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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 29, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 333-107830-05

 

 

DEL MONTE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-3064217

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

One Maritime Plaza, San Francisco, California 94111

(Address of Principal Executive Offices including Zip Code)

(415) 247-3000

(Registrant’s Telephone Number, Including Area Code)

 

 

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
          The number of shares outstanding of the Company’s common stock, par value $0.01, as of close of business on March 9, 2012 was 10.

 

 

 


Table of Contents

LOGO

Table of Contents

 

PART I.

   FINANCIAL INFORMATION      3   

ITEM 1.

   FINANCIAL STATEMENTS      3   
   CONDENSED CONSOLIDATED BALANCE SHEETS –January 29, 2012 (Successor) (unaudited) and May 1, 2011 (Successor)      3   
   CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)  – three and nine months ended January 29, 2012 (Successor) and January 30, 2011 (Predecessor)      4   
   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) – nine months ended January 29, 2012 (Successor) and January 30, 2011 (Predecessor)      5   
   NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)      6   
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      20   
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      34   
ITEM 4.    CONTROLS AND PROCEDURES      35   
PART II.    OTHER INFORMATION      37   
ITEM 1.    LEGAL PROCEEDINGS      37   
ITEM 1A.    RISK FACTORS      37   
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      38   
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES      39   
ITEM 4.    MINE SAFETY DISCLOSURES      39   
ITEM 5.    OTHER INFORMATION      39   
ITEM 6.    EXHIBITS      40   
SIGNATURES      41   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

 

     Successor     Successor  
     January 29,
2012
    May 1,
2011
 
     (unaudited)     (derived from audited
financial statements)
 
ASSETS     

Cash and cash equivalents

   $ 238.3      $ 205.2   

Trade accounts receivable, net of allowance

     197.6        201.5   

Inventories

     887.7        766.9   

Prepaid expenses and other current assets

     106.7        165.4   
  

 

 

   

 

 

 

Total current assets

     1,430.3        1,339.0   

Property, plant and equipment, net

     712.0        731.7   

Goodwill

     2,125.0        2,124.0   

Intangible assets, net

     2,786.9        2,828.7   

Other assets, net

     162.1        180.3   
  

 

 

   

 

 

 

Total assets

   $ 7,216.3      $ 7,203.7   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY     

Accounts payable and accrued expenses

   $ 505.2      $ 486.7   

Short-term borrowings

     4.8        8.6   

Current portion of long-term debt

     27.0        20.3   
  

 

 

   

 

 

 

Total current liabilities

     537.0        515.6   

Long-term debt

     3,953.6        3,973.1   

Deferred tax liabilities

     925.8        969.1   

Other non-current liabilities

     304.2        260.5   
  

 

 

   

 

 

 

Total liabilities

     5,720.6        5,718.3   
  

 

 

   

 

 

 

Stockholder’s equity:

    

Common stock ($0.01 par value per share, shares authorized:

    

1,000; 10 issued and outstanding)

     —          —     

Additional paid-in capital

     1,581.6        1,584.4   

Accumulated other comprehensive income

     0.4        5.5   

Retained earnings (accumulated deficit)

     (86.3     (104.5
  

 

 

   

 

 

 

Total stockholder’s equity

     1,495.7        1,485.4   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 7,216.3      $ 7,203.7   
  

 

 

   

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

3


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in millions)

 

     Successor           Predecessor     Successor           Predecessor  
     Three Months Ended     Nine Months Ended  
     January 29,
2012
          January 30,
2011
    January 29,
2012
          January 30,
2011
 

Net sales

   $ 971.1           $ 969.4      $ 2,741.6           $ 2,714.9   

Cost of products sold

     693.9             664.7        1,960.6             1,834.0   
  

 

 

        

 

 

   

 

 

        

 

 

 

Gross profit

     277.2             304.7        781.0             880.9   

Selling, general and administrative expense

     152.7             159.3        500.1             468.1   
  

 

 

        

 

 

   

 

 

        

 

 

 

Operating income

     124.5             145.4        280.9             412.8   

Interest expense

     62.8             18.8        188.5             58.5   

Other (income) expense

     16.0             (5.8     64.4             (4.2
  

 

 

        

 

 

   

 

 

        

 

 

 

Income from continuing operations before income taxes

     45.7             132.4        28.0             358.5   

Provision for income taxes

     18.4             48.2        11.1             133.3   
  

 

 

        

 

 

   

 

 

        

 

 

 

Income from continuing operations

     27.3             84.2        16.9             225.2   
   

Income from discontinued operations before income taxes

     —               1.0        —               0.8   

Income tax benefit

     (1.3          (1.9     (1.3          (1.6
  

 

 

        

 

 

   

 

 

        

 

 

 

Income from discontinued operations

     1.3             2.9        1.3             2.4   
  

 

 

        

 

 

   

 

 

        

 

 

 

Net income

   $ 28.6           $ 87.1      $ 18.2           $ 227.6   
  

 

 

        

 

 

   

 

 

        

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

4


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in millions)

 

     Successor           Predecessor  
     Nine Months Ended  
     January 29,
2012
          January 30,
2011
 

Operating activities:

         

Net income

   $ 18.2           $ 227.6   

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

     112.4             71.7   

Deferred taxes

     (6.7          32.1   

Loss on asset disposals

     2.3             0.9   

Stock compensation expense

     6.1             10.9   

Excess tax benefits from stock-based compensation

     —               (14.7

Unrealized loss on derivative financial instruments

     61.3             1.1   

Changes in operating assets and liabilities

     (53.2          (158.0
  

 

 

        

 

 

 

Net cash provided by operating activities

     140.4             171.6   
  

 

 

        

 

 

 

Investing activities:

         

Capital expenditures

     (49.1          (56.7

Merger, net of cash acquired

     (47.5          —     
  

 

 

        

 

 

 

Net cash used in investing activities

     (96.6          (56.7
  

 

 

        

 

 

 

Financing activities:

         

Proceeds from short-term borrowings

     5.1             500.7   

Payments on short-term borrowings

     (8.9          (494.3

Principal payments on long-term debt

     (13.5          (22.5

Payments of debt-related costs

     (0.1          —     

Dividends paid

     —               (45.0

Issuance of common stock

     —               59.5   

Capital contribution, net

     2.0             —     

Purchase of treasury stock

     —               (100.0

Taxes remitted on behalf of employees for net share settlement of stock awards

     —               (5.9

Excess tax benefits from stock-based compensation

     —               14.7   
  

 

 

        

 

 

 

Net cash used in financing activities

     (15.4          (92.8
  

 

 

        

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     4.7             (1.8

Net change in cash and cash equivalents

     33.1             20.3   

Cash and cash equivalents at beginning of period

     205.2             53.7   
  

 

 

        

 

 

 

Cash and cash equivalents at end of period

   $ 238.3           $ 74.0   
  

 

 

        

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

5


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended January 29, 2012

(unaudited)

Note 1. Business and Basis of Presentation

On March 8, 2011, Del Monte Foods Company (“DMFC”) was acquired by an investor group led by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Capital, L.P. (“Centerview,” and together with KKR and Vestar, the “Sponsors”). Under the terms of the merger agreement, DMFC’s stockholders received $19.00 per share in cash. The acquisition (also referred to as the “Merger”) was effected by the merger of Blue Merger Sub Inc. (“Blue Sub”) with and into DMFC, with DMFC being the surviving corporation. As a result of the Merger, DMFC became a wholly-owned subsidiary of Blue Acquisition Group, Inc. (“Parent”). DMFC stockholders approved the transaction on March 7, 2011. DMFC’s common stock ceased trading on the New York Stock Exchange before the opening of the market on March 9, 2011. See Note 14 for a discussion of the shareholder litigation related to the Merger.

As a result of the Merger, the Company applied the acquisition method of accounting and established a new basis of accounting on March 8, 2011. Periods presented prior to March 8, 2011 represent the operations of the predecessor company (“Predecessor”) and periods presented after March 8, 2011 represent the operations of the successor company (“Successor”). Black lines separate the Successor’s financial statements from that of the Predecessor since the financial statements are not comparable as a result of the application of acquisition accounting and changes in the Company’s capital structure resulting from the Merger. The Company operates on a 52 or 53-week fiscal year ending on the Sunday closest to April 30. The results of operations for the three months ended January 29, 2012 and January 30, 2011 each reflect periods that contain 13 weeks. The results of operations for the nine months ended January 29, 2012 and January 30, 2011 each reflect periods that contain 39 weeks.

Del Monte Corporation (“DMC” and, together with its consolidated subsidiaries, “Del Monte” or the “Company”) was a direct, wholly-owned subsidiary of DMFC. On April 26, 2011, DMFC merged with and into DMC, with DMC being the surviving corporation. As a result of this merger, DMC became a direct wholly-owned subsidiary of Parent.

Del Monte is one of the country’s largest producers, distributors and marketers of premium quality, branded pet products and food products for the U.S. retail market. The Company’s pet food and pet snacks brands include Meow Mix, Kibbles ‘n Bits, Milk-Bone, 9Lives, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs, Milo’s Kitchen and other brand names, and food brands include Del Monte, Contadina, S&W, College Inn and other brand names. The Company also produces and distributes private label pet products and food products. The majority of its products are sold nationwide in all channels serving retail markets, mass merchandisers, the U.S. military, certain export markets, the foodservice industry and food processors.

For reporting purposes, the Company has two segments: Pet Products and Consumer Products. The Pet Products segment includes the Pet Products operating segment, which manufactures, markets and sells branded and private label dry and wet pet food and pet snacks. The Consumer Products segment includes the Consumer Products operating segment, which manufactures, markets and sells branded and private label shelf-stable products, including fruit, vegetable, tomato and broth products.

The accompanying unaudited condensed consolidated financial statements of Del Monte as of January 29, 2012 and for the three and nine months ended January 29, 2012 and January 30, 2011 have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements. Therefore, actual results could differ from those estimates. Furthermore, operating results for the three and nine months ended January 29, 2012 are not necessarily indicative of the results expected for the fiscal year ending April 29, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s 2011 Annual Report on Form 10-K (“2011 Annual Report”).

Note 2. Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to revise fair value measurements and disclosures. This standard provides clarification about the application of existing fair value measurement and disclosure requirements and expands certain other disclosure requirements. The guidance is effective for the Company beginning in the fourth quarter of fiscal 2012. The adoption of this standard will require expanded disclosures in the notes to the Company’s consolidated financial statements but will not impact its financial results.

 

6


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

In June 2011, the FASB amended its guidance on the presentation of comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This new accounting pronouncement is effective for the Company beginning in the first quarter of fiscal 2013. The adoption of this standard will not impact the Company’s financial results. The Company is assessing the potential impact of this new standard on the disclosure in the Company’s future consolidated financial statements.

In September 2011, FASB issued an Accounting Standards Update which will require additional qualitative and quantitative disclosures for multiemployer pension plans, including a plan’s funded status if it is readily available. This new accounting pronouncement is effective for the Company beginning in the fourth quarter of fiscal 2012. The adoption of this standard will require expanded disclosures in the notes to the Company’s consolidated financial statements but will not impact its financial results.

In September 2011, the FASB issued an Accounting Standards Update that permits companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill is impaired before performing the two-step goodwill impairment test required under current accounting standards. The guidance is effective for the Company beginning in the first quarter of fiscal 2013, with early adoption permitted. The adoption of this standard will not impact the Company’s financial results.

Note 3. Employee Stock Plans

See Note 10 of the 2011 Annual Report for a description of the 2011 Stock Incentive Plan for Key Employees of Blue Acquisition Group, Inc. and its Affiliates (the “2011 Plan”). The 2011 Plan provides for the grant of stock options and other stock based awards to key service providers of Parent and its affiliates, including the Company.

The fair value for service-based stock options granted was estimated at the date of grant using a Black-Scholes option-pricing model. The following table presents the weighted average assumptions for service-based options granted during the nine months ended January 29, 2012 and January 30, 2011:

 

    Successor         Predecessor  
    Nine Months Ended  
    January 29,
2012
        January 30,
2011
 

Expected life (in years)

    6.5          6.0   

Expected volatility

    45.0       29.4

Risk-free interest rate

    1.61       1.70

Dividend yield

    0.0       2.4

The fair value of performance-based options granted during the nine months ended January 29, 2012 was based on an option pricing model. Weighted average key inputs are an expected life of 7.5 years, expected volatility of 40% and a risk-free rate of 1.36%.

Stock option activity and related information during the period indicated was as follows:

 

     Options
Outstanding
    Outstanding
Weighted
Average
Exercise
Price
     Options
Exercisable
    Exercisable
Weighted
Average
Exercise
Price
 

Balance at May 1, 2011

     15,647,164      $ 2.75         9,385,492      $ 1.25   

Granted

     18,020,000        5.55         —          —     

Forfeited

     (1,781,329     5.00         —          —     

Exercised

     —          —           —          —     

Cancelled

     (2,442,725     1.25         (2,442,725     1.25   
  

 

 

      

 

 

   

Balance at January 29, 2012

     29,443,110      $ 4.45         6,942,767      $ 1.25   
  

 

 

      

 

 

   

 

7


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

Options forfeited represents the number of unvested options that were forfeited in connection with the termination of employment of the optionholders. Options cancelled represents the number of vested options that were subject to repurchase and cancellation by the Company in connection with the termination of employment of the optionholders.

As of January 29, 2012, the weighted average remaining contractual life of options outstanding was 8.8 years.

During the nine months ended January 29, 2012, Parent also granted 1,366,199 shares of restricted common stock with a fair value and purchase price of $5.00 per share. The restricted shares generally vest over three years from the employee’s anniversary date of hire. During the nine months ended January 29, 2012, Parent also granted 400,000 shares of restricted common stock with a fair value and purchase price of $5.00 per share which were immediately vested.

Note 4. Supplemental Financial Statement Information

The Company’s inventories consist of the following (in millions):

 

     Successor      Successor  
     January 29,
2012
     May 1,
2011
 

Inventories:

     

Finished products

   $ 771.6       $ 613.4   

Raw materials and in-process materials

     40.4         44.3   

Packaging materials and other

     74.9         109.2   

LIFO reserve

     0.8         —     
  

 

 

    

 

 

 

Total inventories

   $ 887.7       $ 766.9   
  

 

 

    

 

 

 

The Company’s property, plant and equipment consist of the following (in millions):

 

     Successor     Successor  
     January 29,
2012
    May 1,
2011
 

Property, plant and equipment, net:

    

Land and land improvements

   $ 45.0      $ 44.9   

Buildings and leasehold improvements

     252.0        242.3   

Machinery and equipment

     408.2        363.0   

Computers and software

     44.7        36.4   

Construction in progress

     28.4        55.0   
  

 

 

   

 

 

 
     778.3        741.6   

Accumulated depreciation

     (66.3     (9.9
  

 

 

   

 

 

 

Total

   $ 712.0      $ 731.7   
  

 

 

   

 

 

 

 

8


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

Note 5. Goodwill and Intangible Assets

The following table presents the Company’s goodwill and intangible assets (in millions):

 

     Successor     Successor  
     January 29,     May 1,  
     2012     2011  

Goodwill

   $ 2,125.0      $ 2,124.0   
  

 

 

   

 

 

 

Non-amortizable intangible assets:

    

Trademarks

   $ 1,871.6      $ 1,871.6   
  

 

 

   

 

 

 

Amortizable intangible assets:

    

Trademarks

     82.3        82.3   

Customer relationships

     876.7        881.8   
  

 

 

   

 

 

 
     959.0        964.1   

Accumulated amortization

     (43.7     (7.0
  

 

 

   

 

 

 

Amortizable intangible assets, net

     915.3        957.1   
  

 

 

   

 

 

 

Intangible assets, net

   $ 2,786.9      $ 2,828.7   
  

 

 

   

 

 

 

As of January 29, 2012, the Company’s goodwill was comprised of $1,981.1 million related to the Pet Products segment and $143.9 million related to the Consumer Products segment. As of May 1, 2011, the Company’s goodwill was comprised of $1,980.2 million related to the Pet Products segment and $143.8 million related to the Consumer Products segment.

Amortization expense for the three and nine months ended January 29, 2012 was $12.2 million and $36.7 million, respectively, and $1.8 million and $4.9 million for the three and nine months ended January 30, 2011, respectively. The Company expects to recognize $12.3 million of amortization expense during the remainder of fiscal 2012. The following table presents expected amortization of intangible assets as of January 29, 2012, for each of the five succeeding fiscal years (in millions):

 

2013

   $     49.0   

2014

     48.8   

2015

     48.8   

2016

     48.6   

2017

     48.2   

 

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Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

Note 6. Accounts Payable and Accrued Expenses

The Company’s accounts payable and accrued expenses consist of the following (in millions):

 

     Successor      Successor  
     January 29,      May 1,  
     2012      2011  

Accounts payable and accrued expenses:

     

Accounts payable – trade

   $ 203.1       $ 157.3   

Accrued marketing and trade promotion

     54.1         70.4   

Accrued payroll and related costs

     31.9         51.1   

Accrued interest

     57.1         30.1   

Current portion of pension liability

     20.3         29.7   

Other current liabilities

     138.7         148.1   
  

 

 

    

 

 

 

Total accounts payable and accrued expenses

   $ 505.2       $ 486.7   
  

 

 

    

 

 

 

Note 7. Short-Term Borrowings and Long-Term Debt

The Company’s debt consists of the following, as of the dates indicated (in millions):

 

     Successor      Successor  
     January 29,
2012
     May 1,
2011
 

Short-term borrowings:

     

Revolver

   $ —         $ —     

Other

     4.8         8.6   
  

 

 

    

 

 

 

Total short-term borrowings

   $ 4.8       $ 8.6   
  

 

 

    

 

 

 

Long-term debt:

     

Term B Loans

   $ 2,686.5       $ 2,700.0   

7.625% Senior Notes

     1,300.0         1,300.0   
  

 

 

    

 

 

 
     3,986.5         4,000.0   

Less unamortized discount

     5.9         6.6   

Less current portion

     27.0         20.3   
  

 

 

    

 

 

 

Total long-term debt

   $ 3,953.6       $ 3,973.1   
  

 

 

    

 

 

 

During the nine months ended January 29, 2012, the Company did not borrow or repay any amount under its senior secured asset-based revolving facility (“ABL Facility”). As of January 29, 2012, there were no loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $38.2 million and the net availability under the ABL Facility was $519.7 million. The Company is required to pay a commitment fee at an initial rate of 0.500% per annum in respect of the unutilized commitments thereunder. The commitment fee rate may be reduced to 0.375% depending on the amount of excess availability under the ABL Facility. The Company must also pay customary letter of credit fees and fronting fees for each letter of credit issued.

Pursuant to the terms of a registration rights agreement, the Company was obligated, among other things, to use commercially reasonable efforts to file and cause to become effective an exchange offer registration statement with the SEC with respect to a registered offer to exchange the 7.625% Senior Notes for freely tradable notes having substantially identical terms as the 7.625% Senior Notes. Substantially all of the 7.625% Senior Notes were exchanged for substantially identical registered notes pursuant to an exchange offer that was consummated on December 16, 2011.

As of January 29, 2012 and May 1, 2011, the fair value of the Company’s 7.625% Senior Notes were $1,280.5 million and $1,332.5 million, respectively. As of January 29, 2012, the book value of the Company’s floating rate debt instruments approximates fair value.

 

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Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

Maturities

The Company is scheduled to pay $6.8 million of its long-term debt during the remainder of fiscal 2012. As of January 29, 2012, scheduled maturities of long-term debt for each of the five succeeding fiscal years (representing debt under the Term B Loans and 7.625% Senior Notes) are as follows (in millions) 1:

 

2013

   $ 27.0   

2014

     27.0   

2015

     27.0   

2016

     27.0   

2017

     27.0   

Thereafter

     3,844.7   

 

1 

Does not include any excess cash flow or other principal prepayments that may be required under the terms of the Senior Secured Term Loan Agreement, as described in the 2011 Annual Report.

Restrictive and Financial Covenants

The Senior Secured Term Loan Credit Facility, ABL Facility and the indenture related to the 7.625% Senior Notes contain restrictive covenants that limit the Company’s ability and the ability of its subsidiaries to take certain actions. See Note 7 of the 2011 Annual Report for additional information regarding the covenants.

Note 8. Derivative Financial Instruments

The Company uses interest rate swaps, commodity swaps, futures, option and swaption (an option on a swap) contracts as well as forward foreign currency contracts to hedge market risks relating to possible adverse changes in interest rates, commodity, transportation and other prices and foreign currency exchange rates. As of January 29, 2012, all of the Company’s derivative contracts were economic hedges.

Interest Rates: The Company’s debt primarily consists of floating rate term loans and fixed rate notes. The Company maintains its floating rate revolver for flexibility to fund seasonal working capital needs and for other uses of cash. Interest expense on the Company’s floating rate debt is typically calculated based on a fixed spread over a reference rate, such as LIBOR (also known as the Eurodollar rate). Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given amount of floating rate debt.

The Company from time to time manages a portion of its interest rate risk related to floating rate debt by entering into interest rate swaps in which the Company receives floating rate payments and makes fixed rate payments. On April 12, 2011, DMFC entered into interest rate swaps with a total notional amount of $900.0 million as the fixed rate payer. The interest rate swaps fix LIBOR at 3.029% for the term of the swaps. The swaps have an effective date of September 4, 2012 and a maturity date of September 1, 2015. On August 13, 2010, the Company entered into an interest rate swap with a notional amount of $300.0 million as the fixed rate payer. The interest rate swap fixes LIBOR at 1.368% for the term of the swap. The swap has an effective date of February 1, 2011 and a maturity date of February 3, 2014. The fair values of the Company’s interest rate swaps were recorded as current liabilities of $10.1 million and non-current liabilities of $57.1 million at January 29, 2012. The fair values of the Company’s interest rate swaps were recorded as current liabilities of $3.2 million and non-current liabilities of $14.0 million at May 1, 2011.

Swaps are recorded as an asset or liability in the Company’s consolidated balance sheet at fair value. Any gains and losses on economic hedges as well as ineffectiveness of cash flow hedges are recorded as an adjustment to other (income) expense. Derivative gains and losses for cash flow hedges were included in other comprehensive income (pre-Merger) and reclassified to interest expense as the underlying transaction occurred.

Commodities: Certain commodities such as soybean meal, corn, wheat, soybean oil, diesel fuel and natural gas (collectively, “commodity contracts”) are used in the production and transportation of the Company’s products. Generally these commodities are purchased based upon market prices that are established with the vendor as part of the purchase process. The Company uses futures, swaps, swaption or option contracts, as deemed appropriate, to reduce the effect of price fluctuations on anticipated purchases. These contracts may have a term of up to 24 months. The Company accounted for these commodities derivatives as either economic or cash flow hedges. Changes in the value of economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses was deferred in equity (pre-Merger) and recognized as part of cost of products sold in the appropriate period and the ineffective portion was recognized as other (income) expense. On January 29, 2012, the fair values of the Company’s commodities hedges were recorded as current assets of $0.1 million and current liabilities of $6.9 million. The fair values of the Company’s commodities hedges were recorded as current assets of $8.0 million and current liabilities of $2.2 million at May 1, 2011.

 

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Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

The notional amounts of the Company’s commodity contracts as of the dates indicated (in millions):

 

     Successor      Successor  
     January 29,
2012
     May 1,
2011
 

Commodity contracts

   $ 184.1       $ 71.2   

Foreign Currency: The Company manages its exposure to fluctuations in foreign currency exchange rates by entering into forward contracts to cover a portion of its projected expenditures paid in local currency. These contracts may have a term of up to 24 months. The Company accounted for these contracts as either economic hedges or cash flow hedges. Changes in the value of the economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses was deferred in equity (pre-Merger) and recognized as part of cost of products sold in the appropriate period and the ineffective portion was recognized as other (income) expense. As of January 29, 2012, the fair values of the Company’s foreign currency hedges were recorded as current assets of $1.5 million. As of May 1, 2011, the fair values of the Company’s foreign currency hedges were recorded as current assets of $3.0 million and current liabilities of $1.0 million.

The notional amounts of the Company’s foreign currency derivative contracts as of the dates indicated (in millions):

 

     Successor      Successor  
     January 29,
2012
     May 1,
2011
 

Contract amount (Mexican pesos)

   $ 51.4       $ 20.0   

Contract amount ($CAD)

     8.3         15.3   

Fair Value of Derivative Instruments

The fair value of derivative instruments (all of which are not designated as hedging instruments) recorded in the Condensed Consolidated Balance Sheet as of January 29, 2012 was as follows (in millions):

 

    

Asset derivatives

    

Liability derivatives

 

Derivatives in economic hedging
relationships

  

Balance Sheet location

   Fair value     

Balance Sheet location

   Fair value  

Interest rate contracts

   Other non-current assets    $ —         Other non-current liabilities    $ 57.1   

Interest rate contracts

   Prepaid expenses and other current assets      —         Accounts payable and accrued expenses      10.1   

Commodity and other contracts

   Prepaid expenses and other current assets      0.1       Accounts payable and accrued expenses      6.9   

Foreign currency exchange contracts

   Prepaid expenses and other current assets      1.5       Accounts payable and accrued expenses      —     
     

 

 

       

 

 

 

Total

      $ 1.6          $ 74.1   
     

 

 

       

 

 

 

 

12


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

The fair value of derivative instruments (all of which are not designated as hedging instruments) recorded in the Condensed Consolidated Balance Sheet as of May 1, 2011 was as follows (in millions):

 

    

Asset derivatives

    

Liability derivatives

 

Derivatives in economic hedging
relationships

  

Balance Sheet location

   Fair value     

Balance Sheet location

   Fair value  

Interest rate contracts

   Other non-current assets    $ —         Other non-current liabilities    $ 14.0   

Interest rate contracts

   Prepaid expenses and other current assets      —         Accounts payable and accrued expenses      3.2   

Commodity and other contracts

   Prepaid expenses and other current assets      8.0       Accounts payable and accrued expenses      2.2   

Foreign currency exchange contracts

   Prepaid expenses and other current assets      3.0       Accounts payable and accrued expenses      1.0   
     

 

 

       

 

 

 

Total

      $ 11.0          $ 20.4   
     

 

 

       

 

 

 

The effect of the Company’s economic hedges on other (income) expense for the three and nine months ended January 29, 2012 in the Condensed Consolidated Statements of Income was as follows (in millions):

 

    Three Months Ended     Nine Months Ended  
    January 29, 2012     January 29, 2012  

Interest rate contracts

  $ 11.4      $ 52.5   

Commodity and other contracts

    5.5        9.7   

Foreign currency exchange contracts

    (0.7     (0.6
 

 

 

   

 

 

 
  $ 16.2      $ 61.6   
 

 

 

   

 

 

 

The effect of derivative instruments recorded for the three and nine months ended January 30, 2011 in the Condensed Consolidated Statements of Income was as follows (in millions):

 

    Gain (loss) recognized
in AOCI
   

Location of gain
(loss) reclassified
in AOCI

  Gain (loss) reclassified from
AOCI into income
   

Location of gain (loss)
recognized in income
(ineffective portion and
amount  excluded from
effectiveness testing)

  Gain (loss) recognized in income
(ineffective portion and amount
excluded from effectiveness testing)
 

Derivatives in cash flow hedging

relationships

  Three Months
Ended
    Nine Months
Ended
      Three Months
Ended
    Nine Months
Ended
      Three Months
Ended
    Nine Months
Ended
 
 
January 30,
2011
    January 30,
2011
     
January 30,
2011
    January 30,
2011
      January 30, 2011     January 30,
2011
 

Interest rate contracts

  $ 2.1      $ (0.8   Interest expense   $ —        $ —        N/A   $ —        $ —     

Commodity and other contracts

    5.9        18.9      Cost of products sold     5.9        8.7      Other income (expense)     3.6        (1.3 )1 

Foreign currency exchange contracts

    (0.5     (1.5   Cost of products sold     1.2        2.7      Other income (expense)     (0.2     0.1   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ 7.5      $ 16.6        $ 7.1      $ 11.4        $ 3.4      $ (1.2
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

 

1 

Includes a gain of $2.9 million and a loss of $1.4 million for the three and nine months ended January 30, 2011, respectively, for the commodity contracts not designated as hedging instruments.

Note 9. Fair Value Measurements

A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

 

   

Level 1 Inputs—unadjusted quoted prices in active markets for identical assets or liabilities;

 

   

Level 2 Inputs—quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and

 

   

Level 3 Inputs—unobservable inputs reflecting the Company’s own assumptions in measuring the asset or liability at fair value.

The Company uses interest rate swaps, commodity contracts and forward foreign currency exchange contracts to hedge market risks relating to possible adverse changes in interest rates, commodity prices, diesel fuel prices and foreign exchange rates.

 

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Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

The following table provides the fair value hierarchy for financial assets and liabilities measured on a recurring basis (in millions):

 

     Successor  
     Level 1      Level 2      Level 3  

Description

   January 29,
2012
     May 1,
2011
     January 29,
2012
     May 1,
2011
     January 29,
2012
     May 1,
2011
 

Assets

                 

Interest rate contracts

   $ —         $ —         $ —         $ —         $ —         $ —     

Commodity and other contracts

     0.1         7.5         —           0.5         —           —     

Foreign currency exchange contracts

     —           —           1.5         3.0         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0.1       $ 7.5       $ 1.5       $ 3.5       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Interest rate contracts

   $ —         $ —         $ 67.2       $ 17.2       $ —         $ —     

Commodity and other contracts

     2.6         2.2         4.3         —           —           —     

Foreign currency exchange contracts

     —           —           —           1.0         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2.6       $ 2.2       $ 71.5       $ 18.2       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s determination of the fair value of its interest rate swaps was calculated using a discounted cash flow analysis based on the terms of the swap contracts and the observable interest rate curve. The Company’s futures and options contracts are traded on regulated exchanges such as the Chicago Board of Trade, Kansas City Board of Trade and the New York Mercantile Exchange. The Company values these contracts based on the daily settlement prices published by the exchanges on which the contracts are traded. The Company’s commodities swap and swaption contracts are traded over-the-counter and are valued based on the Chicago Board of Trade quoted prices for similar instruments in active markets or corroborated by observable market data available from the Energy Information Administration. The Company measures the fair value of foreign currency forward contracts using an income approach based on forward rates (obtained from market quotes for futures contracts with similar terms) less the contract rate multiplied by the notional amount.

The book value of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair value of the Company’s senior notes and long-term debt are discussed in Note 7.

Note 10. Comprehensive Income

The following table reconciles net income to comprehensive income (in millions):

 

     Successor            Predecessor      Successor           Predecessor  
     Three Months Ended      Nine Months Ended  
     January 29,
2012
           January 30,
2011
     January 29,
2012
          January 30,
2011
 

Net income

   $ 28.6            $ 87.1       $ 18.2           $ 227.6   
  

 

 

         

 

 

    

 

 

        

 

 

 

Other comprehensive income (loss):

                    

Foreign currency translation adjustments

     —                0.4         (0.8          0.3   

Pension and other postretirement employee benefit adjustments

     —                —           (4.3          —     

Income on cash flow hedging instruments, net of tax

     —                1.0         —               2.7   
  

 

 

         

 

 

    

 

 

        

 

 

 

Total other comprehensive income (loss)

     —                1.4         (5.1          3.0   
  

 

 

         

 

 

    

 

 

        

 

 

 

Comprehensive income

   $ 28.6            $ 88.5       $ 13.1           $ 230.6   
  

 

 

         

 

 

    

 

 

        

 

 

 

 

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Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

Note 11. Other (Income) Expense

The components of other (income) expense are as follows (in millions):

 

     Successor           Predecessor     Successor            Predecessor  
     Three Months Ended     Nine Months Ended  
     January 29,
2012
          January 30,
2011
    January 29,
2012
           January 30,
2011
 

Loss (gain) on hedging contracts

   $ 16.2           $ (3.4   $ 61.6            $ 1.2   

Foreign currency transaction loss (gain)

     (0.5          (2.4     1.7              (5.7

Other

     0.3             —          1.1              0.3   
  

 

 

        

 

 

   

 

 

         

 

 

 

Other (income) expense

   $ 16.0           $ (5.8   $ 64.4            $ (4.2
  

 

 

        

 

 

   

 

 

         

 

 

 

Note 12. Retirement Benefits

Del Monte sponsors a qualified defined benefit pension plan and several unfunded defined benefit postretirement plans providing certain medical, dental and life insurance benefits to eligible retired, salaried, non-union hourly and union employees. See Note 11 of the 2011 Annual Report for information about these plans. The components of net periodic benefit cost of such plans for the three and nine months ended January 29, 2012 and January 30, 2011, respectively, are as follows (in millions):

 

    Pension Benefits     Other Benefits     Pension Benefits     Other Benefits  
    Successor          Predecessor     Successor          Predecessor     Successor          Predecessor     Successor          Predecessor  
    Three Months Ended     Nine Months Ended  
    January 29,
2012
         January 30,
2011
    January 29,
2012
         January 30,
2011
    January 29,
2012
         January 30,
2011
    January 29,
2012
         January 30,
2011
 

Components of net periodic benefit cost

                               

Service cost for benefits earned during the period

  $ 3.4          $ 3.4      $ 0.4          $ 0.4      $ 10.2          $ 10.4      $ 1.2          $ 1.2   

Interest cost on projected benefit obligation

    5.7            5.8        2.1            2.1        17.2            17.3        6.3            6.3   

Expected return on plan assets

    (8.2         (7.5     —              —          (24.5         (22.6     —              —     

Amortization of prior service cost/(credit)

    —              0.2        —              (2.1     —              0.7        —              (6.3

Amortization of loss

    —              1.0        —              —          —              2.9        —              —     
 

 

 

       

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

       

 

 

 

Net periodic benefit cost

  $ 0.9          $ 2.9      $ 2.5          $ 0.4      $ 2.9          $ 8.7      $ 7.5          $ 1.2   
 

 

 

       

 

 

   

 

 

       

 

 

   

 

 

       

 

 

   

 

 

       

 

 

 

As of January 29, 2012, the Company had made qualified pension plan contributions of $15.0 million in fiscal 2012 and does not plan to make any further contributions for the remainder of fiscal 2012.

Note 13. Income Taxes

As of January 29, 2012, the Company had gross unrecognized tax benefits of $9.1 million, of which $6.7 million would impact the effective tax rate from continuing operations, if recognized. During the three months ended January 29, 2012, there was a $3.2 million decrease in unrecognized tax benefits resulting from a lapse of the statute of limitations on a tax year, of which $1.4 million impacted the effective tax rate from continuing operations.

 

15


Table of Contents

DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

Note 14. Legal Proceedings

Shareholder Litigation Involving the Company

Following the announcement of the Merger, fifteen putative class action lawsuits (the “Shareholder Cases”) relating to the Transactions were filed against DMFC, certain of its now-former officers and directors, and other parties including (in certain cases) Blue Sub.

As a result of voluntary dismissals and orders consolidating other shareholder cases, only two of the original fifteen Shareholder Cases arising from the Transactions remained pending following the end of the second quarter of fiscal 2012:

 

   

In re Del Monte Foods Company Shareholders Litigation (the “Delaware Shareholder Case”). The Delaware Shareholder Case was filed in the Delaware Court of Chancery and consolidated with other related cases filed in the same court. The latest complaint filed in the case asserted claims on behalf of lead Plaintiff NECA-IBEW Pension Fund and a putative class of shareholders against each of the now-former directors of DMFC (together, the “Directors”), DMFC’s former Chief Executive Officer in his capacity as such, Barclays Capital, Inc. (“Barclays”), DMFC, KKR, Vestar, Centerview (named as Centerview Partners; together with KKR and Vestar, the “Sponsor Defendants”), Parent, Blue Sub and DMC, which was joined as a defendant in the litigation as successor in interest to DMFC (together, the “Defendants”); and

 

   

Franklin v. Del Monte Foods Co., et al. The Franklin case was filed by Elisa J. Franklin on behalf of herself and a putative class of shareholders against the Directors, DMFC and the Sponsor Defendants on December 10, 2010 in Superior Court in San Francisco, California. On February 28, 2011, the Court in the Franklin case granted the motion of DMFC and the Directors to stay the proceeding pending resolution of the Delaware Shareholder Case.

The plaintiff in the Delaware Shareholder Case alleged that the Directors breached their fiduciary duties to the stockholders by agreeing to sell DMFC at a price that was unfair and inadequate and by agreeing to certain preclusive deal protection devices in the Merger Agreement. The plaintiff further alleged that the Sponsor Defendants, Parent, Blue Sub and Barclays aided and abetted the Directors’ alleged breaches of fiduciary duties. In addition, the plaintiff asserted a claim for breach of fiduciary duty against the former Chief Executive Officer of DMFC in his capacity as an officer. The plaintiff also alleged that the Sponsor Defendants violated certain Confidentiality Agreements with DMFC, and that Barclays induced the Sponsor Defendants to violate the Confidentiality Agreements, committing tortious interference with contract. The plaintiff in the Franklin case asserted similar claims against the Directors, alleging that they breached their fiduciary duties of care and loyalty by, among other acts, agreeing to sell DMFC at an inadequate price, running an ineffective sale process that relied on conflicted financial advisors, agreeing to preclusive deal protection measures, and pursuing the transaction for their own financial ends. The plaintiff in the Franklin case also asserted claims against the Sponsor Defendants and DMFC for aiding and abetting these alleged breaches of fiduciary duty.

Each of the complaints sought injunctive relief, rescission of the Merger Agreement, compensatory damages, and attorneys’ fees.

On February 14, 2011, following expedited discovery and a preliminary injunction hearing in the Delaware Shareholder Case, the Court of Chancery entered an order preliminarily enjoining the shareholder vote on the Merger, which was scheduled to occur at a special meeting on February 15, 2011, for a period of 20 days. In addition, the Court of Chancery enjoined the parties, pending the vote on the Merger, from enforcing various provisions in the Merger Agreement, including the no-solicitation and match right provisions in Sections 6.5(b), 6.5(c), and 6.5(h), and the termination fee provisions relating to topping bids and changes in the board of directors’ recommendations on the Merger in Section 8.5(b). The Court’s order was conditioned upon the lead plaintiff’s posting a bond in the amount of $1.2 million, which was posted on February 15, 2011.

 

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DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

The scheduled special meeting was convened on February 15, 2011. At such meeting, a quorum was determined to be present and, in accordance with the Court’s ruling, the meeting was adjourned until March 7, 2011, without a vote on the Merger proposal. The special meeting was reconvened on March 7, 2011. At such meeting, a quorum was determined to be present and the Merger was approved. The Merger closed on March 8, 2011.

Following the closing of the Merger, on March 25, 2011, the plaintiff in the Delaware Shareholder Case filed an application for an interim attorneys’ fee award in the amount of $12 million. On June 27, 2011, the Court of Chancery awarded the plaintiff’s attorneys an interim fee award in the amount of $2.75 million for the supplemental disclosures that DMFC made in connection with the Merger. The Court of Chancery deferred decision regarding the balance of the fee application, which sought fees in connection with the preliminary injunction and suspension of deal protections.

On July 27, 2011, the Court of Chancery issued an order adding the Company as a defendant to the Delaware Shareholder Case and ordering the Company to pay the $2.75 million interim attorney fee award. The Company paid the $2.75 million interim fee award in August 2011.

On October 6, 2011, the lead plaintiff in the Delaware Shareholder Case and the Defendants submitted a Stipulation and Agreement of Compromise and Settlement to the Delaware Court of Chancery (the “Proposed Settlement”).

On December 1, 2011, after settlement class members were given notice of the Proposed Settlement and an opportunity to file written objections, the Court of Chancery conducted a fairness hearing on the Proposed Settlement and entered an Order and Final Judgment approving the Proposed Settlement (as approved, the “Settlement”). In approving the Settlement, the Court of Chancery certified a mandatory, non-opt-out settlement class of certain former shareholders of DMFC, and granted the Defendants a release which extinguished all claims of the settlement class arising out of or relating to the Merger, including claims asserted in the Franklin case and all other Shareholder Cases, in exchange for a total payment of $89.4 million (inclusive of $22.3 million of fees and expenses awarded to plaintiffs’ counsel by the Court of Chancery and of costs of notifying the settlement class and administering claims). In connection with the Settlement, the Company agreed to pay $65.7 million into an escrow account to fund the Settlement, consisting of (1) the financial contribution to the Settlement and (2) the payment of previously unpaid Merger-related fees being contributed to the Settlement. On December 7, 2011, the Company paid $65.5 million into the escrow account ($0.2 million having previously been paid). The Company entered into the Settlement to eliminate the uncertainties, burden, and expense of further litigation. In the Settlement, the Company, together with the other Defendants, denied all allegations of wrongdoing, and the Court of Chancery’s Order and Final Judgment approving the Settlement provides that it does not constitute an admission of wrongdoing by any Defendant.

The Order and Final Judgment approving the Settlement was not appealed and has become final.

The Company has $50 million of director and officer insurance coverage for the Company and the former directors and officers of DMFC. Our primary insurance carrier has reimbursed the Company for a portion of its legal defense costs; however, the insurers have reserved their rights with respect to liability coverage and have not agreed at this point that coverage is available for losses the Company has sustained as a result of the Shareholder Cases or the settlement in the Delaware Shareholder Case. Notwithstanding the Settlement, the Company continues to have certain indemnification obligations relating to the Merger, including the obligation to pay certain outstanding legal fees and expenses, subject to limitations under applicable law or contract.

SEC Investigation

On February 18, 2011, the SEC directed the Company to preserve documents and records relating to recent potential or actual business combinations and preparation of DMFC’s proxy statement relating to the Transactions. On March 4, 2011 the SEC requested that the Company voluntarily produce certain documents and records, which the Company has done on an ongoing basis. On May 23, 2011, the Company received a subpoena from the SEC requesting the same documents. On December 14, 2011, the Company received a supplemental subpoena from the SEC requesting additional documents. The Company is continuing to cooperate with the SEC in its investigation. The Company cannot at this time reasonably estimate a range of exposure, if any, of the potential liability.

Commercial Litigation Involving the Company

On September 28, 2011, a complaint was filed against the Company by the Environmental Law Foundation in California Superior Court for the County of Alameda alleging violations of California Health and Safety Code sections 25249.6, et seq. (commonly known as “Proposition 65”). Specifically, the plaintiff alleges that the Company violated Proposition 65 by distributing certain pear, peach and fruit cocktail products without providing warnings required by Proposition 65. The plaintiff seeks injunctive relief, damages in an unspecified amount and attorneys’ fees. The Company intends to deny these allegations and vigorously defend itself. The Company cannot at this time estimate a range of exposure, if any, of the potential liability.

 

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DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

On December 17, 2010, a putative class action complaint was filed against the Company by Lydia Littlefield, on behalf of herself and all others similarly situated, in the U.S. District Court for the District of Massachusetts, alleging intentional misrepresentation, fraud, negligent misrepresentation, breach of express warranty, breach of the implied warranty of merchantability and unjust enrichment. Specifically, the complaint alleges that the Company engaged in false and misleading representation of certain of the Company’s canned fruit products in representing that these products are safe and healthy, when they allegedly contain substances that are not safe and healthy. The plaintiffs seek certification of the class, injunctive relief, damages in an unspecified amount and attorneys’ fees. The Company intends to deny these allegations and vigorously defend itself. On April 19, 2011, the U.S. Judicial Panel on Multidistrict Litigation issued an order consolidating Littlefield with several similar consumer class actions filed in other jurisdictions (in which the Company is not a defendant) in U.S. District Court for the District of Massachusetts. On July 29, 2011, the Company filed a motion to dismiss plaintiff’s complaint. A hearing on this motion was held November 18, 2011. The Court granted the motion to dismiss on December 21, 2011.

On September 30, 2010, a putative class action complaint was served against the Company, to be filed in Hennepin County, Minnesota, alleging wage and hour violations of the Fair Labor Standards Act (“FLSA”). The complaint was served on behalf of five named plaintiffs and all others similarly situated at a manufacturing facility in Minnesota. Specifically, the complaint alleges that the Company violated the FLSA and state wage and hour laws by failing to compensate plaintiffs and other similarly situated workers unpaid overtime. The plaintiffs are seeking compensatory and statutory damages. Additionally, the plaintiffs sought class certification. On November 5, 2010, in connection with the Company’s removal of this case to the U.S. District Court for the District of Minnesota, the complaint was filed along with the Company’s answer. The Company also filed a motion for partial dismissal on November 5, 2010. The parties jointly stipulated that the causes of action in plaintiff’s complaint for unjust enrichment and quantum meruit would be dismissed without prejudice and further stipulated that the cause of action under the Minnesota minimum wage law would be dismissed without prejudice. The court signed an order dismissing those claims on December 28, 2010. The Company and the plaintiffs jointly stipulated to a conditional certification of the class on April 28, 2011. The plaintiffs sent out notices to the potential class on April 28, 2011. The notice period is now closed, and 53 plaintiffs have opted in to the lawsuit. On November 14, 2011, the Company and the plaintiffs agreed to a proposed settlement of the lawsuit in the amount of approximately $0.2 million. Plaintiffs submitted the proposed settlement to the Court on February 15, 2012. As of January 29, 2012, the Company has accrued this $0.2 million in accounts payable and accrued expenses. Given the inherent uncertainty associated with legal matters, the actual cost of resolving this putative class action may be substantially higher or lower than the estimated accrual.

On October 14, 2008, Fresh Del Monte filed a complaint against the Company in U.S. District Court for the Southern District of New York. Fresh Del Monte amended its complaint on November 5, 2008. Under a trademark license agreement with the Company, Fresh Del Monte holds the rights to use the Del Monte name and trademark with respect to fresh fruit, vegetables and produce throughout the world (including the United States). Fresh Del Monte alleges that the Company breached the trademark license agreement through the marketing and sale of certain of the Company’s products sold in the refrigerated produce section of customers’ stores, including Del Monte Fruit Naturals products and the more recently introduced Del Monte Refrigerated Grapefruit Bowls. Additionally, Fresh Del Monte alleges that it has the exclusive right under the trademark license agreement to sell Del Monte branded pineapple, melon, berry, papaya and banana products in the refrigerated produce section. Fresh Del Monte also alleges that the Company’s advertising for certain of the alleged infringing products was false and misleading. Fresh Del Monte is seeking damages of $10.0 million, treble damages with respect to its false advertising claim, and injunctive relief. On October 14, 2008, Fresh Del Monte filed a motion for a preliminary injunction, asking the Court to enjoin the Company from making certain claims about the Company’s refrigerated products. On October 23, 2008, the Court denied that motion. The Company denies Fresh Del Monte’s allegations and is vigorously defending itself. Additionally, on November 21, 2008, the Company filed counter-claims against Fresh Del Monte, alleging that Fresh Del Monte has breached the trademark license agreement. Specifically, the Company alleged, among other things, that Fresh Del Monte’s “medley” products (vegetables with a dipping sauce or fruit with a caramel sauce) violated the trademark license agreement. The Company requested a voluntary dismissal of its counter-claims against Fresh Del Monte, which was granted by the Court on January 24, 2012. On November 10, 2010, Fresh Del Monte filed a motion for partial summary judgment. On December 8, 2010, the Company filed an opposition to that motion. At a hearing on August 11, 2011, the Court denied Fresh Del Monte’s motion for partial summary judgment. A trial date has been tentatively scheduled for March 26, 2012. The Company cannot at this time reasonably estimate a range of exposure, if any, of the potential liability.

 

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DEL MONTE CORPORATION AND SUBSIDIARIES

(previously reported as DEL MONTE FOODS COMPANY AND SUBSIDIARIES)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(CONTINUED)

For the three and nine months ended January 29, 2012

(unaudited)

 

Other

The Company is also involved from time to time in various legal proceedings incidental to the Company’s business, including proceedings involving product liability claims, workers’ compensation and other employee claims, tort claims and other general liability claims, for which the Company caries insurance, as well as trademark, copyright, patent infringement and related litigation. Additionally, the Company is involved from time to time in claims relating to environmental remediation and similar events. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that none of these legal proceedings will have a material adverse effect on its financial position.

Note 15. Segment Information

The Company has the following reportable segments:

 

   

The Pet Products reportable segment includes the Pet Products operating segment, which manufactures, markets and sells branded and private label dry and wet pet food and pet snacks.

 

   

The Consumer Products reportable segment includes the Consumer Products operating segment, which manufactures, markets and sells branded and private label shelf-stable products, including fruit, vegetable, tomato and broth products.

The Company’s chief operating decision-maker, its CEO, reviews financial information presented on a consolidated basis accompanied by disaggregated information on net sales and operating income, by operating segment, for purposes of making decisions about resources to be allocated and assessing financial performance. The chief operating decision-maker reviews assets of the Company on a consolidated basis only. The accounting policies of the individual operating segments are the same as those of the Company.

The following table presents financial information about the Company’s reportable segments (in millions):

 

     Successor           Predecessor     Successor           Predecessor  
     Three Months Ended     Nine Months Ended  
     January 29,
2012
          January 30,
2011
    January 29,
2012
          January 30,
2011
 

Net sales:

                  

Pet Products

   $ 478.8           $ 458.5      $ 1,370.4           $ 1,319.0   

Consumer Products

     492.3             510.9        1,371.2             1,395.9   
  

 

 

        

 

 

   

 

 

        

 

 

 

Total

   $ 971.1           $ 969.4      $ 2,741.6           $ 2,714.9   
  

 

 

        

 

 

   

 

 

        

 

 

 

Operating income:

                  

Pet Products

   $ 95.3           $ 112.1      $ 231.0           $ 303.5   

Consumer Products

     40.8             56.6        106.8             165.3   

Corporate (1)

     (11.6          (23.3     (56.9          (56.0
  

 

 

        

 

 

   

 

 

        

 

 

 

Total

     124.5             145.4        280.9             412.8   

Reconciliation to income from continuing operations before income taxes:

                  

Interest expense

     62.8             18.8        188.5             58.5   

Other (income) expense

     16.0             (5.8     64.4             (4.2
  

 

 

        

 

 

   

 

 

        

 

 

 

Income from continuing operations before income taxes

   $ 45.7           $ 132.4      $ 28.0           $ 358.5   
  

 

 

        

 

 

   

 

 

        

 

 

 

 

(1) 

Corporate represents expenses not directly attributable to reportable segments.

Note 16. Related Party Transactions

See Note 16 of the 2011 Annual Report for a description of the Company’s related party transactions. As of January 29, 2012, there was a payable of $1.7 million due to the managers related to the monitoring agreement and a payable of $0.1 million to Capstone Consulting LLC for consulting services, which amounts are included in accounts payable and accrued expenses on the Condensed Consolidated Balance Sheets.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion is intended to further the reader’s understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with the financial statements included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended May 1, 2011 (the “2011 Annual Report”). These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in “Part I, Item 1A. Risk Factors” in our 2011 Annual Report and in “Part II, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Corporate Overview

Our Business

Del Monte Corporation (“DMC”) and its consolidated subsidiaries (together, “Del Monte” or the “Company”) is one of the country’s largest producers, distributors and marketers of premium quality, branded pet products and food products for the U.S. retail market, with pet food and pet snack brands for dogs and cats such as Meow Mix, Kibbles ‘n Bits, Milk-Bone, 9Lives, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs, Milo’s Kitchen and other brand names and food brands such as Del Monte, Contadina, S&W, College Inn and other brand names. We have two reportable segments: Pet Products and Consumer Products. The Pet Products segment includes the Pet Products operating segment, which manufactures, markets and sells branded and private label dry and wet pet food and pet snacks. The Consumer Products segment includes the Consumer Products operating segment, which manufactures, markets and sells branded and private label shelf-stable products, including fruit, vegetable, tomato and broth products.

Merger

On March 8, 2011, we were acquired by an investor group led by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Capital, L.P. (“Centerview,” and together with KKR and Vestar, the “Sponsors”). Under the terms of the merger agreement, the stockholders of Del Monte Foods Company (“DMFC”) received $19.00 per share in cash. The acquisition (also referred to as the “Merger”) was effected by the merger of Blue Merger Sub Inc. (“Blue Sub”) with and into DMFC, with DMFC being the surviving corporation. As a result of the Merger, DMFC became a wholly-owned subsidiary of Blue Acquisition Group, Inc. (“Parent”). DMFC stockholders approved the transaction on March 7, 2011. DMFC’s common stock ceased trading on the New York Stock Exchange before the opening of the market on March 9, 2011. See “Note 14. Legal Proceedings” in our Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of the shareholder litigation related to the Merger.

As a result of the Merger, we applied the acquisition method of accounting and established a new basis of accounting on March 8, 2011. Periods presented prior to March 8, 2011 represent the operations of the predecessor company (“Predecessor”) and periods presented after March 8, 2011 represent the operations of the successor company (“Successor”).

On April 26, 2011, DMFC merged with and into DMC, with DMC being the surviving corporation. As a result of this merger, DMC became a direct wholly-owned subsidiary of Parent.

 

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Key Performance Indicators

The following tables set forth some of our key performance indicators that we utilize to assess results of operations (in millions, except percentages):

 

     Successor     Predecessor                          
     Three Months Ended                          
     January 29,
2012
    January 30,
2011
    Change     % Change     Volume (a)     Rate (b)  

Net sales

   $ 971.1      $ 969.4      $ 1.7        0.2     (1.8 %)      2.0

Cost of products sold

     693.9        664.7        29.2        4.4     (0.8 %)      5.2
  

 

 

   

 

 

   

 

 

       

Gross profit

     277.2        304.7        (27.5     (9.0 %)     

Selling, general and administrative expense (“SG&A”)

     152.7        159.3        (6.6     (4.1 %)     
  

 

 

   

 

 

   

 

 

       

Operating income

   $ 124.5      $ 145.4      $ (20.9     (14.4 %)     
  

 

 

   

 

 

   

 

 

       

Gross margin

     28.5     31.4        

SG&A as a % of net sales

     15.7     16.4        

Operating income margin

     12.8     15.0        

Adjusted EBITDA (c)

   $ 164.6      $ 190.7           
            
     Successor     Predecessor                          
       Nine Months Ended                            
     January 29,
2012
    January 30,
2011
    Change     % Change     Volume (a)     Rate (b)  

Net sales

   $ 2,741.6      $ 2,714.9      $ 26.7        1.0     (0.7 %)      1.7

Cost of products sold

     1,960.6        1,834.0        126.6        6.9     0.1     6.8
  

 

 

   

 

 

   

 

 

       

Gross profit

     781.0        880.9        (99.9     (11.3 %)     

Selling, general and administrative expense (“SG&A”)

     500.1        468.1        32.0        6.8    
  

 

 

   

 

 

   

 

 

       

Operating income

   $ 280.9      $ 412.8      $ (131.9     (32.0 %)     
  

 

 

   

 

 

   

 

 

       

Gross margin

     28.5     32.4        

SG&A as a % of net sales

     18.2     17.2        

Operating income margin

     10.2     15.2        

Adjusted EBITDA (c)

   $ 424.7      $ 510.6           

 

(a) This column represents the change, as compared to the prior year period, due to volume and mix. Volume represents the change resulting from the number of units sold, exclusive of any change in price. Volume changes in the above tables include elasticity, the volume decline associated with price increases. Mix represents the change attributable to shifts in volume across products or channels.

 

(b) This column represents the change, as compared to the prior year period, attributable to per unit changes in net sales or cost of products sold.

 

(c) Refer to “Reconciliation of Non-GAAP Financial MeasuresAdjusted EBITDA” below.

Executive Overview

In the third quarter of fiscal 2012, we had net sales of $971.1 million, operating income of $124.5 million and net income of $28.6 million, compared to net sales of $969.4 million, operating income of $145.4 million and net income of $87.1 million in the third quarter of the twelve months ended May 1, 2011. Adjusted EBITDA was $164.6 million for the three months ended January 29, 2012 and $190.7 million for the three months ended January 30, 2011. Refer to “Reconciliation of Non-GAAP Financial Measures—Adjusted EBITDA” below.

Net sales in our Pet Products segment increased by 4.4% and net sales in our Consumer Products segment decreased by 3.6%, resulting in an overall increase in net sales of 0.2% for the quarter. This increase was driven by new product sales and net pricing (pricing net of trade spending), both primarily in our Pet Products segment, partially offset by lower sales volume of existing products, including elasticity (the volume decline associated with price increases) in both our Pet Products and Consumer Products segments.

Operating income for the quarter decreased 14.4% as compared to the year-ago quarter. The decrease in operating income was driven primarily by increased ingredient costs and increased amortization expense related to intangibles resulting from the Merger, partially offset by decreased costs related to the Merger, decreased payroll-related costs and decreased marketing spending. Marketing expense

 

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for fiscal 2012 is expected to be lower than marketing expense in the twelve months ended May 1, 2011, primarily reflecting a shift to fund trade promotions in response to the current competitive environment in both our Pet Products and Consumer Products segments.

Adjusted EBITDA decreased 13.7% as compared to the year-ago quarter. The drivers of the decline in Adjusted EBITDA are similar to those for operating income, except for SG&A. In calculating Adjusted EBITDA, SG&A is more favorable year-over-year because it does not include the amortization of intangibles, severance-related expenses and other expenses related to the Merger.

At January 29, 2012, our total debt was $3,991.3 million primarily driven by higher debt balances resulting from the Merger. Interest expense increased $44.0 million in the three months ended January 29, 2012 compared to the three months ended January 30, 2011, primarily driven by higher debt balances resulting from the Merger.

Results of Operations

The following discussion provides a summary of operating results for the three and nine months ended January 29, 2012, compared to the results for the three and nine months ended January 30, 2011 (in millions, except percentages).

Net sales

 

     Successor      Predecessor                           
     Three Months Ended                           
     January 29,
2012
     January 30,
2011
     Change     % Change     Volume (a)     Rate (b)  

Net sales

                

Pet Products

   $ 478.8       $ 458.5       $ 20.3        4.4     0.9     3.5

Consumer Products

     492.3         510.9         (18.6     (3.6 %)      (4.2 %)      0.6
  

 

 

    

 

 

    

 

 

       

Total

   $ 971.1       $ 969.4       $ 1.7        0.2    
  

 

 

    

 

 

    

 

 

       
              
     Successor      Predecessor                           
     Nine Months Ended                           
     January 29,
2012
     January 30,
2011
     Change     % Change     Volume (a)     Rate (b)  

Net sales

                

Pet Products

   $ 1,370.4       $ 1,319.0       $ 51.4        3.9     1.0     2.9

Consumer Products

     1,371.2         1,395.9         (24.7     (1.8 %)      (2.2 %)      0.4
  

 

 

    

 

 

    

 

 

       

Total

   $ 2,741.6       $ 2,714.9       $ 26.7        1.0    
  

 

 

    

 

 

    

 

 

       

 

(a) This column represents the change, as compared to the prior year period, due to volume and mix. Volume represents the change resulting from the number of units sold, exclusive of any change in price. Volume changes in the above tables include elasticity, the volume decline associated with price increases. Mix represents the change attributable to shifts in volume across products or channels.

 

(b) This column represents the change, as compared to the prior year period, attributable to per unit changes in net sales or cost of products sold.

Net sales in our Pet Products segment increased by 4.4% and net sales in our Consumer Products segment decreased by 3.6%, resulting in an overall increase in net sales of 0.2% for the three months ended January 29, 2012 compared to the three months ended January 30, 2011. The increase was driven by new product sales and net pricing, both primarily in our Pet Products segment, partially offset by lower sales volume of existing products (including elasticity) in both our Pet Products and Consumer Products segments. Net pricing was impacted by increased trade promotional activity, primarily in our Consumer Products segment.

Net sales in our Pet Products segment increased by 3.9% and net sales in our Consumer Products segment decreased by 1.8%, resulting in an overall increase in net sales of 1.0% for the nine months ended January 29, 2012 compared to the nine months ended January 30, 2011. The increase was driven by new product sales and net pricing, both primarily in our Pet Products segment, partially offset by lower sales volume of existing products (including elasticity) in both our Pet Products and Consumer Products segments. Net pricing was impacted by increased trade promotional activity, primarily in our Consumer Products segment.

Net sales in our Pet Products segment were $478.8 million for the three months ended January 29, 2012, an increase of $20.3 million, or 4.4%, compared to $458.5 million for the three months ended January 30, 2011. This increase was primarily driven by new product volume and net pricing, partially offset by lower sales volume of existing products (including elasticity).

 

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Net sales in our Pet Products segment were $1,370.4 million for the nine months ended January 29, 2012, an increase of $51.4 million, or 3.9%, compared to $1,319.0 million for the nine months ended January 30, 2011. This increase was primarily driven by new product volume and net pricing, partially offset by lower sales volume of existing products (including elasticity).

Net sales in our Consumer Products segment were $492.3 million for the three months ended January 29, 2012, a decrease of $18.6 million, or 3.6%, compared to $510.9 million for the three months ended January 30, 2011. This decrease was primarily driven by lower sales volume of existing products (including elasticity), partially offset by net pricing. Net pricing was impacted by increased trade promotional activity.

Net sales in our Consumer Products segment were $1,371.2 million for the nine months ended January 29, 2012, a decrease of $24.7 million, or 1.8%, compared to $1,395.9 million for the nine months ended January 30, 2011. This decrease was primarily driven by lower sales volume of existing products (including elasticity), partially offset by net pricing. Net pricing was impacted by increased trade promotional activity.

Cost of products sold

Cost of products sold for the three months ended January 29, 2012 was $693.9 million, an increase of $29.2 million, or 4.4%, compared to $664.7 million for the three months ended January 30, 2011. This increase was primarily due to increased ingredient costs in our Pet Products segment.

Cost of products sold for the nine months ended January 29, 2012 was $1,960.6 million, an increase of $126.6 million, or 6.9%, compared to $1,834.0 million for the nine months ended January 30, 2011. This increase was primarily due to increased ingredient costs in our Pet Products segment and increased packaging costs in our Consumer Products segment.

Gross margin

Our gross margin percentage for the three months ended January 29, 2012 decreased 2.9 points to 28.5% compared to 31.4% for the three months ended January 30, 2011. Gross margin was impacted by a 3.6 margin point decrease related to the higher costs noted above and a 0.7 margin point decrease due to product mix, partially offset by a 1.4 margin point increase due to net pricing.

For the nine months ended January 29, 2012 our gross margin percentage decreased 3.9 points to 28.5% compared to 32.4% for the nine months ended January 30, 2011. Gross margin was impacted by a 4.5 margin point decrease related to the higher costs noted above and a 0.5 margin point decrease due to product mix, partially offset by a 1.1 margin point increase due to net pricing.

Selling, general and administrative expense

SG&A expense for the three months ended January 29, 2012 was $152.7 million, a decrease of $6.6 million, or 4.1%, compared to $159.3 million for the three months ended January 30, 2011. This decrease was primarily driven by decreased costs related to the Merger, decreased payroll-related costs resulting from the recent organization changes and a $4.4 million decrease in marketing expense, as well as disciplined cost management, partially offset by a $10.4 million increase in amortization expense related to intangibles resulting from the Merger.

SG&A expense for the nine months ended January 29, 2012 was $500.1 million, an increase of $32.0 million, or 6.8%, compared to $468.1 million for the nine months ended January 30, 2011. This increase was primarily driven by a $31.8 million increase in amortization expense related to intangibles resulting from the Merger and $15.0 million in severance-related costs resulting from changes to our corporate organization (affecting both the Pet Products and Consumer Products segments, as well as Corporate) as well as increased compensation costs driven primarily by the make-whole payment to our Chief Executive Officer appointed in the first quarter of fiscal 2012 and other Merger-related expenses, partially offset by decreased payroll-related costs resulting from the recent organization changes and a $9.7 million decrease in marketing costs as well as disciplined cost management.

 

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Operating income

 

     Successor     Predecessor              
     Three Months Ended              
     January 29,
2012
    January 30,
2011
    Change     % Change  
     (in millions)     (in millions, except percentages)  

Operating income

          

Pet Products

   $ 95.3      $ 112.1      $ (16.8     (15.0 %) 

Consumer Products

     40.8        56.6        (15.8     (27.9 %) 

Corporate (1)

     (11.6     (23.3     11.7        50.2
  

 

 

   

 

 

   

 

 

   

Total

   $ 124.5      $ 145.4      $ (20.9     (14.4 %) 
  

 

 

   

 

 

   

 

 

   
        
     Successor     Predecessor              
     Nine Months Ended              
     January 29,
2012
    January 30,
2011
    Change     % Change  
     (in millions)     (in millions, except percentages)  

Operating income

          

Pet Products

   $ 231.0      $ 303.5      $ (72.5     (23.9 %) 

Consumer Products

     106.8        165.3        (58.5     (35.4 %) 

Corporate (1)

     (56.9     (56.0     (0.9     (1.6 %) 
  

 

 

   

 

 

   

 

 

   

Total

   $ 280.9      $ 412.8      $ (131.9     (32.0 %) 
  

 

 

   

 

 

   

 

 

   

 

(1) 

Corporate represents expenses not directly attributable to reportable segments.

Operating income for the three months ended January 29, 2012 was $124.5 million, a decrease of $20.9 million, or 14.4%, compared to $145.4 million for the three months ended January 30, 2011. This decrease reflects the higher cost of products sold partially offset by the lower SG&A expense, both as noted previously.

Operating income for the nine months ended January 29, 2012 was $280.9 million, a decrease of $131.9 million, or 32.0%, compared to $412.8 million for the nine months ended January 30, 2011. This decrease reflects the higher cost of products sold and SG&A expense, partially offset by the higher net sales, all as noted previously.

Our Pet Products segment operating income decreased by $16.8 million, or 15.0%, to $95.3 million for the three months ended January 29, 2012 from $112.1 million for the three months ended January 30, 2011. Higher ingredient costs as well as higher amortization expense resulting from the Merger contributed to the decline in operating income, partially offset by the increase in net sales and decreased marketing expense.

Our Pet Products segment operating income decreased by $72.5 million, or 23.9%, to $231.0 million for the nine months ended January 29, 2012 from $303.5 million for the nine months ended January 30, 2011. Higher ingredient costs as well as higher amortization and other SG&A expenses resulting from the Merger contributed to the decline in operating income, partially offset by the increase in net sales and decreased marketing expense.

Our Consumer Products segment operating income decreased by $15.8 million, or 27.9%, to $40.8 million for the three months ended January 29, 2012 from $56.6 million for the three months ended January 30, 2011. Higher manufacturing costs, higher intangibles amortization expense and lower net sales drove the decrease in operating income.

Our Consumer Products segment operating income decreased by $58.5 million, or 35.4%, to $106.8 million for the nine months ended January 29, 2012 from $165.3 million for the nine months ended January 30, 2011. Higher costs (reflecting higher packaging and logistics and other transportation-related costs and raw product costs), higher intangibles amortization expense and lower net sales drove the decrease in operating income.

Our Corporate expenses decreased by $11.7 million, or 50.2%, during the three months ended January 29, 2012 compared to the prior year period. This decrease was primarily due to decreased costs related to the Merger as well as decreased payroll-related costs resulting from the recent organization changes.

Our Corporate expenses increased by $0.9 million, or 1.6%, during the nine months ended January 29, 2012 compared to the prior year period. This increase was primarily due to severance-related costs and increased compensation costs driven primarily by the make-whole payment to our Chief Executive Officer appointed in the first quarter of fiscal 2012 and other Merger-related expenses,

 

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partially offset by decreased stock compensation costs as well as decreased payroll-related costs resulting from the recent organization changes.

Interest expense

Interest expense increased by $44.0 million, or 234.0%, to $62.8 million for the three months ended January 29, 2012 from $18.8 million for the three months ended January 30, 2011. Interest expense increased by $130.0 million, or 222.2%, to $188.5 million for the nine months ended January 29, 2012 from $58.5 million for the nine months ended January 30, 2011. These increases were primarily driven by higher debt levels due to the Merger.

Other (income) expense

Other expense of $16.0 million for the three months ended January 29, 2012 was comprised primarily of $11.4 million of losses on interest rate swaps. Other income of $5.8 million for the three months ended January 30, 2011 was primarily comprised of gains on hedging contracts and foreign currency transactions.

Other expense of $64.4 million for the nine months ended January 29, 2012 was comprised primarily of $52.5 million of losses on interest rate swaps. Other income of $4.2 million for the nine months ended January 30, 2011 was comprised primarily of foreign currency transaction gains, partially offset by hedging contract losses. As a result of our policy decision to no longer seek hedge accounting for our derivative contracts subsequent to the Merger, we expect other (income) expense to fluctuate from period-to-period.

Provision (benefit) for income taxes

The effective tax rate for continuing operations for the three months ended January 29, 2012 was 40.3% compared to 36.4% for the three months ended January 30, 2011. The effective tax rate for continuing operations for the nine months ended January 29, 2012 was 39.6% compared to 37.2% for the nine months ended January 30, 2011. The change in the effective tax rates for the three and nine month periods was primarily due to the non-deductibility of certain severance and Merger-related expenses, partially offset by the impact of a discretionary change in tax method in a foreign jurisdiction.

Reconciliation of Non-GAAP Financial Measures—Adjusted EBITDA

We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). In this Quarterly Report on Form 10-Q, we also provide a non-GAAP financial measure — Adjusted EBITDA.

We present Adjusted EBITDA because we believe that this is an important supplemental measure relating to our financial condition since it is used in certain covenant calculations that may be required from time to time under the indenture that governs our 7.625% Senior Notes due 2019 (referred to therein as “EBITDA”) and the credit agreements relating to our $2.7 billion Term B Loans and $0.75 billion ABL Facility (referred to therein as “Consolidated EBITDA”).

EBITDA is defined as income before interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA, further adjusted as required by the definitions of “EBITDA” and “Consolidated EBITDA” contained in our indenture and credit agreements.

Although Adjusted EBITDA may be useful to benchmark our performance period to period, our presentation of Adjusted EBITDA has limitations as an analytical tool. Adjusted EBITDA is not a GAAP measure of liquidity or profitability and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure determined in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of cash flow available for discretionary expenditures, as it does not take into account debt service requirements, obligations under the monitoring agreement with our Sponsors, capital expenditures or other non-discretionary expenditures that are not deducted from the measure.

We caution investors that the non-GAAP financial measures presented are intended to supplement our GAAP results and are not a substitute for such results. Additionally, we caution investors that the non-GAAP financial measures used by us may not be comparable to similarly titled measures of other companies. The following table provides a reconciliation of Adjusted EBITDA for the periods indicated, (in millions):

 

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Table of Contents
    Three Months Ended     Nine Months Ended    

Trailing

Twelve

Months Ended

 
    January 29, 2012     January 30, 2011     January 29, 2012     January 30, 2011     January 29, 2012  

Reconciliation:

         

Operating income

  $ 124.5      $ 145.4      $ 280.9      $ 412.8      $ —     

Operating income—January 31, 2011 through March 7, 2011

            10.4   

Operating loss—March 8, 2011 through May 1, 2011

            (83.9

Operating income—Nine months ended January 29, 2012

            280.9   

Adjustments to arrive at EBITDA:

         

Other income (expense)

    (16.0     5.8        (64.4     4.2        (89.1

Depreciation and amortization

    38.3        24.0        112.4        71.7        142.4   

Amortization of debt issuance costs and debt discount1

    (6.3     (1.6     (19.0     (4.7     (23.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    140.5        173.6        309.9        484.0        237.2   

Adjustments

         

Non-cash charges

    0.6        (0.1     2.3        0.9        34.4   

Derivative transactions

    12.5        (0.9     57.9        9.3        72.3   

Non-cash stock based compensation

    3.5        4.0        6.1        10.9        40.9   

Non-recurring (gains) losses

    (1.4     6.4        4.6        (3.7     7.3   

Merger-related items

    0.8        7.6        11.4        7.6        122.2   

Early extinguishment of debt

    —          —          —          —          15.8   

Business optimization charges

    6.1        —          23.4        —          29.7   

Other

    2.0        0.1        9.1        1.6        15.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 164.6      $ 190.7      $ 424.7      $ 510.6      $ 575.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Represents adjustments to exclude amortization of debt issuance costs and debt discount reflected in depreciation and amortization because such costs are not deducted in arriving at operating income.

Liquidity and Capital Resources

We have cash requirements that vary based primarily on the timing of our inventory production for fruit, vegetable and tomato items. Inventory production relating to these items typically peaks during the first and second fiscal quarters. Our most significant cash needs relate to this seasonal inventory production, as well as to continuing cash requirements related to the production of our other products. In addition, our cash is used for the repayment, including interest and fees, of our primary debt obligations (i.e. our revolver and our term loans, our senior notes and, if necessary, our letters of credit), contributions to our pension plan, expenditures for capital assets, lease payments for some of our equipment and properties and other general business purposes. We have also used cash for acquisitions and transformation and restructuring plans. We may from time to time consider other uses for our cash flow from operations and other sources of cash. Such uses may include, but are not limited to, future acquisitions, transformation or restructuring plans or repurchases of our debt from time to time (including without limitation through open market transactions). In December 2011, following approval of the proposed settlement of the shareholder litigation arising out of the Merger, we paid approximately $66 million to an escrow settlement fund. For additional information regarding the shareholder litigation, including the settlement of the Delaware Court of Chancery matter, see “Note 14. Legal Proceedings” in our Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our primary sources of cash are typically funds we receive as payment for the products we produce and sell and from our revolver.

As of January 29, 2012, we had made contributions to our qualified pension plan of $15.0 million in fiscal 2012. As of January 30, 2011, we had made contributions to our qualified pension plan of $40.0 million in the twelve months ended May 1, 2011. We currently meet and plan to continue to meet the minimum funding levels required under the Pension Protection Act of 2006 (the “Act”). The Act imposes certain consequences on our defined benefit plan if it does not meet the minimum funding levels. We have made contributions in excess of our required minimum amounts for the twelve months ended May 1, 2011 and fiscal 2010. Although our qualified pension plan was overfunded as of May 1, 2011, plan asset returns since that date have been less than projected. If asset return rates continue at the same level or decline, the qualified pension plan will likely no longer be overfunded at the end of fiscal 2012. We currently do not expect to make any further contributions in fiscal 2012.

We believe that cash on hand, cash flow from operations and availability under our revolver will provide adequate funds for our working capital needs, planned capital expenditures, debt service obligations and planned pension plan contributions for at least the next 12 months.

 

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Our debt consists of the following, as of the dates indicated, (in millions):

 

     Successor      Successor  
     January 29,
2012
     May 1,
2011
 

Short-term borrowings:

     

Revolver

   $ —         $ —     

Other

     4.8         8.6   
  

 

 

    

 

 

 

Total short-term borrowings

   $ 4.8       $ 8.6   
  

 

 

    

 

 

 

Long-term debt:

     

Term B Loans

     2,686.5         2,700.0   

7.625% Notes

     1,300.0         1,300.0   
  

 

 

    

 

 

 
     3,986.5         4,000.0   

Less unamortized discount

     5.9         6.6   

Less current portion

     27.0         20.3   
  

 

 

    

 

 

 

Total long-term debt

   $ 3,953.6       $ 3,973.1   
  

 

 

    

 

 

 

Description of Indebtedness

The summary of our indebtedness and restrictive and financial covenants set forth below is qualified by reference to our senior secured term loan credit agreement, our senior secured asset-based revolving credit agreement, our senior notes indenture, and the amendments thereto, all of which are set forth as exhibits to our public filings with the Securities and Exchange Commission (“SEC”).

Senior Secured Term Loan Credit Agreement

Our senior secured term loan credit agreement provides for a $2,700.0 million senior secured term loan B facility (with all related loan documents, and as amended from time to time, the “Term Loan Facility”) with a term of seven years.

Loans under the Term Loan Facility bear interest at a rate equal to an applicable margin, plus, at our option, either (i) a LIBOR rate (with a floor of 1.50%) or (ii) a base rate (with a floor of 2.50%) equal to the highest of (a) the federal funds rate plus 0.50%, (b) JPMorgan Chase Bank, N.A.’s “prime rate” and (c) the one-month LIBOR rate plus 1.00%. The applicable margin with respect to LIBOR borrowings is 3.00% and with respect to base rate borrowings is 2.00%. See “Note 8. Derivative Financial Instruments” to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of our interest rate swaps.

The Term Loan Facility requires quarterly scheduled principal payments of 0.25% of the outstanding principal (which is currently $6.75 million) per quarter from September 30, 2011 to December 31, 2017. The balance is due in full on the maturity date of March 8, 2018. Scheduled principal payments with respect to the Term Loan Facility are subject to reduction on a pro rata basis upon mandatory and voluntary prepayments on terms and conditions set forth in the senior secured term loan credit agreement. As of January 29, 2012, the amount of outstanding loans under the Term Loan Facility was $2,686.5 million and the blended interest rate payable was 4.60%.

The senior secured term loan credit agreement also requires us to prepay, subject to certain exceptions, outstanding loans under the Term Loan Facility with, among other things:

 

   

Commencing with our fiscal year ending April 29, 2012, 50% (which percentage will be reduced to 25% if our leverage ratio is 5.5x or less and to 0% if our leverage ratio is 4.5x or less) of our annual excess cash flow, as defined in the senior secured term loan credit agreement;

 

   

100% of the net cash proceeds of certain casualty events;

 

   

100% of the net cash proceeds of all of our non-ordinary course asset sales or other dispositions of property, subject to our right to reinvest the proceeds; and

 

   

100% of the net cash proceeds of any incurrence of debt, other than proceeds from the debt permitted under the senior secured term loan credit agreement.

We have the right to request an additional $500.0 million plus an additional amount of secured indebtedness under the Term Loan Facility. Lenders under this facility are under no obligation to provide any such additional loans, and any such borrowings will be subject to customary conditions precedent, including satisfaction of a prescribed leverage ratio, subject to the identification of willing lenders and other customary conditions precedent.

 

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Table of Contents

Senior Secured Asset-Based Revolving Credit Agreement

Our senior secured asset-based revolving credit agreement provides for senior secured financing of up to $750 million (with all related loan documents, and as amended from time to time, the “ABL Facility”) with a term of five years. We maintain the ABL Facility for flexibility to fund our seasonal working capital needs, which are affected by, among other things, the growing cycle of the fruits, vegetables and tomatoes we process, and for other general corporate purposes. The vast majority of our fruit, vegetable and tomato inventories are produced during the harvesting and packing months of June through October and depleted through the remaining seven months. Accordingly, our need to draw on the ABL Facility may fluctuate significantly during the year.

Borrowings under the ABL Facility bear interest at an initial interest rate equal to an applicable margin, plus, at our option, either (i) a LIBOR rate, or (ii) a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) Bank of America, N.A.’s “prime rate” and (c) the one-month LIBOR rate plus 1.00%. The applicable margin with respect to LIBOR borrowings will initially be 2.25% (and may decrease to 2.00% or increase to 2.50% depending on average excess availability) and with respect to base rate borrowings will initially be 1.25% (and may decrease to 1.00% or increase to 1.50% depending on average excess availability).

In addition to paying interest on outstanding principal under the ABL Facility, we are required to pay a commitment fee at an initial rate of 0.500% per annum in respect of the unutilized commitments thereunder. The commitment fee rate may be reduced to 0.375% depending on the amount of excess availability under the ABL Facility. We must also pay customary letter of credit fees and fronting fees for each letter of credit issued.

Availability under the ABL Facility is subject to a borrowing base. The borrowing base, determined at the time of calculation, is an amount equal to: (a) 85% of eligible accounts receivable and (b) the lesser of (1) 75% of the book value of eligible inventory and (2) 85% of the net orderly liquidation value of eligible inventory, of the borrowers under the facility at such time, less customary reserves. The ABL Facility includes a sub-limit for letters of credit and for borrowings on same-day notice, referred to as “swingline loans.” The ABL Facility will mature, and the commitments thereunder will terminate, on March 8, 2016. As of January 29, 2012, there were no loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $38.2 million and the net availability under the ABL Facility was $519.7 million.

The commitments under the ABL Facility may be increased, subject only to the consent of the new or existing lenders providing such increases, such that the aggregate principal amount of commitments does not exceed $1.0 billion. The lenders under this facility are under no obligation to provide any such additional commitments, and any increase in commitments will be subject to customary conditions precedent. Notwithstanding any such increase in the facility size, our ability to borrow under the facility will remain limited at all times by the borrowing base (to the extent the borrowing base is less than the commitments).

Senior Notes Due 2019

Our senior notes due February 16, 2019 have an aggregate principal amount of $1,300.0 million and a stated interest rate of 7.625% (the “7.625% Notes”). Interest on the 7.625% Notes is payable semi-annually on February 15 and August 15 of each year.

Prior to February 15, 2014, we have the option of redeeming (a) all or a part of the 7.625% Notes at 100% of the principal amount plus a “make whole” premium, or, using the proceeds from certain equity offerings and subject to certain conditions, (b) up to 35% of the then-outstanding 7.625% Notes at a premium of 107.625% of the aggregate principal amount and a special interest payment. Beginning on February 15, 2014, we may redeem all or a part of the 7.625% Notes at a premium ranging from 103.813% to 101.906% of the aggregate principal amount. Finally, beginning on February 15, 2016, we may redeem all or a part of the 7.625% Notes at face value. Any redemption as described above is subject to the concurrent payment of accrued and unpaid interest, if any, upon redemption.

Pursuant to the terms of a registration rights agreement, we were obligated, among other things, to use our commercially reasonable efforts to file and cause to become effective an exchange offer registration statement with the SEC with respect to a registered offer to exchange the 7.625% Notes for freely tradable notes having substantially identical terms as the 7.625% Notes. Substantially all of the 7.625% Notes were exchanged for substantially identical registered notes pursuant to an exchange offer that was consummated on December 16, 2011.

Security Interests and Guarantees

Indebtedness under the Term Loan Facility is generally secured by a first priority lien on substantially all of our assets (except inventories and accounts receivable), and by a second priority lien with respect to inventories and accounts receivable. The ABL Facility is generally secured by a first priority lien on our inventories and accounts receivable and by a second priority lien on substantially all of our other assets. The 7.625% Notes are our senior unsecured obligations and rank senior in right of payment to the existing and future indebtedness and other obligations that expressly provide for their subordination to the 7.625% Notes; rank equally in right of payment to all of the existing and future unsecured indebtedness; are effectively subordinated to all of the existing and future secured debt (including obligations under the Term Loan Facility and ABL Facility described above) to the extent of the value of the collateral securing such debt; and are structurally subordinated to all existing and future liabilities, including trade payables, of the non-guarantor subsidiaries, to the extent of the assets of those subsidiaries.

 

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All our obligations under the senior secured term loan credit agreement and senior secured asset-based revolving credit agreement are unconditionally guaranteed by Parent and by substantially all our existing and future, direct and indirect, wholly-owned material restricted domestic subsidiaries, subject to certain exceptions. The 7.625% Notes are required to be fully and unconditionally guaranteed by each of our existing and future domestic restricted subsidiaries that guarantee our obligations under the Term Loan Facility and ABL Facility. Currently, there are no guarantor subsidiaries under any of our debt agreements.

Maturities

The Company is scheduled to pay $6.8 million of its long-term debt during the remainder of fiscal 2012. As of January 29, 2012, scheduled maturities of long-term debt (representing debt under the Term B Loans and 7.625% Notes) are as follows (in millions)1:

 

2013

   $ 27.0   

2014

     27.0   

2015

     27.0   

2016

     27.0   

2017

     27.0   

Thereafter

     3,844.7   

 

1 

Does not include any excess cash flow or other principal prepayments that may be required under the terms of the senior secured term loan credit agreement, as described above.

Restrictive and Financial Covenants

The Term Loan Facility, ABL Facility and indenture related to our 7.625% Notes contain restrictive covenants. See “Note 7. Short-Term Borrowings and Long-Term Debt” to our consolidated financial statements in our 2011 Annual Report for additional information regarding the covenants.

The Term Loan Facility, ABL Facility and indenture related to our 7.625% Notes generally do not require that we comply with financial maintenance covenants. The ABL Facility, however, contains a financial covenant that applies if availability under the ABL Facility falls below a certain level.

The restrictive and financial covenants in the Term Loan Facility, the ABL Facility and indenture related to the 7.625% Notes may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest, such as acquisitions.

We believe that we are currently in compliance with all of our applicable covenants and were in compliance therewith as of January 29, 2012. Compliance with these covenants is monitored periodically in order to assess the likelihood of continued compliance. Our ability to continue to comply with these covenants may be affected by events beyond our control. If we are unable to comply with the covenants under the Term Loan Facility, the ABL Facility and indenture related to the 7.625% Notes, there would be a default, which, if not waived, could result in the acceleration of a significant portion of our indebtedness. See “Part II, Item 1A. Risk Factors—Restrictive covenants in the Credit Facilities and the indenture governing the Notes may restrict our operational flexibility. If we fail to comply with these restrictions, we may be required to repay our debt, which would materially and adversely affect our financial position and results of operations.” in our 2011 Annual Report.

Cash Flow

During the nine months ended January 29, 2012, our cash and cash equivalents increased by $33.1 million and during the nine months ended January 30, 2011, our cash and cash equivalents increased by $20.3 million.

 

     Successor     Predecessor  
     Nine Months Ended  
     January 29,
2012
    January 30,
2011
 
     (in millions)     (in millions)  

Net cash provided by operating activities

   $ 140.4      $ 171.6   

Net cash used in investing activities

     (96.6     (56.7

Net cash used in financing activities

     (15.4     (92.8

 

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Operating Activities

Cash provided by operating activities was $140.4 million for the nine months ended January 29, 2012, compared to $171.6 million for the nine months ended January 30, 2011. This change was primarily driven by decreased net income. Favorable working capital partially offset the decrease in net income. The favorable working capital resulted from favorable timing of receivables and an increase in interest payable and other accrued expenses, partially offset by payment of severance-related costs, including retirement benefits paid to our former CEO and CFO in connection with the Merger. In addition, we received a $44.0 million income tax refund in the first quarter of fiscal 2012 which represents a refund of estimated tax payments made during the period from May 3, 2010 through March 7, 2011 and resulted from deductible Merger-related expenses.

Typically, the cash requirements of the Consumer Products segment vary significantly during the year to coincide with the seasonal growing cycles of fruit, vegetables and tomatoes. The vast majority of our fruit, vegetable and tomato inventories are produced during the packing season, from June through October, and then depleted during the remaining months of the fiscal year. As a result, the vast majority of our total operating cash flow is generated during the second half of the fiscal year.

Investing Activities

Cash used in investing activities was $96.6 million for the nine months ended January 29, 2012 and $56.7 million for the nine months ended January 30, 2011. Capital spending was $49.1 million for the nine months ended January 29, 2012 compared to $56.7 for the nine months ended January 30, 2011. In addition, we paid $47.5 million in connection with the Merger (relating to our financial contribution to the shareholder litigation settlement) during the nine months ended January 29, 2012. Capital spending for the remainder of fiscal 2012 is expected to be up to $50 million and is expected to be funded by cash on hand and cash generated by operating activities.

Financing Activities

Cash used in financing activities for the nine months ended January 29, 2012 was $15.4 million compared to cash used in financing activities of $92.8 million for the nine months ended January 30, 2011. During the first nine months of fiscal 2012, we made net repayments of $3.8 million on our short-term borrowings, made $13.5 million in payments on long-term debt and received capital contributions from Parent of $2.0 million from the issuance of Parent common stock.

During the nine months ended January 30, 2011, we had net borrowings of $6.4 million from short-term borrowings as a result of incurring seasonal borrowings for operations and we made repayments of $22.5 million towards our outstanding term loan principal. During the nine months ended January 30, 2011, DMFC repurchased $100.0 million of its common stock, received $59.5 million in proceeds from the issuance of common stock and paid $45.0 million in dividends.

Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to revise fair value measurements and disclosures. This standard provides clarification about the application of existing fair value measurement and disclosure requirements and expands certain other disclosure requirements. The guidance is effective for us beginning in the fourth quarter of fiscal 2012. The adoption of this standard will require expanded disclosures in the notes to our consolidated financial statements but will not impact our financial results.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. This new accounting pronouncement is effective for us beginning in the first quarter of fiscal 2013. The adoption of this standard will not impact our financial results. We are assessing the potential impact of this new standard on the disclosure in our future consolidated financial statements.

In September 2011, FASB issued an Accounting Standards Update which will require additional qualitative and quantitative disclosures for multiemployer pension plans, including a plan’s funded status if it is readily available. This new accounting pronouncement is effective for us beginning in the fourth quarter of fiscal 2012. The adoption of this standard will require expanded disclosures in the notes to our consolidated financial statements but will not impact our financial results.

In September 2011, the FASB issued an Accounting Standards Update that permits companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill is impaired before performing the two-step goodwill impairment test required under current accounting standards. The guidance is effective for us beginning in the first quarter of fiscal 2013, with early adoption permitted. The adoption of this standard will not impact our financial results.

Critical Accounting Policies and Estimates

Our discussion and analysis of the financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we reevaluate our estimates, including those related to trade promotions, goodwill and intangibles, retirement

 

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benefits and retained-insurance liabilities. Estimates in the assumptions used in the valuation of our stock compensation expense are updated periodically and reflect conditions that existed at the time of each new issuance of stock awards. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the book values of assets and liabilities that are not readily apparent from other sources. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, these estimates routinely require adjustment.

Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Quarterly Report on Form 10-Q. Our significant accounting policies are described in “Note 2. Significant Accounting Policies” to our consolidated financial statements in our 2011 Annual Report. The following is a summary of the more significant judgments and estimates used in the preparation of our financial statements:

Trade Promotions

Trade promotions are an important component of the sales and marketing of our products and are critical to the support of our business. Trade spending includes amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, to advertise our products in their circulars, to obtain favorable display positions in their stores and to obtain shelf space. We accrue for trade promotions, primarily at the time products are sold to customers, by reducing sales and recording a corresponding accrued liability. The amount we accrue is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer and consumer participation, and sales and payment trends with similar previously offered programs. Our original estimated costs of trade promotions are reasonably likely to change in the future as a result of changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. We perform monthly evaluations of our outstanding trade promotions; making adjustments, where appropriate, to reflect changes in our estimates. The ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by our customers for amounts they consider due to them. Final determination of the permissible trade promotion amounts due to a customer generally may take up to 18 months from the product shipment date. Our evaluations during the three months ended January 29, 2012 resulted in net reductions to the trade promotion liability and increases in net sales from continuing operations of $0.7 million which related to prior year activity, of which $0.6 million related to our Pet Products segment and $0.1 million related to our Consumer Products segment. Our evaluations during the nine months ended January 29, 2012 resulted in net reductions to the trade promotion liability and increases in net sales from continuing operations of $1.9 million which related to prior year activity, of which $4.3 million related to our Pet Products segment, offset by a net increase to the trade promotion liability and decreases in net sales from continuing operations of $2.4 million related to our Consumer Products segment. These adjustments represented less than 1% of our trade promotion expense for both the three and nine months ended January 29, 2012. Our evaluations during the three and nine months ended January 30, 2011 resulted in net reductions to the trade promotion liability and increases in net sales from continuing operations of $0.9 million and $11.2 million, respectively, which related to prior year activity, of which $0.4 million and $2.2 million for the three and nine months ended January 30, 2011, respectively, related to our Pet Products segment and $0.5 million and $9.0 million for the three and nine months ended January 30, 2011, respectively, related to our Consumer Products segment. These adjustments represented approximately 1% and approximately 2% of our trade promotion expense for the three and nine months ended January 30, 2011, respectively.

Goodwill and Intangibles

Del Monte produces, distributes and markets products under many different brand names (also referred to as trademarks). During an acquisition, the purchase price is allocated to identifiable assets and liabilities, including brand names and other intangibles, based on estimated fair value, with any remaining purchase price recorded as goodwill. As a result of the Merger, we applied the acquisition method of accounting and established a new basis of accounting on March 8, 2011. Accordingly, each of our active brand names now has a value on our balance sheet.

We have evaluated our capitalized brand names and other intangibles and determined that some have lives that generally range from 5 to 25 years (“Amortizing Intangibles”) and others have indefinite lives (“Non-Amortizing Brands”). Non-Amortizing Brands typically have significant market share and a history of strong earnings and cash flow, which we expect to continue into the foreseeable future.

Amortizing Intangibles are amortized over their estimated lives. We review the asset groups containing Amortizing Intangibles (including related tangible assets) for impairment whenever events or changes in circumstances indicate that the book value of an asset group may not be recoverable. An asset or asset group is considered impaired if its book value exceeds the undiscounted future net cash flow the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the asset exceeds its fair value. Non-Amortizing Brands and goodwill are not amortized, but are instead tested for impairment at least annually. Our annual impairment tests occur during the fourth quarter of our fiscal year. Non-Amortizing Brands are considered impaired if the book value exceeds the estimated fair value. Goodwill is considered impaired if the book value of the reporting unit containing the goodwill exceeds its estimated fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

 

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The estimated fair value of our Non-Amortizing Brands is determined using the relief from royalty method, which is based upon the estimated rent or royalty we would pay for the use of a brand name if we did not own it. For goodwill, the estimated fair value of a reporting unit is determined using the income approach, which is based on the cash flows that the unit is expected to generate over its remaining life, and the market approach, which is based on market multiples of similar businesses. Our reporting units are the same as our operating segments—Pet Products and Consumer Products—reflecting the way that we manage our business. Annually, we engage third-party valuation experts to assist in this process. Considerable management judgment is necessary in estimating future cash flows, market interest rates, discount rates and other factors affecting the valuation of goodwill and intangibles, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections, and industry information in making such estimates.

We did not recognize any impairment charges for our Amortizing Intangibles, Non-Amortizing Brands or goodwill during the three and nine months ended January 29, 2012 and January 30, 2011. As of January 29, 2012, we had $2,125.0 million of goodwill and $1,871.6 million of Non-Amortizing Brands. The Pet Products segment has 93% of the goodwill and 68% of the Non-Amortizing Brands. The Del Monte brand itself, which is included in the Consumer Products segment, comprises 30% of Non-Amortizing Brands. The Meow Mix and Milk-Bone brands together, which are included in the Pet Products segment, comprise 41% of Non-Amortizing Brands. We have not identified any events that lead us to believe that goodwill or Non-Amortizing brands are impaired as of January 29, 2012. However, because the new basis of accounting established at March 8, 2011 set the book values of goodwill and Non-Amortizing brands equal to fair value and impairment tests are highly sensitive to changes in assumptions, minor changes to assumptions, including assumptions regarding future performance and discount rates, could result in impairment losses.

Retirement Benefits

We sponsor a non-contributory defined benefit pension plan (“DB plan”), defined contribution plans, multi-employer plans and certain other unfunded retirement benefit plans for our eligible employees. The amount of DB plan benefits eligible retirees receive is based on their earnings and age. Retirees may also be eligible for medical, dental and life insurance benefits (“other benefits”) if they meet certain age and service requirements at retirement. Generally, other benefit costs are subject to plan maximums, such that the Company and retiree both share in the cost of these benefits.

Our Assumptions

We utilize third-party actuaries to assist us in calculating the expense and liabilities related to the DB plan benefits and other benefits. DB plan benefits and other benefits which are expected to be paid are expensed over the employees’ expected service period. The actuaries measure our annual DB plan benefits and other benefits expense by relying on certain assumptions made by us. Such assumptions include:

 

   

The discount rate used to determine projected benefit obligation and net periodic benefit cost (DB plan benefits and other benefits);

 

   

The expected long-term rate of return on assets (DB plan benefits);

 

   

The rate of increase in compensation levels (DB plan benefits); and

 

   

Other factors including employee turnover, retirement age, mortality and health care cost trend rates.

These assumptions reflect our historical experience and our best judgment regarding future expectations. The assumptions, the plan assets and the plan obligations are used to measure our annual DB plan benefits expense and other benefits expense.

Since the DB plan benefits and other benefits liabilities are measured on a discounted basis, the discount rate is a significant assumption. The discount rate was determined based on an analysis of interest rates for high-quality, long-term corporate debt at the measurement date. In order to appropriately match the bond maturities with expected future cash payments, we utilize differing bond portfolios to estimate the discount rates for the DB plan and for the other benefits. The discount rate used to determine DB plan and other benefits projected benefit obligation as of the balance sheet date is the rate in effect at the measurement date. The same rate is also used to determine DB plan and other benefits expense for the following fiscal year. The long-term rate of return for DB plan’s assets is based on our historical experience, our DB plan’s investment guidelines and our expectations for long-term rates of return. Our DB plan’s investment guidelines are established based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments.

During the three and nine months ended January 29, 2012, we recognized expense for our qualified DB plan of $0.9 million and $2.9 million, respectively, and other benefits expense of $2.5 million and $7.5 million, respectively. Our remaining fiscal 2012 pension expense for our qualified DB plan is currently estimated to be approximately $1.0 million and other benefits expense is currently estimated to be approximately $2.4 million. Our actual future pension and other benefit expense amounts may vary depending upon the accuracy of our original assumptions and future assumptions.

 

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Stock Compensation Expense

We believe an effective way to align the interests of certain employees with those of our equity stakeholders is through employee stock-based incentives. Stock options are stock incentives in which employees benefit to the extent that the stock price for the stock underlying the option exceeds the strike price of the stock option before expiration. A stock option is the right to purchase a share of common stock at a predetermined exercise price. Restricted stock incentives are stock incentives in which employees receive shares of common stock or the right to own shares of common stock and generally do not require the employee to pay a purchase price or exercise price. Restricted stock incentives include restricted stock, restricted stock units, performance share units and performance accelerated restricted stock units. We follow the fair value method of accounting for stock-based compensation, under which employee stock option grants and other stock-based compensation are expensed over the vesting period, based on the fair value at the time the stock-based compensation is granted.

Pre-Merger Stock Compensation

Prior to the Merger, we typically issued two types of employee stock-based incentives: stock options and restricted stock incentives.

For the stock options that we granted prior to the Merger, the employee’s exercise price was equivalent to DMFC’s stock price on the date of the grant (as set forth in our prior stock incentive plan). Typically, employees vested in stock options in equal annual installments over a four-year period and such options generally had a ten-year term until expiration.

Restricted stock units vested over a period of time. Performance share units vested at predetermined points in time if certain corporate performance goals were achieved or were forfeited if such goals were not met. Performance accelerated restricted stock units vested at a point in time, which may have been accelerated if certain stock performance measures were achieved.

Stock-based awards outstanding prior to the Merger vested in full in connection with the Merger and were converted to either immediate cash payments or fully vested new options to purchase common stock of Parent.

Our Pre-Merger Stock Option Assumptions. We measured stock option expense for service-based options at the date of grant using the Black-Scholes valuation model. This model estimates the fair value of the options based on a number of assumptions, such as interest rates, employee exercises, the current price and expected volatility of common stock and expected dividends.

Valuation of Pre-Merger Restricted Stock Incentives. The fair value of restricted stock units was calculated by multiplying the average of the high and low price of DMFC’s common stock on the date of grant by the number of shares granted. The fair value of performance share units was determined based on a model that considered the estimated probability of possible outcomes. For stock awards that were not credited with dividends during the vesting period, the fair value of the stock award was reduced by the present value of the expected dividend stream during the vesting period.

Post-Merger Stock Compensation

Subsequent to the Merger, Parent has issued to certain of our executive officers and other employees service-based and performance-based stock options and restricted common stock. Service-based stock options generally vest in equal annual installments over a five-year period and generally have a ten-year term until expiration. Performance-based stock options vest only if certain pre-determined performance criteria are met and also have a ten-year term. Certain shares of restricted common stock vested immediately, while certain other shares vest in equal annual installments over a three-year period.

Our Post-Merger Stock Option Assumptions. We measure stock option expense for service-based options at the date of grant using the Black-Scholes valuation model. This model estimates the fair value of the options based on a number of assumptions, such as interest rates, employee exercises, the current price and expected volatility of common stock and expected dividends. The fair value of service-based stock options granted during the nine months ended January 29, 2012 was $19.9 million. The following table presents the weighted-average valuation assumptions used for the recognition of stock option expense for service-based stock options granted during the nine months ended January 29, 2012:

 

Expected life (in years)

     6.5   

Expected volatility

     45.0

Risk-free interest rate

     1.61

Dividend yield

     0.0

Weighted average exercise price

   $ 5.55   

Weighted average option value

   $ 2.21   

Valuation of Performance-based Options. The weighted-average fair value of performance-based options granted during the nine months ended January 29, 2012 was $1.28 and was determined based on an option pricing model. Weighted-average key inputs are an expected life of 7.5 years, expected volatility of 40.0%, and a risk-free rate of 1.36%.

 

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Valuation of Restricted Common Stock. The fair value of restricted common stock was calculated by multiplying the price of Parent’s common stock on the date of grant by the number of shares granted.

Retained-Insurance Liabilities

Our business exposes us to the risk of liabilities arising out of our operations. For example, liabilities may arise out of claims from employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We manage these risks through various insurance contracts from third-party insurance carriers. We, however, retain an insurance risk for the deductible portion of each claim. For example, the deductible under our loss-sensitive worker’s compensation insurance policy is up to $0.5 million per claim. An independent, third-party actuary is engaged to assist us in estimating the ultimate costs of certain retained insurance risks. Actuarial determination of our estimated retained-insurance liability is based upon the following factors:

 

   

Losses which have been reported and incurred by us;

 

   

Losses which we have knowledge of but have not yet been reported to us;

 

   

Losses which we have no knowledge of but are projected based on historical information from both our Company and our industry; and

 

   

The projected costs to resolve these estimated losses.

Our estimate of retained-insurance liabilities is subject to change as new events or circumstances develop which might materially impact the ultimate cost to settle these losses. During the three months ended January 29, 2012 and January 30, 2011, we experienced no significant adjustments to our estimates. During the nine months ended January 29, 2012 and January 30, 2011, we reduced our estimate of retained-insurance liabilities related to prior year by approximately $1.5 million and $0.6 million, respectively, primarily as a result of favorable claims history.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have a risk management program which was adopted with the objective of minimizing our exposure to changes in interest rates, commodity, transportation and other prices and foreign currency exchange rates. We do not trade or use instruments with the objective of earning financial gains on price fluctuations alone or use instruments where there are not underlying exposures. We believe that the use of derivative instruments to manage risk is in our best interest. Subsequent to the Merger, we made a policy decision to no longer seek hedge accounting for our derivative contracts. As of January 29, 2012, all of our derivative contracts were economic hedges.

During the nine months ended January 29, 2012, we were primarily exposed to the risk of loss resulting from adverse changes in interest rates, commodity and other prices and foreign currency exchange rates.

Interest Rates: Our debt primarily consists of floating rate term loans and fixed rate notes. We maintain our floating rate revolver for flexibility to fund seasonal working capital needs and for other uses of cash. Interest expense on our floating rate debt is typically calculated based on a fixed spread over a reference rate, such as LIBOR (also known as the Eurodollar rate). Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given amount of floating rate debt.

From time to time, we manage a portion of our interest rate risk related to floating rate debt by entering into interest rate swaps in which we receive floating rate payments and make fixed rate payments. On April 12, 2011, we entered into interest rate swaps with a total notional amount of $900.0 million, as the fixed rate payer. The interest rate swaps fix LIBOR at 3.029% for the term of the swaps. The swaps have an effective date of September 4, 2012 and a maturity date of September 1, 2015. On August 13, 2010, we entered into an interest rate swap with a notional amount of $300.0 million, as the fixed rate payer. The interest rate swap fixes LIBOR at 1.368% for the term of the swap. The swap has an effective date of February 1, 2011 and a maturity date of February 3, 2014.

On January 29, 2012, the fair values of our interest rate swaps were recorded as current liabilities of $10.1 million and non-current liabilities of $57.1 million. On May 1, 2011, the fair values of our interest rate swaps were recorded as current liabilities of $3.2 million and non-current liabilities of $14.0 million.

Assuming average floating rate loans during the period and average revolver borrowings for the period equal to the trailing twelve months average, a hypothetical one percentage point increase in interest rates would increase interest expense by approximately $18.0 million for the nine months ended January 29, 2012.

 

 

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Commodities: Certain commodities such as soybean meal, corn, wheat, soybean oil, diesel fuel and natural gas (collectively, “commodity contracts”) are used in the production or transportation of our products. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures, swaps, options and swaptions (an option on a swap), to reduce the effect of changing prices and as a mechanism to procure the underlying commodity where applicable. We accounted for these commodities derivatives as either economic or cash flow hedges. Changes in the value of economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses was deferred in equity (pre-Merger) and recognized as part of cost of products sold in the appropriate period and the ineffective portion was recognized as other (income) expense.

On January 29, 2012, the fair values of our commodities hedges were recorded as current assets of $0.1 million and current liabilities of $6.9 million. On May 1, 2011, the fair values of our commodities hedges were recorded as current assets of $8.0 million and current liabilities of $2.2 million.

The sensitivity analyses presented below (in millions) reflect potential losses of fair value resulting from hypothetical changes in market prices related to commodities. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effects such hypothetical adverse changes may have on overall economic activity. Actual changes in market prices may differ from hypothetical changes.

 

     Successor      Successor  
     January 29,      May 1,  
     2012      2011  

Effect of a hypothetical 10% change in fair value

     

Commodity contracts

   $ 15.0       $ 4.7   

Foreign Currency: We manage our exposure to fluctuations in foreign currency exchange rates by entering into forward contracts to cover a portion of our projected expenditures paid in local currency. We accounted for these contracts as either economic hedges or cash flow hedges. Changes in the value of the economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses was deferred in equity (pre-Merger) and recognized as part of cost of products sold in the appropriate period and the ineffective portion was recognized as other (income) expense.

On January 29, 2012, the fair values of our foreign currency hedges were recorded as current assets of $1.5 million. On May 1, 2011, the fair values of our foreign currency hedges were recorded as current assets of $3.0 million and current liabilities of $1.0 million.

The table below (in millions) presents our foreign currency derivative contracts as of January 29, 2012 and May 1, 2011. All of the foreign currency derivative contracts held on January 29, 2012 are scheduled to mature prior to the end of fiscal 2014.

 

     Successor      Successor  
     January 29,      May 1,  
     2012      2011  

Contract amount (Mexican pesos)

   $ 51.4       $ 20.0   

Contract amount ($CAD)

     8.3         15.3   

A summary of the fair value and the market risk associated with a hypothetical 10% adverse change in foreign currency exchange rates on our foreign currency hedges is as follows (in millions):

 

     Successor     Successor  
     January 29,     May 1,  
     2012     2011  

Fair value of foreign currency contracts, net asset

   $ 1.5      $ 2.0   

Potential net loss in fair value of a hypothetical 10% adverse change in currency exchange rates

   $ (5.6   $ (3.8

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, or “Disclosure Controls,” as of the end of the period covered by this Quarterly Report on Form 10-Q. This evaluation, or “Controls Evaluation” was performed under the supervision and with the participation of management, including our Chief Executive Officer (our “CEO”) and our Executive Vice President, Chief Financial Officer and Treasurer (our “CFO”). Disclosure Controls are controls and procedures

 

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designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure Controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our Disclosure Controls include some, but not all, components of our internal control over financial reporting.

Based upon the Controls Evaluation, and subject to the limitations noted in this Part I, Item 4, our CEO and CFO have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and that material information relating to Del Monte Corporation and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Del Monte have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Changes in Company Management

David J. West was appointed Chief Executive Officer (“CEO”), effective August 15, 2011. Thus, effective August 15, 2011, Mr. West became responsible (together with our CFO) for establishing and maintaining the Company’s disclosure controls and procedures, as well as its internal control over financial reporting.

CEO and CFO Certifications

The certifications of the CEO and the CFO required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended, or the “Rule 13a-14 Certifications” are filed as Exhibits 31.1 and 31.2 of this Quarterly Report on Form 10-Q. This Part I, Item 4 of the Quarterly Report on Form 10-Q should be read in conjunction with the Rule 13a-14 Certifications for a more complete understanding of the topics presented.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

For a description of our material pending legal proceedings, see “Note 14. Legal Proceedings” in our Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

This Quarterly Report on Form 10-Q, including the section entitled “Item 1. Financial Statements” and the section entitled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Act of 1934. Statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terms.

Forward-looking statements are based on our plans, estimates, expectations and assumptions as of the date of this Quarterly Report on Form 10-Q, and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. Accordingly, you should not place undue reliance on them. A detailed discussion of the known risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in our 2011 Annual Report.

In addition to the risk factors listed below, the following risk factor from our 2011 Annual Report has been updated:

We rely upon co-packers to provide our supply of some products. Any failure by co-packers to fulfill their obligations or any termination or renegotiation of our co-pack agreements could adversely affect our results of operations.

We have a number of supply agreements with co-packers that require them to provide us with specific finished products. For some of our products, including each of canned pineapple, mandarins, some fruit in plastic containers, some fruit in glass jars, some dog snack and pet food products and some of our broth products, we essentially rely upon a single co-packer as our sole-source for the product. We also anticipate that we will rely on sole suppliers for future products. The failure for any reason of any such sole-source or other co-packer to fulfill its obligations under the applicable agreements with us or the termination or renegotiation of any such co-pack agreement could result in disruptions to our supply of finished goods and have an adverse effect on our results of operations. In November 2011, in connection we believe with its desire to continue to supply us, but under a modified agreement, our primary pineapple supplier provided notice of termination under its co-pack agreement, which is cancelable upon three years’ notice. Additionally, from time to time, a co-packer may experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of finished goods or require that we incur additional expense by providing financial accommodations to the co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new co-pack arrangement with another provider. During an economic downturn, our co-packers may be more susceptible to experiencing such financial difficulties, bankruptcies or other business disruptions. A new co-pack arrangement may not be available on terms as favorable to us as the existing co-pack arrangement, if at all.

Such risks and uncertainties include matters relating to:

 

   

our debt levels and ability to service our debt and comply with covenants;

 

   

the failure of the financial institutions that are part of the syndicate of our revolving credit facility to extend credit to us;

 

   

competition, including pricing and promotional spending levels by competitors;

 

   

our ability to launch new products and anticipate changing pet and consumer preferences;

 

   

our ability to maintain or increase prices and persuade consumers to purchase our branded products versus lower-priced branded and private label offerings;

 

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shifts in consumer purchases to lower-priced or other value offerings, particularly during economic downturns;

 

   

our ability to implement productivity initiatives to control or reduce costs;

 

   

cost and availability of inputs, commodities, ingredients and other raw materials, including without limitation, energy (including natural gas), fuel, packaging, fruits, vegetables, tomatoes, grains (including corn), sugar, spices, meats, meat by-products, soybean meal, water, fats, oils and chemicals;

 

   

logistics and other transportation-related costs;

 

   

performance of our pet products business;

 

   

the loss of significant customers or a substantial reduction in orders from these customers or the financial difficulties, bankruptcy or other business disruption of any such customer;

 

   

transformative plans;

 

   

strategic transaction endeavors, if any, including identification of appropriate targets and successful implementation;

 

   

changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including packaging and labeling regulations, environmental regulations and import/export regulations or duties;

 

   

impairments in the book value of goodwill or other intangible assets;

 

   

sufficiency and effectiveness of marketing and trade promotion programs;

 

   

adverse weather conditions, natural disasters, pestilences and other natural conditions that affect crop yields or other inputs or otherwise disrupt operations;

 

   

contaminated ingredients;

 

   

allegations that our products cause injury or illness, product recalls and product liability claims and other litigation;

 

   

product distribution;

 

   

any disruption to our manufacturing or supply chain, particularly any disruption in or shortage of seasonal pack;

 

   

reliance on certain third parties, including co-packers, our broker and third-party distribution centers or managers;

 

   

industry trends, including changes in buying, inventory and other business practices by customers;

 

   

pension costs and funding requirements;

 

   

risks associated with foreign operations;

 

   

hedging practices and the financial health of the counterparties to our hedging programs;

 

   

currency and interest rate fluctuations;

 

   

protecting our intellectual property rights or intellectual property infringement or violation claims;

 

   

failure of our information technology systems; and

 

   

the control of substantially all of our common stock by a group of private investors and conflicts of interest potentially posed by such ownership.

All forward-looking statements in this Quarterly Report on Form 10-Q are made only as of the date of this report. We undertake no obligation, other than as required by law, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) NONE.

(b) NONE.

(c) NONE.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in our 2011 Annual Report for a description of the restrictions on our ability to pay dividends.

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE.

 

ITEM 4. MINE SAFETY DISCLOSURES

NONE.

 

ITEM 5. OTHER INFORMATION

(a) NONE.

(b) NONE.

 

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ITEM 6. EXHIBITS

 

(a) Exhibits.

 

Exhibit       

Incorporated by Reference

 

Number

 

Description

  

Form

    

Exhibit

    

Filing Date

 
  *10.1  

Sixth Amendment to the Restated Del Monte Foods Retail Brokerage Agreement between Del Monte Corporation and Advantage Sales &

Marketing LLC, dated January 6, 2012 (confidential treatment has been requested as to portions of the Exhibit)

        
    10.2**   Amendment to Form of Management Stockholder Agreement among Blue Acquisition Group, Inc., Blue Holdings I, L.P. and each specified management stockholder - Executive Vice Presidents      10-Q         10.2         December 12, 2011   
    10.3**   Amendment to Form of Stock Option Agreement by and between Blue Acquisition Group, Inc. and each specified employee - Executives with Employment Agreements      10-Q         10.3         December 12, 2011   
  *31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         
  *31.2   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         
  *32.1   Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         
  *32.2   Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         
^101.INS   XBRL Instance Document         
^101.SCH   XBRL Taxonomy Extension Schema Document         
^101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document         
^101.DEF   XBRL Taxonomy Extension Definition Linkbase Document         
^101.LAB   XBRL Taxonomy Extension Label Linkbase Document         
^101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document         

 

* filed herewith
** indicates management contract or compensatory plan or arrangement
^ furnished herewith

XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DEL MONTE CORPORATION
By:    /S/    DAVID J. WEST        
  David J. West
  Chief Executive Officer and Director
By:    /S/    LARRY E. BODNER        
  Larry E. Bodner
  Executive Vice President,
  Chief Financial Officer and Treasurer

Dated: March 13, 2012

 

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