Del Monte Corp 10-Q for FY2021 Q3
Del Monte Corp (DMC)
10-Q
2021-11-03
For: 2021-10-01
View Original
Added on
April 06, 2026
About this 10-Q
Del Monte Corp filed this 10-Q on November 3, 2021, covering the quarter ended October 1, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 1, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1B
- up 1.5% from $989.7M a year earlier
- Net income
- $1.3M
- down 92.5% from net income of $17.4M a year earlier
- Diluted EPS
- $0.03
- down 91.9% from $0.37 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————————
FORM 10-Q
———————————
(Mark One)
For the quarterly period ended October 01, 2021
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 22, 2021, there were 47,545,409 ordinary shares of Fresh Del Monte Produce Inc. issued and outstanding.
TABLE OF CONTENTS
| Page | ||||||||
| PART I: FINANCIAL INFORMATION | ||||||||
| Item 1. Financial Statements | ||||||||
| 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)
| October 1, 2021 | January 1, 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 | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| 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 charges (credits), net | ( | ( | ( | ||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Other expense, net | |||||||||||||||||||||||
| (Loss) income before income taxes | ( | ||||||||||||||||||||||
| Income tax (benefit) provision | ( | ||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Less: Net income (loss) 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 (LOSS) INCOME (Unaudited)
(U.S. dollars in millions)
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Net unrealized (loss) gain on derivatives, net of tax | ( | ( | |||||||||||||||||||||
| Net unrealized foreign currency translation (loss) gain | ( | ( | |||||||||||||||||||||
| Net change in retirement benefit adjustment, net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive (loss) income | $ | ( | $ | $ | $ | ||||||||||||||||||
| Less: Comprehensive income (loss) attributable to redeemable and noncontrolling interests | ( | ( | ( | ||||||||||||||||||||
| Comprehensive (loss) income 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 | |||||||||||
| October 1, 2021 | September 25, 2020 | ||||||||||
| 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 | |||||||||||
| Gain on disposal of property, plant and equipment | ( | ( | |||||||||
| Deferred income taxes | ( | ( | |||||||||
| Foreign currency translation adjustment | ( | ||||||||||
| Other, net | ( | ||||||||||
Changes in operating assets and liabilities | |||||||||||
| Receivables | ( | ||||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Other noncurrent assets and liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from sales of property, plant and equipment | |||||||||||
| Cash 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 | ( | ( | |||||||||
| Repurchase and retirement of ordinary shares | ( | ||||||||||
| Other financing activities | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash | |||||||||||
| Net increase (decrease) 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 | $ | $ | |||||||||
| Retirement of ordinary shares | $ | $ | |||||||||
| 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 January 1, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | ( | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized (loss) gain on derivatives, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation (loss) gain | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 2, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Exercises of stock options | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interests | — | — | — | — | — | — | ( | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized (loss) gain on derivatives, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation (loss) gain | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 2, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Exercises of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized (loss) gain on derivatives, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation (loss) gain | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 1, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
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 December 27, 2019 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock awards | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect adjustment of ASC 326 adoption | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of ordinary shares | ( | — | ( | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | ( | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized (loss) gain on derivatives, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation (loss) gain | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 27, 2020 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock awards | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase and retirement of ordinary shares | ( | — | ( | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized (loss) gain on derivatives, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation gain | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 26, 2020 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based payment expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interests | — | — | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Dividend declared | — | — | — | ( | — | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized (loss) gain on derivatives, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized foreign currency translation (loss) gain | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Change in retirement benefit adjustment, net of tax | — | — | — | — | ( | ( | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September, 25, 2020 | $ | $ | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
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 (which includes Kenya), 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 joint venture arrangements and through supply contracts with independent growers.
Our business is comprised of three reportable segments, two of which represent our primary businesses of fresh and value-added products and banana, and one that represents our other ancillary businesses.
•Fresh and value-added products - includes pineapples, fresh-cut fruit, fresh-cut vegetables, melons, vegetables, non-tropical fruit (including grapes, apples, citrus, blueberries, strawberries, pears, peaches, plums, nectarines, cherries and kiwis), other fruit and vegetables, avocados, and prepared foods (including prepared fruit and vegetables, juices, other beverages, and meals and snacks).
•Banana
•Other products and services - includes our ancillary businesses consisting of sales of poultry and meat products, a plastic product business, and third-party freight services.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements for the quarter and nine months ended October 1, 2021 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 October 1, 2021 are subject to significant seasonal variations and are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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 January 1, 2021.
We are required to evaluate events occurring after October 1, 2021 for recognition and disclosure in the unaudited Consolidated Financial Statements for the quarter and nine months ended October 1, 2021. Events are evaluated based on whether they represent information existing as of October 1, 2021, which require recognition in the unaudited Consolidated Financial Statements, or new events occurring after October 1, 2021 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 October 1, 2021 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
New Accounting Pronouncements - Adopted
In January 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)- Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. We adopted this ASU prospectively on the first day of our 2021 fiscal year. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU introduces new guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction, and also provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax. The ASU also makes changes to the current guidance for making intraperiod allocations and determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting, among other changes. We adopted this ASU on the first day of our 2021 fiscal year. The adoption of this ASU did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements - Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued a related amendment, ASU 2021-01, Reference Rate Reform (Topic 848): Scope. These ASUs provide optional guidance to companies to ease the potential burden associated with transitioning away from reference rates that are expected to be discontinued. The guidance provides optional expedients and exceptions to apply generally accepted accounting principles to contract modifications and hedging relationships, subject to certain criteria, that reference LIBOR or another reference rate expected to be discontinued. Companies can adopt the ASU immediately, however the guidance will only be available through December 31, 2022. We have LIBOR-based borrowings and interest rate hedges that reference LIBOR. We are currently evaluating these ASUs, which we may elect to adopt in a future period on an as-needed basis.
8
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
3. Asset Impairment and Other Charges (Credits), Net
The following represents a summary of asset impairment and other charges (credits), net recorded during the quarters and nine months ended October 1, 2021 and September 25, 2020 (U.S. dollars in millions):
| 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(1) | $ | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Philippines asset impairment of low-yield areas | |||||||||||||||||||||||||||||||||||
| Fresh and value-added products segment: | |||||||||||||||||||||||||||||||||||
Exit costs related to European facility(2) | ( | ( | |||||||||||||||||||||||||||||||||
| Other fresh and value-added products segment charges | ( | ( | |||||||||||||||||||||||||||||||||
Total asset impairment and other charges (credits), net | $ | $ | ( | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||
| Quarter ended | Nine months ended | ||||||||||||||||||||||||||||||||||
| September 25, 2020 | September 25, 2020 | ||||||||||||||||||||||||||||||||||
| 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: | |||||||||||||||||||||||||||||||||||
California Air Resource Board charge(3) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Philippines asset impairment of low-yield areas | |||||||||||||||||||||||||||||||||||
| Fresh and value-added products segment: | |||||||||||||||||||||||||||||||||||
California Air Resource Board charge(3) | |||||||||||||||||||||||||||||||||||
Impairment of production facilities(4) | |||||||||||||||||||||||||||||||||||
Insurance recovery related to product recall(5) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
North America reorganization charges(6) | |||||||||||||||||||||||||||||||||||
| Other fresh and value-added products segment charges | |||||||||||||||||||||||||||||||||||
Total asset impairment and other charges (credits), net | $ | $ | ( | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
(1) $(0.8 ) million insurance recovery for the nine months ended October 1, 2021 associated with damages to certain of our banana fixed assets in Guatemala caused by hurricanes Eta and Iota in the fourth quarter of 2020.
(2) $0.3 million charge for the nine months ended October 1, 2021 primarily relating to severance and other expenses incurred in connection with the exit from a facility in Europe.
(3) $2.0 million charge for the nine months ended September 25, 2020 relating to a settlement with the California Air Resource Board. This charge relates to both our banana and fresh and value-added products segments.
(4) $2.1 million asset impairment charges for the nine months ended September 25, 2020 related to impairment of production facilities in North America and Europe.
9
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
3. Asset Impairment and Other Charges (Credits), Net (continued)
(5) $(10.4 ) million insurance recovery for the nine months ended September 25, 2020 related to a voluntary recall of vegetable products in North America which was announced in the fourth quarter of 2019.
(6) $1.5 million charge for the nine months ended September 25, 2020 related to severance expenses incurred in connection with the reorganization of our sales and marketing function in North America.
4. Income Taxes
In connection with a current examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately $147.4 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 filed an appeal in judicial court on April 30, 2020. On September 10, 2020, we were notified that we lost our final appeal at the administrative level for the audit years 2012-2015, and likewise on October 7, 2021 for the audit year 2016. We intend to file an appeal in the judicial court in November 2021 with respect to the administrative ruling for the audit year 2016. For the audit years 2012-2015, we have filed a request for an injunction in judicial court which would defer payment, if any, until the end of the judicial process, and we intend to do the same for the audit year 2016.
In the other foreign jurisdiction, the administrative process has been completed and we filed a case in judicial court on March 4, 2020.
We expect to 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 (benefit) provision was $(6.6 ) million for the third quarter of 2021 compared to $4.9 million for the third quarter of 2020, and $9.1 million for the first nine months of 2021 compared to $9.4 million for the first nine months of 2020. The decrease in the income tax provision in both periods was primarily due to decreased earnings in certain higher tax jurisdictions. The income tax provision for the first nine months of 2021 and first nine months of 2020 also include a $0.8 million and $1.7 million benefit, respectively, relating to the NOL carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020.
10
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
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 October 1, 2021 were $354.4 million, net of an allowance of $23.7 million. Our allowance for trade receivables consists of two components: a $13.1 million allowance for credit losses and a $10.6 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.
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 October 1, 2021 and September 25, 2020 (U.S. dollars in millions):
| Nine months ended | |||||||||||||||||||||||
| Trade Receivables | October 1, 2021 | September 25, 2020 | |||||||||||||||||||||
Allowance for credit losses: | |||||||||||||||||||||||
Balance, beginning of period(1) | $ | $ | |||||||||||||||||||||
| Provision for uncollectible amounts | |||||||||||||||||||||||
Reclassifications(2) | ( | ||||||||||||||||||||||
Balance, end of period | $ | $ | |||||||||||||||||||||
(1) Beginning balance related to the nine months ended September 25, 2020 includes $1.0 million increase reflecting the impact of our adoption of ASC 326 on the first day of fiscal 2020.
(2) $2.6 million reclassification 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 October 1, 2021. The amount in the long-term allowance for credit losses related to customer trade receivables as of October 1, 2021 is not material to our Consolidated Financial Statements.
11
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
5. Allowance for Credit Losses (continued)
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 5 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.
The following table details the advances to growers and suppliers based on their credit risk profile (U.S. dollars in millions):
| October 1, 2021 | January 1, 2021 | ||||||||||||||||||||||
| Current | Past-Due | Current | Past-Due | ||||||||||||||||||||
| Gross advances to growers and suppliers | $ | $ | $ | $ | |||||||||||||||||||
The allowance for advances to growers and suppliers and the related financing receivables for the nine months ended October 1, 2021 and September 25, 2020 were as follows (U.S. dollars in millions):
| Nine months ended | |||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | ||||||||||||||||||||||
| Allowance for advances to growers and suppliers: | |||||||||||||||||||||||
Balance, beginning of period(1) | $ | $ | |||||||||||||||||||||
| Provision for uncollectible amounts | ( | ( | |||||||||||||||||||||
| Deductions to allowance related to write-offs | ( | ( | |||||||||||||||||||||
| Balance, end of period | $ | $ | |||||||||||||||||||||
(1) Beginning balance related to the nine months ended September 25, 2020 includes $0.2 million increase reflecting the impact of our adoption of ASC 326 on the first day of fiscal 2020.
12
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
6. Share-Based Compensation
Our shareholders approved and ratified the 2014 Omnibus Share Incentive Plan (the “2014 Plan”), which allows us to grant equity-based compensation awards, including stock options, restricted stock awards and restricted stock units including performance stock units. We disclosed the significant terms of the 2014 Plan in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2021.
Stock-based compensation expense related to restricted stock units (“RSUs”), performance stock units (“PSUs”), and restricted stock awards (“RSAs”) 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 | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| RSUs/PSUs | $ | $ | $ | $ | |||||||||||||||||||
| RSAs | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Restricted Stock Units and Performance Stock Units
The following table lists the various RSUs and PSUs awarded under the 2014 Plan for the nine months ended October 1, 2021 and September 25, 2020:
| Date of Award | Type of award | Units awarded | Price per share | ||||||||||||||
| 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 | ||||||||||||||||
| For the nine months ended September 25, 2020 | |||||||||||||||||
| April 28, 2020 | RSU | $ | |||||||||||||||
| March 30, 2020 | RSU | ||||||||||||||||
| March 23, 2020 | RSU | ||||||||||||||||
| March 2, 2020 | PSU | ||||||||||||||||
| March 2, 2020 | RSU | ||||||||||||||||
Under the 2014 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 will vest in three equal annual installments on each of the next three anniversary dates provided that the recipient remains employed with us.
RSUs granted subsequent to January 1, 2021 will vest annually in three equal installments over a three -year service period. RSUs granted prior to January 1, 2021 vest as follows: 20 % on the grant date and 20 % 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 expense 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.
13
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
6. Share-Based Compensation (continued)
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.
7. Inventories, net
Inventories consisted of the following (U.S. dollars in millions):
| October 1, 2021 | January 1, 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):
| October 1, 2021 | January 1, 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 maturing on October 1, 2024 (the “Revolving Credit Facility”). 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
14
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
8. Debt and Finance Lease Obligations (continued)
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 October 1, 2021, we were in compliance with all of the covenants contained in the Second A&R Credit Agreement.
Debt issuance costs of $1.4 million and $1.8 million are included in other noncurrent assets on our Consolidated Balance Sheets as of October 1, 2021 and January 1, 2021, respectively.
We have a renewable 364 -day, $25.0 million commercial stand-by letter of credit facility with Rabobank Nederland.
The following is a summary of the material terms of the Credit Facility and other working capital facilities at October 1, 2021 (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 1.125 %. 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 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 October 1, 2021, we applied $31.9 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”.
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 continues to evaluate with the EPA the clean-up work currently in progress in accordance with the Consent Decree.
The estimates associated with the clean-up costs are between $12.9 million and $28.7 million. The estimate on which our accrual is based totals $12.9 million. As of October 1, 2021, $12.6 million was included in other noncurrent liabilities and $0.3 million included in accounts payable and accrued expenses in our Consolidated Balance Sheets for the Kunia Well Site clean-up. We expect to expend approximately $0.4 million in 2021, $1.1 million in 2022 and $0.9
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.
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 | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| 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.
16
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
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 | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| 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 $0.9 million for the quarter ended October 1, 2021 and $0.8 million for the quarter ended September 25, 2020. The net periodic benefit costs related to other non-U.S.-based plans is $2.7 million for the nine months ended October 1, 2021 and $2.4 million for the nine months ended September 25, 2020.
Service costs are presented in the same line item in the Consolidated Statements of Operations as other compensation costs arising from services rendered by the employees during the period. With the exception of service cost, the other components of net periodic benefit costs (which include interest costs, expected return on assets, amortization of net actuarial losses) are recorded in the Consolidated Statements of Operations in other expense, net.
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, 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 | ||||||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | |||||||||||||||||||||||||
| Segments: | Net Sales | Gross Profit | Net Sales | Gross Profit | ||||||||||||||||||||||
| Fresh and value-added products | $ | $ | $ | $ | ||||||||||||||||||||||
| Banana | ||||||||||||||||||||||||||
| Other products and services | ||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||||||||||||
| Nine months ended | ||||||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | |||||||||||||||||||||||||
| Segments: | Net Sales | Gross Profit | Net Sales | Gross Profit | ||||||||||||||||||||||
| Fresh and value-added products | $ | $ | $ | $ | ||||||||||||||||||||||
| Banana | ||||||||||||||||||||||||||
| Other products and services | ||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||||||||||||
| Quarter ended | Nine months ended | |||||||||||||||||||||||||
| Net Sales by geographic region: | October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||||
| Middle East | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||||||||||||
18
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
12. Business Segment Data (continued)
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 | ||||||||||||||||||||||||||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
Our net sales by product disclosure for the quarter and nine months ended September 25, 2020 in the table above has been adjusted to reflect a reclassification between product categories within our fresh and value-added products segment as the result of a refinement in our definition of prepared foods which we adopted in March 2021. For the quarter ended September 25, 2020, this reclassification resulted in an increase in revenues to our prepared foods category of $3.2 million and a decrease in revenues to the following product categories: fresh-cut fruit - $0.7 million; fresh-cut vegetables - $1.2 million; and avocados - $1.3 million. For the nine months ended September 25, 2020, this reclassification resulted in an increase in revenues to our prepared foods category of $10.7 million and a decrease in revenues to the following product categories: fresh-cut fruit - $3.6 million; fresh-cut vegetables - $4.0 million; and avocados - $3.1 million. On a full year basis for the year ended January 1, 2021, the reclassification resulted in an increase in revenues to our prepared foods category of $14.0 million and a decrease in revenues to the following product categories: fresh-cut fruit - $4.2 million; fresh-cut vegetables - $4.9 million; and avocados - $4.9 million. This reclassification will be reflected accordingly in our future filings with the SEC.
19
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
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 (loss) income, a component of shareholders’ equity, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item.
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 October 1, 2021 is $46.8 million. As of October 1, 2021, 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 2021, 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 October 1, 2021 (in millions):
| Foreign currency contracts qualifying as cash flow hedges: | Notional amount | |||||||||||||||||||||||||||||||||||||
| Euro | EUR | |||||||||||||||||||||||||||||||||||||
| British pound | GBP | |||||||||||||||||||||||||||||||||||||
| Japanese yen | JPY | |||||||||||||||||||||||||||||||||||||
| Chilean peso | CLP | |||||||||||||||||||||||||||||||||||||
| Kenya shilling | KES | |||||||||||||||||||||||||||||||||||||
| Korean won | KRW | |||||||||||||||||||||||||||||||||||||
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 mitigate that exposure by entering into bunker fuel swap agreements which permit us to lock in bunker fuel prices. During fiscal 2020, one of our subsidiaries entered into bunker fuel swap agreements 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.
During fiscal 2020, we dedesignated portions of our bunker fuel cash flow hedges due to decreases in our forecasted fuel consumption for certain fuel types which was partially driven by the delay of the receipt of three of our six new refrigerated container vessels due to the COVID-19 pandemic. Subsequently, during the first quarter of 2021, we made an operational decision to allocate two of our new refrigerated container vessels to service the North America West Coast, primarily as a result of our fleet optimization initiatives, significant market volatility in third-party shipping rates, and inadequate service levels from our shipping providers as it related to timeliness of delivery. This decision resulted in changes to our forecasted fuel mix, thus further decreasing the forecasted fuel consumption related to certain of our U.S. Gulf Coast contracts. Due to this strategic change as well as a result of the previous dedesignations discussed above, we determined to voluntarily terminate the remaining outstanding portions of our fuel hedge portfolio, consisting of a notional amount of 75,342 metric tons, during the first quarter of 2021. At the time of termination, a hedging relationship is dedesignated if it had not already met a separate criteria for dedesignation.
We recorded a gain of $3.3 million during the nine months ended October 1, 2021 related to our dedesignated bunker fuel swaps in other expense, net. A net gain of $1.2 million associated with our terminated bunker fuel swaps remains deferred in accumulated other comprehensive loss related to forecasted transactions that are still probable of occurring within two months of the originally specified timeframe.
Interest Rate Contracts
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. 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 (loss) income and are subsequently reclassified into earnings as the interest expense on debt is recognized in earnings. At October 1, 2021, 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.”
21
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
13. Derivative Financial Instruments (continued)
The following table reflects the fair values of derivative instruments, which are designated as level 2 in the fair value hierarchy, as of October 1, 2021 and January 1, 2021 (U.S. dollars in millions):
Derivatives designated as hedging instruments (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | Bunker fuel swaps | Interest rate swaps | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet location: | October 1, 2021 | January 1, 2021 | October 1, 2021 | January 1, 2021 | October 1, 2021 | January 1, 2021 | October 1, 2021 | January 1, 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.
At January 1, 2021, $1.3 million was included in prepaid expenses and other current assets and $0.3 million was included in accounts payable and accrued expenses for the portions of our bunker fuel swap contracts which were no longer designated as hedging instruments.
We expect that $10.5 million of the net fair value of designated and dedesignated hedges recognized as a net loss in accumulated other comprehensive loss will be transferred to earnings during the next 12 months and the remaining net loss of $31.1 million over a period of approximately 7 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 (Loss) Income for the quarters and nine months ended October 1, 2021 and September 25, 2020 (U.S. dollars in millions):
| | Net amount of (loss) gain recognized in other comprehensive (loss) income on derivatives | ||||||||||||||||||||||||||||||||||
| Quarter ended | Nine months ended | ||||||||||||||||||||||||||||||||||
Derivative instruments | October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | |||||||||||||||||||||||||||||||
| 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 October 1, 2021 and September 25, 2020.
22
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, bunker fuel 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, interest rate and bunker fuel 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 and bunker fuel 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 liability | Bunker fuel contracts, net asset (1) | Interest rate contracts, net liability | |||||||||||||||||||||||||||||||||
| October 1, 2021 | January 1, 2021 | October 1, 2021 | January 1, 2021 | October 1, 2021 | January 1, 2021 | ||||||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Significant observable inputs (Level 2) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Significant unobservable inputs (Level 3) | |||||||||||||||||||||||||||||||||||
(1) Includes both designated and dedesignated cash flow hedges as of January 1, 2021. Refer to Note 13, “Derivative Financial Instruments”, for the balances of each.
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 January 1, 2021.
23
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
14. Fair Value Measurements (continued)
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.
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”). These assets met the held for sale criteria as of October 1, 2021, and primarily relate to our fresh and value-added products segment. Included in the $20.0 million of assets held for sale as of October 1, 2021 were the following: $7.2 million consists of a facility and related assets in the United States, $3.7 million consists of equipment in the Middle East, $2.2 million is related to vacant land in Mexico, $4.3 million consists of facilities and farm land in South America, and the remaining $2.6 million consists of farm land and associated assets primarily located in Asia. 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 October 1, 2021, we received proceeds of $10.7 million from the sale of assets previously held for sale and recorded a gain on disposal of property, plant and equipment, net of $4.4 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 October 1, 2021 | |||||||||||||||||||||||
| Balance at January 1, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (3) | ( | (2) | ( | ( | ||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (4) | ||||||||||||||||||||||
| Net current period other comprehensive (loss) income | ( | ( | |||||||||||||||||||||
| Balance at October 1, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Nine months ended September 25, 2020 | |||||||||||||||||||||||
| Balance at December 27, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | (3) | (2) | ( | ( | ||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (4) | ||||||||||||||||||||||
| Net current period other comprehensive (loss) income | ( | ( | |||||||||||||||||||||
| Balance at September 25, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(1) All amounts are net of tax and noncontrolling interest.
(2) Includes a loss of $4.2 million and a gain of $3.4 million for the nine months ended October 1, 2021 and nine months ended September 25, 2020, respectively, on intra-entity foreign currency transactions that are of a long-term-investment nature.
(3) Includes a tax effect of $(1.9 ) million and $3.2 million for the nine months ended October 1, 2021 and nine months ended September 25, 2020, respectively.
(4) Includes amounts reclassified for both designated and dedesignated cash flow hedges. Refer to the following table for the amounts of each.
24
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 | ||||||||||||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | |||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||
| Bunker fuel swaps | ( | 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 | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
25
FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
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 47,544,395
On February 21, 2018, our Board of Directors approved a three-year stock repurchase program of up to $300.0 million of our ordinary shares that expired during the first quarter of 2021. No shares were repurchased under this program subsequent to the second quarter of 2020.
The below is a summary of the dividends paid per share for the nine months ended October 1, 2021 and September 25, 2020. These dividends were declared and paid within the same fiscal quarter.
| Nine months ended | ||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | |||||||||||||||||||
| Dividend Payment Date | Cash Dividend per Ordinary Share | Dividend Payment Date | Cash Dividend per Ordinary Share | |||||||||||||||||
| September 10, 2021 | $ | September 4, 2020 | $ | |||||||||||||||||
| June 11, 2021 | June 5, 2020 | |||||||||||||||||||
| April 2, 2021 | March 27, 2020 | |||||||||||||||||||
We paid $16.6 million in dividends during the nine months ended October 1, 2021 and $9.6 million in dividends during the nine months ended September 25, 2020.
On November 2, 2021, our Board of Directors declared a quarterly cash dividend of fifteen cents ($0.15 ) per share, payable on December 10, 2021 to shareholders of record on November 17, 2021.
26
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 (which includes Kenya), 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, 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:
COVID-19 Pandemic Impact
In March 2020, the World Health Organization declared the current outbreak of coronavirus (“COVID-19”) a global pandemic. In response to the COVID-19 pandemic, we have taken various preventative and protective measures to support our team members, customers, suppliers, and local communities. These measures included additional operating procedures and safety protocols at our production facilities, continuous monitoring of our supply chain contingency plans to mitigate service disruptions, and staying abreast of guidance from health officials and governmental authorities to determine any additional restrictions to put in place at each of our locations. These measures have allowed us to maintain our commitment to providing healthy, convenient and safe Del Monte® branded products around the world during this critical time.
The COVID-19 pandemic began having a material adverse impact on our results of operations during the first quarter of 2020 which has continued into the third quarter of 2021. Government imposed mandatory closures and restrictions across various of our key global markets have resulted in volatile supply and demand conditions for certain of our products as well as reduced demand in our foodservice distribution channel, factors which continue to persist through the date of this report. During fiscal 2020, we were also negatively impacted by service cancellations and containers that could not clear at certain ports in Asia as well as increased expenses, particularly in our farming operations in Central America where we incurred incremental costs to implement social distancing protocols and more frequent cleaning cycles. While service at the ports have improved during the
27
current year, to the extent that various regions of the world implement significant shut-downs we could experience similar delays in a future period.
Furthermore, during fiscal 2021, the recovery from the COVID-19 pandemic and the current economic climate have resulted in inflationary and cost pressures that have significantly increased our production and distribution costs, including costs of packaging materials, fertilizer, labor, fuel, and inland freight. We are also experiencing pressure in our supply chain due to strained transportation capacity and lack of sufficient labor availability. These factors have led to increased costs in our banana and fresh and value-added products business segments, causing a decline in gross profit for the third quarter of 2021 when compared to the prior-year period. Subsequent to the end of the third quarter and in response to these inflationary and cost pressures, we announced to our customers that we will be raising prices on bananas, pineapples and fresh-cut fruit effective November 1, 2021. While we expect that these inflation-justified price increases will partially mitigate our increased costs, we believe these unfavorable market conditions will continue to negatively impact our net sales and gross profit in future periods.
The COVID-19 pandemic continues to evolve and accordingly, the pace of the recovery from the pandemic as well as the potential impact of new variants or significant resurgences are not presently known. Although we believe that we will ultimately emerge from these events well positioned for long-term growth, the uncertainties with respect to the COVID-19 pandemic remain and, as such, we cannot reasonably estimate the duration or extent of its adverse impact on our business, operating results, and long-term liquidity position.
Refer to the “Results of Operations” and “Liquidity and Capital Resources” sections below for further discussion.
Optimization Program
During fiscal 2020, we performed a comprehensive review of our asset portfolio aimed at identifying non-strategic and underutilized assets to dispose of while reducing costs and driving further efficiencies in our operations (hereon referred to as the “Optimization Program”). As a result of the review, we identified assets across all of our regions which we plan to sell for total anticipated cash proceeds of approximately $100.0 million. These assets primarily consist of underutilized facilities and land, and those pending to be sold are currently reflected in assets held for sale on our Consolidated Balance Sheet. As of the quarter ended October 1, 2021, we have received cash proceeds of $52.0 million in connection with asset sales under the Optimization Program (approximately $40.0 million of which was received in our 2020 fiscal year). Due to challenging market conditions which have resulted in delays of some of the asset sales, in part driven by COVID-19 travel restrictions, we anticipate that the completion of the program will extend beyond the originally anticipated timeframe of the first quarter of 2022.
Included as part of this Optimization Program is the consolidation of our Mann Packing operations from four facilities into one facility in Gonzales, California. The consolidation of Mann Packing allowed us the advantage of processing fresh-cut fruit and fresh-cut vegetables in one facility in the Salinas Valley and will enable us to continue to optimize labor and distribution costs. While we have realized cost savings in connection with the consolidation of our Mann Packing operations as of the quarter ended October 1, 2021, our financial results for this business continue to be negatively impacted by reduced demand in our foodservice distribution channel and increased production and distribution costs which have adversely affected gross profit in our fresh and value-added products business segment.
Income Taxes
In connection with a current examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately $147.4 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 filed an appeal in judicial court on April 30, 2020. On September 10, 2020, we were notified that we lost our final appeal at the administrative level for the audit years 2012-2015, and likewise on October 7, 2021 for the audit year 2016. We intend to file an appeal in the judicial court in November 2021 with respect to the administrative ruling for the audit year 2016. For the audit years 2012-2015, we have filed a request for an injunction in judicial court which would defer payment, if any, until the end of the judicial process, and we intend to do the same for the audit year 2016.
In the other foreign jurisdiction, the administrative process has been completed and we filed a case in judicial court on March 4, 2020.
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We expect to 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.
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 October 1, 2021 (also referred to as the “third quarter of 2021” and “first nine months of 2021,” respectively) and September 25, 2020 (also referred to as the “third quarter of 2020” and “first nine months of 2020,” respectively).
| Quarter ended | Nine months ended | ||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | October 1, 2021 | September 25, 2020 | ||||||||||||||||||||
| Net sales | $ | 1,004.8 | $ | 989.7 | $ | 3,234.6 | $ | 3,200.0 | |||||||||||||||
| Gross profit | 48.9 | 67.3 | 264.0 | 214.5 | |||||||||||||||||||
| Selling, general and administrative expenses | 48.0 | 44.1 | 148.3 | 142.4 | |||||||||||||||||||
| Operating income | 1.3 | 26.6 | 120.2 | 77.4 | |||||||||||||||||||
Net Sales - Net sales for the third quarter of 2021 increased $15.1 million, or 2%, when compared with the third quarter of 2020. The increase in net sales for the third quarter of 2021 was attributable to higher net sales in all of our segments, particularly our other products and services segment including third-party freight services and poultry and meats category.
Net Sales for the first nine months of 2021 increased $34.6 million, or 1%, when compared with the first nine months of 2020. The increase in net sales for the first nine months of 2021 was attributable to higher net sales within our other products and services and fresh and value-added products segments, partially offset by a decrease in net sales in our banana segment.
Net sales in both the third quarter and first nine months of 2021 were also positively impacted by fluctuations in exchange rates versus the euro, British pound, and Korean won.
Gross Profit - Gross profit for the third quarter of 2021 decreased $18.4 million, or 27%, when compared to the third quarter of 2020 primarily as a result of the impact of inflation, strained transportation capacity, lack of sufficient labor availability and other cost pressures which resulted in higher per unit production and distribution costs, specifically relating to packaging materials, fertilizers, inland freight, labor and fuel. The impact of these cost pressures in the third quarter of 2021 were intensified by our seasonality, as we have historically realized a greater portion of our net sales and gross profit during the first two calendar quarters of the year. These adverse factors were partially offset by higher gross profit in our other product and services segment driven by third-party freight services and poultry and meats. As a result of these factors, gross margin decreased 190 basis points to 4.9% in the third quarter of 2021 from 6.8% in the third quarter of 2020.
Gross profit for the first nine months of 2021 increased $49.5 million, or 23%, when compared with the first nine months of 2020. The increase was driven by higher gross profit in all of our business segments. Specifically, the increase relates to (i) higher per unit sales prices in our banana segment, (ii) higher gross profit in our fresh and value-added products segment driven by pineapples, melons, fresh-cut fruits and prepared food products and (iii) higher third-party freight services net sales. These increases more than offset the adverse impact of inflation, strained transportation capacity, lack of sufficient labor availability and other cost pressures experienced in the third quarter. As a result of these factors, gross margin increased 150 basis points to 8.2% in the first nine months of 2021 from 6.7% in the first nine months of 2020.
Gross profit in both the third quarter and first nine months of 2021 was also positively impacted by fluctuations in exchange rates versus the euro and Costa Rican colon, partially offset by unfavorable exchange rates versus the Mexican peso.
Please refer to information under the caption “Seasonality” provided in Item 1. Business of our Annual Report on Form 10-K for the year ended January 1, 2021 for further details. We expect these cost pressures to continue to negatively impact our gross profit in future periods.
Selling, General and Administrative Expenses - Selling, general and administrative expenses increased $3.9 million, or 9%, in the third quarter of 2021 when compared with the third quarter of 2020, and increased $5.9 million, or 4% in first nine months of 2021 when compared with the first nine months of 2020. The increase in both periods was primarily due to higher administrative expenses in the current year, including higher employee benefit and travel costs.
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Gain (Loss) on Disposal of Property, Plant and Equipment, Net - The gain (loss) on disposal of property, plant and equipment, net of $0.5 million during the third quarter of 2021 primarily related to sales 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. Gain (loss) on disposal of property, plant and equipment, net of $(0.1) million for the third quarter of 2020 primarily related to a loss on the disposal of certain production assets in North America which was partially offset by a gain on the sale of surplus land in Chile. Gain (loss) on disposal of property, plant and equipment, net of $1.5 million for first nine months of 2020 primarily related to gains on the sale of surplus land in Chile.
Asset Impairment and Other Charges (Credits), Net - Asset impairment and other charges (credits), net were $0.1 million during the third quarter of 2021, as compared with $(3.5) million during the third quarter of 2020. Asset impairment and other charges (credits), net for the third quarter of 2021 primarily related to impairment of low-yielding banana plants in the Philippines. For the third quarter of 2020, asset impairment and other charges (credits), net primarily consisted of an insurance recovery associated with the 2019 voluntary product recall and severance expense related to the reorganization of our North America sales and marketing function.
Asset impairment and other charges (credits), net were $(0.3) million during the first nine months of 2021, as compared with $(3.8) million during the first nine months of 2020. The first nine months of 2021 primarily included a $(0.8) million insurance recovery associated with damages to certain of our banana segment fixed assets in Guatemala caused by hurricanes Eta and Iota in the fourth quarter of 2020, partially offset by the banana plant impairment discussed above and severance expense incurred in connection with the exit from a facility in Europe. Asset impairment and other charges (credits), net for the first nine months of 2020 primarily consisted of an insurance recovery related to the 2019 voluntary product recall, partially offset by (i) asset impairments, mainly related to certain of our North America and European production facilities and low-yielding banana plants in the Philippines, (ii) a legal settlement charge, and (iii) severance expense related to the reorganization of our North America sales and marketing function.
Operating Income - Operating income decreased by $25.3 million in the third quarter of 2021 when compared with the third quarter of 2020, primarily due to lower gross profit and higher selling, general and administrative expenses. Operating income increased by $42.8 million in the first nine months of 2021 when compared with the first nine months of 2020, primarily due to higher gross profit, partially offset by higher selling, general and administrative expenses.
Interest Expense - Interest expense decreased slightly in both the third quarter and first nine months of 2021 when compared with the comparative prior-year periods, principally due to lower interest rates and lower average debt balances.
Other Expense, Net - Other expense, net increased by $1.0 million in the third quarter of 2021 when compared with the third quarter of 2020 primarily as a result of the prior-year period including a gain related to fuel derivatives no longer designated as hedging instruments, and higher foreign exchange losses in the current year period. Other expense, net increased $0.4 million in the first nine months of 2021 when compared with the first nine months of 2020 mainly due to higher foreign exchange losses partially offset by higher gains on fuel derivatives no longer designated as hedging instruments.
Income Tax (Benefit) Provision - Income tax (benefit) provision was $(6.6) million for the third quarter of 2021 when compared with $4.9 million for the third quarter of 2020, and was $9.1 million for the first nine months of 2021 compared with $9.4 million for the first nine months of 2020. The decrease in the income tax provision in both periods was primarily due to decreased earnings in certain higher tax jurisdictions. The income tax provision for the first nine months of 2021 and first nine months of 2020 also include a $0.8 million and $1.7 million benefit, respectively, relating to the NOL carryback provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was enacted on March 27, 2020.
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Financial Results by Segment
The following table presents net sales and gross profit by segment, and in each case, the percentage of the total represented thereby (U.S. dollars in millions):
| Quarter ended | |||||||||||||||||||||||||||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Segment | Net Sales | Gross Profit | Net Sales | Gross Profit | |||||||||||||||||||||||||||||||||||||||||||
| Fresh and value-added products | $ | 601.2 | 60 | % | $ | 40.9 | 84 | % | $ | 600.6 | 61 | % | $ | 54.2 | 81 | % | |||||||||||||||||||||||||||||||
| Banana | 365.3 | 36 | % | 2.4 | 5 | % | 361.8 | 36 | % | 10.8 | 16 | % | |||||||||||||||||||||||||||||||||||
| Other products and services | 38.3 | 4 | % | 5.6 | 11 | % | 27.3 | 3 | % | 2.3 | 3 | % | |||||||||||||||||||||||||||||||||||
| Totals | $ | 1,004.8 | 100 | % | $ | 48.9 | 100 | % | $ | 989.7 | 100 | % | $ | 67.3 | 100 | % | |||||||||||||||||||||||||||||||
| Nine months ended | |||||||||||||||||||||||||||||||||||||||||||||||
| October 1, 2021 | September 25, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Segment | Net Sales | Gross Profit | Net Sales | Gross Profit | |||||||||||||||||||||||||||||||||||||||||||
| Fresh and value-added products | $ | 1,906.0 | 59 | % | $ | 149.8 | 57 | % | $ | 1,897.8 | 59 | % | $ | 133.8 | 62 | % | |||||||||||||||||||||||||||||||
| Banana | 1,210.2 | 37 | % | 98.2 | 37 | % | 1,218.4 | 38 | % | 74.3 | 35 | % | |||||||||||||||||||||||||||||||||||
| Other products and services | 118.4 | 4 | % | 16.0 | 6 | % | 83.8 | 3 | % | 6.4 | 3 | % | |||||||||||||||||||||||||||||||||||
| Totals | $ | 3,234.6 | 100 | % | $ | 264.0 | 100 | % | $ | 3,200.0 | 100 | % | $ | 214.5 | 100 | % | |||||||||||||||||||||||||||||||
Fresh and value-added products
Third Quarter of 2021 Compared with Third Quarter of 2020
Net sales in the fresh and value-added products segment increased by $0.6 million when compared to the third quarter of 2020, principally as a result of increased net sales of pineapples and avocados. Partially offsetting the increase were decreases in net sales of vegetables, prepared food products, and non-tropical fruit.
•Pineapple net sales increased in most regions driven by higher sales volume, partially offset by lower per unit sales prices.
•Avocado net sales increased primarily in North America driven by higher per unit sales prices, partially offset by lower sales volume.
•Vegetables net sales decreased primarily in North America, including in our Mann Packing operations, driven by lower sales volume related to lower demand from the foodservice channel, partially offset by higher per unit sales prices.
•Prepared food products net sales decreased primarily in Europe driven by lower availability, mainly of canned pineapple products. The prior-year period benefited from heightened customer demand related to the COVID-19 pandemic as more consumers stocked up on canned goods.
•Non-tropical fruit net sales decreased primarily in the Middle East.
Gross profit of fresh and value-added products decreased $13.3 million, or 25%, primarily due to lower gross profit on avocados, prepared food products, fresh-cut vegetables and pineapples, partially offset by higher gross profit on vegetables. Segment performance was negatively impacted by inflationary and cost pressures, which resulted in higher per unit production and distribution costs, including packaging materials, fertilizers, inland freight, labor and fuel. Gross margin decreased 220 basis points to 6.8% from 9.0%.
•Avocado gross profit decreased in North America primarily driven by lower sales volume coupled with higher per unit production and distribution costs.
•Prepared food products gross profit decreased primarily in Europe driven by lower net sales coupled with higher per unit distribution costs.
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•Fresh-cut vegetable gross profit decreased in North America, primarily in our Mann Packing operations, mainly driven by higher per unit product costs and lower production yields.
•Pineapple gross profit decreased primarily in North America due to lower per unit sales prices coupled with higher per unit production and distribution cost.
•Vegetable gross profit increased primarily in the Middle East.
First Nine Months of 2021 Compared with First Nine Months of 2020
Net sales in the fresh and value-added products segment increased $8.2 million in the first nine months of 2021 principally as a result of increased net sales of pineapples and fresh-cut fruits. Partially offsetting the increase were decreases in net sales of non-tropical fruit, vegetables, melons and avocados.
•Pineapple net sales increased in all our regions, driven by higher sales volumes and per unit sales prices.
•Fresh-cut fruit net sales increased across most of our regions, driven by higher sales volumes and per unit sales prices.
•Non-tropical fruit net sales decreased primarily in the Middle East and Asia, due to lower sales volumes and per unit sales prices. The volume of our non-tropical fruit season was negatively impacted by severe rainstorms in Chile, which caused damage to certain of our farms at the beginning of 2021.
•Vegetable net sales decreased primarily due to lower sales in North America, including in our Mann Packing operations. The decrease was driven by lower sales volumes related to lower demand from our foodservice channel, partially offset by higher per unit sales prices.
•Melon net sales decreased primarily due to reduced sales volumes in North America as a result of lower volumes from our Guatemala harvest, which was negatively impacted by crop damage caused by hurricanes Eta and Iota in the fourth quarter of 2020. The decrease in net sales was partially offset by higher per unit sales prices.
•Avocado net sales decreased primarily in North America due to lower sales volume and lower per unit sales prices.
Gross profit in the fresh and value-added products segment increased $16.0 million, or 12%, principally due to increased gross profit on pineapples, melons, fresh-cut fruit and prepared food products. Partially offsetting the increase were decreases in gross profit on fresh-cut vegetables, avocados, non-tropical fruit, and vegetables. Additionally, the gross profit improvement was partially offset by inflationary and cost pressures, which resulted in higher per unit production and distribution costs, including packaging materials, fertilizers, inland freight, labor and fuel. Gross margin increased 80 basis points to 7.9% from 7.1%. Gross profit in the first nine months of 2020 included $18.6 million of inventory write-offs driven by the COVID-19 pandemic.
•Pineapple gross profit increased across all our regions. The consolidated increase was primarily driven by higher net sales. The increase was partially offset by higher per unit production and distribution costs.
•Melon gross profit increased primarily in North America due to higher per unit sales prices of cantaloupes, partially offset by lower sales volume as a result of lower volumes from our Guatemala harvest, which was negatively impacted by crop damage caused by hurricanes Eta and Iota in the fourth quarter of 2020, coupled with higher per unit production and distribution costs.
•Fresh-cut fruit gross profit increased primarily in Europe and Asia. The consolidated increase was driven by higher sales volume and higher per unit sales prices coupled with lower per unit production costs.
•Prepared food products gross profit increased across all our regions, particularly in North America driven by higher sales volume and lower per unit production costs.
•Fresh-cut vegetable and vegetable gross profit decreased primarily in our North America Mann Packing operations.
•Avocado gross profit decreased primarily in North America driven by lower sales volume coupled with higher per unit production and distribution costs.
•Non-tropical fruit gross profit decreased primarily due to severe rainstorms in Chile which caused damage to certain of our farms at the beginning of 2021, resulting in $3.4 million in inventory write-offs. Additionally, gross profit decreased in Asia and the Middle East mainly as a result of lower per unit sales prices and sales volumes due to lower
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demand, partially offset by lower per unit distribution and production costs. The decrease was also partially offset by an increase in gross profit in North America.
Banana
Third Quarter of 2021 Compared with Third Quarter of 2020
Net sales of bananas increased by $3.5 million, or 1%, principally due to higher net sales in Europe primarily related to higher per unit sales prices and higher net sales in the Middle East due to higher sales volume.
Gross profit in the banana segment decreased $8.4 million, or 78%, primarily driven by Asia and North America. The consolidated decrease was driven by excess industry supply which lowered per unit sales prices coupled with higher per unit distribution and production costs impacted by inflationary and cost pressures. As a result of these factors, gross margin decreased 230 basis points to 0.7% from 3.0%.
First Nine Months of 2021 Compared with First Nine Months of 2020
Net sales of bananas decreased by $8.2 million, or 1%, principally due to lower net sales in North America and the Middle East, partially offset by higher net sales in Europe and Asia.
Gross profit in the banana segment increased by $23.9 million, or 32%, primarily driven by North America and Europe, partially offset by lower gross profit in Asia and the Middle East. The improved gross profit in North America and Europe was mainly due to higher per unit sales prices. These improvements were partially offset by inflationary and cost pressures, which resulted in higher per unit production and distribution costs. Gross profit in the banana segment for the first nine months of 2021 also reflects a $2.5 million insurance recovery associated with damages in Guatemala caused by the two hurricanes in the fourth quarter of 2020. As a result of these factors, gross margin increased 200 basis points to 8.1% from 6.1%. Gross profit in the first nine months of 2020 included $2.2 million of inventory write-offs attributable to our banana segment as a result of the COVID-19 pandemic.
Other products and services
Third Quarter of 2021 Compared with Third Quarter of 2020
Net sales of other products and services increased $11.0 million, or 40%, due to higher net sales of third-party freight services and poultry and meats in the Middle East.
Gross profit increased $3.3 million, or 143%, as a result of higher net sales. Gross margin increased to 14.8% from 8.5%.
First Nine Months of 2021 Compared with First Nine Months of 2020
Net sales of other products and services increased $34.6 million, or 41%, due to higher net sales of third-party freight services and poultry and meats in the Middle East.
Gross profit increased $9.6 million, or 150%, as a result of higher net sales. Gross margin increased to 13.5% from 7.6%.
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Liquidity and Capital Resources
Fresh Del Monte Produce Inc. is a holding company with limited business operations of its own. Fresh Del Monte Produce Inc.'s only significant asset is the outstanding capital stock of our subsidiaries that directly or indirectly own all of our assets. We conduct all of our business operations through our subsidiaries. Accordingly, our only source of cash to pay our obligations, other than financings, depends primarily on the net earnings and cash flow generated by these subsidiaries.
Our primary sources of cash flow are net cash provided by operating activities and borrowings under our credit facility. Our primary uses of net cash flow are capital expenditures to increase and expand our product offerings and geographic reach, investments to increase our productivity and investments in businesses such as Mann Packing.
A summary of our cash flows is as follows (U.S. dollars in millions):
| Nine months ended | |||||||||||
| October 1, 2021 | September 25, 2020 | ||||||||||
| Summary cash flow information: | |||||||||||
| Net cash provided by operating activities | $ | 151.6 | $ | 173.9 | |||||||
| Net cash used in investing activities | (67.2) | (82.5) | |||||||||
| Net cash used in financing activities | (86.7) | (111.4) | |||||||||
| Effect of exchange rate changes on cash | 4.8 | 0.7 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 2.5 | (19.3) | |||||||||
| Cash and cash equivalents, beginning | 16.5 | 33.3 | |||||||||
| Cash and cash equivalents, ending | 19.0 | 14.0 | |||||||||
Operating Activities
Net cash provided by operating activities was $151.6 million for the first nine months of 2021 compared with $173.9 million for the first nine months of 2020, a decrease of $22.3 million. The decrease was primarily attributable to higher levels of inventories, mainly impacted by the increase in costs of goods largely related to current cost pressures, and receivables. Partially offsetting the decrease were higher net income and higher balances of accounts payable and accrued expenses, principally due to the timing of period end payments to suppliers.
At October 1, 2021, we had working capital of $458.0 million compared with $457.5 million at January 1, 2021, a slight increase of $0.5 million. The increase in working capital was primarily attributable to higher levels of inventory in the current year period, primarily related to raw materials and packaging supplies, partially offset by higher levels of accounts payable and accrued expenses, mainly due to due to the timing of period end payments to suppliers.
Investing Activities
Net cash used in investing activities for the first nine months of 2021 was $67.2 million compared with $82.5 million for the first nine months of 2020. Net cash used in investing activities for the first nine months of 2021 primarily consisted of capital expenditures of $83.4 million, which mainly included expenditures related to (1) our new 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 and expansion of our banana operations in Central America. Partially offsetting the net cash used in investing activities were proceeds from the sale of property, plant and equipment of $12.5 million 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.
Net cash used in investing activities for the first nine months of 2020 primarily consisted of capital expenditures of $92.9 million. Capital expenditures for the first nine months of 2020 principally included (1) progress payments for the construction of our six new refrigerated container ships, (2) expansion and improvements to fresh-cut facilities in North America, Europe and Asia, and (3) expansion and improvements to our banana and pineapple operations in Central America. These capital expenditures for the first nine months of 2020 relate to both our banana and fresh and value-added products business segments.
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Partially offsetting the net cash used in investing activities were proceeds from the sale of property, plant and equipment of $9.8 million which primarily related to the sale of a facility in the Middle East and proceeds from the sale of surplus land in South America.
Financing Activities
Net cash used in financing activities for the first nine months of 2021 was $86.7 million compared with $111.4 million for the first nine months of 2020. 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.
Net cash used in financing activities for the first nine months of 2020 primarily consisted of net repayments on debt of $76.0 million, repurchase and retirement of ordinary shares of $20.8 million, dividends paid of $9.6 million, and distributions to noncontrolling interests of $6.3 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. Certain of our direct and indirect subsidiaries have guaranteed the obligations under the Second A&R Credit Agreement. We intend to use funds borrowed under the Second A&R Credit Agreement from time to time for general corporate purposes, working capital, capital expenditures and other investment opportunities.
Pursuant to the terms of the Second A&R Credit Agreement, amounts borrowed under the Revolving Credit Facility accrue interest, at our election, at either (i) the Eurocurrency Rate (as defined in the Second A&R Credit Agreement) plus a margin that ranges from 1.0% to 1.5% or (ii) the Base Rate (as defined in the Second A&R Credit Agreement) plus a margin that ranges from 0% to 0.5%, in each case based on our Consolidated Leverage Ratio (as defined in the Second A&R Credit Agreement). The Second A&R Credit Agreement interest rate grid provides for five pricing levels for interest rate margins. At October 1, 2021, we had borrowings of $476.9 million outstanding under the Revolving Credit Facility bearing interest at a per annum rate of 1.24%. 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 October 1, 2021, we were in compliance with all of the covenants contained in the Second A&R Credit Agreement.
We have a renewable 364-day, $25.0 million commercial and stand-by letter of credit facility with Rabobank Nederland.
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As of October 1, 2021, we had $646.9 million of borrowing availability under committed working capital facilities, primarily under the Revolving Credit Facility.
As of October 1, 2021, we applied $31.9 million to letters of credit and bank guarantees issued from Rabobank Nederland, Bank of America, and other banks.
While we believe that our cash on hand, borrowing capacity available under our Revolving Credit Facility, and cash flows from operations for the next twelve months will be sufficient to service our outstanding debt during the next twelve months, we cannot predict whether future developments associated with the COVID-19 pandemic or the current economic environment 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 January 1, 2021.
Contractual Obligations
As of October 1, 2021, there were no material changes in commitments under contractual obligations, compared to the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended January 1, 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 January 1, 2021. There were no material changes to these critical accounting policies or estimates during the third quarter of 2021.
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 liability position of $7.0 million as of October 1, 2021 compared to $6.9 million as of January 1, 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 a net liability position of $35.8 million as of October 1, 2021 compared to $50.6 million as of January 1, 2021. The decrease in our liability position is due to the relative increase in variable interest rates when compared to the rates as of January 1, 2021.
We are exposed to fluctuations in bunker fuel prices on our results of operations and financial condition, and we mitigate that exposure by entering into bunker fuel swap agreements which permit us to lock in bunker fuel prices. During fiscal 2020, one of our subsidiaries entered into bunker fuel swap agreements to hedge portions of our fuel costs incurred by our owned and chartered vessels throughout 2020 and 2021. Certain portions of these bunker fuel cash flow hedges were subsequently dedesignated during fiscal 2020 due to decreases in our forecasted fuel consumption for certain fuel types which was partially driven by the COVID-19 pandemic. As of January 1, 2021, the fair value of the designated bunker fuel swap contracts was a net asset position of $1.4 million and the fair value of the dedesignated bunker fuel swap contracts was a net asset position of $1.0 million. During the first quarter of 2021, we made an operational decision to allocate two of our new refrigerated container vessels to service the North America West Coast, primarily as a result of our fleet optimization initiatives, significant market volatility in third-party shipping rates, and inadequate service levels from our shipping providers as it related to timeliness of delivery. This decision resulted in changes to our forecasted fuel mix, thus further decreasing the forecasted fuel consumption related to certain of our U.S. Gulf Coast contracts. Due to this strategic change as well as the previous dedesignations discussed above, we determined to voluntarily terminate the remaining outstanding portions of our fuel hedge portfolio during the first quarter of 2021.
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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 $10.5 million of the net fair value of designated and dedesignated hedges recognized as a net loss in accumulated other comprehensive loss will be transferred to earnings during the next 12 months, and the remaining net loss of $31.1 million over a period of 7 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 financial statements included in our Annual Report on Form 10-K for the year ended January 1, 2021. During the nine months ended October 1, 2021, 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 the entire 2021 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 January 1, 2021.
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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:
•our expectations regarding the impacts of the COVID-19 pandemic on our business and operating results, and the factors for such impacts;
•our intentions regarding the use of borrowed funds;
•our expectations regarding inflationary pressures 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 plans regarding our Optimization Program, including our intention to sell identified assets and the anticipated value of such sales;
•our expectations regarding the benefits from the consolidation of our Mann Packing facilities;
•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 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 involve risks, assumptions and uncertainties. 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. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:
•the impact of the COVID-19 pandemic on our business, suppliers, customers, consumers, employees, and communities,
•disruptions or inefficiencies in our operations or supply chain;
•the impact of inflation;
•the duration and spread of the COVID-19 pandemic and related government restrictions and our ability to maintain the safety of our workforce;
•our ability to successfully execute our plan to stabilize our core business, diversify our business and transform our business to a value-added business;
•the impact of governmental trade restrictions, including adverse governmental regulation that may impact our ability to access certain markets;
•our anticipated cash needs in light of our liquidity and the impact of COVID-19 on our liquidity;
•the continued ability of our distributors and suppliers to have access to sufficient liquidity to fund their operations;
•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 pricing and other actions by our competitors, particularly during periods of low consumer confidence and spending 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 improve our existing quarantine policies and other prevention strategies, as well as find contingency plans, to protect our and our suppliers’ banana crops from vascular diseases;
•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;
•disruptions or issues that impact our production facilities or complex logistics network; the impact of prices for petroleum-based products and packaging materials; and the availability of sufficient labor during peak growing and harvesting seasons;
•the impact of foreign currency fluctuations;
•our plans for expansion of our business (including through acquisitions) and cost savings;
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•our ability to successfully integrate acquisitions 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 investigations;
•the impact of changes in tax accounting or tax laws (or interpretations thereof), the impact of tax claims or adjustments proposed by the Internal Revenue Service or other taxing authorities in connection with our tax audits and our ability to successfully contest such tax claims and pursue necessary remedies;
•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, including the continuing impact of the 2019 Mann Packing product recall, or other legal proceedings relating to our business;
•our ability to successfully implement our Optimization Program and to realize its expected benefits within the anticipated timeframe; and
•our ability to successfully manage the risks associated with our international operations.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except as presented below, 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 January 1, 2021.
We are exposed to fluctuations in bunker fuel prices on our results of operations and financial condition, and we mitigate that exposure by entering into bunker fuel swap agreements which permit us to lock in bunker fuel prices. During fiscal 2020, one of our subsidiaries entered into bunker fuel swap agreements to hedge portions of our fuel costs incurred by our owned and chartered vessels throughout 2020 and 2021. Certain portions of these bunker fuel cash flow hedges were subsequently dedesignated during fiscal 2020 due to decreases in our forecasted fuel consumption for certain fuel types which was partially driven by the COVID-19 pandemic. During the first quarter of 2021, we made an operational decision to allocate two of our new refrigerated container vessels to service the North America West Coast, primarily as a result of our fleet optimization initiatives, significant market volatility in third-party shipping rates, and inadequate service levels from our shipping providers as it related to timeliness of delivery. This decision resulted in changes to our forecasted fuel mix, thus further decreasing the forecasted fuel consumption related to certain of our U.S. Gulf Coast contracts. Due to this strategic change as well as the previous dedesignations discussed above, we determined to voluntarily terminate the remaining outstanding portions of our fuel hedge portfolio during the first quarter of 2021.
For more information, see Note 13. “Derivative Financial Instruments” to the Consolidated Financial Statements included in Part I, Item 1. Financial Statements.
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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 October 1, 2021. 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 October 1, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Tax related matters
In connection with a current examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately $147.4 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 filed an appeal in judicial court on April 30, 2020. On September 10, 2020, we were notified that we lost our final appeal at the administrative level for the audit years 2012-2015, and likewise on October 7, 2021 for the audit year 2016. We intend to file an appeal in the judicial court in November 2021 with respect to the administrative ruling for the audit year 2016. For the audit years 2012-2015, we have filed a request for an injunction in judicial court which would defer payment, if any, until the end of the judicial process, and we intend to do the same for the audit year 2016.
In the other foreign jurisdiction, the administrative process has been completed and we filed a case in judicial court on March 4, 2020.
We expect to 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.
Item 1A. Risk Factors
“Item 1A. Risk Factors” of our Form 10-K for the year ended January 1, 2021 includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K.
Current market conditions are increasing our production and distribution costs and are resulting in disruptions to our supply chain, all of which have adversely affected, and will continue to adversely affect, our business and results of operations. Our efforts to raise prices may not be successful at offsetting these cost increases and may have other adverse effects.
Our results of operations can be significantly affected by economic and other market conditions, including inflationary pressures, which can vary depending on geographic region. During fiscal 2021, unfavorable market conditions have led to significant increases in our production and distribution costs, specifically relating to packaging materials, fertilizers, inland freight, labor and fuel. We are also experiencing pressure in our supply chain due to strained transportation capacity and lack of sufficient labor availability. These factors have led to increased costs in our banana and fresh and value-added products segments, contributing to a decline in gross profit for the third quarter of 2021 when compared to the prior-year period. While we expect these cost pressures to continue to negatively impact our gross profit in future periods, we cannot predict the extent or duration of the impact at this time.
In response to these inflationary and cost pressures, we began to notify our customers of our plans to institute price increases. However these price increases may not be sufficient to reverse the margin compression experienced as a result of our increased costs and could result in loss of sales, if other competitors do not increase their prices. A continuation of compressed gross profits or a loss of sales due to price increases could adversely impact our ability to undertake future initiatives to drive growth and could have a material adverse impact on our financial results.
In addition, continued cost pressures and disruptions to our supply chain may have a material adverse impact on our liquidity as a result of the increasing cash requirements necessary to, among other things, procure inventories and related resources necessary in our operations.
A continued shortage of qualified labor could negatively affect our business and materially reduce earnings.
The success of our operations depends on our ability, and the ability of third parties on which we rely to supply and to deliver our products, to identify, recruit, develop and retain qualified and appropriately skilled individuals. As a result, any shortage of qualified labor could significantly adversely affect our business. Any such shortage could decrease our ability to effectively produce and deliver product and to achieve our strategic objectives. Such a shortage would also likely lead to higher wages for
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employees (or higher costs to purchase the services of such third parties) and a corresponding reduction in our results of operations. During fiscal 2021, we and participants in our supply chain experienced shortages of qualified labor in our operations. A continuation of such shortages for a prolonged period of time could have a material adverse effect on our profitability and our ability to grow.
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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 October 1, 2021 and January 1, 2021, (ii) Consolidated Statements of Operations for the quarters and nine months ended October 1, 2021 and September 25, 2020, (iii) Consolidated Statements of Comprehensive (Loss) Income for the quarters and nine months ended October 1, 2021 and September 25, 2020, (iv) Consolidated Statements of Cash Flows for the nine months ended October 1, 2021 and September 25, 2020, (v) Consolidated Statements of Shareholders' Equity and Redeemable Noncontrolling Interest for the quarters and nine months ended October 1, 2021 and September 25, 2020 and (vi) Notes to Consolidated Financial Statements.
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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 3, 2021 | By: | /s/ Youssef Zakharia | ||||||||
| Youssef Zakharia | |||||||||||
| President & Chief Operating Officer | |||||||||||
| By: | /s/ Eduardo Bezerra | ||||||||||
| Eduardo Bezerra | |||||||||||
| Senior Vice President & Chief Financial Officer | |||||||||||
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