Fresh Del Monte Produce (FDP) - 2019 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for Q3 and the nine months ended September 27, 2019, show improved net income and asset growth, despite a decrease in operating cash flow Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in millions) | Account | Sep 27, 2019 | Dec 28, 2018 | | :--- | :--- | :--- | | Total current assets | $1,048.8 | $1,138.8 | | Operating lease right-of-use assets | $168.2 | — | | Total assets | $3,345.1 | $3,255.2 | | Total current liabilities | $538.8 | $586.0 | | Long-term debt and finance leases | $589.3 | $661.9 | | Total liabilities | $1,525.1 | $1,485.6 | | Total shareholders' equity | $1,764.8 | $1,717.8 | - The balance sheet as of September 27, 2019 reflects the adoption of the new lease accounting standard (Topic 842), resulting in the recognition of $168.2 million in Operating lease right-of-use assets and corresponding lease liabilities[11][40] Consolidated Statements of Operations Quarterly Performance (in millions, except per share data) | Metric | Q3 2019 | Q3 2018 | | :--- | :--- | :--- | | Net sales | $1,070.2 | $1,069.5 | | Gross profit | $74.7 | $52.6 | | Operating income (loss) | $27.1 | $(11.3) | | Net income (loss) attributable to Fresh Del Monte | $18.1 | $(21.5) | | Diluted EPS | $0.38 | $(0.44) | Nine-Month Performance (in millions, except per share data) | Metric | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | | Net sales | $3,463.8 | $3,448.0 | | Gross profit | $264.3 | $237.4 | | Operating income | $125.6 | $59.0 | | Net income attributable to Fresh Del Monte | $92.3 | $12.1 | | Diluted EPS | $1.90 | $0.25 | Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended (in millions) | Activity | Sep 27, 2019 | Sep 28, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $130.1 | $270.6 | | Net cash used in investing activities | $(44.8) | $(486.0) | | Net cash (used in) provided by financing activities | $(96.3) | $215.4 | | Net decrease in cash and cash equivalents | $(5.0) | $(2.6) | - Investing activities in 2018 were significantly higher due to the $371.8 million purchase of a business (Mann Packing), whereas 2019 investing activities were primarily driven by capital expenditures of $93.5 million, partially offset by $48.0 million in proceeds from asset sales[19] - Financing activities in 2019 showed a net use of cash, driven by net debt payments of $72.5 million and share repurchases of $17.9 million. This contrasts with 2018, which saw net debt proceeds of $269.6 million, largely to fund the Mann Packing acquisition[19][236][238] Notes to Consolidated Financial Statements The notes detail significant accounting policies, including the adoption of Topic 842, ongoing income tax disputes, segment reporting changes, and the subsequent refinancing of the company's credit facility - The company adopted the new lease accounting standard, Topic 842, on the first day of its 2019 fiscal year, resulting in a $3.0 million adjustment to retained earnings due to deferred taxes[40] - The company is contesting income tax deficiencies from two foreign jurisdictions related to transfer pricing, aggregating approximately $153.8 million for tax years 2012-2016. No additional amounts have been accrued as management believes the proposed adjustments are without technical merit[64] - In March 2019, the company changed its reportable segments to two primary businesses: 'fresh and value-added products' and 'bananas', along with an 'other products and services' segment[129] - Subsequent to the quarter end, on October 1, 2019, the company entered into a new five-year, $1.1 billion syndicated senior unsecured revolving credit facility, replacing the prior facility that was set to expire in April 2020[105] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes improved Q3 and nine-month performance to value-added products, with gross profit increases across segments, while liquidity remains solid following a credit facility refinancing Results of Operations Q3 2019 net sales remained flat at $1.07 billion, but gross profit significantly increased to $74.7 million, driven by improved performance across all segments, a trend continuing for the nine-month period Q3 2019 vs Q3 2018 Performance (in millions) | Metric | Q3 2019 | Q3 2018 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,070.2 | $1,069.5 | +$0.7 | | Gross Profit | $74.7 | $52.6 | +$22.1 | | Operating Income (Loss) | $27.1 | $(11.3) | +$38.4 | - The increase in Q3 gross profit was driven by higher margins in fresh-cut fruit, pineapples, and vegetables, along with improved performance in the banana and Jordanian poultry businesses[197][198][199] Nine Months 2019 vs 2018 Performance (in millions) | Metric | Nine Months 2019 | Nine Months 2018 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $3,463.8 | $3,448.0 | +$15.8 | | Gross Profit | $264.3 | $237.4 | +$26.9 | | Operating Income | $125.6 | $59.0 | +$66.6 | - The nine-month gross profit improvement was primarily due to the fresh and value-added products segment, which saw a $28.6 million increase, driven by non-tropical fruit, melons, and fresh-cut fruit[215] Liquidity and Capital Resources Net cash from operations decreased for the first nine months of 2019, while investing and financing activities saw significant shifts, and the company successfully refinanced its $1.1 billion credit facility - Net cash provided by operating activities decreased to $130.1 million in the first nine months of 2019 from $270.6 million in the prior year, primarily due to lower balances of accounts payable and accrued expenses[231] - The company entered into a new five-year, $1.1 billion credit facility on October 1, 2019, replacing the previous facility and extending the maturity to October 1, 2024[240] - Significant capital commitments exist for the construction of six new refrigerated container ships, with expected payments of approximately $12.2 million in 2019, $85.2 million in 2020, and $41.4 million in 2021[251] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in market risk exposures compared to its prior fiscal year's Annual Report on Form 10-K - There were no material changes in market risk compared to the disclosures in the 2018 Form 10-K[265] Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of September 27, 2019, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that as of September 27, 2019, the company's disclosure controls and procedures were effective[267] - No changes to internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal controls were identified during the quarter[267] PART II: OTHER INFORMATION Legal Proceedings This section refers to Note 11 of the Consolidated Financial Statements for details on legal proceedings, including an ongoing environmental liability and a recently settled business litigation - For details on legal proceedings, the report refers to Note 11, which covers commitments and contingencies[270] Risk Factors The company updated its risk factors to highlight the threat of Tropical Race 4 (TR4), a banana crop disease discovered in Colombia, which poses a significant risk to Latin American operations - A key risk factor update relates to Tropical Race 4 (TR4), a serious banana crop disease, which was discovered in Colombia in the third quarter of 2019[274] - The spread of TR4 to the company's farms or suppliers in Latin America could destroy banana crops, adversely affect fruit costs, and harm profitability[274] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2019, the company repurchased 357,493 ordinary shares as part of its $300 million stock repurchase program, with $262.5 million remaining available Share Repurchases for Q3 2019 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jul 1 - Jul 31, 2019 | 356,549 | $24.33 | | Aug 1 - Aug 31, 2019 | 944 | $25.00 | | Sep 1 - Sep 30, 2019 | — | — | | Total | 357,493 | $24.33 | - As of the end of the quarter, $262.5 million remained available under the company's $300 million share repurchase program authorized in February 2018[276] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and the new $1.1 billion credit agreement - Key exhibits filed include CEO/CFO certifications and the new Second Amended and Restated Credit Agreement from October 1, 2019[279]