedy for the Kunia Well Site to a Monitored Natural Attenuation (MNA), thereby reducing our potential liability. In connection with the above decision, we recorded a $9.9 million reduction in our liability during the quarter ended September 30, 2022, presented in asset impairment and other (credits) charges, net in our Consolidated Statements of Operations, to reflect the decrease in estimated costs associated with the clean-up.
The revised estimate associated with the clean-up costs, and on which our accrual is based, is $2.9 million. As of September 30, 2022, $2.5 million was included in other noncurrent liabilities, and $0.4 million was included in accounts payable and accrued expenses in the Consolidated Balance Sheets for the Kunia Well Site clean-up. We expect to expend approximately $0.2 million in the fourth quarter of 2022, $0.3 million in each of the years 2023 and 2024, and $0.1
Additional Information
In addition to the foregoing, we are involved from time to time in various claims and legal actions incident to our operations, both as plaintiff and defendant. In the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on the results of operations, financial position or our cash flows.
We intend to vigorously defend ourselves in all of the above matters.
16
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
10. Earnings Per Share
Basic and diluted net income per ordinary share is calculated as follows (U.S. dollars in millions, except share and per share data):
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net income attributable to Fresh Del Monte Produce Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted average number of ordinary shares - Basic | |||||||||||||||||||||||
Effect of dilutive securities - share-based awards | |||||||||||||||||||||||
Weighted average number of ordinary shares - Diluted | |||||||||||||||||||||||
Antidilutive awards (1) | |||||||||||||||||||||||
Net income per ordinary share attributable to Fresh Del Monte Produce Inc.: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
(1)Certain unvested RSUs and PSUs are not included in the calculation of net income per ordinary share because the effect would have been antidilutive.
11. Retirement and Other Employee Benefits
The following table sets forth the net periodic benefit costs of our defined benefit pension plans and post-retirement benefit plans (U.S. dollars in millions):
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of net actuarial loss | |||||||||||||||||||||||
| Net periodic benefit costs | $ | $ | $ | $ | |||||||||||||||||||
We provide certain other retirement benefits to certain employees who are not U.S.-based and are not included above. Generally, benefits under these programs are based on an employee’s length of service and level of compensation. These programs are immaterial to our consolidated financial statements. The net periodic benefit costs related to other non-U.S. based plans is $1.4 million for the quarter ended September 30, 2022 and $0.9 million for the quarter ended October 1, 2021. The net periodic benefit costs related to other non-U.S. based plans is $3.1 million for the nine months ended September 30, 2022 and $2.7 million for the nine months ended October 1, 2021.
17
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
12. Business Segment Data
Our business is comprised of three reportable segments, two of which represent our primary businesses of fresh and value-added products and banana, and one that represents our other ancillary businesses.
•Fresh and value-added products - includes pineapples, fresh-cut fruit, fresh-cut vegetables (which includes fresh-cut salads), melons, vegetables, non-tropical fruit (including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries and kiwis), other fruit and vegetables, avocados, and prepared foods (including prepared fruit and vegetables, juices, other beverages, and meals and snacks).
•Banana
•Other products and services - includes our ancillary businesses consisting of sales of poultry and meat products, a plastic product business, and third-party freight services.
We evaluate performance based on several factors, of which net sales and gross profit by product are the primary financial measures (U.S. dollars in millions):
| Quarter ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Segments: | Net Sales | Gross Profit | Net Sales | Gross Profit | ||||||||||||||||||||||
| Fresh and value-added products | $ | $ | $ | $ | ||||||||||||||||||||||
| Banana | ||||||||||||||||||||||||||
| Other products and services | ||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||||||||||||
| Nine months ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Segments: | Net Sales | Gross Profit | Net Sales | Gross Profit | ||||||||||||||||||||||
| Fresh and value-added products | $ | $ | $ | $ | ||||||||||||||||||||||
| Banana | ||||||||||||||||||||||||||
| Other products and services | ||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||||||||||||
Our segment data disclosures for the quarter and nine months ended October 1, 2021 have been adjusted to reflect a reclassification of cost of products sold between our three segments as a result of a refinement in our cost allocation methodology. For the quarter ended October 1, 2021, this reclassification resulted in an increase to our fresh and value-added products segment gross profit of $0.7 million, an increase to our banana segment gross profit of $1.3 million and a decrease to our other products and services segment gross profit of $2.0 million. For the nine months ended October 1, 2021, this reclassification resulted in an increase to our fresh and value-added products segment gross profit of $2.3 million, an increase to our banana segment gross profit of $3.6 million and a decrease to our other products and services segment gross profit of $5.9 million.
18
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
12. Business Segment Data (continued)
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| Net sales by geographic region: | September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | |||||||||||||||||||
| North America | $ | $ | $ | $ | |||||||||||||||||||
| Europe | |||||||||||||||||||||||
| Asia | |||||||||||||||||||||||
| Middle East | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Totals | $ | $ | $ | $ | |||||||||||||||||||
The following table indicates our net sales by product and the percentage of the total (U.S. dollars in millions):
| Quarter ended | Nine months ended | ||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Fresh and value-added products: | |||||||||||||||||||||||||||||||||||||||||||||||
| Fresh-cut fruit | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
| Fresh-cut vegetables | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Pineapples | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Avocados | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Non-tropical fruit | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Prepared foods | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Melons | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Tomatoes | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Vegetables | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Other fruit and vegetables | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Total fresh and value-added products | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Banana | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Other products and services | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Totals | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
13. Derivative Financial Instruments
Our derivative financial instruments reduce our exposure to fluctuations in foreign exchange rates, variable interest rates and bunker fuel prices. We designate our derivative financial instruments as cash flow hedges.
Counterparties expose us to credit loss in the event of non-performance on hedges. We monitor our exposure to counterparty non-performance risk both at inception of the hedge and at least quarterly thereafter.
Fluctuations in the value of the derivative instruments are generally offset by changes in the cash flows of the underlying exposures being hedged. A cash flow hedge requires that the change in the fair value of a derivative instrument be recognized in other comprehensive income (loss), 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.
19
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
13. Derivative Financial Instruments (continued)
Certain of our derivative instruments contain provisions that require the current credit relationship between us and our counterparty to be maintained throughout the term of the derivative instruments. If that credit relationship changes, certain provisions could be triggered, and the counterparty could request immediate collateralization of derivative instruments in a net liability position above a certain threshold. The aggregate fair value of all derivative instruments with a credit-risk-related contingent feature that are in a liability position on September 30, 2022 is $11.8 million. As of September 30, 2022, no triggering event has occurred and thus we are not required to post collateral.
Derivative instruments are disclosed on a gross basis. There are various rights of setoff associated with our derivative instruments that are subject to an enforceable master netting arrangement or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties, individually, these financial rights are not material.
Cash flows from derivative instruments that are designated as cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows related to changes in fair value subsequent to the date of discontinuance are classified within investing activities.
Foreign Currency Hedges
We are exposed to fluctuations in currency exchange rates against the U.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, which generally mature within one year. Our foreign currency hedges were entered into for the purpose of hedging portions of our 2022 and 2023 foreign currency exposure.
The foreign currency forward contracts qualifying as cash flow hedges were designated as single-purpose cash flow hedges of forecasted cash flows.
We had the following outstanding foreign currency forward contracts as of September 30, 2022 (in millions):
| Foreign currency contracts qualifying as cash flow hedges: | Notional amount | |||||||||||||||||||||||||||||||||||||
| Euro | EUR | |||||||||||||||||||||||||||||||||||||
| British pound | GBP | |||||||||||||||||||||||||||||||||||||
| Japanese yen | JPY | |||||||||||||||||||||||||||||||||||||
| Chilean peso | CLP | |||||||||||||||||||||||||||||||||||||
| Kenyan shilling | KES | |||||||||||||||||||||||||||||||||||||
| Korean won | KRW | |||||||||||||||||||||||||||||||||||||
Interest Rate Contracts
We are exposed to fluctuations in variable interest rates on our results of operations and financial condition, and we mitigate a portion of that exposure by entering into interest rate swaps. We entered into interest rate swaps in order to hedge the risk of the fluctuation on future interest payments related to our variable rate LIBOR-based borrowings through 2028.
Gains or losses on interest rate swaps are recorded in other comprehensive income (loss) and are subsequently reclassified into earnings as the interest expense on debt is recognized in earnings. At September 30, 2022, the notional value of interest rate contracts outstanding was $400.0 million, with $200.0 million maturing in 2024 and the remaining $200.0 million maturing in 2028. Refer to Note 8, “Debt and Finance Lease Obligations.”
20
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
13. Derivative Financial Instruments (continued)
Bunker Fuel Hedges
We are exposed to fluctuations in bunker fuel prices on our results of operations and financial condition, and we periodically enter into bunker fuel swap agreements which permit us to lock in bunker fuel prices and mitigate that exposure. During fiscal 2020, one of our subsidiaries entered into bunker fuel swap agreements in order to hedge portions of our fuel expenses incurred by our owned and chartered vessels throughout 2020 and 2021. We designated our bunker fuel swap agreements as cash flow hedges. As of September 30, 2022, there were no outstanding bunker fuel hedges.
The following table reflects the fair values of derivative instruments, which are designated as level 2 in the fair value hierarchy, as of September 30, 2022 and December 31, 2021 (U.S. dollars in millions):
Derivatives designated as hedging instruments (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Interest rate swaps | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet location: | September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Asset derivatives: | |||||||||||||||||||||||||||||||||||||||||||||||
| Prepaid expenses and other current assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Other noncurrent assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Total asset derivatives | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Liability derivatives: | |||||||||||||||||||||||||||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
| Other noncurrent liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Total liability derivatives | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||
(1) See Note 14, “Fair Value Measurements,” for fair value disclosures.
We expect that $10.6 million of the net fair value of our cash flow hedges recognized as a net gain in accumulated other comprehensive loss will be transferred to earnings during the next 12 months and a net gain of $6.7 million will be transferred to earnings over a period of approximately 6 years, along with the earnings effect of the related forecasted transactions.
The following table reflects the effect of derivative instruments on the Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 30, 2022 and October 1, 2021 (U.S. dollars in millions):
| | Net amount of gain (loss) recognized in other comprehensive income (loss) on derivatives | ||||||||||||||||||||||
| Quarter ended | Nine months ended | ||||||||||||||||||||||
Derivative instruments | September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | |||||||||||||||||||
| Foreign exchange contracts | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Bunker fuel swaps | ( | ( | |||||||||||||||||||||
| Interest rate swaps, net of tax | |||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ||||||||||||||||||
Refer to Note 15, “Accumulated Other Comprehensive Loss,” for the effect of derivative instruments on the Consolidated Statements of Operations related to amounts reclassified from accumulated other comprehensive loss for the quarters and nine months ended September 30, 2022 and October 1, 2021.
21
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
14. Fair Value Measurements
Fair Value of Derivative Instruments
Our derivative assets or liabilities include foreign exchange and interest rate derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk as well as an evaluation of our counterparties' credit risks. We use an income approach to value our outstanding foreign currency and interest rate hedges, which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contract using current market information as of the measurement date such as foreign currency spot rates, forward rates and interest rates. Additionally, we include an element of default risk based on observable inputs into the fair value calculation. Based on these inputs, the derivative assets or liabilities are classified within Level 2 of the valuation hierarchy.
The following table provides a summary of the fair values of our derivative financial instruments measured on a recurring basis (U.S. dollars in millions):
| Fair value measurements | |||||||||||||||||||||||||||||||||||
| Foreign currency forward contracts, net asset (liability) | Interest rate contracts, net asset (liability) | ||||||||||||||||||||||||||||||||||
| September 30, 2022 | December 31, 2021 | September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Significant observable inputs (Level 2) | ( | ( | |||||||||||||||||||||||||||||||||
| Significant unobservable inputs (Level 3) | |||||||||||||||||||||||||||||||||||
In estimating our fair value disclosures for financial instruments, we use the following methods and assumptions:
Cash and cash equivalents: The carrying amount reported in the Consolidated Balance Sheets for these items approximates fair value due to their liquid nature and are classified as Level 1.
Trade accounts receivable and other accounts receivable, net: The carrying value reported in the Consolidated Balance Sheets for these items is net of allowances, which includes a degree of counterparty non-performance risk and are classified as Level 2.
Accounts payable and other current liabilities: The carrying value reported in the Consolidated Balance Sheets for these items approximates their fair value, which is the likely amount for which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as ours and are classified as Level 2.
Long-term debt: The carrying value of our long-term debt reported in the Consolidated Balance Sheets approximates their fair value since they bear interest at variable rates which contain an element of default risk. The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for those or similar instruments. Refer to Note 8, “Debt and Finance Lease Obligations.”
Fair Value of Non-Financial Assets
The fair value of the banana reporting unit's goodwill and the prepared food reporting unit's goodwill and remaining trade names and trademarks are highly 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. We disclosed the sensitivity related to the banana reporting unit's goodwill and the prepared food reporting unit's goodwill and remaining trade names and trademarks in our notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
In addition, certain definite-lived intangible assets related to our fresh and value-added products segment are sensitive to changes in estimated cash flows. To the extent that future developments result in estimated cash flows that are less than currently estimated levels, it could lead to impairment of these assets.
22
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
14. Fair Value Measurements (continued)
During fiscal 2020, we performed a comprehensive review of our asset portfolio and identified non-strategic and underutilized property, plant, and equipment assets across various of our regions to dispose of while reducing costs and driving further efficiencies in our operations (the “Optimization Program”). Certain of these assets, as well as additional assets identified for sale during the current fiscal year, met the held for sale criteria as of September 30, 2022, and primarily relate to our fresh and value-added products segment. Included in the $61.3 million of assets held for sale as of September 30, 2022 were the following: $37.9 million is related to facilities and land in Middle East, $16.2 million consists of a facility and related assets in the United States, $4.0 million consists of facilities and farm land in South America, $2.2 million consists of a facility and related assets in Europe, and the remaining $1.0 million consists of farm land in Central America. These assets are recognized at the lower of cost or fair value less cost to sell. The fair value measurements for our held for sale assets are generally based on Level 3 inputs, which include information obtained from third-party appraisals.
During the nine months ended September 30, 2022, we received proceeds of $6.9 million from the sale of assets previously held for sale and recorded a gain on disposal of property, plant and equipment, net of $1.8 million.
15. Accumulated Other Comprehensive Loss
The following table includes the changes in accumulated other comprehensive loss by component (U.S. dollars in millions):
Changes in Accumulated Other Comprehensive Loss by Component (1) | |||||||||||||||||||||||
| Cash Flow Hedges | Foreign Currency Translation Adjustment | Retirement Benefit Adjustment | Total | ||||||||||||||||||||
| Nine months ended September 30, 2022 | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (3) | ( | (2) | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Nine months ended October 1, 2021 | |||||||||||||||||||||||
| Balance at January 1, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (3) | ( | (2) | ( | ( | ||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (4) | ||||||||||||||||||||||
| Net current period other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Balance at October 1, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(1) All amounts are net of tax and noncontrolling interest.
(2) Includes a loss of $11.0 million and $4.2 million for the nine months ended September 30, 2022 and nine months ended October 1, 2021, respectively, on intra-entity foreign currency transactions that are of a long-term-investment nature.
(3) Includes a tax effect of $(5.7 ) million and $(1.9 ) million for the nine months ended September 30, 2022 and nine months ended October 1, 2021, respectively.
(4) Includes amounts reclassified for both designated and dedesignated cash flow hedges. Refer to the following table for the amounts of each.
23
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
15. Accumulated Other Comprehensive Loss (continued)
The following table includes details about amounts reclassified from accumulated other comprehensive loss by component (U.S. dollars in millions):
| Amount of (gain) loss reclassified from accumulated other comprehensive loss | ||||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||||||||
| Details about accumulated other comprehensive loss components | Quarter ended | Nine months ended | Quarter ended | Nine months ended | Affected line item in the statement where net income is presented | |||||||||||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||||||||||||||
| Designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Foreign currency cash flow hedges | $ | ( | $ | ( | $ | ( | $ | ( | Net sales | |||||||||||||||||||||||
| Foreign currency cash flow hedges | ( | ( | Cost of products sold | |||||||||||||||||||||||||||||
| Interest rate swaps | Interest expense | |||||||||||||||||||||||||||||||
| Bunker fuel swaps no longer designated as hedging instruments | ( | ( | Cost of products sold | |||||||||||||||||||||||||||||
| Bunker fuel swaps no longer designated as hedging instruments | ( | Other expense, net | ||||||||||||||||||||||||||||||
| Total | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
| Amortization of retirement benefits: | ||||||||||||||||||||||||||||||||
Actuarial losses | Other expense, net | |||||||||||||||||||||||||||||||
| Curtailment and settlement losses | Other expense, net | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
16. Shareholders’ Equity
Our shareholders have authorized 50,000,000 preferred shares at $0.01 par value, of which none 200,000,000 ordinary shares at $0.01 par value, of which 47,836,339
The below is a summary of the dividends paid per share during the nine months ended September 30, 2022 and October 1, 2021. These dividends were declared and paid within the same fiscal quarter.
| Nine months ended | ||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||
| Dividend Payment Date | Cash Dividend per Ordinary Share | Dividend Payment Date | Cash Dividend per Ordinary Share | |||||||||||||||||
| September 9, 2022 | $ | September 10, 2021 | $ | |||||||||||||||||
| June 10, 2022 | June 11, 2021 | |||||||||||||||||||
| April 1, 2022 | April 2, 2021 | |||||||||||||||||||
We paid $21.5 million in dividends during the nine months ended September 30, 2022 and $16.6 million in dividends during the nine months ended October 1, 2021.
On November 1, 2022, our Board of Directors declared a quarterly cash dividend of fifteen cents ($0.15 ) per share, payable on December 9, 2022, to shareholders of record on November 16, 2022.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are one of the world’s leading vertically integrated producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, as well as a leading producer and marketer of prepared fruit and vegetables, juices, beverages and snacks in Europe, Africa and the Middle East. We market our products worldwide under the Del Monte® brand, a symbol of product innovation, quality, freshness and reliability since 1892. Our major sales markets are organized as follows: North America, Europe, the Middle East (which includes North Africa) and Asia. Our global sourcing and logistics system allows us to provide regular delivery of consistently high-quality produce and value-added services to our customers. Our major producing operations are located in North, Central and South America, Asia and Africa.
Our business is comprised of three reportable segments, two of which represent our primary businesses of fresh and value-added products and banana, and one that represents our other ancillary businesses.
•Fresh and value-added products - includes pineapples, fresh-cut fruit, fresh-cut vegetables (which includes fresh-cut salads), melons, vegetables, non-tropical fruit (including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries and kiwis), other fruit and vegetables, avocados, and prepared foods (including prepared fruit and vegetables, juices, other beverages, and meals and snacks).
•Banana
•Other products and services - includes our ancillary businesses consisting of sales of poultry and meat products, a plastic product business, and third-party freight services.
Our vision is to inspire healthy lifestyles through wholesome and convenient products. Our strategy is founded on six goals:
Current Macroeconomic Environment and Inflation Impact
During fiscal year 2021, we began experiencing inflationary and cost pressures due to volatility and disruption in the global economy. These conditions, which have increased our production and distribution costs, have been driven by a multitude of external factors including the ongoing COVID-19 pandemic. Specifically, costs of packaging materials, fertilizers, labor, fuel, and ocean and inland freight have been significantly increasing, and continue to adversely affect our profitability in the current fiscal year. We are also experiencing pressure on our supply chain due to strained transportation capacity and lack of sufficient labor availability.
In addition, the invasion of Ukraine by Russia in early 2022 has led to further economic disruption. While we do not operate in Ukraine and while our operations in Russia are not material, the conflict has exacerbated inflationary cost, supply chain and logistical pressures which have negatively impacted our business.
25
In response to these persisting inflationary and cost pressures, we began instituting price increases on the majority of our products during the latter part of 2021. Additionally, certain of our contracts for key products include contractually indexed fuel and freight surcharges that vary depending on commodity pricing. While we expect that these inflation-justified price increases and surcharges will continue to help mitigate our increased costs, our gross profit continues to be negatively impacted by these unfavorable market conditions as reflected in our financial results for the first nine months of 2022. We believe these factors will continue to impact our financial performance in future periods.
Optimization Program
During fiscal 2020, we performed a comprehensive review of our asset portfolio aimed at identifying non-strategic and underutilized assets to dispose of while reducing costs and driving further efficiencies in our operations (hereon referred to as the “Optimization Program”). As a result of the review, we identified assets across all of our regions, primarily consisting of underutilized facilities and land, which we made a strategic decision to sell for total anticipated cash proceeds of approximately $100.0 million. As of September 30, 2022, we have received cash proceeds of $64.6 million in connection with asset sales under the Optimization Program (approximately $57.0 million of which was received during fiscal years 2020 and 2021). Due to challenging market conditions which have resulted in delays of some of the asset sales, in part driven by COVID-19 travel restrictions, the completion of the program has extended beyond the originally anticipated timeframe.
Income Taxes
In connection with the examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately $144.3 million (including interest and penalties) for tax years 2012 through 2016. We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as we believe that the proposed adjustments are without technical merit.
In one of the foreign jurisdictions, we are currently contesting tax assessments related to the 2012-2015 audit years and the 2016 audit year in both the administrative court and the judicial court. During 2019 and 2020, we filed actions contesting the tax assessment in the administrative office. Our initial challenge to each of these tax assessments was rejected, and we subsequently lost our appeals at the administrative court. We have subsequently filed actions to contest each of these tax assessments in the country’s judicial courts. In addition, we have filed a request for injunction to the judicial court to stay the tax authorities' collection efforts for these two tax assessments, pending final judicial decisions. The court granted our injunction with respect to the 2016 audit year, however denied our injunction with respect to the 2012-2015 audit years. We timely appealed the denial of the injunction, and on August 10, 2022 the appellate court overturned the denial and granted our injunction for the 2012-2015 audit years. Pursuant to local law, we registered real estate collateral with an approximate fair market value of $6.0 million in connection with the grant of the 2016 audit year injunction. This real estate collateral has a net book value of $3.8 million as of the quarter ended September 30, 2022. In addition, in connection with the grant of the 2012-2015 audit year injunction, we registered real estate collateral with an approximate fair market value of $24.0 million, and a net book value of $4.6 million as of the quarter ended September 30, 2022. The registration of this real estate collateral does not affect our operations in the country.
In the other foreign jurisdiction, the administrative court denied our appeal, and on March 4, 2020 we filed an action in the judicial court to contest the administrative court's decision. The case is still pending.
We will continue to vigorously contest the adjustments and to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process.
26
RESULTS OF OPERATIONS
Consolidated Financial Results
The following summarizes the more significant factors impacting our operating results for the 13-week and 39-week periods ended September 30, 2022 (also referred to as the “third quarter of 2022” and "first nine months of 2022," respectively) and October 1, 2021 (also referred to as the “third quarter of 2021” and "first nine months of 2021," respectively).
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Net sales | $ | 1,053.5 | $ | 1,004.8 | $ | 3,402.4 | $ | 3,234.6 | |||||||||||||||
| Gross profit | 88.0 | 48.9 | 258.5 | 264.0 | |||||||||||||||||||
| Selling, general and administrative expenses | 46.8 | 48.0 | 139.3 | 148.3 | |||||||||||||||||||
| Operating income | 51.0 | 1.3 | 125.1 | 120.2 | |||||||||||||||||||
Net sales - Net sales for the third quarter of 2022 increased by $48.7 million, or 5%, when compared with the third quarter of 2021, and increased by $167.8 million, or 5%, for the first nine months of 2022 when compared with the first nine months of 2021. Net sales during the third quarter and first nine months of 2022 benefited from inflation-justified price increases. The increase in net sales in both periods was partially offset by the negative impact of fluctuations in exchange rates primarily versus the euro, Japanese yen, Korean won and British pound compared with the prior-year periods. The negative impact of fluctuations in exchange rates was partially mitigated by our foreign currency hedges.
Gross profit - Gross profit for the third quarter of 2022 increased to $88.0 million compared with $48.9 million in the prior-year period, driven by higher gross profit in all of our business segments. The increase in gross profit primarily relates to higher consolidated net sales and product mix in our fresh and value-added products segment. Partially offsetting the higher gross profit were (1) unfavorable fluctuations in exchange rates which negatively impacted gross profit by $13.9 million during the third quarter of 2022 and (2) higher per unit production and distribution costs, including costs of packaging materials, fertilizers, ocean and inland freight, fuel and labor as a result of broad-based inflationary, supply chain, and logistical cost pressures. Due to these factors, gross profit for the first nine months of 2022 decreased to $258.5 million compared with $264.0 million in the prior-year period despite higher net sales.
Selling, general and administrative expenses - Selling, general and administrative expenses decreased by $1.2 million, or 3%, in the third quarter of 2022 when compared with the third quarter of 2021, primarily as a result of lower advertising expenses. Selling, general and administrative expenses decreased by $9.0 million, or 6%, in the first nine months of 2022 when compared with the first nine months of 2021, mainly due to both lower advertising and administrative expenses in the current year.
Gain (loss) on disposal of property, plant and equipment, net - For the first nine months of 2022, gain (loss) on disposal of property, plant and equipment, net of $(2.2) million primarily related to the disposal of low-yielding banana plants in Central America, partially offset by a $1.4 million gain on the sale of vacant land in Mexico. The gain (loss) on disposal of property, plant and equipment, net of $0.5 million during the third quarter of 2021 primarily related to sale of assets in the Middle East and Europe. For the first nine months of 2021, gain (loss) on disposal of property, plant and equipment, net of $4.2 million also included a $2.4 million gain on the sale of a refrigerated vessel and a $1.1 million gain on the sale of vacant land in the Middle East.
Asset impairment and other (credits) charges, net - Asset impairment and other (credits) charges, net of $(9.8) million during the third quarter of 2022 primarily consisted of a $(9.9) million reduction to our environmental liability for the Kunia Well Site clean-up in Hawaii. For the first nine months of 2022, asset impairment and other (credits) charges, net of $(8.1) million also included severance expenses in connection with (1) the departure of our former President and Chief Operating Officer and (2) the planned exit from a European facility.
Asset impairment and other (credits) charges, net of $(0.3) million for the first nine months of 2021 primarily included a $0.8 million insurance recovery associated with hurricane damage to fixed assets in Guatemala, partially offset by an impairment charge related to low-yielding banana plants in the Philippines and severance expense related to the exit from a facility in Europe.
27
Operating income - Operating income increased by $49.7 million in the third quarter of 2022 and by $4.9 million in the first nine months of 2022 when compared with the respective prior-year periods. The increase in operating income in the third quarter of 2022 was primarily driven by higher gross profit and the Kunia Well Site liability adjustment discussed above. The increase in operating income in the first nine months of 2022 was primarily due to lower selling, general, and administrative expenses and the Kunia Well Site liability adjustment, partially offset by the net impact of disposals of property, plant, and equipment as well as lower gross profit.
Interest expense - Interest expense was higher in the third quarter and first nine months of 2022 when compared with the prior-year periods, due to higher interest rates and higher average debt balances.
Other expense, net - Other expense, net increased by $7.3 million in the third quarter of 2022 when compared with the third quarter of 2021, mainly due to higher foreign currency related losses. For the first nine months of 2022, other expense, net increased by $10.1 million when compared with the first nine months of 2021, primarily as a result of higher foreign currency related losses and the prior-year period including a gain related to fuel derivatives that were no longer designated as hedging instruments.
Income tax provision (benefit) - Income tax provision (benefit) was $3.3 million for the third quarter of 2022 compared with $(6.6) million for the third quarter of 2021, and was $13.9 million for the first nine months of 2022 compared with $9.1 million for the first nine months of 2021. The increase in the income tax provision in both the third quarter and first nine months of 2022 was primarily due to increased earnings in certain higher tax jurisdictions, and the impact of a $1.5 million provision, recognized in the third quarter of 2022, relating to a change in our assertion that certain foreign earnings are no longer deemed permanently reinvested. The income tax provision for the first nine months of 2021 included a $0.8 million benefit associated with the net operating loss carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in March 2020.
Financial Results by Segment
The following table presents net sales and gross profit by segment (U.S. dollars in millions), and in each case, the percentage of the total represented thereby and gross margin percentage:
| Quarter ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment | Net Sales | Gross Profit | Gross Margin | Net Sales | Gross Profit | Gross Margin | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresh and value-added products | $ | 599.8 | 57 | % | $ | 55.1 | 62 | % | 9.2 | % | $ | 601.2 | 60 | % | $ | 41.6 | 85 | % | 6.9 | % | |||||||||||||||||||||||||||||||||||||||
| Banana | 388.4 | 37 | % | 22.6 | 26 | % | 5.8 | % | 365.3 | 36 | % | 3.7 | 8 | % | 1.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Other products and services | 65.3 | 6 | % | 10.3 | 12 | % | 15.7 | % | 38.3 | 4 | % | 3.6 | 7 | % | 9.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Totals | $ | 1,053.5 | 100 | % | $ | 88.0 | 100 | % | 8.3 | % | $ | 1,004.8 | 100 | % | $ | 48.9 | 100 | % | 4.9 | % | |||||||||||||||||||||||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Sales | Gross Profit | Gross Margin | Net Sales | Gross Profit | Gross Margin | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fresh and value-added products | $ | 2,004.9 | 59 | % | $ | 148.9 | 58 | % | 7.4 | % | $ | 1,906.0 | 59 | % | $ | 152.1 | 58 | % | 8.0 | % | |||||||||||||||||||||||||||||||||||||||
| Banana | 1,216.1 | 36 | % | 82.6 | 32 | % | 6.8 | % | 1,210.2 | 37 | % | 101.8 | 38 | % | 8.4 | % | |||||||||||||||||||||||||||||||||||||||||||
| Other products and services | 181.4 | 5 | % | 27.0 | 10 | % | 14.9 | % | 118.4 | 4 | % | 10.1 | 4 | % | 8.5 | % | |||||||||||||||||||||||||||||||||||||||||||
| Totals | $ | 3,402.4 | 100 | % | $ | 258.5 | 100 | % | 7.6 | % | $ | 3,234.6 | 100 | % | $ | 264.0 | 100 | % | 8.2 | % | |||||||||||||||||||||||||||||||||||||||
28
Third Quarter of 2022 Compared with Third Quarter of 2021
Fresh and value-added products
Net sales for the third quarter of 2022 remained relatively in line when compared with the prior-year period. The segment realized higher net sales across key product categories, including pineapple and fresh-cut fruits, driven by inflation-justified price increases. The increase was predominantly offset by lower net sales of avocados and fresh-cut vegetables as a result of lower sales volume. Net sales were also negatively impacted by fluctuations in exchange rates in Europe and Asia.
Gross profit for the third quarter of 2022 increased to $55.1 million from $41.6 million in the third quarter of 2021. Segment gross profit benefited from product mix of higher-margin categories, including pineapples and prepared food products. The increase in gross profit was partially offset by higher costs across the board. Specifically, higher costs of packaging materials, fertilizers, ocean and inland freight, fuel and labor impacted per unit production and distribution costs. Due to these factors, gross margin increased to 9.2% compared with 6.9% in the prior-year period.
Banana
Net sales for the third quarter of 2022 increased by $23.1 million, or 6%, when compared with the prior-year period. The increase in net sales relates to higher per unit sales prices due to a combination of (1) inflation-justified price increases, (2) contractually indexed fuel and freight surcharges within certain of our contracts, (3) our strategic sourcing decisions in response to market conditions, and (4) atypical seasonally low industry supply in certain markets in the third quarter of 2022. Conversely, in the third quarter of 2021 the banana segment was impacted by excess industry supply in the marketplace. The increase was partially offset by the negative impact of fluctuations in exchange rates in Europe and Asia.
Gross profit for the third quarter of 2022 was $22.6 million compared with $3.7 million in the prior-year period. The increase in gross profit was primarily driven by higher net sales, partially offset by higher per unit distribution costs, including ocean and inland freight, and higher per unit production costs. As a result of these factors, gross margin increased to 5.8% compared with 1.0% in the prior-year period.
Other products and services
Net sales for the third quarter of 2022 increased by $27.0 million, or 70%, when compared with the prior-year period mainly due to higher net sales of third-party freight services. Our fleet of vessels has enabled the expansion of our commercial cargo services, which are benefiting from elevated shipping rates and demand due to market logistical conditions.
Gross profit increased by $6.7 million due to higher net sales of third-party freight services. As a result, gross margin increased to 15.7% from 9.4% in the prior-year period.
First Nine Months of 2022 Compared with First Nine Months of 2021
Fresh and value-added products
Net sales for the first nine months of 2022 increased by $98.9 million, or approximately 5%, when compared with the prior-year period. The increase in net sales was primarily driven by higher per unit sales prices across all product categories. Sales volume remained relatively in line with the prior-year period. The increase in net sales was partially offset by the negative impact of fluctuations in exchange rates in Europe and Asia.
Gross profit for the first nine months of 2022 was $148.9 million compared with $152.1 million in the prior-year period. The decrease in gross profit was mainly due to lower gross profit on (i) non-tropical fruit, primarily driven by the lack of availability of third-party shipping capacity on certain shipping routes, (ii) avocados, mainly related to market volatility, and (iii) melons. Additionally, despite higher net sales, gross profit for the segment continued to be negatively impacted by ongoing cost pressures, which resulted in higher per unit production and distribution costs, including ocean and inland freight. As a result, gross margin decreased to 7.4% compared with 8.0% in the prior-year period.
Gross profit in the fresh and value-added products segment included $4.7 million of other product-related charges in the first nine months of 2021 comprised of $3.4 million in non-tropical fruit inventory write-offs related to inclement weather in Chile and a $1.3 million inventory write-off incurred in the Middle East. There were no other product-related charges in the first nine months of 2022.
29
Banana
Net sales for the first nine months of 2022 increased by $5.9 million, or approximately 1%, when compared with the prior-year period. The increase in net sales for the first nine months of 2022 was mainly driven by higher net sales in the third quarter of 2022 due to the factors discussed above. The increase was partially offset by the negative impact of fluctuations in exchange rates in Europe and Asia.
Gross profit for the first nine months of 2022 was $82.6 million compared with $101.8 million in the prior-year period. The decrease in gross profit was primarily driven by lower sales volume and higher per unit production and distribution costs, including ocean and inland freight. The decrease was partially offset by improved gross profit in the third quarter of 2022 compared with the prior-year period. As a result of these factors, gross margin decreased to 6.8% compared with 8.4% in the prior-year period.
Gross profit for the banana segment included a $1.2 million net insurance recovery in the first nine months of 2021 associated with hurricane damage in Central America in the fourth quarter of 2020. There were no other product-related charges in the first nine months of 2022.
Other products and services
Net sales for the first nine months of 2022 increased by $63.0 million, or 53%, when compared with the prior-year period mainly due to higher net sales of third-party freight services. Our fleet of vessels has enabled the expansion of our commercial cargo services, which are benefiting from elevated shipping rates and demand due to market logistical conditions.
Gross profit increased by $16.9 million due to higher net sales of third-party freight services. As a result, gross margin increased to 14.9% from 8.5% in the prior-year period.
Liquidity and Capital Resources
Fresh Del Monte Produce Inc. is a holding company with limited business operations of its own. Fresh Del Monte Produce Inc.'s only significant asset is the outstanding capital stock of our subsidiaries that directly or indirectly own all of our assets. We conduct all of our business operations through our subsidiaries. Accordingly, our only source of cash to pay our obligations, other than financings, depends primarily on the net earnings and cash flow generated by these subsidiaries.
Our primary sources of cash flow are net cash provided by operating activities and borrowings under our credit facility. Our primary uses of net cash flow are capital expenditures to increase our productivity and expand our product offerings and geographic reach.
A summary of our cash flows is as follows (U.S. dollars in millions):
| Nine months ended | |||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||
| Summary cash flow information: | |||||||||||
| Net cash provided by operating activities | $ | 105.7 | $ | 151.6 | |||||||
| Net cash used in investing activities | (37.6) | (67.2) | |||||||||
| Net cash used in financing activities | (57.0) | (86.7) | |||||||||
| Effect of exchange rate changes on cash | 0.7 | 4.8 | |||||||||
| Net increase in cash and cash equivalents | 11.8 | 2.5 | |||||||||
| Cash and cash equivalents, beginning | 16.1 | 16.5 | |||||||||
| Cash and cash equivalents, ending | 27.9 | 19.0 | |||||||||
30
Operating Activities
Net cash provided by operating activities was $105.7 million for the first nine months of 2022 compared with $151.6 million for the first nine months of 2021, a decrease of $45.9 million. The decrease was primarily attributable to working capital fluctuations, mainly driven by accounts payable and accrued expenses, and lower net income.
At September 30, 2022, we had working capital of $558.5 million compared with $467.2 million at December 31, 2021, an increase of $91.3 million. The increase in working capital was mainly due to higher levels of (1) assets held for sale, (2) inventory, as we proactively increased supplies of key raw and packaging materials to secure costs and availability, and (3) prepaid expenses and other current assets, mainly related to our foreign currency hedges.
Investing Activities
Net cash used in investing activities for the first nine months of 2022 was $37.6 million compared with $67.2 million for the first nine months of 2021. Net cash used in investing activities for the first nine months of 2022 primarily consisted of capital expenditures of $35.8 million, which mainly included expenditures related to (1) improvements to our banana operations in Central America, (2) improvements to our operations and production facilities, including operational investments in automation and data-driven technology primarily benefiting our fresh and value-added products segment, and (3) improvements to our pineapple operations in Central America and Kenya. Net cash used in investing activities for the first nine months of 2022 also reflects $9.3 million in investments in unconsolidated companies in the food and nutrition sector that align with our long-term strategy and vision. Partially offsetting the net cash used in investing activities were proceeds from the sale of property, plant and equipment of $7.6 million, primarily relating to the sale of vacant land in Mexico.
Net cash used in investing activities for the first nine months of 2021 primarily consisted of capital expenditures of $83.4 million, mainly related to (1) the purchase of our refrigerated container ships, the final two of which were received during the first nine months of 2021, (2) expansion and improvements to facilities in North America and Asia, related to both our banana and fresh and value-added products segments, and (3) improvements to our banana operations in Central America. Partially offsetting the net cash used in investing activities were $12.5 million in proceeds from the sale of property, plant and equipment which mainly related to the sales of surplus land in the Middle East, South America, and Central America, and a vessel. In addition, proceeds from the settlement of derivative instruments no longer designated in hedging relationships of $4.6 million contributed to the offset in net cash used in investing activities.
Financing Activities
Net cash used in financing activities for the first nine months of 2022 was $57.0 million compared with $86.7 million for the first nine months of 2021. Net cash used in financing activities for the first nine months of 2022 primarily consisted of net repayments on debt of $33.0 million and dividends paid of $21.5 million.
Net cash used in financing activities for the first nine months of 2021 primarily consisted of net repayments on debt of $64.9 million, dividends paid of $16.6 million, and distributions to noncontrolling interests of $5.2 million.
Debt Instruments and Debt Service Requirements
On October 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, including Bank of America, N.A. as administrative agent and BofA 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 on October 1, 2024. Effective September 13, 2022, we exercised our option as included in the Second A&R Credit Agreement to reduce the borrowing limit on the Revolving Credit Facility from $1.1 billion to $0.9 billion. 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 permitted 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).
31
The Second A&R Credit Agreement interest rate grid provides for five pricing levels for interest rate margins. As a result of reference rate reform, we are currently working with our counterparties to amend our Revolving Credit Facility to reference the Secured Overnight Financing Rate (SOFR) effective the first quarter of 2023. At September 30, 2022, we had borrowings of $486.1 million outstanding under the Revolving Credit Facility bearing interest at a per annum rate of 4.00%. 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 2.50 to 1.00. 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, it requires us to maintain a 1) Consolidated Leverage Ratio of not more than 3.50 to 1.00 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 1.00 as of the end of any fiscal quarter. Additionally, it 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. Under the Second A&R Credit Agreement, we are permitted 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. It also provides an 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 of September 30, 2022, we were in compliance with all of the covenants contained in the Second A&R Credit Agreement.
As of September 30, 2022, we had $439.4 million of borrowing availability under committed working capital facilities, primarily under the Revolving Credit Facility.
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. However, we cannot predict whether future developments associated with the current economic environment or COVID-19 pandemic will materially adversely affect our long-term liquidity position. 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 “Item 1A. Risk Factors” of our Form 10-K for the year ended December 31, 2021.
Contractual Obligations
As of September 30, 2022, there were no material changes in our commitments or contractual obligations as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the fiscal year ended December 31, 2021. There were no material changes to these critical accounting policies or estimates during the third quarter of 2022.
Fair Value Measurements
We are exposed to fluctuations in currency exchange rates against the U.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 foreign currency cash flow hedges was a net asset position of $3.5 million as of September 30, 2022 compared to a net
32
liability position of $13.7 million as of December 31, 2021 due to the 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 our interest rate swap cash flow hedges was an asset position of $15.1 million as of September 30, 2022 compared to a liability of $29.4 million as of December 31, 2021. The change to a net asset position is due to the relative increase in variable interest rates when compared to the rates as of December 31, 2021. As a result of reference rate reform and in connection with the expected transition to SOFR for our Revolving Credit Facility, we expect to amend our interest rate swaps to also reference SOFR effective the first quarter of 2023.
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 $10.6 million of the net fair value of our cash flow hedges recognized as a net gain in accumulated other comprehensive loss will be transferred to earnings during the next 12 months and a net gain of $6.7 million over a period of approximately 6 years, along with the earnings effect of the related forecasted transactions.
The fair value of the banana reporting unit's goodwill and the prepared food reporting unit's goodwill and remaining trade names and trademarks are highly 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. We disclosed the sensitivity related to the banana reporting unit's goodwill and the prepared food reporting unit's goodwill and trade names and trademarks in our Annual Report on Form 10-K for the year ended December 31, 2021. During the quarter ended September 30, 2022, we did not record impairment charges associated with these reporting units or trade names and trademarks, however we continue to monitor their performance.
Potential impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than the carrying value of the reporting unit. Future changes in the estimates used to conduct our impairment review, including our financial projections and changes in the discount rates used, could cause the analysis to indicate that our goodwill or trade names and trademarks are impaired in subsequent periods and result in a write-off of a portion or all of goodwill or trade names and trademarks.
In addition, certain definite-lived intangible assets related to our fresh and value-added products segment are sensitive to changes in estimated cash flows. To the extent that future developments result in estimated cash flows that are less than currently estimated levels, it could lead to impairment of these assets.
New Accounting Pronouncements
Refer to Note 2. “Recently Issued Accounting Pronouncements” to the accompanying unaudited consolidated financial statements for a discussion of recent accounting pronouncements.
Seasonality
Interim results are subject to significant variations and may not be indicative of the results of operations that may be expected for an entire fiscal year. Due to seasonal sales price fluctuations, we have historically realized a greater portion of our net sales and gross profit during the first two calendar quarters of the year. The sales price of any fresh produce item fluctuates throughout the year due to the supply of and demand for that particular item, as well as the pricing and availability of other fresh produce items, many of which are seasonal in nature. See the information under the caption “Seasonality” provided in Item 1. Business, of our Annual Report on Form 10-K for the year ended December 31, 2021. However, if current market conditions continue, the impact of seasonality on our financial results may be atypical for fiscal year 2022 where a greater portion of our net sales and gross profit will not necessarily be generated in the first half of the year.
Forward-Looking Statements
This quarterly report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this quarterly report contains forward-looking statements regarding:
33
•our expectations regarding future financial and operational performance;
•our expectations regarding the impacts of the COVID-19 pandemic and the invasion of Ukraine by Russia on our business and operating results, and the factors for such impacts;
•our intentions regarding the use of borrowed funds;
•our expectations regarding continued inflationary pressures, our ability to mitigate such pressures through pricing, and the impacts to our operating results;
•our beliefs that our cash on hand, capacity 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;
•our expectations regarding our derivative instruments, including our counterparties’ credit ratings and the anticipated impacts on our financials;
•our expectations and estimates regarding certain legal, tax and accounting matters, including our litigation strategy, plans and beliefs regarding the ultimate outcome of income tax adjustments assessed by foreign taxing authorities;
•our belief that certain proposed adjustments by taxing authorities are without merit, our ability to contest the adjustments and our plans to contest such adjustments;
•our beliefs related to the sufficiency of our capital resources;
•our expectations related to the transition to SOFR for our Revolving Credit Facility and interest rate swaps, and the timing of such transitions;
•our expectations regarding the impact of seasonality in 2022 on our operating results;
•our expectations concerning the fair value of hedges, including the timing and impact to our results;
•our expectations regarding estimated liabilities related to environmental cleanup; and
•our plans and future performance.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. These various factors include, but are not limited to, the following:
•the impact of the ongoing COVID-19 pandemic and the war in Ukraine on our business, suppliers, customers, consumers, employees, and communities, including the inflationary impact on fuel, petroleum-based products such as fertilizer and packaging materials;
•disruptions or inefficiencies in our operations and supply chain, including any impact of the pandemic, the war in Ukraine and the inflationary environment;
•the impact of inflation and rising costs on our operations;
•our ability to successfully execute our long-term strategy;
•the impact of governmental trade restrictions, including adverse governmental regulation that may impact our ability to access certain markets;
•the ability to meet our anticipated cash needs;
•the continued ability of our distributors and suppliers to have access to sufficient liquidity to fund their operations;
•the impact of product and raw material supply and pricing, as well as prices for petroleum-based products and packaging materials;
•the impact of pricing and other actions by our competitors, particularly during periods of low consumer confidence and spending levels;
•trends and other factors affecting our financial condition or results of operations from period to period, including changes in product mix, consumer preferences or consumer demand for branded products such as ours; anticipated price and expense levels;
•the impact of crop disease, such as vascular diseases, one of which is known as Tropical Race 4, or TR4 (also known as Panama Disease);
•our ability to find contingency plans to protect our and our suppliers’ banana crops from vascular diseases;
•competitive pressures and our ability to realize the full benefits of the inflation driven price increases implemented;
•disruptions or issues that impact our production facilities or complex logistics network;
•the availability of sufficient labor during peak growing and harvesting seasons;
•the impact of foreign currency fluctuations, including the effectiveness of our hedging activities;
•inability to realize expected benefits on plans for expansion of our business (including through acquisitions);
•our ability to successfully integrate acquisitions and new product lines into our operations;
•the impact of impairment or other charges associated with exit activities, crop or facility damage or otherwise,
•the timing and cost of resolution of pending and future legal and environmental proceedings or investigation;
•the impact of changes in tax accounting or tax laws (or interpretations thereof), the impact of claims or adjustments proposed by the Internal Revenue Service or other foreign taxing authorities in connection with our current or future tax audits and our ability to successfully contest such tax claims and pursue necessary remedies;
34
•the success of our joint ventures;
•the impact of severe weather conditions and natural disasters, such as flooding and earthquakes, on crop quality and yields and on our ability to grow, procure or export our products;
•the adequacy of our insurance coverage;
•the cost and other implications of changes in regulations applicable to our business, including potential legislative or regulatory initiatives in the United States or elsewhere directed at mitigating the effects of climate change;
•damage to our reputation or brand names or negative publicity about our products;
•exposure to product liability claims and associated regulatory and legal actions, product recalls, or other legal proceedings relating to our business;
•our ability to continue to comply with covenants and the terms of our credit instruments and our ability to obtain additional financing to fund our capital expenditures;
•our ability to successfully implement our Optimization Program and to realize its expected benefits; and
•our ability to successfully manage the risks associated with international operations, including risks relating to political or economic conditions, inflation, tax laws, currency restrictions and exchange rate fluctuations, legal or judicial systems.
All forward-looking statements in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our plans and performance may also be affected by the factors described in our most recent Annual Report on Form 10-K along with other reports that we file with the Securities and Exchange Commission.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended December 31, 2021.
36
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Such officers also confirm that there were no changes to our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Tax related matters
In connection with the examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately $144.3 million (including interest and penalties) for tax years 2012 through 2016. We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as we believe that the proposed adjustments are without technical merit.
In one of the foreign jurisdictions, we are currently contesting tax assessments related to the 2012-2015 audit years and the 2016 audit year in both the administrative court and the judicial court. During 2019 and 2020, we filed actions contesting the tax assessment in the administrative office. Our initial challenge to each of these tax assessments was rejected, and we subsequently lost our appeals at the administrative court. We have subsequently filed actions to contest each of these tax assessments in the country’s judicial courts. In addition, we have filed a request for injunction to the judicial court to stay the tax authorities' collection efforts for these two tax assessments, pending final judicial decisions. The court granted our injunction with respect to the 2016 audit year, however denied our injunction with respect to the 2012-2015 audit years. We timely appealed the denial of the injunction, and on August 10, 2022 the appellate court overturned the denial and granted our injunction for the 2012-2015 audit years. Pursuant to local law, we registered real estate collateral with an approximate fair market value of $6.0 million in connection with the grant of the 2016 audit year injunction. This real estate collateral has a net book value of $3.8 million as of the quarter ended September 30, 2022. In addition, in connection with the grant of the 2012-2015 audit year injunction, we registered real estate collateral with an approximate fair market value of $24.0 million, and a net book value of $4.6 million as of the quarter ended September 30, 2022. The registration of this real estate collateral does not affect our operations in the country.
In the other foreign jurisdiction, the administrative court denied our appeal, and on March 4, 2020 we filed an action in the judicial court to contest the administrative court's decision. The case is still pending.
We will continue to vigorously contest the adjustments and to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process.
Kunia Well Site
In 1980, elevated levels of certain chemicals were detected in the soil and ground-water at a plantation leased by one of our U.S. subsidiaries in Honolulu, Hawaii (the “Kunia Well Site”). In 2005, our subsidiary signed a Consent Decree (“Consent Decree”) with the Environmental Protection Agency (“EPA”) for the performance of the clean-up work for the Kunia Well Site. Based on findings from remedial investigations, our subsidiary coordinated with the EPA to evaluate the clean-up work required in accordance with the Consent Decree. On July 25, 2022, an Explanation of Significant Differences (ESD) for the Kunia Well Site was filed by the EPA, which formally transitioned the remedy for the Kunia Well Site to a Monitored Natural Attenuation (MNA), thereby reducing our potential liability. In connection with the above decision, we recorded a $9.9 million reduction in our liability during the quarter ended September 30, 2022, presented in asset impairment and other (credits) charges, net in our Consolidated Statements of Operations, to reflect the decrease in estimated costs associated with the clean-up. The revised estimate associated with the clean-up costs, and on which our accrual is based, is $2.9 million.
38
Item 6. Exhibits
| 31.1** | |||||
| 31.2** | |||||
| 32* | |||||
| 101.INS*** | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH*** | Inline XBRL Taxonomy Extension Schema Document. | ||||
| 101.CAL*** | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | ||||
| 101.DEF*** | Inline XBRL Taxonomy Extension Definition Linkbase Document. | ||||
| 101.LAB*** | Inline XBRL Taxonomy Extension Label Linkbase Document. | ||||
| 101.PRE*** | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | ||||
| 104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
_____________________
* Furnished herewith.
** Filed herewith.
*** Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, (ii) Consolidated Statements of Operations for the quarters and nine months ended September 30, 2022 and October 1, 2021, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters and nine months ended September 30, 2022 and October 1, 2021, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and October 1, 2021, (v) Consolidated Statements of Shareholders' Equity and Redeemable Noncontrolling Interest for the quarters and nine months ended September 30, 2022 and October 1, 2021 and (vi) Notes to Consolidated Financial Statements.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Fresh Del Monte Produce Inc. | |||||||||||
| Date: | November 2, 2022 | By: | /s/ Mohammed Abbas | ||||||||
| Mohammed Abbas | |||||||||||
| Executive Vice President & Chief Operating Officer | |||||||||||
| By: | /s/ Monica Vicente | ||||||||||
| Monica Vicente | |||||||||||
| Senior Vice President & Chief Financial Officer | |||||||||||
40
EXHIBIT 31.1
CERTIFICATION
I, Mohammad Abu-Ghazaleh, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Fresh Del Monte Produce Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 2, 2022 | |||||||
| Signature: | /s/ Mohammad Abu-Ghazaleh | |||||||
| Title: | Chairman and Chief Executive Officer | |||||||
EXHIBIT 31.2
CERTIFICATION
I, Monica Vicente, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Fresh Del Monte Produce Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | November 2, 2022 | |||||||
| Signature: | /s/ Monica Vicente | |||||||
| Title: | Senior Vice President and Chief Financial Officer | |||||||
EXHIBIT 32
CERTIFICATIONS
PURSUANT TO 18 USC SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
We, Mohammad Abu-Ghazaleh and Monica Vicente, as Chief Executive Officer and Chief Financial Officer, respectively, of Fresh Del Monte Produce Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
(1)the accompanying Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2022, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | November 2, 2022 | By: | /s/ Mohammad Abu-Ghazaleh | ||||||||
| Name: | Mohammad Abu-Ghazaleh | ||||||||||
| Title: | Chairman and Chief Executive Officer | ||||||||||
| Date: | November 2, 2022 | By: | /s/ Monica Vicente | ||||||||
| Name: | Monica Vicente | ||||||||||
| Title: | Senior Vice President and Chief Financial Officer | ||||||||||