"During the quarter we took the significant step of agreeing to sell our Consumer Products business. We believe separating our two segments will set them up for individual, long-term success and is a good outcome for our stakeholders. Looking ahead to fiscal 2015, we will be solely focused on growing our Pet Products business. We will launch innovation against market gaps, as well as gaps within our portfolio, and continue to cultivate our key brands," said Dave West, CEO of Del Monte Foods. "I'm excited with the prospects that lie ahead for our Pet Products business as we drive innovation and bring new ideas to the marketplace."
Background on the Presentation of Results
On October 9, 2013, Del Monte entered into an agreement to sell the Consumer Products business (the "Consumer Business") to Del Monte Pacific Limited for $1.675 billion, subject to a working capital adjustment. The transaction is expected to close by early calendar year 2014.
The results of the Consumer Business have been reported as discontinued operations for all periods presented. In accordance with U.S. generally accepted accounting principles, discontinued operations only include expenses directly attributable to the discontinued operation. Consequently, certain expenses that have historically been allocated to the Consumer Business are not included in discontinued operations.
The current reporting of Adjusted EBITDA under the Company's 7.625% Notes Indenture and credit agreements continues on the same basis as in previous periods.
Del Monte Foods Results for Three Months Ended October 27, 2013
Pet Products net sales increased 11.1% to $552.0 million compared to $497.0 million in the prior year period. The acquisition of Natural Balance Pet Foods, Inc. ("Natural Balance") primarily drove the year-over-year increase as well as list pricing actions net of trade spend ("net pricing"). Partially offsetting the increase was volume declines for existing products (including pricing elasticity).
Pet Products operating income increased $14.4 million year-over-year, or 20.7%, to $84.1 million in the second quarter fiscal 2014. The increase was primarily driven by net pricing and productivity savings as well as volume driven by Natural Balance. Partially offsetting the increase was higher SG&A expense reflecting Natural Balance's dedicated sales force in the pet specialty channel and higher marketing costs.
Pet Products Adjusted EBITDA increased from $99.9 million in the second quarter fiscal 2013 to $113.9 million in the second quarter fiscal 2014, or 14.0%. The drivers of Adjusted EBITDA are similar to those of operating income described above.
Operating income (Pet Products and Corporate) increased $14.7 million year-over-year to $71.8 million, an increase of 25.7%. The drivers of the year-over-year increase are similar to those noted above for Pet Products operating income.
Income (loss) from discontinued operations before income taxes (Consumer Business) decreased $212.1 million year-over-year to a loss of $162.2 million. The decrease was primarily due to a non-cash impairment charge of $193.8 million recorded in connection with the classification of the Consumer Business to discontinued operations. In addition, lower volume as well as higher marketing costs also impacted results. Partially offsetting the decline was net pricing.
Total Adjusted EBITDA decreased $18.7 million or 11.6% to $142.0 million. The drivers of Adjusted EBITDA are similar to those noted above for both operating income (Pet Products and Corporate) and income (loss) from discontinued operations before income tax (Consumer Business), except that Adjusted EBITDA is not impacted by the non-cash impairment charge discussed above. In addition, the lapping of prior year favorable impact of cash hedge positions drove a year-over-year decrease in Adjusted EBITDA. The cash impact of hedge positions is included within Corporate Adjusted EBITDA as defined pursuant to the Company's 7.625% Notes Indenture and credit agreements.
Del Monte Foods Six Months Ended October 27, 2013
Pet Products net sales for the six months ended October 27, 2013 were $1,033.0 million compared to $955.3 million for the prior year period, an increase of 8.1%. The acquisition of Natural Balance primarily drove the increase as well as net pricing. Partially offsetting the increase was volume declines for existing products (including pricing elasticity).
Pet Products operating income increased $55.4 million year-over-year, or 50.8%, to $164.5 million for the six months ended October 27, 2013. The increase was primarily driven by net pricing. Productivity savings were largely offset by increased ingredient costs.
Pet Products Adjusted EBITDA increased $56.8 million to $228.3 million for the six months ended October 27, 2013, or 33.1%. The drivers of Adjusted EBITDA are similar to those of operating income described above.
Operating income (Pet Products and Corporate) increased $52.8 million or 62.0% to $138.0 million. The increase was primarily driven by net pricing. Productivity savings were largely offset by increased ingredient costs.
Other income of $9.6 million for the six months ended October 27, 2013 decreased $17.6 million from other income of $27.2 million for the six months ended October 28, 2012. The decrease in other income was due to lower gains on commodity hedging contracts, partially offset by lower losses on interest rate swaps.
Income (loss) from discontinued operations before income taxes (Consumer Business) decreased $211.7 million to a loss of $142.7 million. The decrease was primarily due to a non-cash impairment charge of $193.8 million recorded in connection with the classification of the Consumer Business to discontinued operations. In addition, unfavorable volume/mix also impacted results, partially offset by net pricing.
Total Adjusted EBITDA increased 2.6% to $281.5 million compared to $274.3 million in the prior year period. The drivers of Adjusted EBITDA are similar to those noted above for both operating income (Pet Products and Corporate) and income (loss) from discontinued operations before income tax (Consumer Business), except that Adjusted EBITDA is not impacted by the non-cash impairment charge discussed above. In addition, the less favorable year-over-year cash impact of hedge positions drove a decrease in Adjusted EBITDA. The cash impact of hedge positions is included within Corporate Adjusted EBITDA as defined pursuant to the Company's 7.625% Notes Indenture and credit agreements.
Select Liquidity Data
At October 27, 2013, including assets and liabilities of discontinued operations, total debt was $4,065.8 million and cash and cash equivalents were $15.6 million. As of October 27, 2013, there were $156.2 million outstanding borrowings under the Company's $750.0 million ABL Facility. For the six months ended October 27, 2013, capital expenditures totaled $47.6 million.
Free Cash Flow4 for the six months ended October 27, 2013 was $(270.6) million, compared to $(133.7) million in the prior year period. The decline was primarily due to higher working capital driven by inventories reflecting the impact of lower sales volume in the Consumer Business as well as higher cash taxes. Higher Adjusted EBITDA partially offset the decline.
