10-Q 1 fdp-6x30x2017x10q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————————
FORM 10-Q
———————————
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
 ¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             

1-14706
(Commission file number)
———————————
FRESH DEL MONTE PRODUCE INC.
(Exact Name of Registrant as Specified in Its Charter)
 ———————————
The Cayman Islands
N/A
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S Employer
Identification No.)
 
 
c/o Intertrust Corporate Services (Cayman) Limited
190 Elgin Avenue
George Town, Grand Cayman, KY1-9005
Cayman Islands
N/A
(Address of Registrant’s Principal Executive Office)
(Zip Code)

(305) 520-8400
(Registrant’s telephone number including area code)
Please send copies of notices and communications from the Securities and Exchange Commission to:
c/o Del Monte Fresh Produce Company
241 Sevilla Avenue
Coral Gables, Florida 33134
(Address of Registrant’s U.S. Executive Office)

 ——————————— 


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  ý    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  ý    No  ¨
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”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer  x
Accelerated filer  ¨
 
Non-accelerated filer   ¨
(Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
 
Emerging growth company ¨
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

As of July 21, 2017, there were 50,109,584 ordinary shares of Fresh Del Monte Produce Inc. issued and outstanding.

 
 
 
 
 







Forward-Looking Statements
 
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 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) the impact of governmental trade restrictions, including adverse governmental regulation that may impact our ability to access certain markets such as uncertainty surrounding the recent vote in the United Kingdom to leave the European Union (often referred as Brexit), including spillover effects to other Eurozone countries, (iv) our anticipated cash needs in light of our liquidity, (v) the continued ability of our distributors and suppliers to have access to sufficient liquidity to fund their operations, (vi) 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, such as flooding, or natural disasters, such as earthquakes, 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, (vii) the impact of pricing and other actions by our competitors, particularly during periods of low consumer confidence and spending levels, (viii) the impact of foreign currency fluctuations, (ix) our plans for expansion of our business (including through acquisitions) and cost savings, (x) our ability to successfully integrate acquisitions into our operations, (xi) the impact of impairment or other charges associated with exit activities, crop or facility damage or otherwise, (xii) the timing and cost of resolution of pending and future legal and environmental proceedings or investigations, (xiii) 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 (xiv) 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. Our plans and performance may also be affected by the factors described in Item 1A-“Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2016 along with other reports that we have on file with the Securities and Exchange Commission.




TABLE OF CONTENTS
 
 
Page
PART I: FINANCIAL INFORMATION
 
 
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I: FINANCIAL INFORMATION

Item 1.        Financial Statements

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS (Unaudited)
(U.S. dollars in millions, except share and per share data)
 
 
 
 
 
 
June 30,
2017
 
December 30,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
24.4

 
$
20.1

Trade accounts receivable, net of allowance of
$16.7 and $11.3, respectively
382.1

 
349.2

Other accounts receivable, net of allowance of
$8.2 and $7.8, respectively
58.9

 
63.0

Inventories, net
457.5

 
493.2

Prepaid expenses and other current assets
34.9

 
35.6

Total current assets
957.8

 
961.1

 
 
 
 
Investments in and advances to unconsolidated companies
1.9

 
2.0

Property, plant and equipment, net
1,304.9

 
1,272.0

Deferred income taxes
64.0

 
66.2

Goodwill
261.5

 
260.9

Other noncurrent assets
97.9

 
91.1

Total assets
$
2,688.0

 
$
2,653.3

Liabilities and shareholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
360.1

 
$
360.5

Current portion of long-term debt and capital lease obligations
0.5

 
0.6

Income taxes and other taxes payable
15.8

 
8.0

Total current liabilities
376.4

 
369.1

 
 
 
 
Long-term debt and capital lease obligations
226.0

 
231.7

Retirement benefits
96.1

 
93.6

Other noncurrent liabilities
42.1

 
50.8

Deferred income taxes
90.5

 
91.7

Total liabilities
831.1

 
836.9

Commitments and contingencies


 


Shareholders' equity:
 

 
 

Preferred shares, $0.01 par value; 50,000,000 shares
authorized; none issued or outstanding

 

Ordinary shares, $0.01 par value; 200,000,000 shares
authorized; 50,104,086 and 51,256,906 issued and
outstanding, respectively
0.5

 
0.5

Paid-in capital
535.5

 
549.7

Retained earnings
1,335.3

 
1,285.8

Accumulated other comprehensive loss
(39.2
)
 
(44.2
)
Total Fresh Del Monte Produce Inc. shareholders' equity
1,832.1

 
1,791.8

Noncontrolling interests
24.8

 
24.6

Total shareholders' equity
1,856.9

 
1,816.4

Total liabilities and shareholders' equity
$
2,688.0

 
$
2,653.3

 
See accompanying notes.

1


FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(U.S. dollars in millions, except share and per share data)

 
Quarter ended
 
Six months ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Net sales
$
1,147.1

 
$
1,088.6

 
$
2,179.5

 
$
2,106.7

Cost of products sold
1,023.9

 
943.2

 
1,957.2

 
1,820.6

Gross profit
123.2

 
145.4

 
222.3

 
286.1

Selling, general and administrative expenses
41.9

 
44.5

 
89.8

 
91.6

Gain on disposal of property, plant and
equipment, net
(0.1
)
 
(8.9
)
 
(0.9
)
 
(5.8
)
Asset impairment and other charges, net
1.9

 
3.1

 

 
3.1

Operating income
79.5

 
106.7

 
133.4

 
197.2

Interest expense
1.6

 
1.3

 
3.0

 
2.2

Interest income
(0.2
)
 
(0.3
)
 
(0.3
)
 
(0.4
)
Other expense (income), net
0.5

 
(0.7
)
 
0.6

 
(3.3
)
Income before income taxes
77.6

 
106.4

 
130.1

 
198.7

Provision for income taxes
7.8

 
8.7

 
14.7

 
19.8

Net income
$
69.8

 
$
97.7

 
$
115.4

 
$
178.9

Less: Net income (loss) attributable to
noncontrolling interests
0.6

 
1.5

 
(0.2
)
 
1.0

     Net income attributable to Fresh Del Monte
           Produce Inc.
$
69.2

 
$
96.2

 
$
115.6

 
$
177.9

     Net income per ordinary share attributable to
           Fresh Del Monte Produce Inc. - Basic
$
1.37

 
$
1.88

 
$
2.27

 
$
3.46

     Net income per ordinary share attributable to
           Fresh Del Monte Produce Inc. - Diluted
$
1.36

 
$
1.86

 
$
2.25

 
$
3.43

Dividends declared per ordinary share
$
0.150

 
$
0.125

 
$
0.300

 
$
0.250

Weighted average number of ordinary shares:
 

 
 

 
 
 
 
Basic
50,572,056

 
51,164,438

 
50,895,738

 
51,396,505

Diluted
50,932,365

 
51,700,345

 
51,300,697

 
51,868,455


See accompanying notes.

2


FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(U.S. dollars in millions)

 
Quarter ended
 
Six months ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Net income
$
69.8

 
$
97.7

 
$
115.4

 
$
178.9

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net unrealized (loss) gain on derivatives
(3.8
)
 
0.3

 
(6.4
)
 
(9.6
)
Net unrealized foreign currency translation gain (loss)
7.1

 
(4.4
)
 
11.1

 
1.2

Net change in retirement benefit adjustment, net of tax
0.2

 
0.1

 
0.3

 
0.2

Comprehensive income
$
73.3

 
$
93.7

 
$
120.4

 
$
170.7

Less: comprehensive gain (loss) attributable
to noncontrolling interests
0.6

 
1.4

 
(0.2
)
 
1.3

Comprehensive income attributable to Fresh Del
Monte Produce Inc.
$
72.7

 
$
92.3

 
$
120.6

 
$
169.4


See accompanying notes.


3


FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(U.S. dollars in millions)
 
 
Six months ended
 
June 30,
2017
 
July 1,
2016
Operating activities:
 
 
 
Net income
$
115.4

 
$
178.9

Adjustments to reconcile net income to net cash
 

 
 

provided by operating activities:
 

 
 

Depreciation and amortization
40.0

 
38.0

Amortization of debt issuance costs
0.2

 
0.2

Stock-based compensation expense
6.5

 
7.9

Asset impairment, net
2.2

 
3.1

Change in uncertain tax positions
0.2

 
0.1

Gain on disposal of property, plant and equipment
(0.9
)
 
(5.8
)
Deferred income taxes
0.2

 
(0.9
)
Foreign currency translation adjustment
6.2

 
(1.8
)
Changes in operating assets and liabilities:
 

 
 

Receivables
(28.2
)
 
9.3

Inventories
34.4

 
57.4

Prepaid expenses and other current assets
(4.2
)
 
(0.8
)
Accounts payable and accrued expenses
12.5

 
(12.1
)
Other noncurrent assets and liabilities
(10.6
)
 
(4.1
)
Net cash provided by operating activities
173.9

 
269.4

Investing activities:
 

 
 

Capital expenditures
(71.9
)
 
(67.3
)
Proceeds from sales of property, plant and equipment
2.9

 
7.4

Purchase of a business

 
(7.1
)
Net cash used in investing activities
(69.0
)
 
(67.0
)
Financing activities:
 

 
 

Proceeds from long-term debt
330.9

 
250.6

Payments on long-term debt
(337.3
)
 
(316.6
)
Purchase of noncontrolling interest

 
(40.0
)
     Distributions to noncontrolling interests, net
(3.6
)
 
(0.1
)
Proceeds from stock options exercised
0.1

 
4.2

Stock-based awards settled in cash for taxes
(3.8
)
 
(0.3
)
Dividends paid
(15.2
)
 
(12.7
)
Repurchase and retirement of ordinary shares
(71.6
)
 
(68.7
)
Net cash used in financing activities
(100.5
)
 
(183.6
)
Effect of exchange rate changes on cash
(0.1
)
 
(0.9
)
Net increase in cash and cash equivalents
4.3

 
17.9

Cash and cash equivalents, beginning
20.1

 
24.9

Cash and cash equivalents, ending
$
24.4

 
$
42.8

Supplemental cash flow information:
 

 
 

Cash paid for interest
$
2.6

 
$
1.9

Cash paid for income taxes
$
5.9

 
$
7.5

Non-cash financing and investing activities:
 

 
 

Purchase of assets under capital lease obligations
$

 
$
0.1

Retirement of ordinary shares
$
71.6

 
$
66.9

Purchase of noncontrolling interest
$

 
$
5.0

Dividends on restricted stock units
$
0.3

 
$


 See accompanying notes.

4

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1.  General
 
Reference in this Report to "Fresh Del Monte", “we”, “our” and “us” and the “Company” refer to Fresh Del Monte Produce Inc. and its subsidiaries, unless the context indicates otherwise.
 
We were incorporated under the laws of the Cayman Islands in 1996 and are engaged primarily in the worldwide production, transportation and marketing of fresh produce. We source our products, which include bananas, pineapples, melons and non-tropical fruit (including grapes, apples, pears, peaches, plums, nectarines, citrus, kiwis and blueberries) avocados and tomatoes, primarily from Central America, South America, Africa and the Philippines. We also source products from North America, Europe and the Middle East and distribute our products in North America, Europe, Middle East, Asia, South America and Africa. Products are sourced from our company-owned farms, through joint venture arrangements and through supply contracts with independent growers. 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. We are also a producer, marketer and distributor of prepared fruit and vegetables, juices and snacks and we hold a perpetual, royalty-free license to use the DEL MONTE® brand for prepared foods throughout Europe, Africa, the Middle East and countries formerly part of the Soviet Union. 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 in certain geographic regions.
  
The accompanying unaudited Consolidated Financial Statements for the quarter and six months ended June 30, 2017 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for fair presentation have been included. Operating results for the quarter and six months ended June 30, 2017 are subject to significant seasonal variations and are not necessarily indicative of the results that may be expected for the year ending December 29, 2017. For further information, refer to the Consolidated Financial Statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 30, 2016.
 
We are required to evaluate events occurring after June 30, 2017 for recognition and disclosure in the unaudited Consolidated Financial Statements for the quarter and six months ended June 30, 2017. Events are evaluated based on whether they represent information existing as of June 30, 2017, which require recognition in the unaudited Consolidated Financial Statements, or new events occurring after June 30, 2017, which do not require recognition but require disclosure if the event is significant to the unaudited Consolidated Financial Statements. We evaluated events occurring subsequent to June 30, 2017 through the date of issuance of these unaudited Consolidated Financial Statements.

2. Recently Issued Accounting Pronouncements

New Accounting Pronouncements Adopted

In March 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU"), Improvements to Employee Share-Based Payment Accounting, which simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The new standard requires excess tax benefits or deficiencies for share-based payments to be recognized as income tax benefit or expense, rather than within additional paid-in capital, when the awards vest or are settled. Furthermore, cash flows related to excess tax benefits are required to be classified as operating activities in the statement of cash flows rather than financing activities. We have elected to adopt the cash flow presentation of excess tax benefits retrospectively and have adjusted our Consolidated Statement of Cash Flows by $0.2 million for the six months ended July 1, 2016. We adopted these amendments effective December 31, 2016, the first day of our fiscal 2017 year.

We have elected to account for forfeitures of stock-based awards as they occur and have adopted on a modified retrospective basis, as such, we recorded a cumulative effect adjustment of $0.2 million (pre-tax) to reduce retained earnings and increase additional paid-in capital as of December 31, 2016, the first day of our fiscal 2017 year.



5

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)


2. Recently Issued Accounting Pronouncements (continued)

The new standard also requires the presentation of cash paid to taxing authorities at settlement arising from the withholding of shares from employees be classified as a financing activity on the statement of cash flows. We adopted these amendments, effective December 31, 2016, the first day of our fiscal 2017 year, on a retrospective basis and included $0.3 million related to stock-based awards settled in cash for taxes in financing activities in our Consolidated Statements of Cash Flows for the six months ended July 1, 2016.

In July 2015, the FASB issued an ASU, Simplifying the Measurement of Inventory.  The core principal of the guidance is that an entity should measure inventory at the lower of cost and net realizable value.  Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  This guidance does not apply to inventory that is being measured using the Last-In, First-Out (LIFO) or the retail inventory method. The Company adopted this guidance on December 31, 2016, the first day of our fiscal 2017 year, and determined there were no changes to disclosure, financial statement presentation, or valuation of inventory as a result of adoption.

New Accounting Pronouncements Not Yet Adopted

In May 2017, the FASB issued an ASU, Stock Compensation (Topic 718), Scope of Modification Accounting. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance clarifies that modification accounting will be applied if the value, vesting conditions or classification of the award changes. This ASU will be effective for us beginning the first day of our 2018 fiscal year. We expect this award to impact modifications meeting the clarified criteria prospectively beginning in 2018.

In March 2017, the FASB issued an ASU, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same Consolidated Statements of Income captions as other compensation costs arising from services rendered by the covered employees during the period.  The other components of net benefit cost will be presented in the Consolidated Statements of Income separately from service costs.  Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice.  This ASU will be effective for us beginning the first day of our 2018 fiscal year. As this ASU only affects presentation and disclosure, we do not anticipate a significant impact of adoption on our financial condition, results of operations and cash flows.

In February 2017, the FASB issued an ASU, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. This ASU will be effective for us beginning the first day of our 2018 fiscal year. Early adoption is permitted. We are evaluating the impact of adoption of this ASU on our financial condition, results of operations and cash flows, and, as such, we are not able to estimate the effect the adoption of the new standard will have on our financial statements.

In January 2017, the FASB issued an ASU, Business Combinations: Clarifying the Definition of a Business, which adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU will be effective for us beginning the first day of our 2018 fiscal year. Early adoption is permitted. We do not expect this ASU to have an impact until a valid transaction takes place.

In January 2017, the FASB issued an ASU, Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. The ASU permits an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU will be effective for us beginning the first day of our 2020 fiscal year. Early adoption is permitted. We are evaluating whether to early adopt. After adoption, we do not expect this ASU to have an impact until a valid transaction takes place.

In October 2016, the FASB issued an ASU, Intra-Entity Transfers of Assets Other Than Inventory, which will require companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory, particularly those asset transfers involving intellectual property, in the period in which the transfer occurs. The ASU will be effective for us beginning the first day of our 2018 fiscal year.

6

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

2. Recently Issued Accounting Pronouncements (continued)

The guidance requires modified retrospective adoption. We are evaluating the impact of adoption of this ASU on our financial condition, results of operations and cash flows, and, as such, we are not able to estimate the effect the adoption of the new standard will have on our financial statements.

In August 2016, the FASB issued an ASU, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues in an effort to reduce diversity in practice. This ASU will be effective for us beginning the first day of our 2018 fiscal year. Early adoption is permitted. We are evaluating the impact of adoption of this ASU on our cash flows, and as such, we are not able to estimate the effect that the adoption of this ASU will have on reclassifications within our Consolidated Statement of Cash Flows.

In June 2016, the FASB issued an ASU, Financial Instruments - Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. Entities will be required to use a new forward-looking “expected loss” model that results in the earlier recognition of allowances for losses on trade and other receivables. Additionally, entities will need to disclose significantly more information they use to track credit quality by year of origination for most financing receivables. This ASU will be effective for us beginning the first day of our 2020 fiscal year. Early adoption is permitted beginning the first day of our 2019 fiscal year. We are evaluating the impact of adoption of this ASU on our financial condition, results of operations and cash flows, and, as such, we are not able to estimate the effect the adoption of the new standard will have on our financial statements.

In February 2016, the FASB issued an ASU, Leases, which requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases may result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This ASU will be effective for us beginning the first day of our 2019 fiscal year. Early adoption is permitted. We are evaluating the impact of adoption of this ASU on our financial condition, results of operations and cash flows, and, as such, we are not able to estimate the effect the adoption of the new standard will have on our financial statements.

In May 2014, the FASB issued an ASU, Revenue From Contracts with Customers, and has subsequently issued several supplemental and/or clarifying ASUs (collectively, "ASC 606"), which prescribes a comprehensive new revenue recognition standard that will supersede existing revenue guidance. The core principle is that a company will recognize revenue when it transfers promised goods or services to customers for an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard outlines a five-step model, whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. ASC 606 will be effective for us beginning the first day of our 2018 fiscal year. Early adoption is permitted. We have commenced our implementation analysis including contract review under the ASC 606 framework and identification of revenue streams. Our analysis includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under this new standard. The Company has reviewed a sample of contracts with its customers that the Company believes is representative of its revenue streams and continues to review additional contracts with its customers during 2017, including any additional revenue streams identified. ASC 606 requires increased disclosure which in turn is expected to require certain new processes. The impact of adoption of ASC 606 on our financial condition, results of operations, cash flows and disclosures, is ongoing, and, as such, we are not able to reasonably estimate the effect that the adoption of the new standard will have on our financial statements. The standard permits the use of either the retrospective or modified retrospective transition method. We will adopt the new standard using the modified retrospective transition method, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings on the first day of our 2018 fiscal year.


7

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

3.  Asset Impairment and Other Charges, Net
 
The following represents a summary of asset impairment and other charges, net recorded during the quarters and six months ended June 30, 2017 and July 1, 2016 (U.S. dollars in millions):
 
 
Quarter ended
 
Six months ended
 
June 30, 2017
 
June 30, 2017
 
Long-lived
and other
asset
impairment
 
Long-lived
and other
asset
impairment
 
 
Other
credits
 
Total
Banana segment:
 
 
 
 
 
 
 
Philippines floods
$
0.5

 
$
0.8

 
$

 
$
0.8

Chile floods
0.8

 
0.8

 

 
0.8

Underutilized assets in Central America
0.6

 
0.6

 

 
0.6

Other fresh produce segment:
 

 
 
 
 
 
 

Chile insurance proceeds on floods

 

 
(2.2
)
 
(2.2
)
Total asset impairment and other charges
(credits), net
$
1.9

 
$
2.2

 
$
(2.2
)
 
$

 
 
 
 
 
 
 
 
 
Quarter ended
 
Six months ended
 
July 1, 2016
 
July 1, 2016
 
Long-lived
and other
asset
impairment
 
Long-lived
and other
asset
impairment
 
Other
credits
 
Total
Banana segment:
 
 
 
 
 
 
 
Philippines plantation conversion to pineapple

$
2.5

 
$
2.5

 
$

 
$
2.5

Underutilized assets in Central America

0.6

 
0.6

 

 
0.6

Total asset impairment and other charges
$
3.1

 
$
3.1

 
$

 
$
3.1



8

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

3.  Asset Impairment and Other Charges, Net (continued)

Exit Activity and Other Reserves

Exit activity and other reserve balances are recorded in the Consolidated Balance Sheets in accounts payable and accrued expenses for the current portion and in other noncurrent liabilities for the noncurrent portion. The following is a rollforward of 2017 exit activity and other reserves (U.S. dollars in millions):
 
Exit activity and
other reserve
balance at
December 30, 2016
 
Cash paid
 
Foreign exchange impact
 
Exit activity and
other reserve
balance at
June 30,
2017
Contract termination and other exit activity charges
$
1.0

 
$
(0.3
)
 
$
(0.1
)
 
$
0.6

 
$
1.0

 
$
(0.3
)
 
$
(0.1
)
 
$
0.6


The exit activity and other reserve balance at June 30, 2017 includes $0.6 million related to contract termination costs for an underutilized facility in the United Kingdom which relates to previous periods. We do not expect additional charges related to the exit activities mentioned above that would significantly impact our results of operations or financial condition.

4.  Acquisition

During June 2016, we purchased a blueberry farm in Chile of approximately 320 acres, which includes agricultural production land, packing houses and farm equipment. The purchase price for this farm was $7.1 million and was funded using operating cash flows and available borrowings under the Credit Facility (as defined in Note 11Long-Term Debt and Capital Lease Obligations”). Goodwill represents the excess purchase price above the fair market value of the net assets acquired. We recorded $0.8 million of goodwill in our Other Fresh Produce segment as a result of this acquisition.

5.  Noncontrolling Interests
 
The following table reconciles shareholders’ equity attributable to noncontrolling interests (U.S. dollars in millions):
 
 
Six months ended
 
June 30,
2017
 
July 1,
2016
Noncontrolling interests, beginning
$
24.6

 
$
42.9

Purchase of noncontrolling interest (1)

 
(19.5
)
Net (loss) income attributable to noncontrolling interests
(0.2
)
 
1.0

Translation adjustments

 
0.3

Retirement benefit adjustment

 
(0.1
)
Capital contributions from, net of dividends
0.4

 

Noncontrolling interests, ending
$
24.8

 
$
24.6


(1)
We purchased the remaining interest of this Variable Interest Entity ("VIE") for $45.0 million on April 28, 2016. We recorded a charge of $25.5 million to equity as a result of the difference between the fair value of the consideration of $45.0 million less the $19.5 million carrying value of the noncontrolling interest. Refer to Note 6, “Variable interest Entities”, for disclosures related to the purchase of the remaining interest in our VIE. 


9

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)


6.  Variable Interest Entities
 
One of our Del Monte Gold® Extra Sweet pineapple producers met the definition of a VIE pursuant to the ASC guidance on “Consolidation” and is consolidated. Our variable interest in this entity included an equity investment and certain debt guarantees. All of this VIE's pineapple production was sold to us. Based on the criteria of this ASC, as amended, we were the primary beneficiary of this VIE’s expected residual returns or losses in excess of our ownership interest.

On April 28, 2016, we acquired the remaining 60% noncontrolling interest of this VIE for $45.0 million, which we paid using operating cash flows and available borrowings under the Credit Facility (as defined in Note 11Long-Term Debt and Capital Lease Obligations”).

7. Income Taxes

In connection with a current examination of the tax returns in two foreign jurisdictions the taxing authorities have issued, during the current quarter, income tax deficiencies related to transfer pricing of approximately $125.4 million (including interest and penalties) for tax years 2012 through 2015.  We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as the Company believes that the proposed adjustments are without technical merit.  The Company will continue to vigorously contest the adjustments and exhaust all administrative and judicial remedies to resolve the matters, which could be a lengthy process.   The Company regularly assesses the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of its tax reserves. Accordingly, the Company has not accrued any additional amounts based upon the proposed adjustments.  There can be no assurance that this matter will be resolved in our favor, and an adverse outcome of this matter, or any future tax examinations involving similar assertions, could have a material effect on our results of operations and financial condition.


8.  Financing Receivables
 
Financing receivables are included in other accounts receivable, less allowances on our accompanying Consolidated Balance Sheets and are recognized at net realizable value, which approximates fair value. Other accounts receivable may include value-added taxes receivables, seasonal advances to growers and suppliers, which are usually short-term in nature, and other financing receivables.

A significant portion of the fresh produce we sell is acquired through supply contracts with independent growers. In order to ensure the consistent high quality of our products and packaging, we make advances to independent growers and suppliers. These growers and suppliers typically sell all of their production to us and make payments on their advances as a deduction to the agreed upon selling price of the fruit or packaging material. The majority of the advances to growers and suppliers are for terms less than one year and typically span a growing season. In certain cases, there may be longer term advances with terms of up to 10 years.

These advances are collateralized by property liens and pledges of the respective season’s produce; however, certain factors such as unfavorable weather conditions, crop disease and financial stability could impact the ability for these growers to repay their advance. Occasionally, we agree to a payment plan or take steps to recover the advance via established collateral.  Allowances for advances to independent growers and suppliers are determined on a case by case basis depending on the production for the season and other contributing factors.  






10

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

8.  Financing Receivables (continued)

The following table details financing receivables including the related allowance for advances to independent growers and suppliers including their credit risk profile (U.S. dollars in millions):

 
June 30, 2017
 
December 30, 2016
 
Short-term
 
Long-term
 
Short-term
 
Long-term
Gross advances to independent growers and suppliers
$
26.3

 
$
1.7

 
$
35.8

 
$
0.2

Allowance for advances to independent growers and suppliers
(past due)
(2.5
)
 
(0.1
)
 
(1.5
)
 

Net advances to independent growers and suppliers
$
23.8

 
$
1.6

 
$
34.3

 
$
0.2

 
The short-term and long-term portions of the financing receivables included above are classified in the Consolidated Balance Sheets in other accounts receivable and other noncurrent assets.

The allowance for advances to independent growers and suppliers and the related financing receivables for the quarters and six months ended June 30, 2017 and July 1, 2016 were as follows (U.S. dollars in millions):
 
Quarter ended
 
Six months ended
 
June 30, 2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Allowance for advances to independent growers and suppliers:
 
 
 
 
 
 
 
Balance, beginning of period
$
1.5

 
$
2.1

 
$
1.5

 
$
2.1

Provision for uncollectible amounts
1.1

 

 
1.1

 

Deductions to allowance related to write-offs

 
(0.5
)
 

 
(0.5
)
Balance, end of period
$
2.6

 
$
1.6

 
$
2.6

 
$
1.6


11

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)


9.  Stock-Based Compensation

Our shareholders approved and ratified the 2014 Omnibus Share Incentive Plan (the “2014 Plan”), which allows us to grant equity-based compensation awards, including stock options, restricted stock awards and restricted stock units including performance stock units. We disclosed the significant terms of the 2014 Plan and prior plans in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016.
 
Stock-based compensation expense related to stock options, restricted stock awards ("RSAs"), restricted stock units ("RSUs") and performance stock units ("PSUs") is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income and is comprised as follows (U.S. dollars in millions): 
 
Quarter ended
 
Six months ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Stock options
$
0.2

 
$
0.6

 
$
0.3

 
$
1.3

RSUs/PSUs
2.7

 
2.6

 
5.3

 
5.7

RSAs

 

 
0.9

 
0.9

Total
$
2.9

 
$
3.2

 
$
6.5

 
$
7.9

 
We received proceeds from the exercise of stock-based options of $0.1 million for the six months ended June 30, 2017 and $4.2 million for the six months ended July 1, 2016.



12

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

9.  Stock-Based Compensation (continued)

Stock Option Awards

Under the 2014 Plan and prior plans, 20% of the options vest immediately, and the remaining options vest in equal installments over the next four years. Options under the 2014 Plan and prior plans may be exercised over a period not in excess of 10 years from the date of the grant. Prior plan provisions are still applicable to outstanding options and awards under those plans. There were no stock option grants for the six months ended June 30, 2017 or July 1, 2016.

The fair value for stock options was estimated at the date of grant using the Black-Scholes option pricing model, which requires us to make certain assumptions. Volatility is estimated based on the historical volatility of our stock over the past five years. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of grant. The dividend yield is estimated over the expected term based on our dividend policy, historical cash dividends and expected future
cash dividends. The expected term of grant was based on the contractual term of the stock option and expected employee exercise and post-vesting employment termination trends. Forfeitures are recognized as they occur.

Restricted Stock Awards

A share of restricted stock is one of our ordinary shares that has restrictions on transferability until certain vesting conditions are met.

For RSAs awarded under the 2014 Plan, 50% of each award of our restricted stock vested on the date it was granted. The remaining 50% of each award vests upon the six-month anniversary of the date on which the recipient ceases to serve as a member of our Board of Directors. Restricted stock awarded during the six months ended June 30, 2017 and July 1, 2016 allows directors to retain all of their awards once they cease to serve as a member of our Board of Directors and is considered a nonsubstantive service condition in accordance with the guidance provided by the ASC on “Compensation – Stock Compensation”.  Accordingly, we recognize compensation cost immediately for restricted stock awards granted to non-management members of the Board of Directors.

The following table lists RSAs awarded under the 2014 plan for the six months ended June 30, 2017 and July 1, 2016:

Date of award
 
Shares of
restricted stock
awarded
 
Price per share
January 3, 2017
 
14,294
 
$
61.21

January 4, 2016
 
22,946
 
38.13


Restricted Stock Units/Performance Stock Units

Under the 2014 Plan, each RSU/PSU represents a contingent right to receive one of our ordinary shares. The PSUs are subject to meeting minimum performance criteria set by the Compensation Committee of our Board of Directors. The actual number of shares the recipient receives is determined based on the results achieved versus performance goals. Those performance goals are based on exceeding a measure of our earnings. Depending on the results achieved, the actual number of shares that an award recipient receives at the end of the period may range from 0% to 100% of the award units granted. Provided such criteria are met, the PSUs will vest in three equal annual installments on each of the next three anniversary dates provided that the recipient remains employed with us. The RSUs will vest 20% on the award date and 20% on each of the next four anniversaries.

RSUs and PSUs do not have the voting rights of ordinary shares and the shares underlying the RSUs and PSUs are not considered issued and outstanding. However, shares underlying RSUs/PSUs are included in the calculation of diluted earnings per share to the extent the performance criteria are met, if any.


13

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

9.  Stock-Based Compensation (continued)

The fair market value for RSUs and PSUs is based on the closing price of our stock on the award date. Forfeitures are recognized as they occur.

The following table lists the various RSUs and PSUs awarded under the 2014 Plan for the six months ended June 30, 2017 and July 1, 2016 (U.S. dollars in millions, except share and per share data):
Date of award
 
Type of award
 
Units awarded
 
Price per share
February 22, 2017
 
PSU
 
100,000
 
$
56.52

February 22, 2017
 
RSU
 
50,000
 
56.52

February 24, 2016
 
PSU
 
140,000
 
38.99

February 24, 2016
 
RSU
 
50,000
 
38.99


RSUs and PSUs are eligible to earn Dividend Equivalent Units ("DEUs") equal to the cash dividend paid to ordinary shareholders. DEUs are subject to the same performance and/or service conditions as the underlying RSUs and PSUs and are forfeitable.

We recognize expense related to RSUs and PSUs based on the fair market value, as determined on the date of award, ratably over the vesting period, provided the performance condition, if any, is probable.

10.  Inventories
 
Inventories consisted of the following (U.S. dollars in millions):
 
 
June 30,
2017
 
December 30, 2016
Finished goods
$
167.1

 
$
199.4

Raw materials and packaging supplies
146.1

 
134.0

Growing crops
144.3

 
159.8

Total inventories
$
457.5

 
$
493.2



11.  Long-Term Debt and Capital Lease Obligations
 
The following is a summary of long-term debt and capital lease obligations (U.S. dollars in millions):
 
 
June 30,
2017
 
December 30,
2016
Senior unsecured revolving credit facility (see Credit Facility below)
$
225.0

 
$
230.5

Capital lease obligations
1.5

 
1.8

Total long-term debt and capital lease obligations
226.5

 
232.3

Less:  Current portion
(0.5
)
 
(0.6
)
Long-term debt and capital lease obligations
$
226.0

 
$
231.7



14

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

11.  Long-Term Debt and Capital Lease Obligations (continued)

Credit Facility

On April 16, 2015, we entered into a five-year $800 million syndicated senior unsecured revolving credit facility maturing on April 15, 2020 (the "Credit Facility") with Bank of America, N.A. as administrative agent and Merrill Lynch, Pierce, Fenner & Smith Inc. as sole lead arranger and sole book manager. Borrowings under the Credit Facility bear interest at a spread over LIBOR that varies with our leverage ratio. The Credit Facility also includes a swing line facility and a letter of credit facility. Debt issuance costs of $1.0 million are included in other noncurrent assets on our Consolidated Balance Sheets.

We have a renewable 364-day, $25.0 million commercial and stand-by letter of credit facility with Rabobank Nederland.

The following is a summary of the material terms of the Credit Facility and other working capital facilities at June 30, 2017 (U.S. dollars in millions):
 
Term
 
Maturity
date
 
Interest rate
 
Borrowing
limit
 
Available
borrowings
Bank of America credit facility
5 years
 
April 15, 2020
 
2.29%
 
$
800.0

 
$
575.0

Rabobank letter of credit facility
364 days
 
June 21, 2018
 
Varies
 
25.0

 
15.4

Other working capital facilities
Varies
 
Varies
 
Varies
 
22.2

 
11.1

 
 
 
 
 
 
 
$
847.2

 
$
601.5


The current margin for LIBOR advances is 1.00%. We intend to use funds borrowed under the Credit Facility from time to time for general corporate purposes, which may include the repayment, redemption or refinancing of our existing indebtedness, working capital needs, capital expenditures, funding of possible acquisitions, possible share repurchases and satisfaction of other obligations.

The Credit Facility requires us to comply 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 June 30, 2017, we were in compliance with all of the covenants contained in the Credit Facility. The Credit Facility is unsecured as long as we maintain a certain leverage ratio and is guaranteed by certain of our subsidiaries. The Credit Facility permits borrowings under the revolving commitment with an interest rate determined based on our leverage ratio and spread over LIBOR. In addition, we pay a fee on unused commitments.

As of June 30, 2017, we applied $9.6 million to the Rabobank Nederland letter of credit facility, in respect of certain contingent obligations and other governmental agency guarantees combined with guarantees for purchases of raw materials and equipment and other trade related letters of credit. We also had $18.2 million in other letters of credit and bank guarantees not included in the Rabobank or Bank of America letter of credit facilities.



15

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

12.  Commitments and Contingencies

DBCP Litigation

Beginning in December 1993, certain of our U.S. subsidiaries were named among the defendants in a number of actions in courts in Texas, Louisiana, Hawaii, California and the Philippines involving claims by numerous non-U.S. plaintiffs alleging that they were injured as a result of exposure to a nematocide containing the chemical dibromochloropropane (“DBCP”) during the period 1965 to 1990. As a result of a settlement entered into in December 1998, the remaining unresolved DBCP claims against our U.S. subsidiaries are pending or subject to appeal in Hawaii, Delaware and the Philippines.

On October 14, 2004, two of our subsidiaries were served with a complaint in an action styled Angel Abarca, et al. v. Dole Food Co., et al. filed in the Superior Court of the State of California for the County of Los Angeles on behalf of more than 2,600 Costa Rican banana workers who claim injury from exposure to DBCP. On January 2, 2009, three of our subsidiaries were served with multiple complaints in related actions styled Jorge Acosta Cortes, et al. v. Dole Food Company, et al. filed in the Superior Court of the State of California for the County of Los Angeles on behalf of 461 Costa Rican residents. An initial review of the plaintiffs in the Abarca and Cortes actions found that a substantial number of the plaintiffs were claimants in prior DBCP actions in Texas and may have participated in the settlement of those actions. On June 27, 2008, the court dismissed the claims of 1,329 plaintiffs who were parties to prior DBCP actions. On June 30, 2008, our subsidiaries moved to dismiss the claims of the remaining Abarca plaintiffs on grounds of forum non conveniens in favor of the courts of Costa Rica. On September 22, 2009, the court granted the motion to dismiss and on November 16, 2009 entered an order conditionally dismissing the claims of those remaining plaintiffs who allege employment on farms in Costa Rica exclusively affiliated with our subsidiaries. Those dismissed plaintiffs re-filed their claim in Costa Rica on May 17, 2012. On January 18, 2013, all remaining plaintiffs in California filed Requests for Dismissal effecting the dismissal of their claims without prejudice. On September 25, 2013, our subsidiaries filed an answer to the claim re-filed with the courts of Costa Rica. Two additional DBCP-related lawsuit were filed in Costa Rica in 2015, as to which the Company has not yet been served.
 
On May 31 and June 1, 2012, eight actions were filed against one of our subsidiaries in the United States District Court for the District of Delaware on behalf of approximately 3,000 plaintiffs alleging exposure to DBCP on or near banana farms in Costa Rica, Ecuador, Panama, and Guatemala. We and our subsidiaries have never owned, managed or otherwise been involved with any banana growing operations in Panama and were not involved with any banana growing operations in Ecuador during the period when DBCP was in use. The plaintiffs include 229 claimants who had cases pending in the United States District Court for the Eastern District of Louisiana which were dismissed on September 17, 2012. On August 30, 2012, our subsidiary joined a motion to dismiss the claims of those plaintiffs on the grounds that they have first-filed claims pending in the United States District Court for the Eastern District of Louisiana. The motion was granted on March 29, 2013 and appealed to the United States Court of Appeals for the Third Circuit. On September 21, 2012, our subsidiary filed an answer with respect to the claims of those plaintiffs who had not already filed in Louisiana. On May 27, 2014, the court granted a motion made by a co-defendant and entered summary judgment against all remaining plaintiffs based on the September 19, 2013 affirmance by the United States Court of Appeals for the Fifth Circuit of the dismissal on statute of limitations grounds of related cases by the United States District Court for the Eastern District of Louisiana. On July 7, 2014, our subsidiary joined in a motion for summary judgment on statute of limitations grounds as to all remaining plaintiffs on the basis of the court’s May 27, 2014 ruling. Plaintiffs agreed that judgment be entered in favor of all defendants for the claims still pending in the United States District Court for the District of Delaware on the basis of the summary judgment granted on May 27, 2014 and the district court entered judgment dismissing all plaintiffs’ claims on September 22, 2014. On October 21, 2014, a notice of appeal was filed with the United States Court of Appeals for the Third Circuit expressly limited the appeal to the claims of 57 (out of the more than 2,600) plaintiffs who had not previously filed claims in Louisiana. On August 11, 2015, a panel of the Court of Appeals affirmed the dismissal of the claims of these plaintiffs. Plaintiffs filed a Motion for Rehearing en Banc with the Third Circuit, which was granted on September 22, 2015. On September 2, 2016, the Third Circuit en banc reversed the District Court’s dismissal on first-filed doctrine grounds of the claims of approximately 229 of the plaintiffs and remanded the case back to the District Court for further proceedings. The United States Court of Appeals for the Third Circuit has canceled the hearing previously scheduled for March 9, 2017 to hear oral argument in the appeal from the grant of summary judgment to defendants on the statute of limitations issue and has advised the parties that its decision on the appeal, which remains pending, will be issued on the basis of the written pleadings filed by the parties. On June 2, 2017, the Third Circuit issued a Petition for Certification of State Law to the Delaware Supreme Court to resolve the complex procedural question pending on appeal regarding the applicability of the first-filed doctrine for tolling the statute of limitations on class actions claims. The Delaware Supreme Court has accepted certification of the pending question of law.


16

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

12.  Commitments and Contingencies (continued)

In Hawaii, plaintiffs filed a petition for certiorari to the Hawaii Supreme Court based upon the Hawaii Court of Appeals affirmance in March 2014 of a summary judgment ruling in defendants’ favor at the trial court level. The Hawaii Supreme Court accepted the petition and oral argument was held on September 18, 2014 with respect to whether the claims of the six named plaintiffs were properly dismissed on statute of limitations grounds. On October 21, 2015, the Hawaii Supreme Court reversed the Hawaii Court of Appeals and the Hawaii state trial court’s grant of partial summary judgment against the DBCP plaintiffs on statute of limitations grounds.  The Hawaii Supreme Court remanded the claims of six remaining plaintiffs back to the Hawaii state trial court for further proceedings.

Kunia Well Site
 
In 1980, elevated levels of certain chemicals were detected in the soil and ground-water at a plantation leased by one of our U.S. subsidiaries in Honolulu, Hawaii (the “Kunia Well Site”). Shortly thereafter, our subsidiary discontinued the use of the Kunia Well Site and provided an alternate water source to area well users and the subsidiary commenced its own voluntary cleanup operation.

In 1993, the Environmental Protection Agency (“EPA”) identified the Kunia Well Site for potential listing on the National Priorities List (“NPL”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. On December 16, 1994, the EPA issued a final rule adding the Kunia Well Site to the NPL.

On September 28, 1995, our subsidiary entered into an order (the “Order”) with the EPA to conduct the remedial investigation and the feasibility study of the Kunia Well Site. Under the terms of the Order, our subsidiary submitted a remedial investigation report in November 1998 and a final draft feasibility study in December 1999 (which was updated from time to time) for review by the EPA. The EPA approved the remedial investigation report in February 1999 and the feasibility study on April 22, 2003.

As a result of communications with the EPA in 2001, we recorded a charge of $15.0 million in the third quarter of 2001 to increase the recorded liability to the estimated expected future cleanup cost for the Kunia Well Site to $19.1 million. Based on conversations with the EPA in the third quarter of 2002 and consultation with our legal counsel and other experts, we recorded a charge of $7.0 million during the third quarter of 2002 to increase the accrual for the expected future clean-up costs for the Kunia Well Site to $26.1 million.

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 the Kunia Well Site will range from $12.9 million to $25.4 million and will last approximately 10 years. It remains to be determined how long the remediation will last.

On January 13, 2004, the EPA deleted a portion of the Kunia Well Site (Northeast section) from the NPL. On May 2, 2005, our subsidiary signed a Consent Decree with the EPA for the performance of the clean-up work for the Kunia Well Site. On September 27, 2005, the U.S. District Court for Hawaii approved and entered the Consent Decree. Based on findings from remedial investigations at the Kunia Well Site, our subsidiary continues to evaluate with the EPA the clean-up work currently in progress in accordance with the Consent Decree.

During 2014, as a result of a meeting held with the EPA which resulted in changes to the remediation work being performed, we reduced the liability related to the Kunia well site clean-up by $1.4 million. We increased the liability by $0.4 million during 2016 and reduced the liability by $0.8 million during 2015 due to changes to the remediation work being performed. The estimates are between $13.7 million and $28.7 million. The estimate on which our accrual is based, totals $13.6 million. As of June 30, 2017, there are $13.2 million included in other noncurrent liabilities and $0.4 million included in accounts payable and accrued expenses in the Consolidated Balance Sheets for the Kunia Well Site clean-up, which we expect to expend in the next 12 months. We expect to expend approximately $0.4 million each year in 2017 and 2018, $1.1 million in 2019, $1.0 million in 2020 and $0.9 million in 2021.


17

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

12.  Commitments and Contingencies (continued)

Additional Information
 
In addition to the foregoing, we are involved from time to time in various claims and legal actions incident to our operations, both as plaintiff and defendant. In the opinion of management, after consulting with legal counsel, none of these other claims are currently expected to have a material adverse effect on the results of operations, financial position or our cash flows.

We intend to vigorously defend ourselves in all of the above matters.


13.  Earnings Per Share
 
Basic and diluted net income per ordinary share is calculated as follows (U.S. dollars in millions, except share and per share data):
 
 
Quarter ended
 
Six months ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to Fresh Del Monte Produce Inc.
$
69.2

 
$
96.2

 
$
115.6

 
$
177.9

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
Weighted average number of ordinary shares - Basic
50,572,056

 
51,164,438

 
50,895,738

 
51,396,505

Effect of dilutive securities - Share based employee options and awards
360,309

 
535,907

 
404,959

 
471,950

Weighted average number of ordinary shares - Diluted
50,932,365

 
51,700,345

 
51,300,697

 
51,868,455

 
 
 
 
 
 
 
 
Antidilutive awards (1)
96,526

 
140,734

 
96,526

 
140,734

 
 
 
 
 
 
 
 
Net income per ordinary share attributable to
     Fresh Del Monte Produce Inc.:
 

 
 

 
 

 
 
Basic
$
1.37

 
$
1.88

 
$
2.27

 
$
3.46

Diluted
$
1.36

 
$
1.86

 
$
2.25

 
$
3.43


(1) 
Certain unvested PSUs are not included in the calculation of net income per ordinary share because the effect would have been antidilutive.

Refer to Note 19, “Shareholders’ Equity”, for disclosures related to the stock repurchase program and retired shares.



18

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

14.  Retirement and Other Employee Benefits
 
The following table sets forth the net periodic benefit costs of our pension plans and post-retirement plans (U.S. dollars in millions):
 
 
Quarter ended
 
Six months ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Service cost
$
1.4

 
$
1.3

 
$
2.8

 
$
2.6

Interest cost
1.5

 
1.6

 
3.1

 
3.3

Expected return on assets
(0.9
)
 
(0.9
)
 
(1.7
)
 
(1.9
)
Amortization of net actuarial loss
0.3

 
0.3

 
0.6

 
0.6

Net periodic benefit costs
$
2.3

 
$
2.3

 
$
4.8

 
$
4.6

 


We provide certain other retirement benefits to certain employees who are not U.S.-based not included above. Generally, benefits under these programs are based on an employee’s length of service and level of compensation. These programs are immaterial to our consolidated financial statements. The net periodic benefit costs related to other non-U.S.-based plans is $0.9 million for the quarter ended June 30, 2017 and $0.5 million for the quarter ended July 1, 2016. The net periodic benefit costs related to other non-U.S.-based plans is $1.5 million for the six months ended June 30, 2017 and $1.1 million for six months ended July 1, 2016.

15.  Business Segment Data
 
We are principally engaged in one major line of business, the production, distribution and marketing of bananas, other fresh produce and prepared food. Our products are sold in markets throughout the world with our major producing operations located in North, Central and South America, Europe, Asia and Africa.
 
Our operations are aggregated into business segments on the basis of our products: bananas, other fresh produce and prepared food. Other fresh produce includes pineapples, fresh-cut products, non-tropical fruit (including grapes, apples, pears, peaches, plums, nectarines, citrus, kiwis and blueberries), avocados, melons, tomatoes, other fruit and vegetables, a third-party ocean freight business and a plastic products business. Prepared food includes prepared fruit and vegetables, juices, beverages, snacks, poultry and meat products.
 
We evaluate performance based on several factors, of which net sales and gross profit by product are the primary financial measures (U.S. dollars in millions):
 
 
Quarter ended
 
June 30, 2017
 
July 1, 2016
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Banana
$
499.5

 
$
58.1

 
$
497.4

 
$
66.5

Other fresh produce
568.1

 
55.0

 
496.8

 
59.9

Prepared food
79.5

 
10.1

 
94.4

 
19.0

Totals
$
1,147.1

 
$
123.2

 
$
1,088.6

 
$
145.4

 
 
 
 
 
 
 
 
 
Six months ended
 
June 30, 2017
 
July 1, 2016
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Banana
$
944.6

 
$
93.1

 
$
956.0

 
$
115.4

Other fresh produce
1,074.3

 
103.4

 
977.7

 
136.9

Prepared food
160.6

 
25.8

 
173.0

 
33.8

Totals
$
2,179.5

 
$
222.3

 
$
2,106.7

 
$
286.1


19

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

16.  Derivative Financial Instruments
 
We account for derivative financial instruments in accordance with the ASC guidance on “Derivatives and Hedging”.  This ASC 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.  On entry into a derivative instrument, we formally designate and document it as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction.

Derivatives are recorded in our Consolidated Balance Sheets at fair value in prepaid expenses and other current assets, other non-current assets, accounts payable and accrued expenses or other non-current liabilities, depending on whether the amount is an asset or liability and whether it is short-term or long-term in nature.  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, as well as the overall reduction in our risk.  In addition, the earnings impact resulting from our derivative instruments is recorded in the same line item within the Consolidated Statements of Income as the underlying exposure being hedged.
 
We predominantly designate our hedges as cash flow hedges.  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.
 
Counterparties expose us to credit losses in the event of non-performance on hedges.  We monitor our exposure to counterparty non-performance risk both at inception of the hedge and at least quarterly thereafter.  However, because these contracts are entered into with highly rated financial institutions, we do not anticipate non-performance by any of the counterparties.  The exposure is usually the amount of the unrealized gains, if any, in such contracts.
 
Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the cash flows or fair value of the underlying exposures being hedged.  In addition, we perform an assessment of hedge effectiveness, both at inception and at least quarterly thereafter, in order to determine whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the cash flows or fair value of the related underlying exposures. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings.
 
Foreign Currency Hedges
 
We are exposed to fluctuations in currency exchange rates against the U.S. dollar on our results of operations and financial condition and we mitigate that exposure by entering into foreign currency forward contracts.  Certain of our subsidiaries periodically enter into foreign currency forward contracts in order to hedge portions of forecasted sales or cost of sales denominated in foreign currencies, which generally expire within one year. Our foreign currency hedges were entered into for the purpose of hedging portions of our 2017 foreign currency exposure.
 
The foreign currency forward contracts qualifying as cash flow hedges were designated as single-purpose cash flow hedges of forecasted cash flows.  Based on our formal assessment of hedge effectiveness of our qualifying foreign currency forward contracts, we determined that the impact of hedge ineffectiveness was de minimis for the quarters and six months ended June 30, 2017 and July 1, 2016.
 

20

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

16.  Derivative Financial Instruments (continued)

We had the following outstanding foreign currency forward contracts as of June 30, 2017 (in millions):
 
Foreign currency contracts qualifying as cash flow hedges:
 
Notional amount
Euro
 
EUR
 
59.6

British pound
 
GBP
 
3.1

Japanese yen
 
JPY
 
1,496.5

Korean Won
 
KRW
 
10,635.8

 
The following table reflects the fair values of derivative instruments, all of which are designated as Level 2 in the fair value hierarchy, as of June 30, 2017 and December 30, 2016 (U.S. dollars in millions):
 
Derivatives designated as hedging instruments (1)
 
Foreign exchange contracts
Balance Sheet location:
June 30, 2017 (2)
 
December 30, 2016
Asset derivatives:
 
 
 
Prepaid expenses and other current assets
$
0.6

 
$
5.4

Total asset derivatives
$
0.6

 
$
5.4

 
 
 
 
Liability derivatives:
 

 
 

Accounts payable and accrued expenses
$
1.6

 
$

Total liability derivatives
$
1.6

 
$


(1) See Note 17, "Fair Value Measurements", for fair value disclosures.
(2) We expect that $1.0 million of the net fair value of hedges recognized as a loss in accumulated other comprehensive income ("AOCI") will be transferred to earnings during the next 12 months, along with the earnings effect of the related forecasted transactions.

21

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

16.  Derivative Financial Instruments (continued)

The following table reflects the effect of derivative instruments on the Consolidated Statements of Income for the quarters and six months ended June 30, 2017 and July 1, 2016 (U.S. dollars in millions):
 
 
Derivatives in effective cash flow
hedging relationships
Amount of (loss) gain recognized in other
comprehensive income on derivatives
(effective portion)
 
Location of gain
(loss) reclassified
from AOCI into
income (effective
portion)
Amount of gain reclassified from
AOCI into income (effective portion)
 
Quarter ended
 
 
Quarter ended
 
June 30,
2017
 
July 1,
2016
 
 
June 30,
2017
 
July 1,
2016
Foreign exchange contracts
$
(4.1
)
 
$
0.6

 
Net sales
$
0.5

 
$
0.8

Foreign exchange contracts
0.3

 
(0.3
)
 
Cost of products sold
0.1

 
0.1

Total
$
(3.8
)
 
$
0.3

 
 
$
0.6

 
$
0.9

 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
Six months ended
 
June 30,
2017
 
July 1,
2016
 
 
June 30,
2017
 
July 1,
2016
Foreign exchange contracts
$
(5.9
)
 
$
(10.0
)
 
Net sales
$
1.6

 
$
2.7

Foreign exchange contracts
(0.5
)
 
0.4

 
Cost of products sold
0.3

 
0.1

Total
$
(6.4
)
 
$
(9.6
)
 
 
$
1.9

 
$
2.8


17.  Fair Value Measurements
 
We measure fair value for financial instruments, such as derivatives and equity securities, 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.
 
Derivative Instruments
 
We may choose to mitigate the risk of fluctuations in currency exchange rates on our results of operations and financial condition by entering into foreign currency cash flow hedges.  We account for the fair value of the related forward contracts as prepaid expenses and other current assets, other non-current assets, accounts payable and accrued expenses or other non-current liabilities.  We use an income approach to value our outstanding foreign currency 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 contract using current market information as of the measurement date such as foreign currency, bunker fuel spot, and forward rates.  Additionally, we built an element of default risk based on observable inputs into the fair value calculation. Due to the fact that inputs to fair value these derivative instruments can be observed, they are classified as Level 2.


22

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

17.  Fair Value Measurements (continued)

The following table provides a summary of the fair values of assets and liabilities measured on a recurring basis under the ASC on “Fair Value Measurements and Disclosures” (U.S. dollars in millions): 
 
Fair value measurements
 
Foreign currency forward contracts, net (liability) asset
 
June 30,
2017
 
December 30,
2016
Quoted prices in active markets for identical assets (Level 1)
$

 
$

Significant observable inputs (Level 2)
(1.0
)
 
5.4

Significant unobservable inputs (Level 3)

 

 
In estimating our fair value disclosures for financial instruments, we use the following methods and assumptions:
 
Cash and cash equivalents: The carrying amount reported in the Consolidated Balance Sheets for these items approximates fair value due to their liquid nature and are classified as Level 1.
 
Trade accounts receivable and other accounts receivable, net: The carrying value reported in the Consolidated Balance Sheets for these items is net of allowances, which includes a degree of counterparty non-performance risk and are classified as Level 2.
 
Accounts payable and other current liabilities: The carrying value reported in the Consolidated Balance Sheets for these items approximates their fair value, which is the likely amount for which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as ours and are classified as Level 2.
 
Capital lease obligations: The carrying value of our capital lease obligations reported in the Consolidated Balance Sheets approximates their fair value based on current interest rates, which contain an element of default risk.  The fair value of our capital lease obligations is estimated using Level 2 inputs based on quoted prices for those or similar instruments.
Refer to Note 11, “Long-Term Debt and Capital Lease Obligations”.
 
Long-term debt: The carrying value of our long-term debt reported in the Consolidated Balance Sheets approximates their fair value since they bear interest at variable rates or fixed rates which contain an element of default risk.   The fair value of our long-term debt is estimated using Level 2 inputs based on quoted prices for those or similar instruments.
Refer to Note 11, “Long-Term Debt and Capital Lease Obligations”.


23

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)


17.  Fair Value Measurements (continued)

Fair Value of Non-Financial Assets

The Company recorded asset impairment and other charges during the quarter and six months ended June 30, 2017, that do not fall under the scope of fair value measurement. Refer to Note 3, "Asset Impairment and Other Credits, Net".

The following is a tabular presentation of the non-recurring fair value measurements recorded during the second quarter of 2016, along with the level within the fair value hierarchy in which the fair value measurement in their entirety fall (U.S. dollars in millions):


 
Fair value measurements for the six months ended July 1, 2016
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Underutilized assets in Central America
$
1.0

 
$

 
$

 
$
1.0

Philippines plantation conversion to pineapple
0.3

 

 

 
0.3

 
$
1.3

 
$

 
$

 
$
1.3


During the second quarter of 2016, the Company recognized $0.6 million in asset impairment and other charges, net related to certain underutilized assets in Central America. The asset impairment consisted of a write-down of $0.6 million related to assets with a carrying value of $1.6 million. We estimated the fair value of these assets of $1.0 million using the market approach. The fair value of these assets are classified as Level 3 in the fair value hierarchy due to the mix of unobservable inputs utilized.

During the second quarter of 2016, we also recognized $2.5 million in asset impairment and other charges, net as a result of our decision to convert a banana plantation in the Philippines to a pineapple plantation during the next three years. The asset impairment consisted of a write-down of $2.5 million related to the plantation with a carrying value of $2.8 million. The plantation was written down to a fair value of $0.3 million. We estimated the fair value of this asset using an income based approach, whereby our cash flows were adjusted for a market premium risk. The fair value of the plantation of $0.3 million is classified as Level 3 in the fair value hierarchy due to the mix of unobservable inputs utilized.

The fair value of the banana reporting unit's goodwill and the prepared food unit's remaining trade names and trademarks are highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of these assets. We disclosed the sensitivity related to the banana reporting unit's goodwill and the prepared food reporting unit's trade names and trademarks in our notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016.


24

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

18.  Accumulated Other Comprehensive (Loss) Income

The following table includes the changes in accumulated other comprehensive (loss) income attributable to U.S. by component under the ASC on “Comprehensive Income” (U.S. dollars in millions): 
 
Changes in accumulated other comprehensive (loss) income by component (1)
 
Six months ended June 30, 2017
 
Changes in fair value of effective cash flow hedges
 
Foreign currency translation adjustment
 
Retirement benefit adjustment
 
Total
 
 
 
 
 
 
 
 
Balance at December 30, 2016
$
5.4

 
$
(25.4
)
 
$
(24.2
)
 
$
(44.2
)
Other comprehensive (loss) income
 
 
 
 
 
 
 
before reclassifications
(4.5
)
 
11.1

(2) 
(0.3
)
 
6.3

Amounts reclassified from accumulated
 
 
 
 
 
 
 
other comprehensive (loss) income
(1.9
)
 

 
0.6

 
(1.3
)
Net current period other comprehensive
 
 
 
 
 
 
 
(loss) income
(6.4
)
 
11.1

 
0.3

 
5.0

Balance at June 30, 2017
$
(1.0
)
 
$
(14.3
)
 
$
(23.9
)
 
$
(39.2
)
 
 
 
 
 
 
 
 
 
Six months ended July 1, 2016
Balance at January 1, 2016
$
11.9

 
$
(14.8
)
 
$
(20.1
)
 
$
(23.0
)
Other comprehensive (loss) income
 
 
 
 
 
 
 
before reclassifications
(6.8
)
 
0.7

(2) 
(0.3
)

(6.4
)
Amounts reclassified from accumulated
 
 
 
 
 
 
 
other comprehensive (loss) income
(2.8
)
 

 
0.6

 
(2.2
)
Net current period other comprehensive
 
 
 
 
 
 
 
(loss) income
(9.6
)
 
0.7

 
0.3

 
(8.6
)
Balance at July 1, 2016
$
2.3

 
$
(14.1
)
 
$
(19.8
)
 
$
(31.6
)

(1) All amounts are net of tax and noncontrolling interest.
(2) Includes a gain of $4.0 million for the six months ended June 30, 2017 and a gain of $5.5 million for the six months ended July 1, 2016 on intra-entity foreign currency transactions that are of a long-term-investment nature; there was less than $0.1 million loss for the six month ended June 30, 2017 and a loss of $0.3 million for the six month ended July 1, 2016 related to noncontrolling interest.


25

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

18.  Accumulated Other Comprehensive (Loss) Income (continued)

The following table includes details about amounts reclassified from accumulated other comprehensive (loss) income by component
(U.S. dollars in millions): 
 
 
Amount reclassified from accumulated other comprehensive (loss) income
 
 
 
 
June 30, 2017
 
July 1, 2016
 
 
Details about accumulated other comprehensive (loss) income components
 
Quarter ended
 
Six months ended
 
Quarter ended
 
Six months ended
 
Affected line item in the statement where net income is present
Changes in fair value of effective cash flow hedges:
 
 
 
 
 
 
 
 
Foreign currency cash flow hedges
 
$
(0.5
)
 
$
(1.6
)
 
$
(0.8
)
 
$
(2.7
)
 
Sales
Foreign currency cash flow hedges
 
(0.1
)
 
(0.3
)
 
(0.1
)
 
(0.1
)
 
Cost of sales
Total
 
$
(0.6
)
 
$
(1.9
)
 
$
(0.9
)
 
$
(2.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of retirement benefits:
 
 
 
 
 
 
 
 
 
 
Actuarial losses
 
$
0.1

 
$
0.2

 
$
0.1

 
$
0.2

 
Selling, general and administrative expenses
Actuarial losses
 
0.2

 
0.4

 
0.2

 
0.4

 
Cost of sales
Total
 
$
0.3

 
$
0.6

 
$
0.3

 
$
0.6

 
 

19.  Shareholders’ Equity
 
Our shareholders have authorized 50,000,000 preferred shares at $0.01 par value, of which none are issued or outstanding at June 30, 2017, and 200,000,000 ordinary shares of common stock at $0.01 par value, of which 50,104,086 are issued and outstanding at June 30, 2017.
 
Ordinary share activity is summarized as follows:
 
Six months ended
 
June 30,
2017
 
July 1,
2016
Ordinary shares issued (retired) as a result of:
 
 
 
Stock option exercises
6,500

 
163,467

Restricted stock grants
14,294

 
22,946

Restricted and performance stock units
137,287

 
177,054

Ordinary shares repurchased and retired
(1,310,900
)
 
(1,672,535
)

26

FRESH DEL MONTE PRODUCE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)

19.  Shareholders’ Equity (continued)

On July 29, 2015, our Board of Directors approved a three-year stock repurchase program of up to $300 million of our ordinary shares. We have repurchased $169.9 million of ordinary shares, or 4,518,091 ordinary shares, under the aforementioned repurchase programs and retired all the repurchased shares. We have a maximum dollar amount value of $130.1 million of shares that we can purchase under the stock repurchase program approved on July 29, 2015.

Subsequent to the quarter ended June 30, 2017, no ordinary shares were repurchased.

Dividend activity is summarized as follows:
Six months ended
June 30, 2017
 
July 1, 2016
Dividend Date
 
Cash Dividend Declared, per Ordinary Share
 
Dividend Date
 
Cash Dividend Declared, per Ordinary Share
June 2, 2017
 
$
0.150

 
June 3, 2016
 
$
0.125

March 31, 2017
 
$
0.150

 
April 1, 2016
 
$
0.125


We paid $15.2 million in dividends in the six months ended June 30, 2017 and $12.7 million in dividends in the six months ended July 1, 2016.


27


Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
We are one of the world’s leading vertically integrated producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, as well as a leading producer and marketer of prepared fruit and vegetables, juices, beverages and snacks in Europe, Africa, the Middle East and countries formerly part of the Soviet Union. 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 and prepared food.  Other fresh produce includes pineapples, non-tropical fruit (including grapes, apples, pears, peaches, plums, nectarines, citrus, kiwis and blueberries), fresh-cut produce, avocados, melons, tomatoes, other fruit and vegetables, a plastic products business and a third-party ocean freight service. Prepared food includes prepared fruit and vegetables, juices, beverages, snacks, poultry and meat products.

Liquidity and Capital Resources
 
Net cash provided by operating activities was $173.9 million for the first six months of 2017 compared with net cash provided by operating activities of $269.4 million for the first six months of 2016, a decrease of $95.5 million.   The decrease in net cash provided by operating activities was principally attributable to lower net income and higher levels of trade accounts receivables, partially offset by lower levels of inventory and higher levels of taxes payable.

Working capital was $581.4 million at June 30, 2017 compared with $592.0 million at December 30, 2016, a decrease of $10.6 million. This decrease in working capital is principally due to lower levels of fresh produce and prepared food inventory and higher levels of income taxes and other taxes payable. Partially offsetting these decreases in working capital were higher levels of trade accounts receivable primarily as a result of higher net sales.

Net cash used in investing activities for the first six months of 2017 was $69.0 million compared with $67.0 million for the first six months of 2016. Net cash used in investing activities for the first six months of 2017 consisted of capital expenditures of $71.9 million, partially offset by proceeds from sales of property, plant and equipment of $2.9 million. Capital expenditures for the first six months of 2017 consisted primarily of expansion and improvements of our distribution and fresh-cut fruit facilities in North America related to the other fresh produce and banana segments; expansion and improvements to our banana operations in the Philippines and Central America; expansion and improvements to our production facilities in the Middle East and Kenya related to the prepared food and other fresh produce segments; and expansion and improvements to production facilities in Costa Rica and Chile in the other fresh produce segment. Proceeds from sale of property, plant and equipment for the first six months of 2017 consisted primarily of the sale of surplus shipping equipment and other surplus equipment.

Net cash used in investing activities for the first six months of 2016 consisted of capital expenditures of $67.3 million and purchase of a business for $7.1 million, partially offset by proceeds from sales of property, plant and equipment of $7.4 million. Capital expenditures for the first six months of 2016 consisted primarily of expansion of our distribution and fresh-cut fruit facilities in North America and Asia related to the other fresh produce and banana segments; expansion and improvements to our banana operations in the Philippines and Central America; expansion and improvements to our manufacturing facilities in the Middle East and Kenya related to the prepared food and other fresh produce segments; and expansion and improvements to production facilities in Costa Rica and Chile in the other fresh produce segment. Purchase of a business consisted of the purchase of a blueberry farm in Chile. Proceeds from sale of property, plant and equipment for the first six months of 2016 consisted primarily of the sale of surplus land in Central and South America.
 
Net cash used by financing activities for the first six months of 2017 was $100.5 million compared with net cash used in financing activities of $183.6 million for the first six months of 2016. Net cash used by financing activities for the first six months of 2017 consisted of net repayments on long-term debt of $6.4 million, distributions to noncontrolling interest, net, of $3.6 million, stock-based awards settled in cash for taxes of $3.8 million, dividends paid of $15.2 million and repurchase and retirement of ordinary shares of $71.6 million, partially offset by proceeds from stock options exercised of $0.1 million.
 
Net cash used in financing activities for the first six months of 2016 consisted of net repayments on long-term debt of $66.0 million, purchase of noncontrolling interest of $40.0 million, distributions to noncontrolling interest, net of $0.1 million, dividends paid of $12.7 million, repurchase and retirement of ordinary shares of $68.7 million, partially offset by proceeds from stock options exercised of $4.2 million and excess tax benefits from stock-based compensation of $0.2 million.

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 On April 16, 2015, we entered into a five-year, $800 million syndicated senior unsecured revolving credit facility maturing on April 15, 2020 (the "Credit Facility") with Bank of America, N.A. as administrative agent and Merrill Lynch, Pierce, Fenner & Smith Inc. as sole lead arranger and sole book manager. Borrowings under the Credit Facility bear interest at a spread over the London Interbank Offer Rate ("LIBOR") that varies with our leverage ratio. The margin for LIBOR advances under the Credit Facility currently is 1.00%. The Credit Facility also includes a swing line facility and a letter of credit facility. We intend to use funds borrowed under the Credit Facility from time to time for general corporate purposes, which may include the repayment or refinancing of our existing indebtedness, working capital needs, capital expenditures, funding of possible acquisitions, possible share repurchases and satisfaction of other obligations.

We have a renewable 364-day, $25.0 million commercial and stand-by letter of credit facility with Rabobank Nederland.

At June 30, 2017, we had $225.0 million outstanding under the Credit Facility bearing interest at a per annum rate of 2.29%.  In addition, we pay a fee on unused commitments under the Credit Facility.

The Credit Facility is unsecured as long as we maintain a certain leverage ratio and also requires us to comply with certain 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 June 30, 2017, we were in compliance with all of the financial and other covenants contained in the Credit Facility.

At June 30, 2017, we had $601.5 million available under committed working capital facilities, primarily under the Credit Facility. At June 30, 2017, we applied $9.6 million to the Rabobank letter of credit facility, in respect of certain contingent obligations and other governmental agencies and purchases of equipment and raw material guarantees and other trade related letters of credit.  We also had $18.2 million in other letters of credit and bank guarantees not included in the Rabobank or Bank of America letter of credit facilities.
 
As of June 30, 2017, we had $226.5 million of long-term debt and capital lease obligations, including the current portion, consisting of $225.0 million outstanding under the Credit Facility and $1.5 million of capital lease obligations.

Based on our operating plan, combined with our available borrowing capacity under our Credit Facility, we believe we will have sufficient resources to meet our cash obligations in the foreseeable future.
 
As of June 30, 2017, we had cash and cash equivalents of $24.4 million.
 
As a result of the closure of distribution centers and restructuring in Europe in previous periods, we paid approximately $0.3 million in contractual obligations during the first six months of 2017. We expect to make additional payments of approximately $0.6 million.

In connection with a current examination of the tax returns in two foreign jurisdictions the taxing authorities have issued during the current quarter income tax deficiencies related to transfer pricing of approximately $125.4 million (including interest and penalties) for tax years 2012 through 2015.  We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities as the Company believes that the proposed adjustments are without technical merit.  The Company will continue to vigorously contest the adjustments and exhaust all administrative and judicial remedies to resolve the matters, which could be a lengthy process.  The Company regularly assesses the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of its tax reserves. The Company does not expect to make any cash payments at this time. We have not accrued any additional amounts based upon the proposed adjustments.  There can be no assurance that this matter will be resolved in our favor, and an adverse outcome of this matter, or any future tax examinations involving similar assertions, could have a material effect on our results of operations and financial condition.

The fair value of our foreign currency cash flow hedges changed from a net asset of $5.4 million as of December 30, 2016, to a net liability of $1.0 million as of June 30, 2017. We expect that a loss of $1.0 million will be transferred to earnings during the next 12 months, along with the earnings effect of the related forecasted transactions.


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Recent Developments

On May 29, 2017, the Company executed a contract with the Republic of Panama and will invest up to a minimum of $100.0 million over a period of seven years, which includes the development of a minimum of 4,000 hectares of leased land suitable for banana production, refurbishment of packing plants, buildings and other banana facilities and preparation of banana infrastructure including land, roads and water systems. The contract is for an initial period of 20 years, and renews automatically for an additional 20 year period. In addition, the contract provides the Company with tax exempt status for 20 years related to this project. The Company may re-apply for the tax exempt status at the expiration of that period. This investment significantly increases our production area and our presence in the banana market. We expect this investment will enable 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, 2017, Fresh Del Monte Produce Inc. (the "Company") and Del Monte Pacific Limited ("Del Monte Pacific") jointly announced a series of new joint ventures between the Company and Del Monte Pacific. The Company and Del Monte Pacific also announced their entrance into a long-term mutual supply agreement, various joint collaborations and the full and final settlement of all active litigation between Del Monte Pacific and its subsidiary Del Monte Foods Inc., on the one hand, and the Company, on the other hand, effective immediately. These new joint ventures will result in expanded refrigerated offerings sold across all distribution channels, and a new retail food and beverage concept modeled after an already successful Fresh Del Monte Produce Inc. business in the Middle East. These joint ventures will initially focus on the U.S. market with the potential for expansion into other territories where the companies' businesses complement each other. This will also greatly increase the scale of the Del Monte brand by expanding into more high-quality, healthy and convenient product options for consumers.




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Results of Operations
 
The following tables present for each of the periods indicated (i) net sales by geographic region and (ii) net sales and gross profit by product category, and in each case, the percentage of the total represented thereby (U.S. dollars in millions, except percent data):
 
Net sales by geographic region:
 
 
Quarter ended
 
Six months ended
 
June 30, 2017
 
July 1, 2016
 
June 30, 2017
 
July 1, 2016
North America
$
655.5

 
57
%
 
$
578.6

 
53
%
 
$
1,256.9

 
58
%
 
$
1,166.1

 
55
%
Europe
192.7

 
17
%
 
190.3

 
17
%
 
367.2

 
17
%
 
363.7

 
17
%
Middle East
147.8

 
13
%
 
161.1

 
15
%
 
270.7

 
12
%
 
285.1

 
14
%
Asia
138.5

 
12
%
 
139.8

 
13
%
 
251.7

 
12
%
 
255.1

 
12
%
Other
12.6

 
1
%
 
18.8

 
2
%
 
33.0

 
1
%
 
36.7

 
2
%
Total
$
1,147.1

 
100
%
 
$
1,088.6

 
100
%
 
$
2,179.5

 
100
%
 
$
2,106.7


100
%

Product net sales and gross profit:
 
 
Quarter ended
 
June 30, 2017
 
July 1, 2016
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Banana
$
499.5

 
44
%
 
$
58.1

 
47
%
 
$
497.4

 
45
%
 
$
66.5

 
46
%
Other fresh produce
568.1

 
49
%
 
55.0

 
45
%
 
496.8

 
46
%
 
59.9

 
41
%
Prepared food
79.5

 
7
%
 
10.1

 
8
%
 
94.4

 
9
%
 
19.0

 
13
%
Totals
$
1,147.1

 
100
%
 
$
123.2

 
100
%
 
$
1,088.6

 
100
%
 
$
145.4

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
June 30, 2017
 
July 1, 2016
 
Net Sales
 
Gross Profit
 
Net Sales
 
Gross Profit
Banana
$
944.6

 
43
%
 
$
93.1

 
42
%
 
$
956.0

 
45
%
 
$
115.4

 
40
%
Other fresh produce
1,074.3

 
49
%
 
103.4

 
46
%
 
977.7

 
46
%
 
136.9

 
48
%
Prepared food
160.6

 
8
%
 
25.8

 
12
%
 
173.0

 
9
%
 
33.8

 
12
%
Totals
$
2,179.5

 
100
%
 
$
222.3

 
100
%
 
$
2,106.7

 
100
%
 
$
286.1

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Second Quarter 2017 Compared with Second Quarter of 2016
 
Net Sales. Net sales for the second quarter of 2017 were $1,147.1 million compared with $1,088.6 million for the second quarter of 2016. The increase in net sales of $58.5 million was principally attributable to higher net sales in our other fresh produce and banana business segments, partially offset by lower net sales in prepared food segment.
 
Net sales in the other fresh produce segment increased $71.3 million, principally as a result of higher net sales of fresh-cut products, avocados and pineapples, partially offset by lower net sales of non-tropical fruit.
Net sales of fresh-cut products increased due to higher worldwide sales volumes primarily as a result of increased customer demand in all regions combined with increased production capacity. Also contributing to the increase in net sales of fresh-cut products was higher per unit sales prices in North America.

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Net sales of avocados increased due to higher per unit sales prices in North America principally as a result of higher customer demand and favorable market conditions. Partially offsetting this increase in net sales were lower supplies resulting in reduces sales volumes.
Net sales of pineapples increased due to higher sales volumes in North America, Europe and the Middle East principally as a result of higher production in our Costa Rica and Philippines operations. Partially offsetting these increases were lower per unit sale prices in all of our regions. Worldwide pineapple sales volume increased 23%.
Net sales of non tropical fruit decreased principally due to lower sales volumes of apples and citrus in the Middle East mainly a result of lower demand.

Net sales of bananas increased by $2.1 million principally due to higher net sales in North America and Europe, partially offset by lower net sales in the Middle East and Asia. Worldwide banana sales volume increased 3%.
North America banana net sales increased as a result of higher sales volumes and per unit sales prices principally due to increased customer demand.
Europe banana net sales increased due to higher sales volumes and per unit sales prices principally as a result of higher customer demand. Partially offsetting these decreases were unfavorable euro and British pound exchange rates.
Asia banana net sales decreased due to lower per unit sales price principally as a result of higher industry volumes.
Middle East banana net sales decreased due to lower per unit sales price principally due to higher industry volumes, partially offset by higher sales volumes.

Net sales in the prepared food segment decreased $14.9 million principally due to lower sales volumes and lower sales prices of canned pineapple and deciduous products along with weak pricing on industrial pineapple products, primarily as a result of high industry supply and lower customer demand. Also contributing to the decrease in net sales in the prepared food segment were lower sales volumes in our Jordanian poultry business.

Cost of Products Sold.  Cost of products sold was $1,023.9 million for the second quarter of 2017 compared with $943.2 million for the second quarter of 2016, an increase of $80.7 million.  The increase was primarily attributable to higher fruit costs for avocados, non-tropical fruit and fresh-cut products. Also contributing to the increase in cost of product sold was a 4% increase in total sales volume.

Gross Profit. Gross profit was $123.2 million for the second quarter of 2017 compared with $145.4 million for the second quarter of 2016, a decrease of $22.2 million.  This decrease was attributable to lower gross profit in all of our business segments.
 
Gross profit in the prepared food segment decreased by $8.9 million principally as a result of lower sales prices and sales volumes on industrial pineapple products combined with lower sales volumes and selling prices of canned pineapple and deciduous products.

Gross profit in the banana segment decreased $8.4 million primarily due to lower per unit sales prices in Asia and the Middle East as a result of higher industry supplies and unfavorable exchange rates in Japan, partially offset by higher worldwide sales volume and higher per unit sales prices in North America and Europe. Worldwide banana per unit sales prices decreased 2% and per unit costs remained relatively flat.

Gross profit in the other fresh produce segment decreased $4.9 million principally due to lower gross profit on pineapples and fresh-cut products, partially offset by higher gross profit on non-tropical fruit.
Gross profit on pineapples decreased principally due to lower per unit sales prices in North America and Europe primarily as a result of higher sales volumes and unfavorable exchange rates. Worldwide pineapple per unit sales prices decreased 11% and per unit costs decreased 4%.
Gross profit on fresh-cut products decreased principally due to higher fruit and distribution costs in North America. Worldwide fresh-cut products per unit sales prices increased 1% and per unit costs increased 6%.
Gross profit on non-tropical fruit increased principally due to higher per unit sales prices of grapes in North America and Asia combined with lower cost of sales.


32


Selling, General and Administrative Expenses.  Selling, general and administrative expenses decreased $2.6 million from $44.5 million in the second quarter of 2016 to $41.9 million for the second quarter of 2017. The decrease was principally due to lower legal fees and executive compensation expense.

Gain on Disposal of Property, Plant and Equipment, Net. The gain on disposal of property, plant and equipment, net, of $0.1 million during the second quarter of 2017 was related to the sale of surplus equipment. The gain on disposal of property, plant and equipment, net, of $8.9 million during the second quarter of 2016 was principally related to sale of surplus land in Central and South America.

Asset Impairment and Other Charges, Net. Asset impairment and other charges, net, was $1.9 million during the second quarter of 2017 consisting of $0.8 million due to flood damage in our Chile non-tropical fruit operation, $0.6 million in asset impairment related to underutilized assets in Central America in the banana segment and $0.5 million due to floods damage incurred in our Philippines banana operation. During the second quarter of 2016, asset impairments and other charges (credits), net, was a charge of $3.1 million and relates to asset impairment of $2.5 million due to our decision to convert a banana plantation in the Philippines to a pineapple plantation during the next three years and $0.6 million in impairment charges related to underutilized assets in Central America in the banana segment.
 
Operating Income.  Operating income for the second quarter of 2017 decreased by $27.2 million from $106.7 million in the second quarter of 2016 to $79.5 million for the second quarter of 2017. This decrease was due to lower gross profit and lower gain on disposal of property, plant and equipment, net, partially offset by lower selling, general and administrative expenses and lower asset impairment and other charges,net.
 
Interest Expense.  Interest expense was $1.6 million for the second quarter of 2017 as compared with $1.3 million for the second quarter of 2016. The increase was due to higher interest rates combined with higher average loan balances.
 
Other Expense (Income), Net.  Other expense (income), net, was an expense of $0.5 million for the second quarter of 2017 as compared with income of $(0.7) million for the second quarter of 2016. The change in other expense (income), net, of $1.2 million was principally attributable to foreign exchange losses during the second quarter of 2017 as compared with foreign exchange gains during the second quarter of 2016.
 
Provision for Income Taxes. Provision for income taxes was