UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-Q

 

 

 

Commission file number 1-4455

 

 

 

 

Dole Food Company, Inc.

(Exact name of registrant as specified in its charter)

 

 

One Dole Drive, Westlake Village, California 91362

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code:

(818) 879-6600

 

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 þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

DOLE FOOD COMPANY, INC.

 

INDEX

 

 

DOLE FOOD COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

DOLE FOOD COMPANY, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

DOLE FOOD COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

DOLE FOOD COMPANY, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued

(Unaudited)

 

Supplemental cash flow information

 

At October 4, 2008, cash and cash equivalents of $70.8 million included $10.8 million of JP Fresh Limited and Dole France subsidiary cash. These subsidiaries were sold during the fourth quarter of 2008.

 

At October 4, 2008 and December 29, 2007, accounts payable included approximately $3.2 million and $17.8 million, respectively, for capital expenditures. Of the $17.8 million of capital expenditures included in accounts payable at December 29, 2007, approximately $16.2 million had been paid during the three quarters ended October 4, 2008.

 

During the three quarters ended October 4, 2008, the Company recorded approximately $75 million of tax-related adjustments that resulted from changes to unrecognized tax benefits that existed at the time of the going-private merger transaction. This tax-related adjustment resulted in a decrease to goodwill and a decrease to the liability for unrecognized tax benefits. Refer to Note 8 — Goodwill and Intangible Assets for additional information.

 

See Accompanying Notes to Condensed Consolidated Financial Statements

DOLE FOOD COMPANY, INC.

(Unaudited)

 

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Dole Food Company, Inc. and its consolidated subsidiaries (“Dole” or the “Company”) include all adjustments necessary, which are of a normal recurring nature, to present fairly the Company’s financial position, results of operations and cash flows. The Company operates under a 52/53-week year. The quarters ended October 4, 2008 and October 6, 2007 are sixteen weeks in duration. For a summary of significant accounting policies and additional information relating to the Company’s financial statements, refer to the Notes to Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K (“Form 10-K”) for the year ended December 29, 2007.

 

In March 2003, the Company completed a going-private merger transaction (“going-private merger transaction”). The privatization resulted from the acquisition by David H. Murdock, the Company’s Chairman, of the approximately 76% of the Company that he and his affiliates did not already own. As a result of the transaction, the Company became wholly-owned by Mr. Murdock through DHM Holding Company, Inc.

 

Interim results are subject to seasonal variations and are not necessarily indicative of the results of operations for a full year. The Company’s operations are sensitive to a number of factors including weather-related phenomena and their effects on industry volumes, prices, product quality and costs. Operations are also sensitive to fluctuations in foreign currency exchange rates in both sourcing and selling locations as well as economic crises and security risks in developing countries.

 

Certain amounts in the prior year financial statements and related footnotes have been reclassified to conform to the 2008 presentation. As discussed in Note 5 — Discontinued Operations, the Company reclassified the operating results of its fresh-cut flowers operating segment and its North American citrus and pistachio operations to discontinued operations.

 

 

During the quarter ended June 14, 2008, the Company reclassified to current liabilities its $350 million 8.625% notes due May 2009 (“2009 Notes”). The Company also completed the early redemption of $5 million of the 2009 Notes during the third quarter of 2008. As of October 4, 2008, the Company had cash and cash equivalents of $70.8 million and borrowing capacity of $154.7 million under its existing revolving credit facility. For the three quarters ended October 4, 2008, the Company received cash proceeds of $154 million on all asset sales including $145 million on assets which had been reclassified as held-for-sale. After the end of its third fiscal quarter, the Company completed the sale of its JP Fresh Limited (“JP Fresh”) and Dole France subsidiaries which were in the European ripening and distribution business as well as a farm located in central California. The Company received sales proceeds of $76 million on these sales which were used to pay down the Company’s term loan facilities. These sales brought the Company’s total asset sales for 2008 to date to $230 million. In addition, the Company anticipates the sale of additional assets with a net book value of approximately $95 million within the next year comprising net assets held-for-sale of $151 million at October 4, 2008, less the net book value of the assets sold during the fourth quarter of 2008 of $56 million. Nonetheless, the Company is anticipating the need to refinance at least some portion of the 2009 Notes when they become due. The Company is currently evaluating various alternatives, including replacement unsecured financing, amendment of the Company’s secured credit facilities, additional equity, other financing or combinations thereof. A failure by the Company to timely pay the 2009 Notes at or before maturity could lead to an event of default which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

The Company believes that available borrowings 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, refinancing of the 2009 Notes and access to capital markets will enable it to meet its working capital, capital expenditure, debt maturity and other commitments and funding requirements. Management’s plan is

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

dependent upon the occurrence of future events which will be impacted by a number of factors including the availability of refinancing, the general economic environment in which the Company operates, the Company’s ability to generate cash flows from its operations, and its ability to attract buyers for assets being marketed for sale. The accompanying condensed consolidated financial statements do not include any adjustments in respect of such factors.

 

 

During May 2008, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with generally accepted accounting principles. This statement will be effective 60 days after the Securities and Exchange Commission approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of ‘Present Fairly in Conformity With Generally Accepted Accounting Principles’. The Company does not anticipate that the adoption of FAS 162 will have an effect on its consolidated financial statements.

 

During March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“FAS 161”). This new standard requires enhanced disclosures for derivative instruments, including those used in hedging activities. It is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2009. The Company is evaluating the potential impacts that the adoption of FAS 161 may have on its consolidated financial statements.

 

During December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS 160”). FAS 160 requires all entities to report noncontrolling (minority) interests in entities in the same way as equity in the consolidated financial statements. The Company is required to adopt FAS 160 for the first fiscal year beginning after December 15, 2008. The Company is currently evaluating the impact, if any, the adoption of FAS 160 will have on its consolidated financial statements.

 

During December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“FAS 141R”). FAS 141R provides revised guidance for recognizing and measuring assets acquired and liabilities assumed in a business combination. It establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed and also requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Changes in acquired tax contingencies, including those existing at the date of adoption, will be recognized in earnings if outside the maximum allocation period (generally one year). FAS 141R will be applied prospectively to business combinations with acquisition dates on or after January 1, 2009. Following the date of adoption of FAS 141R, the resolution of such items at values that differ from recorded amounts will be adjusted through earnings, rather than goodwill.

 

During September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. FAS 157 requires companies to disclose the fair value of financial instruments according to a fair value hierarchy as defined in the standard. In February 2008, the FASB issued FASB Staff Position 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP 157-1”) and FSP 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-1 amends FAS 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except for items that are

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

recognized or disclosed at fair value in the financial statements on a recurring basis. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and was adopted by the Company, as it applies to its financial instruments, effective December 30, 2007. The impact of adoption of FAS 157 is discussed in Note 15 — Derivative Financial Instruments.

 

 

Included in other income (expense), net in the Company’s condensed consolidated statements of operations for the quarters and three quarters ended October 4, 2008 and October 6, 2007 are the following items:

 

 

Refer to Note 15 — Derivative Financial Instruments for further discussion regarding the Company’s cross currency swap.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

During the second quarter of 2008, the Company approved and committed to a formal plan to divest its fresh-cut flowers operations. In addition, during the fourth quarter of 2007, the Company approved and committed to a formal plan to divest its citrus and pistachio operations (“Citrus”) located in central California. The operating results of Citrus were included in the fresh fruit operating segment. The sale of Citrus was completed during the third quarter of 2008. Refer to Note 14 — Assets Held-For-Sale. In evaluating the two businesses, the Company concluded that they each met the definition of a discontinued operation as defined in Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). Accordingly, the results of operations of these businesses have been reclassified for all periods presented. The operating results of fresh-cut flowers and Citrus for the quarters and three quarters ended October 4, 2008 and October 6, 2007 are reported in the following table:

 

 

 

Included in the fresh-cut flowers loss before income taxes for both the quarter and three quarters ended October 4, 2008, is a $17 million impairment charge. Refer to Note 14 — Assets Held-For-Sale for further information.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Gain on disposal of discontinued operations, net of income taxes, for both the quarter and three quarters ended October 4, 2008 included minority interest expense of $12.3 million. For all other periods presented, minority interest expense was not material.

 

 

The Company recorded an income tax benefit of $60.1 million on $83.1 million of income from continuing operations before income taxes for the three quarters ended October 4, 2008. The Company’s reported income tax benefit on continuing operations differed from the expense calculated using the U.S. federal statutory tax rate for the following reasons:

 

 

 

 

The income tax expense for the three quarters ended October 6, 2007 was $1.1 million on $11.2 million of losses from continuing operations before income taxes, including interest expense of $8.3 million (net of associated income tax benefits of approximately $5 million) related to the Company’s unrecognized tax benefits. The Company’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.

 

The total liability for unrecognized tax benefits, including interest, recorded in other long-term liabilities was $144 million and $269 million at October 4, 2008 and December 29, 2007, respectively. The change is primarily due to the settlement of the federal income tax audit for the years 1995 to 2001.

 

Under Accounting Principles Board Opinion No. 28, Interim Financial Reporting (“APB 28”), and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods (“FIN 18”), the Company 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. Applying the provisions of APB 28 and FIN 18 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.

 

In applying APB 28 and FIN 18 to the income tax provision computation for the period ended October 4, 2008, the Company excluded, from its calculation of the estimated annual effective tax rate, income or loss earned in certain foreign jurisdictions having tax rates that vary significantly from those associated with the Company’s earnings from operations in the rest of the jurisdictions in which it operates. Due to the volatility in the mix of earnings, the Company believes this approach is more representative of what is expected for the full year.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

For the periods presented, the Company’s income tax provision differs from the U.S. federal statutory rate applied to the Company’s pretax income primarily due to operations in foreign jurisdictions that are taxed at a rate lower than the U.S. federal statutory rate and the accrual for current year uncertain tax positions. In addition, income tax for the three quarters ended October 4, 2008 also benefited from the settlement of the federal income tax audit for the years 1995-2001.

 

The Company recognizes accrued interest and penalties related to its unrecognized tax benefits as a component of income taxes in the condensed consolidated statement of operations. Accrued interest and penalties before tax benefits were $64.6 million and $27.7 million at December 29, 2007 and October 4, 2008, respectively, and are included as a component of other long-term liabilities in the condensed consolidated balance sheet. The decrease is primarily attributable to the reduction in liabilities for unrecognized tax benefits associated with the settlement of the federal income tax audit for the years 1995-2001.

 

Dole Food Company or one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2001.

 

Income Tax Audits:  The Company believes its tax positions comply with the applicable tax laws and that it is adequately provided for all tax related matters. Matters raised upon audit may involve substantial amounts and could result in material cash payments if resolved unfavorably; however, management does not believe that any material payments will be made related to these matters or that total unrecognized tax benefits will significantly change within the next year. Management considers it unlikely that the resolution of these matters will have a material adverse effect on the Company’s results of operations.

 

1995 — 2001 Federal Income Tax Audit:  In June 2006, the IRS completed an examination of the Company’s federal income tax returns for the years 1995 to 2001 and issued a Revenue Agent’s Report (“RAR”) that included various proposed adjustments. The net tax deficiency associated with the RAR was $175 million for which the Company provided $110 million of gross unrecognized tax benefits, plus penalties and interest. The Company filed a protest letter contesting the proposed adjustments contained in the RAR. During January 2008, the Company was notified that the Appeals Branch of the IRS had finalized its review of the Company’s protest and that the Appeals Branch’s review supported the Company’s position in all material respects. On June 13, 2008, the Appeals review was approved by the Joint Committee on Taxation. The impact of the settlement on the Company’s three quarters ended October 4, 2008 condensed consolidated financial statements is $136 million, which includes a $110 million reduction in gross unrecognized tax benefits recorded in other long-term liabilities plus a reduction of $26 million for interest and penalties, net of federal and state tax benefits. Of this amount, $61 million reduced the Company’s income tax provision and effective tax rate for the three quarters ended October 4, 2008, and the remaining $75 million reduced goodwill.

 

2002 — 2005 Federal Income Tax Audit:  The Company is currently under examination by the Internal Revenue Service for the tax years 2002-2005 and it is anticipated that the examination will be completed by the end of 2009.

 

 

The major classes of inventories were as follows:

 

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Goodwill has been allocated to the Company’s reporting segments as follows:

 

 

The tax-related adjustments result from changes to unrecognized tax benefits that existed at the time of the going-private merger transaction. These changes were due to the settlement of the federal income tax audit as discussed in Note 6 — Income Taxes.

 

Details of the Company’s intangible assets were as follows:

 

 

Amortization expense of intangible assets totaled $1.4 million for each of the quarters ended October 4, 2008 and October 6, 2007, respectively, and $3.4 million for each of the three quarters ended October 4, 2008 and October 6, 2007, respectively.

 

As of October 4, 2008, the estimated remaining amortization expense associated with the Company’s intangible assets for the remainder of 2008 and in each of the next four fiscal years is as follows (in thousands):

 

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

During the third quarter of 2008, the Company reclassified all of the assets and liabilities of JP Fresh to assets held-for-sale. Goodwill and intangible assets related to JP Fresh totaled $24 million and $7.3 million, respectively, at October 4, 2008. Refer to Note 14 — Assets Held-For-Sale.

 

The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, during the second quarter of fiscal 2008. This review indicated no impairment to goodwill or any of the Company’s indefinite-lived intangible assets. As market conditions change, the Company continues to monitor and perform updates of its impairment testing of the recoverability of goodwill and long-lived assets.

 

 

Notes payable and long-term debt consisted of the following amounts:

 

 

Debt Issuance Costs

 

The Company amortized deferred debt issuance costs of $1.2 million and $3.1 million during the quarter and three quarters ended October 4, 2008, respectively. The Company amortized deferred debt issuance costs of $1.3 million and $3.2 million during the quarter and three quarters ended October 6, 2007, respectively.

 

Debt Repayment

 

On September 19, 2008, the Company completed the early redemption of $5 million of its 8.625% notes due in 2009 at a price of 99% of the principal amount plus accrued interest through the date of redemption.

 

Term Loans and Revolving Credit Facility

 

As of October 4, 2008, the term loan facilities consisted of $182.2 million of Term Loan B and $731.2 million of Term Loan C. The term loan facilities bear interest at LIBOR plus a margin ranging from 1.75% to 2%, dependent

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

upon the Company’s senior secured leverage ratio. The weighted average variable interest rate at October 4, 2008 for Term Loan B and Term Loan C was LIBOR plus 2%, or 4.8%. The term loan facilities require quarterly principal payments, plus a balloon payment due in 2013. Related to the term loan facilities, the Company holds an interest rate swap to hedge future changes in interest rates and a cross currency swap to effectively lower the U.S. dollar fixed interest rate to a Japanese yen fixed interest rate. Refer to Note 15 — Derivative Financial Instruments for additional information related to these instruments.

 

As of October 4, 2008, the asset based revolving credit facility (“ABL revolver”) borrowing base was $350 million and the amount outstanding under the ABL revolver was $190 million. The ABL revolver bears interest at LIBOR plus a margin ranging from 1.25% to 1.75%, dependent upon the Company’s historical borrowing availability under this facility. At October 4, 2008, the weighted average variable interest rate for the ABL revolver was LIBOR plus 1.75%, or 5.4%. The ABL revolver matures in April 2011. After taking into account approximately $5.3 million of outstanding letters of credit issued under the ABL revolver, the Company had approximately $154.7 million available for borrowings as of October 4, 2008. In addition, the Company had approximately $82.4 million of letters of credit and bank guarantees outstanding under its pre-funded letter of credit facility as of October 4, 2008.

 

Covenants

 

Provisions under the Company’s senior secured credit facilities and the indentures governing the Company’s senior notes and debentures require the Company to comply with certain covenants. These covenants include limitations on, among other things, indebtedness, investments, loans to subsidiaries, employees and third parties, the issuance of guarantees and the payment of dividends. At October 4, 2008, the Company was in compliance with all applicable covenants.

 

 

Comprehensive Income (Loss)

 

The components of comprehensive income (loss) were as follows in each period:

 

 

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

Dividends

 

The Company did not declare or pay a dividend to its parent during either of the quarters or three quarters ended October 4, 2008 and October 6, 2007.

 

The Company’s ability to declare dividends is limited under the terms of its senior secured credit facilities and senior notes indentures. As of October 4, 2008, the Company had no ability to declare and pay dividends or other similar distributions.

 

 

The components of net periodic benefit cost for the Company’s U.S. and international pension plans and other postretirement benefit (“OPRB”) plans were as follows:

 

 

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

During the fourth quarter of 2008, the Company amended its domestic OPRB plan. This amendment will be effective January 1, 2009. The Company replaced health care coverage (including prescription drugs) for Medicare eligible retirees and surviving spouses who are age 65 and older with a new Health Reimbursement Arrangement (“HRA”), whereby each participant will be provided an annual amount in an HRA account. The HRA account may be used to help offset health care costs. This plan amendment will reduce the benefit obligation by approximately $11 million and will reduce the annual net periodic benefit cost by $1.1 million in each of the next 10 years, which represents the average remaining life expectancy of the participants.

 

The Company expected to voluntarily contribute $8 million to its U.S. qualified plan during the 2008 fiscal year. However, under the minimum funding requirements of the Pension Protection Act of 2006, no contribution will be required for fiscal 2008. As a result, the Company will not make any contributions to its U.S. qualified plan during 2008.

 

 

As discussed in Note 5, the Company approved and committed to a formal plan to divest its fresh-cut flowers operating segment and accordingly reclassified the results of operations to discontinued operations. As a result of this reclassification of the fresh-cut flowers segment, the Company now has three reportable operating segments.

 

The Company 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.

 

Management evaluates and monitors segment performance primarily through, among other measures, earnings before interest expense and income taxes (“EBIT”). EBIT is calculated by adding interest expense and income taxes to income (loss) from continuing operations. 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 the Company as a whole. EBIT is not defined under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered in isolation or as a substitute for net income or cash flow measures prepared in accordance with GAAP or as a measure of the Company’s profitability. Additionally, the Company’s computation of EBIT may not be comparable to other

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

similarly titled measures computed by other companies, because not all companies calculate EBIT in the same fashion.

 

Revenues from external customers and EBIT for the reportable operating segments and corporate were as follows:

 

 

 

The Company’s equity earnings in unconsolidated subsidiaries, which have been included in EBIT in the table above, relate primarily to the fresh fruit operating segment.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Total assets for the three reportable operating segments, corporate and fresh-cut flowers were as follows:

 

 

 

The Company is a guarantor of indebtedness of some of its key fruit suppliers and other entities integral to the Company’s operations. At October 4, 2008, guarantees of $2.9 million consisted primarily of amounts advanced under third-party bank agreements to independent growers that supply the Company with product. The Company has not historically experienced any significant losses associated with these guarantees.

 

The Company issues letters of credit and bank guarantees through its ABL revolver and its pre-funded letter of credit facilities, and, in addition, separately through major banking institutions. The Company also provides insurance-company-issued bonds. These letters of credit, bank guarantees and insurance company bonds are required by certain regulatory authorities, suppliers and other operating agreements. As of October 4, 2008, total letters of credit, bank guarantees and bonds outstanding under these arrangements were $129.9 million, of which $82.4 million was issued under its pre-funded letter of credit facility.

 

The Company has change of control agreements with certain key executives, under which severance payments and benefits would become payable in the event of specified terminations of employment in connection with a change of control (as defined) of the Company.

 

The Company is involved from time to time in claims and legal actions incidental to its operations, both as plaintiff and defendant. The Company has established what management currently believes to be adequate reserves for pending legal matters. These reserves are established as part of an ongoing worldwide assessment of claims and legal actions that takes into consideration such items as changes in the pending case load (including resolved and new matters), opinions of legal counsel, individual developments in court proceedings, changes in the law, changes in business focus, changes in the litigation environment, changes in opponent strategy and tactics, new developments as a result of ongoing discovery, and past experience in defending and settling similar claims. In the opinion of management, after consultation with outside counsel, the claims or actions to which the Company is a party are not expected to have a material adverse effect, individually or in the aggregate, on the Company’s financial condition or results of operations.

 

DBCP Cases:  A significant portion of the Company’s legal exposure relates to lawsuits pending in the United States and in several foreign countries, alleging injury as a result of exposure to the agricultural chemical DBCP (1,2-dibromo-3-chloropropane). As to all the DBCP matters, the Company has denied liability and asserted substantial defenses. Although no assurance can be given concerning the outcome of these cases, in the opinion of management, after consultation with legal counsel and based on past experience defending and settling DBCP claims, the pending lawsuits are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

DBCP was manufactured by several chemical companies including Dow and Shell and registered by the U.S. government for use on food crops. The Company and other growers applied DBCP on banana farms in Latin America and the Philippines and on pineapple farms in Hawaii. Specific periods of use varied among the different locations. The Company halted all purchases of DBCP, including for use in foreign countries, when the U.S. EPA cancelled the registration of DBCP for use in the United States in 1979. That cancellation was based in part on a 1977 study by a manufacturer which indicated an apparent link between male sterility and exposure to DBCP among factory workers producing the product, as well as early product testing done by the manufacturers showing testicular effects on animals exposed to DBCP. To date, there is no reliable evidence demonstrating that field application of DBCP led to sterility among farm workers, although that claim is made in the pending lawsuits. Nor is there any reliable scientific evidence that DBCP causes any other injuries in humans, although plaintiffs in the various actions assert claims based on cancer, birth defects and other general illnesses.

 

Currently there are 389 lawsuits, in various stages of proceedings, alleging injury as a result of exposure to DBCP, seeking enforcement of Nicaraguan judgments, or seeking to bar Dole’s efforts to resolve DBCP claims in Nicaragua. Twenty-four of these lawsuits are currently pending in various jurisdictions in the United States, of which nine have been brought by foreign workers who allege exposure to DBCP in countries where Dole did not even have operations during the relevant time period. One case pending in Los Angeles Superior Court with 10 Nicaraguan plaintiffs currently has a trial date of May 11, 2009. One case pending in Hawaii Superior Court with 10 plaintiffs from Costa Rica, Guatemala, Ecuador and Panama currently has a trial date of January 18, 2010. The remaining cases are pending in Latin America and the Philippines, including 150 labor cases pending in Costa Rica under that country’s national insurance program. Claimed damages in DBCP cases worldwide total approximately $44.1 billion, with lawsuits in Nicaragua representing approximately 87% of this amount. In almost all of the non- labor cases, the Company is a joint defendant with the major DBCP manufacturers and, typically, other banana growers. Except as described below, none of these lawsuits has resulted in a verdict or judgment against the Company.

 

One case pending in Los Angeles Superior Court with 12 Nicaraguan plaintiffs initially resulted in verdicts which totaled approximately $5 million in damages against Dole in favor of six of the plaintiffs. As a result of the court’s March 7, 2008 favorable rulings on Dole’s post-verdict motions, including, importantly, the court’s decision striking down punitive damages in the case on U.S. Constitutional grounds, the damages against Dole have now been reduced to $1.58 million in total compensatory awards to four of the plaintiffs; and the court granted Dole’s motion for a new trial as to the claims of one of the plaintiffs. Execution of the $1.58 million judgment is stayed until 14 days after the court’s determination of costs. Once the court makes its determination of costs, the Company will file an appeal bond, which will further stay the judgment pending the resolution of the appeal. Additionally, the court appointed a mediator to explore possible settlement of all DBCP cases currently pending before the court.

 

In Nicaragua, 194 cases are currently filed (of which 26 are active) in various courts throughout the country, all but one of which were brought pursuant to Law 364, an October 2000 Nicaraguan statute that contains substantive and procedural provisions that Nicaragua’s Attorney General formally opined are unconstitutional. In October 2003, the Supreme Court of Nicaragua issued an advisory opinion, not connected with any litigation, that Law 364 is constitutional. Twenty-four cases have resulted in judgments in Nicaragua: $489.4 million on December 11, 2002; $82.9 million on February 25, 2004; $15.7 million on May 25, 2004; $4 million on May 25, 2004; $56.5 million on June 14, 2004; $64.8 million on June 15, 2004; $27.7 million on March 17, 2005; $98.5 million on August 8, 2005; $46.4 million on August 20, 2005; $809 million on December 1, 2006; and $38.4 million on November 14, 2007. The Company has appealed all judgments, with the Company’s appeal of the August 8, 2005 $98.5 million judgment and of the December 1, 2006 $809 million judgment currently pending before the Nicaragua Court of Appeal.

 

The claimants’ attempted enforcement of the December 11, 2002 judgment for $489.4 million in the United States resulted in a dismissal with prejudice of that action by the United States District Court for the Central District

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

of California on October 20, 2003. The claimants have voluntarily dismissed their appeal of that decision, which was pending before the United States Court of Appeals for the Ninth Circuit. Defendants’ motion for sanctions against Plaintiffs’ counsel is still pending before the Court of Appeals in that case. A Special Master appointed by the Court of Appeals has recommended that Plaintiffs’ counsel be ordered to pay Defendants’ fees and costs up to $130,000 each to Dole and the other two defendants; and following such recommendation, the Court of Appeals has appointed a special prosecutor.

 

Claimants have also sought to enforce the Nicaraguan judgments in Colombia, Ecuador and Venezuela. In addition, there is one case pending in U.S. District Court in Miami, Florida seeking enforcement of the August 8, 2005 $98.5 million Nicaraguan judgment.

 

The Company believes that none of the Nicaraguan judgments will be enforceable against any Dole entity in the U.S. or in any other country, because Nicaragua’s Law 364 is unconstitutional and violates international principles of due process. Among other things, Law 364 is an improper “special law” directed at particular parties; it requires defendants to pay large, non-refundable deposits in order to even participate in the litigation; it provides a severely truncated procedural process; it establishes an irrebuttable presumption of causation that is contrary to the evidence and scientific data; and it sets unreasonable minimum damages that must be awarded in every case.

 

On October 23, 2006, Dole announced that Standard Fruit de Honduras, S.A. reached an agreement with the Government of Honduras and representatives of Honduran banana workers. This agreement establishes a Worker Program that is intended by the parties to resolve in a fair and equitable manner the claims of male banana workers alleging sterility as a result of exposure to DBCP. The Honduran Worker Program will not have a material effect on Dole’s financial condition or results of operations. The official start of the Honduran Worker Program was announced on January 8, 2007. On August 15, 2007, Shell Oil Company was included in the Worker Program. While Dole believes there is no reliable scientific basis for alleged injuries from the agricultural field application of DBCP, Dole continues to seek reasonable resolution of other pending litigation and claims in the U.S. and Latin America. For example, as in Honduras, Dole is committed to finding a prompt resolution to the DBCP claims in Nicaragua, and is prepared to pursue a structured worker program in Nicaragua with science-based criteria. Additional information concerning DBCP matters is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

European Union Antitrust Inquiry:  On October 15, 2008, the European Commission (“EC”) adopted a Decision against Dole Food Company, Inc. and Dole Fresh Fruit Europe OHG (collectively “Dole”) and against other unrelated banana companies, finding violations of the European competition (antitrust) laws. The Decision imposes €45.6 million in fines on Dole.

 

The Decision follows a Statement of Objections, issued by the EC on July 25, 2007, and searches carried out by the EC in June 2005 at certain banana importers and distributors, including two of the Company’s offices. On November 28 and 29, 2007, the EC conducted searches of certain of the Company’s offices in Italy and Spain, as well as of other companies’ offices located in these countries.

 

Dole received the Decision on October 21, 2008 and has 70 days to appeal the Decision to the European Court of First Instance. The Company will appeal the Decision. The payment of the fine, or bonding of the fine with interest, is required within 90 days of the Company’s receipt of the Decision. The Company has proposed a payment plan, with the request that the EC stay enforcement of the Decision and waive the bond requirement to take effect within 60 days of the Company’s receipt of the Decision in accordance with the Company’s credit agreements. Although no assurances can be given, and although there could be a material adverse effect on the Company, the Company believes that it has not violated the European competition laws. No accrual for the Decision has been made in the accompanying condensed consolidated financial statements, since the Company cannot determine at this time the amount of probable loss, if any, incurred as a result of the Decision.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Honduran Tax Case:  In 2005, the Company received a tax assessment from Honduras of approximately $137 million (including the claimed tax, penalty, and interest through the date of assessment) relating to the disposition of all of the Company’s interest in Cervecería Hondureña, S.A in 2001. Although no assurance can be given concerning the outcome of this case, in the opinion of management, after consultation with legal counsel, the pending lawsuits and tax-related matters are not expected to have a material adverse effect on the Company’s financial condition or results of operations. Additional information concerning this matter is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

Hurricane Katrina Cases:  Dole is one of a number of parties sued, including the Mississippi State Port Authority as well as other third-party terminal operators, in connection with the August 2005 Hurricane Katrina. Dole expects that this Katrina-related litigation will not have a material adverse effect on its financial condition or results of operations. Additional information concerning this matter is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

Spinach E. coli Outbreak:  On September 15, 2006, Natural Selection Foods LLC recalled all packaged fresh spinach that Natural Selection Foods produced and packaged with Best-If-Used-By dates from August 17 through October 1, 2006, because of reports of illness due to E. coli O157:H7 following consumption of packaged fresh spinach produced by Natural Selection Foods. These packages were sold under 28 different brand names, only one of which was ours. At that time, Natural Selection Foods produced and packaged all of our spinach items. Dole has no ownership or other economic interest in Natural Selection Foods. To date, 204 cases of illness due to E. coli O157:H7 infection have been reported to the Centers for Disease Control and Prevention (203 in 26 states and one in Canada) including 31 cases involving a type of kidney failure called Hemolytic Uremic Syndrome (HUS), 104 hospitalizations, and three deaths. Dole expects that the vast majority of the spinach E. coli O157:H7 claims will be handled outside the formal litigation process. Dole expects that the spinach E. coli O157:H7 matter will not have a material adverse effect on Dole’s financial condition or results of operations. Additional information concerning this matter is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2007, under the heading “Item 3. Legal Proceedings.”

 

 

The Company continuously reviews its assets in order to identify those assets that do not meet the Company’s future strategic direction or internal economic return criteria. As a result of this review, the Company has identified and is in the process of selling certain businesses and long-lived assets. In accordance with FAS 144, the Company has reclassified these assets as held-for-sale.

 

Total assets held-for-sale by segment were as follows:

 

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

The major classes of assets and liabilities held-for-sale included in the Company’s condensed consolidated balance sheet at October 4, 2008 were as follows:

 

 

For the three quarters ended October 4, 2008, the Company received cash proceeds of $154 million on assets sold during the three quarters ended October 4, 2008, including $145 million on assets which had been reclassified as held-for-sale with a net book value of $101.5 million.

 

Fresh Fruit

 

During the three quarters ended October 4, 2008, the Company added $188.5 million to the assets held-for-sale balance in the fresh fruit reporting segment. These assets primarily consist of a packing and cooling facility and wood box plant located in Chile, approximately 8,000 acres of Hawaiian land and the assets of two European businesses discussed below.

 

During the third quarter ended October 4, 2008, the Company entered into a definitive purchase and sale agreement to sell its JP Fresh subsidiary in the United Kingdom and its Dole France subsidiary which were in the European ripening and distribution business to Compagnie Fruitière Paris. Compagnie Fruitière Paris is a subsidiary of Compagnie Financière de Participations, a company in which Dole holds a non-controlling 40% ownership interest.

 

2008 Sales

 

The Company sold the following assets during the three quarters ended October 4, 2008, which had been classified as held-for-sale: approximately 2,200 acres of land parcels in Hawaii, two Chilean farms, property located in Turkey and a breakbulk refrigerated ship owned by a Latin American subsidiary. The amount of cash collected on these sales totaled approximately $65 million. The total sales proceeds of $65 million includes $12.7 million for the sale of the ship. The Company also entered into a lease agreement for the same ship and recognized a deferred gain of $11.9 million on the sale. The deferred gain is amortized over the 3 year lease term. The total realized gain recorded on the sale of these assets, excluding the ship, was approximately $2 million and $7 million for the quarter and three quarters ended October 4, 2008, respectively.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

During the fourth quarter of 2007, the Company reclassified approximately 4,400 acres of land and other related assets of its citrus and pistachio operations located in central California as assets held-for-sale. These assets were held by non-wholly owned subsidiaries of the Company. In March 2008, the Company entered into an agreement to sell these assets. The sale was completed during the third quarter of 2008 and the Company received net proceeds of $44 million. The Company’s share of these net proceeds was $28.1 million. The Company recorded a gain of $3.3 million, net of income taxes, which was recorded as gain on disposal of discontinued operations, net of income taxes, for both the quarter and three quarters ended October 4, 2008.

 

Packaged Foods

 

During the second quarter of 2008, the Company reclassified approximately 600 acres of peach orchards located in California as assets held-for-sale. The net book value of these assets is $4.5 million.

 

Fresh-Cut Flowers — Discontinued Operation

 

During the second quarter of 2008, the Company approved and committed to a formal plan to divest its fresh-cut flowers operating segment. Accordingly, all the assets and liabilities were reclassified as held-for-sale.

 

During the third quarter of 2008, the Company signed a binding letter of intent to sell its fresh-cut flowers division (“Flowers transaction”). The sale of the fresh-cut flowers division is expected to take place in phases. The first phase is expected to close during the fourth quarter of 2008 or the first quarter of 2009. The remaining phases can be purchased by the same buyer under separate option contracts that expire in two years. The sale of the remaining phases are expected to close within the next year. If the options on the remaining phases are exercised, the Company will receive total sales proceeds of approximately $56 million on assets with a net book value of $40 million, after recording of the impairment loss discussed in the following paragraph.

 

The Company recorded an impairment loss of $17 million on the assets to be sold in the first phase of the Flowers transaction. The impairment charge represents the amount by which the net book value exceeds the fair market value less cost to sell. The fair market value of the assets was determined by the sales price agreed upon in the binding letter of intent. The impairment loss was recorded as a component of loss from discontinued operations, net of income taxes, for both the quarter and three quarters ended October 4, 2008.

 

2008 Sales

 

The Company reclassified its fresh-cut flowers headquarters facility, located in Miami, Florida as assets held-for-sale during the third quarter of 2007. The Company completed the sale of this facility during the third quarter of 2008 and received net cash proceeds of $34 million. In addition, the Company received net cash proceeds of $1.9 million on the sale of two farms. The gain realized on the sale of these assets, net of income taxes, was approximately $3.1 million and is included as a component of loss from discontinued operations, net of income taxes in the condensed consolidated statement of operations for both the quarter and three quarters ended October 4, 2008.

 

Fourth Quarter 2008 Sales and Activity

 

During the fourth quarter of 2008, the Company completed the sale of its JP Fresh and Dole France subsidiaries as well as one farm located in central California. The Company received total cash proceeds of approximately $76 million for these transactions all of which was used to pay down the Company’s term loan facilities. The Company also entered into a binding letter of intent to sell certain portions of its banana operations in Latin America. As a result, the Company will reclassify the related assets and liabilities to held-for-sale during the fourth quarter of 2008. The sale is expected to close during the first quarter of 2009.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

 

The Company is exposed to foreign currency exchange rate fluctuations, bunker fuel price fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments to hedge certain foreign currency, bunker fuel and interest rate exposures. The Company’s objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

 

Through the first quarter of 2007, all of the Company’s derivative instruments, with the exception of the cross currency swap, were designated as effective hedges of cash flows as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“FAS 133”). However, during the second quarter of 2007, the Company elected to discontinue its designation of both its foreign currency and bunker fuel hedges as cash flow hedges under FAS 133. The interest rate swap will continue to be accounted for as a cash flow hedge under FAS 133. As a result, all changes in the fair value of the Company’s derivative financial instruments from the time of discontinuation of hedge accounting are reflected in the Company’s condensed consolidated statements of operations.

 

At October 4, 2008, the gross notional value and fair market value of the Company’s foreign currency hedges were as follows:

 

 

At October 4, 2008, the notional volume and the fair market value of the Company’s bunker fuel hedges were as follows:

 

 

For both the foreign currency and bunker fuel hedges, the fair market value of these instruments is recorded in the condensed consolidated balance sheet as either a current asset or current liability. Settlement of these hedges will occur during 2008 and 2009.

 

DOLE FOOD COMPANY, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Net unrealized gains (losses) and realized gains (losses) on the foreign currency and bunker fuel hedges for the quarters and three quarters ended October 4, 2008 and October 6, 2007 were as follows: