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Item 1A. Risk Factors of our Form 10-K for the year ended December 29, 2023.
Contractual Obligations
As of June 28September 27, 2024, there were no material changes in our commitments or contractual obligations as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 29, 2023.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates can be found in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the fiscal year ended December 29, 2023. There were no material changes to these critical accounting policies or estimates during the seconthird quarter of 2024.
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Table of Contents
Fair Value Measurements
Our results of operations and financial condition are exposed to fluctuations in currency exchange rates against the U.S. dollar, and we mitigate that exposure by entering into foreign currency forward contracts. Certain of our subsidiaries periodically enter into foreign currency forward contracts in order to hedge portions of forecasted sales or cost of sales denominated in foreign currencies which generally expire within one year. During the quarter ended June 28, 2024, we entered into a foreign currency collar contract to hedge portions of our cost of sales denominated in the Kenyan shilling. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options strike prices. The fair value of our foreign currency cash flow hedges was a net assetliability position of $1.82.2 million as of June 28September 27, 2024 compared to a net liability position of $0.3 million as of December 29, 2023 due to the relative strengthening or weakening of exchange rates when compared to contracted rates.
Our results of operations and financial condition are exposed to fluctuations in variable interest rates, and we mitigate that exposure by entering into interest rate swaps from time to time. During 2018, we entered into interest rate swaps in order to hedge the risk of the fluctuation on future interest payments related to a portion of our variable rate borrowings through 2028. The fair valuOn July 19, 2024, we agreed to terminate of ourur remaining outstanding interest rate swap cash flow hedges was an assin exchange for $7.3 million, net positionof fees of $9.1approximately $0.2 million as . As a result, as of June 28September 27, 2024 compare, we had no outstanding interest rate swap cash flow
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hed to ages. The fair value of our interest rate swap cash flow hedges were at an asset position of $7.9 million as of December 29, 2023. The change in value waprior to termination of the outstanding interest rate swap was due to the relative indecrease in variable interest rates when compared to the rates as of December 29, 2023. SubsequeBased on our assessment to June 28, 2024, we agreed to terminate our outstandinghat the originally hedged cash flows associated with our variable rate borrowings remain probable, the proceeds received as a result of our terminated interest rate swap in exchange for $7.3 million, net of fees of approximately $0.2 millionwill remain in accumulated other comprehensive loss and be reclassified to earnings through interest expense over the remaining life of the hedged debt.
We enter into derivative instruments with counterparties that are highly rated and do not expect a deterioration of our counterpartys credit ratings; however, the deterioration of our counterpartys credit ratings would affect the Consolidated Financial Statements in the recognition of the fair value of the hedges that would be transferred to earnings as the contracts settle. We expect that $5.71.2 million of the net fair value of our cash flow hedges recognized as a net gain in accumulated other comprehensive loss, inclusive of amounts received related to our interest rate swap terminated subsequent to June 28,during the third quarter of 2024, will be transferred to earnings during the next 12 months and the remaining net gain of $5.03.2 million over a period of approximately 4 years, along with the earnings effect of the related forecasted transactions.
The fair value of the banana reporting unit's goodwill and the prepared food reporting unit's goodwill and remaining trade names and trademarks are highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of these assets. We disclosed the sensitivity related to the banana reporting unit's goodwill and the prepared food reporting unit's goodwill and trade names and trademarks in our Annual Report on Form 10-K for the year ended December 29, 2023. During the quarter ended June 28September 27, 2024, we did not record impairment charges associated with these reporting units or trade names and trademarks, however we continue to monitor their performance.
Potential impairment exists if the fair value of a reporting unit to which goodwill has been allocated is less than the carrying value of the reporting unit. Future changes in the estimates used to conduct our impairment review, including our financial projections and changes in the discount rates used, could cause the analysis to indicate that our goodwill or trade names and trademarks are impaired in subsequent periods and result in a write-off of a portion or all of goodwill or trade names and trademarks.
New Accounting Pronouncements
Refer to Note 2. Recently Issued Accounting Pronouncements of the accompanying unaudited consolidated financial statements for a discussion of recent accounting pronouncements.
Seasonality
Interim results are subject to significant variations and may not be indicative of the results of operations that may be expected for an entire fiscal year. Due to seasonal sales price fluctuations, we have historically realized a greater portion of our net sales and gross profit during the first two quarters of the year. The sales price of any fresh produce item fluctuates throughout the year due to the supply of and demand for that particular item, as well as the pricing and availability of other fresh produce items, many of which are seasonal in nature. Information about the seasonality of our results is included under the caption Seasonality provided in Item 1. Business, of our Annual Report on Form 10-K for the year ended December 29, 2023.
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Forward-Looking Statements
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this quarterly report contains forward-looking statements regarding:
our expectations regarding future financial and operational performance;
our intentions regarding the use of borrowed funds;
our expectation regarding the exploratiour ability to implement strategic alternatives for our Mann Packing business, including the consolidation and timingof Mann Packing operations and our anticipated completion of strategic alternatives for othe sale of certain assets of Fresh Leaf Farms;
our expectations regarding the anticipated completion of the sale of our distribution facility;
our Mann Packexpectations regarding the impact of storms on our business and our ability to recover insurance proceeds, if any;
our expectations regarding the impact on our business operations of any geopolitical conflicts, including the as a result of the Red Sea conflict;
our expectations regarding continued inflationary pressures, our ability to mitigate such pressures through pricing, and the impacts to our operating results;
our expectations regarding market conditions, volatility and seasonality, and their impact on our operating results;
our beliefs related to the sufficiency of our capital resources, including that our cash on hand, capacity under our 2024 Amended Credit Facility and cash flows from operations for the next twelve months will be sufficient to service our outstanding debt during the next twelve months;
our expectations regarding our derivative instruments, including our counterparties credit ratings and the anticipated impacts on our financials;
our expectations and estimates regarding certain legal, tax and accounting matters, including our litigation strategy, plans and beliefs regarding the ultimate outcome of income tax adjustments assessed by foreign taxing authorities;
our expectations concerninregarding the potential impact of pending legislation and any impact that may have on our financial condition, results of operations and cash flows;
our expectations concerning the fair value of hedges, including the timing and impact to our results;
our expectations regarding estimated liabilities related to environmental cleanup; and
our plans and future performance.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. These various factors include, but are not limited to, the following:
the impact of inflationary pressures on raw materials and other costs;
our exposure to political, economic and other risks from operating a multinational business, which could have a material adverse effect on our results and financial condition;
the impact of increased costs for many of our products, including bananas, pineapples, avocados and other fresh produce;
the impact of pricing and other actions by competitors, particularly during periods of low consumer confidence and spending levels;
our athe risk that we may not be able to consummate the Fresh Leaf Farms transaction;
the ability to successfully compete in tand willingness of each party to fulfill their respective closing conditions with respect to the Fresh Leaf Farms transaction;
the timing and cost of resolution of pending and future legal and environmental proceedings or investigation;
the impact of severe weather conditions and natural disasters, such as flooding, hurricanes, earthquakes, on crop quality and yields and on our ability to grow, procure or export our products;
the adequacy of our insurance coverage;
the cost and other implications of changes in regulations applicable to our business, including potential legislative or regulatory initiatives in the marUnited States or elsewhere directed at mitigating the effects of climate change;
our ability to successfully compete in the markets in which we do business;
the impact on our business of the consolidation of retailers, wholesalers and distributors in the food industry;
the impact of foreign currency fluctuations and currency exchange risks because of our international business;
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the impact on our sales and profits if we lose one or more of our largest customers or such customers reduce their purchases from us;
the availability of sufficient labor during peak growing and harvesting seasons;
the continued ability of our distributors and suppliers to have access to sufficient liquidity to fund their operations;
the impact of governmental trade restrictions, including adverse governmental regulation that may impact our ability to access certain markets;
our ability to meet our anticipated cash needs in light of our liquidity;
trends and other factors affecting our financial condition or results of operations from period to period, including changes in product mix, consumer preferences or consumer demand for branded products such as ours; anticipated price and expense levels;
the impact of crop disease, such as vascular diseases, one of which is known as Tropical Race 4, or TR4 (also known as Panama Disease);
our ability to improve our existing quarantine policies and other prevention strategies, as well as find contingency plans, to protect our and our suppliers banana crops from vascular diseases;
global or local disruptions or issues that impact our production facilities or complex logistics network;
our inability to realize expected benefits on plans for expansion of our business (including through acquisitions);
our ability to successfully integrate acquisitions and new product lines into our operations;
the impact of impairment or other charges associated with exit activities, crop or facility damage or otherwise,
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the timing and cost of resolution of pending and future legal and environmental proceedings or investigation;
the impact impact of changes in tax accounting or tax laws (or interpretations thereof), the impact of claims or adjustments proposed by the Internal Revenue Service or other taxing authorities, including the EU, in connection with our tax audits and our ability to successfully contest such tax claims and pursue necessary remedies;
the success of our joint ventures;
the impact of severe weather conditions and natural disasters, such as flooding and earthquakes, on crop quality and yields and on our ability to grow, procure or export our products;
the adequacy of our insurance coverage;
the cost and other implications of changes in regulations applicable to odamage to our business, including potential legislative or regulatory initiatives in the United States or elsewhere directed at mitigating the effects of climate change;
damage to our rereputation or brand names or negative publicity about our products
our ability to successfully manage the risks associated with international operations, including risks relating to inflation, tax laws, currency restrictions and exchange rate fluctuations, legal or judicial systems, and political or economic conditions;
the impact of disruptions or breaches of our technology or information system security measures, or of third parties we rely upon;
our ability to continue to comply with covenants and the terms of our credit instruments and our ability to obtain additional financing to fund our capital expenditures; and
exposure to product liability claims and associated regulatory and legal actions, product recalls, or other legal proceedings relating to our business.
All forward-looking statements in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our plans and performance may also be affected by the factors described in our most recent Annual Report on Form 10-K along with other reports that we file with the Securities and Exchange Commission.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended December 29, 2023.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 28September 27, 2024. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Such officers also confirm that there were no changes to our internal control over financial reporting during the quarter ended June 28September 27, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Tax related matters
In connection with the examination of the tax returns in two foreign jurisdictions, the taxing authorities have issued income tax deficiencies related to transfer pricing aggregating approximately $171.73.9 million (including interest and penalties) for tax years 2012 through 2016. We strongly disagree with the proposed adjustments and have filed a protest with each of the taxing authorities.
In one of the foreign jurisdictions, we are currently contesting tax assessments related to the 2012-2015 audit years and the 2016 audit year in both the administrative court and the judicial court. During 2019 and 2020, we filed actions contesting the tax assessment in the administrative office. Our initial challenge to each of these tax assessments was rejected, and we subsequently lost our appeals at the administrative court. We have subsequently filed actions to contest each of these tax assessments in the countrys judicial courts. In addition, we have filed a request for injunction to the judicial court to stay the tax authorities' collection efforts for these two tax assessments, pending final judicial decisions. The court granted our injunction with respect to the 2016 audit year, however denied our injunction with respect to the 2012-2015 audit years. We timely appealed the denial of the injunction, and on August 10, 2022 the appellate court overturned the denial and granted our injunction for the 2012-2015 audit years with a trial date set for July 4, 2025. Pursuant to local law, we registered real estate collateral with an approximate fair market value of $6.97.0 million in connection with the grant of the 2016 audit year injunction. This real estate collateral has a net book value of $3.8 million as of the quarter ended June 28September 27, 2024. In addition, in connection with the grant of the 2012-2015 audit year injunction, we registered real estate collateral with an approximate fair market value of $29.04 million, and a net book value of $4.6 million as of the quarter ended June 28September 27, 2024. The registration of this real estate collateral does not affect our operations in the country.
In the other foreign jurisdiction, the administrative court denied our appeal, and on March 4, 2020 we filed an action in the judicial court to contest the administrative court's decision. The case is still pending.
We will continue to vigorously contest the adjustments and intend to exhaust all administrative and judicial remedies necessary in both jurisdictions to resolve the matters, which could be a lengthy process.
California Air Resource Board
On December 21, 2022, the California Air Resource Board ("CARB") issued a Notice of Violation ("NOV") to the Company regarding violations of certain California anti-air pollution regulations by three non-shore capable vessels that were subject to a time charter by us from an unrelated non-U.S. third party. We are cooperating with and assisted CARB in its audits for the alleged violations during 2021. While a formal proceeding by CARB has not been filed, we are discussing a settlement with CARB directly. During the sixnine months ended June 28September 27, 2024, we accrued expenses of $0.5 million as a contingent reserve which are included in asset impairments and other charges, net in the Consolidated Statements of Operations. This amount is in addition to a $0.4 million contingent reserve accrued as of December 29, 2023 related to this matter.
For more information, see Note 9. "Commitments and Contingencies" to the Consolidated Financial Statements included in Part I, Item 1. Financial Statements.