Description
Dole Food Company, Inc. Director, 10% Owner DAVID H MURDOCK bought 278,800 shares on 7-25-2012 at $ 10.15
BUSINESS OVERVIEW
Overview
Dole is the world’s leading producer, marketer and distributor of fresh fruit and fresh vegetables, including an expanding line of value-added products. We are one of the world’s largest producers of bananas and pineapples, and an industry leader in packaged fruit products, packaged salads and fresh-packed vegetables. Our most significant products hold the number 1 or number 2 positions in their respective markets. For the fiscal year ended December 31, 2011, Dole generated revenues of $7.2 billion and operating income of $229.6 million. At December 31, 2011 we had total assets of $4.3 billion.
We provide wholesale, retail and institutional customers around the world with high quality food products that bear the DOLE ® trademarks. The DOLE brand was introduced in 1933 and is one of the most recognized brands for fresh and packaged produce in the United States, as evidenced by Dole’s 68% unaided consumer brand awareness — more than twice that of Dole’s nearest competitor, according to a major global research company (Millward Brown). We utilize product quality, brand recognition, competitive pricing, food safety, nutrition education, customer service and consumer marketing programs to enhance our position within the food industry. Consumer and institutional recognition of the DOLE trademarks and related brands and the association of these brands with high quality food products contribute significantly to our leading positions in the markets that we serve.
Dole has built a fully-integrated operating platform as a result of which our nearly 200 products are sourced, grown, processed, marketed and distributed in more than 90 countries. Our products are produced both directly on Dole-owned or leased land and in Dole-owned factories and through associated producer and independent grower arrangements under which we provide varying degrees of farming, harvesting, packing, storing, shipping and marketing services. We use our global refrigerated supply chain that features the largest dedicated refrigerated containerized fleet in the world, as well as an extensive network of packaging, ripening and distribution centers, to deliver fresh Dole products to market.
Fresh Fruit
Our fresh fruit business segment has four primary operating divisions: bananas, European ripening and distribution, fresh pineapples and Dole Chile. We believe that we are the industry leader in growing, sourcing, shipping and distributing consistently high-quality fresh fruit. The fresh fruit business segment represented approximately 70% of 2011 consolidated revenues.
Bananas
We are one of the world’s largest producers of bananas, growing and selling approximately 154 million boxes of bananas in 2011. We sell most of our bananas under the DOLE brand. We primarily sell bananas to customers in North America, Europe and Asia. We are the number 1 brand of bananas in both the U.S. (an approximate 34% market share) and Japan (an approximate 31% market share) and the number 2 provider in Europe (an approximate 7% market share). In Latin America, we source our bananas primarily in Honduras, Costa Rica, Ecuador, Colombia, Guatemala and Peru, growing on approximately 32,000 acres of company-owned farms and approximately 66,900 acres of independent producers’ farms. We ship our Latin American bananas to North America and Europe in our refrigerated and containerized shipping fleet. In Asia, we source our bananas primarily in the Philippines. Bananas accounted for approximately 41% of our fresh fruit business segment revenues in 2011.
Consistent with our strategy to focus on value-added products, we have continued to expand our focus on higher margin, niche bananas. While the traditional “green” bananas still comprise the majority of our banana sales, we have successfully introduced niche bananas (e.g., organic). We have also improved the profitability of our banana business by focusing on profitable customer relationships and markets.
While bananas are sold year round, there is a seasonal aspect to the banana business. Banana prices and volumes are typically higher in the first and second calendar quarters before the increased competition from summer fruits.
Approximately 90% of our total retail volume in North America is sold under contract. The contracts are typically one year in duration and help to insulate us from fluctuations in the banana spot market. Our principal competitors in the international banana business are Chiquita Brands International, Inc., Fresh Del Monte Produce Inc. and Fyffes plc.
European Ripening and Distribution
Dole performs four activities in Europe. Our European ripening and distribution business distributes DOLE and non-DOLE branded fresh produce in Europe. This business operates seven ripening and distribution centers in five countries. As well, we provide distribution services dedicated to certain retail chains from five distribution centers in Sweden, Germany and Austria. We produce value-added pre-cut lettuce in two facilities in Sweden and Finland. We also source and export DOLE and non-DOLE branded deciduous and citrus fruit from South Africa serving a worldwide customer structure.
We have a 40% interest in a French company, Compagnie Financière de Participations (“CF”), the leading African provider of bananas and pineapples out of plantations in Cameroon, Ghana and the Ivory Coast. During the fourth quarter of 2008, CF acquired our JP Fresh and Dole France subsidiaries which operate banana ripening and distribution facilities in the United Kingdom and France, respectively. In the fourth quarter of 2011, CF acquired Dole’s Spanish subsidiary, also a banana ripening and distribution company.
In 2011, the European ripening and distribution business accounted for approximately 37% of our fresh fruit business segment’s revenues. Our principal competitors in this business are Total Produce Plc and Univeg.
Fresh Pineapples
We are the number 2 global marketer of fresh pineapples, growing and selling more than 30 million boxes in 2011. We source our pineapples primarily from Dole-operated farms and independent growers in Hawaii, Latin America, the Philippines and Thailand. We produce and sell several different varieties, including the sweet yellow pineapple. We introduced the sweet yellow pineapple in 1999, and now market a substantial portion of this fruit under the DOLE TROPICAL GOLD ® label. Varieties of pineapple other than the sweet pineapples are also used in our packaged products. Our primary competitor in fresh pineapples is Fresh Del Monte Produce Inc. Pineapples accounted for approximately 8% of our fresh fruit business segment’s revenues in 2011.
Dole Chile
We began our Chilean operations in 1982 and we are the largest exporter of Chilean fruit. We export grapes, apples, pears, stone fruit (e.g., peaches and plums) and kiwifruit from approximately 600 primarily leased acres and 15,300 contracted acres. The weather and geographic features of Chile are similar to those of the Western United States, with opposite seasons. Accordingly, Chile’s harvest is counter-seasonal to that in the northern hemisphere, offsetting the seasonality in our other non-tropical fresh fruit. We primarily export Chilean fruit to North America, Latin America and Europe. Our Dole Chile business division accounted for approximately 6% of our fresh fruit business segment’s revenues in 2011.
Fresh Vegetables
Our fresh vegetables business segment produces and markets fresh-packed and value-added vegetables as well as fresh berries. We source fresh vegetables and berries from Dole-owned, leased and contracted farms. Under arrangements with independent growers, we purchase fresh produce at the time of harvest and are generally responsible for harvesting, packing and shipping the product to our central cooling and distribution facilities. Our value-added products are produced in state-of-the-art processing facilities in Yuma, Arizona, Soledad, California, Springfield, Ohio and Bessemer City, North Carolina. The fresh vegetables business segment accounted for approximately 14% of 2011 consolidated revenues.
Fresh-packed Vegetables
We source, harvest, cool, distribute and market more than 20 different types of fresh and fresh-cut vegetables, including iceberg lettuce, red and green leaf lettuce, romaine lettuce, butter lettuce, celery, cauliflower, broccoli, carrots, brussels sprouts, green onions, asparagus, snow peas, artichokes and radishes. Products are grown by independent farmers under seasonal contracts, with harvesting primarily provided by us. Many of our fresh-packed vegetables are packaged in the field, reducing handling and increasing product quality. We sell our fresh-packed vegetables products primarily in North America and, to a lesser extent, in Western Europe and Asia. Based on our estimates, we are the largest supplier of iceberg lettuce and celery, and the third largest producer of cauliflower in the U.S. Our primary competitors in this category include: Tanimura & Antle, Duda Farm Fresh Foods, Ocean Mist Farms, and the Nunes Company, Inc. Fresh-packed vegetables revenues accounted for 24% of our fresh vegetables business segment’s revenues.
Fresh Berries
During the fourth quarter of 2011, we strengthened our presence in fresh berries with the acquisition of SunnyRidge Farms (“SunnyRidge”), one of the top blueberry companies in the United States. SunnyRidge is a grower and distributor of fresh berries to the wholesale and food service markets in North America. In addition to its own berry farms, SunnyRidge packages and distributes blueberries, blackberries, raspberries and strawberries for various independent growers located in North America and Latin America.
Our berry products include strawberries, blueberries, blackberries and raspberries that are sourced throughout North and Latin America which allows us to take advantage of the various growing seasons to maximize freshness and availability. Berries are grown and harvested from company-owned farms and through our independent grower network. We sell our berries primarily in North America and, to a lesser extent, in Western Europe and Asia. Based on our estimates, we are the second largest supplier of strawberries and blueberries in the U. S. Our primary competitors in this category include Driscoll Strawberry Associates, Inc., Naturipe Farms LLC, and Well-Pict Berries, Inc. Revenues from fresh berries accounted for 18% of our fresh vegetables business segment’s revenues.
Value-Added
Our value-added vegetable products include packaged salads and packaged fresh-cut vegetables. Our U.S. unit market share of the packaged salads category, as reported by IRI, was approximately 32% for the 2011 fiscal year. New product development continues to drive growth in this area. Packaged salads go through a three-step process: (i) vegetables are grown for us by farmers under seasonal contracts, (ii) vegetables and other ingredients are delivered to our plants where they are washed three times in chilled, chlorinated water, and packaged under strict cold-chain and HACCP (Hazard Analysis and Critical Control Points) standards, and (iii) salads are shipped to retailers’ warehouses for delivery to stores. Our primary competitors in packaged salads include Chiquita Brands International, Inc. (which markets Fresh Express), Ready Pac Produce, Inc. and Taylor Fresh Foods, Inc. In 2011, value-added products accounted for 58% of the revenues for this segment.
Packaged Foods
Our packaged foods segment produces canned pineapple, canned pineapple juice, fruit juice concentrate, fruit in plastic cups, jars and pouches, fruit parfaits, healthy snack foods and frozen fruit. Most of our significant packaged food products hold the number 1 branded market position in North America. We remain the market leader in the plastic fruit cup category with six of the top twelve items in the category. Fruit for our packaged food products is sourced primarily in the Philippines, Thailand, the United States and China and packed primarily in four Asian canneries, two in Thailand and two in the Philippines. We have continued to focus on expanding our product range beyond our traditional canned fruit and juice products. FRUIT BOWL and other non-canned products accounted for approximately 55% of the segment’s 2011 revenues. To keep up with demand for our products, we have made substantial investments in our Asian canneries, significantly increasing our FRUIT BOWLS capacity in the past five years. These investments should ensure our position as an industry innovator and low-cost producer.
In response to the trend towards convenient, healthy snacking, the single-serve shelf stable packaged fruit category has grown to exceed the applesauce and shelf-stable prepared gelatin categories combined. Our FRUIT BOWLS products, introduced in 1998, have achieved significant market share, as evidenced by our 49% dollar market share in the United States during 2011, as reported by IRI. In late 2010, we introduced FRUIT BOWLS in 100% juice, the only non-refrigerated fruit bowl in 100% juice. FRUIT BOWLS in 100% juice have no added sugar or artificial sweeteners, and completely replace our FRUIT BOWLS in light syrup in the U.S.
In the frozen fruit category, Dole has grown its revenue at a compounded annual growth rate of 7.1% over the past six years. Dole is the branded category leader in frozen fruit and expects to continue to grow its brand position in the future by increasing its distribution base with innovative new products using new processing technologies.
During 2011, we introduced two new concepts in the frozen fruit category to take advantage of the consumer’s desire for healthier, portion controlled, products that contain no additives or preservatives. Our first new item, “Fruit Smoothie SHAKERS ® ,” is a single serve container of frozen fruit and yogurt which, when mixed with juice and shaken, creates a great tasting and nutritious fruit smoothie. The product line comes in three popular flavors and offers a perfect snack or meal replacement without having to use a blender.
The other new concept is a three ounce, frozen fruit single serve cup that features our new Nature Lock technology, which guarantees fresh fruit flavor and texture. Our strawberry, blueberry and pineapple varieties, available in two-packs, offer consumers another unique, convenient, and good for you snack or topping that is equivalent to one full serving of fruit.
During the first quarter of 2012, we acquired Mrs. May’s Naturals Inc., a company committed to providing consumers with wholesome snacks for a healthier lifestyle. A family-run business founded in 2002, Mrs. May’s Naturals was created to bring consumers natural, wholesome snack alternatives to junk food. With product offerings like fruit and nut based clusters, bars and freeze-dried fruit, Mrs. May’s Naturals provides a platform for growth of all-natural offerings in the health and nutrition food category. Mrs. May’s products will continue to be packaged under the Mrs. May’s label.
Our packaged foods segment accounted for approximately 17% of 2011 consolidated revenues.
Discontinued Operations
During the fourth quarter of 2007, we approved and committed to a formal plan to divest our citrus and pistachio operations (“Citrus”) located in central California. During March 2008, we entered into an agreement to sell land and other related assets of Citrus. The sale was completed during the third quarter of 2008, and we received net proceeds of $28.1 million. In addition, during the second quarter of 2008, we approved and committed to a formal plan to divest our fresh-cut flowers operations, and during the third quarter of 2008 we signed a binding letter of intent to sell these operations. During the first quarter of 2009, the majority of the related assets of this business were sold. During the third quarter of 2010, Dole sold a building and a farm located in Colombia to the buyer of the flowers business. During the second quarter of 2011, Dole sold a warehouse located in Miami, Florida to the buyer of the flowers business. In addition, Dole sold a farm in Colombia.
Global Logistics
We have significant product sourcing and related operations in Chile, China, Costa Rica, Ecuador, Honduras, the Philippines, South Africa, Spain, Thailand and the United States. Significant volumes of Dole’s fresh fruit and packaged products are marketed in Canada, Western Europe, Japan and the United States, with lesser volumes marketed in Australia, China, Hong Kong, New Zealand, South Korea, and other countries in Asia, Europe, and Central and South America.
The produce that we distribute internationally is transported primarily by 17 owned or leased ocean-going vessels. We ship our tropical fruit in owned or chartered refrigerated vessels. All of our tropical fruit shipments into the North American and core European markets are delivered using pallets or containers. This increases efficiency and minimizes damage to the product from handling. Most of the vessels are equipped with controlled atmosphere technology, to ensure product quality. “Backhauling” services, transporting our own and third-party cargo primarily from North America and Europe to Latin America, reduce net transportation costs. We use vessels that are both owned or operated under long-term leases, as well as vessels chartered under contracts that typically last one year.
Customers
Our top 10 customers in 2011 accounted for approximately 34% of total revenues. No individual customer accounted for greater than 10% of Dole’s revenues during 2011. Our customer base is highly diversified, both geographically and in terms of product mix. Each of our segments’ largest customers accounted for no more than approximately 20% of that segment’s revenues. Our largest customers are leading global and regional mass merchandisers and supermarkets in North America, Europe and Asia.
Sales and Marketing
We sell and distribute our fruit and vegetable products through a network of fresh produce operations in North America, Europe, Asia and Latin America. Some of these operations involve the sourcing, distribution and marketing of fresh fruits and vegetables while others involve only distribution and marketing. We have regional sales organizations dedicated to servicing major retail and wholesale customers. We also use the services of brokers in certain regions, including for some sales of packaged fruit products and packaged salads. Retail customers include large chain stores with which Dole enters into product and service contracts, typically for a one- or two-year term. Wholesale customers include large distributors in North America, Europe and Asia. We use consumer advertising, marketing and trade spending to promote new items, bolster our exceptional brand awareness and promote nutrition knowledge.
Competition
The global fresh and packaged produce markets are intensely competitive, and generally have a small number of global producers, filled out with independent growers, packers and middlemen. Our large, international competitors are Chiquita, Fresh Del Monte Produce and Del Monte Foods. In some product lines, we compete with smaller national producers. In fresh vegetables, a limited number of grower shippers in the United States and Mexico supply a significant portion of the United States market, with numerous smaller independent distributors also competing. We also face competition from grower cooperatives and foreign government sponsored producers. Competition in the various markets in which we operate is affected by reliability of supply, product quality, brand recognition and perception, price and the ability to satisfy changing customer preferences through innovative product offerings.
Employees
At December 31, 2011, we had approximately 34,500 full-time permanent employees and 36,600 full-time seasonal or temporary employees, worldwide. Approximately 36% of our employees work under collective bargaining agreements, some of which are in the process of being renegotiated. Certain other bargaining agreements are scheduled to expire during 2012, subject to automatic renewals unless a notice of non-extension is given by the union or us. We have not received any notice that a union intends not to extend a collective bargaining agreement. We believe our relations with our employees are generally good.
Trademark Licenses
In connection with the sale of the majority of our juice business to Tropicana Products, Inc. in May 1995, we received cash payments up front and granted to Tropicana a license, requiring no additional future royalty payments, to use certain DOLE trademarks on certain beverage products. We continue to produce and market DOLE canned pineapple juice and pineapple juice blend beverages, which were not part of the 1995 sale. We have a number of additional license arrangements worldwide, none of which is material to Dole and its subsidiaries, taken as a whole.
Research and Development
Our research and development programs concentrate on sustaining the productivity of our agricultural lands, food safety, nutrition science, product quality, value-added product development, and packaging design. Agricultural research is directed toward sustaining and improving product yields and product quality by examining and improving agricultural practices in all phases of production (such as development of specifically adapted plant varieties, land preparation, fertilization, cultural practices, pest and disease control, post-harvesting, handling, packing and shipping procedures), and includes on-site technical services and the implementation and monitoring of recommended agricultural practices. Research efforts are also directed towards integrated pest management and biological pest control. We develop specialized machinery for various phases of agricultural production and packaging that reduce labor costs, increase efficiency and improve product quality. We conduct agricultural research at field facilities primarily in California, Hawaii, Latin America and Asia. Our research at the Dole Nutrition Research Lab in Kannapolis, North Carolina, investigates both basic science as well as the next frontier in phytochemical research. We also sponsor research related to environmental improvements and the protection of worker and community health. The aggregate amounts we spent on research and development in each of the last three years have not been material in any of such years.
Food Safety
Dole is undertaking strong measures to improve food safety. We spearheaded the industry-wide Leafy Greens Marketing Agreements in California and in Arizona. We developed and adopted enhanced Good Agricultural Practices, which include raw material testing in the fields, expanded buffer zones and increased water testing. We also use radio-frequency identification (RFID) tags to track leafy greens as they move from fields to trucks and through processing.
Dole salad plants are sanitized and inspected daily. We wash our leafy greens three times in chilled, chlorinated water. All of Dole’s U.S. salad plants are SQF 2000, Level 2 certified.
Corporate Responsibility and Sustainability
Dole embraces Corporate Responsibility & Sustainability (CR&S) as one of the values that drive all our operations and activities worldwide. Our CR&S strategy is based on a holistic approach, assessing the social, environmental and economic dimensions related directly or indirectly to our operations and activities.
From a social perspective, Dole promotes and maintains a continuous dialog and collaboration with its different stakeholders, including employees, workers’ representatives, suppliers, clients, communities, governmental and non-governmental organizations and other civil society organizations. Directly, or through the support of local foundations, we implement programs aimed at providing medical services, promoting education, empowering communities and women in particular, protecting workers’ health and safety, freedom of association, and other labor rights.
CEO BACKGROUND
David A. DeLorenzo, President and Chief Executive Officer and Director. Mr. DeLorenzo, 65, rejoined Dole, as its President and Chief Executive Officer in June 2007. Mr. DeLorenzo originally joined Dole in 1970. He was President of Dole Fresh Fruit Company from September 1986 to June 1992, President of Dole from July 1990 to March 1996, President of Dole Food Company-International from September 1993 to March 1996, President and Chief Operating Officer of Dole from March 1996 to February 2001, and Vice Chairman of Dole from February 2001 through December 2001, at which time Mr. DeLorenzo became a consultant for Dole under contract for the period from January 2002 through January 2007. From 2006 to 2007, Mr. DeLorenzo served as Non-Executive Chairman of the Board of Versacold Inc. (formerly listed on the Toronto Stock Exchange: ICE_u.TO). Mr. DeLorenzo serves on the Executive Committee of Dole’s Board of Directors.
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The Nominating and Corporate Governance Committee and the Board of Directors believe that Mr. DeLorenzo’s vast and diverse history with the Company, from both an operational standpoint and that of a member of management, are vital to the Board’s collective knowledge of the Company’s day to day operations. Mr. DeLorenzo also provides great insight as to how the Company grew into the organization that it is today. His institutional knowledge is an invaluable asset to the Board in effecting its oversight of the Company and its path into the future. Mr. DeLorenzo’s presence on the Board also allows for a seamless flow of information and ideas between the Board and management.
David H. Murdock, Chairman of the Board and Director. Mr. Murdock, 88, joined Dole as Chairman of the Board and Chief Executive Officer in July 1985, and continued as Dole’s Chief Executive Officer until June 2007. Mr. Murdock was also Dole’s President from February 2004 to July 2004. He has been Chairman of the Board, Chief Executive Officer and Director of Castle & Cooke, Inc., a Hawaii corporation, since October 1995 (Mr. Murdock has beneficially owned all of the capital stock of Castle & Cooke, Inc. since September 2000). Since June 1982, he has been Chairman of the Board and Chief Executive Officer of Flexi-Van Leasing, Inc., a Delaware corporation wholly owned by Mr. Murdock. Mr. Murdock also is the owner/developer of numerous real estate developments and is the owner of Castle & Cooke Mortgage Company, a Delaware corporation. Mr. Murdock also is the sole stockholder of numerous corporations engaged in a variety of business ventures and in the manufacture of industrial and building products. Mr. Murdock is Chairman of the Executive Committee of Dole’s Board of Directors. Mr. Murdock is the father of Justin M. Murdock, who is a Director and also served as the Company’s Vice President, New Products and Corporate Development until January 28, 2011.
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The Nominating and Corporate Governance Committee and the Board of Directors believe that Mr. Murdock’s presence on the Board has been vital to the Company’s growth and success over the past 27 years. Mr. Murdock’s passion for healthy living has given the Company direction and focus through his leadership. Mr. Murdock’s vast experiences and successes in the business world are also an invaluable asset to the Board as it evaluates not only the Company’s present circumstances, but the direction it will head in the future.
Dennis M. Weinberg, Director. Mr. Weinberg, 59, was one of the founding Directors for WellPoint, Inc. (NYSE:WLP), a health benefits company. From February 2002 to May 2006, Mr. Weinberg served as President and Chief Executive Officer of ARCUS Enterprises, a WellPoint business development company. Mr. Weinberg served for nearly 20 years in a variety of CEO, Group President, and Executive Vice President positions with WellPoint and its various affiliates. Prior to WellPoint, Mr. Weinberg held a variety of business consulting positions with the accounting firm of Touche Ross & Co. (currently Deloitte & Touche LLP) in Chicago. Before that, he was General Manager for the CTX Products Division of Pet, Inc., which division designed and manufactured commercial computerized processing equipment. At that time, Pet, Inc. was owned by I.C. Industries, Inc. Mr. Weinberg is Chairman and General Member of the development companies of FRW1, LLC, KNIC, LLC and SkyView Development, LLC. Mr. Weinberg has served as a Director and Chairman of the Audit Committee of Salem Communications Corporation (NASDAQ:SALM) since 2005, and is also a Director for private equity (non-publicly traded) companies Applied Merchant Systems, Inc., and Renal Ventures Management, LLC, each since early 2011. Mr. Weinberg served as a Director and Audit Committee Chairman of Health Management, Inc. (NASDAQ:HMI) from 1995 to 1997. He is the co-founder of Cornerstone Network Associates and Life Skills for American Families, and was a Director of The Health Insurance Association of America, The CEO Forum, Pepperdine University Center for the Family, National Coalition for the Protection of Families and Children, and a number of other non-profit organizations. Mr. Weinberg is Chairman of the Audit Committee of Dole’s Board of Directors, and he also serves on its Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee and the Board of Directors believe that Mr. Weinberg’s wide array of experiences in the business world give the Board a unique perspective on not only its business, but the broader economy as well. Mr. Weinberg’s collective experiences as an executive of other companies allow him to better appreciate the day-to-day issues management faces, thereby allowing for better communications between the Board and management. Mr. Weinberg’s experience is also significant to the Board in understanding today’s complex and ever-changing accounting rules and regulations. It is very important to the Company to have an Audit Committee chair with substantial experience on other public company audit committees. Mr. Weinberg also has experience as a public company director.
Andrew J. Conrad, Director. Mr. Conrad, 48, was a co-founder of the National Genetics Institute, a provider of advanced genetics testing services for blood screening, medical testing and clinical research, and has been its Chief Scientific Officer since 1992. The National Genetics Institute is now a subsidiary of Laboratory Corporation of America Holdings (NYSE: LH), where Mr. Conrad is Executive Vice President, Chief Scientific Officer. Mr. Conrad is Chairman of the Corporate Compensation and Benefits Committee of Dole’s Board of Directors, and he also serves on its Audit Committee and its Nominating and Corporate Governance Committee.
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The Nominating and Corporate Governance Committee and the Board of Directors believe that Mr. Conrad’s scientific background (he received his Ph.D. in Cell Biology and has more than 85 publications in scientific and medical journals) makes him an invaluable member of the Board of Directors, as Mr. Conrad is the only member of the Board with a technical scientific background. Science is a significant consideration in the Company’s business, not only in the initial stages of growing product and ensuring its freshness from packaging to purchase by the end user, but also in the Company’s focus on consumer health and well-being. Mr. Conrad provides great insight to the Board on these and other scientific matters. Mr. Conrad has served as a director of the Company for more than seven years.
Justin M. Murdock, Director. Mr. Justin M. Murdock, 39, has been Senior Vice President of Investments of Castle & Cooke, Inc., which is wholly owned by David H. Murdock, since 2004, and prior to that its Vice President of Investments since 2001; and previously, from 1999, Vice President of Mergers and Acquisitions of Pacific Holding Company, a sole proprietorship of David H. Murdock. Mr. Justin M. Murdock is also Chairman of the Board and CEO of NovaRx, a privately held clinical-stage biopharmaceutical company dedicated to the discovery, development and commercialization of novel cell-based therapeutic vaccines for the treatment of cancer, a position he has held since October 2006. He served on the Audit Committee of Dole’s Board of Directors until his planned departure on October 13, 2010, owing to the necessity of having a wholly-independent Audit Committee by the first anniversary of Dole’s initial public offering. He served as Dole’s Vice President, New Products and Corporate Development from November 2004 to January 28, 2011, but stepped down to devote his full time and energies to his duties as CEO of NovaRx. Justin M. Murdock is the son of David H. Murdock, Dole’s Chairman of the Board.
The Nominating and Corporate Governance Committee and the Board of Directors believe that Mr. Justin M. Murdock’s past experience and insight as the Company’s Vice President, New Products and Corporate Development contribute greatly to the Board’s knowledge of the Company’s customers and consumers as well as its product development and marketing activities. His investment expertise developed through his positions with Castle & Cooke, Inc. also provides the Board with insight into matters of global finance. As the youngest member of the Board, his input also gives the Board a greater understanding of the Company’s younger consumers.
Elaine L. Chao, Director. Ms. Chao, 59, was the nation’s 24th Secretary of Labor from 2001 to 2009, and the first Asian Pacific American woman in our country’s history to be appointed to the President’s cabinet. From 1996 to 2001, and presently, Ms. Chao was and is a Distinguished Fellow at the Heritage Foundation, an educational and research organization based in Washington, D.C. From 1992 to 1996, she was President and Chief Executive Officer of United Way of America where she restored public trust and confidence to an organization tarnished by scandal. From 1991 to 1992, she served as Director of the Peace Corps. From 1989 to 1991, she was the Deputy Secretary of Transportation, the second in charge of a department with a budget of $30 billion and workforce of 110,000. Prior to that, she worked as Vice President of syndications at BankAmerica Capital Markets Group and Citicorp. Ms. Chao serves as a director of Wells Fargo & Company (NYSE: WFC) and of Protective Life Corporation (NYSE: PL), both since 2011. Ms. Chao previously served on the Board of Directors of Dole from 1993 to 2001. She previously served on the Boards of Northwest Airlines, National Association of Security Dealers, Raymond James Financial, and C.R. Bard. Ms. Chao is Chairman of the Nominating and Corporate Governance Committee of Dole’s Board of Directors, and she also serves on its Corporate Compensation and Benefits Committee.
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The Nominating and Corporate Governance Committee and the Board of Directors believe that Ms. Chao’s vast experience as the leader of many large scale organizations allows her to provide great insight into the effectiveness of a company such as Dole with operations around the world. Ms. Chao also brings a very diverse background to the Board. Not only has she held leadership positions in the finance industry, but she has also achieved great success as a leader in both the public service and charitable sectors. Ms. Chao’s experience as Secretary of Labor also gives the Board an important perspective on workforce issues, an invaluable asset for a company with approximately 34,500 full-time permanent employees and 36,600 full-time seasonal or temporary employees worldwide. Because the Company has frequent interactions with governments, on both the local and national level, having a director with such high-level, extensive experience in government gives the Board unique insight on these matters that it would not otherwise have. Ms. Chao also has experience as a public company director.
Sherry Lansing, Director. Ms. Lansing, 67, is the Founder and Chair of the Sherry Lansing Foundation, a philanthropic organization focusing on cancer research, health and education. From 1992 to 2005, she was the Chair of the Motion Picture Group of Paramount Pictures where she oversaw the release of more than 200 films, including Academy Award ® winners Forrest Gump, Braveheart and Titanic. From 1984 to 1990, she operated her own production company, Lansing Productions, and co-founded Jaffe/Lansing Productions. In 1980, she became the film industry’s first woman to oversee all aspects of a studio’s motion picture production when she was appointed President of Production at 20th Century Fox. Ms. Lansing has served as a director of Qualcomm Incorporated (NASDAQ: QCOM) since 2006, and RealD (NYSE: RLD) since 2010. She holds additional trustee, chair and advisory positions with the Friends of Cancer Research, the American Association of Cancer Research, the Carter Center and Stop Cancer, a non-profit philanthropic group she founded in partnership with Dr. Armand Hammer. Ms. Lansing is also Vice Chair of the University of California Regents and serves as the Chair of the University Health Services Committee. She has earned the Woodrow Wilson Award for Corporate Citizenship, the Distinguished Community Service Award from Brandeis University, the Alfred P. Sloan, Jr. Memorial Award, the Horatio Alger Humanitarian Award and an honorary doctorate in fine arts from the American Film Institute. Ms. Lansing serves on the Audit Committee and the Corporate Compensation and Benefits Committee of Dole’s Board of Directors.
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The Nominating and Corporate Governance Committee and the Board of Directors believe that Ms. Lansing’s success as an entrepreneur, as well as her vast experience as a leader in Hollywood and in the philanthropic community, give her a unique perspective as to how large organizations work. Ms. Lansing’s experiences in such a fast-paced business are key to helping the Board react to changing trends and consumer preferences in today’s market. Through her charitable work, Ms. Lansing has also shown a great interest in health and nutrition, issues that are crucial to the Company’s goals and mission. Ms. Lansing’s commitment to volunteer work mirrors the Company’s commitment to the communities in which it operates. Ms. Lansing also has experience as a public company director.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Significant highlights for Dole Food Company, Inc. and its consolidated subsidiaries (“Dole” or the Company”) for the year ended December 31, 2011 were as follows:
•Revenues for 2011 were $7.2 billion, an increase of 5%. Revenues grew in all three of Dole’s reporting segments.
•Operating income in 2011 was $229.6 million compared to $193.7 million in 2010, an increase of 19%. Excluding the $32.5 million gain on legal settlements recorded during 2010, operating income increased $68.5 million or 43%.
•Fresh fruit operating income increased primarily as a result of improved banana performance worldwide. In addition, Dole’s European ripening and distribution and Chilean deciduous fruit businesses generated higher earnings.
•Fresh vegetables operating income increased due to improved pricing and lower marketing expenditures in our packaged salads operations, partially offset by higher harvesting and growing costs in the fresh-packaged vegetables operations.
•Packaged foods operating income was lower as improved pricing was offset by higher product costs and higher selling, marketing and general and administrative expense worldwide.
•Dole committed to a new restructuring plan during the third quarter of 2011 in the fresh fruit segment in Europe, Latin America and Asia. These restructuring efforts, coupled with our 2010 restructuring plan, will further reduce costs by realigning supply with demand. During fiscal 2011, Dole incurred total restructuring costs of $30.2 million. As a result of the two plans, Dole has recorded total restructuring charges of $51.6 million to date and expects to incur additional charges of $3.7 million during 2012. Cost savings realized for fiscal 2011 are estimated to be $38 million associated with the 2010 plan. During fiscal 2012, Dole expects to realize additional cost savings of $25 million related to the 2011 restructuring plan.
•During the fourth quarter of 2011, Dole completed the sale of Dole Food España, S.A.U. (“Dole Spain”), to a subsidiary of Compagnie Financière de Participations, a company in which Dole holds a non-controlling 40% ownership interest.
•Dole completed the acquisition of SunnyRidge Farms, one of the top blueberry companies in the United States, during the fourth quarter of 2011. Total consideration was $91.3 million, plus an earn-out payable in 2015 that will be between $0 and $15 million. Dole paid the consideration, less certain escrowed amounts, primarily from cash on hand, some of which was attributable to Dole’s third quarter 2011 refinancing transactions.
•During the fourth quarter of 2011, Dole entered into an agreement to sell a non-core subsidiary in Germany. The sale is expected to close during the first half of 2012 subject to the satisfaction of certain conditions. The German subsidiary generated fiscal 2011 revenues of approximately $550 million.
•During the first quarter of 2012, Dole acquired Mrs. May’s Naturals, Inc., a company committed to providing consumers with wholesome snacks for a healthier lifestyle. The acquisition provides a platform for growth of all-natural offerings in the health and nutrition food category, which is a part of our packaged foods segment.
Operating Income
For the year ended December 31, 2011, operating income increased $36 million or 19% to $229.6 million compared with $193.7 million for the year ended January 1, 2011. Excluding the $32.5 million gain on the legal settlements recorded in 2010, operating income increased $68.5 million or 43%. Fresh fruit operating results increased primarily due to higher earnings in Dole’s worldwide banana operations, European ripening and distribution business and Chilean deciduous fruit business. Banana earnings benefitted from improved performance in Asia. In addition, there was better local pricing worldwide for bananas and lower shipping and distribution costs in Europe. Fresh vegetables operating results increased due primarily to higher earnings in packaged salads partially offset by lower earnings in the fresh-packed vegetables and berries operations. These improvements were partially offset by lower operating results in Dole’s packaged foods segment due primarily to higher product costs worldwide and higher levels of marketing expenditures in North America associated with the 2011 product launches. New product launches included FRUIT BOWLS ® in 100% juice, fruit in jars in 100% juice, fruit smoothie SHAKERS ® and frozen fruit single-serve cups. If foreign currency exchange rates in Dole’s significant foreign operations during the year ended December 31, 2011 had remained unchanged from those experienced during the year ended January 1, 2011, Dole estimates that its operating income would have been lower by approximately $16 million.
For the year ended January 1, 2011, operating income was $193.7 million compared to $351.7 million for the year ended January 2, 2010. Operating income for 2010 included a net benefit of $5.2 million due to asset sale and unrealized hedging gains, compared to a net benefit of $73.9 million for 2009 due to asset sale and unrealized hedging gains. Fresh fruit operating results decreased primarily as a result of lower banana and fresh pineapple earnings worldwide, as well as lower earnings in the European ripening and distribution businesses. Dole’s banana earnings were impacted by lower sales in North America and higher product costs in North America and Europe, as well as lower banana pricing in Asia. Fresh fruit operating results were also impacted by $32.7 million of restructuring and long-term receivables charges recorded in 2010. These factors were partially offset by a $27.3 million benefit from an arbitration settlement involving faulty manufactured containers sold to Dole. Fresh vegetables operating results increased primarily due to improved pricing, favorable product mix, and lower product costs in Dole’s packaged salads business. In addition, packaged salads EBIT in 2010 benefitted from a $5.3 million settlement with a fresh vegetables supplier. Packaged foods operating results increased slightly due to higher earnings of FRUIT BOWLS and frozen fruit operations in North America and improved pricing for concentrate worldwide. This was partially offset by higher product and selling, marketing and general and administrative costs for worldwide packaged fruit. If foreign currency exchange rates in Dole’s significant foreign operations during the year ended January 1, 2011 had remained unchanged from those experienced during the year ended January 2, 2010, Dole estimates that its operating income would have been lower by approximately $4 million.
Other Income (Expense), Net
Other income (expense), net was expense of $49.2 million in 2011 compared to expense of $63.6 million in 2010. The improvement was primarily due to the decrease of net losses of $56.9 million generated on Dole’s cross currency swap, which was effectively unwound during the first quarter of 2011. These improvements were partially offset by net unrealized losses of $20.4 million incurred in connection with unwinding the cross currency swap and entering into a series of long-term Japanese yen hedges. In addition, charges of $13.5 million were recorded during 2011 related to premiums paid, write-off of debt issuance costs and debt discounts in connection with the early retirement of some of Dole’s 13.875% senior secured notes due 2014 (“2014 Notes”). Furthermore, compared to 2010, the write-off of debt issuance costs increased $8.1 million primarily due to the 2011 refinancing transactions.
The cross currency swap was scheduled to mature in June 2011. During the first quarter of 2011, Dole effectively unwound the cross currency swap by entering into a transaction to refinance its obligation under the cross currency swap through a series of long-term Japanese yen hedges that mature through December 2014. The value of these contracts will continue to fluctuate based on changes in the exchange rate over the life of the individual forward contracts. Refer to Note 16 — Derivative Financial Instruments for additional information.
Other income (expense), net was expense of $63.6 million in 2010 compared to expense of $24.7 million in 2009. The change was due to an increase in unrealized losses of $46.2 million on Dole’s cross currency swap and an increase in unrealized losses of $1.2 million on Dole’s foreign denominated borrowings. These factors were partially offset by an increase in the foreign currency exchange gain on Dole’s British pound sterling denominated vessel obligation of $9 million.
Interest Expense
Interest expense for the year ended December 31, 2011 was $142.4 million compared to $164 million in 2010. The decrease was primarily due to lower effective borrowing rates related due in part to the maturity of Dole’s interest swap during the second quarter of 2011.
Interest expense for the year ended January 1, 2011 was $164 million compared to $205.7 million in 2009. The decrease was primarily due to debt reduction due in part to Dole’s October 2009 initial public offering. In addition, interest expense benefitted from lower effective borrowing rates related to Dole’s March 2010 senior secured credit facilities amendments.
Income Taxes
Dole recorded income tax expense of $6.5 million on $42.6 million of income from continuing operations before income taxes and equity earnings for the year ended December 31, 2011, reflecting a 15.3% effective tax rate for the year. Income tax expense decreased $6.9 million in 2011 compared to 2010 due primarily to the impact of a state law change effective for 2011 that reduced the deferred taxes on certain of Dole’s intangibles. The effective tax rate in 2010 was (48.3%). Dole’s effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in its various U.S. and foreign jurisdictions. For 2011, Dole’s income tax provision differs from the U.S. federal statutory rate applied to Dole’s pre-tax income primarily due to the impact of a state law change that reduced the tax rate on certain of Dole’s intangibles, a reduction of its U.S. federal valuation allowance partially offset by an increase in Dole’s liability for unrecognized tax benefits, primarily attributable to potential issues with foreign investment in U.S. property.
Income tax expense for the fiscal year 2010 decreased by $9.3 million compared to 2009 due primarily to lower earnings generated in certain foreign jurisdictions. The effective tax rate in 2009 was 23.2%. For 2010, Dole’s income tax provision differed from the U.S. federal statutory rate applied to Dole’s pre-tax losses due to losses in certain foreign jurisdictions for which it is more likely than not that a tax benefit will not be realized which is partially offset by the reduction in Dole’s liability for unrecognized tax benefits, primarily attributable to the lapse of the statute of limitations relating to a state unrecognized tax benefit. For 2009, Dole’s income tax provision differed from the U.S. federal statutory rate applied to Dole’s pretax income primarily due to operations in foreign jurisdictions that are taxed at a rate lower than the U.S. federal statutory rate.
As of December 31, 2011, Dole has not provided for U.S. federal income and foreign withholding taxes on approximately $2.4 billion of the excess of the amount for financial reporting over the tax basis of investments that are essentially permanent in duration. Management believes that such excess at December 31, 2011 will remain indefinitely invested at this time. The repatriation of cash currently held by Dole’s foreign subsidiaries at December 31, 2011 would not currently result in a material cash tax payment. In the event cash flow from U.S. operations combined with accumulated previously taxed income is insufficient to fund U.S. cash flow requirements, Dole may be required to provide U.S. federal income tax and foreign withholding taxes on a portion of its anticipated fiscal 2012 foreign earnings. As a result, Dole’s overall effective tax rate may increase in fiscal 2012 versus the effective tax rate experienced in previous years.
Dole had federal deferred tax assets totaling $171 million at December 31, 2011 which management believes are recoverable through the realization of income on appreciated non-core assets, including income to be generated from the reversal of the related existing taxable temporary differences upon the sale of such assets. If additional U.S. losses are experienced by Dole, valuation allowances will be required. The establishment of such valuation allowances would, all else being equal, result in increases to Dole’s effective tax rate in the periods recorded.
Internal Revenue Service Audit: On August 27, 2009, the IRS completed its examination of Dole’s U.S. federal income tax returns for the years 2002-2005 and issued a Revenue Agent’s report (“RAR”) that included various proposed adjustments, including with respect to the 2003 going-private merger transactions. The IRS proposed that certain funding used in the going-private merger was taxable and that some related investment banking fees were not deductible. The net tax deficiency associated with the RAR was $122 million, plus interest. On October 27, 2009, Dole filed a protest letter challenging the proposed adjustments contained in the RAR and pursued resolution of these issues with the IRS Appeals Division. During the quarter ended October 8, 2011, Dole reached a final settlement with the Appeals Division on all issues. As a result, Dole’s total amount of unrecognized tax benefits decreased by $41 million, of which $20 million represents a cash payment. The tax of $20 million was paid in the fourth quarter of 2011, along with interest of $11 million. The matter is now closed.
Refer to Note 7 of the Consolidated Financial Statements for additional information about Dole’s income taxes.
Earnings from Equity Method Investments
Earnings from equity method investments for the year ended December 31, 2011 decreased to $5.5 million from $7.4 million in 2010. The decrease was primarily related to lower earnings generated by Compagnie Financière de Participations (“CF”), a company in which Dole holds a non-controlling 40% ownership interest. Lower earnings generated by CF were due in part to lower pricing and lower consumer demand in markets to which they sell.
Earnings from equity method investments for the year ended January 1, 2011 decreased to $7.4 million from $10.1 million in 2009. The decrease was primarily related to lower earnings generated by CF. Lower earnings generated by CF were due in part to lower pricing in markets to which they sell.
Segment Results of Operations
Dole has three reportable operating segments: fresh fruit, fresh vegetables and packaged foods. These reportable segments are managed separately due to differences in their products, production processes, distribution channels and customer bases.
Dole’s management evaluates and monitors segment performance primarily through earnings before interest expense and income taxes (“EBIT”). EBIT is calculated by adding interest expense and income taxes to income (loss) from continuing operations, net of income taxes. Management believes that segment EBIT provides useful information for analyzing the underlying business results as well as allowing investors a means to evaluate the financial results of each segment in relation to Dole as a whole. EBIT is not defined under U.S. GAAP and should not be considered in isolation or as a substitute for net income measures prepared in accordance with U.S. GAAP or as a measure of Dole’s profitability. Additionally, Dole’s computation of EBIT may not be comparable to other similarly titled measures computed by other companies, because not all companies calculate EBIT in the same fashion.
Fresh vegetables EBIT for the year ended December 31, 2011 decreased to $31.4 million from $34.3 million for the year ended January 1, 2011. Excluding the $5.3 million settlement with a fresh vegetable supplier recorded in the fourth quarter of 2010, EBIT increased $2.4 million. EBIT in the packaged salads business increased primarily due to improved pricing and lower marketing expenditures, partially offset by higher packaging and vegetable costs. The increase in vegetable costs was due in part to product shortages as a result of challenging weather conditions in January and February 2011. These improvements were partially offset by lower EBIT in the fresh-packed vegetables business primarily due to higher harvesting and growing costs. The acquisition of SunnyRidge did not have a significant impact to EBIT during 2011.
Packaged Foods: Packaged foods revenues for the year ended December 31, 2011 increased 7% to $1.2 billion from $1.12 billion for the year ended January 1, 2011. Revenues increased in all major product lines primarily due to improved pricing worldwide as well as higher volumes of packaged fruit products sold in Asia, and the North America frozen fruit business. Higher volumes of frozen fruit products were due in part to two new products launched in the third quarter of 2011, Dole fruit smoothie SHAKERS and Dole frozen fruit single-serve cups. These improvements were partially offset by lower volumes of packaged fruit products sold in North America. Net favorable foreign currency exchange movements in Dole’s foreign selling locations resulted in higher revenues of approximately $8 million during the year ended December 31, 2011.
EBIT in the packaged foods segment for the year ended December 31, 2011 decreased to $96.5 million from $107 million for the year ended January 1, 2011. The decrease in EBIT was due primarily to higher product, marketing, selling, and general and administrative costs worldwide, partially offset by higher pricing worldwide. The increase in product costs resulted from higher purchased fruit costs and unfavorable foreign currency exchange movements in Thailand and the Philippines, where product is sourced. Higher marketing expenditures were due to the 2011 product launches in North America. If foreign currency exchange rates in Dole’s packaged foods foreign operations during the year ended December 31, 2011 had remained unchanged from those experienced during the year ended January 1, 2011, Dole estimates that packaged foods EBIT would have been higher by approximately $14 million.
Corporate: Corporate EBIT includes general and administrative costs not allocated to the operating segments. Corporate EBIT in 2011 was a loss of $109.4 million compared to a loss of $115.4 million in 2010. Corporate EBIT is impacted by expenses as described in the EBIT table under “Segment Results of Operations.” Corporate operating and other expenses increased $16 million primarily due to the fact that fiscal 2010 benefitted from a decrease in incentive compensation accruals.
2010 Compared with 2009
Fresh Fruit: Fresh fruit revenues in 2010 of $4.8 billion were comparable to 2009. Excluding fiscal 2009 box plant sales of $110 million, fresh fruit revenues increased $127 million. Banana sales increased as a result of higher volumes sold in Asia partially offset by lower volumes sold in North America and Europe as well as lower pricing in Asia. European ripening and distribution revenues increased $33 million primarily as a result of higher local pricing, higher volumes sold in Germany and Italy, and favorable Swedish krona foreign currency exchange movement, partially offset by unfavorable euro foreign currency exchange movements. Revenues also increased due to higher sales of citrus, other fresh fruit, and fresh vegetables in Asia. Chilean deciduous fruit revenues increased primarily as a result of improved pricing and higher volumes. Net favorable foreign currency exchange movements in Dole’s foreign selling locations resulted in higher revenues of approximately $18 million during 2010.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
Significant highlights for Dole Food Company, Inc. and its consolidated subsidiaries (“Dole”) for the quarter and half year ended June 16, 2012 were as follows:
•Net revenues for the second quarter of 2012 were $1.7 billion, a decrease of 10% from the second quarter of 2011. Excluding the sales from both our German ripening and distribution subsidiary, which was sold during the first quarter of 2012 and our Dole Spain ripening and distribution subsidiary, which was sold in the fourth quarter of 2011 (“European divested businesses”), as well as sales from SunnyRidge Farms, which was acquired in the fourth quarter of 2011 (“berry acquisition”), sales were comparable.
•Operating income for the second quarter of 2012 was $98 million compared to $122 million in the second quarter of 2011. Earnings decreased in our fresh fruit and packaged foods segments, partially offset by improved results from our fresh vegetables segment.
•Fresh fruit operating income decreased primarily as a result of lower banana earnings worldwide, partially offset by higher earnings in our Chilean deciduous fruit business and North America fresh pineapples operations. Lower pricing in North America and Asia were the main drivers of the lower banana performance.
•Fresh vegetables operating income increased primarily due to higher earnings of packaged salads and fresh berries, partially offset by lower pricing for fresh-packed vegetables. Packaged salads and fresh berries earnings increased as a result of improved pricing. In addition, fresh berries earnings benefitted from our berry acquisition.
•Packaged foods operating income decreased due to higher worldwide product costs and higher marketing expenses in North America to support new frozen fruit products, partially offset by improved pricing worldwide.
•Dole’s 2011 restructuring plan in the fresh fruit segment in Europe, Latin America and Asia remains on track. Full year net cash savings for fiscal 2012 are estimated at $23 million, of which $8 million has already been realized in the first half of 2012. The 2011 restructuring initiatives are not expected to have a significant impact on fiscal 2012 revenues. Although first half 2012 cost of products sold benefitted from our shipping and farming restructuring initiatives, higher purchased fruit costs from Latin America growers more than offset the benefits derived from the initiatives. The remaining $15 million of estimated net cash savings are expected to be realized in the remaining two quarters of fiscal 2012. Approximately $14 million of these savings are expected to reduce cost of products sold and $1 million to reduce selling, marketing and general and administrative expenses.
Revenues
Revenues in the quarter ended June 16, 2012 decreased 10% to $1.7 billion from $1.9 billion for the quarter ended June 18, 2011. Excluding second quarter 2011 sales from Dole’s European divested businesses of $199 million as well as second quarter 2012 sales from the berry acquisition of $26 million, sales were comparable. Fresh vegetables sales increased $30 million mainly due to higher sales of fresh berries and packaged salads. The increase was partially offset by lower pricing for fresh-packed vegetables. Packaged foods sales increased $19 million primarily due to higher sales in the North America frozen fruit and healthy snack businesses and improved global pricing, partially offset by lower volumes of packaged fruit sold in North America and Europe. Fresh fruit sales decreased $246 million. Excluding second quarter 2011 sales from Dole’s European divested businesses, fresh fruit sales decreased $47 million. The decrease is primarily related to lower sales in Europe and lower pricing of bananas in North America and Asia. These factors were partially offset by higher volumes of Asia bananas and higher sales of other fresh fruit sold in Asia. Net unfavorable foreign currency exchange movements in Dole’s selling locations resulted in lower revenues of approximately $31 million.
Revenues in the half year ended June 16, 2012 decreased 7% to $3.3 billion from $3.6 billion for the half year ended June 18, 2011. Excluding sales from Dole’s European divested businesses of $235 million, as well as half year 2012 sales from the berry acquisition of $41 million, sales decreased 2%. Fresh fruit revenues decreased $78.1 million due primarily to the same factors that impacted sales during the second quarter as well as higher volumes of fresh pineapples sold in North America and Asia during the first quarter of 2012. Fresh vegetables sales increased $35.4 million due primarily to the same factors that impacted sales during the second quarter. Packaged foods sales increased $21.1 million due primarily to the same factors that impacted sales during the second quarter. Net unfavorable foreign currency exchange movements in Dole’s selling locations resulted in lower revenues of approximately $42 million.
Operating Income
For the quarter ended June 16, 2012, operating income decreased to $98.1 million compared with $122 million for the quarter ended June 18, 2011. Fresh fruit operating income decreased primarily due to lower earnings in Dole’s banana operations worldwide, partially offset by higher earnings in Dole’s Chilean deciduous fruit business and North America fresh pineapple operations. Packaged foods operating income decreased primarily due to higher product costs worldwide and higher marketing expenditures in the North America frozen fruit operations associated with the introduction of Dole fruit smoothie SHAKERS ® and Dole frozen fruit single-serve cups. These factors were partially offset by higher pricing worldwide for packaged fruit products. Fresh vegetables operating income increased due to higher earnings in the packaged salads business and higher earnings in the fresh berries business due to the berry acquisition, partially offset by lower pricing in all major fresh-packed vegetable product lines.
For the half year ended June 16, 2012, operating income decreased to $144.5 million compared with $201.3 million for the half year ended June 18, 2011. Fresh fruit operating income decreased primarily due to the same factors that impacted the second quarter. Packaged foods operating income decreased primarily due to the same factors that impacted the second quarter, except for lower levels of marketing expenditures in North America as prior year first quarter results included additional spending for the introduction of FRUIT BOWLS ® in 100% juice and fruit in jars in 100% juice. Fresh vegetables operating income was comparable as lower pricing in all major fresh-packed vegetable product lines were offset by higher earnings of packaged salads and fresh berries.
Other Income (Expense), Net
For the quarter ended June 16, 2012, other income (expense), net was expense of $1.5 million compared to income of $4.3 million in the prior year. The change was primarily due to unrealized losses of $1.5 million recorded during the second quarter of 2012 on Dole’s long-term Japanese yen hedges, compared to unrealized gains of $4.8 million recorded in the second quarter of 2011. This factor was partially offset by unrealized gains of $0.9 million generated on Dole’s British pound sterling vessel obligation (“vessel obligation”), compared to unrealized losses of $0.1 million in the prior year.
For the half year ended June 16, 2012, other income (expense), net was income of $1.5 million compared to an expense of $35 million in the prior year. The improvement was primarily due to the absence of $27.4 million of unrealized losses incurred in connection with the March 2011 unwinding of the cross currency swap and entering into a series of long-term Japanese yen hedges. In addition, unrealized gains of $3.1 million were recorded during the first half of 2012 on Dole’s foreign denominated borrowings, compared with unrealized losses of $8.1 million recorded in the first half of 2011. There also was a decrease in unrealized losses of $2.0 million generated on the vessel obligation. These improvements were partially offset by unrealized losses of $0.6 million recorded during the first half of 2012 on the long-term Japanese yen hedges compared with unrealized gains of $4.1 million recorded in the prior year.
The cross currency swap was scheduled to mature in June 2011. During the first quarter of 2011, Dole entered into a transaction to effectively unwind the cross currency swap by refinancing its obligation under the cross currency swap and entered into a series of long-term Japanese yen hedges that mature through December 2014. The value of these contracts will continue to fluctuate based on changes in the exchange rate over the life of the individual forward contracts. Refer to Note 12 — Derivative Financial Instruments for additional information.
Interest Expense
Interest expense for the quarter ended June 16, 2012 was $30.8 million compared to $34.8 million for the quarter ended June 18, 2011. Interest expense for the half year ended June 16, 2012 was $61.6 million compared to $70.3 million for the half year ended June 18, 2011. Interest expense decreased in both periods primarily as a result of lower effective borrowing rates due in part to the maturity of Dole’s interest rate swap in the second quarter of 2011 as well as Dole’s repurchase and retirement of $52.5 million of its 13.875% senior secured notes due 2014 during the third quarter of 2011.
Income Taxes
Dole recorded $7.8 million of income tax expense on $87 million of pretax income from continuing operations for the half year ended June 16, 2012. Income tax expense included an interest benefit of $3.2 million related to Dole’s unrecognized tax benefits. Income tax expense of $18.7 million on $98.5 million of pretax income from continuing operations was recorded for the half year ended June 18, 2011, which included an interest benefit of $2.6 million related to Dole’s unrecognized tax benefits. Dole’s effective tax rate varies significantly from period to period due to the level, mix and seasonality of earnings generated in its various U.S. and foreign jurisdictions. For the half year ended June 16, 2012, Dole’s income tax expense differs from the U.S. federal statutory rate applied to Dole’s pretax income primarily due to a decrease in Dole’s total amount of unrecognized tax benefits of $17 million as a result of the expiration of the statute of limitations concerning certain transfer pricing items. Including interest, net of tax benefits, the total amount recorded for this item was $18.7 million, which was partially offset by an increase in Dole’s U.S. federal valuation allowance. For the half year ended June 18, 2011, Dole’s income tax expense differed from the U.S. federal statutory rate applied to Dole’s pretax income primarily due to operations in foreign jurisdictions that are taxed at a rate lower than the U.S. federal statutory rate. Income tax expense for the half year ended June 18, 2011 also benefitted by $8.4 million, including tax and interest, due to a favorable court ruling in Ecuador relating to a non-U.S. unrecognized tax benefit.
Income tax expense for the quarters ended June 16, 2012 and June 18, 2011 were $4 million and $13.5 million, respectively.
Dole is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. This could result in a higher or lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections.
Segment Results of Operations
Dole has three reportable operating segments: fresh fruit, fresh vegetables and packaged foods. These reportable segments are managed separately due to differences in geography, products, production processes, distribution channels and customer bases.
The fresh fruit reportable operating segment (“fresh fruit”) primarily sells bananas, fresh pineapple and deciduous fruit, which are sourced from local growers or Company-owned or leased farms located in Latin America and Asia, with significant selling locations in North America, Western Europe and Japan. The Asia component of fresh fruit not only sells fruit, but also sources and grows vegetables for sale primarily in Japan.
The fresh vegetables reportable operating segment (“fresh vegetables”) sells packaged salads and has a line of fresh-packed products that includes iceberg and romaine lettuce, celery, and fresh berries including strawberries and blueberries. Substantially all of the sales for fresh vegetables are generated in North America.
During the fourth quarter of 2011, Dole changed the segment classification of its Asia fresh vegetables operations from the fresh vegetables operating segment to the fresh fruit operating segment, due to a change in operational reporting. The segment reporting change has been reflected for all periods presented.
The packaged foods reportable operating segment (“packaged foods”) sells and distributes packaged fruit and frozen fruit products in North America, Europe and Asia, with North America as the primary market. The largest component of packaged foods sales are FRUIT BOWLS, canned pineapple and pineapple juice.
Management evaluates and monitors segment performance primarily through, among other measures, EBIT. EBIT before discontinued operations is calculated from net income by adding interest expense and income tax expense, and adding the loss or subtracting the income from discontinued operations, net of income taxes. Management believes that segment EBIT provides useful information for analyzing the underlying business results as well as allowing investors a means to evaluate the financial results of each segment in relation to Dole as a whole. EBIT is not defined under U.S. GAAP and should not be considered in isolation or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of Dole’s profitability. Additionally, Dole’s computation of EBIT may not be comparable to other similarly titled measures computed by other companies, because not all companies calculate EBIT in the same manner.
Fresh Fruit
Fresh fruit revenues for the quarter ended June 16, 2012 decreased 18% to $1.1 billion from $1.4 billion for the quarter ended June 18, 2011. Excluding second quarter 2011 sales from Dole’s European divested businesses of $199 million, fresh fruit revenues decreased 4% mainly due to lower sales in Europe. European sales decreased as a result of lower volumes sold in Eastern Europe, and unfavorable euro and Swedish krona foreign currency exchange movements. Banana sales were comparable as lower pricing in North America and Asia were offset by higher volumes of bananas sold in Asia and Europe. Fresh pineapple sales increased primarily due to improved pricing in Asia. Sales in Asia also increased due to higher pricing and volumes of other fresh fruit. Sales of Chilean deciduous fruit decreased as a result of lower sales volumes partially offset by improved local pricing for grapes and apples. Net unfavorable foreign currency exchange movements in Dole’s foreign selling locations resulted in lower revenues of approximately $30 million during the second quarter ended June 16, 2012. Fresh fruit revenues for the half year ended June 16, 2012 decreased 12% to $2.3 billion from $2.6 billion for the half year ended June 18, 2011. Excluding first half 2011 sales from Dole Spain and second quarter 2011 sales from the divested German subsidiary, totaling $235 million, fresh fruit revenues decreased 3%. The decrease in revenues was mainly due to the same factors that impacted sales during the second quarter as well as higher volumes of fresh pineapples sold in North America and Asia during the first quarter of 2012. Net unfavorable foreign currency exchange movements in Dole’s foreign selling locations resulted in lower revenues of approximately $41 million during the half year ended June 16, 2012.
Fresh Vegetables
Fresh vegetables revenues for the quarter ended June 16, 2012 increased 11% to $ 288.6 million from $258.9 million for the quarter ended June 18, 2011. Fresh berries revenues increased as a result of sales associated with the berry acquisition as well as improved pricing for strawberries. Packaged salads revenues increased as a result of improved pricing. Fresh-packed vegetable revenues decreased as a result of lower pricing across all major vegetable product lines despite higher volumes sold. Lower pricing has continued to impact the fresh-packed business in the second quarter due to favorable growing conditions and an abundance of supply. Fresh vegetables revenues for the half year ended June 16, 2012 increased 7% to $524.5 million from $489.1 million for the half year ended June 18, 2011. The increase in revenues was mainly due to the same factors that impacted sales during the second quarter, except for lower pricing for strawberries during the first quarter of 2012. Revenues from the berry acquisition were $25.7 million and $40.9 million for the quarter and half year ended June 16, 2012, respectively. In addition, the year over year comparison for fresh-packed vegetables was impacted by abnormally strong pricing during the first quarter of 2011 associated with product shortages from challenging weather conditions.
Fresh vegetables EBIT for the quarter ended June 16, 2012 increased to $10.3 million from $5.6 million for the quarter ended June 18, 2011. EBIT increased as a result of higher earnings in the fresh berries business as a result of earnings generated from the berry acquisition and improved pricing for strawberries partially offset by higher growing costs. Packaged salads earnings increased as a result of improved pricing and lower product costs due in part to production efficiencies partially offset by higher marketing expenditures. Fresh-packed vegetables earnings were lower as a result of lower pricing. Fresh vegetables EBIT for the half year ended June 16, 2012 decreased slightly to $17.3 million from $17.9 million for the half year ended June 18, 2011. EBIT for the first half of 2012 was impacted by the same factors experienced during the second quarter, except for lower growing costs for strawberries during the first quarter of 2012.
Packaged Foods
Packaged foods revenues for the quarter ended June 16, 2012 increased 7% to $291.2 million from $272.3 million for the quarter ended June 18, 2011. Revenues increased primarily due to higher pricing of packaged fruit products worldwide and higher sales of frozen fruit and healthy snacks. These improvements were partially offset by lower volumes of packaged fruit products sold in North America and Europe. Packaged foods revenues for the half year ended June 16, 2012 increased 4% to $558.2 million from $537.1 million for the half year ended June 18, 2011. The increase in revenues was mainly due to the same factors that impacted sales during the second, quarter, except for lower volumes of packaged fruit products sold worldwide during the first quarter of 2012.
EBIT in the packaged foods segment for the quarter ended June 16, 2012 decreased to $17.5 million from $25.9 million for the quarter ended June 18, 2011. The decrease in EBIT was due primarily to higher product costs and higher marketing expenses for frozen fruit products partially offset by higher global pricing. The increase in product costs was due in part to higher purchased fruit and growing costs as well as higher tinplate costs. Higher marketing expenses were attributable to the additional spending associated with the introduction of new frozen fruit products. EBIT in the packaged foods segment for the half year ended June 16, 2012 decreased to $33.8 million from $38.1 million for the half year ended June 16, 2012. The decrease in EBIT was primarily due to the same factors that impacted the second quarter, except for lower levels of marketing expenditures in North America as prior year first quarter results included additional spending for the introduction of FRUIT BOWLS in 100% juice and fruit in jars in 100% juice.
Corporate
Corporate EBIT was a loss of $16.5 million for the quarter ended June 16, 2012 compared to a loss of $8.1 million for the quarter ended June 18, 2011. The change in EBIT was primarily due to unrealized losses of $1.5 million recorded during the second quarter of 2012 on the long-term Japanese yen hedges, compared to unrealized gains of $4.8 million recorded in the second quarter of 2011. Corporate EBIT was a loss of $25.4 million for the half year ended June 16, 2012 compared to a loss of $55.9 million for the half year ended June 18, 2011. The improvement in EBIT was primarily due to the absence of unrealized losses of $27.4 million incurred in connection with the March 2011 unwinding of the cross currency swap and entering into a series of long-term Japanese yen hedges. In addition, unrealized gains of $3.1 million were recorded during the first half of 2012 on Dole’s foreign denominated borrowings, compared with unrealized losses of $6.4 million recorded in the first half of 2011. There improvements were partially offset by higher levels of general and administrative expenses.
Liquidity and Capital Resources
Cash flows provided by operating activities were $57.7 million for the half year ended June 16, 2012, compared to $77 million for the half year ended June 18, 2011. The change was primarily related to lower banana earnings partially offset by lower inventory spending and lower levels of receivables due in part to timing of collections.
Cash flows used in investing activities were $19.6 million for the half year ended June 16, 2012, compared to cash flows provided by investing activities of $16.7 million for the half year ended June 18, 2011. The change was primarily due to the $40.9 million deposit of restricted cash. This deposit was no longer required as a result of the unwind of the cross currency swap in the second quarter of 2011. Excluding this factor, cash flows used in investing activities decreased $4.5 million primarily due to net cash proceeds received from the first quarter 2012 sale of a German subsidiary, partially offset by the first quarter 2012 acquisition of Mrs. May’s.
Cash flows used in financing activities was $65.9 million for the half year ended June 16, 2012, compared to $27.4 million for the half year ended June 18, 2011. The change was primarily due to approximately $19 million of higher repayments, net of borrowings, and an increase in settlements related to the long-term Japanese yen hedges of $20.7 million,
As of June 16, 2012, Dole had a cash balance of $94.7 million including $0.6 million of restricted cash and an ABL revolver borrowing base of $330.6 million. There was no outstanding balance under the ABL revolver at June 16, 2012. After taking into account approximately $91.1 million of outstanding letters of credit issued under the ABL revolver, Dole had approximately $239.5 million available for borrowings as of June 16, 2012. The ABL revolver matures in 2016.
Dole believes that available borrowing capacity under the revolving credit facility and subsidiaries’ uncommitted lines of credit, together with its existing cash balances, future cash flow from operations, planned asset sales and access to capital markets will enable it to meet its working capital, capital expenditure, debt maturity and other commitments and funding requirements over the next 12 months. Management’s plan is dependent upon the occurrence of future events which will be impacted by a number of factors including the general economic environment in which Dole operates, Dole’s ability to generate cash flow from its operations, and its ability to attract buyers for assets being marketed for sale. Factors impacting Dole’s cash flow from operations include, but are not limited to, product pricing, commodity prices, interest rates and foreign currency exchange rates.
Other Matters
Recently Issued and Adopted Accounting Pronouncements: There were no recently issued accounting pronouncements that impacted Dole’s condensed consolidated financial statements. In addition, Dole did not adopt any new accounting pronouncements during the quarter ended June 16, 2012.
European Union (“EU”) Banana Import Regime: Effective March 7, 2011, a new EU “tariff only” import regime for bananas went into force on all banana imports to the EU market from Latin America. Under terms of the agreement, there will be a gradual tariff reduction from 148 euros per metric ton in 2010 to a final tariff of 114 euro per metric ton on January 1, 2017 or January 1, 2019 (the 2019 date applies if no further trade agreements are reached in the ongoing Doha Development Agenda global trade discussions). Bananas from African, Caribbean, and Pacific countries may be imported to the EU duty-free.
In addition, the EU has negotiated several free trade areas agreements (“FTA”) that will allow for an even lower import tariff on specified volumes of banana exports from certain countries. An EU-Colombia-Peru FTA was signed on June 26, 2012 and an EU-Central America (i.e., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama) FTA was signed on June 29, 2012. Both of these FTAs must still be ratified by the European Parliament before they can come into effect, which is expected by early 2013. Ecuador has not yet negotiated an FTA with the EU on bananas and may not benefit, like the other Latin American countries party to an FTA, unless a similar FTA can be negotiated with the EU. Dole continues to monitor these developments but cannot yet anticipate when the necessary approvals will be obtained and when, or if, these FTAs will come into force.
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Fund Letters
