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CQB > SEC Filings for CQB > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for CHIQUITA BRANDS INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CHIQUITA BRANDS INTERNATIONAL INC


10-May-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
2012 was a year of transformation for Chiquita, and we are pleased with the progress that we have been able to show through the first quarter of 2013. Our restructuring and relocation initiatives implemented at the end of 2012 have meaningfully reduced our "Selling, general and administrative" expenses, and our strategic decisions to focus on our core bananas and salads businesses, combined with the deployment of efficiency and productivity initiatives in our value chain have resulted in lower logistics costs and improved volume and costs per box at our owned farms. As previously discussed, we secured 5 million boxes of incremental volume in our core North American bananas business in late 2012. These wins have driven significant volume gains in our North American business in first quarter of 2013 compared to 2012 and have resulted in further logistics cost savings enhanced by scale efficiencies.
Changes in our agriculture practices and favorable weather conditions in regions where our bananas are grown increased productivity and reduced costs not only on our owned banana farms but in the cost of purchased bananas because we were able to significantly reduce the volume of fruit purchased in the spot market in the first quarter of 2013 as compared to 2012. European banana pricing in the first quarter of 2013 was higher than the same period of 2012 continuing the trend from late 2012, although volume was lower as we prioritized price over volume and eliminated approximately 1 million boxes of low value, second brand contracted volume. Typically European pricing is significantly stronger in the first half of the year, however through April 2013, pricing has remained relatively flat versus 2012 pricing, which we attribute to balanced supply and demand.
In late February 2013, we commenced shipping private label salads against our communicated signature win. We anticipate that the several private label wins to date will deliver approximately 2 million annualized cases, beginning from the second quarter of this year. Retail value-added salad volumes were lower in the first quarter of 2013 compared to 2012, as expected, reflecting customer contract losses and conversions from branded to private label that continued into early 2012. Higher pricing and improved mix partially offset the lower volumes. In the first quarter of 2013, our salad business experienced adverse weather conditions in the Yuma growing regions that resulted in reduced yields and increased raw product cost. We were able to partly offset these increased costs through manufacturing efficiencies, and our value-added salad results improved versus the same period of 2012, though remained below our long term expectations for the business. We realized improvements versus the same period of 2012 in volume and pricing of foodservice and healthy snacking that both enhanced segment results and further absorbed fixed overhead costs. We remain on schedule in the construction of a new, more efficient and more automated salad production and warehousing facility in the Midwest that will fully replace three existing facilities in the region. The first production lines were operating in April, and we expect to be fully transitioned during third quarter 2013. Comparisons of 2013 to 2012 were also affected by exit activities in the first quarter of 2012 that included: $6 million of expected net losses on the sublease of ships that were removed from service as a result of implementing a new European shipping configuration; $4 million of expense related to the relocation of our headquarters from Cincinnati to Charlotte; and $4 million of charges related to asset write-offs and severance related to discontinued product lines. On February 5, 2013, we issued $425 million of 7.875% senior secured notes due February 1, 2021 (the "7.875% Notes") and entered into a secured asset-based lending facility (the "ABL Facility") that has a maximum borrowing capacity of $200 million, subject to a borrowing base calculation based on specified percentages of our domestic accounts receivable, certain inventory and certain domestic machinery and equipment with the potential for additional advances against foreign accounts receivable. The $457 million of net proceeds from issuance of the 7.875% Notes and the initial borrowings of the ABL Facility were used to retire our previous senior secured credit facility (Term Loan and Revolving Credit Facility) and to retire our 7% Senior Notes. This refinancing significantly extends our debt maturities and reduces the cash required for debt service over the next several years, provides financial flexibility in the form of reduced financial maintenance covenants and provides the ability to reduce debt with excess cash flow during this period. In connection with the refinancing, we recorded a $6 million loss on debt extinguishment for the write-off of deferred financing fees related to the debt that was extinguished. Our results are subject to significant seasonal variations and interim results are not indicative of the results of operations for the full fiscal year. Generally, our results during the second half of the year are weaker than in the first half of the year due to increased availability of competing fruits and resulting lower banana prices, as well as seasonally lower consumption of salads in the fourth quarter. However, due to trends and transactions described above and below, we expect the quarterly flow of earnings to differ during 2013 as compared to prior years. For a further description of our challenges and risks, see the Overview section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part I - Item 1A - Risk Factors" in our 2012 Annual Report on Form 10-K and discussion below.


Table of Contents

Operations
                              Quarter ended March 31,
(In millions)                  2013              2012
Net sales:
Bananas                             $508             $520
Salads and Healthy Snacks        240                238
Other Produce                     26                 35
                                    $774             $793
Cost of sales:
Bananas                             $441             $451
Salads and Healthy Snacks        209                208
Other Produce                     26                 44
Corporate costs                    3                  3
                                    $679             $705
Operating income (loss):
Bananas                   $       30         $       19
Salads and Healthy Snacks          7                  0
Other Produce                     (0 )               (6 )
Corporate Costs                  (11 )              (14 )
                          $       25         $       (0 )

Table may not total or recalculate due to rounding.
CONSOLIDATED NET SALES, COST OF SALES AND OPERATING INCOME Net sales declined on a consolidated basis by 2.4% in the quarter ended March 31, 2013, compared to the same period in 2012. Our banana sales were lower in the first quarter of 2013 primarily as a result of lower volumes in core Europe and the Middle East, an unfavorable exchange rate net of hedging and lower pricing in North America. These declines were partially offset by significant new banana volumes in North America as a result of recent customer wins and better pricing in core Europe. Salad and Healthy Snacks sales were slightly higher, driven mainly by improved volumes and pricing in our Healthy Snacks and Foodservices businesses. Retail value-added salad net sales were slightly lower primarily reflecting customer contract losses and conversions from branded to private label that continued into early 2012. Sales of other produce declined primarily as a result of discontinuing our North American deciduous product lines at the end of 2012.
Cost of sales decreased on a consolidated basis by 3.7% in the quarter ended March 31, 2013, compared to the same period in 2012. Our restructuring and relocation initiatives were fully implemented beginning in the first quarter of 2013, resulting in significant improvements in our banana sourcing and logistics costs from the deployment of value chain efficiency and productivity initiatives at the end of 2012 and the reduction in overhead expenses benefiting both "Cost of sales" and "Selling, general and administrative" expense. Additionally, as a result of discontinuing our North American deciduous business at the end of 2012, cost of sales for our Other Produce segment was lower.
As a result, our operating income increased on a consolidated basis in the quarter ended March 31, 2013 compared to the same period in 2012.
Additional detail of the variances are included in the segment discussion below.
REPORTABLE SEGMENTS
We report three business segments: Bananas; Salads and Healthy Snacks; and Other Produce. Segment descriptions and results can be found in Note 13 to the Condensed Consolidated Financial Statements. Certain corporate expenses are not allocated to the reportable segments and are included in "Corporate costs," including costs related to the relocation of the company's headquarters and restructuring activities described in Note 2 to the Condensed Consolidated Financial Statements. Inter-segment transactions are eliminated.


Table of Contents

BANANA SEGMENT
Net sales for the segment were $508 million and $520 million for the first
quarter of 2013 and 2012, respectively. Significant increases (decreases) in
segment net sales compared to the year-ago period were as follows:
(In millions)                                   Q1
Pricing                                       $   -
Volume                                           (6 )
Average European exchange rates                  (8 )
Unrealized gains on currency hedge portfolio1     3
Other                                            (1 )
Change in Banana segment net sales            $ (12 )

1 Hedge accounting was terminated on certain positions included in our currency hedge portfolio during the first quarter of 2013, and therefore unrealized gains related to these positions are included in net sales. See Note 6 to the Condensed Consolidated Financial Statements for further details. Our banana sales volumes1 in 40-pound box equivalents were as follows:
% (In millions, except percentages) Q1 2013 Q1 2012 Change North America 17.5 15.8 10.8 % Europe and the Middle East:

Core Europe2                          9.1       10.5    (13.3 )%
Mediterranean3                        3.0        2.6     11.5  %
Middle East                           1.1        1.7    (31.0 )%

1 Volume sold represents all banana varieties, including Chiquita to Go, Chiquita minis, organic bananas and plantains.
2 Core Europe includes the 27 member states of the European Union, Switzerland, Norway and Iceland. Banana sales in Core Europe are primarily in euros but also include other European currencies.
3 Mediterranean markets are mainly European and Mediterranean countries that do not belong to the European Union.
The following table shows year-over-year favorable (unfavorable) percentage changes in our banana prices for 2013 compared to 2012:

Q1
North America1     (3.3 )%
Core Europe:
U.S. Dollar Basis2  5.9  %
Local currency      5.0  %
Mediterranean       2.4  %
Middle East        (5.5 )%

1 North America pricing includes fuel-related and other surcharges.

2 Prices on a U.S. dollar basis exclude the effect of hedging.

Cost of sales in the Banana segment was $441 million and $451 million for the first quarter of 2013 and 2012, respectively. Significant increases (decreases) in segment cost of sales compared to the year-ago period were as follows:
(In millions) Q1

Volume                                                       $  (2 )
Sourcing and logistics costs                                    (4 )
Average European exchange rates                                  4
Acceleration of losses on ship sublease arrangements in 2012    (6 )
Tariffs                                                         (1 )
Other                                                           (1 )
Change in Banana segment cost of sales                       $ (10 )


Table of Contents

Our logistics costs were lower in 2013 than in 2012 as a result of the continued optimization of our logistics network and additional volume distribution in North America, which resulted in logistical scale efficiencies that more than overcame other cost increases. Logistics costs are significantly affected by fuel prices, and include the effect of bunker fuel hedges, which was a benefit of $2 million and $6 million for the first quarter of 2013 and 2012, respectively.
Sourcing costs include costs of producing fruit in our owned operations and purchasing fruit from our third party growers. Sourcing costs were lower in 2013 than in 2012, primarily due to increased productivity on both our owned operations and our third party growers, which resulted in significantly less fruit purchased in the spot market in 2013.
In third quarter of 2011, we implemented a new European shipping configuration that resulted in significant reductions in logistics costs in 2012 that will continue in 2013. The new configuration involves shipment of part of our core volume in container equipment on board third-parties' container ships. This container capacity is more flexible than leasing entire ships, which is expected to primarily benefit the second half of the year, when volume demand is typically lower. As a result of the shipping reconfiguration, five chartered cargo ships were subleased until the end of 2012, and an equivalent number of ship charters were not renewed in 2013. We accelerated $6 million of losses on the three sublease arrangements in the first quarter of 2012, net of $2 million of related deferred sale-leaseback gain amortization during the sublease period. Operating income in the Banana segment was $30 million and $19 million for the first quarter of 2013 and 2012, respectively. Significant increases (decreases) in segment operating income compared to the year-ago period were as follows:
(In millions) Q1

Change in Banana segment net sales from above     $ (12 )
Change in Banana segment cost of sales from above    10
Selling, general and administrative expenses         10
Other                                                 3
Change in Banana segment operating income         $  11

Selling, general and administrative expenses were lower in 2013 compared to 2012 as a result of the restructuring initiatives implemented in late 2012, which resulted in lower headcount and reduced marketing investments.
Our primary markets are in North America and Europe, but we also have sales in the Middle East and other markets. The majority of our sales in the Middle East are in Iran under license from the U.S. government that allows sale of food products to non-sanctioned parties. Sales to Iranian customers are in U.S. dollars and represent $19 million, $20 million and $17 million of "Trade receivables, less allowances" on the Condensed Consolidated Balance Sheet as of March 31, 2013, December 31, 2012 and March 31, 2012, respectively. Even though the sales in Iran are permitted, the international sanctions against Iran are affecting the ability of Iranian customers to pay invoices within terms because it is difficult for them to obtain U.S. dollars, euros or other suitable currencies in sufficient quantity on a regular basis. Over the course of 2012, our receivable balance with these customers increased, and we established payment plans with each of these customers to reduce their balances. Most Iranian customers have so far been able to find acceptable methods of payment to comply with their payment plans. However, one significant customer has not, and as a result, we reserved $9 million of these receivables in the second half of 2012 representing the excess of the customer's obligations over the cash it has posted as collateral. We source bananas from the Philippines for sale in the Middle East under a committed-volume long term purchase contract with a former joint venture partner through 2016. To mitigate our risk in 2013, we have reduced the amount of volume being sent to Iran and have developed customers in other Middle Eastern markets, such as Iraq and Saudi Arabia, even though pricing is lower in these other markets. However, Iran remains an important market for our Philippine-sourced bananas.
We use hedging instruments (derivatives) to reduce the negative cash flow and earnings effect that any significant decline in the value of the euro would have on the conversion of euro-based revenue into U.S. dollars for up to 18 months in the future. To minimize the volatility that changes in fuel prices could have on the operating results of our core shipping operations, we also use hedging instruments (derivatives) to lock in prices of future bunker fuel purchases for up to three years in the future. Further discussion of hedging risks and instruments can be found under the caption Item 3 - Quantitative and Qualitative Disclosures About Market Risk below and Note 6 to the Condensed Consolidated Financial Statements.
The average spot and hedged euro exchange rates were as follows:
(Dollars per euro) Q1 2013 Q1 2012 % Change Euro average exchange rate, spot $ 1.32 $ 1.31 1.1 % Euro average exchange rate, hedged1 1.28 1.34 (4.9 )%

1 Only includes realized hedging gains and losses.


Table of Contents

The net European currency impact increased (decreased) our results as compared to the year-ago period as follows:

Q1
Revenue                                       $  2
Local costs                                    (0)
Hedging1                                       (11 )
Unrealized gains on currency hedge portfolio2    3
Balance sheet translation3                      (3 )
Net European currency impact                  $ (9 )

Columns may not total due to rounding.

1         First quarter hedging loss was $6 million in 2013 versus gains of $4
          million recognized in the same period of 2012.


2         As further described in Note 6 to the Condensed Consolidated Financial
          Statements, hedge accounting was terminated for certain currency hedges
          that were transferred to banks participating in our ABL Credit
          Facility. These unrealized gains were recognized in "Net sales" in the
          first quarter of 2013 for positions originally intended to hedge sales
          in the second and third quarters of 2013. Termination of hedge
          accounting does not change the economic purpose or effect to reduce
          uncertainty in the U.S. dollar realization of euro-denominated sales,
          but does result in unrealized changes in fair value of these hedge
          positions to be recognized currently in "Net sales" until the hedge
          positions settle.


3         First quarter balance sheet translation was a loss of $2 million in
          2013 versus a gain of $1 million in the same period of 2012.

EU Banana Import Regulation. From 2006 through 2010, bananas imported into the European Union ("EU") from Latin America, our primary source of fruit, were subject to a tariff of 176 per metric ton, while bananas imported from African, Caribbean and Pacific sources continue to enter the EU tariff-free (since January 2008 in unlimited quantities). In 2009, the EU and 11 Latin American countries reached the World Trade Organization ("WTO") Geneva Agreement on Trade in Bananas ("GATB"), under which the EU agreed to reduce tariffs on Latin American bananas annually, ending with a rate of 114 per metric ton by 2019. The GATB resulted in tariff rates per metric ton of 136 and 132 in 2012 and 2013, respectively. The EU also signed a WTO agreement with the United States, under which it agreed not to reinstate WTO-illegal tariff quotas or licenses on banana imports.
In another regulatory development, in June 2012, the EU signed free trade area ("FTA") agreements with (i) Colombia and Peru and (ii) the Central American countries. Under both FTA agreements, the EU committed to reduce its banana tariff to 75 per metric ton over ten years for specified volumes of banana exports from each of the countries covered by these FTAs, and further required that the banana volumes assigned to each country under the Central American FTA be administered through export licenses. Implementation of an export license system in the 1990's (subsequently declared illegal) significantly increased our logistics and other export costs. The EU implemented its Colombia-Peru FTA for Peru, but not Colombia, on March 1, 2013. Its agreements with Colombia and Central America are in various stages of ratification among the parties and are currently expected to be implemented in the second half of 2013 at the earliest. Because the approval procedures and implementation arrangements remain unsettled, it is unclear when the remaining FTAs will be implemented, and what, if any, effect the new FTAs will have on our operations.

SALADS AND HEALTHY SNACKS SEGMENT
Net sales for the Salads and Healthy Snacks segment were $240 million and $238
million for the quarters ended March 31, 2013 and 2012, respectively.
Significant increases (decreases) in segment net sales compared to the year-ago
period were as follows:
(In millions)                                          Q1
Pricing:
Retail value-added salads                             $ 2
Healthy snacks, foodservice and other                   5
Volume:
Retail value-added salads                              (7 )
Healthy snacks, foodservice and other                   3
Mix:
Retail value-added salads                               3
Healthy snacks, foodservice and other                  (2 )
Other                                                  (2 )
Change in Salads and Healthy Snacks segment net sales $ 2


Table of Contents

Sales in our retail value-added salads were slightly lower in 2013 as compared to 2012. Higher pricing and mix partially offset lower volumes. Retail value-added salad volumes were lower, as expected, due to customer contract losses and conversions from branded to private label that continued into early 2012. While traditionally we were a supplier of branded product offerings, we expanded our product offerings as part of our strategic transformation in 2012 without the need for significant capital expenditures. We now offer branded and private label packaged salads, organic packaged salads and whole-head lettuce products so as to offer our customers a more comprehensive set of salad solutions. We expect these changes to positively impact our results in 2013. During the fourth quarter of 2012, we were awarded private label business from certain retail grocery customers that commenced towards the end of the first quarter of 2013 and represents new estimated volume of 1.6 million cases for the balance of 2013 and 2 million cases annualized. Healthy snacks and foodservice businesses sales were slightly higher, driven mainly by improved volumes and pricing.
Volume and pricing for our retail value-added salads was as follows:
(In millions, except percentages) Q1 2013 Q1 2012 % Change Volume 11.7 12.3 (4.6 )% Pricing 3.3 %

Pricing includes fuel-related and other surcharges. Fuel surcharges generally reset quarterly based on the previous quarter's average fuel index prices. The change in pricing represents the net change in sales of individual product pricing changes, without considering changes in product mix.
Cost of sales in the Salads and Healthy Snacks segment were $209 million and $208 million for the quarters ended March 31, 2013 and 2012, respectively. Significant increases (decreases) in segment cost of sales compared to the year-ago period were as follows:

(In millions)                                               Q1
Volume:
Retail value-added salads                                 $ (5 )
Healthy snacks, foodservice and other                        2
Mix:
Retail value-added salads                                    1
Healthy snacks, foodservice and other                        -
Industry input and manufacturing costs:
Retail value-added salads                                    6
Healthy snacks, foodservice and other                        2
Other                                                       (5 )
Change in Salads and Healthy Snacks segment cost of sales $  1

Adverse weather in the Yuma growing regions in the first quarter of 2013 resulted in reduced yields and increased raw product cost that was partly offset by manufacturing efficiencies. The first quarter of 2012 also included costs of $1 million, primarily related to inventory write-offs, to exit healthy snacking products that were not sufficiently profitable.


Table of Contents

Operating income (loss) in the Salads and Healthy Snacks segment was $7 million and less than $1 million for the quarters ended March 31, 2013 and 2012, respectively. Significant increases (decreases) in segment operating income compared to the year-ago period were as follows:

(In millions)                                                         Q1
Change in Salads and Healthy Snacks segment net sales from above     $ 2
Change in Salads and Healthy Snacks segment cost of sales from above  (1 )
Selling, general and administrative                                    4
Equity in losses of investees                                          2
Other                                                                 (1 )
Change in Salads and Healthy Snacks segment operating income         $ 6

Selling, general and administrative expenses were lower in 2013 compared to 2012 as a result of the restructuring initiatives implemented in late 2012 and the timing of marketing spend. Other includes $1 million to restructure our European healthy snacking sales force in the first quarter of 2012.
In March 2013, the Danone JV sold its smoothie operations and the Chiquita brand is now licensed to a third-party smoothies manufacturer in Europe. The JV continues pending resolution of its remaining obligations; the company has fully accrued any probable cash funding requirements to the JV.
In June 2012, we entered into a 20-year lease agreement for a salad production and warehousing facility in the Midwest that will replace three existing facilities in the region. The lease agreement contains two 5-year extension periods. The new facility is expected to be more automated and efficient than . . .

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