Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

OR

For the transition period from                      to                     

Commission file number 1-1550

CHIQUITA BRANDS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

250 East Fifth Street

Cincinnati, Ohio 45202

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (513) 784-8000

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x. No ¨.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes x. No ¨.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31, 2004, there were 40,845,646 shares of Common Stock outstanding.

Table of Contents

CHIQUITA BRANDS INTERNATIONAL, INC.

TABLE OF CONTENTS

2

Table of Contents

Part I - Financial Information

Item 1 - Financial Statements

CHIQUITA BRANDS INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(In thousands, except per share amounts)

See Notes to Consolidated Financial Statements.

3

Table of Contents

CHIQUITA BRANDS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET (Unaudited)

(In thousands, except share amounts)

See Notes to Consolidated Financial Statements.

4

Table of Contents

CHIQUITA BRANDS INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)

(In thousands)

See Notes to Consolidated Financial Statements.

5

Table of Contents

CHIQUITA BRANDS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Interim results for Chiquita Brands International, Inc. and subsidiaries (the “Company”) are subject to significant seasonal variations and are not necessarily indicative of the results of operations for a full fiscal year. The Company’s results during the third and fourth quarters are generally weaker than in the first half of the year due to increased availability of competing fruits and resulting lower prices. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair statement of the results of the interim periods shown have been made. See Notes to Consolidated Financial Statements included in the Company’s 2003 Annual Report on Form 10-K for additional information relating to the Company’s financial statements.

Note 1 - Earnings Per Share

Basic and diluted earnings per common share (“EPS”) are calculated as follows (in thousands, except per share amounts):

The assumed conversions to common stock of the Company’s outstanding warrants, stock options and other stock awards are excluded from the diluted EPS computations for periods in which these items, on an individual basis, have an anti-dilutive effect on diluted EPS.

6

Table of Contents

Note 2 - Sale of Colombian Division

In June 2004, the Company sold its banana-producing and port operations in Colombia to Invesmar Ltd. (“Invesmar”), the holding company of C.I. Banacol S.A. Banacol is a Colombian-based producer and exporter of bananas and other fruit products.

In exchange for these operations, the Company received, subject to certain post-closing adjustments, $28.5 million in cash; $15 million face amount of notes and deferred payments (of which $3 million is due by September 2004); and the assumption by the buyer of approximately $7 million of pension liabilities.

In connection with the sale, Chiquita entered into eight-year agreements to purchase bananas and pineapples from affiliates of the buyer. Under the banana purchase agreement, Chiquita will purchase approximately 11 million boxes of Colombian bananas per year at above-market prices. This resulted in a liability of $33 million at the sale date, which represents the estimated net present value of the above-market premium to be paid for the purchase of bananas over the term of the contract. Substantially all of this liability is included in “Other liabilities” in the Consolidated Balance Sheet. Under the pineapple purchase agreement, Chiquita will purchase approximately 2 million boxes of Costa Rican golden pineapples during the first year of the contract and 2.5 million boxes per year thereafter at below-market prices. This resulted in a receivable of $25 million at the sale date which represents the estimated net present value of the discount to be received for the purchase of pineapples over the term of the contract. Substantially all of this receivable is included in “Investments and other assets, net” in the Consolidated Balance Sheet.

Also in connection with the sale, Chiquita agreed that, in the event that it becomes unable to perform its obligations under the banana purchase agreement due to a conflict with U.S. law, Chiquita will indemnify Invesmar primarily for the lost premium on the banana purchases or, alternatively, rescind the sale transaction and allow Invesmar to retain certain port assets in Colombia which had a carrying value of approximately $7 million at the sale date.

The net book value of the assets and liabilities transferred in the transaction was $36 million, primarily comprised of $25 million of property, plant and equipment, $19 million of growing crop inventory, $5 million of materials and supplies inventory, $6 million of deferred tax liabilities, and $7 million of pension liabilities. The Company recognized a before-tax loss of $9 million and an after-tax loss of $4 million on the transaction, which takes into account the net $8 million loss from the two long-term fruit purchase agreements.

Note 3 - Contingency

In April 2003, the Company’s management and audit committee, in consultation with the board of directors, voluntarily disclosed to the U.S. Department of Justice that the Company’s banana-producing subsidiary in Colombia, which was sold in June 2004, had been forced to make “protection” payments to certain groups in that country that have been designated under United States law as foreign terrorist organizations. The Company’s sole reason for submitting to these payment demands was to protect its employees from the risks to their safety if the payments were not made.

The voluntary disclosure to the Justice Department was made because the Company’s management became aware that these groups had been designated as foreign terrorist organizations under a U.S. statute that makes it a crime to support such an organization. The Company requested the Justice Department’s guidance. Following the voluntary disclosure, the Department undertook an investigation. The Company has cooperated with that investigation.

7

Table of Contents

In late March 2004, the Department advised that, as part of the investigation, it will be evaluating the role and conduct of the Company and some of its officers. The Company cannot predict the outcome of the investigation or its possible effect on the Company.

For a discussion of risks the Company encounters in its international operations, including this matter, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risks of International Operations.”

Note 4 - Sale of Armuelles Division

On June 30, 2003, the Company sold the assets of its Armuelles, Panama banana production division for $20 million to a worker cooperative. In connection with this transaction, the cooperative signed a 10-year contract to supply Chiquita with fruit at market prices. Sales proceeds included $15 million in cash financed by a Panamanian bank and $5 million from a loan provided by Chiquita. This loan is being repaid to the Company through an agreed-upon discount to the price per box during the initial years of the contract. As part of the transaction, Chiquita paid $20 million in workers’ severance and certain other liabilities of the Armuelles division, which were previously accrued. The Company recognized a gain of $21 million in the 2003 second quarter on the sale of Armuelles assets and settlement of its severance liabilities.

Note 5 - Acquisition of German Distributor

On March 27, 2003, the Company acquired the remaining equity interests in Scipio GmbH & Co., a German limited partnership that owns Atlanta AG and its subsidiaries (collectively, “Atlanta”). Atlanta is the primary distributor of Chiquita products in Germany and Austria and had been the Company’s largest customer in Europe for many years. Prior to the acquisition, Atlanta was an investment accounted for under the equity method. Starting with the second quarter of 2003, Atlanta’s operating results were fully consolidated in Chiquita’s financial statements. The acquisition resulted in higher 2004 first quarter sales of $283 million, cost of sales of $262 million, and selling, general and administrative costs of $15 million, all compared to the first quarter 2003.

Note 6 - Discontinued Operations

The results of Chiquita Processed Foods (“CPF”), several former Atlanta subsidiaries and Progressive Produce Corporation (“Progressive”), all of which have been sold, are included as discontinued operations in the Consolidated Financial Statements for all periods presented in which they were owned.

In May 2003, the Company sold CPF to Seneca Foods Corporation for $110 million in cash and approximately 968,000 shares of Seneca preferred stock convertible into an equal number of shares of Seneca Common Stock Class A, which was recorded at its estimated fair value of $13 million on the sale date. Seneca also assumed CPF debt, which was $61 million on the sale date. The Company recognized a $9 million gain on the transaction.

In April 2003, the Company sold a port operation of Atlanta for approximately $10 million in cash, resulting in a gain of $3 million. Also in 2003, the Company sold or agreed to sell certain other Atlanta operations, including fresh produce operations in Italy and France, for losses totaling $4 million. Goodwill write-offs included in these amounts were $5 million.

8

Table of Contents

In January 2003, the Company sold Progressive, a California-based distributor of potatoes and onions, for approximately $7 million in cash. A $2 million gain on this sale was recognized in the 2003 first quarter.

Beginning with the 2003 third quarter, the Company revised its business segments. The financial information of CPF was previously included in the old Processed Foods business segment, and the Atlanta operations and Progressive were previously included in the old Fresh Produce business segment.

The income from discontinued operations presented below includes interest expense of $1 million and $2 million, respectively, on debt assumed by the buyers for the quarter and six months ended June 30, 2003.

In the financial information presented below, each of the discontinued operations is included through the date of its sale (in thousands):

9

Table of Contents

Note 7 - Pension and Severance Benefits

Net periodic benefit cost consists of the following (in thousands):

Note 8 - Inventories (in thousands)

Note 9 - Segment Information

The Company’s Banana segment includes the sourcing (production and purchase), transportation, marketing and distribution of bananas, including those marketed by Atlanta. The Company’s Other Fresh Produce segment includes the sourcing, marketing and distribution of fresh fruits and vegetables other than bananas. In almost all cases, Chiquita does not grow the other fresh produce sold, but rather sources it from independent growers. Chiquita’s Other Fresh Produce business increased substantially with the March 2003 acquisition of Atlanta, which has annual sales of approximately $900 million in non-banana fresh produce. The Other Fresh Produce segment also includes Chiquita’s new fresh-cut fruit business. Remaining operations from the old Processed Foods segment consist of processed fruit ingredient products, which are produced in Latin America and sold in other parts of the world, and other consumer packaged goods. These operations are reported in “Other.” The Company evaluates the performance of its business segments based on operating income. Intercompany transactions between segments are eliminated.

10

Table of Contents

Financial information for each segment follows (in thousands):

Note 10 - Debt

The Company allowed the bank credit facility of Chiquita Brands, Inc., now known as Chiquita Brands L.L.C. (“CBL”), to expire in June 2004. There had been no outstanding borrowings under the revolving credit line since May 2003, and all term loans under the facility had been repaid in full in March 2004. The Company expects to replace the expired facility with a new multi-year revolving credit facility later in 2004.

Upon expiration of the CBL credit facility, the Company entered into an agreement with Wells Fargo Bank to provide up to $15 million of letters of credit. At June 30, 2004, letters of credit for $9 million were outstanding.

In June 2004, the Company refinanced the debt of its Chiquita Chile subsidiary in the amount of $13 million. Interest is variable based on LIBOR, and principal is due in installments over 5 years. Under the terms of the agreement, which is secured by liens on certain of Chiquita Chile’s assets, the subsidiary is subject to financial covenants, including minimum tangible net worth and limitations on liabilities.

In June 2004, a subsidiary of the Company entered into a 17 million euro committed credit line for bank guarantees to be used primarily to guarantee the Company’s payments for licenses used to import bananas into European Union countries. This line is in addition to the Company’s existing 25 million euro uncommitted credit line for bank guarantees.

11

Table of Contents

Note 11 - Comprehensive Income (in thousands)

Note 12 - Hedging

The Company enters into contracts to hedge its risks associated with euro exchange rate movements, primarily to reduce the negative earnings impact that any significant decline in the value of the euro would have on the conversion of euro-based revenue into U.S. dollars. In late 2003, the Company began to purchase solely put options instead of entering into new forward and zero-cost collar contracts. Purchased put options, which require an upfront premium payment, can reduce the negative earnings impact on the Company of a significant future decline in the value of the euro, without limiting the benefit received from a stronger euro. The Company also enters into hedge contracts for fuel oil for its shipping operations, which permit it to lock in fuel purchase prices for up to two years and thereby minimize the volatility that changes in fuel prices could have on its operating results.

Currency hedging costs charged to the Consolidated Statement of Income were $7 million and $18 million for the quarter and six months ended June 30, 2004, compared to $13 million and $22 million for the quarter and six months ended June 30, 2003. These costs reduced the favorable impact of the exchange rate on U.S. dollar realizations of euro-denominated sales. At June 30, 2004, unrealized losses of $8 million on the Company’s option and zero-cost collar contracts were included in “Accumulated other comprehensive income”, and substantially all of these losses are expected to be reclassified to net income during the next 12 months.

At June 30, 2004, the Company had euro-denominated put options which allow for conversion of approximately €135 million of sales in 2004 at rates ranging from $1.10 per euro to $1.20 per euro, approximately €185 million of sales in the first half of 2005 at rates ranging from $1.15 per euro to $1.23 per euro, and approximately €130 million of sales in the first half of 2006 at rates ranging from $1.17 per euro to $1.20 per euro. Additionally, the Company had zero-cost collar contracts which ensure conversion of approximately €60 million of sales in 2004 at average rates between $1.08 and $1.13 per euro. The Company had 3.5% Rotterdam barge fuel oil forward contracts at June 30, 2004 that require conversion of approximately 100,000 metric tons of fuel oil in 2004 and 90,000 metric tons in 2005 at prices ranging from $130 to $170 per metric ton, and a combination of Singapore and New York Harbor fuel oil forward contracts that require conversion of approximately 20,000 metric tons of fuel oil in 2004 and 20,000 metric tons in 2005 at prices ranging from $145 to $195 per metric ton. At June 30, 2004, the fair value of the foreign currency option and fuel oil forward contracts was $15 million, $9 million of which was included in “Other current assets” and $6 million in “Investments and other assets, net.” The

12

Table of Contents

fair value of the foreign currency zero-cost collar contracts at June 30, 2004 was a loss of approximately $5 million, which was included in “Accrued liabilities.” During the quarter and six months ended June 30, 2004, the change in the fair value of these contracts relating to hedge ineffectiveness was not significant.

Note 13 - Income Taxes

The Company’s effective tax rate is affected by the level and mix of income among various domestic and foreign jurisdictions in which the Company operates. In the 2004 second quarter, income tax expense reflects a $5.7 million benefit from the sale of the Company’s Colombian banana production division. A deferred tax liability of $5.7 million related to Colombia growing crops had been previously recorded; this tax liability was released to income upon sale of the Colombian division.

13

Table of Contents

Note 14 - Stock-Based Compensation

Effective January 1, 2003, the Company began using the fair value method to recognize stock option expense in its results of operations for new stock options granted after December 31, 2002. Prior to January 1, 2003, the Company accounted for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

The table below illustrates the effect of stock compensation expense on the periods presented as if the Company had always applied the fair value method under SFAS No. 123, “Accounting for Stock-Based Compensation.”

14

Table of Contents

Options for 325,000 shares were granted during the first quarter of 2004, and no options were granted during the second quarter. During the 2003 first and second quarters, options were granted for 260,000 and 75,000 shares, respectively. The estimated weighted average fair value per option share granted was $12.47 during the first quarter of 2004, $6.58 during the first quarter of 2003 and $6.34 during the second quarter of 2003 using a Black-Scholes option pricing model based on market prices and the following assumptions at the dates of option grant: weighted average risk-free interest rate of 3.0% in the first quarter of 2004, 2.8% in the first quarter of 2003 and 2.9% in the second quarter of 2003; dividend yield of 0%; volatility factor for the Company’s common stock price of 60%; and a weighted average expected life of five years for options not forfeited. Approximately 640,000 options were exercised during the first six months of 2004, resulting in a cash inflow of $11 million.

Restricted stock awards for 124,000 shares and 579,000 shares were granted to employees and directors during the quarter and six months ended June 30, 2004. These awards generally vest over 1-4 years, and the fair value of the awards at the grant date is expensed over the vesting periods. The shares are issued at the end of the applicable vesting period.

15

Table of Contents

Item 2

CHIQUITA BRANDS INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The most significant factors affecting year-over-year comparisons of the Company’s second quarter 2004 operating income were the gains and losses from the sales of the Colombian and Armuelles banana production divisions. These sales negatively influenced year-over-year operating income comparisons by $30 million. The Company reported a before-tax loss of $9 million on the sale of its Colombian banana production division in the 2004 second quarter and a $21 million gain on the sale of the Armuelles, Panama division in the 2003 second quarter.

Apart from these sales, the benefit received from favorable European currency exchange rates for the quarter was mostly offset by lower local banana prices in Europe and by an increase in marketing costs to build brand equity in several European countries, including those that became E.U. member states in May 2004.

On a year-to-date basis, the acquisition of Atlanta in late March 2003 resulted in significant increases to the Company’s sales, cost of sales and selling, general and administrative costs in the first quarter of 2004 compared to 2003.

Operations

Net sales

Net sales for the second quarter of 2004 were $848 million, an increase of $19 million from last year’s second quarter. The increase resulted from favorable European currency exchange rates and increased other fresh produce sales, partially offset by lower local banana pricing and volume in Europe.

Net sales for the six months ended June 30, 2004 were $1.642 billion, compared to $1.301 billion in 2003. The acquisition of Atlanta, a fresh produce distributor the Company acquired in late March 2003, accounted for $283 million of the $341 million increase.

Operating income – Second Quarter

Operating income for the second quarter of 2004 was $37 million, compared to $61 million in the second quarter of 2003.

Banana Segment. In the Company’s Banana segment, operating income was $37 million, compared to $61 million last year.

Banana segment operating results were favorably affected by: