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CQB > SEC Filings for CQB > Form 10-Q on 8-Aug-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


8-Aug-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 made through the first half of 2013. The restructuring and relocation initiatives implemented at the end of 2012 have meaningfully reduced our "Selling, general and administrative" expenses. Our strategic decisions to focus on our core bananas and salads businesses and implement initiatives that lowered logistics costs and improved banana yield at our owned farms have positively impacted our results of operations. Productivity on our owned farms improved substantially as a result of previously disclosed changes in agricultural practices and favorable weather conditions in some of the regions where we grow bananas. The additional volume from our owned farms reduced our banana spot market purchases during the first half of 2013 as compared to 2012, resulting in lowered costs. As previously disclosed, we also secured 5 million boxes of incremental annualized banana volume in North America in late 2012 and an additional 2 million annualized boxes in the first quarter of 2013. These wins have driven significant volume gains in our North American business in the first half of 2013 compared to 2012 and resulted in further logistics cost savings from scale efficiencies. In Europe, we continued to prioritize price over volume during the second quarter of 2013 resulting in higher pricing but lower volume, particularly with respect to second quality fruit. Typically, European pricing is significantly stronger in the first half of the year when supply and demand are more in balance as compared to the second half of the year when supply is greater than demand.
In late February 2013, we commenced shipping private label salads under our communicated signature contract. We anticipate that the several private label wins to date will deliver approximately 4 million annualized cases, beginning from the second quarter of this year. Retail value-added salad volumes were approximately 1 million cases higher in the second quarter of 2013 compared to 2012, as a result of increased velocity with our current customers and the impact of new branded and private label customer volume. Lower pricing, primarily reflecting product mix, slightly offset the increased sales volumes in the second quarter of 2013. Operating income in our salads and healthy snacks segment was lower in the second quarter of 2013 as compared to 2012 primarily from transition and startup costs at our new Midwest facility (discussed further below), which were approximately $7 million in the second quarter of 2013. We also incurred increased raw product costs from the adverse weather conditions across growing regions in the first half of 2013. We realized improvements versus the same period of 2012 in foodservice volume and healthy snacks pricing and volume. We remain on schedule in the construction of the 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 began operating in April 2013, and we expect to be fully transitioned in the fourth quarter of 2013. We are balancing manufacturing line transitions with the requirement to maintain customer service to our retail and foodservice customers. As a result, we expect to continue to incur transition and startup costs through the completion in the second half of 2013.
Comparisons of the second quarter and first half of 2013 to the 2012 periods were also affected by exit activities, the sale of non-strategic businesses, discontinuation of non-strategic product lines and average European exchange rates net of hedging. We exited our North American deciduous product lines after the end of the California grape season at the end of 2012. These product lines represented approximately $40 million of net sales and an insignificant negative contribution to our operating income on an annual basis. At the end of the second quarter of 2013, we sold a European healthy snacking business, which represented approximately $12 million of net sales and an insignificant contribution to our operating income on an annual basis. Additionally, 2012 included:
? $6 million of expected net losses in the first quarter of 2012 on the sublease of ships that were removed from service as a result of implementing a new European shipping configuration;

? $7 million and $11 million in the second quarter of 2012 and first half of 2012, respectively, of expense related to the relocation of our headquarters from Cincinnati to Charlotte;

? $4 million of charges in the first quarter of 2012 for asset write-offs and severance related to discontinued other produce and healthy snacking product lines; and

? $8 million of more favorable average European exchange rates net of hedging as compared to the first half of 2013. In mid-2012, we had increased our hedging coverage through 2013 to reduce exposure to further declines in the value of the euro at that time; however, subsequent increases in the value of the euro resulted in hedging losses that will continue through the balance of 2013 based on June 30, 2013 exchange rates.

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


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retire our 7% Senior Notes. This refinancing significantly extends our debt maturities, 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 in the first quarter of 2013 a $6 million loss on debt extinguishment for the write-off of deferred financing fees related to the debt that was extinguished. During the second quarter of 2013, we repaid the revolving ABL balance of approximately $28 million.
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. Operations

                                                            Better                                           Better
                             Quarter ended June 30,        (Worse)         Six months ended June 30,        (Worse)
                                                           Percent                                          Percent
(In millions)                 2013            2012          Change          2013               2012          Change
Net sales:
Bananas                   $     518       $      533         (2.8 )%   $      1,026       $      1,053        (2.6 )%
Salads and Healthy Snacks       260              252          3.4  %            500                489         2.2  %
Other Produce                    34               49        (29.7 )%             60                 84       (28.1 )%
                          $     812       $      833         (2.5 )%   $      1,586       $      1,627        (2.5 )%
Cost of sales:
Bananas                   $     423       $      462          8.5  %   $        864       $        912         5.3  %
Salads and Healthy Snacks       234              214         (9.1 )%            443                422        (5.0 )%
Other Produce                    34               49         29.5  %             60                 93        35.2  %
Corporate costs                   2                3          6.3  %              5                  6         4.3  %
                          $     693       $      728          4.7  %   $      1,372       $      1,433         4.2  %
Operating income (loss):
Bananas                   $      53       $       29         82.7  %   $         83       $         48        73.3  %
Salads and Healthy Snacks         3               10        (70.5 )%             10                 10        (6.3 )%
Other Produce                    (0 )             (3 )       98.7  %             (0 )               (9 )      95.5  %
Corporate Costs                 (16 )            (18 )       15.0  %            (27 )              (32 )      15.6  %
                          $      41       $       18        130.6  %   $         66       $         17       282.9  %

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 2.5% both in the quarter and six months ended June 30, 2013 compared to the same periods in 2012. Our banana sales were lower in the second quarter and six months ended June 30, 2013 compared to the 2012 periods primarily as a result of lower volumes in core Europe, where we continued to prioritize price over volume, and the Middle East in addition to 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. Salad and Healthy Snacks sales were higher in the quarter and six months ended June 30, 2013 compared to the same periods of 2012, driven by higher volumes in our retail value-added salads, improved volumes in our Foodservices business and improved pricing in our healthy snacks products. Healthy Snacks business volumes were also higher in the first half of 2013 as compared to the first half of 2012. Retail value-added salad volumes and net sales were higher in the second quarter of 2013 primarily as a result of increased velocity with our current customers and the impact of new private label volume which began towards the end of the first quarter of 2013. 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 4.7% and 4.2% in the second quarter and six months ended June 30,


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2013, compared to the same periods in 2012. Our restructuring and relocation initiatives were fully implemented at the beginning of 2013, resulting in significant improvements in our banana sourcing and logistics costs from the deployment of value chain efficiency and productivity initiatives that commenced at the end of 2012 and the reduction in overhead expenses benefiting both "Cost of sales" and "Selling, general and administrative" expense. Changes in our agriculture practices and favorable weather conditions in some of the regions where we grow bananas increased productivity. As a result, we purchased less fruit in the spot market in the first half of 2013 as compared to 2012. Additionally, as a result of discontinuing our North American deciduous product lines at the end of 2012, cost of sales for our Other Produce segment was lower. These decreases in cost of sales were partially offset by transition and startup costs at our new Midwest facility, which were approximately $7 million in the second quarter of 2013. We also incurred increased raw product costs from the adverse weather conditions across growing regions in the first half of 2013 related to our salads business.
As a result of the above, as well as the benefits of our completed restructuring and relocation plans, our operating income increased on a consolidated basis in the second quarter and six months ended June 30, 2013 compared to the same periods of 2012 and our "Selling, general and administrative" expense decreased by 4.1% and 12.5%, respectively.
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.

BANANA SEGMENT
Net sales for the segment were $518 million and $533 million for the second
quarter of 2013 and 2012, respectively and $1.0 billion and $1.1 billion for the
six months ended June 30, 2013 and 2012, respectively. Significant increases
(decreases) in segment net sales compared to the year-ago periods were as
follows:
(In millions)                                            Q2        YTD
Pricing                                                $ (11 )   $ (11 )
Volume                                                     -        (6 )
Average European exchange rates                           (2 )     (11 )
Unrealized gains (losses) on currency hedge portfolio1    (2 )       2
Other                                                      -        (1 )
Change in Banana segment net sales                     $ (15 )   $ (27 )

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) Q2 2013 Q2 2012 % Change YTD 2013 YTD 2012 % Change North America 18.5 16.7 11.1 % 36.0 32.5 10.9 % Europe and the Middle East:

Core Europe2                          9.2        10.1        (8.6 )%       18.3         20.6       (11.0 )%
Mediterranean3                        3.1         2.9         9.2  %        6.1          5.5        10.3  %
Middle East                           0.9         1.7       (47.3 )%        2.0          3.3       (39.2 )%

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.


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The following table shows year-over-year favorable (unfavorable) percentage changes in our banana prices for 2013 compared to 2012:

                     Q2        YTD
North America1     (2.9 )%   (3.1 )%
Core Europe:
U.S. Dollar Basis2  3.1  %    4.2  %
Local currency      1.9  %    3.2  %
Mediterranean      (7.0 )%   (2.6 )%
Middle East        (5.2 )%   (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 $423 million and $462 million for the second quarters of 2013 and 2012, respectively, and $864 million and $912 million for the six months ended June 30, 2013 and 2012, respectively. Significant increases (decreases) in segment cost of sales compared to the year-ago periods were as follows:

(In millions)                                                  Q2        YTD
Volume                                                       $  (1 )   $  (3 )
Sourcing and logistics costs                                   (27 )     (31 )
Average European exchange rates                                 (5 )      (1 )
Acceleration of losses on ship sublease arrangements in 2012     -        (6 )
Tariffs                                                         (1 )      (2 )
Other                                                           (5 )      (5 )
Change in Banana segment cost of sales                       $ (39 )   $ (48 )

Our logistics costs were lower in the second quarter and first half of 2013 compared to the 2012 periods as a result of the continued optimization of our logistics network and additional volume distribution in North America, which resulted in 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 $1 million and $3 million for the second quarter of 2013 and 2012, respectively, and a benefit of $3 million and $9 million for the six months ended June 30, 2013 and 2012.
Sourcing costs include costs of producing fruit in our owned operations and purchasing fruit from third party growers. Sourcing costs were lower in the second quarter and first half of 2013 compared to the 2012 periods, primarily due to increased productivity on our owned operations and growers under contract, which resulted in significantly less fruit purchased in the spot market in the second quarter and first half of 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 throughout 2013. The new configuration involves shipment of part of our core volume in container equipment aboard 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 $53 million and $29 million for the second quarters of 2013 and 2012, respectively and $83 million and $48 million for the six months ended June 30, 2013 and 2012, respectively. Significant increases (decreases) in segment operating income compared to the year-ago periods were as follows:

(In millions)                                       Q2        YTD
Change in Banana segment net sales from above     $ (15 )   $ (27 )
Change in Banana segment cost of sales from above    39        48
Selling, general and administrative expenses          2        13
Other                                                (2 )       1
Change in Banana segment operating income         $  24     $  35


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Selling, general and administrative expenses were lower in the second quarter and first half of 2013 compared to 2012 periods 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 $18 million, $20 million and $20 million of "Trade receivables, less allowances" on the Condensed Consolidated Balance Sheet as of June 30, 2013, December 31, 2012 and June 30, 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 had 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 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) Q2 2013 Q2 2012 % Change YTD 2013 YTD 2012 % Change Euro average exchange rate, spot $ 1.30 $ 1.29 1.1 % $ 1.31 $ 1.30 0.7 % Euro average exchange rate, hedged1 1.27 1.29 (1.6 )% 1.27 1.31 (3.3 )%

1 Only includes realized hedging gains and losses.
The net European currency impact increased (decreased) our results as compared to the year-ago periods as follows:

(In millions)                                  Q2      YTD
Revenue                                       $ 3     $  5
Local costs                                    (1 )     (1 )
Hedging1                                       (5 )    (16 )
Unrealized gains on currency hedge portfolio2  (2 )      2
Balance sheet translation3                      5        2
Net European currency impact                  $ -     $ (8 )

Columns may not total due to rounding.

1         Second quarter hedging loss was $5 million in 2013 versus a gain of
          less than a million recognized in the same period of 2012. For the six
          months ended June 30, 2013 the hedging loss was $11 million versus a
          gain of $5 million recognized in the six months ended June 30, 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         Second quarter balance sheet translation was a loss of $3 million in
          2013 versus a loss of $8 million in the same period of 2012. For the
          six months ended June 30, 2013 the balance sheet translation was a loss
          of $5 million versus a loss of $7 million in the six months ended June
          30, 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


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("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 FTA with Peru on March 1, 2013, and its FTAs with Panama, Honduras, Nicaragua, and Colombia on August 1, 2013. It is expected to implement its FTAs with Costa Rica, Guatemala, and El Salvador later in 2013. Because the FTA banana volume and export licensing regulations remain unsettled, it is unclear 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 $260 million and $252
million for the second quarters of 2013 and 2012, respectively and $500 million
and $489 million for the six months ended June 30, 2013 and 2012, respectively.
. . .
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