UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended January 1, 2010
OR
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¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
.
Commission
file number 1-14706
FRESH
DEL MONTE PRODUCE INC.
(Exact
Name of Registrant as Specified in Its Charter)
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The
Cayman Islands
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N/A
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(I.R.S
Employer
Identification
No.)
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|
c/o
Walkers Corporate Services Limited
Walker
House, 87 Mary Street
George
Town, Grand Cayman, KY1-9002
Cayman
Islands
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N/A
|
|
(Address
of Registrant’s Principal Executive Offices)
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(Zip
Code)
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(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 Offices)
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Ordinary
Shares, par value $0.01 per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act: None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer
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x
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Accelerated filer
|
¨
|
|
|
Non-accelerated
filer
|
¨
|
Smaller reporting company
|
¨
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
The
aggregate market value of Ordinary Shares held by non-affiliates at
June 26, 2009, the last business day of the registrant’s most recently
completed second quarter, and was $692,624,994 based on the number of shares
held by non-affiliates of the registrant and the reported closing price of
Ordinary Shares on June 26, 2009 of $16.51. The registrant does not have
non-voting common stock outstanding.
As of
February 22, 2010, there were 63,600,150 Ordinary Shares of Fresh Del Monte
Produce Inc. issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s definitive Proxy Statement for the 2010 Annual General
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the end of the registrant’s fiscal year are incorporated
by reference in Part III of this report.
TABLE OF
CONTENTS
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Forward-Looking
Statements
In this
Annual Report (the “Report”), references to “$” and “dollars” are to United
States dollars. References in this Report to Fresh Del Monte, “we”, “our”
and “us” refer to Fresh Del Monte Produce Inc. and its subsidiaries, unless the
context indicates otherwise. Percentages and certain amounts contained herein
have been rounded for ease of presentation. Any discrepancies in any table
between totals and the sums of amounts listed are due to rounding. As used
herein, references to years ended 2007 through 2009 are to fiscal years ended
December 28, 2007, December 26, 2008 and January 1, 2010,
respectively.
This
Report, information included in future filings by us and information contained
in written material, press releases and oral statements, issued by or on behalf
of us contains, or may contain, statements that constitute forward-looking
statements in particular, information in Item 1. Business and Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Trend Information, contained in this Report. In this Report, these
statements appear in a number of places and include statements regarding the
intent, beliefs or current expectations of us or our officers (including
statements preceded by, followed by or that include the words “believes,”
“expects,” “anticipates” or similar expressions) with respect to various
matters, including our plans and future performance. These
forward-looking statements involve risks and uncertainties. Fresh Del
Monte’s actual plans and performance may differ materially from those in the
forward-looking statements as a result of various factors, including (i) the
uncertain global economic environment and the timing and strength of a recovery
in the markets we serve, and the extent to which adverse economic conditions
continue to affect our sales volume and results, including our ability to
command premium prices for certain of our principal products, or increase
competitive pressures within the industry, (ii) the impact of governmental
initiatives in the United States and abroad to spur economic activity, including
the effects of significant government monetary or other market interventions on
inflation, price controls and foreign exchange rates, (iii) our anticipated
cash needs in light of our liquidity, (iv) the continued ability of
our distributors and suppliers to have access to sufficient liquidity to fund
their operations, (v)
trends and other factors affecting our financial condition or results of
operations from period to period, including changes in product mix or consumer
demand for branded products such as ours, particularly as consumers remain
price-conscious in the current economic environment; anticipated price and
expense levels; the impact of crop disease, severe weather conditions or natural
disasters, such as the recent earthquake in Chile, on crop quality and yields
and on our ability to grow, procure or export our products; the impact of prices
for petroleum-based products and packaging materials; and the
availability of sufficient labor during peak growing and harvesting seasons,
(vi) the impact of pricing and other actions by our competitors,
particularly during periods of low consumer confidence and spending levels,
(vii) the impact of foreign currency fluctuations, (viii) our plans for
expansion of our business (including through acquisitions) and cost savings,
(ix) our ability to successfully integrate acquisitions into our
operations, (x) the timing and cost of resolution of pending legal and
environmental proceedings, (xi) the impact of changes in tax accounting or tax
laws (or interpretations thereof), and the impact of settlements of adjustments
proposed by the Internal Revenue Service or other taxing authorities in
connection with our tax audits, and (xii) 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. 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.
The
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. It is important to note that our actual results may
differ materially from those in the forward-looking statements as a result of
various factors. The accompanying information contained in this Report,
identifies important factors that could cause our actual results to differ
materially from those in the forward-looking statements.
The
volume data included in this Report has been obtained from our records. Except
for volume data for Fresh Del Monte, the market share, volume and consumption
data contained in this Report have been compiled by us based upon data and other
information obtained from third-party sources, primarily from the Food and
Agriculture Organization of the United Nations (the “FAO”), and from our surveys
of customers and other company-compiled data. Except as otherwise indicated,
volume data contained in this Report is shown in millions of 40-pound equivalent
boxes.
|
Business
|
History
and Development of Fresh Del Monte
Our legal
name is Fresh Del Monte Produce Inc., and our commercial name is Del Monte Fresh
Produce. We are an exempted holding company, incorporated under the laws of the
Cayman Islands on August 29, 1996. At January 1, 2010, the close of our
most recent fiscal year, members of the Abu-Ghazaleh family directly owned 33.9%
of our outstanding Ordinary Shares.
Our
principal executive office is located at Walker House, 87 Mary Street, George
Town, Grand Cayman, KY1-9002, Cayman Islands. The address of our U.S. executive
office is located at Del Monte Fresh Produce Company, 241 Sevilla Avenue, Coral
Gables, Florida 33134. Our telephone number at our U.S. executive office is
(305) 520-8400. Our Internet address is http://www.freshdelmonte.com. The electronic version of
this Annual Report on Form 10-K, along with other information about us, our
operations and our results and other documents filed with the Securities and
Exchange Commission (the “SEC”) can be found on our Web site. Information on our
Web site is not a part of this Report on Form 10-K.
Our
global business, conducted through subsidiaries, is primarily the worldwide
sourcing, transportation and marketing of fresh and fresh-cut produce together
with prepared food products in Europe, Africa and the Middle East. We source our
fresh produce products (bananas, pineapples, melons, tomatoes, grapes, apples,
pears, peaches, plums, nectarines, apricots, cherries, citrus, avocados,
blueberries and kiwi) primarily from Central and South America, Africa, the
Philippines, North America and Europe. We source our prepared food
products primarily from Africa, Europe and Asia. Our products are
sourced from company-owned operations, through joint venture arrangements and
through supply contracts with independent producers. We distribute
our products in North America, Europe, Asia, the Middle East, Africa and South
America.
On
June 6, 2008, we acquired all of the shares of Desarollo Agroindustrial de
Frutales, S.A., a producer of high-quality bananas in Costa Rica; all of the
shares of Frutas de Exportacion, S.A., a major producer of gold pineapples in
Costa Rica; and all of the shares of an affiliated sales and marketing company,
collectively known as “Caribana”. The purchase price for Caribana was $405.9
million plus $2.9 million for acquisition-related expenses, financed with $88.5
million in cash on hand and drawings under our then-existing syndicated
revolving credit facility. As a result of this acquisition, our land holdings in
Costa Rica increased by approximately 13,000 hectares of quality farm land
producing approximately 13 million boxes of bananas and 11 million
boxes of gold pineapples annually. We also acquired state-of-the-art packing
facilities, as well as modern farming equipment. Caribana’s extensive production
area substantially increases our presence in the banana market and further
strengthens our number one position in the gold pineapple market. The close
proximity of Caribana’s production and packing operations to our existing farms
has provided significant operating efficiencies and synergies. This transaction
has enabled us to continue to capitalize on the growing global demand for fresh
produce and to expand our reach into existing and new markets.
On
June 27, 2008, we acquired certain operating assets, excluding land, of
Melones de Costa Rica, S.A. (“MCR”). MCR is a 50%-owned unconsolidated
subsidiary that produces melons for us in Costa Rica. MCR continues to own the
land that is leased to us on a long-term basis. Total area
under production is approximately 2,300 hectares with an estimated annual
production of three million boxes. The purchase price was $8.0
million.
1
During
the third quarter of 2008, we acquired two additional melon operations in
Guatemala. The assets acquired comprised principally farming equipment, packing
sheds and materials and supplies inventory. Total area under
production is approximately 1,500 hectares producing two crops annually on
leased land with an estimated annual production of 4.5 million boxes. The
purchase price was $13.9 million.
Our
capital expenditures totaled $84.5 million in 2009, consisting of approximately
$51.4 million primarily for distribution centers in Saudi Arabia and for
expansion of production facilities in Costa Rica, Guatemala, Brazil and the
Philippines related to the banana segment, $27.8 million principally for
expansion of our pineapple operations in Costa Rica and the Philippines,
expansion of non-tropical fruit operations in Chile and expansion of fresh-cut
fruit facilities in North America and the United Kingdom related to the other
fresh produce segment and $5.3 million for expansion of production facilities in
Jordan and Kenya related to the prepared food segment. Our
capital expenditures totaled $101.5 million in 2008, consisting of $59.4 million
principally for distribution centers in Saudi Arabia and South Korea and for
expansion of production facilities in the Philippines, Guatemala and Brazil
related to the banana segment, $23.1 million principally for expansion of
production facilities in Costa Rica, the Philippines and Chile related to the
other fresh produce segment and $19.0 million principally for production
facilities in Jordan and Kenya related to the prepared food segment. Our capital
expenditures for 2007 consisted of $81.4 million primarily for the expansion of
distribution and manufacturing facilities in the Middle East and the expansion
of production facilities in Kenya, Brazil and the Philippines. The
principal capital expenditures planned for 2010 consist primarily of the
expansion and improvements of production facilities in Costa Rica, Guatemala,
Chile, Kenya and the Philippines, and for our distribution and fresh-cut
facilities in North America and the United Kingdom. We expect to fund
our planned capital expenditures of approximately $103.0 million in 2010 through
operating cash flows and borrowings under credit facilities.
Business
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 distributor 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 global sourcing and logistics network allows us to provide regular
delivery of consistently high-quality fresh produce, juices, beverages,
processed fruit and vegetables and value-added services to our
customers.
We have
leading market positions in the following product categories. We believe we
are:
|
|
•
|
the
number one marketer of fresh pineapples worldwide, including our Del Monte Gold ® Extra Sweet
pineapple;
|
|
|
•
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a
leading marketer of branded melons in the United States and the United
Kingdom;
|
|
|
•
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a
leading marketer of branded fresh-cut fruit in the United
States;
|
|
|
•
|
the
third-largest marketer of bananas
worldwide;
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|
|
•
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a
leading re-packer of tomatoes in the United
States;
|
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|
•
|
a
leading year-round marketer of branded grapes in the United
States;
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|
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•
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a
leading marketer of branded non-tropical fruit in selected markets;
and
|
|
|
•
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a
leading marketer for canned fruit and pineapple in many Western European
markets.
|
We source
and distribute our products on a global basis. Our products are grown primarily
in Central and South America, Africa and the Philippines. We also source
products from North America and Europe. Our products are sourced from
company-controlled farms and independent growers. We transport our fresh produce
to markets using our fleet of 16 owned and 17 chartered refrigerated vessels,
and we operate four port facilities in the United States. At year end 2009, we
operated 44 distribution centers, generally with cold storage and banana
ripening facilities in our key markets worldwide, including the United States,
the United Kingdom, Germany, Japan, South Korea, Hong Kong, Poland, the United
Arab Emirates and Saudi Arabia. We also operate 13 fresh-cut facilities in the
United States, the United Kingdom, Japan and the United Arab Emirates, some of
which are located within our distribution centers. Through our vertically
integrated network, we manage the transportation and distribution of our
products in a continuous temperature-controlled environment. This enables us to
preserve quality and freshness, and to optimize product shelf life, while
ensuring timely and year-round distribution. Furthermore, our position as a
volume producer and shipper of bananas allows us to lower our average per-box
logistics cost and to provide regular deliveries of our premium fresh fruit to
meet the increasing demand for year-round supply.
2
We market
and distribute our products to retail stores, food clubs, wholesalers,
distributors and foodservice operators in more than 100 countries around the
world. North America is our largest market, accounting for 48% of our net sales
in 2009. Europe, Asia and the Middle East regions are our other major markets,
accounting for 28%, 12% and 9% of our net sales in 2009, respectively. Our
distribution centers and fresh-cut facilities address the growing demand from
supermarket chains, club stores, mass merchandisers and independent grocers to
provide value-added services, including the preparation of fresh-cut produce,
ripening, customized sorting and packing, just-in-time and direct-store-delivery
and in-store merchandising and promotional support. Large national retail chains
are increasingly choosing fewer suppliers – ones that can serve all of their
needs on a national basis – and there is a significant opportunity for a company
with a full fresh and fresh-cut produce line, a well-recognized brand, a
consistent supply of quality produce and a national distribution network to
become the preferred supplier to these large retail customers. We believe that
we are uniquely positioned as a preferred supplier, and our goal is to expand on
this status by increasing our leading position in fresh-cut produce, expanding
our banana, pineapple and melon business and diversifying our other fresh
produce selections. In recent years, we have transformed our company
from a fresh and fresh-cut produce company into a multinational prepared food
company with a product line that includes prepared fruit and vegetables, juices,
beverages and snacks in Europe, Africa and the Middle East.
Our
strategy is focused on a combination of maximizing revenues from our existing
infrastructure, entering new markets and strict cost control initiatives. We
plan to continue to capitalize on the growing global demand for fresh produce
and expand our reach into existing and new markets. We expect sales growth of
fresh produce in key markets by increasing sales volume and per unit sales
prices as permitted by market conditions. Our recent acquisitions have
substantially increased our production capability of bananas, pineapples and
melons and provide the potential over time for significant operating
efficiencies and synergies. In addition, our number one position in
the gold pineapple market has been further strengthened. Our strategy
includes increasing volumes from existing production and distribution facilities
in order to improve operating efficiencies and reduce per unit costs. We plan
additional investments in growth markets, such as the Middle East, by adding
distribution facilities and expanding our value-added services.
Products
Sourcing and Production
Our
products are grown and sourced primarily in Central and South America, Africa
and the Philippines. We also source products from North America and Europe. In
2009, 49% of the fresh produce we sold was grown on company-controlled farms and
the remaining 51% was acquired through supply contracts with independent
growers.
We
produce, source, distribute and market a broad array of fresh produce throughout
the world, primarily under the DEL MONTE®
brand, as well as under other proprietary brands, such as UTC® and
Rosy®. We
also produce, distribute and market prepared fruits and vegetables, juices,
beverages and snacks under the DEL MONTE®
brand, as well as other proprietary brands, such as Fruit Express™, Just
Juice®,
Fruitini® and
other regional trademarks in Europe, Africa and the Middle East.
3
The
following table indicates our net sales by product for the last three
years:
|
Year
ended
|
||||||||||||||||||||||||
|
January
1,
|
December
26,
|
December 28, | ||||||||||||||||||||||
|
2010
|
2008
|
2007
|
||||||||||||||||||||||
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(U.S.
dollars in millions)
|
||||||||||||||||||||||||
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Net
sales by product category:
|
||||||||||||||||||||||||
|
Banana
|
$ | 1,510.9 | 43 | % | $ | 1,420.2 | 40 | % | $ | 1,199.0 | 35 | % | ||||||||||||
|
Other
fresh produce:
|
||||||||||||||||||||||||
|
Gold
pineapples
|
475.6 | 14 | % | 458.2 | 13 | % | 428.7 | 13 | % | |||||||||||||||
|
Fresh-cut
produce
|
314.8 | 9 | % | 319.2 | 9 | % | 328.8 | 10 | % | |||||||||||||||
|
Non-tropical
fruit
|
278.6 | 8 | % | 286.1 | 8 | % | 273.8 | 8 | % | |||||||||||||||
|
Melons
|
242.1 | 7 | % | 221.1 | 6 | % | 250.9 | 7 | % | |||||||||||||||
|
Tomatoes
|
120.0 | 3 | % | 140.0 | 4 | % | 156.9 | 5 | % | |||||||||||||||
|
Vegetables
|
68.4 | 2 | % | 78.8 | 2 | % | 107.1 | 3 | % | |||||||||||||||
|
Other
fruit
|
52.0 | 1 | % | 56.4 | 2 | % | 68.7 | 2 | % | |||||||||||||||
|
Total
other fresh produce
|
1,551.5 | 44 | % | 1,559.8 | 44 | % | 1,614.9 | 48 | % | |||||||||||||||
|
Prepared
food
|
337.4 | 10 | % | 412.4 | 12 | % | 429.4 | 13 | % | |||||||||||||||
|
Other
products and services
|
96.6 | 3 | % | 138.6 | 4 | % | 122.2 | 4 | % | |||||||||||||||
|
Total
|
$ | 3,496.4 | 100 | % | $ | 3,531.0 | 100 | % | $ | 3,365.5 | 100 | % | ||||||||||||
See Note
23, “Business Segment
Data”, to the Consolidated Financial Statements included in Item 8.
Financial Statements and
Supplementary Data for further information.
Bananas
Bananas
are the leading internationally traded fresh fruit in terms of volume and dollar
sales and the best-selling fresh fruit in the United States. Europe
and North America are the world’s largest banana markets and Asia is the third
largest market. According to the latest published statistics from the Food and
Agriculture Organization of the United Nations (“FAO”), in 2007, Europe, North
America, Asia and the Middle East consumed 17.8, 9.9, 4.0 and 1.7 billion pounds
of bananas, respectively. Bananas are a key produce department product due to
their high turnover and the premium margins realized by grocers.
Bananas
have a relatively short growing cycle and are grown in tropical locations with
humid climates and heavy rainfall, such as Central and South America, the
Caribbean, the Philippines and Africa. Bananas are grown throughout the year in
these locations, although demand and prices fluctuate based on the relative
supply of bananas and the availability of seasonal and alternative
fruit.
We
believe that we are the world’s third-largest marketer of bananas, based on
internally generated data. Our banana sales in North America, Europe,
Asia and the Middle East accounted for approximately 41%, 28%, 21% and 10% of
our net sales of bananas in 2009, respectively. We produced 39% of the banana
volume we sold in 2009 on company-controlled farms, and we purchased the
remainder from independent growers. As a result of our Caribana acquisition, on
an annualized basis, we have increased our total company-controlled banana
volume by approximately 27%.
Bananas
are the best-selling fresh produce item, as well as a high-margin product for
many of our customers. Accordingly, our ability to provide our customers with a
year-round supply of high-quality DEL MONTE®
bananas is important to maintaining our existing customer relationships and
attracting new customers. Our position as a volume shipper of bananas has also
allowed us to make regular shipments of a wide array of other fresh produce,
such as pineapples, melons and plantains, reducing our average per-box logistics
costs and maintaining higher quality produce with a longer shelf
life.
We
produce bananas on company-controlled farms in Costa Rica, Guatemala, Brazil,
Cameroon and the Philippines and we purchase bananas from independent growers in
Costa Rica, Ecuador, Colombia, Guatemala, the Philippines and India. Although
our supply contracts are primarily long-term, we also make purchases in the spot
market, primarily in Ecuador. In Ecuador and Costa Rica, there are minimum
export prices for the sale of bananas, which are established by the respective
governments and reviewed by them on a periodic basis.
4
Due in
part to limitations in the Philippines on foreign ownership of land, we purchase
the majority of bananas in the Philippines through long-term contracts with
independent growers. Approximately 76% of our Philippine-sourced bananas are
supplied by one grower, representing 15% of the supplier’s industry volume in
2009. In the Philippines, we have leased approximately 3,000 hectares
of land where we have planted Highland bananas for the Asia market.
Gold
Pineapples
Pineapples
are grown in tropical and sub-tropical locations, including the Philippines,
Costa Rica, Hawaii, Thailand, Malaysia, Brazil, Indonesia and various countries
in Africa. In contrast to bananas, pineapples have a long growing cycle of 18
months, and require re-cultivation after one to two harvests. Pineapple growing
thus requires a higher level of capital investment, as well as greater
agricultural expertise.
The
premium pineapples, such as our Del Monte Gold® Extra Sweet pineapple, which
has enhanced taste, golden shell color, bright yellow flesh and higher vitamin C
content, has replaced the Champaka and other traditional pineapple varieties in
popularity and demand and has led to increased competition.
We
believe we are the market leader of fresh pineapples worldwide, based on
internally generated data. This market share excludes the pineapple
we sell in the fresh-cut format. Pineapple sales in North America,
Europe, Asia and the Middle East accounted for 49%, 35%, 13% and 3% of our net
sales of pineapples in 2009, respectively. From 1996 to 2009, our
volume of the Del Monte
Gold® Extra Sweet pineapple
increased from two and a half million boxes to 27.6 million boxes. Our
pineapple volume has increased by 11% this year. Based on FAO data,
for the 10-year period from 1997 to 2007, the volume of pineapple sales in the
United States, Europe, Asia and the Middle East has increased by 250%, 203%, 74%
and 634%, respectively. We believe that a substantial portion of this growth is
due to our introduction of the Del Monte Gold® Extra Sweet pineapple. As a
result of our recent Caribana acquisition and our continued expansion of
existing pineapple operations, we expect to continue to increase the sales
volume of our extra sweet pineapples in the near future with extra sweet
pineapples grown in Costa Rica and the Philippines.
The
principal production and procurement areas for our gold pineapples are Costa
Rica and the Philippines. Given the complexity of pineapple cultivation relative
to our bananas, a higher percentage of the fresh pineapples we sell (84% by
volume in 2009) are produced on company-controlled farms. Our Caribana
acquisition has increased our total company-controlled Del Monte Gold® Extra Sweet pineapple volume
by approximately 29% on an annualized basis.
Fresh-Cut
Produce
Fresh-cut
produce first gained prominence in many U.S. and European markets with the
introduction of washed and cut vegetables. While packaged salads continue to
lead the category of fresh-cut produce sales, the category has expanded
significantly to include gold extra sweet pineapple, melons, mango, grapes,
citrus and assorted vegetable produce items that are washed, cut and packaged in
a ready-to-use form. Market expansion has been driven largely by consumer demand
for fresh, healthy and ready-to-eat food alternatives, as well as significant
demand from foodservice operators. Within this market, we believe that there has
been increasing differentiation between companies active primarily in the
packaged salad market and other companies, like us, that can offer a wide
variety of fresh-cut fruit and vegetable items.
The
majority of fresh-cut produce is sold to consumers through retail store and club
store settings, as well as non-conventional settings such as convenience stores,
gas stations and airports. We believe that outsourcing by food retailers will
increase, particularly as food safety regulations become more stringent and
retailers demand more value-added services. This trend should benefit large
branded suppliers like us, who are better positioned to invest in fresh-cut
facilities and to service regional and national chains and foodservice
operators, as well as supercenters, mass merchandisers and club stores. We also
believe that large branded suppliers benefit from merchandising, branding and
other marketing strategies for fresh-cut products, similar to those used for
branded processed food products, which depend substantially on product
differentiation.
We
believe that the fresh-cut produce market continues to be one of the
fastest-growing categories in the fresh produce segment, largely due to consumer
trends favoring healthy and conveniently packaged ready-to-eat foods. We
established a platform in this industry through acquisitions and by building
upon our existing fresh-cut pineapple business. We believe that our experience
in this market, coupled with our sourcing and logistics capabilities and the
DEL MONTE®
brand, have enabled us to achieve a leading position in this highly fragmented
market. Based on the latest supermarket scan data as supplied by an independent
market data provider for 2009, we believe that we are now the market leader in
branded fresh-cut fruit in the United States. Our fresh-cut fruit products
include pineapple, melons, grapes, citrus, apples, mango, kiwi and other fruit
items. The fruit we use in our fresh-cut operations are sourced within our
integrated system of company-controlled farms and from GAP-certified (good
agricultural practices) independent growers. We also offer fresh-cut vegetables
for prepared salads, such as coleslaw and potato salad. We purchase our
vegetables for these purposes from GAP-certified independent growers in the
United States and in Europe. Our purchase contracts for both fruit and
vegetables are typically short-term but vary by produce item. Our fresh-cut
products are sold in the United States, the United Kingdom, the Middle East and
Japan.
5
Non-Tropical
Fruit
Non-tropical
fruit includes grapes, apples, pears, peaches, plums, nectarines, cherries,
apricots, avocados, citrus and kiwis. Generally, non-tropical fruit grows on
trees, bushes or vines that shed their leaves seasonally. Approximately 41% of
our non-tropical fruit net sales are from the sale of grapes. Fresh grapes are a
favorite quick, easy and healthy snack among consumers young and old. In
addition to their delicious taste, a growing body of research on fresh grapes
suggests that grapes may offer significant health benefits as well. Fresh
grapes are a well-known fruit worldwide, fitting into almost any lifestyle.
Based on a 2009 study by the United States Department of Agriculture (“USDA”),
Economic Research Service, since the 1998/99 season, fresh grape consumption has
grown 20% in the United States and, on average, Americans now consume 8.5 pounds
of fresh grapes each year. Fresh grapes are also processed for the
production of wine, raisins, juices and canned products. The higher
production cost and higher product value of fresh grapes result from more
intensive production practices than are required for grapes grown for
processing. While California supplies the majority of total grape volumes,
imports have made fresh grapes available year-round in the United States, with
shipments mostly from Chile. Most U.S. production is marketed from
May to October. Chilean grapes dominate the market from December to
April.
Approximately
26% of our non-tropical fruit net sales are from the sale of
avocados. According to the latest published statistics from the FAO,
for the 10-year period from 1997 to 2007, avocado imports to the United States
have increased by 1200%. Per capita consumption of avocados in the
United Sates has also increased significantly in the last 10
years. According to the Economic Research service of the USDA, per
capita consumption of avocados was estimated to reach 3.8 pounds during the
2008/2009 season.
We sell a
variety of non-tropical fruit, including all of the types referred to
above. In 2009, non-tropical fruit sales in North America, Europe,
the Middle East, Asia and South America accounted for approximately 63%, 10%,
14%, 9% and 4% of our total net sales of non-tropical fruit, respectively. We
obtain our supply of non-tropical fruit from company-owned farms in Chile and
from independent growers in Chile, the United States, Mexico, Spain and New
Zealand. In Chile, we purchase non-tropical fruit from independent
growers and also produce a variety of non-tropical fruit on approximately 5,200
acres of company-owned or leased land. Our avocados are sourced principally from
Mexico. In Spain and Mexico, we have our own sourcing operations,
ensuring a consistent supply of high-quality non-tropical fruit during the
growing season. Purchase contracts for non-tropical fruit are typically made on
an annual basis.
Melons
Based on
FAO data, for the 10-year period from 1997 to 2007, the volume of imports of
cantaloupes and other melons increased in North America, Europe and the Middle
East by 18%, 74% and 150%, respectively. Melons are one of the highest volume
fresh produce items, and this category includes many varieties, such as
cantaloupe, honeydew and watermelon. During the summer and fall growing seasons
in the United States and Europe, demand is met in large part by local suppliers
of unbranded or regionally branded melons. By contrast, in North America and
Europe, imports significantly increase, and melons generally command premium
pricing from October to May. Melons are grown in temperate and tropical
locations and have a relatively short growing cycle.
We sell a
variety of melons including cantaloupe, honeydew, watermelon and specialty
melons, which we introduced to meet the different tastes and expectations of
consumers in Europe. Cantaloupes represented over 80% of our melon sales volume
in 2009. We are a significant producer and distributor of melons from October to
May in North American and European regions by sourcing melons from our
company-controlled farms and independent growers in Central and South America,
where production generally occurs during this period. Melons sold in
North America and Europe from October to May generally command a premium price
due to the relative scarcity of melons and alternative fruit. Melon sales in
North America and Europe accounted for 79% and 19% of our net sales of melons in
2009, respectively. In terms of volume, we produced 81% of the melons we sold in
2009 on company-controlled farms and purchased the remainder from independent
growers.
6
We are
able to provide our customers with a year-round supply of melons from diverse
sources. For example, we supply the North American market during its summer
season with melons from Arizona, California and the East Coast of the United
States, and we supply the European market during its summer season with melons
from Spain.
We have
devoted significant research and development efforts towards maintaining our
expertise in melons, especially cantaloupes. Melon crop yields are highly
sensitive to weather conditions and are adversely affected by high levels of
precipitation during the growing period of the fruit. We have developed
specialized melon growing technology that we believe has reduced our exposure to
the risk of intemperate weather conditions and significantly increased our
yields.
Tomatoes
The
United States is one of the largest producers of tomatoes in the world,
ranking second only to China. Mexico and Canada are also
important suppliers of fresh tomatoes within North America.
Based on “Fresh Trends”, an industry publication published in 2008,
fresh tomatoes remain a top performer for food retailers, generating
approximately 7.4% of a retailers produce sales.
We source
our fresh tomatoes mainly from the United States, Mexico and Canada. The tomato
category is highly fragmented with many suppliers, re-packers and wholesalers in
various geographic regions of the United States. As a high volume
item, tomatoes are important for our network of distribution and re-packing
facilities. This product category allows us to add value through leveraging our
purchase volumes to reduce costs and perform the sorting, packaging and custom
labeling locally, in addition to delivering on a just-in-time basis to retail
chains and foodservice customers. With our fresh-cut fruit and vegetable
facilities, we can add additional value by incorporating tomatoes into our
consumer-packaged products.
Vegetables
We
distribute and market a variety of vegetables including mainly potatoes, onions,
bell peppers and cucumbers. While we sell bulk product, we also use our size and
distribution network to find opportunities to add value such as sorting and
packaging. We source our vegetables from independent growers in North and
Central America.
Other
Fruit
We
produce, distribute and market a variety of other fruit, including strawberries,
plantains and mangos, as well as various other varieties of fruit. We source
these other fruit items from company-controlled farms and independent growers in
Costa Rica, Colombia, Guatemala and the United States.
Prepared
Food
We have a
royalty-free perpetual license to use the DEL MONTE®
Trademark in connection with the production, manufacture, sale and distribution
of prepared foods and beverages in over 100 countries throughout Western,
Eastern and Central Europe, Africa and the Middle East. Del Monte has operated
in Europe for over 75 years, is the premier brand associated with fruit-based or
fruit-derived products and is the leading brand for canned fruit and pineapple
in many Western European markets. Del Monte has had a presence in the United
Kingdom, the largest market, since 1926 and is perceived to be a quality brand
with high consumer awareness. Del Monte has a reputation with both consumers and
retailers for value, quality and reliability.
We
produce, distribute and market prepared pineapple, peaches, apricots, fruit
cocktail, pears, tomatoes and other fruit and vegetables. Our deciduous prepared
food products, which include peaches, apricots, pears and fruit cocktail are
principally sourced from our own facilities in Greece and South Africa. Our
tomato products are sourced from our own facilities in Greece together with
independent producers in Europe and the Middle East. Our prepared pineapple
products are primarily sourced from our own facility in Kenya and are also
sourced from independent producers in Asia. These products are sold primarily
under the DEL MONTE® label
and under the buyers’ own label for major retailers. We also distribute and
market beverages, including ambient juices and juice drinks as well as various
snacks. In the United Kingdom, our beverage production has been
outsourced to a third party since the first quarter of 2008. During
the second quarter of 2009, we consolidated the production, distribution and
sales and marketing function of our United Kingdom beverages with this same
third party. We believe that outsourcing these functions will reduce
costs and increase our competitiveness. We also produce and market
industrial products that are composed of fruit that has been processed in our
production facilities in the form of purees, pulps and concentrates for further
processing (yogurt, cake manufacture, pizza, etc.) and for sale to the
foodservice industry worldwide. We expect to continue investing in new product
development to increase revenue, defend our premium price position and maintain
market leadership in our product categories. In recent years, we have expanded
our offerings in the snack category by offering multiple varieties and sizes of
fruit in plastic pots and various frozen juice stick bars products, targeting
the convenience store and foodservice trade in selected European and Middle East
markets.
7
Our
prepared food segment also includes our Jordanian food business. This business
includes a state-of-the-art vertically integrated poultry business, including
poultry farms, a grain mill, a slaughterhouse and a meat processing plant in
Jordan. Our Jordanian poultry business is the leading provider of poultry
products to retail stores and foodservice operators in that country. The newly
established meat processing operation provides meat products for the Jordanian
market and to other Middle East and African markets.
Other
Products and Services
Our other
products and services include our third-party ocean freight business, our
third-party plastics and box manufacturing business and our Argentine grain
business. Our third-party ocean freight business allows us to generate
incremental revenue on vessels’ return voyages to our product sourcing locations
and when space is available on outbound voyages to our major markets, which
reduces our overall shipping costs. During the fourth quarter of
2009, as a result of unfavorable economic conditions, we eliminated our
third-party ocean freight service from North Europe to the
Caribbean. Our plastics and box manufacturing business produces bins,
trays, bags and boxes. Although this business is intended mainly to satisfy
internal packaging requirements, we also sell these products to third
parties.
In
addition, we grow grain on leased farms in Argentina, including soybean, wheat
and rice. We own and operate grain silos in Argentina for the storage of our
grain and that grown by third parties, which may be held for future
sales.
Logistics
Operations
We market
and distribute our products to retail stores, foodservice operators, wholesalers
and distributors in more than 100 countries around the world. As a result, we
conduct complex logistics operations on a global basis, transporting our
products from the countries in which they are grown to the many markets in which
they are sold worldwide. Maintaining fruit at the appropriate temperature is an
important factor in preventing premature ripening and optimizing product quality
and freshness. Consistent with our reputation for high-quality fresh produce, we
must preserve our fresh fruit in a continuous temperature-controlled
environment, beginning with the harvesting of the fruit in the field through its
distribution to our end markets.
We have a
fully integrated logistics network, which includes land and sea transportation
through a broad range of refrigerated environments in vessels, port facilities,
containers, trucks and warehouses. Our objective is to maximize utilization of
our logistics network to lower our average per-box logistics cost, while
remaining sufficiently flexible to redeploy capacity or shipments to meet
fluctuations in demand in our key markets. We believe that our control of the
logistics process is a competitive advantage because we are able to continuously
monitor and maintain the quality of our produce and ensure timely and regular
distribution to customers on a year-round basis. Because logistics costs are
also our largest expense other than our cost of products, we devote substantial
resources to managing the scheduling and availability of various means of
reliable transportation.
We
transport our fresh produce to markets worldwide using our fleet of 16 owned and
17 chartered refrigerated vessels. During 2009, we sold five of our
older, less efficient vessels and entered into 10-year agreements to charter
four new Japanese-built vessels. These vessels are capable of
carrying approximately 430,000 40-pound boxes of palletized and containerized
fruit. Two of these new vessels were put into service during the
fourth quarter of 2009 and the remaining two are scheduled for delivery during
the first half of 2010. We believe that our fleet of owned vessels,
combined with longer-term charters, is effective in reducing our ocean freight
costs and mitigates our exposure to the volatility of the charter
market. We also operate a fleet of approximately 6,100 refrigerated
containers, which are 43% owned or under capital leases, and the remaining 57%
are under operating leases. Our logistics system is supported by various
information systems. As a vertically integrated food company, managing the
entire distribution chain from the field to the customer requires the technology
and infrastructure to be able to meet our customers’ complex delivery
needs.
8
Sales
and Marketing
Our sales
and marketing activities are conducted by our sales force located at our sales
offices worldwide and at each of our distribution centers. Our commercial
efforts are supported by marketing professionals located in key markets and
regional offices. A key element of our sales and marketing strategy is to use
our distribution centers as a means of providing value-added services for our
customers. During 2009, we made significant investments in our network of
distribution centers, primarily concentrated in the Middle East, where we
believe that a strong presence will allow us to service a greater proportion of
customers’ needs and to capture a greater proportion of these expanding fresh
and fresh-cut produce markets. Investments in our network included new
distribution centers with banana ripening, cooling, re-packing and other
value-added service facilities.
We
actively support our customers through technical training in the handling of
fresh produce, in-store merchandising support, joint promotional activities,
market research and inventory and other logistical support. Since most of our
customers carry only one branded product for each fresh produce item, our
marketing and promotional efforts for fresh produce emphasize trade advertising
and in-store promotions.
One of
our most recent innovations is our new Controlled Ripening Technology (“CRT™”) banana
packaging. Launched in October 2009, our proprietary, patent pending
CRT™
packaging was created for individual single-serve packages and for our
40-pound bulk banana boxes. This packaging utilizes state-of-the-art
technology to help improve the ripening and handling process while helping
retailers increase banana sales, reduce product losses and maximize
profits. It also allows us to deliver to our customers the highest
quality fruit. As a result of this CRT™
packaging, we are able to broaden our distribution channels to include
vending machines and expand our product offerings to our convenience store
customer base.
During
2009, one customer, Wal-Mart, Inc. (including its affiliates), accounted for
approximately 13% of our total net sales. These sales are reported in our
banana, other fresh produce and prepared food segments. No other customer
accounted for 10% or more of our net sales. In 2009, the top 10 customers
accounted for approximately 34% of our net sales.
The level
of marketing investment necessary to support the prepared food business is
significantly higher than that required for the fresh produce and fresh-cut
fruit and vegetable business. We have utilized a variety of promotional tools to
build the DEL MONTE® brand
and engage consumers in key markets in Europe, Africa and the Middle
East. In recent years, we implemented a new strategy for the prepared
food business in certain key European markets consisting of utilizing exclusive
distributors to perform product distribution, sales and marketing activities.
Under these agreements, the sales, warehousing, logistics, marketing and
promotion functions are all performed by the distributor. This strategy of
utilizing independent distributors has enabled us to reduce distribution and
sales and marketing expenses. In addition, we plan to expand our prepared food
business by entering new markets in Eastern Europe, Africa and the Middle East
and by expanding our offerings in the snack category, targeting the convenience
store and foodservice trade in selected European and Middle East
markets.
North
America
In 2009,
48% of our net sales were made in North America. In North America, we have
established a highly integrated sales and marketing network that builds on our
ability to control transportation and distribution throughout our extensive
logistics network. We operate a total of 22 distribution centers and fresh-cut
facilities in the United States. Our distribution centers have ripening
capabilities and/or other value-added services. We also operate four port
facilities, which include cold storage facilities.
Our
logistics network provides us with a number of sales and marketing advantages.
For example, because we are able to maintain the quality of our fresh produce in
a continuous temperature-controlled environment, we are under less pressure to
fully sell a shipment prior to its arrival at port. We are thus better able to
manage the timing of our sales to optimize margins. Our ability to off-load
shipments for cold storage and distribution throughout our network also improves
ship utilization by minimizing in-port docking time. Our logistics network also
allows us to manage our inventory among distribution centers to respond more
effectively to fluctuations in customer demand in the regions we
serve.
9
We have
sales professionals in locations throughout the United States and in Canada. We
sell to leading grocery stores and other retail chains, wholesalers, mass
merchandisers, supercenters, foodservice operators, club stores and distributors
in North America. These large customers typically take delivery of our products
at the port facilities, which we refer to as FOB delivery. We also service these
large customers, as well as an increasing number of smaller regional chains and
independent grocers, through our distribution centers.
Europe
In 2009,
28% of our net sales were made in Europe. We distribute our products throughout
Europe. In the United Kingdom, where we operate three distribution centers and
two fresh-cut facilities, our products are distributed to leading retail chains,
smaller regional customers as well as to wholesalers and distributors through
direct sales and distribution centers. In Northern Europe, we distribute our
fresh produce products through our own marketing entities with operations
located in Germany and The Netherlands. In Southern Europe, we
distribute our fresh produce through an independent marketing
company. Our prepared food products are distributed through
independent distributors throughout most of Europe, except in Germany, France
and Poland where we use our own marketing entities. In Germany, we
operate three distribution centers. In Poland, we operate two distribution
centers. In recent years, we restructured various prepared food operations and
have transitioned to utilizing exclusive distributors to perform product
distribution and sales and marketing activities in certain key European markets.
Under these agreements, the sales, warehousing, logistics, marketing and
promotion functions are all performed by the distributors. This strategy of
utilizing independent distributors has enabled us to reduce distribution, sales
and marketing expenses.
Middle
East and North Africa
In 2009,
9% of our net sales were made in the Middle East and North Africa. We
distribute our products through independent distributors and company-operated
distribution facilities. We have increased our sales of bananas in the Middle
East market through distributors and established our own direct sales
initiatives. Our distribution/manufacturing center in Dubai, United Arab
Emirates (“UAE”) is a state-of-the-art facility with just-in-time delivery
capabilities that includes banana ripening and cold storage facilities,
fresh-cut fruit and vegetable operations and an ultra-fresh juice manufacturing
operation. We distribute these products in the UAE and export them to other
Middle East countries. We also operate a distribution center in Abu-Dhabi, UAE
that includes banana ripening and cold storage facilities. In Saudi Arabia,
through our 60%-owned joint venture, we are implementing an expansion program
that includes the construction of two distribution centers with banana ripening,
cold storage facilities and future manufacturing capabilities. One of
the distribution centers, located in Riyadh, the capital city of Saudi Arabia,
was completed in 2009 while the second one, located in Jeddah, is planned for
completion in the first quarter of 2010. These strategically
located distribution centers will distribute our fresh produce products to this
growing market. In addition, we market and distribute prepared food products in
the UAE, Jordan, Saudi Arabia and various other Middle East and North African
markets. We have also established a presence in Egypt where we market and
distribute prepared food. In Jordan, we own a state-of-the-art vertically
integrated poultry business including poultry farms, a grain mill, a
slaughterhouse and a meat processing plant. We are the leading provider of
poultry products to retail stores and foodservice operators in that country. In
recent years, we have expanded our food business in Jordan with the addition of
the meat processing operation that provides meat products for the local market
and for export to other Middle East and North African markets. We believe that
the Middle East and North Africa markets represent an area for rapid sales
development of our fresh and prepared food products. Utilizing our extensive
knowledge of this region, we plan to capitalize on this opportunity with
increased focus and investments in these markets.
Asia
In 2009,
12% of our net sales were made in Asia. We distribute our products in
Asia through direct marketing and large distributors. Our principal markets in
this region are Japan, South Korea, mainland China and Hong Kong. In Japan, we
distributed approximately 89% of the products we sold in 2009 through direct
sales and the remainder through Japan’s largest fresh produce wholesaler, which
distributes our products on a sales commission basis. Our products are
distributed from four distribution centers located at strategic ports in Japan
with cold storage and banana ripening operations.
10
We also
engage in direct sales and marketing activities in South Korea and Hong Kong. In
other Asian markets, including mainland China, we sell to local distributors. We
have one distribution center and banana ripening facility in Hong Kong. In South
Korea, we have three distribution centers that utilize state-of-the art ripening
technology, which we believe is not otherwise available in that market. This
increases our ability to offer value-added services to our
customers.
South
America
We also
distribute our products in South America. We have direct sales and marketing
activities in strategic markets and also utilize local distributors in this
region. Our sales in these markets focus mainly on non-tropical fruit including
grapes, apples, pears, peaches, plums, cherries, kiwi and
nectarines.
Competition
We
compete based on a variety of factors, including the appearance, taste, size,
shelf life and overall quality of our fresh produce, price and distribution
terms, the timeliness of our deliveries to customers and the availability of our
produce items. The fresh produce business is highly competitive, and the effect
of competition is intensified because our products are perishable. Competition
in the sale of bananas, pineapples, melons and the other fresh fruit and
vegetables that we sell comes from competing producers and distributors. Our
sales are also affected by the availability of seasonal and alternative produce.
While historically our main competitors have been multinational banana and
pineapple producers, our significantly increased product offering in recent
years has resulted in additional competition from a variety of companies. These
companies include local and regional producers and distributors in each of our
fresh produce and fresh-cut product categories.
The
extent of competition varies by product. In the pineapple and non-tropical fruit
markets, we believe that the high degree of capital investment and cultivation
expertise required, as well as the longer length of the growing cycle, makes it
relatively difficult to enter the market. However, in recent years we have
experienced an increase in competition with our Del Monte Gold® Extra Sweet pineapple, which
has negatively affected our results.
In the
banana market, we continue to face competition from a limited number of large
multinational companies. At times, particularly when demand is greater than
supply, we also face competition from a large number of relatively small banana
producers. Unlike the pineapple and non-tropical fruit markets, there are few
barriers to entry into the banana market. Supplies of bananas can be increased
relatively quickly due to bananas relatively short growing cycle and the limited
capital investment required for banana growing. As a result of changes in supply
and demand, as well as seasonal factors, banana prices fluctuate
significantly.
In the
melon market, we compete with producers and distributors of both branded and
unbranded melons. From June to October, the peak North American and European
melon-growing season, many growers enter the market with less expensive
unbranded or regionally branded melons due to the relative ease of growing
melons during this period, the short growth cycle and reduced transportation
costs resulting from the proximity of the melon farms to the markets. These
factors permit many smaller domestic growers to enter the market. During the
offshore growing season from October to May, we compete with growers principally
in Central America. In recent years, there has been an abundant
supply of melons in the market during the offshore growing season, which has
negatively affected our results.
The
fresh-cut produce market is highly fragmented, and we compete with a wide
variety of local and regional distributors of branded and unbranded fresh-cut
produce and, in the case of certain fresh-cut vegetables, a small number of
large, branded producers and distributors. In this market, however, we believe
that our principal competitive challenge is to capitalize on the growing trend
of retail chains and independent grocers to outsource their own on-premises
fresh-cut operations. We believe that our sales strategy, which emphasizes not
only our existing sources of fresh produce, but also a full range of value-added
services, strict compliance with food safety standards and our national
distribution capability, positions us to gain an increasing share of this
market.
The
processed fruit and beverage markets are mature markets characterized by high
levels of competition and consumer awareness. Consumer choices are driven by
price and/or quality. Large retailers with their “buyers own label” (“BOL”)
products appeal to price-conscious consumers, while brand names are the key
differentiator for quality-focused consumers. In the processed food and beverage
markets in Europe, Africa and the Middle East, we compete with various local
producers, large retailers with their BOL products, as well as with large
international branded companies. It is in the branded section that our processed
foods products, specifically, canned fruit and pineapple in many European
countries, hold a leading position in the markets. The mature state of the
market in Western Europe, together with the strength and sophistication of the
large retailers there, account in part for the increasing presence of BOL
products in many food and beverage categories. In the past few years, we have
faced increased competitive pressure, particularly in the U.K. market, for
branded processed food and beverage products. At the same time, our marketing
and distribution costs in these European markets have increased. In order to
reduce costs and increase our competitiveness in the processed food business, we
decided to use distributors in certain key European markets to perform product
distribution and sales and marketing activities. Under these arrangements, the
sales, warehousing, logistics, marketing and promotion functions are all
performed by the distributor. In the United Kingdom and Italian
markets we have also outsourced our beverage production. This
strategy, taking advantage of lower cost and established marketing and
distribution networks, has enabled us to reduce costs and increase our
competitiveness in these mature markets.
11
Quality
Assurance
To ensure
the consistent high quality of our products, we have a quality assurance group
that maintains detailed quality specifications for all our products so that they
meet or exceed minimum regulatory requirements. Our specifications require
extensive sampling of our fresh produce at each stage of the production and
distribution processes to ensure high quality and proper sizing, as well as to
identify the primary sources of any defects. Our fresh produce is evaluated
based on both external appearance and internal quality, using size, color,
porosity, translucence and sweetness as criteria. Only fresh produce meeting our
stringent quality specifications is sold under the DEL MONTE®
brand.
We are
able to maintain the high quality of our products by growing a substantial
portion of our own produce and working closely with our independent growers. We
insist that all produce supplied by our independent growers meet the same
stringent quality requirements as produce grown on our farms. Accordingly, we
monitor our independent growers to ensure that their produce will meet
agricultural and quality control standards, offer technical assistance on
certain aspects of production and packing and, in some cases, manage the farms.
The quality assurance process begins on the farms and continues as harvested
products enter our packing facilities. Where appropriate, we cool the fresh
produce at our packing facilities to maximize quality and optimize shelf life.
As an indication of our commitment to quality, many of our operations have
received certificates of compliance from the International Standards of
Operation, in environmental compliance (14001) and production processes
(9001). In 2003, we became the world’s first multinational fresh produce company
to receive GlobalGap certification. We believe that this certification is among
the more difficult food certifications to achieve, and signals to European
retailers and consumers that the fresh produce from our certified operations are
of the highest quality and that it meets the strictest food safety
standards.
Government
Regulation
Agriculture
and the sale and distribution of fresh produce are subject to extensive
regulation by government authorities in the countries where the produce is grown
and the countries where such produce is marketed. We have internal policies and
procedures to comply with the most stringent regulations applicable to our
products, as well as a technical staff to monitor pesticide usage and compliance
with applicable laws and regulations. We believe we are in material compliance
with these laws and regulations.
We are
also subject to various government regulations in countries where we market our
products. The countries in which we market a material amount of our products are
the United States, Canada, the countries of the European Union (the “EU”),
Japan, China, South Korea, Jordan and the UAE. These government regulations
include:
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sanitary
regulations, particularly in the United States and the countries of the
EU;
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regulations
governing pesticide use and residue levels, particularly in the United
States, United Kingdom, Germany and Japan;
and
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regulations
governing traceability, packaging and labeling, particularly in the United
States and the countries of the EU.
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12
Any
failure to comply with applicable regulations could result in an order barring
the sale of part or all of a particular shipment of our products or, in an
extreme case, the sale of any of our products for a specified period. In
addition, we believe there has been an increasing emphasis on the part of
consumers, as well as retailers, wholesalers, distributors and foodservice
operators, on food safety issues, which could result in our business and
operations being subject to increasingly stringent food safety regulations or
guidelines.
Although
the fresh-cut produce industry is not currently subject to any specific
governmental regulations, we cannot predict whether or when any regulation will
be implemented or the scope of any possible regulation.
European
Union Banana Import Regulations
In
November 2005, the EU agreed to reform its controversial banana import license
regime. Latin America banana exporters and the United States long have
complained that the EU’s banana trading system favored African, Caribbean and
Pacific countries (“ACP”) in violation of global trade rules. From
January 1, 2006, the quotas controlling import volumes of “third country”
(almost exclusively Latin American) bananas coming into the EU were eliminated.
Importers are now required to pay a euro (“€”) tariff of €176 per ton and a
small guarantee of €15 per ton. Import licenses have been eliminated,
but an import certificate is still required. The EU agreed to retain a duty-free
quota of 775,000 tons per annum for bananas from ACP countries. In December
2007, most of the ACP countries, including Cameroon, signed a bilateral
agreement with the EU that allows bananas duty free access to the EU market
without any quantitative limitation commencing on January 1,
2008. On December 15, 2009, the EU entered into an agreement
with certain Latin America banana exporting countries to settle the long running
dispute over banana import tariffs. The EU will gradually reduce
import tariffs on bananas from Latin America from the current level of €176 per
ton to €114 per ton in 2017. The largest reduction in the import
tariff of €28 per ton will be retroactively effective to December 15, 2009, once
the national lawmakers ratify the agreement. The import tariff will
then be reduced again on January 1, 2011 and at the beginning of each subsequent
year for seven years, as follows: 2011-€143, 2012-€136, 2013-€132, 2014-€127,
2015-€122, 2016-€117 and 2017-€114. This agreement is expected to be
ratified during the first half of 2010. If certain global
agricultural trade conditions, as stipulated in the agreement, are not meet by
the end of 2013, the reduction in import tariffs will be frozen for two years
until 2015. Afterwards, commencing in 2016, irrespective of meeting
the stipulated conditions, the EU will continue to reduce its tariff each year
as agreed, until the tariff reaches €114 on January 1, 2019. We
cannot predict the impact of this reduction of banana import tariffs on the EU
market.
Environmental
Proceedings
The
management, use and disposal of some chemicals and pesticides are inherent
aspects of our production operations. These activities and other aspects of
production are subject to various environmental laws and regulations, depending
upon the country of operation. In addition, in some countries of operation,
environmental laws can require the investigation and, if necessary, remediation
of contamination related to past or current operations. We are not a party to
any dispute or legal proceeding relating to environmental matters where we
believe that the risk associated with the dispute or legal proceeding would be
material, except as described in Item 3. Legal Proceedings and Note
18, “Litigation” to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data in
connection with the Kunia Well Site.
On
May 10, 1993, the EPA identified a certain site at our plantation in Hawaii
for potential listing on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended. See
Item 3. Legal
Proceedings and Note 18, “Litigation” to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data.
Research
and Development, Patents and Licenses, Etc.
Our
research and development programs have led to improvements in agricultural and
growing practices and product packaging technology. These programs are directed
mainly at reducing the cost and risk of pesticides, using natural biological
agents to control pests and diseases, testing new varieties of our principal
fruit varieties for improved crop yield and resistance to wind damage and
improving post-harvest handling. We have also been seeking to increase the
productivity of low-grade soils for improved banana growth and experimenting
with various other types of fresh produce. Our research and development efforts
are conducted by our staff of professionals and include studies conducted in
laboratories, as well as on-site field analyses and experiments. Our research
and development professionals are located at our production facilities and in
the United States, and we provide our growers with access to improved
technologies and practices. We operate research and development facilities in
the San Francisco Bay area of California and Costa Rica where we conduct various
research activities relating to the development of new fruit
varieties.
13
Some of
the research and development projects include:
|
•
|
the
development of the Del
Monte Gold®
Extra Sweet
pineapple and other pineapple and melon
varieties;
|
|
•
|
improved
irrigation methods and soil preparation for melon planting;
and
|
|
•
|
the
development of our new CRT™ banana packaging created
for individual single-serve packages and for our 40-pound bulk banana
boxes that improves the ripening and handling
process.
|
Our total
corporate research and development expenses were $3.2 million, $3.5 million and
$3.1 million for 2009, 2008 and 2007, respectively, and are included in selling,
general and administrative expenses in the Consolidated Financial
Statements.
We have
the exclusive right to use the DEL MONTE® brand
for fresh fruit, fresh vegetables and other fresh and fresh-cut produce and
certain other specified products on a royalty-free basis under a worldwide,
perpetual license from Del Monte Corporation, an unaffiliated company that owns
the DEL MONTE®
trademark. Del Monte Corporation and several other unaffiliated companies
manufacture, distribute and sell under the DEL MONTE® brand
canned or processed fruit, vegetables and other produce, as well as dried fruit,
snacks and other products. Our licenses allow us to use the trademark
“DEL MONTE®” and
the words “DEL MONTE®” in
association with any design or logotype associated with the brand. The licenses
also give us certain other trademarks and trademark rights, on or in connection
with the production, manufacture, sale and distribution of fresh fruit, fresh
vegetables, other fresh produce and certain other specified products. In
addition, the licenses allow us to use certain patents and trade secrets in
connection with the production, manufacture, sale and distribution of our fresh
fruit, fresh vegetables, other fresh produce and certain other specified
products.
We have a
royalty-free perpetual license to use the DEL MONTE®
trademark in connection with the production, manufacture, sale and distribution
of all food and beverage products in Europe, Africa and the Middle
East.
We also
sell produce under several other brands for which we have obtained registered
trademarks, including UTC®,
Rosy®,
Fruit Express®, Just
Juice®,
Fruitini® and
other regional brands.
14
Seasonality
In part
as a result of seasonal sales price fluctuations, we have historically realized
a greater portion of our net sales and of our 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. For example, the production of
bananas is continuous throughout the year and production is usually higher in
the second half of the year, but the demand for bananas varies because of the
availability of other fruit. As a result, demand for bananas is seasonal and
generally results in higher sales prices during the first six months of the
calendar year. We make most of our sales of non-tropical fruit from October to
May. In the melon market, the entry of many growers selling unbranded or
regionally branded melons during the peak North American and European melon
growing season results in greater supply, and therefore lower sales prices, from
June to October. As a result of greater demand during the fourth quarter, the
prepared food business is expected to have higher net sales and gross profit
during this period. These seasonal fluctuations are illustrated in the following
table, which presents certain unaudited quarterly financial information for the
periods indicated:
|
Year
ended
|
||||||||
|
January
1,
|
December
26,
|
|||||||
|
2010
|
2008
|
|||||||
|
Net
sales:
|
||||||||
|
First
quarter
|
$ | 879.7 | $ | 894.9 | ||||
|
Second
quarter
|
978.4 | 972.2 | ||||||
|
Third
quarter
|
766.2 | 832.9 | ||||||
|
Fourth
quarter
|
872.1 | 831.0 | ||||||
|
Total
|
$ | 3,496.4 | $ | 3,531.0 | ||||
|
Gross
profit:
|
||||||||
|
First
quarter
|
$ | 83.8 | $ | 96.9 | ||||
|
Second
quarter
|
91.0 | 99.6 | ||||||
|
Third
quarter
|
69.0 | 79.0 | ||||||
|
Fourth
quarter
|
67.0 | 68.5 | ||||||
|
Total
|
$ | 310.8 | $ | 344.0 | ||||
Employees
At year
end 2009, we employed approximately 44,000 persons worldwide, substantially all
of whom are year-round employees. Approximately 88% of these persons are
employed in production locations. We believe that our overall relationship with
our employees and unions is satisfactory.
15
Organizational
Structure
We are
organized under the laws of the Cayman Islands and, as set forth in our Amended
and Restated Memorandum of Association, we are a holding company for the various
subsidiaries that conduct our business on a worldwide basis. Our significant
subsidiaries, all of which are directly or indirectly wholly owned,
are:
|
Subsidiary
|
Country
of Incorporation
|
|
|
Corporacion
de Desarrollo Agricola Del Monte S.A.
|
Costa
Rica
|
|
|
Del
Monte B.V.
|
Netherlands
|
|
|
Del
Monte Fresh Produce (Asia-Pacific) Limited
|
Hong
Kong
|
|
|
Del
Monte Fresh Produce Company
|
United
States
|
|
|
Del
Monte Fresh Produce International Inc.
|
Liberia
|
|
|
Del
Monte Fresh Produce N.A., Inc.
|
United
States
|
|
|
Del
Monte Fund B.V.
|
Netherlands
Antilles
|
|
|
Fresh
Del Monte Produce N.V.
|
Netherlands
Antilles
|
Web
site Access to Reports
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports can be viewed on the Company’s Web
site at www.freshdelmonte.com
as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the SEC.
In
addition, copies of our annual report may be obtained free of charge at Fresh
Del Monte Produce Inc., upon written request to attention: Investor Relations
c/o Del Monte Fresh Produce Company, 241 Sevilla Avenue, Coral Gables, Florida
33134.
|
Risk
Factors
|
We are
subject to many risks and uncertainties that may affect our future financial
performance and our stock price. Some of the risks and uncertainties that may
cause our financial performance to vary or that may materially or adversely
affect our financial performance or stock price are discussed
below.
We
could realize losses and suffer liquidity problems due to declines in sales
prices for bananas, pineapples and other fresh produce.
Our
profitability depends largely upon our profit margins and sales volumes of
bananas, pineapples and other fresh produce. In 2007, 2008 and 2009, banana
sales accounted for the most significant portion of our total net sales, and
historically pineapple sales have accounted for the most significant portion of
our total gross profit.
Supplies
of bananas can be increased relatively quickly due to the banana’s relatively
short growing cycle and the limited capital investment required for banana
growing. As a result of imbalances in supply and demand and import regulations,
banana prices fluctuate; consequently, our operating results could be adversely
affected.
Sales
prices for bananas, pineapples and other fresh produce are difficult to predict.
It is possible that sales prices for bananas and pineapples will decline in the
future, and sales prices for other fresh produce may also decline. In recent
years, there has been increasing consolidation among food retailers, wholesalers
and distributors. We believe the increasing consolidation among food retailers
may contribute to further downward pressure on our sales prices. In the event of
a decline in sales prices or sales volumes, we could realize significant losses,
experience liquidity problems and suffer a weakening in our financial condition.
A significant portion of our costs is fixed, so that fluctuations in the sales
prices have an immediate impact on our profitability. Our profitability is also
affected by our production costs, which may increase due to factors beyond our
control.
16
Due
to fluctuations in the supply of and demand for fresh produce, our results of
operations are seasonal, and we realize a greater portion of our net sales and
gross profit during the first two quarters of each year.
In part
as a result of seasonal sales price fluctuations, we have historically realized
a greater portion of our gross profit during the first two quarters of each
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. For example, the production of bananas is continuous throughout the year
and production is usually higher in the second half of the year, but the demand
for bananas during that period varies because of the availability of seasonal
and alternative fruit. As a result, demand for bananas is seasonal and generally
results in higher sales prices during the first six months of each calendar
year. In the melon market, the entry of many growers selling unbranded or
regionally branded melons during the peak North American and European melon
growing season results in greater supply, and therefore, lower sales prices from
June to October. In North American and European regions, we realize most of our
sales and gross profit for melons, grapes and non-tropical fruit from October to
May. During 2009, due to higher industry volumes, melon per unit sales prices
decreased, adversely affecting our results of operations. In the
prepared food business, we historically realize the largest portion of our net
sales and gross profit in the third and fourth quarters of the
year.
Crop
disease, severe weather, natural disasters and other conditions affecting the
environment, including the effects of climate change, could result in
substantial losses and weaken our financial condition.
Crop
disease, severe weather conditions, such as floods, droughts, windstorms and
hurricanes, and natural disasters, such as the recent earthquake in Chile, may
adversely affect our supply of one or more fresh produce items, reduce our sales
volumes, increase our unit production costs or prevent or impair our ability to
ship products as planned. This is particularly true in the case of our premium
pineapple product, the Del
Monte Gold ® Extra Sweet pineapple,
because a substantial portion of our production is grown in one region in Costa
Rica. Since a significant portion of our costs are fixed and contracted in
advance of each operating year, volume declines due to production interruptions
or other factors could result in increases in unit production costs, which could
result in substantial losses and weaken our financial condition. We have
experienced crop disease, insect infestation, severe weather and other adverse
environmental conditions from time to time, including hurricanes, droughts,
floods and earthquakes in our sourcing locations. Severe weather
conditions may occur with higher frequency or may be less predictable in the
future due to the effects of climate change. When crop disease,
insect infestations, severe weather, earthquakes and other adverse environmental
conditions destroy crops planted on our farms or our suppliers’ farms or prevent
us from exporting them on a timely basis, we may lose our investment in those
crops or our purchased fruit cost may increase.
The
fresh produce and prepared food markets in which we operate are highly
competitive.
The fresh
produce and prepared food business is highly competitive, and the effect of
competition is intensified because most of our products are perishable. In
banana and pineapple markets, we compete principally with a limited number of
multinational and large regional producers. In the case of our other fresh fruit
and vegetable products, we compete with numerous small producers, as well as
regional competitors. Our sales are also affected by the availability of
seasonal and alternative fresh produce. The extent of competition varies by
product. To compete successfully, we must be able to strategically source fresh
produce and prepared food of uniformly high quality and sell and distribute it
on a timely and regular basis. In addition, our profitability has depended
significantly on our gross profit on the sale of our Del Monte Gold® Extra Sweet pineapples.
Increased competition in the production and sale of Del Monte Gold® Extra Sweet pineapples has
adversely affected our results. We expect these competitive pressures to
continue.
We
are subject to material currency exchange risks because our operations involve
transactions denominated in various currencies.
We
conduct operations in many areas of the world involving transactions denominated
in a variety of currencies, and our results of operations, as expressed in
dollars, may be significantly affected by fluctuations in rates of exchange
between currencies. Although a substantial portion of our net sales (41% in
2009) are denominated in non-dollar currencies, we incur a significant portion
of our costs in dollars. Although we periodically enter into currency forward
contracts as a hedge against currency exposures, we may not enter into these
contracts during any particular period or these contracts may not adequately
offset currency fluctuations. We generally are unable to adjust our non-dollar
local currency sales prices to compensate for fluctuations in the exchange rate
of the dollar against the relevant local currency. In addition, there is
normally a time lag between our incurrence of costs and collection of the
related sales proceeds. Accordingly, if the dollar appreciates relative to the
currencies in which we receive sales proceeds, our operating results may be
negatively affected. Our costs are also affected by fluctuations in the value,
relative to the U.S. dollar, of the currencies of countries in which we have
significant production operations, with a weaker dollar resulting in increased
production costs.
17
Our
strategy of diversifying our product line, expanding into new geographic markets
and increasing the value-added services that we provide to our customers may not
be successful.
We
are diversifying our product line through acquisitions and internal growth. In
addition, we have expanded our service offerings to include a higher proportion
of value-added services, such as the preparation of fresh-cut produce, ripening,
customized sorting and packing, direct-to-store delivery and in-store
merchandising and promotional support. This represents a significant departure
from our traditional business of delivering our products to our customers at the
port. In recent periods, we have made significant investments in distribution
centers, fresh-cut and prepared food facilities through capital expenditures and
acquisitions and have expanded our business into new geographic markets. We may
not be successful in anticipating the demand for these products and services, in
establishing the requisite infrastructure to meet customer demands or the
provision of these value-added services. During recent years, we incurred
significant asset impairment and other charges as a result of our continuing
efforts to align our diversified product lines to market demand. If we are
unable to recover from current challenging economic conditions in Europe,
specifically in the United Kingdom, the prepared food goodwill and trademark may
be at risk for impairment in the future. If we are not successful in
our diversification efforts, our business, financial condition or results of
operations could be further materially and adversely affected.
Increased
prices for fuel, packaging materials or short-term refrigerated vessel charter
rates could increase our costs significantly.
Our costs
are determined in large part by the prices of fuel and packaging materials,
including containerboard, plastic, resin and tin plate. We may be adversely
affected if sufficient quantities of these materials are not available to us.
Any significant increase in the cost of these items could also materially and
adversely affect our operating results. Other than the cost of our products
(including packaging), sea and inland transportation costs represent the largest
component of cost of products sold.
During
2007, the cost of fuel increased 17% and containerboard had a slight increase as
compared with 2006. During 2008, the cost of fuel increased by 42% and
containerboard increased by 11%. During 2008, we also experienced a
significant amount of cost increases on our products due to higher fertilizer
and other raw material prices. During 2009, cost of fuel decreased by
32% and containerboard decreased 24% as compared with 2008. In
addition, we are subject to the volatility of the short-term charter vessel
market because approximately one-half of our refrigerated vessels are chartered
rather than owned. These charters are for periods of one to 10
years. Charter rates have generally increased during 2007 and 2008 as
compared with the relevant prior year, but did not experience any further
increase during 2009. As a result, significant increases in fuel,
packaging material and short-term charter rates would materially and adversely
affect our results.
Compliance
with regulation aimed at mitigating the effects of climate change, as discussed
elsewhere in these Risk Factors, could also increase the cost of fuel for our
shipping and logistics operations. We may be unable to pass along any
cost increases in our product pricing. Even if we can pass on cost increases,
significant changes in product pricing could also change consumer buying
patterns, including a greater reliance on local production rather than
imports.
We
are subject to the risk of product contamination and product liability
claims.
The sales
of our products involve the risk of injury to consumers. Such injuries may
result from tampering by unauthorized personnel, product contamination or
spoilage, including the presence of foreign objects, substances, chemicals, or
residues introduced during the growing, packing, storage, handling or
transportation phases. While we are subject to governmental inspection and
regulations and believe our facilities comply in all material respects with all
applicable laws and regulations, including internal product safety policies, we
cannot be sure that consumption of our products will not cause a health-related
illness in the future or that we will not be subject to claims or lawsuits
relating to such matters. Even if a product liability claim is unsuccessful, the
negative publicity surrounding any assertion that our products caused illness or
injury could adversely affect our reputation with existing and potential
customers and our brand image. In addition, claims or liabilities of this sort
might not be covered by our insurance or by any rights of indemnity or
contribution that we may have against others. We maintain product liability
insurance in an amount that we believe is adequate. However, we cannot be sure
that we will not incur claims or liabilities for which we are not insured or
that exceed the amount of our insurance coverage, resulting in significant cash
outlays that would materially and adversely affect our results and financial
condition.
18
We
are subject to legal and environmental risks that could result in significant
cash outlays.
We are
involved in several legal and environmental matters that, if not resolved in our
favor, could require significant cash outlays and could materially and adversely
affect our results of operations and financial condition. In addition, we may be
subject to product liability claims if personal injury results from the
consumption of any of our products. In addition, although the fresh-cut produce
market is not currently subject to any specific governmental regulations, we
cannot predict whether or when any regulation will be implemented or the scope
of any possible regulation.
The U.S.
Environmental Protection Agency (the “EPA”) has placed a certain site at our
former plantation in Oahu, Hawaii on the National Priorities List under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980.
Under an order entered into with the EPA, we completed a remedial investigation
and engaged in a feasibility study to determine the extent of the environmental
contamination. The remedial investigation report was finalized on
January 21, 1999 and approved by the EPA in February 1999. A final draft
feasibility study was submitted for EPA review in December 1999 and updated in
December 2001 and October 2002, and approved by the EPA on April 22, 2003.
On September 25, 2003, the EPA issued the Record of Decision (“ROD”). The
EPA estimates in the ROD that the remediation costs associated with the cleanup
of our plantation will range from $12.9 million to $25.4 million. Certain
portions of the EPA’s estimates have been discounted using a 5% interest rate.
The undiscounted estimates are between $14.8 million to $28.7 million. As of
January 1, 2010, there is $19.4 million included in other noncurrent liabilities
and $0.5 included in accounts payable and accrued expenses in our Consolidated
Balance Sheets relating to the Kunia well site clean-up. We expect to expend
approximately $0.5 million per year on this matter for the next five years. See
Item 3. Legal
Proceedings and Note 18, “Litigation” to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data. In addition, we are involved in several actions in
U.S. and non-U.S. courts involving allegations by numerous Central American and
Philippine plaintiffs that they were injured by exposure to a nematocide
containing the chemical Dibromochloropropane (“DBCP”) during the 1970’s. See
Item 3. Legal
Proceedings and Note 18, “Litigation” to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data.
Environmental
and other regulation of our business, including potential climate change
regulation, could adversely impact us by increasing our production cost or
restricting our ability to import certain products into the United
States.
Our
business depends on the use of fertilizers, pesticides and other agricultural
products. The use and disposal of these products in some jurisdictions are
subject to regulation by various agencies. A decision by a regulatory agency to
significantly restrict the use of such products that have traditionally been
used in the cultivation of one of our principal products could have an adverse
impact on us. For example, most uses of methyl bromide, a pesticide used for
fumigation of imported produce (principally melons) for which there is currently
no known substitute, were phased out in the United States in 2006, however,
various exemptions will allow its use offshore until 2015. Also, under the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal Food, Drug and
Cosmetic Act and the Food Quality Protection Act of 1996, the EPA is undertaking
a series of regulatory actions relating to the evaluation and use of pesticides
in the food industry. Similarly, in the EU, regulation (EC) No.
1107/2009 will apply starting June 14, 2011 and will fundamentally change the
pesticide approval process from the current risk base to hazard criteria based
on the intrinsic properties of the substance. These actions and
future actions regarding the availability and use of pesticides could have an
adverse effect on us. In addition, if a regulatory agency were to determine that
we are not in compliance with a regulation in that agency’s jurisdiction, this
could result in substantial penalties and a ban on the sale of part or all of
our products in that jurisdiction.
There has
been a broad range of proposed and promulgated state, national and international
regulation aimed at reducing the effects of climate change. Such regulations
apply or could apply in countries where we have interests or may have interests
in the future. In the United States, there is a significant possibility that
some form of regulation will be forthcoming at the federal level to address the
effects of climate change. Such regulation could take any of several forms that
result in the creation of additional costs in the form of taxes, the restriction
of output, investments of capital to maintain compliance with laws and
regulations, or required acquisition or trading of emission allowances. Climate
change regulation continues to evolve, and while it is not possible to
accurately estimate either a timetable for implementation or our future
compliance costs relating to implementation, we do not believe that such
regulation is reasonably likely to have a material effect in the foreseeable
future on our business, results of operations, capital expenditures or financial
position.
19
We
are exposed to political, economic and other risks from operating a
multinational business.
Our
business is multinational and subject to the political, economic and other risks
that are inherent in operating in numerous countries. These risks include those
of adverse government regulation, including the imposition of import and export
duties and quotas, currency restrictions, expropriation and potentially
burdensome taxation. For example, banana import regulations have in prior years
restricted our access to the EU banana market and increased the cost of doing
business in the EU. On December 15, 2009, the EU entered into an
agreement with certain Latin America banana exporting countries to settle the
long running dispute over banana import tariffs. The EU will
gradually reduce import tariffs on bananas from Latin America from the current
level of €176 per ton to €114 per ton in 2017. The largest reduction
in the import tariff of €28 per ton will be retroactively effective to December
15, 2009, once the national lawmakers ratify the agreement. This
agreement is expected to be ratified during the first half of 2010.
We have a
contract to purchase all of the banana production from an entity controlled by
the Government of Cameroon. In 2007, we signed a new banana purchasing agreement
with our Cameroon partner, effective May 1, 2008 and terminating on
December 31, 2008 with automatic one-year renewal and a cancellation notice
period of 12 months. This contract was automatically renewed for 2009 and once
more for 2010. Effective January 1, 2010, the cancelation notice
period has been extended to 36 months. The Government of Cameroon has
declared again its intention to privatize these banana plantations in the
future. Since bananas produced in Cameroon benefit from certain banana import
preferences and tax exemptions in the EU, privatization may have a negative
effect on our results of operations.
Costa
Rica and Ecuador, countries in which we operate, have established “minimum”
export prices for bananas that are used as the reference point in banana
purchase contracts from independent producers, thus limiting our ability to
negotiate lower purchase prices. These minimum export price requirements could
potentially increase the cost of sourcing bananas in countries that have
established such requirements.
We are
also subject to a variety of government regulations in countries where we market
our products, including the United States, the countries of the EU, Asia,
countries of the Middle East and Africa. Examples of the types of regulation we
face include:
|
|
•
|
sanitary
regulations;
|
|
|
•
|
regulations
governing pesticide use and residue levels;
and
|
|
|
•
|
regulations
governing packaging and labeling.
|
If we
fail to comply with applicable regulations, it could result in an order barring
the sale of part or all of a particular shipment of our products or, possibly,
the sale of any of our products for a specified period. Such a development could
result in significant losses and could weaken our financial
condition.
The
distribution of our fresh produce in Southern Europe could be adversely affected
if we fail to maintain our distribution arrangement.
We import
and distribute a substantial portion of our fresh produce in Southern Europe
through a marketing entity with which we have an exclusive arrangement. If we
were to discontinue this exclusive arrangement, our ability to import and
distribute our fresh produce products in Southern Europe and the Mediterranean
region may be affected. On June 16, 2008, as a result of continuing
disagreements with this distributor related to operational issues, we delivered
our formal notice that we will cease all business with them by December 31,
2011. We are continuing to negotiate with this distributor in order to establish
a revised distribution agreement. Our inability to successfully establish a new
agreement could affect the distribution of our fresh produce products in
Southern Europe and the Mediterranean region and may have a negative effect on
our results of operations.
20
Acts
or omissions of other companies could adversely affect the value of the
DEL MONTE® brand.
We depend
on the DEL MONTE® brand
in marketing our products. We share the DEL MONTE® brand
with unaffiliated companies that manufacture, distribute and sell canned or
processed fruit and vegetables, dried fruit, snacks and other products. Acts or
omissions by these companies, including an instance of food-borne contamination
or disease, may adversely affect the value of the DEL MONTE®
brand. Our reputation and the value of the DEL MONTE® brand
may be adversely affected by negative consumer perception of this
brand.
Our
success depends on the services of our senior executives, the loss of whom could
disrupt our operations.
Our
ability to maintain our competitive position is dependent to a large degree on
the services of our senior management team. We may not be able to retain our
existing senior management personnel or attract additional qualified senior
management personnel.
Our
acquisition and expansion strategy may not be successful.
Our
growth strategy is based in part on growth through acquisitions or expansion,
which poses a number of risks. We may not be successful in identifying
appropriate acquisition candidates, consummating acquisitions on satisfactory
terms or integrating any newly acquired or expanded business with our current
operations. We may issue Ordinary Shares, incur long-term or short-term
indebtedness, spend cash or use a combination of these for all or part of the
consideration paid in future acquisitions or to expand our operations. The
execution of our acquisition and expansion strategy may entail repositioning or
similar actions that in turn require us to record impairments, restructuring and
other charges. Any such charges would reduce our earnings.
Our
indebtedness could limit our financial and operating flexibility and subject us
to other risks.
Our
ability to obtain additional debt financing or refinance our debt in the future
for working capital, capital expenditures or acquisitions may be limited either
by financial considerations or due to covenants in existing loan agreements. Our
principal working capital revolving credit facility was refinanced on July 17,
2009. The new credit facility has an outstanding balance of $309.7 million as of
January 1, 2010.
Our
ability to meet our financial obligations will depend on our future performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, some of which are beyond our control. Our ability to meet our
financial obligations also may be adversely affected by the seasonal nature of
our business, the cyclical nature of agricultural commodity prices, the
susceptibility of our product sourcing to crop disease, severe weather and other
adverse environmental conditions and other factors.
Since we
are an exempted holding company, our ability to meet our financial obligations
depends primarily on receiving sufficient funds from our subsidiaries. The
payment of dividends or other distributions to us by our subsidiaries may be
restricted by the provisions of our credit agreements and other contractual
requirements and by applicable legal restrictions on payment of
dividends.
If we
were unable to meet our financial obligations, we would be forced to pursue one
or more alternative strategies, such as selling assets, restructuring or
refinancing our indebtedness or seeking additional equity capital, strategies
which might not be successful. Additional sales of our equity capital could
substantially dilute the ownership interest of existing
shareholders.
Our new
credit facility imposes operating and financial restrictions on our activities.
Our failure to comply with the obligations under this facility, including
maintenance of financial ratios, could result in an event of default, which, if
not cured or waived, would permit acceleration by the lender of the indebtedness
due under the facility.
We
are controlled by our principal shareholders.
Members
of the Abu-Ghazaleh family, including our Chairman and Chief Executive Officer
and one of our directors, are our principal shareholders. Together, as of
February 22, 2010, they beneficially own approximately 34% of our
outstanding Ordinary Shares, and our Chairman and Chief Executive Officer holds,
and is expected to continue to hold, an irrevocable annual proxy to vote all of
these shares. We expect our principal shareholders to continue to use their
interest in our Ordinary Shares to direct our management, to significantly
influence the election of our entire board of directors, to determine the method
and timing of the payment of dividends also limited by debt covenants, to
determine substantially all other matters requiring shareholder approval and to
control us. The concentration of our beneficial ownership may have the effect of
delaying, deterring or preventing a change in control, may discourage bids for
the Ordinary Shares at a premium over their market price and may otherwise
adversely affect the market price of the Ordinary Shares.
21
A
substantial number of our Ordinary Shares are available for sale in the public
market, and sales of those shares could adversely affect our share
price.
Future
sales of our Ordinary Shares by our principal shareholders, or the perception
that such sales could occur, could adversely affect the prevailing market price
of our Ordinary Shares. Of the 63,600,150 Ordinary Shares outstanding as of
February 22, 2010, 21,565,457 Ordinary Shares are owned by the principal
shareholders and are “restricted securities.” These “restricted” Ordinary Shares
can be registered upon demand and are eligible for sale in the public market
without registration under the Securities Act of 1933 (the “Securities Act”),
subject to compliance with the resale volume limitations and other restrictions
of Rule 144 under the Securities Act.
Our
organizational documents contain a variety of anti-takeover provisions that
could delay, deter or prevent a change in control.
Various
provisions of our organizational documents and Cayman Islands law may delay,
deter or prevent a change in control of us that is not approved by our board of
directors. These provisions include:
|
|
•
|
a
classified board of directors;
|
|
|
•
|
a
prohibition on shareholder action through written
consents;
|
|
|
•
|
a
requirement that general meetings of shareholders be called only by a
majority of the board of directors or by the Chairman of the
Board;
|
|
|
•
|
advance
notice requirements for shareholder proposals and
nominations;
|
|
|
•
|
limitations
on the ability of shareholders to amend, alter or repeal our
organizational documents; and
|
|
|
•
|
the
authority of the board of directors to issue preferred shares with such
terms as the board of directors may
determine.
|
In
addition, a change of control would constitute an event of default under our new
credit facility, which would have a material adverse effect on us. These
provisions also could delay, deter or prevent a takeover attempt.
Our
shareholders have limited rights under Cayman Islands law.
We are
incorporated under the laws of the Cayman Islands, and our corporate affairs are
governed by our Memorandum and Articles of Association and by the Companies Law
(As Revised) of the Cayman Islands. Principles of law relating to matters, such
as the validity of corporate procedures, the fiduciary duties of our management,
directors and controlling shareholders and the rights of our shareholders differ
from those that would apply if we were incorporated in a jurisdiction within the
United States. Further, the rights of shareholders under Cayman Islands law are
not as clearly established as the rights of shareholders under legislation or
judicial precedent applicable in most U.S. jurisdictions. As a result, our
public shareholders may have more difficulty in protecting their interests in
the face of actions by the management, directors or controlling shareholders
than they might have as shareholders of a corporation incorporated in a U.S.
jurisdiction. In addition, there is doubt as to whether the courts of the Cayman
Islands would enforce, either in an original action or in an action for
enforcement of judgments of U.S. courts, liabilities that are predicated upon
the U.S. federal securities laws.
|
Unresolved
Staff Comments
|
None.
22
|
Properties
|
The
following table summarizes the approximate plantation acreage under production
that are owned or leased by us and the principal products grown on such
plantations by location as of the end of 2009:
|
Acres Under Production
|
||||||||||
|
Location
|
Acres Owned
|
Acres Leased
|
Products
|
|||||||
|
Costa
Rica
|
41,500 | 9,700 |
Bananas, Pineapples,
Melons
|
|||||||
|
Guatemala
|
8,300 | 15,900 |
Bananas,
Melons
|
|||||||
|
Brazil
|
5,800 | — |
Bananas, Melons
|
|||||||
|
Chile
|
4,400 | 800 |
Non-Tropical
Fruit
|
|||||||
|
Kenya
|
— | 10,200 |
Pineapples
|
|||||||
|
Philippines
|
180 | 11,500 |
Bananas,
Pineapples
|
|||||||
|
United
States
|
— | 4,800 |
Melons
|
|||||||
We also
lease land in Argentina on a seasonal basis for our grain operations. Our
significant properties include the following:
North
America
We
operate a total of 22 distribution centers in the United States of which nine
are also fresh-cut facilities. We own seven of our distribution centers,
including a 200,000 square foot distribution center in Dallas, Texas, a
distribution center in Plant City, Florida and a repack facility in Winder,
Georgia. The remaining 15 distribution centers are leased from third parties.
All of our distribution centers have ripening capabilities and/or other
value-added services. Also included are two stand-alone fresh-cut facilities
that we own in Kankakee, Illinois and Portland, Oregon. In addition, we lease
four port facilities that include cold storage capabilities.
Europe
We
operate three distribution centers, mostly under leases from third parties, in
the United Kingdom and own one and lease two distribution centers in Germany,
where our products are distributed to leading retail chains. We also own and
operate two fresh-cut facilities in the United Kingdom. In Poland, we operate
two distribution centers that are leased from third parties and include ripening
facilities and other value added services. We own and operate a production
facility for prepared fruit, tomato products and snacks in Larissa,
Greece.
Asia
Our
products are distributed from four leased distribution centers located at
strategic ports in Japan with cold storage and banana ripening operations. In
addition, we own three distribution centers in South Korea and lease a
distribution center in Hong Kong. Our South Korean distribution centers include
state-of-the art ripening technology and other value-added services. We also own
and operate one fresh-cut facility in Japan.
South
America
We own
and operate grain silos in Argentina. In Uruguay, we own approximately 9,600
acres of which 7,400 acres contain a citrus plantation that is leased to a third
party on a five-year basis.
Africa
We own
and operate a warehouse and cannery in Thika, Kenya. In Tulbagh, South Africa,
we own and operate a production facility for prepared non-tropical fruit. The
total amount of land owned in South Africa is approximately 700
acres.
Middle
East
In
Jordan, we own an integrated poultry business including poultry farms, a grain
mill and a poultry slaughterhouse and a meat processing plant. We
also own a combined distribution/manufacturing center in Dubai, UAE. This
state-of-the-art facility includes banana ripening and cold storage facilities,
fresh-cut fruit and vegetable operations and an ultra fresh juice manufacturing
operation. In addition, we operate a distribution center under an operating
lease from a third party in Abu-Dhabi, UAE that includes banana ripening and
cold storage facilities. In Saudi Arabia, we own 60% of a joint venture, which
has initiated an expansion program that includes the construction of two owned
distribution centers with banana ripening, cold storage facilities and future
manufacturing capabilities. One of the distribution centers was
completed in December 2009 and the second is planned for completion in the first
quarter of 2010.
23
Maritime
and Other Equipment (including Containers)
We own a
fleet of 16 and charter another 17 refrigerated vessels. In addition, we own or
lease other related equipment, including approximately 6,100 refrigerated
container units and 170 trucks and refrigerated trailers used to transport our
fresh produce in the United States.
Other
Properties
We own
our U.S. executive headquarters building in Coral Gables, Florida, our Central
America regional headquarters building in San Jose, Costa Rica and our South
America regional headquarters building in Santiago, Chile. We own our office
space in Guatemala City, Guatemala and Amman, Jordan. Our remaining office space
in North America, Europe, Asia, Central and South America is leased from third
parties.
We
believe that our property, plant and equipment are well maintained, in good
operating condition and adequate for their present needs. Except as noted in
Item 3. Legal
Proceedings and Note 18, “Litigation” to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data, we know of no other environmental issues that may
affect the utilization of our property plant and equipment. For further
information with respect to our property, plant and equipment, see Note 8,
“Property, Plant and
Equipment” to the Consolidated Financial Statements filed as part of this
Report.
The
principal capital expenditures planned for 2010 are approximately $103.0
million, consisting of expansion and improvements of production facilities in
Costa Rica, Guatemala, Chile, Kenya and the Philippines and distribution
facilities in North America and the United Kingdom. We expect to fund
our capital expenditures in 2010 through operating cash flows and borrowings
under credit facilities.
|
Legal
Proceedings
|
See Note
18, “Litigation” to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data.
24
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Ordinary
Share Prices and Related Matters
Our
Ordinary Shares are traded solely on the New York Stock Exchange, under the
symbol FDP, and commenced trading on October 24, 1997, the date of our
initial public offering.
The
following table presents the high and low sales prices of our Ordinary Shares
for the periods indicated as reported on the New York Stock Exchange Composite
Tape:
|
High
|
Low
|
|||||||
|
2008
|
||||||||
|
First
quarter
|
$ | 37.90 | $ | 30.17 | ||||
|
Second
quarter
|
$ | 39.20 | $ | 23.25 | ||||
|
Third
quarter
|
$ | 25.30 | $ | 21.00 | ||||
|
Fourth
quarter
|
$ | 25.24 | $ | 14.33 | ||||
|
2009
|
||||||||
|
First
quarter
|
$ | 26.04 | $ | 13.02 | ||||
|
Second
quarter
|
$ | 18.75 | $ | 14.52 | ||||
|
Third
quarter
|
$ | 24.00 | $ | 15.51 | ||||
|
Fourth
quarter
|
$ | 24.43 | $ | 20.91 | ||||
Dividend
Policy
We have
not paid dividends for the years 2007, 2008 and 2009. Because we are an exempted
holding company, our ability to pay dividends and to meet our debt service
obligations depends primarily on receiving sufficient funds from our
subsidiaries. Pursuant to the new credit facility, we may declare and pay
dividends and distributions in cash solely out of and up to 50% of our net
income for the year immediately preceding the year in which the dividend or
distribution is paid; provided that we may declare dividends in cash solely out
of and up to 70% of our net income for the fiscal year immediately preceding the
year in which the dividend or distribution is paid if, after giving effect to
such dividend payment, we have a leverage ratio of 2.50 to 1.00 for such year.
It is also possible that countries in which one or more of our subsidiaries are
located could institute exchange controls, which could prevent those
subsidiaries from remitting dividends or other payments to us. Dividends are
payable when, as and if declared by our board of directors, and we cannot assure
you that dividends will be paid in the future.
Shareholders
As of
February 22, 2010, we had 106 shareholders of record, which excludes
shareholders whose shares were held by brokerage firms, depositories and other
institutional firms in “street name”.
25
Performance
Graph
The graph
below matches the cumulative five-year total return of holders of Fresh Del
Monte Produce Inc.'s common stock with the cumulative total returns of the
S&P 500 index and the S&P 500 Food Products index. The graph assumes
that the value of the investment in the Company's common stock and in each of
the indexes (including reinvestment of dividends) was $100 on December 31, 2004
and tracks it through January 1, 2010.
|
12/31/04
|
12/30/05
|
12/29/06
|
12/28/07
|
12/26/08
|
1/1/10
|
||
|
Fresh
Del Monte Produce Inc.
|
100.00
|
79.15
|
53.25
|
120.92
|
84.53
|
78.92
|
|
|
S&P
500
|
100.00
|
104.91
|
121.48
|
128.16
|
80.74
|
102.11
|
|
|
S&P
500 Food Products
|
100.00
|
93.98
|
114.61
|
119.74
|
97.65
|
115.01
|
The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.
26
Share
Repurchase Program
The
following table provides information regarding our purchases of Ordinary Shares
during the periods indicated:
|
Period
|
Total
Number of
Shares
Purchased
|
Average
Price Paid
per
Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
Maximum
Dollar Value
of
Shares that May
Yet
Be Purchased
Under
the
Program
(1)
|
|
September
26, 2009
through
October
31, 2009
|
-
|
-
|
-
|
$ 150,000,000
|
|
November
1, 2009
through
November
30, 2009
|
-
|
-
|
-
|
$ 150,000,000
|
|
December
1, 2009
through
January
1, 2010
|
-
|
-
|
-
|
$ 150,000,000
|
|
Total
|
-
|
-
|
-
|
$ 150,000,000
|
|
(1) On
August 3, 2009, we announced that our Board of Directors, at their July
31, 2009 board meeting,
approved
a three-year stock repurchase program of up to $150.0 million of our
Ordinary Shares.
|
||||
27
|
Selected
Financial Data
|
Our
fiscal year end is the last Friday of the calendar year or the first Friday
subsequent to the end of the calendar year, whichever is closest to the end of
the calendar year.
The
following selected financial data for the years ended December 30,
2005, December 29, 2006, December 28, 2007, December 26, 2008 and
January 1, 2010 is derived from our audited Consolidated Financial Statements
for the applicable year, prepared in accordance with U.S. generally accepted
accounting principles.
The
following selected financial data should be read in conjunction with
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
and our Consolidated Financial Statements and accompanying notes contained in
Item 8. Financial
Statements and Supplementary Data in this Report.
|
Year
ended (a)
|
||||||||||||||||||||
|
As
adjusted (b)
|
||||||||||||||||||||
|
January
1,
|
December
26,
|
December
28,
|
December
29,
|
December
30,
|
||||||||||||||||
|
2010
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(U.S.
Dollars in millions, except share and per share data)
|
||||||||||||||||||||
|
Statement
of Income Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 3,496.4 | $ | 3,531.0 | $ | 3,365.5 | $ | 3,214.3 | $ | 3,259.7 | ||||||||||
|
Cost
of products sold
|
3,185.6 | 3,187.0 | 3,000.6 | 3,024.9 | 2,944.7 | |||||||||||||||
|
Gross
profit
|
310.8 | 344.0 | 364.9 | 189.4 | 315.0 | |||||||||||||||
|
Selling,
general and administrative expenses
|
165.8 | 162.5 | 176.8 | 201.6 | 190.9 | |||||||||||||||
|
Gain
on sales of property, plant and equipment
|
11.2 | 7.5 | 17.4 | 1.6 | 1.2 | |||||||||||||||
|
Asset
impairment and other charges, net
|
8.0 | 18.4 | 12.5 | 105.3 | 3.1 | |||||||||||||||
|
Operating
income (loss)
|
148.2 | 170.6 | 193.0 | (115.9 | ) | 122.2 | ||||||||||||||
|
Interest
expense, net
|
11.2 | 13.1 | 25.9 | 25.6 | 16.1 | |||||||||||||||
|
Other
income (expense), net
|
(5.2 | ) | 4.5 | 14.3 | (1.4 | ) | (3.8 | ) | ||||||||||||
|
Income
(loss) before income taxes
|
131.8 | 162.0 | 181.4 | (142.9 | ) | 102.3 | ||||||||||||||
|
Provision
for (benefit from) income taxes
|
(12.8 | ) | 4.8 | 1.4 | (0.5 | ) | (8.3 | ) | ||||||||||||
|
Net
income (loss)
|
$ | 144.6 | $ | 157.2 | $ | 180.0 | $ | (142.4 | ) | $ | 110.6 | |||||||||
|
Less:
net income (loss) attributable to
|
||||||||||||||||||||
|
noncontrolling
interest (c)
|
0.7 | (0.5 | ) | 0.2 | (0.2 | ) | 0.5 | |||||||||||||
|
Net
Income (loss) attributable to
|
||||||||||||||||||||
|
Fresh
Del Monte Produce Inc.
|
$ | 143.9 | $ | 157.7 | $ | 179.8 | $ | (142.2 | ) | $ | 110.1 | |||||||||
|
Net
income (loss) per ordinary share - Basic
|
$ | 2.26 | $ | 2.49 | $ | 3.07 | $ | (2.46 | ) | $ | 1.90 | |||||||||
|
Net
income (loss) per ordinary share - Diluted
|
$ | 2.26 | $ | 2.48 | $ | 3.06 | $ | (2.46 | ) | $ | 1.90 | |||||||||
|
Dividends
declared per ordinary share
|
$ | - | $ | - | $ | - | $ | 0.50 | $ | 0.80 | ||||||||||
|
Weighted
average number of ordinary shares:
|
||||||||||||||||||||
|
Basic
|
63,570,999 | 63,344,941 | 58,490,281 | 57,819,416 | 57,926,466 | |||||||||||||||
|
Diluted
|
63,668,352 | 63,607,786 | 58,772,718 | 57,819,416 | 58,077,282 | |||||||||||||||
|
Balance
Sheet Data (at period end):
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 34.5 | $ | 27.6 | $ | 30.2 | $ | 39.8 | $ | 24.5 | ||||||||||
|
Working
capital
|
543.1 | 200.2 | 491.2 | 436.7 | 419.7 | |||||||||||||||
|
Total
assets
|
2,596.0 | 2,651.0 | 2,185.7 | 2,089.6 | 2,128.3 | |||||||||||||||
|
Total
debt
|
325.2 | 512.8 | 238.6 | 469.9 | 360.8 | |||||||||||||||
|
Shareholders'
equity (c)
|
1,695.2 | 1,513.9 | 1,379.6 | 1,038.5 | 1,174.8 | |||||||||||||||
|
_______________
|
||||||||||||||||||||
|
(a) We
reclassified gain on sales of property, plant and equipment in other
income (expense), net on the Consolidated Statements of Income for 2008
and 2007. Accordingly, we have reclassified these amounts for
years prior to 2009 to gain on sales of property, plant and equipment, a
component of operating income. See Note 1, "General" to our
Consolidated Financial Statements.
|
|
(b)
Effective December 30, 2006, the first day of our 2007 year, we adopted
the deferral method of accounting for planned major maintenance activities
related to vessel dry-dock activities, whereby actual costs incurred are
deferred and amortized on a straight-line basis over the period until the
next scheduled dry-dock activity. We have applied the new guidance
included in the ASC related to "Other Assets and Deferred
Costs" retrospectively to the years ended December 29,
2006 and December 30, 2005. See Note 2, "Summary of Significant
Accounting Policies" to our Consolidated Financial
Statements.
|
|
(c)
The ASC on “Consolidation” was
amended to require classification of noncontrolling interests as a
component of consolidated shareholders’ equity and the elimination of
“minority interest” accounting in results of
operations. Earnings attributable to noncontrolling interests
are required to be reported as part of consolidated earnings and not as a
separate component of income or expense and are required to be disclosed
on the face of the statement of income. We adopted this additional
guidance on December 27, 2008, the first day of our 2009 fiscal
year. See Note 2, "Summary of Significant
Accounting Policies" to our Consolidated Financial
Statements.
|
28
|
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 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. Production operations are aggregated on the
basis of our products: bananas, other fresh produce, prepared foods and other
products and services. Other fresh produce includes pineapples, melons,
tomatoes, non-tropical fruit (including grapes, apples, pears, peaches, plums,
nectarines, apricots, avocados, citrus and kiwis), fresh-cut produce and other
fruit and vegetables. Prepared foods include prepared fruit and vegetables,
juices, beverages, snacks, poultry and meat products. Other products and
services includes a plastic product and box manufacturing business, a grain
business and third-party ocean freight services.
Strategy
Our
strategy is focused on a combination of maximizing revenues from our existing
infrastructure, entering new markets and strict cost control initiatives. We
plan to continue to capitalize on the growing global demand for fresh produce
and expand our reach into existing and new markets. We expect sales growth of
fresh produce in key markets by increasing sales volume and per unit sales
prices as permitted by market conditions. Our recent acquisitions have
substantially increased our production capability of bananas, pineapples and
melon and provide the potential over time for significant operating efficiencies
and synergies. In addition, our number one position in the gold
pineapple market has been further strengthened. Our strategy includes increasing
volumes from existing production and distribution facilities in order to improve
operating efficiencies and reduce per unit costs. We plan additional investments
in growth markets by adding distribution facilities and expanding our
value-added services.
Net
Sales
Our net
sales are affected by numerous factors, including mainly the balance between the
supply of and demand for our produce and competition from other fresh produce
companies. Our net sales are also dependent on our ability to supply a
consistent volume and quality of fresh produce to the markets we serve. For
example, seasonal variations in demand for bananas as a result of increased
supply and competition from other fruit are reflected in the seasonal
fluctuations in banana prices, with the first six months of each year generally
exhibiting stronger demand and higher prices, except in those years where an
excess supply exists. During 2009, generally, bananas were in short supply at
certain times of the year, which contributed to a 4% improvement in our
worldwide per unit sales prices. In the processed foods business, we
generally realize the largest portion of our net sales and gross profit in the
third and fourth quarters of the year. During 2009, our prepared food
net sales were negatively affected by the current challenging economic
conditions, principally in the U.K. market, which resulted in lower sales
volume.
Since our
financial reporting currency is the U.S. dollar, our net sales are significantly
affected by fluctuations in the value of the currency in which we conduct our
sales versus the dollar, with a weak dollar versus such currencies resulting in
increased net sales in dollar terms. Including the effect of our foreign
currency hedges, net sales for 2009 were negatively impacted by approximately
$80.3 million, as compared to 2008, principally as a result of a weaker British
pound, South Korean won, euro and Polish zloty, partially offset by a stronger
Japanese yen, versus the U.S. dollar.
Our net
sales growth in recent years has been achieved primarily through increased sales
volume in existing markets of other fresh produce, primarily pineapples, melons
and non-tropical fruit, and favorable pricing on our Del Monte Gold® Extra Sweet pineapple
combined with increased sales volume and per unit sales prices of bananas in
existing and new markets. During 2009, our net sales were positively affected by
higher sales volume of bananas, gold pineapples and melons that resulted from
our recent acquisitions and production expansion, which were offset principally
by lower net sales of prepared food and other products and
services. Also positively impacting our sales in 2009 were higher
sales volumes of avocados in North America. Our net sales growth in
recent years is also attributable to a broadening of our product line with the
expansion of our fresh-cut produce business and our expansion into new markets.
We expect our net sales growth to continue to be driven by increased sales
volumes in our banana, other fresh produce and the prepared food segments. As a
result of our 2008 acquisitions and expansion of our production of banana, gold
pineapple and melon operations, we expect a further increase in net sales of
these products in North America, Europe and the Middle East. In the
Middle East, we expect to increase our net sales of our fresh produce and
prepared food product offerings as a result of our expansion in the Saudi
Arabian market. We also expect to increase our sales by developing new products
in the prepared food segment, targeting the convenience store and foodservice
trade in selected European and Middle East markets.
29
Cost
of Products Sold
Cost of
products sold is principally composed of two elements, product and logistics
costs. Product cost for our produce is primarily composed of cultivation (the
cost of growing crops), harvesting, packaging, labor, depreciation and farm
administration. Product cost for produce obtained from independent growers is
composed of produce and packaging costs. Logistics costs include land and sea
transportation and expenses related to port facilities and distribution centers.
Sea transportation cost is the most significant component of logistics costs and
is comprised of the cost of vessel operating expenses and chartering
refrigerated vessels. Vessel operating expenses for our owned vessels include
operations, maintenance, depreciation, insurance, fuel (the cost of which is
subject to commodity price fluctuations), and port charges. For chartered
vessels, operating expenses include the cost of chartering the vessels, fuel and
port charges. Variations in containerboard prices, which affect the cost of
boxes and other packaging materials, and fuel prices can have a significant
impact on our product cost and our profit margins. Also, variations
in the production yields, fertilizers and other input costs and the cost to
procure products from independent growers can have a significant impact on our
costs. Containerboard, plastic, resin and fuel prices have
historically been volatile. During 2008, the cost of fuel increased by 42% and
containerboard increased by 11%. This increase in containerboard and fuel prices
added approximately $48.0 million to cost of products sold in 2008 as compared
to 2007. During 2009, fuel prices decreased by 32% and containerboard decreased
24% as compared with 2008, reducing cost of products sold by $67.0
million. This decrease in cost of products sold that resulted from
lower fuel and containerboard prices was partially offset by an increase in
production costs due to lower yields and higher input costs and increased cost
of produce from independent growers of approximately $75.0 million and a charge
of $17.2 million related to growing crop inventory as a result of our decision
to discontinue pineapple operations in Brazil.
In
general, changes in our volume of products sold can have a disproportionate
effect on our gross profit. Within any particular year, a significant portion of
our cost of products sold is fixed, both with respect to our operations and with
respect to the cost of produce purchased from independent growers from whom we
have agreed to purchase all the products they produce. Accordingly, higher
volumes produced on company-owned farms directly reduce the average per-box
cost, while lower volumes directly increase the average per-box cost. In
addition, because the volume that will actually be produced on our farms and by
independent growers in any given year depends on a variety of factors, including
weather, that are beyond our control or the control of our independent growers,
it is difficult to predict volumes and per-box costs.
Since our
financial reporting currency is the U.S. dollar, our costs are affected by
fluctuations in the value of the currency in which we have significant
operations versus the dollar, with a weak dollar versus those currencies
resulting in increased costs. During 2009, cost of products sold was favorably
impacted by approximately $75.1 million as a result of a stronger U.S. dollar
versus the various currencies in which we have significant
operations.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses primarily include the costs associated with
selling in countries where we have our own sales force, advertising and
promotional expenses, professional fees, general corporate overhead and other
related administrative functions.
Gain
on Sales of Property, Plant and Equipment
Gain on
sales of property, plant and equipment was $11.2 million in 2009 principally as
a result of the sale of five refrigerated vessels and properties in South
America and Africa. In 2008, the gain on sales of property, plant and
equipment of $7.5 million resulted primarily from the sale of land and equipment
in South America.
Asset
Impairment and Other Charges, Net
Asset
impairment and other charges, net were $8.0 million in 2009 as compared with
$18.4 million in 2008, a decrease of $10.4 million. In 2009, we recorded asset
impairment and other charges totaling $10.9 million as a result of our decision
to discontinue pineapple planting in Brazil and our decision to not use certain
property, plant and equipment as originally intended for other crop
production. During 2009, we also incurred charges of $1.2 million for
termination benefits and contract termination costs resulting from our decision
to discontinue our commercial cargo service in Germany, a $2.0 million
impairment charge of the DEL MONTE®
perpetual, royalty-free brand name license for beverage products in the United
Kingdom due to lower than expected sales volume and pricing and a $2.8 million
asset impairment charge related to an intangible asset for a non-compete
agreement as a result of the Caribana acquisition. These charges were
partially offset by $5.5 million of credits due to the reversal of contract
termination costs as a result of the closure of an under-utilized distribution
center in the United Kingdom, and the discontinuance of retiree medical benefits
and the reversal of contract termination costs related to the closing of our
Hawaii pineapple operations. Also included in asset impairments and
other charges, net, for 2009 was $3.4 million of insurance recoveries related to
the 2008 floods of our Brazil banana operations.
30
Asset
impairment and other charges were $18.4 million in 2008 as compared with $12.5
million in 2007, an increase of $5.9 million. In 2008, we recorded asset
impairment charges totaling $11.3 million as a result of extensive flood damage
at our banana farms in Brazil and Costa Rica and $10.0 million principally due
to the closure of under-utilized distribution centers and the previously
announced closure of our beverage production operation in the United Kingdom
combined with related contract termination costs related to the banana and
prepared food segments. During 2008, we also recorded a net benefit of
approximately $2.9 million related to the previously announced closing of our
Hawaii pineapple operations.
In 2007,
we recorded asset impairment and other charges, net of $12.5 million, consisting
of $16.9 million related to exit activities principally in Europe and South
America. In addition, as a result of the decision to exit all
production activities in Hawaii in 2006, we recorded a net gain of $4.4 million
during 2007 which consisted of a curtailment gain related to the retiree medical
plan, partially offset by additional severance and other exit activity
charges.
Interest
Expense
Interest
expense consists primarily of interest on borrowings under working capital
facilities that we maintain and interest on other long-term debt primarily for
capital lease obligations. In 2009, our interest expense declined, reflecting a
slight decrease in our average outstanding debt and lower average interest
rates, partially offset by the write-off of debt issuance cost related to the
refinancing of the term loan previously being amortized through May 10,
2011.
Other
Income (Expense), Net
Other
income (expense), net, primarily consists of currency exchange gains or losses,
equity gains and losses in unconsolidated companies and other miscellaneous
income and expense items. During 2009, we recorded currency exchange
losses that resulted primarily from unfavorable exchange rate movements in the
euro, British pound and other currencies versus the U.S. dollar.
Provision
for (Benefit from) Income Taxes
Provision
for (benefit from) income taxes was a benefit of $(12.8) million in 2009 related
principally to $13.6 million of net changes in the deferred tax valuation
allowance due to expected utilization of deferred tax assets as a result of
increased profitability of our North America operations combined with the
settlement of certain tax positions in connection with an audit.
Income taxes consist of the consolidation of the tax provisions, computed
on a separate entity basis, in each country in which we have operations. Since
we are a non-U.S. company with substantial operations outside the United States,
a substantial portion of our results of operations is not subject to U.S.
taxation. Many of the countries in which we operate have favorable tax rates. We
are subject to U.S. taxation on our operations in the United States. From time
to time, tax authorities in various jurisdictions in which we operate audit our
tax returns and review our business structures and positions and there are
audits presently pending in various countries. There can be no assurance that
any tax audits, or changes in existing tax laws or interpretations in countries
in which we operate, will not result in an increased effective tax rate for us.
We have established tax accruals for uncertain tax positions, including those
relating to various tax audits currently in process. The amount of income taxes
due as a result of the eventual outcome of these audits may differ from the
amount of estimated tax accruals.
31
Results
of Operations
The
following table presents, for each of the periods indicated, certain income
statement data expressed as a percentage of net sales:
|
Year
ended
|
||||||||||||
|
January
1,
|
December
26,
|
December
28,
|
||||||||||
|
2010
|
2008
|
2007
|
||||||||||
|
Statement
of Income Data:
|
||||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Gross
profit
|
8.9 | 9.7 | 10.8 | |||||||||
|
Selling,
general and
|
||||||||||||
|
administrative
expenses
|
4.7 | 4.6 | 5.3 | |||||||||
|
Operating
income
|
4.2 | 4.8 | 5.7 | |||||||||
|
Interest
expense
|
0.3 | 0.4 | 0.8 | |||||||||
|
Net
income attributable to
|
||||||||||||
|
Fresh
Del Monte Produce Inc.
|
4.1 | 4.5 | 5.3 | |||||||||
The
following tables present for each of the periods indicated (i) net sales by
geographic region, (ii) net sales by product category and (iii) gross
profit (loss) by product category and, in each case, the percentage of the total
represented thereby:
|
Year
ended
|
||||||||||||||||||||||||
|
January
1,
|
December
26,
|
December
28,
|
||||||||||||||||||||||
|
2010
|
2008
|
2007
|
||||||||||||||||||||||
|
(U.S.
dollars in millions)
|
||||||||||||||||||||||||
|
Net
sales by geographic region:
|
||||||||||||||||||||||||
|
North
America
|
$ | 1,675.9 | 48 | % | $ | 1,633.1 | 46 | % | $ | 1,530.2 | 45 | % | ||||||||||||
|
Europe
|
995.2 | 28 | % | 1,081.4 | 30 | % | 1,113.6 | 33 | % | |||||||||||||||
|
Asia
|
420.2 | 12 | % | 408.1 | 12 | % | 374.8 | 11 | % | |||||||||||||||
|
Middle
East
|
314.1 | 9 | % | 275.8 | 8 | % | 228.2 | 7 | % | |||||||||||||||
|
Other
|
91.0 | 3 | % | 132.6 | 4 | % | 118.7 | 4 | % | |||||||||||||||
|
Total
|
$ | 3,496.4 | 100 | % | $ | 3,531.0 | 100 | % | $ | 3,365.5 | 100 | % | ||||||||||||
|
Year
ended
|
||||||||||||||||||||||||
|
January
1,
|
December
26,
|
December
28,
|
||||||||||||||||||||||
|
2010
|
2008
|
2007
|
||||||||||||||||||||||
|
(U.S.
dollars in millions)
|
||||||||||||||||||||||||
|
Net
sales by product category:
|
||||||||||||||||||||||||
|
Banana
|
$ | 1,510.9 | 43 | % | $ | 1,420.2 | 40 | % | $ | 1,199.0 | 36 | % | ||||||||||||
|
Other
fresh produce
|
1,551.5 | 44 | % | 1,559.8 | 44 | % | 1,614.9 | 48 | % | |||||||||||||||
|
Prepared
food
|
337.4 | 10 | % | 412.4 | 12 | % | 429.4 | 13 | % | |||||||||||||||
|
Other
products and services
|
96.6 | 3 | % | 138.6 | 4 | % | 122.2 | 4 | % | |||||||||||||||
|
Total
|
$ | 3,496.4 | 100 | % | $ | 3,531.0 | 100 | % | $ | 3,365.5 | 101 | % | ||||||||||||
|
Gross
profit by product category:
|
||||||||||||||||||||||||
|
Banana
|
$ | 108.7 | 35 | % | $ | 117.7 | 34 | % | $ | 61.0 | 17 | % | ||||||||||||
|
Other
fresh produce
|
148.7 | 48 | % | 171.1 | 50 | % | 240.5 | 66 | % | |||||||||||||||
|
Prepared
food
|
52.2 | 17 | % | 51.9 | 15 | % | 59.7 | 16 | % | |||||||||||||||
|
Other
products and services
|
1.2 | 0 | % | 3.3 | 1 | % | 3.7 | 1 | % | |||||||||||||||
|
Total
|
$ | 310.8 | 100 | % | $ | 344.0 | 100 | % | $ | 364.9 | 100 | % | ||||||||||||
32
2009
Compared with 2008
Net
Sales
|
Net
sales in 2009 were $3,496.4 million compared with $3,531.0 million in
2008. The decrease in net sales of $34.6 million was primarily
attributable to lower net sales of prepared food, other products and
services and other fresh produce, partially offset by higher net sales of
bananas.
|
|
·
|
Net
sales in the prepared food segment decreased by $75.0 million principally
due to lower sales volume of canned pineapples, beverage and deciduous
products due to poor market conditions and unfavorable exchange
rates. Also contributing to the decrease in net sales in the
prepared food segment was a change to a beverage production and
distribution agreement in the United Kingdom, whereby sales are recognized
net of production and distribution costs, resulting in approximately $11.0
million of lower net sales in 2009 as compared to
2008.
|
|
·
|
Net
sales in the other products and services segment decreased by $42.0
million principally due to lower commodity selling prices affecting our
Argentine grain business and lower third-party freight revenue due to the
elimination of freight services from Northern Europe to the
Caribbean.
|
|
·
|
Net
sales in the other fresh produce segment decreased by $8.3 million
principally as a result of lower net sales of tomatoes, other fruits and
vegetables, non-tropical fruit and fresh-cut products, partially offset by
higher net sales of melons and
pineapples.
|
|
o
|
Net
sales of tomatoes decreased primarily due to lower sales volume resulting
from fluctuations in supply and demand. Net sales of other
fruits and vegetables decreased primarily due to product rationalization
in North America combined with challenging market
conditions.
|
|
o
|
Net
sales of non-tropical fruit decreased principally as a result of lower
sales volume of grapes and lower per unit sales prices for apples,
partially offset by higher sales volume of
avocados.
|
|
o
|
Net
sales of fresh-cut products decreased primarily due to lower sales in
Europe due to unfavorable exchange rates and product
rationalization.
|
|
o
|
Net
sales of melons increased as a result of higher sales volume that resulted
principally from improved yields and increased production from
Company-operated facilities in Central America, partially offset by a 7%
decrease in per unit selling prices that resulted from higher industry
volumes.
|
|
o
|
Net
sales of pineapples increased principally due to an 11% increase in sales
volume that resulted from the Caribana acquisition, partially offset by
lower per unit sales prices. Pineapple per unit sales prices decreased as
a result of the unfavorable current economic conditions and unfavorable
exchange rates in Europe and South
Korea.
|
|
·
|
Net
sales in the banana segment increased by $90.8 million due to higher sales
volume in North America, the Middle East and Asia combined with higher per
unit sales prices in all regions, partially offset by unfavorable exchange
rates in Europe and South Korea. Also contributing to the
increase in sales volume was the additional sales volume that resulted
from the Caribana acquisition.
|
Cost
of Products Sold
Cost of
products sold was $3,185.6 million in 2009 compared with $3,187.0 million in
2008, a decrease of $1.4 million. This decrease in cost of products sold was
primarily attributable to lower ocean freight rates that resulted from lower
fuel prices, favorable exchange rates and $2.1 million of insurance proceeds
related to the 2008 Brazil flood damage, partially offset by an increase in
production costs due to lower yields and higher input costs and increased cost
of produce from independent growers and a charge of $17.2 million related to
growing crop inventory as a result of our decision to discontinue pineapple
operations in Brazil.
Gross
Profit
Gross
profit was $310.8 million in 2009 compared with $344.0 million in 2008, a
decrease of $33.2 million. The decrease in gross profit was attributable to
lower gross profit on other fresh produce, bananas and other products and
services, partially offset by higher gross profit on prepared food.
|
·
|
Gross
profit on the other fresh produce segment decreased by $22.4 million
principally as a result of lower gross profit on gold pineapples, melons
and non-tropical fruit, partially offset by higher gross profit on
fresh-cut products.
|
33
|
o
|
Gross
profit on gold pineapples decreased principally as a result of a charge of
$17.2 million related to growing crop inventory as a result of our
decision to discontinue pineapple operations in Brazil, combined with
lower per unit sales prices principally in Europe and North America as a
result of poor market conditions and unfavorable exchange rates in Europe,
partially offset by higher volume in all
markets.
|
|
o
|
Gross
profit on melons decreased principally due to lower per unit sales prices
as a result of higher industry volumes in North
America.
|
|
o
|
Gross
profit in non-tropical fruit decreased principally due to lower gross
profit on apples and grapes as a result of unfavorable market conditions,
partially offset by higher gross profit on stone fruit (peaches,
nectarines, plums, cherries, apricots) and avocados as a result of lower
fruit costs.
|
|
o
|
Gross
profit on fresh-cut products increased principally due to lower per unit
costs and improved efficiencies in North
America.
|
|
·
|
Gross
profit in the banana segment decreased by $9.0 million principally due to
a 5% increase in per unit cost as a result of higher procurement,
production and distribution costs, partially offset by higher per unit
sales prices and lower per unit ocean freight costs that resulted from
lower fuel costs and improvements in vessel utilization. Also
affecting gross profit in the banana segment was the effect of the Brazil
flood, which decreased gross profit by $2.1 million in 2008 due to
inventory write-offs and increased gross profit in 2009 for the same
amount due to insurance recovery.
|
|
·
|
Gross
profit on the other products and services segment decreased by $2.1
million principally due to lower gross profit in our Argentine grain
business resulting from lower commodity
prices.
|
|
·
|
Gross
profit in the prepared food segment increased by $0.3 million primarily
due to lower freight costs, partially offset by higher distribution
costs.
|
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased $3.3 million to $165.8 million in
2009 compared with $162.5 million in 2008. The increase was primarily due to
higher marketing and selling expenses in Europe and the Middle East as a result
of our efforts to support brand awareness, combined with higher professional
fees and employee benefit expenses.
Gain
on Sales of Property, Plant and Equipment
Gain on
sales of property, plant and equipment was $11.2 million in 2009 principally as
a result of the sale of five refrigerated vessels and properties in South
America and Africa. In 2008, the gain on sales of property, plant and
equipment of $7.5 million resulted primarily from the sale of land and equipment
in South America.
Asset
Impairment and Other Charges
Asset
impairment and other charges, net were $8.0 million in 2009 as compared with
$18.4 million in 2008, a decrease of $10.4 million.
Asset
impairment and other charges (credits) for 2009 were as follows:
|
·
|
$10.9
million in asset impairment and other charges as a result of our decision
to discontinue pineapple operations in Brazil and our decision to not use
certain property, plant and equipment as originally intended for other
crop production related to the other fresh produce
segment.
|
|
·
|
$1.2
million in termination benefits and contract termination costs resulting
from our decision to eliminate our commercial cargo service from Northern
Europe to the Caribbean related to the other products and services
segment.
|
|
·
|
$2.0
million charge for impairment of the DEL MONTE®
perpetual, royalty-free brand name license for beverage products in the
United Kingdom due to lower than expected sales volume and pricing related
to the prepared food segment.
|
|
·
|
$2.8
million impairment charge related to an intangible asset for a non-compete
agreement as a result of the Caribana acquisition related to the banana
segment.
|
34
|
·
|
$(0.8)
million in reversals of contract termination costs previously recorded
related to the closure of an under-utilized distribution center in the
United Kingdom related to the banana
segment.
|
|
·
|
$(4.7)
million principally due to a gain from the discontinuance of the retiree
medical plan and the reversal of certain contract termination costs
related to the previously announced closing of our Hawaii pineapple
operations related to the other fresh produce
segment.
|
|
·
|
$(3.4)
million gain due to insurance proceeds related to the 2008 Brazil floods
related to the banana segment.
|
Asset
impairments and other charges for 2008 were as follows:
|
·
|
$11.3
million in asset impairment and other charges as a result of extensive
flood damage at our banana farms in Brazil and Costa
Rica.
|
|
·
|
$10.0
million in asset impairment and contract termination costs principally due
to the closure of under-utilized distribution centers and the previously
announced closure of our beverage production operation in the United
Kingdom related to the banana and prepared food
segments.
|
|
·
|
$(2.9)
million net gain primarily due to unrecognized prior service costs as a
result of the previously announced closing of our Hawaii pineapple
operations related to the other fresh produce
segment.
|
Operating
Income
Operating
income in 2009 was $148.2 million compared with an operating income of $170.6
million in 2008, a decrease of $22.4 million. The decrease in operating income
is attributable to lower gross profit and higher selling, general and
administrative expense, partially offset by increased gain on sales of property,
plant and equipment and lower asset impairment and other charges.
Interest
Expense
Interest
expense was $11.9 million in 2009 as compared with $14.5 million in 2008, a
decrease of $2.6 million. The lower interest expense in 2009 reflects a slight
decrease in our average outstanding debt and lower average interest rates,
partially offset by the write-off of debt issuance cost related to the
refinancing of our term loan that was previously being amortized through May 10,
2011.
Other
Income (Expense), Net
Other
income (expense), net was a loss of $(5.2) million in 2009 compared with income
of $4.5 million in 2008. The loss in 2009 was principally due to $6.4 million in
foreign exchange losses primarily as a result of unfavorable exchange rates for
the euro and British pound as compared with $6.5 million in foreign
exchange gains in 2008. Partially offsetting the foreign exchange
losses incurred in 2009 were higher equity earnings from unconsolidated
subsidiaries.
Provision
for (Benefit from) Income Taxes
Provision for (benefit from) income
taxes was a benefit of $(12.8) million in 2009 as compared with a provision of
$4.8 million in 2008. The benefit from income taxes for 2009 related
principally to $13.6 million of net changes in the deferred tax valuation
allowance due to expected utilization of deferred tax assets as a result of
increased profitability of our North America operations combined with the
settlement of certain tax positions in connection with an audit.
35
2008
Compared with 2007
Net
Sales
Net sales
in 2008 were $3,531.0 million compared with $3,365.5 million in 2007. The
increase in net sales of $165.5 million was primarily attributable to higher net
sales of bananas and other products and services, partially offset by lower net
sales of other fresh produce and prepared food. Net sales of bananas increased
by $221.2 million due to higher per unit sales prices in all regions and higher
sales volume in North America and the Middle East, partially offset by lower
sales volume in Europe and Asia. On a worldwide basis, per unit sales prices
increased 14%. The Caribana acquisition contributed to the increase in sales
volume in North America. Net sales in the other products and services segment
increased $16.4 million primarily due to increased sales in the Argentina grain
and Chile plastic businesses. Net sales in the other fresh produce segment
decreased by $55.1 million principally due to lower sales of melons, tomatoes,
potatoes, vegetables and fresh-cut produce, partially offset by higher sales of
gold pineapples and non-tropical fruit. Melon sales decreased due to a 12%
decrease in sales volumes that resulted primarily from unfavorable growing
conditions in Central America and North America. Sales of tomatoes, potatoes and
other vegetables decreased primarily due to lower sales volume resulting from
continuing product rationalization in North America and the salmonella outbreak
in the United States originally linked to tomatoes. Sales of fresh-cut produce
decreased due to the economic downturn affecting North America and Europe, which
has resulted in consumers buying less expensive whole fruit as compared to
pre-cut products. Sales of gold pineapples increased as a result of an 8%
increase in sales volume primarily as a result of the Caribana acquisition,
partially offset by a slight decrease in per unit sales prices. Sales of
non-tropical fruit increased primarily due to higher per unit sales prices. Net
sales in the prepared food segment decreased $17.0 million primarily as a result
of the weakening British pound as compared to the U.S. dollar combined with
increased sales of inventory on-hand that occurred during 2007 as a resulted
from the conversion to independent distributors in the U.K. and Benelux markets,
partially offset by higher sales in the Jordanian poultry and prepared meat
business.
Cost
of Products Sold
Cost of
products sold was $3,187.0 million in 2008 compared with $3,000.6 million in
2007, an increase of $186.4 million. This increase in cost of products sold was
primarily attributable to higher fruit costs resulting from increase input
prices and procurement costs combined with negative foreign exchange impact as
currencies in producing countries strengthened against the U.S. dollar as well
as increased ocean freight that resulted from higher fuel prices, vessel
operating expenses and charter rates. Also contributing to the increase in cost
of sales were approximately $3.0 million in charges incurred principally related
to wages paid to idled workers and write-offs of packaging materials and other
clean-up costs as a result of extensive flood damage to our banana farms in
Brazil and Costa Rica combined with a credit of $3.0 million for insurance
proceeds related to the Kenya product recall that was included in cost of
product sold in 2007.
Gross
Profit
Gross
profit was $344.0 million in 2008 compared with $364.9 million in 2007, a
decrease of $20.9 million. The decrease in gross profit was primarily
attributable to lower gross profit on the other fresh produce segment of $69.4
million and lower gross profit on the prepared food segment of $7.8 million,
partially offset by higher gross profit on bananas of $56.7
million.
Gross
profit on other fresh produce decreased principally as a result of lower gross
profit on gold pineapples, fresh-cut products and melons, partially offset by
higher gross profit on non-tropical fruit. Gross profit on gold pineapples
decreased principally as a result of a 15% increase in per unit fruit costs that
resulted from higher production costs and higher ocean freight costs. Gross
profit on fresh-cut produce decreased principally as a result of a 17% increase
in cost due to higher production costs as a result of labor shortages in North
America and higher input costs combined with a 10% reduction in sales volume due
to a weaker economic environment. Gross profit on melons decreased principally
due to a reduction in sales volume that resulted from poor production conditions
in North and Central America, which also contributed to a 10% increase in
cost.
36
Gross
profit on prepared food decreased principally as a result of higher production
and transportation costs and as a result of our decision to market our prepared
food products through independent distributors in the United Kingdom, Italy and
the Benelux countries, which was offset by lower selling, general and
administrative expenses as indicated below.
Gross
profit on bananas increased primarily due to higher per unit selling prices in
all regions and higher sales volumes in North America and the Middle East,
partially offset by higher input, procurement and ocean freight costs. On a per
unit basis, worldwide banana pricing increased 14% while total costs increased
10%.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased $14.3 million to $162.5 million in
2008 compared with $176.8 million in 2007. The decrease was primarily due to
lower selling and marketing expenses in Europe as a result of our decision to
market our prepared food products through independent distributors in the United
Kingdom, Italy and the Benelux countries.
Gain
on Sales of Property, Plant and Equipment
Gain on
sales of property, plant and equipment was $7.5 million in 2008 principally as a
result of the sale of land and equipment in South America. In 2007, the gain on
sales of property, plant and equipment of $17.4 million was principally due to
our disposal of non-performing assets, the sale of a refrigerated vessel and the
insurance proceeds related to the accidental loss of another
vessel.
Asset
Impairment and Other Charges
Asset
impairment and other charges were $18.4 million in 2008 as compared with $12.5
million in 2007, an increase of $5.9 million. In 2008, we recorded asset
impairment totaling $11.3 million as a result of extensive flood damage at our
banana farms in Brazil and Costa Rica and $10.0 million principally due to the
closure of under-utilized distribution centers and the previously announced
closure of our beverage production operation in the United Kingdom combined with
related contract termination cost related to the banana and prepared food
segments. During 2008, we also recorded a net benefit of approximately $2.9
million related to the previously announced closing of our Hawaii pineapple
operations related to the other fresh produce segment.
In 2007,
we recorded asset impairment charges totaling $15.5 million related to exit
activities in the prepared food and other fresh produce segments principally in
Europe and South America. In addition, as a result of the decision to exit all
production activities in Hawaii in 2006, we recorded a net gain of $4.4 million
during 2007 related to the other fresh produce segment. This net gain consisted
principally of a curtailment gain related to the U.S.-based post-retirement
health plan, partially offset by additional severance and other exit activity
charges. Also included in asset impairment and other charges in 2007 were $1.4
million principally related to exit activities in the prepared food segment in
Europe as a result of our decision to market our prepared food products through
independent distributors in certain European markets and to outsource the U.K.
beverage production.
Operating
Income
Operating
income in 2008 was $170.6 million compared with an operating income of $193.0
million in 2007, a decrease of $22.4 million. The decrease in operating income
was attributable to lower gross profit, lower gain on sales of property, plant
and equipment and higher asset impairment and other charges, partially offset by
lower selling, general and administrative expenses.
Interest
Expense
Interest
expense was $14.5 million in 2008 as compared with $27.8 million in 2007, a
decrease of $13.3 million. In 2008, interest expense declined, reflecting a
slight decrease in our average outstanding debt and lower average interest
rates.
Other
Income (Expense), Net
Other
income (expense), net was $4.5 million in 2008 compared with $14.3 million in
2007. The decrease in other income (expense), net was principally due
to lower foreign exchange gains as a result of unfavorable exchange rate
movements in our principal trading currencies.
37
Provision
for Income Taxes
Provision
for income taxes was $4.8 million in 2008 compared with $1.4 million in 2007, an
increase of $3.4 million. The increase in provision for income taxes was due to
increased taxable earnings in certain jurisdictions, combined with additional
accruals for uncertain tax positions.
Liquidity
and Capital Resources
Net cash
provided by operating activities was $256.1 million for 2009 as compared with
$205.0 million for 2008, an increase of $51.1 million. The increase in cash
provided by operating activities was principally attributable to lower levels of
trade receivables that resulted from improved collections and lower sales
combined with lower levels of raw materials and packaging supplies inventories,
partially offset by lower net income and higher payments for accounts payable
and accrued expenses.
Net cash
provided by operating activities for 2008 was $205.0 million, an increase of
$57.7 million from 2007. The increase in cash provided by operating activities
was primarily attributable to changes in operating assets and liabilities
primarily comprised of lower levels of accounts receivable that resulted from
improved collections, higher accounts payable and accrued expenses due to
increased costs, partially offset by higher levels of growing crop inventory as
a result of expanded melon and pineapple farming operations.
Working
capital was $543.1 million at January 1, 2010, compared with $200.2 million at
December 26, 2008, an increase of $342.9 million. This increase in working
capital was primarily attributable to the classification of the borrowings under
the New Credit Facility (as defined below), as long-term debt as of January 1,
2010 compared with the classification of borrowings under the Credit Facility
(as defined below), as current as of December 26, 2008, combined with lower
levels of accounts payable and accrued expenses, partially offset by lower
levels of trade receivables and inventories and prepaid expenses and other
current assets.
Net cash
used in investing activities was $66.9 million for 2009, $499.5 million for 2008
and $50.8 million for 2007. Net cash used in investing activities for 2009
consisted primarily of capital expenditures of $84.5 million, partially offset
by proceeds from sales of property, plant and equipment of $17.6
million. Our capital expenditures for 2009 were comprised of $51.6
million primarily for distribution centers in Saudi Arabia and expansion of
production facilities in Costa Rica, Guatemala, Brazil and the Philippines
related to the banana segment, $29.9 million principally for expansion and
improvements of our pineapple operations in Costa Rica and the Philippines,
improvements of non-tropical fruit operations in Chile and of fresh-cut fruit
facilities in North America and the United Kingdom related to the other fresh
produce segment and $5.3 million for expansion of production facilities in
Jordan and Kenya related to the prepared food segment. Proceeds from
sale of property, plant and equipment for 2009 consisted primarily of the sale
of five refrigerated vessels that were scrapped and properties in South America
and Africa.
Net cash
used in investing activities for 2008 consisted primarily of capital
expenditures of $101.5 million, purchase business combination of $414.5 million,
partially offset by $16.5 million of proceeds from sale of property, plant and
equipment. Capital expenditures for 2008 consisted of $59.4 million principally
for distribution centers in Saudi Arabia and South Korea and for production
facilities in the Philippines, Guatemala and Brazil related to the banana
segment, $23.1 million principally for expansion of production facilities in the
Philippines, Costa Rica and Chile related to the other fresh produce segment and
$19.0 million principally for production facilities in Jordan and Kenya related
to the prepared food segment. Cash payments for purchases of business
combinations consisted principally of the acquisition of Caribana for $401.2
million and the purchase of melon operations in Costa Rica and Guatemala for
$12.4 million. Proceeds from sale of property, plant and equipment consisted
primarily of disposal of non-performing assets in South America and
Europe.
Net cash
used in investing activities for 2007 consisted primarily of capital
expenditures of $81.4 million and an additional investment of $2.0 million in an
unconsolidated subsidiary in Costa Rica, partially offset by $32.2 million of
proceeds from sale of property, plant and equipment. Capital expenditures for
2007 consisted primarily of expansion of distribution and manufacturing
facilities in the Middle East and expansion of production facilities in Kenya,
Brazil and the Philippines. Proceeds from sale of property, plant and equipment
principally consisted of disposals of non-performing assets in Europe, Africa
and North America, combined with the sale of a refrigerated vessel and the
insurance proceeds related to the accidental loss of another
vessel.
Net cash
used in financing activities of $182.2 million for 2009 was primarily
attributable to net repayments on long-term debt of $198.0 million, partially
offset by contributions from noncontrolling interest of $14.8 million and
proceeds from stock options exercised of $1.0 million.
38
Net cash
provided by financing activities of $304.5 million for 2008 was attributable to
net borrowings under our credit facilities of $271.8 million, proceeds from
stock options exercised of $22.1 million and contributions from noncontrolling
interest of $10.6 million.
Net cash
used in financing activities of $106.3 million for 2007 was attributable to net
repayment of long-term debt of $242.3 million, partially offset by $117.5
million of proceeds from the issuance of our Ordinary Shares and $13.3 million
from stock options exercised and $5.2 million of contributions from
noncontrolling interest. During November 2007, we sold 4,222,000 of our Ordinary
Shares in a public offering. The net proceeds from the issuance of our Ordinary
Shares were primarily used for repayments of long-term debt.
During
the first six months of 2009, we financed our working capital and other
liquidity requirements primarily through cash from operations and borrowings
under a credit facility administered by Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland,” New York Branch, which we
refer to as Rabobank (the “Credit Facility”). The Credit Facility included a
revolving commitment of $600.0 million expiring November 10, 2009 and a term
loan commitment (the “Term Loan”).
On July
17, 2009, we refinanced and replaced the Credit Facility (including the Term
Loan) with a $500 million senior secured revolving credit facility (the “New
Credit Facility”) with Rabobank Nederland, New York Branch, as administrative
agent and lead arranger. The New Credit Facility has a 3.5-year term,
with a scheduled maturity date of January 17, 2013. The New Credit
Facility includes a swing line facility and a letter of credit facility with a
$100 million sublimit. Borrowings under the New Credit Facility bear
interest at a spread over the London Interbank Offer Rate (“LIBOR”) that varies
with our leverage ratio. The New Credit Facility is collateralized
directly or indirectly by substantially all of our assets and is guaranteed by
certain of our subsidiaries. At January 1, 2010, we had $309.7
million outstanding under the New Credit Facility bearing interest at
3.26%. In addition, we pay a fee on unused commitments.
The New
Credit Facility requires us to be in compliance with financial and other
covenants, including limitations on capital expenditures, the amount of
dividends that can be paid in the future, the amount and types of liens and
indebtedness, material asset sales and mergers. As of January 1,
2010, we were in compliance with all of the financial and other covenants
contained in the New Credit Facility.
At
January 1, 2010, we had $184.7 million available under committed working capital
facilities, primarily under the New Credit Facility. At January 1,
2010, we applied $17.9 million to the letter of credit facility, comprised
primarily of certain contingent obligations and other governmental agencies
guarantees combined with guarantees for purchases of raw materials and
equipment. We also had $7.8 million in other letters of credit and
bank guarantees not included in the letter of credit facility.
As of
January 1, 2010, we had $325.2 million of long-term debt and capital lease
obligations, including the current portion, consisting of $309.7 million
outstanding under the New Credit Facility, $6.0 million of capital lease
obligations and $9.5 million of other long-term debt.
Based on
our operating plan combined with our borrowing capacity under our New Credit
Facility, we believe we will have sufficient resources to meet our cash
obligations in 2010 and the foreseeable future.
As of
January 1, 2010, we had cash and cash equivalents of $34.5 million.
As a
result of the previously announced closure of our Hawaii pineapple operations,
the closure of an under-utilized facility in the United Kingdom and the
discontinuance of commercial cargo service in Europe, we paid approximately $2.1
million in termination benefits and contractual obligations during
2009. We expect to make additional payments of $3.1 million in 2010
and thereafter related to these matters. These cash outlays will be
funded from operating cash flows and available borrowings under our credit
facilities. We do not expect additional charges related to the exit
activities mentioned above that would significantly impact our results of
operations and financial condition.
The
principal capital expenditures planned for 2010 consist of approximately $103
million consisting of expansion and improvements of production facilities in
Costa Rica, Guatemala, Chile, Kenya and the Philippines and distribution
facilities in North America and the United Kingdom. We expect to fund
our capital expenditures in 2010 through operating cash flows and borrowings
under credit facilities. We generated cash from operations of $256.1 million in
2009 and had $172.4 million available under our New Credit Facility as of
January 1, 2010.
The fair
value of our derivatives increased from a net asset of $7.1 million as of
December 26, 2008, to a net asset of $19.6 million as of January 1, 2010,
related to our foreign currency and bunker fuel cash flow hedges. For
foreign currency hedges, these fluctuations are primarily driven by the
strengthening or weakening of the U.S. dollar compared to the euro, British
pound and Japanese yen currencies being hedged relative to the contracted
exchange rates. For bunker fuel hedges, these fluctuations are driven
by the increase or decrease in bunker fuel prices relative to the contracted
bunker fuel price. During 2009, we predominately entered into
derivative contracts to hedge the British pound, euro and Japanese yen, as well
as to hedge bunker fuel prices. The change in 2009 was primarily related to
the strengthening of the U.S. dollar compared to the Japanese yen relative to
the contracted hedge position coupled with the fact that we entered into bunker
fuel derivatives in 2009 of which the fair valuation resulted in a net
unrealized gain of $4.3 million. We enter into derivative instruments
with counterparties that are highly rated and do not expect a deterioration of
our counterparty’s credit rating; however, the deterioration of our
counterparty’s credit 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 gains
of $16.3 million and $3.3 million of the fair value of hedges will be
transferred to earnings in 2010 and 2011 along with the earnings effect of the
hedged forecasted transactions.
39
Other
We are
involved in several legal and environmental matters that, if not resolved in our
favor, could require significant cash outlays and could have a material adverse
effect on our results of operations, financial condition and liquidity. See
Item 1. Business Overview
under “Environmental Matters” and Item 3. Legal Proceedings and Note
18, “Litigation” to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data.
Critical
Accounting Policies
We
believe the following accounting polices used in the preparation of our
Consolidated Financial Statements may involve a high degree of judgment and
complexity and could have a material effect on our Consolidated Financial
Statements.
Growing
Crops
Expenditures
on pineapple, melon and non-tropical fruit, including grapes, growing crops are
valued at the lower of cost or market and are deferred and charged to cost of
products sold when the related crop is harvested and sold. The deferred growing
costs consist primarily of land preparation, cultivation, irrigation and
fertilization costs. The deferred growing crop calculation is dependent on an
estimate of harvest yields and future crop expenditures. If there is an
unexpected decrease in estimated harvest yields, a write-down of deferred
growing costs may be required. During 2009, we incurred a charge of $17.1
million in cost of products sold primarily related to growing crop inventory as
a result of our decision to discontinue pineapple operations in Brazil, in the
other fresh produce segment.
Stock-Based
Compensation
Our
share-based payments are composed entirely of compensation expense related to
stock options and all stock option awards are granted to employees and members
of our Board of Directors, each of whom meets the definition of an employee
under the provisions of the Accounting Standards CodificationTM (the
“Codification” or “ASC”) guidance on “Compensation-Stock
Compensation”. We use the Black-Scholes option pricing
model to estimate the fair value of stock options granted.
Stock-based
compensation expense related to stock options for the year ended January 1,
2010, included in the determination of income before provision for income taxes
and net income, totaled $10.4 million on the straight-line, single award basis,
or $0.16 per diluted share, respectively, and are included in the accompanying
Consolidated Statements of Income for the year ended January 1, 2010 in selling,
general and administrative expenses. We are in a net operating loss carryforward
position in the relevant jurisdictions for the years ended 2007, 2008 and 2009,
therefore there was no reduction in taxes currently payable or related effect on
cash flows as the result of excess tax benefits from stock options exercised in
these periods. The amount of cash received from the exercise of
stock options was $1.0 million for the year ended January 1, 2010. As of January
1, 2010, the total remaining unrecognized compensation costs related to
non-vested stock options amounted to $16.2 million, which will be amortized over
the weighted-average remaining requisite service period of 2.1
years.
Goodwill
and Indefinite-Lived Intangible Assets
We assess
goodwill for impairment on an annual basis on the first day of the fourth
quarter of each year, or sooner if events indicate such a review is necessary.
Based on this valuation, we have determined that there was no impairment of
goodwill in 2009, 2008 or 2007. As of January 1, 2010, we were not aware of any
items or events that would cause us to further adjust the recorded value of
goodwill for impairment. 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. The amount of the impairment to recognize, if any,
is calculated as the amount by which the carrying value of goodwill exceeds its
implied value. Future changes in the estimates used to conduct the impairment
review, including revenue projection, market values and changes in the discount
rate used, could cause the analysis to indicate that our goodwill is impaired in
subsequent periods and result in a write-off of a portion or all of goodwill.
The discount rate used is based on independently calculated risks, our capital
mix and an estimated market risk premium. The fair value of the prepared and
melon reporting units’ goodwill is highly sensitive to differences between
estimated and actual cash flows and changes in the related discount rate used to
evaluate the fair value of this asset. If we are unable to recover from current
challenging economic conditions in Europe, the prepared reporting unit goodwill
may be at risk for impairment in the future. If we are unable to
recover from lower melon pricing in North America, the melon reporting unit may
be at risk for impairment in the future. As of the latest annual
impairment test, the fair values of the prepared and melon reporting units’
goodwill exceeded their carrying values by 10% and 20%,
respectively. We estimate that a one-percentage point increase in the
discount rate and a five percent decrease in expected future cash flows used
would result in the carrying values exceeding the fair values by $30.9 million
and $1.8 million related to the prepared and melon reporting units,
respectively. This would then trigger a fair valuation of the
respective reporting unit to determine the amount of the
impairment.
40
As part
of the Del Monte Foods acquisition, we acquired perpetual, royalty-free licenses
to use the DEL MONTE® brand
for processed and/or canned food in more than 100 countries throughout Europe,
Africa and the Middle East. Included in other non-current assets at January 1,
2010 is an indefinite-lived intangible asset of $70.3 million related to these
licenses. This indefinite-lived intangible asset is not being amortized but is
reviewed for impairment consistent with the Codification guidance on “Intangibles – Goodwill and
Other”. In 2009, we recorded a $2.0 million charge for
impairment of the DEL MONTE®
royalty-free brand name license for U.K. beverage products due to lower than
expected sales volume and pricing. This indefinite-lived asset is
highly sensitive to differences between estimated and actual cash flows and
changes in the related discount rate used to evaluate the fair value of this
asset. We estimate that a five percent decrease in the expected future cash
flows of this indefinite-lived intangible asset and a one-percentage point
increase in the discount rate used would result in a further impairment loss of
approximately $0.6 million related to this asset.
Impairment
of Long-Lived Assets
We
account for the impairment of long-lived assets in accordance with the
Codification guidance related to “Property, Plant and
Equipment”. The Codification guidance requires write-downs to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount. In 2007, we recorded asset
impairment charges of $15.5 million related to exit activities in the prepared
food and other fresh produce segments principally in Europe and South America.
In 2008, we recorded asset impairment of $15.7 million primarily as a result of
extensive flood damage at our banana farms in Brazil and Costa Rica, the closure
of under-utilized distribution centers and the previously announced closure of
our beverage production operation in the United Kingdom. During 2009,
we recorded asset impairment charges of $13.3 million due to our decision to
discontinue pineapple planting in Brazil, our decision not to use certain
property, plant and equipment as originally intended for other crop production
and an impairment of an intangible asset for a non-compete agreement as a result
of the Caribana acquisition.
In
assessing potential impairment, we consider the operating performance and
projected undiscounted cash flows of the relevant assets. If the projected cash
flows are estimated to be less than the assets’ carrying value, we may have to
record additional impairment charges. The fair value of the assets is determined
based on discounted future cash flows or independent appraisals from third
parties.
Income
Taxes
Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end, based on enacted tax laws and statutory tax
rates applicable to the year in which the differences are expected to affect
taxable income. Valuation allowances are established when it is deemed more
likely than not that some portion or all of the deferred tax assets will not be
realized. Our judgments regarding future profitability may change due to future
market conditions and other factors. These changes, if any, may require
adjustments to our deferred tax assets. We have established tax accruals for
uncertain tax positions, including those as a result of various tax audits
currently in process. The amount of income taxes due as a result of the eventual
outcome of these audits could differ from the amount of the estimated tax
accruals.
41
Contingencies
Estimated
losses from contingencies are expensed if it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Gain
contingencies are not reflected in the financial statements until realized. We
use judgment in assessing whether a loss contingency is probable and estimable.
Actual results could differ from these estimates.
Environmental
Remediation Liabilities
Estimated
expenses associated with environmental remediation obligations are accrued when
such expenses are probable and can be reasonably estimated. We have recorded
provisions for the Kunia Well Site related to the expected environmental
remediation. The related liability is based on the Record of Decision, which was
issued by the EPA on September 25, 2003. Certain portions of the EPA’s
estimates have been discounted using a 5% interest rate. Interest expense of
$0.6 million was accrued during 2009. In 2004, we commenced certain remediation
and further testing activities. At January 1, 2010 and December 26, 2008, the
total liability for the Kunia Well Site was $19.9 million and $20.2 million,
respectively. We expect to expend approximately $0.5 million in cash per year
for the next five years. The ultimate amount of the cost for the expected
environmental remediation of the Kunia Well Site is dependent on the actual
cost. Actual remediation costs could significantly differ from our
estimates.
Derivative
Financial Instruments
We
account for derivative financial instruments in accordance with the ASC guidance
on “Derivatives and
Hedging”. The ASC on “Derivatives and Hedging”
requires us to recognize the value of derivative instruments as either assets or
liabilities in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated as a hedge and qualifies as
part of a hedging relationship. The accounting also depends on the
type of hedging relationship, whether a cash flow hedge, a fair value hedge, or
hedge of a net investment in a foreign operation. A fair value hedge
requires that the effective portion of the change in the fair value of a
derivative financial instrument be offset against the change in the fair value
of the underlying asset, liability, or firm commitment being hedged through
earnings. A cash flow hedge requires that the effective portion of the change in
the fair value of a derivative instrument be recognized in other comprehensive
income, a component of shareholders’ equity, and reclassified into earnings in
the same period or periods during which the hedged transaction affects
earnings. The ineffective portion of the change in fair value of a
derivative instrument is to be recognized in earnings in the same line in which
the hedge transaction affects earnings. The ineffective portion of
the change in fair value is immaterial for the year ended January 1,
2010.
We use
derivative financial instruments primarily to reduce our exposure to adverse
fluctuations in foreign exchange rates and bunker fuel prices. When entered
into, we formally designate and document the financial instrument as a hedge of
a specific underlying exposure, as well as the risk management objectives and
strategies for undertaking the hedge transaction. The fair values of derivatives
used to hedge or modify our risks fluctuate over time. These fair value amounts
should not be viewed in isolation, but rather in relation to the cash flows or
fair value of the underlying hedged transactions or assets and other exposures
and to the overall reduction in our risk relating to adverse fluctuations in
foreign exchange rates and bunker fuel prices.
We
account for the fair value of our derivative financial instruments as either an
asset in other current assets or noncurrent assets or a liability in accrued
expenses or other noncurrent liabilities. We use an income approach
to value our outstanding foreign currency and bunker fuel cash flow
hedges. An income approach consists of a discounted cash flow model
that takes into account the present value of future cash flows under the terms
of the contracts using current market information as of the measurement date
such as foreign currency and bunker fuel spot and forward rates. An
element of default risk based on observable inputs is also built into the fair
value calculation.
Fair
Value Measurements
We
measure fair value for financial instruments, such as derivatives on an ongoing
basis. We measure fair value for non-financial assets, when a
valuation is necessary, such as for impairment of long-lived and
indefinite-lived assets when indicators of impairment exist. Fair
value is measured in accordance with the ASC on “Fair Value Measurements and
Disclosures”. The ASC on “Fair Value Measurements and
Disclosures” defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measures required under
other accounting pronouncements, but does not change existing guidance as to
whether or not an instrument is carried at fair value. The ASC also
requires us to classify fair value measurements based on the weight of
observable and unobservable valuation inputs as follows: Level
1: inputs are derived from quoted prices in active markets for
identical assets; Level 2: inputs are derived from significant other observable
inputs and Level 3: inputs utilized are not observable. We
adopted the provisions of “Fair Value Measurements and
Disclosures” for financial instruments effective December 29, 2007, the
first day of our 2008 fiscal year and for non-financial assets effective
December 27, 2008, the first day of our 2009 fiscal year.
42
During
the quarter ended March 27, 2009, we recognized an impairment charge of $2.0
million related to the Del Monte indefinite-lived intangible of a perpetual,
royalty-free brand name license due to lower than expected sales volumes and
pricing in the United Kingdom in the prepared foods segment specifically related
to beverage products. There was no further impairment on the U.K.
beverage licenses for the year ended January 1, 2010. An income-based
approach was used to value the trademark intangible, which measures the fair
value of an intangible asset by capitalizing the royalties saved due to
ownership of the intangible asset rather than paying a rent or royalty for the
use of the asset. This income-based approach referred to as the
royalty savings method utilizes internal unobservable inputs such as a
discounted net sales cash flow model with the application of a royalty savings
rate assumption corroborated by a mix of internal and market
inputs. Due to the weight of the unobservable inputs used, we
classify the fair value of this indefinite-lived intangible asset within Level 3
of the fair value hierarchy.
Our
trademarks are valued on the basis of prepared products, specifically beverage
products produced and sold in the United Kingdom, with a trademark carrying
value at January 1, 2010 of $6.7 million and all other prepared products with a
trademark carrying value at January 1, 2010 of $63.6 million.
We
recorded $10.5 million in asset impairment and other charges (credits) resulting
from our decision in May 2009 to discontinue pineapple planting in Brazil and
our subsequent decision, during the third quarter, to not use certain property,
plant and equipment as originally intended for other crop
production. The carrying value of these assets was $17.4 million and
was written down to a fair value of $6.9 million. We estimated the
fair value of the underlying assets by using a combination of the market
approach and the cost approach. The cost approach is based on the
amount that currently would be required to replace the service capacity of the
assets. The market approach uses prices and other relevant
information generated by market transactions involving comparable
assets. We used a combination of observable inputs primarily based on
appraisals and unobservable inputs using market participant assumptions to
estimate the fair value of the underlying assets. Due to the weight
of the unobservable inputs used, we classify the fair value of these long-lived
assets within Level 3 of the fair value hierarchy.
Recent
Developments
On
February 27, 2010, Chile experienced an earthquake of significant magnitude that
caused widespread damage in the central part of the country, including Santiago,
where our South American regional headquarters is located. Our
preliminary assessment revealed no significant damage to our
facilities. However, we are still assessing the earthquake’s effects
on our operations and our ability to export fruit from Chile. At this
time, we are not able to determine the effect on our financial condition or
results of operations due to this event.
New
Accounting Pronouncements
On
December 23, 2009, the Financial Accounting Standards Board (“FASB”) issued an
Accounting Standards Update (“ASU”) on accounting for transfers of financial
assets, which codifies Statement of Financial Accounting Standard (“SFAS”) No.
166, “Accounting for Transfers
of Financial Assets – an amendment of FASB Statement No.
140”. ASC guidance on “Transfers and Servicing”
provides accounting and financial reporting rules for sales, securitizations,
and servicing of receivables and other financial assets, and for secured
borrowing and collateral transactions. Furthermore, existing guidance
on “Transfers and
Servicing” defines the criteria for determining whether a transfer of
financial assets represents a sale of the assets or a collateralized borrowing
arrangement. This ASU amends the guidance on “Transfers and Servicing” to
(a) eliminate the concept of Qualified Special Purpose Entities (“QSPEs”); (b)
clarify many of the requirements to account for a transfer of financial assets
as a sale; and (c) include additional disclosure requirements. We are
required to comply with the requirements of this ASU commencing on the first day
of our 2010 fiscal year and we expect an immaterial impact, if any, on our
Consolidated Financial Statements.
On
December 23, 2009, the FASB issued an ASU on variable interest entities, which
codifies SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)”, which amends the consolidation guidance that applies to
Variable Interest Entities (“VIEs”). The ASU amends many important
provisions of the existing guidance on “Consolidation”. The
key changes include (a) the requirement that QSPEs be considered under the
consolidation guidance, whereas QSPEs were previously exempted from the existing
consolidation guidance; (b) the requirement that the reconsideration of an
entity’s status as the primary beneficiary be assessed qualitatively on an
on-going basis and not only when a triggering event occurs; (c) the
consideration of “kick-out” rights in determining if an entity is a VIE, which
may cause additional entities to now be considered VIEs; and (d) amendment to
the events that trigger a reassessment of whether an entity is a
VIE. We are required to comply with the requirements of this ASU
commencing on the first day of our 2010 fiscal year and we expect an immaterial
impact, if any, on our Consolidated Financial Statements.
On
January 21, 2010, the FASB issued an ASU on improving disclosures about fair
value measurements, which amends the ASC on “Fair Value Measurements and
Disclosures” to add new requirements for disclosures about transfers into
and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. The ASU
also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair
value. Further, the ASU amends guidance on employers’ disclosures
about postretirement benefit plan assets under the ASC guidance on “Compensation – Retirement
Benefits” to require that disclosures be provided by classes of assets
instead of by major categories of assets. We are required to comply
with the requirements of this ASU commencing the first day of our 2010 fiscal
year. This ASU will not have an impact to our Consolidated Financial
Statements except to require us to provide increased disclosure.
43
Trend
Information
Our net
sales growth in recent years has been achieved primarily through increased sales
volume in existing markets of other fresh produce, primarily pineapples, melons
and non-tropical fruit, and favorable pricing on our Del Monte Gold® Extra Sweet pineapple
combined with increased sales volume of bananas in existing and new markets.
During 2009, our net sales were positively affected by higher sales volume of
bananas, gold pineapples and melons that resulted from our recent acquisitions
and production expansion, which was offset principally by lower net sales of
prepared food and other products and services. Our net sales growth in recent
years is also attributable to a broadening of our product line with the
expansion of our fresh-cut produce business and our expansions into new markets.
We expect our net sales to continue to be driven by increased sales volumes in
our banana, other fresh produce and the prepared food segments. As a result of
our 2008 acquisitions of banana, gold pineapple and melon operations, we expect
a continued increase in net sales of these products in North America, Europe and
the Middle East. In Europe, Africa and the Middle East, we expect increased
sales of our fresh produce and prepared food product offerings. More
specifically, we expect to increase our sales in the Middle East by expanding
our distribution networks and increasing our sales volume in the fresh produce
product lines. We also expect to increase our sales by developing new products
in the prepared food segment, such as various frozen juice stick bars, targeting
the convenience store and foodservice trade in selected European and Middle East
markets.
In the
pineapple, grape and non-tropical fruit markets, we believe that the high degree
of capital investment and cultivation expertise required, as well as the longer
length of the growing cycle, makes it relatively difficult to enter the market.
However, in recent years we have experienced an increase in competition with
respect to our Del Monte
Gold® Extra Sweet pineapple, which
has affected our results. We expect these competitive pressures to continue in
2010.
In the
EU, the banana import tariff system that has been in effect since 2006 is
expected to be modified in 2010. On December 15, 2009, the EU entered
into an agreement with certain Latin America banana exporting countries to
settle the long running dispute over banana import tariffs. The EU
will gradually decrease import tariffs on bananas from Latin America from the
current level of €176 per ton to €114 per ton in 2017. The largest
reduction in the import tariff of €28 per ton will be retroactively
effective to December 15, 2009, once the national lawmakers ratify
the agreement, which is expected within four months. During 2009, the
EU banana market was stable and per unit net sales prices
increased. We cannot predict the impact of this reduction of banana
import tariffs on the EU market.
Our costs
are determined in large part by the prices of fuel and packaging materials,
including containerboard, plastic, resin and tin plate. Any significant increase
in the cost of these items could also materially and adversely affect our
operating results. Other than the cost of our products (including packaging),
sea and inland transportation costs represent the largest component of cost of
products sold. Fuel prices increased by 21% and containerboard prices increased
by 17% in 2006 as compared with 2005. During 2007, the cost of fuel
further increased by 17% and containerboard increased slightly as compared with
2006, and during 2008, fuel prices increased an additional 42% and
containerboard increased 11%. During 2009, fuel prices decreased by 32% and
containerboard decreased 24% as compared with 2008, reducing cost of product
sold by $67.0 million. We do not expect the cost of fuel and
containerboard to continue to decrease in 2010. In addition, we are
subject to the volatility of the short-term charter vessel market because
approximately one-half of our refrigerated vessels are chartered rather than
owned. These charters are for periods of one to 10 years. Charter
rates have generally increased during 2007 and 2008 as compared with the
relevant prior year, but did not experience any further increase during 2009.
During 2009, we entered into 10-year agreements to charter four new
vessels. Two of these new vessels were put into service during the
fourth quarter of 2009 and the remaining two are scheduled for delivery during
the first half of 2010. We believe that our fleet of owned vessels
combined with longer-term charters is effective in reducing our ocean freight
costs and mitigates our exposure to the volatility of the charter
market.
44
Tabular
Disclosure of Contractual Obligations
The
following details information with respect to our contractual obligations as of
January 1, 2010.
|
(U.S.
dollars in millions)
|
||||||||||||||||||||
|
Contractual
obligations by period
|
Total
|
Less
than
1
year
|
1
- 3 years
|
3
- 5 years
|
More
than
5
years
|
|||||||||||||||
|
Fruit
purchase agreements
|
$ | 1,724.2 | $ | 250.8 | $ | 441.9 | $ | 393.1 | $ | 638.4 | ||||||||||
|
Purchase
obligations
|
243.2 | 178.7 | 33.4 | 22.1 | 9.0 | |||||||||||||||
|
Operating
leases and charter agreements
|
477.1 | 102.6 | 120.5 | 77.3 | 176.7 | |||||||||||||||
|
Capital
lease obligations (including interest)
|
6.5 | 3.2 | 3.2 | 0.1 | - | |||||||||||||||
|
Long-term
debt
|
319.2 | 2.0 | 317.1 | 0.1 | - | |||||||||||||||
|
Retirement
benefits
|
84.8 | 7.5 | 14.7 | 15.5 | 47.1 | |||||||||||||||
|
Uncertain
tax positions
|
9.4 | 1.6 | 7.2 | 0.6 | - | |||||||||||||||
|
Totals
|
$ | 2,864.4 | $ | 546.4 | $ | 938.0 | $ | 508.8 | $ | 871.2 | ||||||||||
We have
agreements to purchase the entire production of certain products of our
independent growers in Costa Rica, Guatemala, Ecuador, Cameroon, Colombia,
Chile, Brazil and the Philippines that meet our quality standards. Total
purchases under these agreements amounted to $670.0 million, $690.3 million and
$580.8 million for 2009, 2008 and 2007, respectively. During 2009, we
entered into a contract to charter four refrigerated vessels for a 10 year
period. The contractual obligation related to this long-term charter
agreement is included in operating leases and charter agreements
above.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
We are
exposed to market risk from changes in currency exchange rates and interest
rates, which may adversely affect our results of operations and financial
condition. We seek to minimize the risks from these currency exchange rate and
interest rate fluctuations through our regular operating and financing
activities and, when considered appropriate, through the use of derivative
financial instruments. Our policy is to not use financial instruments for
trading or other speculative purposes and not to be a party to any leveraged
financial instruments.
We manage
our currency exchange rate risk by hedging a portion of our overall exposure
using derivative financial instruments. We also have procedures to monitor the
impact of market risk on the fair value of long-term debt, short-term debt
instruments and other financial instruments, considering reasonably possible
changes in currency exchange and interest rates.
Exchange
Rate Risk
Because
we conduct our operations in many areas of the world involving transactions
denominated in a variety of currencies, our results of operations as expressed
in U.S. dollars may be significantly affected by fluctuations in rates of
exchange between currencies. These fluctuations could be significant.
Approximately 41% of our net sales and a significant portion of our costs and
expenses in 2009 were denominated in currencies other than the dollar. We
generally are unable to adjust our non-dollar local currency sales prices to
reflect changes in exchange rates between the dollar and the relevant local
currency. As a result, changes in exchange rates between the euro, Japanese yen,
British pound or other currencies in which we receive sale proceeds and the
dollar have a direct impact on our operating results. There is normally a time
lag between our sales and collection of the related sales proceeds, exposing us
to additional currency exchange rate risk.
To reduce currency exchange rate risk,
we generally exchange local currencies for dollars promptly upon receipt. We
periodically enter into currency forward contracts as a hedge against a portion
of our currency exchange rate exposures; however, we may decide not to enter
into these contracts during any particular period. As of January 1, 2010, we had
several foreign currency cash flow hedges outstanding. The fair value of these
hedges as of that date was a net asset of $19.6 million.
The
results of a hypothetical 10% strengthening in the average value of the dollar
during 2009 relative to the other currencies in which a significant portion of
our net sales are denominated would have resulted in a decrease in net sales of
approximately $132.0 million for the year ended January 1, 2010. This
calculation assumes that each exchange rate would change in the same direction
relative to the dollar. In addition to the direct effect of changes in exchange
rates quantified above, changes in exchange rates also affect the volume of
sales. Our sensitivity analysis of the effects of changes in currency exchange
rates does not factor in a potential change in sales levels or any offsetting
gains on currency forward contracts.
45
Interest
Rate Risk
As
described in Note 13, “Long-Term Debt and Capital Lease
Obligations” to the Consolidated Financial Statements, our indebtedness
is both variable and fixed rate.
At
January 1, 2010, our variable rate total debt had a carrying value of $317.3
million. The fair value of the debt approximates the carrying value because the
variable rates approximate market rates. A 10% increase in the interest rate for
2009 would have resulted in a negative impact of approximately $1.2 million on
our results of operations for the year ended January 1, 2010.
The above
discussion of our procedures to monitor market risk and the estimated changes in
fair value resulting from our sensitivity analyses are forward-looking
statements of market risk assuming certain adverse market conditions
occur.
Actual
results in the future may differ materially from these estimated results due to
actual developments in the global financial markets. The analysis methods we
used to assess and mitigate risk discussed above should not be considered
projections of future events or losses.
46
|
Financial
Statements and Supplementary Data
|
Our
Consolidated Financial Statements and Schedule set forth in the accompanying
Index are filed as part of this Report.
Index
to Consolidated Financial Statements
|
Page
|
|
|
Internal
Control over Financial Reporting
|
|
|
48
|
|
|
49
|
|
|
Consolidated
Financial Statements
|
|
|
50
|
|
|
51
|
|
|
52
|
|
|
53
|
|
|
54
|
|
|
55
|
|
|
Supplemental
Financial Statement Schedule
|
|
|
107
|
47
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. The Company’s internal control over
financial reporting is designed under the supervision of our Chairman and Chief
Executive Officer and Senior Vice President and Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:
|
(i)
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
(ii)
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made
only in accordance with authorizations of our management and directors;
and
|
|
(iii)
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Under the
supervision and with the participation of our management, including our Chairman
and Chief Executive Officer and Senior Vice President and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based on
our evaluation under the framework in Internal Control-Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of January 1, 2010.
The
effectiveness of our internal control over financial reporting as of January 1,
2010 has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report that is included elsewhere
herein. That report expresses an unqualified opinion on the effectiveness of our
internal control over financial reporting.
Fresh Del
Monte Produce Inc.
48
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
The Board
of Directors and Shareholders of
Fresh Del
Monte Produce Inc.
We have
audited Fresh Del Monte Produce Inc. and subsidiaries’ internal control over
financial reporting as of January 1, 2010, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Fresh Del Monte Produce Inc. and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Fresh Del Monte Produce Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
January 1, 2010, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Fresh Del
Monte Produce Inc. and subsidiaries as of January 1, 2010 and December 26, 2008,
and the related consolidated statements of income, shareholders’ equity, and
cash flows for each of the three years in the period ended January 1, 2010 of
Fresh Del Monte Produce Inc., and our report dated March 2, 2010 expressed
an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
|
Certified
Public Accountants
|
Miami,
Florida
March 2,
2010
49
The Board
of Directors and Shareholders of
Fresh Del
Monte Produce Inc.
We have
audited the accompanying consolidated balance sheets of Fresh Del Monte Produce
Inc. and subsidiaries as of January 1, 2010 and December 26, 2008, and the
related consolidated statements of income, shareholders’ equity, and cash flows
for each of the three years in the period ended January 1, 2010. Our
audits also included the financial statement schedule listed in the Index at
Item 15. These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Fresh Del Monte
Produce Inc. and subsidiaries at January 1, 2010 and December 26, 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 1, 2010, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As
discussed in Note 2 to the accompanying consolidated financial statements, in
2009 the Company changed its method of accounting for noncontrolling
interests. In addition, as discussed in Note 2 to the accompanying
consolidated financial statements, in 2008 the Company changed its method of
accounting and disclosures for fair value of assets and
liabilities.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Fresh Del Monte Produce Inc.’s internal
control over financial reporting as of January 1, 201