Fresh Del Monte Produce (FDP) - 2021 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Fresh Del Monte Produce Inc. and its subsidiaries, including balance sheets, statements of operations, comprehensive income, cash flows, and shareholders' equity, along with detailed notes explaining accounting policies, recent pronouncements, asset impairments, income taxes, credit losses, share-based compensation, inventories, debt, commitments, earnings per share, retirement benefits, business segment data, derivative instruments, fair value measurements, and accumulated other comprehensive loss Consolidated Balance Sheets (Unaudited) This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific dates | Metric | October 1, 2021 (Millions USD) | January 1, 2021 (Millions USD) | | :------------------------------------------------------------------ | :----------------------------- | :----------------------------- | | Assets | | | | Total current assets | 1,046.6 | 1,012.3 | | Total assets | 3,387.7 | 3,343.3 | | Liabilities and Shareholders' Equity | | | | Total current liabilities | 588.6 | 554.8 | | Long-term debt and finance leases | 476.9 | 541.8 | | Total liabilities | 1,506.4 | 1,543.4 | | Total Fresh Del Monte Produce Inc. shareholders' equity | 1,810.4 | 1,728.0 | | Total liabilities, redeemable noncontrolling interest and shareholders' equity | 3,387.7 | 3,343.3 | - Total assets increased by $44.4 million from January 1, 2021, to October 1, 2021, reaching $3,387.7 million. Total liabilities decreased by $37.0 million, while total shareholders' equity increased by $82.2 million[14] Consolidated Statements of Operations (Unaudited) This section details the company's financial performance, including net sales, gross profit, operating income, and net income over specified periods | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | 1,004.8 | 989.7 | 3,234.6 | 3,200.0 | | Gross profit | 48.9 | 67.3 | 264.0 | 214.5 | | Operating income | 1.3 | 26.6 | 120.2 | 77.4 | | Net income attributable to Fresh Del Monte Produce Inc. | 1.3 | 17.4 | 91.2 | 48.3 | | Net income per ordinary share - Basic | 0.03 | 0.37 | 1.92 | 1.01 | | Net income per ordinary share - Diluted | 0.03 | 0.37 | 1.91 | 1.01 | | Dividends declared per ordinary share | 0.15 | 0.05 | 0.35 | 0.20 | - Net sales increased by 2% in Q3 2021 YoY and 1% in 9M 2021 YoY. Gross profit decreased by 27% in Q3 2021 YoY but increased by 23% in 9M 2021 YoY. Net income attributable to Fresh Del Monte Produce Inc. significantly decreased in Q3 2021 YoY from $17.4 million to $1.3 million, but nearly doubled in 9M 2021 YoY from $48.3 million to $91.2 million[16] Consolidated Statements of Comprehensive (Loss) Income (Unaudited) This section outlines the company's comprehensive income, including net income and other comprehensive income components like unrealized gains/losses on derivatives and foreign currency translation | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net income | 1.5 | 16.2 | 90.6 | 47.3 | | Other comprehensive (loss) income: | | | | | | Net unrealized (loss) gain on derivatives, net of tax | (5.7) | 0.3 | 12.3 | (26.9) | | Net unrealized foreign currency translation (loss) gain | (4.9) | 6.1 | (9.2) | 2.5 | | Net change in retirement benefit adjustment, net of tax | (0.3) | (0.1) | (1.2) | 0.4 | | Comprehensive (loss) income | (9.4) | 22.5 | 92.5 | 23.3 | | Comprehensive (loss) income attributable to Fresh Del Monte Produce Inc. | (9.6) | 23.7 | 93.1 | 24.3 | - Comprehensive income attributable to Fresh Del Monte Produce Inc. shifted from a gain of $23.7 million in Q3 2020 to a loss of $9.6 million in Q3 2021. For the nine months, it significantly increased from $24.3 million in 2020 to $93.1 million in 2021, primarily driven by a positive shift in unrealized gains on derivatives[21] Consolidated Statements of Cash Flows (Unaudited) This section reports the company's cash inflows and outflows from operating, investing, and financing activities over specified periods | Metric | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :-------------------------------------------- | :--------------------- | :--------------------- | | Net cash provided by operating activities | 151.6 | 173.9 | | Net cash used in investing activities | (67.2) | (82.5) | | Net cash used in financing activities | (86.7) | (111.4) | | Net increase (decrease) in cash and cash equivalents | 2.5 | (19.3) | | Cash and cash equivalents, ending | 19.0 | 14.0 | - Net cash provided by operating activities decreased by $22.3 million in the first nine months of 2021 compared to 2020, primarily due to higher inventory levels and receivables, partially offset by higher net income and accounts payable[24][217][219][224] - Net cash used in investing activities decreased by $15.3 million, while net cash used in financing activities decreased by $24.7 million[24][217][219][224] Consolidated Statements of Shareholders' Equity and Redeemable Noncontrolling Interest (Unaudited) This section details changes in shareholders' equity and noncontrolling interests, reflecting contributions, distributions, and comprehensive income | Metric | October 1, 2021 (Millions USD) | January 1, 2021 (Millions USD) | | :------------------------------------------------------------------ | :----------------------------- | :----------------------------- | | Fresh Del Monte Produce Inc. Shareholders' Equity | 1,810.4 | 1,728.0 | | Noncontrolling Interests | 21.5 | 21.7 | | Total Shareholders' Equity | 1,831.9 | 1,749.7 | | Redeemable Noncontrolling Interest | 49.4 | 50.2 | - Total shareholders' equity increased by $82.2 million from January 1, 2021, to October 1, 2021, primarily driven by an increase in retained earnings and paid-in capital, partially offset by a decrease in accumulated other comprehensive loss[27] Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies and specific financial items 1. General This note describes the company's business operations, global presence, and reportable segments - Fresh Del Monte Produce Inc. is a vertically integrated producer, marketer, and distributor of fresh and fresh-cut fruit and vegetables, and prepared foods, operating globally under the Del Monte brand[34][35] - The business is organized into three reportable segments: Fresh and value-added products, Banana, and Other products and services[36] 2. Recently Issued Accounting Pronouncements This note discusses the adoption and evaluation of recent accounting standards and their impact on financial statements - The company adopted ASU 2020-01 (Investments-Equity Securities) and ASU 2019-12 (Income Taxes) on the first day of fiscal year 2021, neither of which had a material impact on consolidated financial statements[41][42] - The company is evaluating ASU 2020-04 and ASU 2021-01 (Reference Rate Reform) for potential future adoption, as it has LIBOR-based borrowings and interest rate hedges[43] 3. Asset Impairment and Other Charges (Credits), Net This note details asset impairment charges, credits, and other related items affecting the company's financial results | Segment / Item | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :-------------------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Total asset impairment and other charges (credits), net | 0.1 | (3.5) | (0.3) | (3.8) | | Banana segment: Philippines asset impairment | 0.3 | 0.1 | 0.3 | 0.8 | | Fresh and value-added products segment: Exit costs related to European facility | (0.2) | — | 0.3 | — | | Fresh and value-added products segment: Insurance recovery related to product recall | — | (4.4) | — | (10.4) | - For the nine months ended October 1, 2021, asset impairment and other charges resulted in a net credit of $(0.3) million, including a $(0.8) million insurance recovery for hurricane damages in Guatemala[45] - This contrasts with a net credit of $(3.8) million in 9M 2020, which included a $(10.4) million insurance recovery for a product recall, partially offset by asset impairments and legal settlement charges[45][174] 4. Income Taxes This note provides information on the company's income tax provision, effective tax rates, and ongoing tax disputes | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Income tax (benefit) provision | (6.6) | 4.9 | 9.1 | 9.4 | - The income tax provision decreased in both the third quarter and first nine months of 2021, primarily due to decreased earnings in certain higher tax jurisdictions[50] - The nine-month provision also includes benefits from the CARES Act NOL carryback provision ($0.8 million in 2021 vs. $1.7 million in 2020)[47][48] - The company is vigorously contesting $147.4 million in transfer pricing tax deficiencies in two foreign jurisdictions for tax years 2012-2016[49] 5. Allowance for Credit Losses This note outlines the company's allowance for credit losses on trade receivables and advances to growers and suppliers | Metric | October 1, 2021 (Millions USD) | January 1, 2021 (Millions USD) | | :------------------------------------ | :----------------------------- | :----------------------------- | | Trade accounts receivable, net | 354.4 | 359.0 | | Allowance for trade receivable credit losses (end of period) | 13.1 | 15.1 | | Gross advances to growers and suppliers (Current) | 36.7 | 34.3 | | Gross advances to growers and suppliers (Past-Due) | 5.7 | 4.0 | | Allowance for advances to growers and suppliers (end of period) | 1.7 | 2.1 | - The allowance for trade receivable credit losses decreased from $15.1 million at the beginning of the period to $13.1 million as of October 1, 2021, partly due to a $2.6 million reclassification to long-term allowance[56][57] - Gross advances to growers and suppliers increased, with past-due amounts rising from $4.0 million to $5.7 million[63] 6. Share-Based Compensation This note describes the company's share-based compensation plans, including expense recognition and types of awards granted | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Total share-based compensation expense | 2.1 | 1.6 | 5.8 | 6.2 | - Share-based compensation expense increased to $2.1 million in Q3 2021 from $1.6 million in Q3 2020, but slightly decreased for the nine months from $6.2 million in 2020 to $5.8 million in 2021[66] - Awards include Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) under the 2014 Omnibus Share Incentive Plan, with PSUs vesting based on performance criteria and RSUs vesting over a three-year service period[67][68][69] 7. Inventories, net This note details the composition of the company's inventories, including finished goods, raw materials, and growing crops | Metric | October 1, 2021 (Millions USD) | January 1, 2021 (Millions USD) | | :------------------------------------ | :----------------------------- | :----------------------------- | | Finished goods | 190.4 | 190.7 | | Raw materials and packaging supplies | 167.5 | 136.8 | | Growing crops | 180.9 | 180.2 | | Total inventories, net | 538.8 | 507.7 | - Total inventories, net, increased by $31.1 million from $507.7 million at January 1, 2021, to $538.8 million at October 1, 2021, primarily driven by a $30.7 million increase in raw materials and packaging supplies[74] 8. Debt and Finance Lease Obligations This note provides information on the company's debt instruments, finance lease obligations, and compliance with debt covenants | Metric | October 1, 2021 (Millions USD) | January 1, 2021 (Millions USD) | | :------------------------------------ | :----------------------------- | :----------------------------- | | Senior unsecured revolving credit facility | 476.9 | 541.7 | | Finance lease obligations | 0.1 | 0.3 | | Total debt and finance lease obligations | 477.0 | 542.0 | | Long-term debt and finance lease obligations | 476.9 | 541.8 | - Long-term debt and finance lease obligations decreased by $64.9 million from $541.8 million at January 1, 2021, to $476.9 million at October 1, 2021[75] - The company maintains a $1.1 billion syndicated senior unsecured revolving credit facility maturing in October 2024, with $476.9 million outstanding at an interest rate of 1.24% as of October 1, 2021[76][81][83][226] - The company was in compliance with all debt covenants[228] 9. Commitments and Contingencies This note discloses the company's significant commitments and contingencies, including environmental liabilities and legal actions - The company has an estimated clean-up cost of $12.9 million to $28.7 million for the Kunia Well Site in Hawaii, with $12.6 million accrued in other noncurrent liabilities and $0.3 million in accounts payable as of October 1, 2021[87] - Expected expenditures are $0.4 million in 2021, $1.1 million in 2022, and $0.9 million annually from 2023-2025[88] - Management believes other claims and legal actions are not currently expected to have a material adverse effect on operations, financial position, or cash flows[89] 10. Earnings Per Share This note presents the calculation of basic and diluted earnings per share, including the weighted average number of shares outstanding | Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :------------------------------------------------------------------ | :------ | :------ | :------ | :------ | | Net income attributable to Fresh Del Monte Produce Inc. (Millions USD) | 1.3 | 17.4 | 91.2 | 48.3 | | Weighted average number of ordinary shares - Basic | 47,535,873 | 47,355,918 | 47,494,168 | 47,641,712 | | Weighted average number of ordinary shares - Diluted | 47,743,758 | 47,427,723 | 47,661,055 | 47,731,747 | | Net income per ordinary share - Basic | 0.03 | 0.37 | 1.92 | 1.01 | | Net income per ordinary share - Diluted | 0.03 | 0.37 | 1.91 | 1.01 | - Basic and diluted EPS for Q3 2021 were $0.03, a significant decrease from $0.37 in Q3 2020[91] - For the nine months, basic and diluted EPS increased to $1.92 and $1.91, respectively, from $1.01 in 9M 2020[91] 11. Retirement and Other Employee Benefits This note details the company's defined benefit pension and post-retirement plans, including net periodic benefit costs | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net periodic benefit costs | 2.4 | 2.8 | 7.3 | 8.3 | | Net periodic benefit costs (other non-U.S.-based plans) | 0.9 | 0.8 | 2.7 | 2.4 | - Net periodic benefit costs for defined benefit pension and post-retirement plans decreased to $2.4 million in Q3 2021 from $2.8 million in Q3 2020, and to $7.3 million in 9M 2021 from $8.3 million in 9M 2020[93] - Service costs are recognized in the Consolidated Statements of Operations, while other components (interest, expected return, amortization) are recorded in other expense, net[94] 12. Business Segment Data This note provides financial information by business segment and geographic region, including net sales and gross profit | Segment | Q3 2021 Net Sales (Millions USD) | Q3 2020 Net Sales (Millions USD) | 9M 2021 Net Sales (Millions USD) | 9M 2020 Net Sales (Millions USD) | | :-------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Fresh and value-added products | 601.2 | 600.6 | 1,906.0 | 1,897.8 | | Banana | 365.3 | 361.8 | 1,210.2 | 1,218.4 | | Other products and services | 38.3 | 27.3 | 118.4 | 83.8 | | Totals | 1,004.8 | 989.7 | 3,234.6 | 3,200.0 | | Segment | Q3 2021 Gross Profit (Millions USD) | Q3 2020 Gross Profit (Millions USD) | 9M 2021 Gross Profit (Millions USD) | 9M 2020 Gross Profit (Millions USD) | | :-------------------------- | :---------------------------------- | :---------------------------------- | :---------------------------------- | :---------------------------------- | | Fresh and value-added products | 40.9 | 54.2 | 149.8 | 133.8 | | Banana | 2.4 | 10.8 | 98.2 | 74.3 | | Other products and services | 5.6 | 2.3 | 16.0 | 6.4 | | Totals | 48.9 | 67.3 | 264.0 | 214.5 | | Geographic Region | Q3 2021 Net Sales (Millions USD) | Q3 2020 Net Sales (Millions USD) | 9M 2021 Net Sales (Millions USD) | 9M 2020 Net Sales (Millions USD) | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | North America | 622.0 | 619.4 | 1,951.2 | 1,992.0 | | Europe | 150.7 | 150.0 | 531.2 | 485.2 | | Asia | 111.9 | 107.9 | 380.2 | 355.3 | | Middle East | 108.2 | 102.7 | 323.0 | 329.3 | | Other | 12.0 | 9.7 | 49.0 | 38.2 | | Totals | 1,004.8 | 989.7 | 3,234.6 | 3,200.0 | - Net sales for Fresh and value-added products increased slightly in Q3 2021 and 9M 2021, while Banana segment net sales increased in Q3 but decreased in 9M[98] - Other products and services showed strong growth in both periods[98] - Gross profit for Fresh and value-added products and Banana segments decreased significantly in Q3 2021 due to cost pressures, but both showed increases for the nine-month period[98] 13. Derivative Financial Instruments This note describes the company's use of derivative instruments to hedge exposure to foreign currency, fuel prices, and interest rates | Derivative Type | Notional Amount (Millions) as of Oct 1, 2021 | | :-------------------------- | :------------------------------------------- | | Euro (foreign currency) | 53.8 | | British pound (foreign currency) | 6.8 | | Japanese yen (foreign currency) | 1,964.0 | | Chilean peso (foreign currency) | 56,583.4 | | Kenya shilling (foreign currency) | 898.5 | | Korean won (foreign currency) | 17,984.5 | | Interest rate contracts | 400.0 | | Derivative Type | Q3 2021 Net Amount in OCI (Millions USD) | Q3 2020 Net Amount in OCI (Millions USD) | 9M 2021 Net Amount in OCI (Millions USD) | 9M 2020 Net Amount in OCI (Millions USD) | | :-------------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Foreign exchange contracts | (6.7) | (2.0) | (0.1) | (3.8) | | Bunker fuel swaps | (1.4) | 0.9 | (0.5) | (1.3) | | Interest rate swaps, net of tax | 2.4 | 1.4 | 12.9 | (21.8) | | Total | (5.7) | 0.3 | 12.3 | (26.9) | - The company uses foreign currency forward contracts, bunker fuel swap agreements, and interest rate swaps to hedge exposure to fluctuations in foreign exchange rates, bunker fuel prices, and variable interest rates[102][108][112] - During Q1 2021, the company voluntarily terminated its remaining bunker fuel hedge portfolio due to fleet optimization and changes in forecasted fuel mix, resulting in a $3.3 million gain recorded in other expense, net[113][114][115] 14. Fair Value Measurements This note explains the fair value measurements of financial instruments and assets held for sale, categorized by input levels | Derivative Type (Net Liability) | October 1, 2021 (Millions USD) | January 1, 2021 (Millions USD) | | :------------------------------ | :----------------------------- | :----------------------------- | | Foreign currency contracts | (7.0) | (6.9) | | Bunker fuel contracts | — | 2.4 | | Interest rate contracts | (35.8) | (50.6) | - The fair value of derivative instruments, classified as Level 2, includes foreign exchange, bunker fuel, and interest rate derivatives[122][123] - The net liability position for interest rate swaps decreased from $50.6 million to $35.8 million due to an increase in variable interest rates[130] - The company also holds $20.0 million in assets held for sale, primarily non-strategic property, plant, and equipment, valued using Level 3 inputs (third-party appraisals)[236] 15. Accumulated Other Comprehensive Loss This note details the components of accumulated other comprehensive loss, including cash flow hedges and foreign currency translation adjustments | Component | Balance at Jan 1, 2021 (Millions USD) | Balance at Oct 1, 2021 (Millions USD) | | :-------------------------------------- | :------------------------------------ | :------------------------------------ | | Cash Flow Hedges | (49.6) | (37.3) | | Foreign Currency Translation Adjustment | (3.3) | (12.5) | | Retirement Benefit Adjustment | (24.1) | (25.3) | | Total Accumulated Other Comprehensive Loss | (77.0) | (75.1) | - Accumulated other comprehensive loss improved from $(77.0) million at January 1, 2021, to $(75.1) million at October 1, 2021[132] - This change was primarily driven by a $12.3 million net current period other comprehensive income from cash flow hedges, partially offset by a $9.2 million loss from foreign currency translation adjustment[132] | Reclassified from AOCI (9M 2021) | Amount (Millions USD) | Affected Line Item in Statement of Operations | | :------------------------------- | :-------------------- | :-------------------------------------------- | | Foreign currency cash flow hedges (Net sales) | (0.8) | Net sales | | Foreign currency cash flow hedges (Cost of products sold) | — | Cost of products sold | | Bunker fuel swaps (Cost of products sold) | — | Cost of products sold | | Interest rate swaps | 8.5 | Interest expense | | Bunker fuel swaps no longer designated (Cost of products sold) | (4.6) | Cost of products sold | | Bunker fuel swaps no longer designated (Other expense, net) | (1.0) | Other expense, net | | Actuarial losses | 0.7 | Other expense, net | | Total | 2.1 | | 16. Shareholders' Equity This note provides information on changes in shareholders' equity, including ordinary shares outstanding and dividends declared | Metric | October 1, 2021 | January 1, 2021 | | :------------------------------------ | :-------------- | :-------------- | | Ordinary shares issued and outstanding | 47,544,395 | 47,372,419 | | Dividend Payment Date | Cash per Share (9M 2021) | Cash per Share (9M 2020) | | :-------------------- | :----------------------- | :----------------------- | | September 10, 2021 | 0.15 | 0.05 | | June 11, 2021 | 0.10 | 0.05 | | April 2, 2021 | 0.10 | 0.10 | | Total Dividends Paid (9M) | 16.6 (Millions USD) | 9.6 (Millions USD) | - The number of ordinary shares issued and outstanding increased to 47,544,395 as of October 1, 2021[139] - Dividends paid for the nine months ended October 1, 2021, totaled $16.6 million, an increase from $9.6 million in the prior-year period[141] - The Board declared a quarterly cash dividend of $0.15 per share payable on December 10, 2021[142] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and results of operations for the third quarter and first nine months of 2021 compared to 2020. It highlights the impact of the COVID-19 pandemic, inflationary pressures, the Optimization Program, and details financial results by segment, liquidity, capital resources, and critical accounting policies Overview This section provides an overview of the company's global operations, business structure, and key product segments - Fresh Del Monte Produce Inc. is a global, vertically integrated producer, marketer, and distributor of fresh and fresh-cut fruit and vegetables, and prepared foods under the Del Monte brand[144][146] - The company's business is structured into three reportable segments: Fresh and value-added products, Banana, and Other products and services[147] COVID-19 Pandemic Impact This section discusses the material impact of the COVID-19 pandemic on operations, including cost inflation and supply chain disruptions - The COVID-19 pandemic has materially impacted operations since Q1 2020, causing volatile supply/demand, reduced foodservice channel demand, and increased production and distribution costs due to inflation (packaging, fertilizer, labor, fuel, inland freight) and strained transportation capacity[145] - The company announced price increases on bananas, pineapples, and fresh-cut fruit effective November 1, 2021, to partially mitigate these cost pressures, which are expected to continue negatively impacting gross profit[151] Optimization Program This section details the company's program to dispose of non-strategic assets and consolidate operations for cost savings - The Optimization Program, initiated in fiscal 2020, aims to dispose of non-strategic and underutilized assets across all regions, with anticipated cash proceeds of approximately $100.0 million[154] - As of October 1, 2021, $52.0 million in cash proceeds have been received[155] - The program's completion is delayed beyond Q1 2022 due to challenging market conditions and COVID-119 travel restrictions[155] - The consolidation of Mann Packing operations has yielded cost savings, but financial results are still negatively impacted by reduced foodservice demand and increased costs[155] Income Taxes This section addresses the company's ongoing disputes regarding income tax deficiencies related to transfer pricing in foreign jurisdictions - The company is vigorously contesting income tax deficiencies totaling approximately $147.4 million (including interest and penalties) related to transfer pricing in two foreign jurisdictions for tax years 2012-2016[156][157][158] - Appeals have been filed in judicial courts, and the company intends to exhaust all administrative and judicial remedies[160] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's consolidated and segment-specific financial performance Consolidated Financial Results This section analyzes the company's overall net sales, gross profit, and operating income for the reported periods | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net sales | 1,004.8 | 989.7 | 3,234.6 | 3,200.0 | | Gross profit | 48.9 | 67.3 | 264.0 | 214.5 | | Selling, general and administrative expenses | 48.0 | 44.1 | 148.3 | 142.4 | | Operating income | 1.3 | 26.6 | 120.2 | 77.4 | - Net sales increased by 2% in Q3 2021 and 1% in 9M 2021, positively impacted by exchange rate fluctuations[162][163] - Gross profit decreased by 27% in Q3 2021 due to inflation and cost pressures, but increased by 23% in 9M 2021 due to higher per unit sales prices in bananas and improved performance in fresh and value-added products[164][165][166] - Operating income decreased by $25.3 million in Q3 2021 but increased by $42.8 million in 9M 2021[175] Financial Results by Segment This section breaks down the company's financial performance by its Fresh and value-added products, Banana, and Other products and services segments Fresh and value-added products This section analyzes the net sales and gross profit performance of the Fresh and value-added products segment | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net Sales | 601.2 | 600.6 | 1,906.0 | 1,897.8 | | Gross Profit | 40.9 | 54.2 | 149.8 | 133.8 | - Q3 2021 net sales increased slightly by $0.6 million, driven by pineapples and avocados, but gross profit decreased by $13.3 million (25%) due to higher production and distribution costs[182][183] - For 9M 2021, net sales increased by $8.2 million, primarily from pineapples and fresh-cut fruits, and gross profit increased by $16.0 million (12%) due to higher net sales and lower production costs in some categories, despite ongoing inflationary pressures[192][198] Banana This section analyzes the net sales and gross profit performance of the Banana segment | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net Sales | 365.3 | 361.8 | 1,210.2 | 1,218.4 | | Gross Profit | 2.4 | 10.8 | 98.2 | 74.3 | - Q3 2021 net sales increased by $3.5 million (1%) due to higher per unit sales prices in Europe and higher sales volume in the Middle East[206] - However, gross profit decreased by $8.4 million (78%) due to excess industry supply, lower per unit sales prices, and increased distribution and production costs[207] - For 9M 2021, net sales decreased by $8.2 million (1%), but gross profit increased by $23.9 million (32%) primarily due to higher per unit sales prices in North America and Europe, and a $2.5 million insurance recovery, partially offset by inflationary cost pressures[208][209] Other products and services This section analyzes the net sales and gross profit performance of the Other products and services segment | Metric | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net Sales | 38.3 | 27.3 | 118.4 | 83.8 | | Gross Profit | 5.6 | 2.3 | 16.0 | 6.4 | - Net sales for other products and services increased significantly by $11.0 million (40%) in Q3 2021 and $34.6 million (41%) in 9M 2021, primarily driven by higher sales of third-party freight services and poultry and meats in the Middle East[210][211] - Gross profit also saw substantial increases, rising by $3.3 million (143%) in Q3 and $9.6 million (150%) in 9M, directly correlating with the higher net sales[212][213] Liquidity and Capital Resources This section discusses the company's cash flows from operating, investing, and financing activities, along with its debt and capital resources Operating Activities This section details the cash generated or used by the company's core business operations | Metric | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | | Net cash provided by operating activities | 151.6 | 173.9 | - Net cash provided by operating activities decreased by $22.3 million to $151.6 million for the first nine months of 2021, primarily due to higher inventory levels and receivables, partially offset by higher net income and increased accounts payable[217][218] - Working capital slightly increased by $0.5 million to $458.0 million at October 1, 2021[218] Investing Activities This section outlines the cash flows related to the acquisition and disposal of long-term assets and investments | Metric | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | | Net cash used in investing activities | (67.2) | (82.5) | | Capital expenditures | (83.4) | (92.9) | | Proceeds from sales of property, plant and equipment | 12.5 | 9.8 | - Net cash used in investing activities decreased by $15.3 million to $67.2 million for the first nine months of 2021[219] - This was mainly due to lower capital expenditures ($83.4 million vs. $92.9 million) for new refrigerated container ships and facility expansions, partially offset by proceeds from asset sales ($12.5 million) and derivative settlements ($4.6 million)[219][220] Financing Activities This section describes the cash flows associated with debt, equity, and dividend payments | Metric | 9M 2021 (Millions USD) | 9M 2020 (Millions USD) | | :------------------------------------ | :--------------------- | :--------------------- | | Net cash used in financing activities | (86.7) | (111.4) | | Net repayments on debt | (64.9) | (76.0) | | Dividends paid | (16.6) | (9.6) | | Repurchase and retirement of ordinary shares | — | (20.8) | - Net cash used in financing activities decreased by $24.7 million to $86.7 million for the first nine months of 2021[224] - This was primarily due to lower net repayments on debt ($64.9 million vs. $76.0 million) and no share repurchases (compared to $20.8 million in 2020), partially offset by higher dividends paid ($16.6 million vs. $9.6 million)[224] Debt Instruments and Debt Service Requirements This section provides details on the company's debt facilities, outstanding balances, interest rates, and covenant compliance - The company has a $1.1 billion senior unsecured revolving credit facility maturing October 1, 2024, with $476.9 million outstanding at an interest rate of 1.24% as of October 1, 2021[225][226] - The facility includes an accordion feature for up to $300 million in incremental increases[227] - The company was in compliance with all financial covenants, including a Consolidated Leverage Ratio not exceeding 3.50 to 1.00 and a minimum Consolidated Interest Coverage Ratio of 2.25 to 1.00[228] - As of October 1, 2021, the company had $646.9 million of borrowing availability under committed working capital facilities[231] - Management believes current cash, credit facility capacity, and operating cash flows will be sufficient for the next twelve months, but acknowledges uncertainties related to the COVID-19 pandemic and economic environment[232] Contractual Obligations This section summarizes the company's material commitments under contractual obligations - There were no material changes in commitments under contractual obligations as of October 1, 2021, compared to those disclosed in the Annual Report on Form 10-K for the year ended January 1, 2021[233] Critical Accounting Policies and Estimates This section highlights the accounting policies and estimates that require significant management judgment - No material changes occurred to the critical accounting policies or estimates during the third quarter of 2021, as previously discussed in the Form 10-K for the fiscal year ended January 1, 2021[234] Fair Value Measurements This section discusses the fair value of derivative instruments and assets held for sale, and their sensitivity to market changes - The fair value of foreign currency cash flow hedges was a net liability of $7.0 million as of October 1, 2021, while interest rate swap cash flow hedges had a net liability of $35.8 million, a decrease from $50.6 million due to increased variable interest rates[235][236] - The company terminated its bunker fuel hedge portfolio in Q1 2021 due to fleet optimization[237] - $10.5 million of net fair value from designated and dedesignated hedges is expected to transfer to earnings in the next 12 months, with the remaining $31.1 million over 7 years[239] - The fair value of goodwill for the banana and prepared food reporting units, and related trade names/trademarks, remains sensitive to changes in estimated cash flows and discount rates[240] - No impairment charges were recorded for these assets during the nine months ended October 1, 2021, but performance is continuously monitored[241] New Accounting Pronouncements This section refers to disclosures on recently issued accounting pronouncements and their potential impact - Refer to Note 2, 'Recently Issued Accounting Pronouncements,' for a discussion of recent accounting pronouncements[243] Seasonality This section explains the seasonal variations in the company's net sales and gross profit - Interim results are subject to significant seasonal variations, with a greater portion of net sales and gross profit historically realized during the first two calendar quarters of the year due to fluctuating sales prices based on supply and demand for fresh produce[244] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section describes the company's exposure to market risks, particularly bunker fuel price fluctuations, and hedging strategies - The company is exposed to bunker fuel price fluctuations and previously used swap agreements to hedge this risk[254] - However, due to fleet optimization initiatives and changes in forecasted fuel mix, the remaining bunker fuel hedge portfolio was voluntarily terminated in Q1 2021[254] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports on internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of October 1, 2021[257] - No material changes to internal control over financial reporting occurred during the quarter ended October 1, 2021[257] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, exhibits, and required signatures Item 1. Legal Proceedings This section details ongoing legal proceedings, specifically focusing on significant income tax deficiencies related to transfer pricing in foreign jurisdictions - The company is contesting income tax deficiencies of approximately $147.4 million (including interest and penalties) from transfer pricing in two foreign jurisdictions for tax years 2012-2016[260][261] - Appeals have been filed in judicial courts, and the company intends to vigorously pursue all administrative and judicial remedies[262] Item 1A. Risk Factors This section updates the risk factors, emphasizing current market conditions, inflationary pressures, and supply chain disruptions - Current market conditions, including inflationary pressures, are significantly increasing production and distribution costs (packaging, fertilizers, inland freight, labor, fuel) and causing supply chain disruptions due to strained transportation capacity and labor shortages[264][265][266][267][268] - These factors have adversely affected gross profit in Q3 2021 and are expected to continue impacting future periods[268] - Efforts to raise prices may not fully offset these cost increases and could lead to sales losses[270] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - The exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, as well as Inline XBRL documents for the Consolidated Balance Sheets, Statements of Operations, Comprehensive (Loss) Income, Cash Flows, Shareholders' Equity, and Notes to Consolidated Financial Statements[272] Signatures This section contains the required signatures for the Form 10-Q, confirming its submission on behalf of the company - The report was signed by Youssef Zakharia, President & Chief Operating Officer, and Eduardo Bezerra on November 3, 2021[277][278]